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 touch-tone 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, Director of Investor Relations. 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 a 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 one two one two nine one five eight zero eight four. 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. 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. Also, 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, Victor Krauze, Head of Willis North America, and Tim Wright, Head of Willis International. We will all be happy to answer your questions after Mike and I offer our introductory remarks. I'm now about four months into my new role, and I've had a chance to move throughout the company, working closely with our global leaders in London and also spending time in our key businesses in Europe, Asia, North America, and Latin America.
In fact, as soon as this call concludes, Vic and I will be heading to California to meet our top North American producers and visit a number of our offices in the Western region of the country. From Willis Global to Willis International to Willis North America, I am finding among our people even more confidence, commitment, and optimism, and a lot of great ideas that will propel Willis to the next level in the years ahead. With that, let me turn to an overview of our results. Focusing on the top line, I'm pleased that we've started the year with well-balanced organic growth of 4.1% with each of our segments, North America, International, and Global, achieving organic growth within 50 basis points of each other. North America led the way with 4.3% growth, with International and Global growing at 3.8% and 4.1%, respectively.
My congratulations to Vic, Tim, and Steve and their entire teams for continuing to build on the progress that was evident in the fourth quarter. Digging into the numbers a bit, our reported earnings of $1.24 per diluted share in the current quarter include the impact from the $46 million, or $0.22 per share, expense reduction initiative charge that we announced on our call in February. This action, which was completed in the quarter, will drive expense savings that Mike Neborak will discuss later in the call. If you account for the impact of the charge, our adjusted earnings per diluted share for the first quarter were $1.46. That is up $0.14 or 10.6% compared to $1.32 in the first quarter of 2012.
Just to make sure you're taking in the full picture, that first quarter 2012 EPS number does not reflect the negative $0.01 impact on earnings from changing our remuneration policy as we outlined on our call in February. In addition, you should also understand that approximately $0.10 of the EPS improvement results from a lower tax rate in the current period relative to last year. Mike Neborak will also cover our tax rate in a few minutes. With those group-wide numbers as context, let's spend a few minutes looking at each of the segments in some detail. First, let's have a look at Willis North America. As I mentioned, North America achieved 4.3% 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 a strong fourth quarter result.
North America's growth was again well-distributed geographically across the regions, a testament to the work that Vic and all of his national partners and their teams are doing to strengthen our business. The metro region, which covers the Northeast U.S. and the Atlantic region, led the way during this quarter. In looking at our practices, human capital put up a strong organic growth number in the quarter, coming in at mid-single digits. With human capital making up more than 20% of our revenues in North America, that is an important and robust result. Taking a look at construction, our second largest industry practice. Our revenues grew by low single digits. This aligns with news from the construction industry as a whole, that construction spending in the U.S. is on the rise. We remain bullish on our construction business as activity is clearly stronger than the year ago period.
Rates during the quarter were generally positive, and we estimate that it accounted for a little over 1% of our growth during the quarter. For those interested, we recently published our Marketplace Realities report that discusses our detailed view of North American market rates. The report is available on our website. In concluding these comments on North America, I think that with two consecutive quarters of positive growth, we are no longer looking back at the issues we have highlighted in past years and have set our sights ahead. Ready for the challenges, certainly, but excited about the opportunities. Let's now move to Willis International. Willis International's organic revenue grew a solid 3.8% in the first quarter. With a number of promotions and key hires that you may have read about in recent news releases from Willis International, Tim Wright has filled out his leadership ranks across the globe.
This strong team and these steady results for Tim's segment in the first quarter are welcome as we face very uneven economic conditions across the many parts of the world that we serve, and especially given the weak environment across most of the Eurozone. Let me provide a little detail of International's results by region. Western Europe, a region that for Willis has had a very consistent record of growth in the face of generally weak economic conditions, reported a low single-digit decline in revenue. Weakness in the Nordics after a strong fourth quarter and flat results in Germany were partially offset by Switzerland, which was up double digits, and Iberia, up mid-single digits. Additionally, a few other important Eurozone countries, such as Italy and the Netherlands, managed low single-digit growth in the period. In Eastern Europe, a growing market for us, we saw mid-single-digit growth, primarily driven by Russia.
In the U.K., our business achieved low single-digit growth in the quarter. This is a steady result, marking the third consecutive quarter of growth in a difficult environment. In Latin America, we continue to see great results, with growth in double digits. Brazil and Argentina were especially strong during the period. Despite a backdrop of political transition and significant economic challenges, our Venezuela operations were also very strong. In Asia, we were up double digits, with Korea, Hong Kong, and Indonesia all delivering strong double-digit growth, while China grew low single digits. We remain very excited about our China business, with its strong leadership, industry-leading footprint, substantial market growth potential, and strong pipelines in place. Finally, Australasia, which had a difficult year in 2012, bounced back in the first quarter as Australia delivered high double-digit growth.
I believe Australia has great promise as a growth market for Willis, and I am very pleased with its performance for the quarter. Let's now move to Willis Global. Willis Global comprises Willis Re, Specialty, Placement, and Willis Capital Markets & Advisory. Those of you who have listened to our calls in the past will notice that we have now implemented the simpler structure for Willis Global that Steve Hearn had laid out on our second quarter call last year. Under this new structure, we have combined a number of our divisions into larger P&Ls under a smaller number of management teams. This structure is bringing our highly successful global businesses closer together and enabling them to work more closely with colleagues in Willis North America and Willis International. Willis Global had a solid quarter with organic growth of 4.1%.
The reinsurance business grew mid-single digits in its seasonally largest quarter, with North America Reinsurance reporting even stronger results. It was up double digits on the back of strong new business wins. International reinsurance grew mid-single digits, while specialty reinsurance was flat in the quarter. Willis Re found rates during the quarter to be broadly flat. Once again, Peter Hearn and John Cavanagh, respectively our Chairman and CEO of Willis Re, published Willis Re's closely watched 1st View report on April the 1st. In that report, available on our website, you will find detailed information on our view of reinsurance rates by region and product. The global specialty businesses of Willis Global were up low single digits, delivering good growth from new business. Faber Global had a strong quarter, recording mid-teen growth driven by new business. The marine and energy unit grew mid-single digits, driven by strong growth in energy.
Offsetting this was weakness in the FINEX and aerospace units. 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, and 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 Q1 2012, unless otherwise stated. Turning to Slide three, reported EPS this quarter was $1.24 versus $1.28. That reported EPS number becomes $1.46 after adjusting out the $46 million charge we recorded to reduce our cost base. Since the $1.46 figure includes $0.10 from a lower tax rate and $0.01 of favorable foreign exchange, we consider the underlying result to be $1.35, which compares to $1.32 last year. The 19% tax rate in the quarter was driven by a very low tax charge against U.S. income. As a reminder, our U.S. operations are in a cumulative three-year loss position due to the goodwill impairment and a number of one-off charges recorded in 2011 and 2012.
This requires us to maintain a valuation allowance against our deferred tax assets 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 at the end of 2014 or early 2015. The full-year tax rate is expected to be 22%, the tax rate for quarters two, three, and four should range between 22%-26%. The quarterly tax rate is impacted by a number of factors, including the proportion of U.S. income to total income. During the time we remain in a cumulative three-year loss position, higher percentages of U.S. income produce a lower tax rate.
For example, in the first quarter, the proportion of U.S. income to total income is higher than the remaining three quarters of the year, largely due to the North American reinsurance business. Therefore, the 19% tax rate is comparatively low versus what we expect to report in the remaining quarters. Again, the full-year tax rate is expected to be approximately 22%. As Dominic mentioned earlier, we delivered 4.1% organic commission and fee growth, which was broad-based across our three segments. The adjusted operating margin declined 90 basis points, driven by 5.1% adjusted expense growth, which is shown on slide four. Excluding the favorable impact of year-over-year foreign exchange movements, underlying expense growth was 5.6%. You should note that Q1 2012 numbers are based on our old remuneration policy.
If our new remuneration policy had been in effect during that period, the $1.32 adjusted EPS figure from last year would have been $1.31, the 5.6% underlying expense growth would have been 4.9%, and the 90 basis points of margin contraction would have been 50 basis points. The impact of this change in remuneration policy becomes more pronounced in quarters two, three, and four. Slide five summarizes the quarterly information we provided on our last earnings call. To reiterate, our S&B expense in 2012 would have been $48 million higher had we been accruing for annual cash bonuses throughout 2012 instead of amortizing retention awards. Let me remind you that this change in remuneration policy had no impact on cash flow. On slide six, note that adjusted S&B grew 6.5% in underlying S&B, which excludes the year-over-year benefit from foreign exchange movements increased 6.9%.
Again, this growth is overstated because of the change in remuneration policy. The purpose of slide seven is to highlight S&B growth, assuming that we accrued bonuses throughout 2012. On a comparable basis, underlying S&B growth was 6.1%, or 80 basis points lower than the straight comparison. Slide eight shows that the underlying growth in other operating expenses was 1.4%, reflecting our focus on controlling these costs. As I mentioned earlier, we excluded from adjusted earnings a $46 million charge that was aimed at reducing our cost base in the future. We announced this charge last quarter. Slide nine summarizes the charge. To be specific, we eliminated 207 full-time positions, resulting in a $29 million charge included in Salaries and Benefits.
In addition, property and systems rationalization costs impacted other operating expenses by $12 million. Lastly, we incurred $5 million of depreciation expense related to fixed asset write-offs. While the total amount of the charge was slightly above the high end of our previously announced $35 million-$45 million range, there will be no further expenses related to this action in 2013. We expect the charge to generate savings of approximately $20 million in 2013, beginning in the second quarter. On an annualized basis, savings are expected to be in the range of $25 million-$30 million. Around three-quarters of the savings are expected to be S&B related. Now, let me comment on the associates line, which is primarily Gras Savoye. The first quarter is the strongest for the associates line, which contributed $15 million this quarter, unchanged from last year.
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 to $3 million for the full year 2013, with the losses more weighted to the second half of the year. Let me wrap up with the balance sheet. We ended the first quarter with $531 million of cash, up $31 million from year-end. Total debt outstanding at March 31st was $2.4 billion, up slightly from year-end as well. As we do each year in the first quarter, we drew down our revolver to pay prior year incentive compensation. The draw down in the first quarter amounted to $55 million, which compares to $85 million last year. With that, I'll turn the call back to Dominic.
Thanks, Mike. Before we take your questions, I'll conclude our preliminary remarks by saying this. To sum up, I am pleased that our results were very well balanced and solid across all three of our business units. At the end of the day, growing our business depends on delighting the clients we have, working on their behalf every day to provide them with resilience for a risky world, and winning new clients based on the outstanding service we offer. In addition to the on-the-ground engagement with our leaders and colleagues around the world that I talked about a few minutes ago, I've also spent as much time as possible talking directly to our clients and insurance carriers with whom we work and welcoming their feedback.
All in all, I continue to be impressed with the quality of the global teams and the depth of service that we, as an organization, provide to our clients of every size and type in every geography. That's just not my opinion. I've heard it expressed in so many meetings with our constituents, those we serve. We can always do better. It is our intention to continue to improve on that client service, and doing so will only result in greater client loyalty, more new business wins, increased revenues, and ultimately expanded shareholder value. With that in mind, as we continue to review and analyze all aspects of our operations around the world, we will be making changes, investing in markets and/or products that we believe will provide the best growth and value opportunities.
We look forward to laying out many of these initiatives and strategies at our Investor Day in New York City on the afternoon of July 30th. 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 Jay Gelb of Barclays. Your line is open.
Thank you and good morning.
Morning, Jay.
The overall organic revenue growth of 4%, as we expected, that slowed from the outsized growth we saw in fourth quarter of 2012. It would be helpful if we can get a sense of where you see the glide path of that heading forward, reflecting the rate environment, the economy, and net new business growth.
As you know, we don't give guidance, but we remain optimistic and working with Vic and Tim and Steve, we are very much focused on serving our clients as effectively as we can and introducing new initiatives to meet their needs. We remain optimistic for the outlook, but as you know, we don't give specific guidance on our major P&L items.
All right. Switching gears to Gras Savoye, the option to assume the full control of Gras Savoye was extended by a year. Can you talk about what drove that decision and perhaps ultimately what that means for the ownership?
Yeah. This was pretty straightforward. We've been in dialogue with Gras Savoye for a while. As you know, conditions in the Eurozone have been interesting, and Gras Savoye is going through a restructuring, which Mike talked about. That's going to take place through most of 2013 and into bits of 2014. In order that we inherit a Gras Savoye which is firing on all cylinders and to give us all full time to make sure that we are fully able to integrate and build all the synergies that we want to build between Willis and Gras Savoye. Given the present environment, we all thought that it made sense to push the option back a year. It has no implications for our intentions. We continue to be very excited about Gras Savoye.
It will give us a leadership position in a major market in Europe, and of course, very interesting positions in Africa and the Middle East and Asia. We are very excited about the opportunity and very excited about working closer and closer with Gras Savoye. However, as with any acquisition, when the time comes, we are going to look very closely, not only at the strategic fit, which I just described, but also to make sure that the numbers make sense for the firm and our shareholders. That's the context of that decision.
That's helpful. Thank you.
Our next question comes from Greg Locraft of Morgan Stanley. Your line is open.
Just wanted to actually get some color on the operating margin. Two of the three segments, actually, even with the SMB drag that you highlighted
Actually showed year-over-year improvement. The one segment Global showed year-over-year declines. How do you think about the operating margin by segment? How should we be thinking about Global going forward? Is the S&B impact really from the change in the compensation really centered in this Global segment?
Let me just give an overview, then I'm going to hand over to Steve Hearn to talk specifically about Global. Obviously, our objective is to grow our revenues faster than we grow our expenses. Hardly a great insight. We are very focused on that, and that's the way we are going to deliver ongoing shareholder value to our investors. In that context, you saw what we did with our charge in the first quarter. I would say that we are going to continue to invest in our growth businesses, and we do expect, you should expect us to continue to try and expand the business and grow where we see growth opportunities. At the same time, the solution here will always be to grow our revenues faster than our costs.
Referring specifically to Global in the first quarter, let me turn over to Steve.
Thanks, Dominic. Thanks, Greg. Firstly, just to explain, the revenues in the core constituent parts of Global are growing faster than their expenses. Our reinsurance business and our insurance specialty businesses, their revenue is growing faster than expense. We are, as Dominic said, investing in those high growth areas of our business, high growth, high margin areas of our business. Global also includes placement, the placement infrastructure on behalf of the organization in totality, Willis Group, analytics, and corporate analytics specifically, and Willis Limited, our regulated entity in the U.K. In the case of placement and analytics, we've increased our investments year-over-year in technology and in people as strategic investments as we focus more closely on our placement strategy, particularly executing WillPLACE, which we've talked about on calls previously.
The emergence of, as I've described it, the analytical broker as the corporate buyer is looking for more than just a risk transfer insurance transaction, but looking for more consultative advice. We've invested in people in that area of our business. Finally, running a regulated entity anywhere in the world, but particularly in the U.K., costs money. There we're investing in compliance, audit, legal, those types of areas in terms of supporting the development of that business. I tell you, we have budgeted as a total in Global to expand our revenues at a faster rate than our expenses, per Dominic's introduction. We continue to believe that's what we'll achieve for the year. That's our ambition.
Greg, one other item I would just point out on slide five, a majority of that difference in the first quarter that's shown to be four is in the Global unit. That also is distorting the expense growth a little bit above what Steve just described.
Okay. That's great color. I guess if I could, sort of reading between the lines, it sounds like the margin trajectory from a year-over-year improvement perspective in Global, in particular, is back-end loaded.
I think you could assume that from what we said.
Yeah.
Yeah. Okay, perfect. Just shifting gears entirely. You mentioned pricing and reinsurance is flat. Pricing in North America is up one. Can you give us some color on the international markets in terms of pricing?
I will give you some sense, of course, as your question points out. I'm glad you phrased it that way. The very high level headlines you hear about pricing in the markets hide enormous detail underneath. You see these headlines about rates are firming in North America, whatever, and then you find the detail is very different. Tim has the difficult task here to try and give you a sense of what rates are doing across three quarters of the globe. Tim, over to you with that task.
Sure. Thank you, Dominic. Greg, the overall picture for Willis International is a modest rate improvement overall. That disguises a considerable variation from country to country. We see rate increases in the places you would expect to see rate increases where we have catastrophic exposure and claims experience, which Steve can elaborate on from a reinsurance perspective. Those would be places like Australia, and parts of Asia, like Thailand. It's very much a mixed picture country by country. I'm glad to say, whereas in the past we would have said overall, we are having a headwind from rates in Willis International. We are seeing them being either neutral or modestly positive. Steve?
Thanks, Tim. I think I agree with both what Dominic and Tim said. I mean, rates are all over the place at a global level. I've given up giving blanket answers such as they're up X%, down X%, because it's just meaningless. You need to look, as Dominic said in his opening remarks, at the region, the specialty, the product line to get precise answers in terms of what's going on. What is interesting, we're seeing anyway, is a disconnection at the moment between reinsurance rates and primary rates. Again, I refer you to our website in terms of 1st View and what we came out with on the 1st of April in terms of reinsurance rates
Likewise, as Dominic said, that Willis North America primary rates and what's going on there, again, which we have information on the website. The U.S. reinsurance renewal period, I think, is going to be very interesting. We'll be watching what goes on there in terms of any rating indicators. It's a very complicated world that we operate in at the moment. At least I think I would agree with Tim, we're not talking down everywhere, giving those sorts of blanket answers.
Okay, that's great. Look forward to July 30th. Thanks.
Me too.
Our next question comes from Michael Nannizzi of Goldman Sachs. Your line is open.
Thank you. I guess just to drill down a bit on the Gras Savoye deferral. How should we think about that extra year? Is it the context of providing more time to generate cash for the eventual purchase, or is it more time to invest for growth to generate leverageable operating income growth? Also, if the extra year allows for Gras Savoye to improve its own operations, does the formula to calculate the purchase price result in a higher number? Just one follow-up. Thanks.
I think I'll just sort of reiterate what I said the first time. The extra year makes sense on both sides because of the specific circumstances that are all too well-publicized on what's going on in the Eurozone and in France, and the actions that Gras Savoye is taking, very sensible actions Gras Savoye is taking to get the business ready for further growth going forward, which is taking place, as I said, a lot of the action in 2013, which explains why our associates line will be trending the way that Mike described earlier on the call.
Given that, we thought it made sense if we want to take on Gras Savoye, we want to make sure Gras Savoye is a healthy, growing company, has a proven track record of performance in a new structure, a new environment, and that we have as much time as possible to build out the synergies between the two businesses. As we looked at what was taking place in 2013 and the immediate outlook in the Eurozone, we just felt more comfortable pushing out the option one year. The terms of our contract with them and our negotiation with them are confidential. I can assure you, we obviously took full account of what might happen in terms of their performance to make sure we controlled anything we paid for the business.
It's not fair to assume then if Gras Savoye makes more money, that the formulas will render a higher purchase price. That's not a good conclusion then.
The terms are confidential. What I can absolutely assure you is we were very attuned during the course of these discussions, both the original discussions and these new discussions, to make sure that anything we paid reflected the true value of the business going forward.
Okay. Thank you. Can you talk about any of the underlying trends that contributed to growth in human capital? Just any color on incremental drivers or the granular drivers would be helpful.
Well, let me turn over to Vic to give a sense of what were the underlying drivers there.
Great. Thanks.
Thank you, Dominic. Good morning. Actually, I think the human capital business results were reflective of the investment that we actually made in 2012. As you may recall, we spent a fair amount of money hiring what we would call regional wellness teams as part of our value proposition for the businesses we serve. We started seeing results from that. One of the questions that I saw come up was, is this reflective solely of our decision to take MDI in that space? It was not. We did not get a full year effect on MDI. It was basically underlying business growth across the regions, and I was pretty happy with it.
Great. Last one, if I could squeeze one last one in. In North America, how much did client retention, so higher client retention factor into the organic growth, or were there other factors involved that helped contribute to that nice number? Thanks.
Retention did help us in the first quarter. It was close to 200 basis points. We were very pleased with what we saw in our retention efforts and seeing that it came through. It was helpful.
Great. Thank you.
Our next question comes from Adam Klauber of William Blair. Your line is open.
Thanks. Good morning. I guess, what's the potential for you to increase your free cash flow going forward, and what are your priorities for free cash flow?
Well, I think as we discussed on the last call, focusing on cash flow is one of the things we want to do. The key driver of that obviously is our EBITDA performance. That is obviously driven by the equation between our revenues and costs. We see great opportunities to grow our cash flow, but we will be very focused on that. Now, we gave you a picture of what our cash flow was in 2012. We will probably do that on an annual basis or maybe semi-annual. We're in discussion as to what the best way of doing that is. We are going to be very focused on making sure that that number grows. As I said to you, it's organic growth that is the key driver of our free cash flow performance.
Thanks. As to priorities for usage of that free cash flow?
Oh, again, as we discussed on the last call. We will constantly have a trade-off to make between investing for medium-term growth so that we can continue to grow cash flow on an ongoing basis into the future and returning some of that cash flow to our shareholders. We signaled our intent to be very focused on the latter by increasing our dividend at the end of last year. Every year, we will be looking at the trade-off between investing for the medium term and returning cash to shareholders. That is a decision we will take every year. We've got to get the balance right because we've got to make sure that we continue to invest for the medium term. We're active in many growth markets, and we see many growth opportunities.
At the same time, we are very conscious and cognizant of the need to return cash to our shareholders.
Okay. One follow-up on North American organic growth. Clearly, nice rebound in the last two quarters. Should we think about it that the last two quarters are coming off weaker comparisons? Or should we think about it as 4% or 5% is more potential baseline, and if the environment gets better, pricing goes up, audit premiums turn around, you could actually improve from there? Not asking for a forecast, but just how we should think about the base.
Probably the best way I can answer that question is to say that we're continuing to focus on the three basics of the business that have helped us turn the business, and it's quite simply our new business pipelines, our recruiting efforts, and our retention efforts. I would expect that if we continue to do the things that we have been doing, we would continue to see results that improve over prior years' quarters.
Okay. Thank you very much.
Our next question comes from Arash Soleimani, KBW. Your line is open.
Thanks. Just had a quick question. Is there any update in terms of potential investments within the healthcare exchanges? From what you've seen thus far with both Aon and MMC establishing an exchange, is there any concern in terms of them having tried to poach any clients or clients that you have that are interested in that type of defined contribution healthcare strategy? Is there any concern about them leaving to go to one of those brokers, or is that not an issue in your eyes?
When I first got to know the team at Willis, I was very impressed that thinking on this issue was very well advanced. The team have been doing a lot of thinking about what the best way for us to position ourselves in this space. We're making progress, let me have Vic just describe how we're thinking about this.
Sure. It is an issue that we're watching very carefully. We've spent a lot of time and effort in terms of examining the space. It might be one of the things I look at more than most others right now. What I can tell you is that we are looking very carefully at the exchange space. We are looking at a Willis option in that space in order to compete in that area. My view is that it is not necessarily going to completely disintermediate the brokerage space. There'll be a portion of customers that'll be interested in exchanges in the DC world, if you will, we want to make sure we have an option for those customers that do that. I'm not as concerned that the two exchanges that are out there would necessarily cause us to lose business to them.
Okay. That's very helpful. Thank you for the answer.
Our next question comes from Ray Iardella, Macquarie. Your line is open.
Thanks, and good morning. Just maybe touching back on Gras Savoye, the thought process in extending the option. Just if I could get your updated thoughts on sort of your capital flexibility and updated thoughts on potentially buying back stock, debt, or any other M&A opportunities out there.
Well, obviously, we are doing medium-term planning around our financing needs and have great confidence in our financial flexibility to be able to execute the Gras Savoye transaction should we decide to proceed with it. On the financial flexibility, we continue to look at our financial structure on an ongoing basis and make sure that it is fit for purpose. As I said, we are very focused on free cash flow and focused on how we use that cash flow to both drive medium-term growth and to return cash to shareholders. We'll be making those trade-offs on an ongoing basis. In terms of financial flexibility to meet the needs of the company to grow and to invest in Gras Savoye and any other acquisition opportunities that we think pass our very stringent tests in being attractive, we're very confident.
Okay. That's helpful. Maybe, Mike, do you have the CapEx for the quarter handy?
The CapEx for the quarter was around $25 million.
Okay. Thank you very much.
Next question, Nikki.
Brett Huff of Stephens Inc. You may ask your question.
Good morning, and thanks for taking my question. My question is on investment priorities. In the prepared remarks, you mentioned that you've been looking around as you're evaluating the organization, have already started making some investments in Global. Can you give us just a broad sense of what kinds of investments you're going to make? Will it be people? Will it be technology? Will that investment include organic, inorganic acquisition of talent or other channels, et cetera? Just broad strokes, what are the different pieces that you're thinking about in terms of investment?
Brett, we're in motion on that, and we hope to give you much more information on July 30th at our Investor Day. It will come as no surprise to you that we're going to obviously be focused on opportunities to grow with attractive returns. We're going to be targeting our investments, I think, on growth areas. That does not mean just the emerging markets. It means growth areas throughout the world and in all our businesses where we see specific opportunities. Organic growth is undoubtedly our preferred way forward, but where we see attractive M&A opportunities that, as I say, pass stringent tests in terms of a strategic and cultural and integration fit and very tough net present value analysis of what the cash flows will actually bring us, then we will also consider inorganic growth. Again, focused on growth.
Just a quick follow-up. The expense reductions that you have going forward, I think you said the annualized savings would be $25 million-$30 million or $25 million-$35 million. Should we think about that as dropping to the bottom line, or should we think of that as part of the source of funds for some investments going forward as you guys look to the next few years?
We said on an annualized basis, it would be $25 million-$30 million. I think to answer your question, both of what you referred to in terms of Some will drop to the bottom line, and some will be used to invest for future growth of the business going forward.
Okay. That's what I needed. Thanks for your time.
Great.
Our next question comes from Brian Meredith of UBS. Your line is open.
Yeah, good morning. A couple quick questions here for you. First, Mike, I'm curious, could you just give us what the depreciation amortization runway is going to look like here going forward?
Well, take the figure that's in the Q and subtract $5 million from it because the reported numbers I mentioned included $5 million related to fixed asset write-offs.
Right.
Take that number, subtract five, and multiply it out by four. I think a number of about $21 million plus per quarter is really what you should model.
Okay. Great. Thanks. Second question, just back on the benefits business and getting the contingent commissions and change to the compensation structure. What was the impact on the organic revenue growth rate from that in the Willis North America business, and where are we in that process right now? What's the benefit going to look like going forward?
Well, the benefit looking forward is somewhat hard to calculate given the very nature of that revenue stream, although we think we'll do better on it as we move forward. As a reminder, we only started that effective April 1st, we didn't even get a full year run rate. It was approximately $2 million in the quarter. We actually had some legacy HRH runoff MDI of close to $1 million. The impact was not that significant, though I'd expect it would be helpful downstream.
Great. Last question, what was the impact of Willis Capital Markets in the quarter on the global business? Was it a benefit for organic growth? Hurt?
Do you want to
I'll take that.
Okay.
Yeah. Go ahead, Steve.
No, it was a negative comparable year-on-year. We don't get into stripping out the absolute numbers in terms of the capital markets business. As I think we've explained before, it's a very lumpy business in terms of a small number of large value transactions, but it was down year-on-year, quarter-to-quarter.
Okay. Thank you.
Tom Mitchell, Miller Tabak, you may ask your question.
I'm wondering if you could elaborate a little on the trends in reinsurance rates. There have been a couple of underwriters who suggested that reinsurance is less attractive as a place to be putting their capital, whereas certain parts of North America seem to be more interesting. I'm wondering what your observations are.
Sure. I'll take that as well. Yeah, again, I'll repeat, it is all over the place in terms of rating environment. I point you back to the website in terms of some detailed commentary, region by region, country by country, and line by line. Certainly, my view is not that this is a place people aren't interested in putting capital at the moment. Quite the reverse. We've seen all sorts of new capital turn up in the reinsurance world, particularly in the property cat area so far. I think discussions we're having and hearing, that capital is starting to look more globally in terms of where it's turning up, and also product line-wise is getting into some interesting places. Relatively modest at the moment, maybe $35 billion, something like that, but growing. We see more, not less of that.
Again, I think that's probably a reflection of the macroeconomic environment of where capital can go to make a return, and reinsurance offers an interesting opportunity. No, I think more capital, not less.
In terms of non-traditional people who are raising cat bonds and other alternatives to traditional underwriting, are you seeing anything in that area that's a meaningful change from where it was, say, a year ago?
Yeah. Again, I'd say more, not less, is probably my summary answer. There's certainly a lot more interest and activity. There's been a lot of debate about the fickle nature of that capital and whether it's a temporary development or something that's going to be more sustained. My personal view is it's more sustained, and it's coming from some places where you find long-term investors. We'll see what happens, but certainly seems to be more, not less.
Great. Thank you very much.
Our next question comes from Bob Glasspiegel of Langen McAlenney. Your line is open.
Good morning, everyone. Dominic, I think these board announcements are often a lot more important than we investors appreciate. The company recently announced a non-executive chairman replacing executive chairman and a large investor on the board. I was wondering if you could summarize where the board is coming from on these announcements, what they mean, and what sort of skill sets these guys are bringing that you'll tap.
Sure. Well, when I came on board as CEO, we moved to a structure of having a non-executive chairman and a CEO, and that's what we did. Then, as everyone knows, Joe Plumeri had announced his intent to retire in the middle of the year. What we've done is to find within our existing board, Jim McCann to take over the role of non-executive chairman. That's a wonderful transition. We're very excited about that, excited about the extraordinary leadership that Joe has provided this company for over 12 years, excited that an incumbent member of the board is stepping up to become non-executive chairman. That's a quite natural transition. In the course of that happening, we realized that we needed to do some medium-term planning as to how the board might evolve, that has been underway for quite some time.
We knew that with Joe leaving the board, we would have a board place open. We've been going through this process, and we were in dialogue with Jeff Ubben, who is one of our major investors in the company, we've been in a series of very constructive dialogues over a prolonged period of time. We're delighted to welcome Jeff onto the board beginning again in July. That is part of an ongoing process we're going through. We also announced, you will have seen that we have two more vacancies emerging, we're in the middle of that process I described and looking forward to announcing two new names in the near future.
Great. I was wondering if you could just tell me the skill sets that Jim McCann and Jeff Ubben bring and perhaps what the board is looking for as far as depth that they don't have now.
Well, in terms of what are we looking for, generally, our business is a reasonably complex global operation with deep operations in Willis North America and around the globe, Europe, Asia, Middle East, Latin America. We obviously are looking for strong capabilities who are used to leading companies in that world. Generally, we're looking for people who want to contribute to enabling us to be a long value creating company in the medium term. The specifics around Jim McCann and Jeff Ubben are obviously Jim McCann is a very seasoned CEO and knows the company extremely well, having been on the board for many years. We're delighted to have him as Non-Executive Chairman. Jeff Ubben has very deep experience on a large number of public company boards. Both of them bring great strengths to the board.
It'd be great if Mr. McCann could be at the investor day so we could get to meet him.
Yeah. We will certainly try to make that happen.
Thank you.
Our next question comes from Mark Hughes of SunTrust. Your line is open.
Thank you very much. Two quick ones. The employee benefits impact on organic growth in North America, was it a positive or was it a drag?
The employee benefits impact was positive. They had mid-single digit growth. It was helpful. It was in line with everything else we did.
Okay, great.
Remember, we call that practice our human capital practice.
Right. Yep. Then in terms of the Willis Capital Markets, the pipeline you have occasionally commented on it in the past. Are there any larger transactions, or what should we expect for the 2Q or the balance of the year?
Yeah, I'll take that one again. We have a fantastic Capital Markets business, a leader in the insurance industry in terms of proposition and advice. It is very active. It has a very full pipeline of prospects and existing engagements that it's working on. It is, as I said, a lumpy business because obviously its revenues and the announcements are dependent on a transaction. Typically a transaction happening. You see these periods where quarter-on-quarter things move around. We're very happy with our Capital Markets business and expect it to be a contributor to growth of revenue and margin this year.
Thank you.
Were you ready for the next question?
Yes, thank you. Yeah.
Thank you. Jay Cohen, BofA Merrill Lynch, your line is open.
Yes, thank you. I just wanted to follow up on the U.S. business. In the past, you've shared some metrics with us as far as producer count and what the new business pipeline looks like. I'm wondering if you can give us an update on those metrics.
Sure, I'm happy to. On the pipelines, the pipelines are as robust as they have ever been. We are maintaining a level. I think I'd indicated in the past that our initial targets were 2 times and we had gotten to 3 times, and we're in excess of that still. On the recruiting front, we're down what I would call a handful of producers in the first quarter. We traditionally drop a little bit. The recruiting dips as producers were looking to hire, waiting to collect their bonuses from their previous firms. Then, the last one is retention. Where we came in for this quarter was above what we had traditionally done and in line with aspirationally what I'd like to hit. We target 95% retention. No one's ever done that consistently, but at 93%, I'm a pretty happy guy.
Great. Thanks, Vic.
Yeah.
At this time, we have no further questions.
Well, let me thank everybody for attending our call. We are very excited about your interest in our company, and we look forward to continuing to engage with you in the coming months. Thank you.
This concludes today's conference call. Thank you for participating. You may disconnect at this time.