Welcome. Thank you for standing by. At this time, all participants are in a listen-only mode. During the question and answer session, please press star one on your touchtone phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr. Peter Poillon. You may begin.
Thank you. Welcome to our earnings conference call, which is being hosted by Dominic Casserley, Chief Executive Officer of Willis Group Holdings. A webcast replay of the call, along with the slide presentation to which we'll be referring, can be accessed through our website. If you have any questions after the call, my direct line is 1-212-915-8084. Please note that we may make certain statements relating to future results, which are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results, or those estimated or anticipated. These statements reflect our opinions only as of today's date, and we undertake no obligation to revise or publicly update them in light of new information or future events.
Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2012, and subsequent filings, as well as our earnings press release for a more detailed discussion of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the investor relations section of our website. Please note that certain financial measures we use on the call are expressed on a non-GAAP basis. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release. I'll now turn the call over to Dominic.
Welcome. Thank you for joining our quarterly conference call. By now, you've had a chance to read the news release that we put out last night and have a copy of our slides at the ready. With me today are Michael Neborak, Chief Financial Officer, Steve Hearn, our Deputy CEO and Head of Willis Global, and Tim Wright, Head of Willis International. Joining us today for the first time is Todd Jones, who recently took over from Vic Krauze as CEO of Willis North America. As you saw in our recent press release, Todd joined Willis 10 years ago, and he and Vic have worked closely together for a number of years with Todd, most recently in the role of President of Willis North America, and prior to that, as national partner for the Northeast.
I'm delighted that Todd and Vic will continue their partnership as they work to further strengthen and grow our Willis North America business. While I'm on the topic of introducing new faces, I'm sure you also saw our release this week following our annual shareholders meeting. We have three newly elected board members, Paco Luzón, Jaymin Patel, and Jeffrey Ubben. In addition, you will also have seen that on July 8th, Jim McCann was appointed as Non-Executive Chairman. These are all highly talented individuals who bring broad expertise in global enterprise, finance, management, teamwork, and innovation. I'm sure that their strong leadership and governance experience will help guide our business forward. As usual, we will be happy to answer your questions after Mike and I offer our introductory remarks. Let me turn to an overview of our results.
We continue to make progress this quarter in growing our top line, delivering 6.3% organic growth. We are very happy with that. Importantly, this was the third consecutive quarter of solid organic growth in each of our segments, Willis North America, Willis International, and Willis Global. Global led the way with 10.3% growth, with North America and International growing at 5.5% and 2.6%, respectively. My congratulations to Steve, Vic, Todd, and Tim, and their organizations for the continued progress we are seeing in building strong, sustainable revenue growth. Digging into the numbers a bit, our reported GAAP earnings were $0.59 per diluted share in the current quarter. Importantly, the current quarter had no adjusting items, so our reported and adjusted figures were the same. This compares to adjusted EPS of $0.59 in the year-ago quarter.
I would point out that this does not really give you the full picture of how we view the underlying improvement in EPS, as there were a few items that we highlighted in our press release, which distorted the year-over-year comparisons. Mike will walk you through those in more detail shortly. Let's spend a few minutes looking at each of the businesses in some detail. I'll start with Willis North America. As I mentioned, North America achieved 5.5% organic growth in the quarter. In the year-ago quarter, North America organic growth declined. This is a good result that follows on the back of improving results in recent quarters. Importantly, growth in the quarter was largely driven by new business wins. While rate was generally positive, we estimated that it accounted for around 1.5% of our growth during the quarter.
North America's growth was well distributed geographically across all regions, an important result of the work that the North American team has done to strengthen our business. The Midwest, West, and metro regions led the way during this quarter. Important for the North American business are the two largest practices, human capital and construction. Both performed well. Human capital put up strong organic growth in the quarter, coming in at high single digits. With human capital making up more than 20% of our revenues in North America, that is an important and robust result. Construction, our second-largest practice, grew revenues by low double digits. We remain bullish on our construction business as activity is clearly stronger than in the year-ago period. We also saw good results in other industry practices, including financial services, tech and telecom, and mergers and acquisitions.
Before moving on from North America, I want to thank once again, Vic Krauze, for the tremendous job he did in guiding our largest business through one of its most challenging periods, returning it to growth and improving profitability. I look forward to Vic's continued guidance and counsel in his role as the chairman of Willis North America. Let's now move to Willis International. Willis International grew by a modest 2.6% in the second quarter, which was below the level we have come to expect but was affected by some delayed revenues. This portfolio comprises a variety of businesses, including some underperformers, as well as real stars, operating in some of the most challenging as well as exciting markets.
I don't want to steal Tim's thunder for the Investor Day, but he and his team are implementing a range of compelling strategies to maintain or improve on the performance we have previously seen from International. Let me provide some detail of International's results for the quarter by region. Western Europe, despite generally weak economic conditions, reported a low single-digit increase in revenue. This was led by strong performances in Sweden and Denmark on the back of new business wins and modest but still positive low single-digit growth in Iberia and Italy. Offsetting this were declines in countries such as Germany, Ireland, and the Netherlands. In Eastern Europe, a growing market for us, we saw double-digit growth, primarily driven by our performance in Russia. In the U.K., our business was down low single digits in the quarter.
We believe that the actions we have taken to build positive long-term growth in the U.K. are progressing well. In Latin America, we saw another quarter of great results with growth in the double digits. While the drivers of growth were different in each country, Brazil, Argentina, and Peru were especially strong during the period. Additionally, our Venezuela operations had another very strong quarter. In Asia, we were up mid-single digits with double-digit growth in China, Indonesia, Malaysia, and Taiwan. That growth was partially offset by declines in Korea and Hong Kong. Finally, Australasia declined mid-single digits in the quarter, attributable to a decline in revenues in Australia. Uncertain economic conditions and upcoming elections, together with some delayed revenues, had an effect on our results, but we believe that the improvement we had started to see over the last couple of quarters remains on track.
You can see from the description of this quarter's results that International is generally performing fine. What is driving the business's growth down has been the U.K. and much of Western Europe, both for obvious reasons. We are working diligently on strategies that will drive better results from those slower growth markets and remain confident that International will generate long-term growth in its historic 4%-6% range. Let's now move to Willis Global. Willis Global comprises Willis Re, Specialty, Placement, and Willis Capital Markets and Advisory. Willis Global had a very strong quarter, with organic growth of 10.3%. Willis Re led the way, reporting growth in the mid-teens. In turn, Willis Re was led by North America Reinsurance, once again driving growth with strong new business wins and solid retention. International and specialty reinsurance both grew solidly in the mid-single-digit range.
This was an impressive result once again for our reinsurance colleagues around the globe. The global specialty businesses of Willis Global were up mid-single digits, delivering good growth from new business. Across the various specialty businesses, we experienced areas of over and underperformance as expected, but most notable was the strong performance delivered by our energy team during the quarter. With that, I will turn it over to Mike to discuss the rest of the financial results. I'll return later with some final comments before turning it over to you for questions.
Thank you, Dominic, good day, everyone. During my comments, I will be referring to the slide presentation that is posted on our website. In reviewing the numbers, all comparisons are to the second quarter 2012, unless otherwise stated. As Dominic mentioned, we continue to deliver solid underlying results driven by 6.3% organic commission and fee growth. The published numbers on slide three, however, show adjusted EPS of $0.59 flat to Q2 2012, and adjusted operating income of $171 million, down slightly from $174 million. This warrants some further discussion. In fact, the year-over-year comparison is much stronger after eliminating the unfavorable impact from two items. First, foreign exchange movements, which reduced operating income this quarter by $11 million. Second, the change in our remuneration policy from retention award amortization to bonus accrual, which distorts the prior year comparison by $12 million.
When you factor out those two items, you see a different picture, amounting to an adjusted operating income that increased by $20 million or 12%. In analyzing our adjusted operating margin, you should understand that the quarter-over-quarter decline is more than offset by those two items, the change in our remuneration policy and unfavorable foreign exchange movements. When adjusted for these items, our adjusted operating margin actually increased by 110 basis points in contrast to the 150 basis point decline that is shown on slide three. I hope that explanation helps in clarifying questions about margin that may be on your mind. Now, in looking at our second quarter 2013 adjusted EPS of $0.59, please follow the progression that I'm about to lay out. Unfavorable foreign exchange decreased EPS by $0.05, the lower tax rate in the quarter increased EPS by $0.03.
As such, EPS for the second quarter 2013 on an underlying basis is $0.61. This compares to $0.54 in the second quarter 2012 after adjusting for the $0.05 impact from changing the remuneration policy. Taking all that into account, the way we look at it, this results in a $0.07 or 13% increase in adjusted EPS from $0.54 to $0.61. Now let me explain our total expense growth in more detail on slide four. Underlying growth in total expenses was 7.0%, we know that is an uneven comparison because of the change in remuneration policy that we made at the end of last year. That discussion brings us to slide five, which summarizes the quarterly impact from changing that policy.
As discussed in the previous quarter, our S&B expense for the full year 2012 actually would have been $48 million higher had we been accruing for annual cash bonuses throughout 2012, the way we are doing it now, instead of amortizing retention awards. The second quarter impact from this change was $12 million. You can see that the quarterly impact is somewhat uneven, so we will continue to provide this slide each quarter through year end. It's important to remember this change had no impact on cash flow. Let me provide some details on the component pieces of our expense growth. Turning to slide six, please note the quarterly comparison of salaries and benefits. Underlying S&B expense increased 6.4%, and the main drivers of the increase were a combination of factors. First, increased headcount of approximately 450 people since July 1st, 2012.
Second, increased production incentive payments that resulted from higher commissions and fees generated thus far in 2013. Third, the year-over-year impact of annual salary increases. Favorable foreign exchange movements of $3 million partially offset these factors. In addition to this comparison is the effect of changing the remuneration policy that I just described. To cover this, please turn to slide seven. On slide seven, S&B growth is laid out assuming that we had accrued bonuses throughout 2012 as we are doing today. This is to provide what I would call an apples-to-apples comparison. As you can see on this comparable basis, underlying S&B growth was 3.9% or 250 basis points lower than the straight comparison. Slide eight shows the quarterly comparison of other operating expenses. On an adjusted basis, other operating expenses grew 10.4% in the quarter. That was a summary of our reported and our underlying expenses.
As you saw in our press release, we commented on some items that flowed through both our salaries and benefits line and our other operating expense line this quarter. Our S&B expense this quarter benefited by $10 million of compensation-related accrual reversals. Conversely, our other operating expenses were hurt by $7 million of VAT-related expenses. With all that laid out to get to a truer growth rate on our component expenses, you might want to adjust for those items that I just described. Here's how that math works out. With all the adjustments made, S&B growth was 5.9% and other operating expense growth was 5.2%. I know I've thrown a lot of numbers at you, and I'll be happy to take further questions when Dominic concludes his remarks, but hopefully this now gives you a better understanding of our expense growth. Moving to taxes.
Similar to last quarter, the 21% tax rate in the quarter was primarily driven by the low tax charge against our U.S. income. As a reminder, our U.S. operations are in a cumulative three-year loss position due to the goodwill impairment in a number of one-off charges recorded in 2011 and 2012. This requires us to maintain a valuation allowance against our deferred tax assets so that very little tax charge is booked against our U.S. income. We expect that this will be the case until our U.S. operations are beyond the cumulative three-year loss position period, which is likely sometime in 2015. Let me comment on the associates line, which as you all know is primarily Gras Savoye. In the second quarter of 2013, this line showed a loss of $3 million compared to a loss of $1 million in the year-ago quarter.
For the full year 2013, we continue to expect that the associates line will come in lower than last year as Gras Savoye completes its operational review. As such, at this time, we still expect the associates line to be a loss of $1 million-$3 million for the full year 2013. Let me wrap up my comments with some thoughts on the balance sheet. We ended the second quarter with $503 million of cash. Total debt outstanding at June 30th was $2.3 billion, down slightly from year-end. During the quarter, we paid down the $55 million balance that was outstanding on a revolver at the end of the first quarter. Lastly, we just amended our credit facility.
The key points on the amendment are we pushed out the maturity date on our term loan and revolver to July 2018 from December 2016. We also increased the size of our revolver from $500 million to $800 million, which simply provides us with more flexibility as we move forward. With that, I'll turn the call back to Dominic.
Thanks, Mike. To sum up, I am pleased once again with our top-line growth. I feel that we are delivering on the initiatives that have been discussed over the past several quarters, going back to late 2011. Many things that affect our performance, pipeline development and management, producer growth, and development and client retention initiatives are all having the desired effect that we had anticipated and discussed with you in prior quarters. We believe, however, that there is more work to do and more improvements to be made. Our goal is to be the best at what we do, and to achieve that goal, we need to continually strengthen our already outstanding service and analytics to our clients to provide them with resilience for a risky world.
For those of you who have signed up to attend our Investor Day next Tuesday, July 30th, or are planning to watch or listen to the webcast, I look forward to the discussion of our strategies on how we plan to serve our clients and thereby grow our business into the future. Thank you. We will now be happy to take your questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your request, press star two. Once again, to ask a question, please press star one. Our first question comes from Thomas Mitchell of Miller Tabak. Your line is open.
Thank you. I had one question about the Willis North America business in that, of course, the comparison of 2012 to 2011 was down 3% for commissions and fees, so that 2013 is really up about a little over 2% from second quarter of 2011. I'm wondering if the underlying trends that you described, obviously they're positive versus 2012, but on a continuing basis, is there something underneath that is keeping that business from returning to a more robust level?
Well, let me give a quick overview here of how we think about that, then I'm going to hand it over to Todd Jones. I think we are very excited about the momentum we see in this business. We all know that this business suffered a period when we were losing some producers and the business was actually shrinking. I think the correct momentum comparison is how we are seeing continued growth both in retentions, new business won, and the producer force. The forward momentum is extremely positive. Let me hand over to Todd to provide any color on that.
Yeah. Thanks, Dominic. In terms of what we see going forward, obviously, as you know, we don't necessarily provide segment-related guidance, the plan for us in Willis North America is frankly to continue to build on those foundational elements that we've seen take hold over the course of the last three quarters. We're confident that we can continue to refine and build on those elements to continue to drive good results. We're obviously optimistic about not only the balance of the year, but as this business is, we continue to move forward.
Okay. Is the process of delays and sort of questions in the Affordable Care Act affecting your business one way or the other?
Yeah. Good question. It's affecting it in a positive way. As you can imagine, this time extension gives us the opportunity to frankly provide more counsel and guidance to folks that are sort of struggling with how this is going to impact. As you probably saw, there was a bill that was introduced to delay it an additional year. That just gives us even more time potentially to get out there, offer some solutions, talk about our tools, and deliver the expertise that we build to the clients. We think it's a positive thing.
That's great. Thank you very much.
Our next question comes from Mark Hughes of SunTrust. Your line is open.
Thank you. Just to follow up on that question, how much of the growth you think is related to the, let's say, uncertainty caused by the Healthcare Reform in general?
That's a really hard one to answer. I would literally be pulling a number out if I gave it to you. Clearly, it's created an opportunity for us, and we're confident it will continue to create an opportunity, but we're not necessarily capturing growth in that framework.
Could you give a little more granularity on the rates in the P&C space, specifically in North America, how you saw 2Q as compared to Q1, and then how they might be trending just very recently?
Let me just start by reiterating what I said before, which is, when people ask us about rate, I do like to remind them that we are affected by global rates. We are a global firm. Rates, yes, in the North American P&C market are clearly important to us, but so are Brazilian facultative risk rates. Are rates in Western Europe, so are rates and what's happening in Asia. When we think about rate, the diversity of what we do gives us quite a lot of softening of particular volatility in any one market. With that, let me have Todd address your specific question about North America.
We definitely saw rates slower in Q2 than we did in Q1, with one exception, related to workers' comp. If you saw some of the material that we have put out in our Marketplace Realities for the balance of the year on some of the major lines, i.e. property, we're definitely showing a trend towards flattening to modestly down. Clearly, that's going to be dependent upon the season we're entering as far as the storms. We are definitely seeing a flattening to modestly trending down rate environment.
Thank you.
Our next question comes from Dan Farrell of Sterne Agee. Your line is open.
Hi, good morning. Just a couple of questions. Firstly, you had a very strong result, I think, in the reinsurance brokerage, particularly given some of the comments we're hearing on market conditions. I was wondering if you could talk about or expand a little bit more on what's driving the strong organic, also how you think about sustainability there as we go forward.
It's Steve Hearn. Great question. Thank you. Quickly, congratulations to our reinsurance team, who did an outstanding job in the quarter. As we've highlighted in our Willis North America business, particularly, I guess at the heart of your question is, was it timing? Is it sustainable? For a number of quarters, I've highlighted Willis Re very much as one of the jewels in Willis' crown. Actually, what drove our number in Q2 and in Willis North America was high new business performance and strong retention. New business in reinsurance, as I'm sure you know, has a long lead time. In fact, what you saw manifest in Q2 was actually work of last year, as well as earlier in this year, i.e., the award of the contract and when the money actually turns up being two different times.
In terms of its sustainability, there's been a lot of comment, particularly around new capital, certainly we have seen an impact on new capital in parts of the reinsurance book. Any new capital of any size is obviously going to have an impact on rates. At the moment, the impact is fairly concentrated to the property cat world in Willis North America. Again, this raises, I think, a really important point, because new capacity and rate reduction doesn't necessarily correlate to reduced commission and fee income for a reinsurance broker. The standout business unit for Willis Re in Q2 was Willis North America, Willis North America is where the impact's been of this capacity. There's a good illustration of that as fact. The client may well see reduced spend in terms of the rate impact, for us, it's new earnings, new revenue, new business wins.
You've really got to analyze what's going on in a reinsurance broker's book to understand the rate impact. For us, good new business growth in Q2 and good strong retention is what's driving those numbers.
Thanks. That's helpful detail. Then just one other question. You did have margin growth if you make all the adjustments in this quarter and last quarter. With the strong organic, I would have thought that the margin could have been even better. Is there still some other stuff that is sort of holding back the operating leverage? How do you think about margin trending going forward?
We're going to talk about this a bit in Investor Day, I think our view is that we should be continuing to invest in our growth opportunities. We did in this period. Over the last 12 months, we've been looking to add people in our growth markets. Of course, we continue to invest in analytics. Those are natural investments to drive growth in the top line. In parallel with that, of course, we've continued to take a very tough look at lower growth areas and our fixed cost areas to get more operating leverage. We remain committed to making sure that we have a positive gap between revenues and costs over the medium term. We'll talk about this more in the Investor Day.
Those are all helpful answers. Thank you very much.
Our next question comes from Brian Meredith of UBS. Your line is open.
Good morning. A couple of questions. The first one, I'm sorry if I missed this, if Todd you said this, but on the human capital business growth, was there any impact in year-over-year from the contingent commissions?
It was a very small impact. It was less than $1 million.
Okay. When are we going to start seeing the real impact of that? I know that was one of the changes that went on in that business.
Brian, I think the expectation is that's going to continue to ramp up during the course of the rest of this year and into the first quarter next year. We'll start to see as we get to more normalized state in second quarter and beyond next year in terms of the impact of contingents on that human capital book.
Great. Back on the reinsurance book, just curious, was any of the growth bolstered by Willis Capital Markets?
It's not in our treaty operation. We don't add that number into Willis Re's results. Willis Capital Markets is a separate business.
How'd that do during the quarter?
It did fine. It did grow, but modestly.
Got you. Just lastly, on the reinsurance business, you all have been having a lot of success with new business and stuff. I wonder if you could talk a little bit about why do you think you're winning this new business. Is it coming from competitors? Is it new programs and stuff being put on? If you could kind of drill down a little bit on that'd be great.
I would be delighted to, only too delighted to, and apologize in advance for the advert or advertisement. We're the best. In all seriousness, we focused a lot of effort around our reinsurance business over the last couple of years, particularly investment in analytics, and differentiating our analytics proposition from even our larger competitors in this space in terms of embedded analytics totally into our proposition. Our proposition clear to the client in terms of content and in terms of the analytics and transactional capability being brought together. We're very focused in terms of new business. We only go for business where we feel we can add significant value to the client, and reject other opportunities. We don't just respond to every RFP or tender opportunity that we're offered. We're very focused in that regard, and we've been highly successful.
We've won pretty much every opportunity we've turned our attention to during the course of last year and into this year as well. Been very successful.
Great. Thanks for the answers.
Our next question comes from Adam Klauber of William Blair. Your line is open.
Good morning. Thanks. Just a clarification, within the reinsurance, do alternative market transaction, in other words, if you help organize a cat bond, does that fall in reinsurance or capital markets?
Yeah, fundamentally into our capital markets business, it may be an opportunity is uncovered or discovered, I guess, by our reinsurance relationship with an organization. No, the transaction and execution is done by our capital markets business.
Okay. Has there been reasonable growth in your fees related to those transactions?
I would say there's been more activity. As I said, our capital markets business revenue has grown in the quarter, albeit modestly. There's certainly been more activity, yeah.
Okay. A different topic. There's been a lot of talk about one of your competitors has done a quota share like transaction with Berkshire in London. Are you doing any type of similar structures?
That probably falls to me, Steve, again. Yes and no would be the answer. One, we should say that what our competitor did with that particular capacity provider isn't perhaps as revolutionary as it's been heralded. There are similar arrangements. In fact, we operate one on our energy portfolio in London, have done so for a number of years. We have put together a proposition which we are marketing across the carrier community at the moment, seeking capacity too, under the banner of Global 360. We think we've done it very differently than our competitors in terms of canvassing widely to see which carriers offer best solution to our client and put the client very much at the center of our discovery here of what's available. We continue to consider propositions that have been put to us. The answer is yes, we are doing something.
Is it a clone of something one of our competitors has done? Not at all.
Okay. That's helpful. In human capital, obviously, nice quarter. Could you give us an idea how much of the growth is coming from more traditional brokerage placement business versus HR consulting business or benefit consulting business?
Most of the growth is the transactional business that we're seeing. The traditional broking business. We are absolutely seeing an increase in activity on the consulting side. As I think we mentioned earlier, just healthcare reform and some of the challenges in any organization on how to comply and what it means and goals and objectives for a benefit program create a lot of opportunity to discuss and sell solutions. At the end of the day, a majority of it was transactional.
Okay. Is that being helped by increased rates in healthcare, or is that more market share gains?
I'd call market share gains.
Okay. As far as the construction, obviously nicely that area grow, and I know you have a big practice there. Is that more smaller risks or is that larger construction taking off?
I'd say it's a little bit of both. Clearly we're seeing an uptick in the project work as financing continues to come back online. We're definitely seeing some of the larger projects, but it really sort of cuts across the whole spectrum of opportunities.
Okay, great. Thank you very much.
Our next question comes from Michael Nannizzi of Goldman Sachs. You may ask your question.
Thank you very much. Dominic, I think that last quarter you implied that margin improvement in Global would be more kind of back half of the year loaded. Looks like it came in a bit earlier this time, and I was just curious, was it maybe less investments in the second quarter, or was it just that revenues grew faster than you expected? If you can give just a little context on that'd be great. Thank you.
Well, I'll give a first perspective and then go back to Steve. I think we saw very strong revenue growth this quarter, which obviously had the resulting effect on flow through to margin. We were very pleased with that. Steve, do you want to add anything to that?
Sure. Yeah, clearly we had very strong new business growth, as I've mentioned before, particularly in one area of our business, which had an effect on the overall result. Clearly, as I said, our North American reinsurance business performed particularly well. Again, I think in the last quarter, we referred to the other parts of global which drive some of the expense investments. So we have responsibility for running the regulated entity in the U.K., Willis Limited, and there are some increasing costs around U.K. regulation. Secondly, we have responsibility in global for the placement activity for the entire organization in terms of our carrier management function and by example, the investment in Willis Place. Again, that drives some of the expense growth that you see in global.
The business units themselves, the core bits of Willis Re, Specialty Willis Capital Markets, are showing generally good growth in revenue relative to their growth in total operating expense.
Great. The second quarter is not pull forward, if you will, of kind of the margin. Okay.
We're not benefiting from timing on either line. No.
Great.
It's true results.
Okay, great. Just one question back on Re, I guess. It's great, you're certainly winning new business and retention, it sounds like it's very strong as well. I guess I'm just a little surprised that alternative capital either hasn't been maybe more disruptive or that hasn't been an area, a larger contributor of growth. Maybe, I think John had mentioned a pipeline and that it takes time for these transactions to move through. If we look at that pipeline from here, what do we see and is there any color on the capital market side where maybe some of that activity might be on the come? Thanks.
Yeah. I'll probably give three quick answers. One will be a little bit of repetition. North America performed very strongly for us on reinsurance. We are a significant intermediary in Florida, and yet Florida is where the impact of new capital has probably been felt the greatest in the reinsurance world. Please, there isn't a correlation necessarily between rate and what a reinsurance broker will earn. Reason for us, particularly year-over-year, is we won a lot of new business from our competitors last year that wasn't in our revenue last year and is in our revenue this year as a new business. The client's rate may have gone down. They might actually choose to buy more, but the rate has gone down, but that doesn't necessarily mean it reduces our earnings in that case because it's new business.
It's 100% growth for us, if you like, at a client level. Secondly, longer term prognosis in terms of new capital in the reinsurance world, if not the insurance world, is subject to lots of debate at the moment, internally, externally with clients, et cetera. You'll hear very different views of how fickle, sustainable that new capital may or may not be. My personal opinion is that it is a significant development and certainly has the potential to be significant. That's not, thirdly, a Willis comment. We have plenty of opportunity to earn both from the arrival of this new capital in terms of advising our clients, as well as frankly, given our relative market share, an opportunity for us to develop conquest business from our competitors. I don't see it as a threat for us.
Got it. Last part, I guess it just sounds like you're growing your share of a shrinking pie if the pie is shrinking because the alternative capital stuff would come into you through a different part of your business. I guess that it would sound like it even more pronounced in terms of your taking market share from peers. Does that make sense or is that not right?
Yeah, sort of. It does make sense. The real thing that is driving our reinsurance business at the moment is retention of existing clients and acquisition of conquest business from our competitors.
Traditional reinsurance business that we are winning from our competitors.
Okay, great. Thank you.
Our next question comes from Jay Cohen of Bank of America Merrill Lynch. You may ask your question.
Yes, thank you. I guess for Mike, the tax rate, obviously first half was relatively low, and you talk about, I guess, using some of the deferred tax asset. Given that situation, can you give us some guidance what the tax rate should look like in the second half and in 2014?
Okay, Jay. It's rather complicated. I say that because it's very sensitive to where that income comes in geographically. For example, here in the second quarter, I think at the end of the first quarter, I had mentioned that our tax rate in the Q2, 3 and 4 would be somewhere between 22% and 26% each of those quarters. We came in here in the second quarter at around and up to 21%. I was a little bit low and off that range, principally because more income came in North America than what we had budgeted for. The sensitivity of the situation is that it's a little bit perverse. The more income we have in North America, the lower our tax rate's going to be overall, because that income is not getting a tax rate against it.
What I would tell you is that for the full year, I believe the full-year rate will come in somewhere between 22% and 24%. If we book a tax rate of 19% in the first quarter and 21% in the second quarter, it's going to be higher in Q3 and Q4. I'd like to just characterize it as 22%-24% for the whole year. Q3 is very difficult because it's our smallest net income quarter, so it's really sensitive to where the changes might be in the geographic distribution of that income.
What about for next year at this point? It should still be, I would assume, aided by your tax situation.
Next year is going to be similar, at least as we see right now, to our situation here in 2013, because we'll still be within this three-year loss period, if you will. Therefore, more or less, not permitted under GAAP to book a tax provision against our North America profits.
Somewhere in 22%-24% for next year as well?
I'm sorry, Jay.
I said somewhere between 22% and 24% for 2014 as well?
Yes.
Great. Thanks a lot.
Okay, thank you.
Our next question comes from Meyer Shields of KBW. Your line is open. Please check your mute button.
Sorry, can you hear me?
Yes.
Okay. These are just a few modeling questions. The VAT charge and the accrual reversal, what segment were those? Where did they hit?
The VAT charge, about $5 million was in Willis International and $2 million was in our Willis Global segment. That's the $7 million.
The accrual reverse basically was $5 million positive in Global, $3 million in International and $2 million in North America.
Okay, thanks. That's very helpful. I think Dominic had mentioned 450 people added since the end of June or end of July of last year. Can you give us a sense of the timing of that so we can sort of expect it in the expense growth?
450 people. Most of those happened in the third and fourth quarter of 2012. On a net basis here in 2013, I think we've added 80 people.
Okay. Dominic also mentioned delayed revenues in the International segment. Is that something that we should anticipate coming back in the third quarter?
I think what Dominic meant delayed revenue, meaning deals that got delayed, pushed into the third quarter, which is an ongoing occurrence each quarter. I don't think you should look at our third quarter as being impacted by that comment. It's going to happen, not be impacted very substantially by that at all.
Okay. Do the modified credit facilities have any impact on the run rate for interest expense?
No. They were all renewed at the same LIBOR plus 150 basis points that we currently pay.
Okay, great. Thank you very much.
Our next question comes from Jay Gelb of Barclays. Your line is open.
Sorry, I wanted to touch base on the pre-tax adjusted margin. I know there were a bunch of one-time items in 2Q, I'm just trying to get a sense, compared to the second half of 2012, is there anything to prevent that pre-tax adjusted margin improving relative to the as stated numbers from back half of 2012? I just want to get a sense if there are any other anticipated one-time items.
Well, there's no anticipated one-time items in Q3 and Q4 coming up. I have to recall what happened in Q3 and Q4 last year. Maybe we can handle that offline because I just don't recall what was there, we certainly could go back and find that out for you.
Okay. I guess more importantly, directionally, when you talk about the underlying perspective in 2Q actually showing 110 basis points of margin improvement year-over-year, but for a couple items, is there anything to prevent that from not showing up in the back half in terms of stated margin improvement?
Well, obviously, we have to grow our revenues like we grew our revenues here in the second quarter. As Dominic mentioned, we've continued to invest quite a bit in our growth markets. At the same time, we're looking hard at reducing the costs in our lower growth markets.
I see. Okay.
I think we'll talk about this more at the Investor Day.
Great. Have there been given any thoughts to resuming share buybacks since there hasn't been any for the past three quarters?
Well, right now, we have no plans to do share buyback, but we're going to talk about the topic of capital allocation very specifically at Investor Day on Tuesday.
Okay. Thank you.
Our next question comes from Brett Huff of Stephens Inc.. You may ask your question.
Good morning, and thanks for taking my question. Two quick ones. You had talked a little bit about rates in North America, and you'd kind of gone through some of the different major categories, and I only caught part of that. I know you mentioned property specifically that you were seeing that might soften. Can you just go through those major categories that you outlined again for me?
Yes. I'll bucket it in just three areas, property, casualty, and then financial lines, which we track as well. In the property market, we see for the balance of the year sort of a flattening to a modestly downward trend. In the casualty market, call it flattening to still modestly up. A lot of that is going to depend upon jurisdiction, obviously, but not the same kind of trend we're seeing in property. In financial lines, similar as to what I said in property, sort of flat to modestly down.
The drivers of that, is this just an excess capital question? Is it maybe underwriters not being as disciplined, sort of what's the driver of those?
Well, I won't call it a lack of underwriting discipline, but definitely excess capital, certainly performance of the underlying portfolios within the various underwriters. Frankly, the lack of catastrophes that we've seen in some of those areas as well. All of those things kind of combine to create an environment, again, depending largely on the product and the geography that you're operating in.
Great. That's helpful. One final question, too. I think you had talked about construction as being particularly strong or a highlight in, I think it was North America. Can you just comment on that? It sounds like it's up year-over-year, but any particular color you can give us on that would be helpful.
Sure. This is Todd again. Construction had a terrific quarter, I too would like to offer my congratulations to my colleagues in that business. It wasn't in one specific area. We saw it across all of our geographies, both in terms of size of projects, sort of large and small. It was really a balanced recovery, one, I think aided by an improving finance market and some of these deals getting funded. Also the fact that we just have a very large and differentiated construction business across North America.
Great. That's what I needed. Thanks for your time.
Our next question comes from Mike Nannizzi of Goldman Sachs. You may ask your question.
Just one quick follow-up. On the financing, Mike, or the actions, I guess, in terms of kind of delaying the maturity dates of the revolver and the credit facility. Anything coincident about that and the option date of the Gras Savoye transaction?
I think we look at that as well as a lot of other opportunities that may come to be in the market. We had the opportunity to extend it out and to increase the size of the revolver, which just gives us a lot more financial flexibility. We took the opportunity that was presented to give us more financial flexibility, which may be helpful in Gras Savoye, might not, depending on what we decide to do about the option. Just in the normal course of operating our business.
Great. Thank you.
Our next question comes from Joshua Shanker of Deutsche Bank. You may ask your question.
Thank you. I just want to go over the headcount a little bit more. You said you added, I guess, 80 people since the beginning of the year. I wonder if you could talk about what the gross heads were, the people you added, whether they were client-facing or not, and where you've been growing.
Generally, it's Dominic here, we've been adding people in line with our strategy. We're obviously adding people in where we see revenue growing opportunities. In the growth markets in Tim Wright's world of Willis International, we've definitely added some people in Steve's world of Willis Global, there have been some public announcements about that, about some people that have been added in that world. Todd continues to have year-on-year growth in the producer model. When you added all that up, you see growth. At the same time, as we grow the business, we have to mildly continue to grow the fixed infrastructure of compliance, audit, et cetera, to take account of more activity.
To what extent have the new hires brought in new business at this point in time and that's fueling some growth, maybe particularly on the reinsurance side?
Steve.
Yeah. I'd probably make two comments. One, to just elaborate on something Dominic said. Yeah, I can pick up the re one as well. In the global number will be headcount that came to us through an acquisition in London, which is of Prime Professions, which was an acquisition for us, that I think brought in about 45 people. You'll see that in Willis Global. Then as Dominic says, we continue to invest in high growth, high margin operations. That includes our reinsurance business, we have hired some people in there and absolutely focused on production and client service and analytics. Absolutely. This isn't about filling out back office positions. It's very much about client-facing activity.
To the extent that reinsurance growth related to new hires?
No. As I said earlier, the key driver of revenue in Q2 was new business we won last year, and business that we were on RFP, tender response, et cetera, last year, so it was existing resource. Absolutely, as we bring in production staff into reinsurance, hopefully you'll see that recognized in successful growth going forward for sure.
Well, I appreciate all the color. Thank you very much.
Our next question comes from Meyer Shields, KBW. Your line is open.
Thank you. Just one I missed. The corporate and other expense line was, I guess, lower than it had been for a while at $19 million. Is that a good run rate going forward?
I mean, that's a good number. It usually runs somewhere between 20 and 25, sometimes as low as 15, 19 is a good number.
Okay. Thank you.
It jumps around a lot because we have obviously items in there that are related to certain foreign exchange get recorded in corporate. Balance sheet foreign exchange typically gets recorded in corporate, it does jump around. I mean, things like the amortization of our intangibles, which we keep, are steady. There are items that create a little bit of volatility, like some of the foreign exchange that ends up being booked there.
Okay. That helps. Thank you.
Our next question comes from Thomas Mitchell of Miller Tabak. Your line is open.
Thank you. This is just a short follow-up. On the reinsurance business, we've heard that there seems to be a trend, maybe it's a relatively long-term trend, for primary insurers to gradually become increasingly sophisticated in their decisions on whether they're going to buy reinsurance or keep business and where they, slicing and dicing it by lines and by tranches. I'm wondering if that feeds into your strength or even if you agree that that is a trend. I'm just interested in your comments.
Yeah. I'd say, Tom. Thanks.
Can you guys see us by any chance?
This one?
We're here.
Yeah.
You're really.
Short.
Sorry, it's got a bit of a wire.
Can you hear us, Tom?
Yes. Thank you.
Sorry, I beg your pardon.
Sorry about that.
We got a crossed wire there. Yes, the trend is absolutely right. It has developed over a number of years, the client, in effect, becoming more sophisticated, their needs and understanding becoming more sophisticated. This is really where analytics has come to its fore, being able to, as you describe it, slice and dice a portfolio, to optimize the reinsurance spend in terms of where the premium's going to and what they're shifting from their own balance sheet into the reinsurance community. Absolutely is becoming increasingly sophisticated. That plays to the intermediary who best deploys analytic capability to their client base. I think we do that exceptionally well.
Certainly in any research that we've done blindly on the reinsurance buyer's perspective on Willis Re, the feedback is generally, if not always, that we have a very strong analytics proposition as well as very strong broking talent in terms of execution. As the client becomes more sophisticated in their needs, we've been able to deliver upon those needs. I would attribute a lot of the recent success to being very good at it.
Okay. Thank you very much.
Thank you.
At this time, we have no further questions.
Well, thank you all very much for your attention, and we look forward to seeing those of you who are able to join us on Tuesday at our investor conference in New York. Thank you very much.
This concludes today's conference call. Thank you for participating. You may disconnect at this time.