Welcome, thank you for standing by. At this time, all participants will be in a listen-only mode. After the presentation, we will conduct a question and answer session. To ask a question at that time, please press star one. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to Mr. Peter Pugliese. You may begin.
Thank you, welcome to our third quarter 2011 earnings conference call and webcast. Our call today is hosted by Joe Plumeri, Willis Group Holdings Chairman and Chief Executive Officer. A replay of the call will be available through November 25th, 2011, at 11:59 P.M. Eastern Time, by calling 866-495-6480 from within the U.S. or country code 1, 203-369-1769 from outside the U.S. No passcode is needed. Alternatively, the webcast replay can be accessed through the investor relations section of our website at www.willis.com. If you have any questions after the call, my direct line is 212-915-8084. As we begin our call, let me remind you 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. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, we undertake no obligation to revise or publicly update the results of any update to these forward-looking statements 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, 2010, 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 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 Joe.
Thank you, Peter, and hi, everybody. Welcome, and thank you for joining our call today. On the call with me today are Grahame Millwater, our Group President, Vic Krauze, CEO of North America, Michael Neborak, the Chief Financial Officer, and as usual, other members of the management team are also here and will be happy to answer all your questions at the conclusion of our prepared remarks. First of all, I want to tell you that I feel good about the quarter and how the company is doing. Even the North America segment, once you adjust out for the impact of Loan Protector, which I'll get into momentarily, had flat organic growth in the face of an uneven pricing market and as you all know, continued difficult economic conditions.
I mentioned in my quote in the press release that this quarter's earnings were complicated by a number of factors. I appreciate that that's an understatement. We believe that many of those factors are either non-core to our business or otherwise not generally considered in analyst estimates. I'd like to start off right away by walking you through those items in some detail. Hopefully, this will make the earnings a little bit easier for all of you to understand. In the third quarter of 2011, we reported earnings of $0.34 per diluted share. There were two non-core items that had a significant negative impact on this measure and one core item that had a relatively smaller impact. First, we had a $15 million charge for our 2011 operational review.
We've discussed our operational review during the past three quarterly calls. We told you that we expected to take charges throughout 2011. Mike obviously will discuss this in further detail on the call. The current quarter charge equates to about $0.06 per diluted share. There is a further $0.01 adjustment to our senior note redemption. As we've done in previous quarters, we adjusted those charges out of our reported earnings and disclosed adjusted earnings per diluted share are $0.41. Second, the poor performance of the Loan Protector business included within our North America segment that places loan protection insurance primarily for mortgage services. Loan Protector achieved strong earnings and margin growth in the third quarter of 2010 and really throughout all of 2010 and into the first quarter of 2011.
Unfortunately, starting in the second quarter of this year, that performance has fallen off significantly, primarily due to the loss of clients through either attrition or M&A activity. Also, there was industry-wide commission pressures and a general slowdown, as you know, by banks in starting foreclosures on delinquent properties. We expect this negative trend to continue in the fourth quarter of 2011. The earnings impact from the drop-off in Loan Protector performance was $0.05 per diluted share. This is the delta from the third quarter of 2010 to the third quarter of 2011. Lastly, during the third quarter of 2010, we reported to you that we had taken a $7 million benefit in other operating expenses related to the release of a previously established legal accrual.
In the third quarter of 2011, other operating expenses were similarly favorably impacted by a release of funds related to potential legal liabilities, but only by $5 million. That differential of $2 million had a $0.01 per diluted share negative impact quarter-over-quarter. Combined, those negative items added up to $0.13 per diluted share. We also recorded a few items that we considered to be non-core in nature that had a positive impact on this quarter's reported earnings per diluted share. First, we recorded an adjustment to our taxes to update our full year estimated tax rate from 25% to 22%. This is essentially a positive catch-up since we booked our first two quarters taxes at an estimated effective rate of 25%, as previously disclosed. Mike will take you through that later in the call. The positive adjustment came to $0.05 per diluted share.
Second, we recorded revenues in our reinsurance business that may or may not recur related to a profitability initiative in that unit, that resulted in $0.02 per diluted share. Finally, as we discuss every quarter in our press release, favorable foreign exchange increased earnings per share relative to the third quarter of 2010 by $0.01 per diluted share. Combined, if you take all those items, all of which had a positive impact on our reported earnings, it added up to $0.08 per diluted share. We have earnings of $0.39 per diluted share, which is a non-GAAP measure, slightly different than our defined adjusted earnings per share, but we wanted to present it in this quarter because it provides even more clarity to investors regarding the underlying business.
I also want you to know that having said all that, our goal is to provide uncomplicated earnings in the future, to do that simply by growing revenues across our segments, controlling expenses, and improving our margins. We expect to do better, that is why we've undertaken our initiatives in 2011. As a reminder, at the risk of being repetitive to earlier quarters this year, we set out clear goals for what we wanted to achieve this year, I just want to remind you what we said. One, undertake an operational review to better align our resources with our growth strategies and generate meaningful savings. We think we've done that or are doing that. Two, take a charge to implement these changes. We've done that. We'll talk about that more. Rollout growth initiatives. We've done that.
We'll talk about that some more, review our balance sheet, we've certainly done that. I'm pleased with the progress we've made on these very important initiatives. During the third quarter, we recorded a $15 million related to the operational review. Year-to-date, we've recorded $130 million. Also during the quarter, we identified additional opportunities to achieve efficiencies, we now expect the full year charge for the operational review to be $160 million, which will have a positive effect on next year's expenses, Mike will talk about that later on.
Importantly, we've realized about $48 million in savings year-to-date, and we now expect that the operational efficiencies will result in full year cost savings in 2011 of approximately $75 million, and that the company will achieve annualized cost savings of approximately $115 million to $125 million beginning in 2012, and that is significant. You already know about our debt refinancing that we completed earlier in the year. That is already saving us money on our interest expense line. Grahame will update you on some of our revenue initiatives later on the call. In previous quarters, I said that we expected these actions would help us deliver modest growth in both adjusted operating margin and adjusted earnings per share in 2011, even as we knew costs would increase from higher retention award amortization, reinstatement of salary review, and reinstatement of 401(k) match.
At the time of those statements, I did not foresee the significant deterioration in the financial results of Loan Protector. In 2010, Loan Protector contributed about $41 million to our earnings before income taxes and achieved higher than our average margin. We expected similar results in 2011. However, due to the unanticipated decline in Loan Protector's business due to the reasons I mentioned earlier, we currently expect that it will contribute approximately $10 million to $14 million to earnings before income taxes in the full year 2011, and its margins have compressed significantly. As you know from reading the press release, we have accordingly modified our expectations for 2011 adjusted earnings per share and margins. Our expectation is that full year 2011 adjusted earnings per share will fall in the range of $2.70 to $2.80 per diluted share.
That takes into consideration the significant negative impact that Loan Protector has had on our earnings year-to-date and the expected impact in the fourth quarter. It also takes into consideration the stubbornly difficult economic conditions encountered throughout Europe and the U.S. Those are our two largest revenue-generating markets, and both are tracking below our expectations. That earnings range does not include any impact, positive or negative, from foreign exchange in the fourth quarter of 2011. As mentioned in our press release, we also expect to achieve full year adjusted operating margin in the mid-22% range. However, I continue to believe that delivering The Willis Cause to our clients, together with our other revenue initiatives and the efficiencies we're achieving from our operational review, will position us to drive significant growth in adjusted earnings per share and adjusted operating margin in 2012.
Now let me provide you with some details behind our organic growth in the quarter. Organic growth in commissions and fees was up 2% over the prior year quarter, a very good result given the conditions. That growth was led by our global and international segments. North America was down 4% compared to the prior year. However, as I just discussed, Loan Protector was a big driver of the disappointing results. Excluding Loan Protector from both periods, North America's organic growth would have been flat. I'll talk more about the segments in a moment. The net new business was up 2%, driven by double-digit new business generation and retention of existing clients, which increased to 92%. During the quarter, for the first time in a while, rates did not have a material negative impact on our growth. Essentially, rates overall were flat to slightly down year-over-year.
Any improvement in rates will benefit our top line significantly, as 70%, as you all know, of our revenues come from commission on a worldwide basis, and 80% of North America's revenues are commission-based. We already have seen some firming in loss-affected areas or where there have been specific events. Workers' comp rates in some states in North America are showing signs of rate increase. Property rates on global basis for cat or loss-affected accounts are rising, and RMS 11 is impacting both North American and European property cat exposures. This firming is being offset by continued softening of rates in areas where there is excess capacity. For example, D&O is still seeing double-digit decreases, and aviation is seeing moderate decreases.
Overall, there's still plenty of capital, so as soon as the rates start to harden in one area, capital is being quickly deployed, and this is keeping pressure on rates overall. I would say that obviously, given the economics that carriers are now experiencing, pressure on rates to go up will continue to be the discussion, simply because interest income is down, combined ratios are up, and obviously that's the reason why rate is constantly being discussed, and it's something that we have to keep an eye on, and we can discuss later on if you want to. In addition, the external environment remains difficult and really hasn't changed much since the last conference call. In fact, the economic news out of the U.S. and in many of the European countries, including the U.K., has been pretty bleak and has gotten worse. Exposures, too, are basically unchanged.
Let me talk more about our segments. In North America, our underlying business remains in good shape, as I said earlier, in spite of some familiar challenges. The overall insurance rate environment is still not positive but is less of a headwind than it has been. Exposures aren't increasing, and clients aren't buying more, and we still got a weak economy and high unemployment, meaning tough operating conditions for our middle-market clients, which, as you know, as a reminder, is the mainstream of our business in North America. Against that, flat economic growth, excluding Loan Protector, was really not a bad outcome, although I will tell you that we expect better. New business generation was in the low double digits, while client retention, calculated on a dollar basis, not a client basis, remained at a solid 92%, and you need to know that our goal is 95%.
In terms of geographies, we saw good growth from South and Atlantic regions. Employee benefits, our largest practice, was flat for the quarter. That was a pretty good result given the stubbornly high unemployment that we still have in the U.S. Construction, our next largest practice, was up single digits. Also, a pretty good result given the continued tough conditions in that industry. Our tech and telecom practices had a great quarter, growing double digits. Additionally, financial services and executive risks did well. As I said, the underlying business in North America remains in good shape. Looking at the margins this quarter, the decline in commission and fees, primarily as a result of the decline in the Loan Protector business, partially offset by cost savings, primarily from the operational review, drove the 180 basis point decrease to 19.5%.
180 basis points is a lot, especially when you consider how much the contribution in 2010 came from Loan Protector. In International, although the third quarter is a seasonally light one for International, the segment had another quarter of growth, reflecting the strength and the diversity of our extensive network. Organic growth in commissions and fees was 5%. New business generation remained in the double digits against a rate headwind of 1%, while retention grew to 93%. Latin America and Eastern Europe delivered double-digit growth, with strong contributions from Brazil, Chile, and Argentina in Latin America, and Russia in Eastern Europe. Asia Pacific was flat overall. Strong double-digit growth from China and Indonesia was offset by negative growth in Australia. Continental Europe continues to be economically pressured. In that tough environment, we grew low single digits.
Growth in the region was led by Sweden, Norway, and Germany, and offset by Denmark and the Netherlands. The U.K. and Ireland businesses was down slightly, although retention was up slightly. The decline there also reflects the ongoing weakness in economic growth and employment in both countries. Operating margin declined 240 basis points to 1.9%. Higher amortization of retention awards and continued investment in future growth were the primary drivers of the margin decline, partially offset by favorable foreign exchange movements. Let me now talk about our global businesses. The global business segment comprising reinsurance global specialties, London market wholesale, and Willis Capital Markets, performed strongly, delivering 9% organic growth. Reinsurance maintained strong growth momentum. Growth was driven primarily by renewal business, with particular strength in Asia Pacific and North America.
Secondarily, we also had some revenues that may or may not recur related to a reinsurance business profitability initiative that helped the quarter. In terms of the reinsurance market overall, the rating environment is generally flat, although varies by line, geography, and client size, e.g. aviation down, energy up. Reinsurers are seeking pricing increases based on most recent model changes in Europe, but buyers are resisting. U.S. reinsurers are noticing some positive rate trend on catastrophe-affected property as a function of loss activity and changes in modeling exposures. Signs of reinsurers revisiting their diversification strategies with some pulling back from second and third tier territories and are requiring higher pricing. Overall, pricing buyer versus seller is finally balanced. Global specialties had mid-single digit growth driven by energy, marine, and construction. Growth from strong new business and improved client retention with continued overall softness.
Willis Capital Markets & Advisory is an interesting story. As we've said in the past, it's a choppy business in terms of revenue. Capital markets would have had a very good quarter except for a timing issue, with the deal closing that we expected in the third quarter slipped from the third quarter to the fourth quarter, that would have made a difference in the quarter. The numbers that we reported would have been much different, but that's the nature of the business, and we're looking forward to that in the next quarter. London market wholesale, good growth in our Global Markets International business, driven by new business generation, offset by weakness in Faber & Dumas, which reflects continued softness in the wholesale market. Operating margin was down 70 basis points to 22.4%.
Unfavorable foreign currency movements and increased amortization of retention awards were partially offset by strong growth in commissions and fees and lower pension expense. As far as our growth strategies for the future, let me just talk about that for a second. What I did was give you a look back on the quarter's results. I went into gory detail more than I usually do because I appreciate from your perspective, it could have been a little complicated, and I wanted to make sure that we tried to help you as much as possible. Ahead of Grahame's discussion, though, I'd like to spend some time discussing with you our view on one aspect of our growth strategy into the future. We've spent the past three years absorbing HRH, right-sizing the organization, implementing important initiatives like The Willis Cause, Sales 2.0, WillPLACE, the operational review to drive our growth organically.
Those organic initiatives are well underway. I'm very satisfied with the traction that we've made to date, and you're going to hear that from Grahame shortly. Over those three years, we've paid very little attention to growth via strategic acquisitions. I think you should expect us to be more proactive in that area as a way to supplement our organic growth and allow us to grow our revenue and our geographic footprint even faster. What I'm basically saying is for three years, we have been inactive as it relates to acquisitions. That does not mean that our business model will turn to acquisitions.
I simply want you to know that as we look and we find and we see acquisitions that makes sense strategically, geographically, or by way of sector, we're going to take a look at them, whereas over the last three years, we were concentrating on our disciplines, we were concentrating on our strategy, we were concentrating on our costs, we were concentrating on our integration, we were concentrating on our initiatives, and we're going to still do all of those things. I think we got a little bit of time now in our diary, as they say here in London, to concentrate a little bit on acquisitions, and I wanted you to know that we're ready to do that. I'm going to conclude my prepared marks by saying that I'm really excited about the future of this company. This has been a choppy quarter. I appreciate that.
If you look at the underlying strength of the place, and you look at the 2% growth, the 2% growth without Loan Protector and the insertion of what might have happened in capital markets could have been a much bigger number. It wasn't. It is the way it is. The excitement that you hear is that we got all the things in place to make sure that the future is the one that we expect and deliver on our value proposition, The Willis Cause, and everything that we've talked about as it relates to our future and the significant improvement I think we can make in our numbers next year. With that, I'll turn it over to Grahame Millwater to update you on the initiatives and The Willis Cause. Grahame?
Thanks, Joe. Given that Joe spent a lot of time on the complexities of the quarter, I will make this relatively short. Our growth will be driven by 3 factors: pure organic recruitment and acquisition. Given we have now largely completed our operational review and revised our capital structure and re-strengthened the balance sheet, we will really focus on growth going forward with very little distraction. The organic growth plan is in good shape, as Joe says, and we've laid great foundations under the heading of delivering The Willis Cause. A quick update on our core programs. Sales 2.0 continues at a pace as our industry-focused proposition in the middle market. We are more convinced about this as a proposition, as when we deploy it, we're getting good early hit rates.
We've now assigned about 8,000 prospects to 500 associates globally and are monitoring weekly calls made, meetings arranged, reviews produced, and ultimately, sales made. Obviously, Sales 2.0 is a critical factor in filling our forward-looking pipelines of new business, which we continue to drive across all geographies and all segments. However, although new business is critical, so is retention. Our retention levels continue to improve. We monitor pipeline and retention by business unit on a monthly basis, and these 2 metrics will become fundamental to our performance management as we increasingly focus on growth. Additionally, having spent 2 years developing our approach in terms of carrier relationships and management of our premium flows, we're delighted to be launching our completely new placement process, data analysis, and technology in the next 3 months in 14 countries.
This is called WillPLACE. The 14 countries include U.K., U.S., and most of Europe, and will cover 70% of our premium volume, with the remaining countries coming online by the middle of next year. WillPLACE has already been piloted in Italy, Brazil, and a couple of offices in the U.S. We have really good reception from carriers when we've taken them through the process. We have launches of WillPLACE with carriers in November in New York and London. This will give us control, data flow, and analysis that we've never had and will create a really differentiated benefit for both our clients and our carriers. Let me talk about large accounts. We're getting real traction in the global solutions unit that focuses on the world's largest companies, and we are ahead of plan for 2011.
However, more importantly in this sector, where the time lag between prospecting and winning is at its longest, we've established real foundations in terms of our offering, while also laying down initial relationships with global companies that frankly did not know Willis as a viable alternative to our largest competitors. Out of the top 1,200 companies worldwide we identified, we have continued to work on clear account plans for the 450 we have given real priority to. We will really focus on the Sales 2.0, WillPLACE, and global solutions programs in 2012 to continue to drive organic growth. As Joe indicated earlier, we know in certain cases to attract the right talent in the scale and to fill out our platform, scientifically targeted strategic acquisitions will also become part of our growth program.
For example, acquisition will be an important part of our strategy in EB, where we need to build further scale quickly in certain critical territories, whether it be mature markets such as the U.K. and U.S. or rapidly developing regions such as Asia or Latin America. With that, I will hand it over to Mike Neborak to review the financial results. Mike.
Thank you, Grahame. Let me begin by commenting on some important items that impacted our financial results. All comparisons are to the third quarter of 2010, unless otherwise noted. The first item is the operational review. As described in our press release, we recorded a charge of $15 million in the quarter related to the operational review, bringing the total recorded in the first nine months of the year to $130 million. That $15 million charge in Q3 was spread. $7 million went to our salary and benefits line, and $8 million went to other operating expense lines. Joe mentioned we have identified more opportunities to lower our cost structure and now expect the total charge in 2011 to be approximately $160 million. The remaining $30 million will be recorded in the fourth quarter.
Just to give you some perspective, a substantial majority of that increase comes from further headcount reduction and function relocation to lower-cost geographies. We expect to realize cost savings in 2011 of approximately $75 million, which is the top end of our previously estimated range. In the third quarter, we achieved cost savings of close to $24 million, of which $14 million were against our salary and benefit line and $10 million against other operating expenses. Total savings year to date were approximately $48 million. Full-year cost savings in 2012 are now estimated at $115 million-$125 million, up from our previous estimate of $95 million-$105 million. Therefore, 2012 will benefit incrementally by approximately $40 million-$50 million of lower costs before investment. Turning to Q3 2011 results. Reported earnings were $60 million, or $0.34 per diluted share.
These numbers were negatively impacted by the $15 million in costs from our operational review. Adjusted net income was $72 million, or $0.41 per diluted share, up 11% from Q3 2010. That adjusted EPS benefited by $0.01 from FX movements. Basically, foreign exchange increased our revenues by $21 million-$22 million and increased our expenses by $17 million-$18 million. The principal reason for that was weakness of the U.S. dollar against the pound sterling and against the euro. We should also mention that these movements resulted in a 30-basis point increase in our adjusted operating margin. On the revenue side, total reported revenues increased 4% to $762 million. Reported commissions and fees also grew 4% to $755 million, while organic growth was 2%. Total investment income was $7 million, down slightly from the year ago period.
Important to note that we continue to estimate that the full year 2011 investment income will be approximately $30 million. Included in fiduciary assets on the balance sheet was fiduciary cash of $1.8 billion, down from $2 billion at the end of the second quarter. Let me turn to expenses, which continue to be an important focus for us. Again, our goal is to keep expense growth lower than revenue growth and expand the operating margin. Total reported operating expenses were up $45 million or 7% to $672 million. Around 3% or $17 million of that increase related to foreign exchange, 2% or $15 million came from the costs associated with implementing the operational review. As a result, the underlying organic growth in total expenses comes to approximately 2% or $13 million.
Let me give a little bit more perspective on the two major components of our expense structure. First, salaries and benefits were up $28 million or 6% to $490 million. If you exclude the $7 million charge that the operational review has recorded in that line, and you exclude the increased cost from foreign exchange movement, the underlying growth in salary and benefits was about 1% or $6 million. You can look at that 1% growth in another way. That came from higher amortization expense related to cash retention awards and other compensation costs, including salary increases, 401(k) matches , and investment in new hires. Those costs and increases were partially offset by $14 million of realized savings coming from implementing our operational review, an $8 million decrease in pension expense.
Reported other operating expenses, the second large category, were up $18 million or 14% to $147 million. Excluding $8 million of operational review costs and the increased cost from foreign exchange movements, underlying growth in other operating expenses was approximately 7% or $9 million. The biggest driver of that underlying growth came from investing in our technology infrastructure and operating systems, and also increases in the U.K. statutory VAT rate. The interest expense for the quarter was $38 million, down from $40 million in the third quarter of last year. Those savings were driven by the refinancing we did back in the first quarter of our high-cost debt. Please note the current quarter expense was higher than the second quarter of 2011.
Third quarter higher than the second quarter on a sequential basis, primarily due to changes to the fair market value of certain derivatives that we use to hedge portions of our fixed rate debt. However, we continue to expect our quarterly run rate to be approximately $34 million. While on the topic of expenses, I would like to outline some parameters for expense growth in 2012. First, we expect total operating expenses will grow approximately 3%-4% on an adjusted earnings basis, meaning excluding the impact on 2011 expenses from the operational review, the FSA settlement, and the make-whole premium paid to refinance our high-cost debt earlier this year. That growth will be driven by several factors, including increased amortization of retention awards, although a substantially smaller increase than 2011 over 2010.
A full-year impact to costs coming from people investments we made in 2011, continued reinvestment in our business during 2012 via new hires, and increased depreciation expense related to technology infrastructure investments such as Sales 2.0, WillPLACE, and Epic, which is our new North American broker management system. These factors will be partially offset by the $40 million-$50 million of incremental savings associated with the 2011 operational review. Turning to taxes, which were complicated this quarter, I want to spend a little bit of time. Income tax expense for the quarter was $2 million, resulting in an income tax rate of 4% compared to income tax expense of $10 million and a rate of 15% in the year ago quarter. Our current quarter income tax expense reflects a revised estimate of the annual effective tax rate from 25% down to 22%.
This decrease is driven by an increased operational review charge and changes in the geographical mix of profits, especially from Loan Protector in North America. As many of you know, North America has the highest corporate tax rate in our group. The revised estimate of expected full-year 2011 effective tax rate when applied to our year-to-date normalized income, resulted in a tax benefit of $8 million being recorded in this quarter. This benefit reflects the impact of applying the revised rate to the income of the first two quarters, which previously had been taxed at 25%. Excluding the impact of non-recurring items, you should look at our effective tax rate going forward as being 24%. Income from associates was $10 million, compared with $9 million in the year ago quarter.
We continue to expect income from associates in the fourth quarter of 2011 to be similar to the fourth quarter of 2010. Our U.K., U.S., and international defined benefit plans had a combined GAAP surplus of $133 million at September 30th, up from approximately $15 million at year-end 2010, principally due to cash contributions we've made to the plan during the year. Pension contribution payments were $42 million in the quarter, and we still expect that cash contributions for the full year to be approximately $130 million. Pension expense in the quarter was $3 million, an $8 million reduction from the third quarter of 2010. We continued to make progress on debt reduction and capital management in the third quarter. Total debt was $2.4 billion, largely the same as at the end of the second quarter. However, we did make a $27 million principal repayment on our term loan.
The leverage ratio was calculated under our term loan agreement was approximately 2.5 times at the end of the quarter, down slightly from the June 30th figure. Cash and cash equivalents were $363 million, compared to $317 million at June 30th. During the third quarter, we generated approximately $146 million in cash from operations, bringing the total in the first nine months of 2011 to $272 million. Importantly, Standard & Poor's reaffirmed our investment-grade rating and raised their outlook from stable to positive, while Moody's reaffirmed our investment-grade rating and stable outlook. Regarding priorities for capital management, our first priority is to pay down debt and to reduce financial leverage. As I've said before, our goal is to lower our debt to adjusted EBITDA ratio into the low two times range. Once we're there is good room to consider share buybacks and other types of capital management.
That's the end of my prepared remarks. I'll turn it back to you, Joe.
Thank you very much, everybody. I know that that presentation was longer than usual. We also appreciate it. As I said at the beginning of this call, this quarter is a little bit more complicated than usual, and we wanted to clarify as much as we can, and we appreciate very much your patience in allowing us to do that. I think what you'll find as you went through the presentation and you listened, that the underlying revenues were a little bit better than they seem, and the underlying expenses were a little bit better than they appear to be. That's why we wanted to go through that in as much detail as possible. We told you that what we were going to do at the beginning of the year, I think we're continuing to do that. We've completed the operational review.
We're implementing the associated cost and revenue initiatives. We've improved our debt. We're concentrating on putting the right people in the right place so that we can execute on all those strategies. I've said before, everything we're doing is being done to differentiate Willis in the eyes of our clients, retain those clients, and grow the business. We're not where we want to be yet. The actions we've taken will allow us to achieve our goals and get a little bit closer. We know we can do better, and we will, and we appreciate you listening. We'll take questions now. We'll open it up. Thank you very much.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press *1 on your touchtone phone. Please remember to unmute your phone and record your name clearly when prompted. You may withdraw a question by pressing *2. Our first question comes from Jay Gelb with Barclays Capital. Your line is open.
Thank you. For overall organic growth, what was that ex the drag from Loan Protector in the third quarter and the second quarter?
Say that again, Jay. I'm sorry, I couldn't hear you.
Overall organic revenue growth for the company.
Oh, 4%.
Ex Loan Protector in 3Q, what would that have been in 2Q?
2Q, 4% as well.
Okay. For next year, where you talk about 3% to 4% underlying operating expense growth, it would seem that based on your goal of generating significant adjusted operating margin, that you would have to generate organic revenue growth well in excess of that amount. Is that achievable?
Well, we would definitely have to generate organic revenue growth in excess of that amount. Depends on what you define to be well. 3% to 4% organic revenue growth, 4% to 5%, depending on how the mix comes out, you'll get more than 100 basis points margin.
Okay. Joe, it may be helpful given the recent announcements about unit management leadership changes. Can you give us a bit more insight in terms of
What's going on there?
The only insight that I can give you is that you shouldn't expect by virtue of those changes, Jay, that there's going to be an event you read about next week or two weeks or three weeks from now. They weren't associated to any event whatsoever. It was simply a couple of people that left the company, we go forward from there. It wasn't related to an activity that you're going to read about.
All right, thanks. Finally, we've heard from a couple of the large underwriters late last week they're seeing monthly improvement in rates, particularly in the U.S. Do you see that flowing through as well, going into end of 2011 and into 2012?
Well, it's a general question. Your question is more of a feeling, okay, than anything else. I gave you the stats. The stats that in the U.S. rates are flat. In the rest of the world are kind of down -1. You throw the economic backdrop on top of that. Those are the facts. As it relates from a feeling point of view, I think what you're getting is a little bit of a breeze. I wouldn't call it wind at our back. I think what you're getting is a breeze, and you're getting from carriers a sense and a hope maybe, that's why I call it subjective, that the rates will at least go from flat, let's say, in the U.S. to maybe up a little bit because the statistics require it and the economics require it. That's the subjective part.
I gave you the factual part. The subjective part is there's probably a little bit of a breeze that they would like to see. Haven't seen it in exposures. I haven't seen it in real rates. As I said, where we've seen the increases, they've been offset by where there's a lot of money, like D&O and aviation and things like that. I think that's what you're hearing.
Excellent. Thank you.
You're welcome. Thank you.
Our next question is from Keith Walsh with Citi. Your line is open.
Hey, good morning, everybody.
Hi, Keith. How you doing?
I'm good, thanks. First question, if Peter Hearn is there, just in the press release, looking at the reinsurance profit initiative, can you just give us a little more color what that is and how much that contributed?
Keith, to answer your question, we have in place agreements with a portion of our client base, which while contractual in nature, some provide for negotiations for additional revenue based on our performance.
Okay.
As you well know, we don't break out individually what we do in reinsurance.
Okay. You guys were happy to break out the Loan Protector, so I want to understand what was the wind at your backs? If you're going to give us the negatives, we want to hear what the positives are as well.
Just to clarify that, we have obviously some pricing agreements with insurance companies that we do business with. There's some adjustments in the prices that were renegotiated, Keith. That's what he's talking about.
Okay, maybe we can take that offline. I guess, second question for Mike Neborak. You guys were really clear about some of the savings you have, and I appreciate that. What are some of the costs that maybe come back next year if we think about the furlough program, is that still in effect and will it be in 2012, as well as thinking about pension expense right now with where discount rates are?
Well, next year, as I mentioned, we will have an increase in the cash retention amortization, albeit much smaller than the increase that we faced 2011 versus 2010. Just to order the magnitude, going into 2011, we knew that the amortization of the cash retention would be up to about $65 million versus 2010. 2012 versus 2011, that number is somewhere between $20 million-$30 million. We'll have paid reviews again next year. That'll be an increase there. We'll hire new people in terms of investing in certain areas of the business. In terms of the pension expense, Keith, that's a great question. Right now it's a little bit premature. I can tell you that we've done some things here in 2011 that would reduce the benefits of that plan.
On the other hand, the market's been very choppy, so the investment performance of the portfolio isn't as good as we would like. That obviously has a negative impact. Obviously the assumed rates of return, all companies with rates of return on portfolios in terms of the future, there's probably some pressure there. At this point, I don't know how to quantify that. I think it's obviously something that we're looking at and we're focused on.
The furlough program, is that still in effect or is it going to continue to be?
If you're talking about the Willis Choice program, Keith?
Yes.
That's still in effect. That's part of our benefits package, basically. We put that in effect a couple of years ago, as you know, and people enjoyed it so much in terms of giving them flexibility that we just left it in. It's a permanent part of what we do today. It gives people flexibility. It gives people the opportunity to travel with their family, spend time with their family, and that gives us ongoing savings, but it's not predictable because it's a choice. It's not forced, so we don't know what it is. We do get savings out of it if that's what you're asking.
Last question, just for Mike or Joe. You guys mentioned M&A. I was a little surprised by that just without the mention of repurchase. How do you think about your free cash flow in 2012 and potential uses and what's the priority of cash flow? Thank you very much.
Thank you. I'll answer that question, then he can answer it from a capital point of view, because it's appropriate that you hear me talk about acquisitions, then you wonder what the priority of your cash is. You want to buy back stock, you want to pay down debt, what are you going to do? I simply mentioned it so that if you see that there's an acquisition here or there, that you're not surprised by it. I just wanted to mention, again, for full transparency, that we have not looked at acquisitions at all. Not only haven't we looked, but ones that have called us, we haven't even bothered to entertain.
I just wanted you to know that to the extent that we have now time, we have the ability to be able to do that on a strategic basis, geographically or otherwise, we're going to do that. That doesn't mean to say our business model, as I said earlier, is going to be just to buy companies like some people do. We don't do that. We're still going to grow organically, but to the extent that there's something out there that makes some sense, I'm not talking about an HRH type of acquisition. I'm talking about things that could be bolt-ons or fill in some sectors. We might do that. I don't see doing that from the point of view that there's a lot of money that's going to be shifted from one priority to the other.
I just wanted to make sure you understood that to the extent that they occur, we don't know when they do, where they will, or in what form, we're going to take a look at them because I think we have the time and the taste, if you will, to do that now. Mike?
I just would also like to add, Keith, that right now, paying down our debt or reducing our leverage and buying back stock, those two items are mutually exclusive. You might ask why, because on our balance sheet, it shows we have $360 million of cash. A substantial majority of that cash is committed, meaning it's not available for general corporate purposes. For example, we have approximately $180 million of that cash in Willis Limited. Not all that's required regulatorily, but we have that much in Willis Limited. We need a certain amount, say $50 million-$100 million just of working capital. Then we have other restricted cash, either in geographic locations or other regulatory environments. Out of that $360 million of cash, probably $30 million-$40 million is really for general corporate purposes.
Right now, if we were to repurchase stock in a meaningful way, I don't mean just to repurchase stock, but in a meaningful way, we would have to draw down our revolver, increase our debt, and that would increase our leverage. As I said, our goal is to reduce our leverage. During 2012, as we continue to generate cash, the cash available that we can use for any purpose really will grow. Based on the facts at the time, either as it relates to M&A or buying back our stock, we'll take all that into consideration.
Thanks a lot.
Our next question comes from Thomas Mitchell with Miller Tabak. Your line is open.
In looking at the Loan Protector, what I heard, a couple of things was that there seems to have been possibly a temporary or cyclical factor in the slower processing of foreclosures that was going on. There was also what seemed to be a kind of a secular change in the mortgage servicing industry. I'm wondering if you could give a little more detail on that.
Sure. I think there were a couple of factors, a couple of which you mentioned. I'll go through the categories. I think that there was basically a slowdown in foreclosures, whereby the banks were not as forceful with regard to foreclosures as they had been in 2009 and 2010, specifically. Secondly, what you had additionally is that that is an MGA for us, which means as an MGA, we represent insurance companies. We do not represent the client in that regard, so that when you had less foreclosures, less volume, they are linked to contingents that we do take in MGAs because it's not client-related, and as a result, they slowed down as well. You had the addition of flooding and other issues that came with the housing market, and as a result, that slowed down the profitability contingent that you get from that type of business.
On top of that, we had a loss of accounts through M&A and loss of accounts through attrition. If you take all of those things together, the comparison to last year was certainly not as good as it was, and that's the reason for the significant difference in how much money we've made from Loan Protector in 2010 versus this year.
That seems clear. I guess just the follow-up on that is I thought, I may be wrong, but I think that when you went through the unusual items in the third quarter, to get to your $0.39 number, not the official adjusted number, you had added back the decline from Loan Protector, and I'm wondering how we should view that. Should we view that as a business that may be going into runoff or may be available for sale? How should we be thinking about that?
I think it was $0.05 when I did the review of the math. I said it was $0.05. Your second question is how you should view that. It's an ongoing business that's not as viable and as vibrant as it was in the past. As a result, we're not going to simply get the returns that we did in the past at a time when the world and that business was much different, and we're going to continue to review it. No, you shouldn't look at it the way you did it in the past.
Good. Thank you very much.
Thank you.
Our next question comes from Mark Hughes with SunTrust. Your line is open.
Yeah, thank you. How did the benefits business do in the third quarter? Was it a little better or worse than what you saw in 2Q?
I'm sorry, would you say that again, please?
Yeah. How did the employee benefits business do, and I'm thinking North America, in the third quarter as compared to the second quarter?
In the second quarter, we were up 3%, in the third quarter, we were flat. That business is not a business where it's sort of like every quarter you look at it, and it's up 1%, up 1%, up 2%, et cetera. It's choppy because it comes in terms of employment. Most of our business is tied to a per employee basis sort of a thing. As a result, you saw flatness in the third quarter. Don't look at that flatness as being a deterioration quarter-over-quarter. The business doesn't work that way. It's still a very vibrant business.
As a matter of fact, the more confusion we found that's being caused by the health reform in the United States is really making employers look more toward the kinds of things that we can do for them on an advice and a consultative basis, which then looks at their benefits plans differently. I'm pretty excited about that business, especially the platform that we have in the U.S.
Thank you.
You're welcome.
Our next question comes from Matthew Heimermann with JPMorgan. Your line is open.
Hi, good morning, everybody.
Hi.
I guess this is just more clarification questions around Loan Protector, you mentioned we're kind of looking at $10 million-$14 million this year. Given that you had mentioned some things that went against you this year, like the flooding, when we're thinking about this business for next year, assuming we don't model in any dramatic change in the foreclosure landscape, what's incrementally the step-up we would get if you get kind of more normal performance from a loss perspective in that book?
It'd be difficult to say, because there's been included in that, I should have mentioned, a dramatic decrease in the pricing. In other words, the amount of commissions that we were paid have reduced dramatically as well. In 2010, you had everything in the world going for it, if you will. In the last couple of quarters of 2011, you've had just the opposite. Given the fact that the commissions have been reduced dramatically, one of the accounts were lost through M&A. Another account dropped dramatically in terms of commissions. Others, the MDI has gone down. It's very difficult to predict, but you're probably looking more at the $10 million level that we are at now than you are at a higher level going forward.
Okay, that's helpful. Just on the M&A side, I just want to clarify this too. Is the right word to use to describe the deals you're looking at, especially given that you're still kind of priority-wise de-leveraging, that these are things that would be tuck-in kind of acquisitions?
Yeah. I just wanted to make sure, again, full transparency, that in the next call, if you see us do a deal and somebody said, "Joe, where did that come from?" I just wanted you to know that we are more sanguine to, it's a good word, we're more sanguine toward entertaining an acquisition that makes some sense in a geography or a sector to fill in a business line that we're not appropriately good at when we think specialization is everything. You say, "Joe, what happened to your de-leveraging?" and all that kind of stuff. I just wanted to make sure that we put everything out on the table. That's all.
Okay, that's helpful. Just maybe for Peter, just on the reinsurance side, just curious how we should think about 2012 prospects versus 2011. There were kind of two ways I was thinking about this question. One was just how you're thinking about demand globally in 2012 relevant to 2011. The other question I had was, is there any risk around pricing given we saw some big gains in some geographies in 2011 that you actually see some slippage as we go through the year on price in some areas?
I think Matthew, if I could take it in chunks, I think it'll be interesting to see how the year plays out because there's always the issue of whether these spate of losses globally were earnings effective or capital effective. If they start to affect capital I think demand will go up because of companies concerned of 2012 looking like 2011, in that there was a frequency of loss in the U.S., and internationally, there was severity of loss. I can see a scenario where demand goes up to protect capital. With regard to pricing, I would say that pricing by the reinsurance market has been reasonably consistent in that where model impact exposures, there was some increase. Where exposures went down as a result of model change, they stayed the same or went down.
When there was increase in exposure and an increase due to loss, there was bigger increase pricing. I don't see that changing fundamentally absent some big event happening between now and the first of the year or what happens in 2012. I would say that, again, demand could well go up based on how 2011 ultimately looks, and pricing should stay reasonably stable.
Okay. That's helpful.
Absent significant model change or loss.
Okay, that's helpful. Michael, just clarification. Just want to make sure that when you guys talk about your savings, we're still talking run rate savings, not in the period savings.
Yes. Well, for 2011, the $75 million is an absolute number, so that's the savings in all of 2011. In 2012, when the full impact of the benefit from the operational review takes hold, that's a full year savings number that we said was about $120 million. What I want to point out is that we're only going to get the benefit in 2012 incrementally over the $75 that we realized in 2011.
Yeah, that's fair. Okay, just wanted to make sure. Thanks.
Our next question comes from Ray Ardello with Macquarie. Your line is open.
Thanks. Good morning.
Hey, Ray.
Just a question going back to Loan Protector. In 2010, what would the organic growth number for North America be, excluding that business?
We were flat in North America in 2010. It would've been -1.8%.
Okay. Then I think you mentioned too, in 2010, the pre-tax earnings of about $41 million from that business. What piece of that would be the contingent piece that I think you mentioned earlier from the MGA side?
The contingent part would have been, of the $41 million, about, I have to look at the number, and this is a guess. I don't want to give you a bad number, but give us a call because I'm kind of thinking that about 25% to 30% of that number was MDI.
Okay.
That's not an answer, that's a guess, but Peter will give you a specific answer.
Okay. I'll take that offline. Then I guess just turning over to the international side. I guess you guys have had pretty good growth there, and I guess margins are being pressured a little bit from investments being made, and I can completely understand why you're investing in the business. Can you maybe give some more color surrounding maybe the geographies you guys are focusing on?
Yeah. I think most of the increase in expense has been our investment in Asia. Primarily, we invested in a lot of people in China, Asia, for all the obvious reasons, Ray. We did a lot of investing in Brazil, obviously. When you look at our international business and you see the S&B or expense line go up there, basically you're looking at it from that point of view. I will also tell you, that's the large majority of it, you still have to appreciate that you make decisions in this business, even though the economy, I'll give you an example in Spain, is not the greatest in the world. We have a great operation in Spain. They're really good. They're growing their business at mid-single digits, you want to be able, even at a time like this, and the margins are very high.
You want to reinforce and help them at a time like this, not pull back. That would be an example of where we would be investing still, even in a place where the economy's not so hot. I would give you two ends of the spectrum. One, where we're investing where we have great franchises, where the economy's not so good, where we have very good developing franchises, like in China, where we're growing. Our margins are in the mid-20s in China. We have 22 branches in China, we're investing in people a lot in China because of our footprint. That's where you're seeing that from.
Okay, that's very helpful. Thank you.
You're welcome.
Our next question comes from Jeroen Cannaert with Deutsche Bank. Your line is open.
Good morning, everybody.
Hi, how are you?
Good, thanks. I had a question on the additional efficiencies that were identified in the operational review. Maybe the timing of them. How were they identified now versus the other efficiencies that were identified earlier in the process?
Well, basically, during the end of the third quarter, actually during the end of the second quarter, third quarter, when we looked out in terms of the economic landscape, I think you'd agree that things are deteriorating versus 3 to 6 months earlier when perhaps there was more optimism. We just said we're going to take a harder look. Therefore, we're going to eliminate more staff and actually move more functions to lower cost areas.
Okay, if economic conditions don't improve or actually deteriorate further, should we expect or not be surprised if we see additional actions?
No, I don't think that you're going to Listen, the charge is going to end here in 2011. You're not going to see It's going to be about approximately $30 million that we'll record in the fourth quarter. It could be 25, could be 32. You're not going to see any big difference.
Okay.
The other thing I would add, which would be a legitimate question, they're all legitimate questions, if I were you, we started the year by saying we have $130 million charge, now we're at $160 million, what's going on? Is there something that we're not seeing? It's just that the world hasn't gotten any better, and we're just trying to make sure that we take care of ourselves and put the right expense base into place, because the world is so unpredictable going into 2012. That's what we're doing. There's nothing that has occurred that bothers us, if you will, so that we keep enlarging the charge.
It's simply that the unpredictability of the world, the unpredictability of the market in terms of its softness, the unpredictability of the economies, and what's going on, we're simply saying to ourselves, we're better off if we're really conservative with regard to our expenses, and while we have the charge in place, take advantage of it. That's what that's about.
Okay, that's very helpful. Then on the employee benefits, I guess I was a little bit confused, given that I understand that employment levels are certainly not where we would like to see them, after all, they are relatively flat the last year, if even improving slightly. Then if you have healthcare reform and you have medical loss trends creeping up, shouldn't we expect further improvements there?
Yeah, I think our employee benefits business, as I said before, is a very good platform in the U.S. It represents 24% of our business in the U.S., and frankly, we would expect that business to go even higher. We're very comfortable with our platform, which is a middle market platform. Which means that it takes in the number of employees that would be beyond what normally would go to exchanges, which would be 50 or 100 employees or less. As a result, we feel very good about that platform and what we're doing in the U.S.
If you ask me if there was something that we found interesting someplace in the U.S. in employee benefits, which goes with another of other questions that you've asked about acquisitions, I would say that if there was an employee benefits broker in the right geography, that was the right type of a broker to buy, that would be the one we would look at.
Okay. Got it. Then one last question, if I may. With regards to the P&C rate environment, can you maybe break out over what you see as renewal rates versus new rates?
I can't really break that out for you because I don't have that statistic right off the top of my head. Obviously there's a differential between what you charge new accounts and what you charge on a renewal basis. Vic, you want to give them any insight to that?
Sure, Joe. The only thing I can add is we track the renewal rates on our existing book, and we can see what the carriers do in terms of what's happening there. On new business, we don't have a year-over-year basis. What I can tell you is that on business that is being competed for, rates are very competitive and dropping. For businesses that are just being renewed, you're seeing more pressure to increase rates. That's about all I can.
Which would make sense because when you're buying with other people for an account, you're going to be much more competitive with regard to rate versus one that you're renewing and you already have.
Right. Thank you very much.
I think you got to distinguish when you hear carriers speak, whether they're speaking about their renewal book or they're talking about their new book.
Right. Thank you.
Thank you.
Our next question comes from Jay Cohen with Bank of America Merrill Lynch. Your line is open.
Yes, thanks. A couple of questions.
Hi, Jay.
Hey, Joe. On the Loan Protector, you suggested that the first quarter of this year was still a reasonably good year, I think. Does it suggest that the first quarter of 2012, you had a tough comparison?
Yes.
Okay. Then secondly, just on the 3%-4% increase in the expense base, is that just operating expenses or are you including interest expense in there as well?
I mean, excluding interest expense, everything other than interest expense.
Okay. You're including the expected savings, the incremental savings from the operational review?
That's correct.
Okay. Just wanted to clarify that. That's it. Thanks a lot.
Thanks, Jay.
Our next question comes from Brian Meredith with UBS. Your line is open.
Hi, Brian.
Hey, how you all doing? Two questions here for you, Joe. The first one, I'm wondering if you could talk a little bit about kind of competition for talent here. Are you finding it maybe more expensive to keep people and recruit people? Is that maybe part of the reason that you're seeing an increased kind of investment spend and you're having to take some more expense out of the business?
Yeah, that's a good question. I think that when you see brokers having hard times growing, there's a greater degree of pressure in the recruiting arena. By buying brokers. That even though a broker, let's say, at this company year-over-year may be flat, for another company, it's an increase of whatever the heck they do. As a result, we find that there's a lot of movement from brokers to brokers, and then as a result, they have to fill in what they lost, so they wind up coming to Willis sometimes to do that. You play round robin. If you have no growth or very little growth in an industry, you got to find ways to do that. As a result, sometimes you find yourself in the defensive position to retain people. Yeah, you're right.
Sometimes you do what you got to do, and that tends to increase the S&B or the retention level.
Great. Just one quick question on the P&C environment. Maybe if you can give us a sense, kind of small business, what's going through the Insurance Noodle, how pricing is there versus as you kind of work your way up to your larger corporate clients, is there a difference in what's going with pricing?
Is there a difference in terms of what's going with what, Jay? I'm sorry, Brian, I didn't hear you.
Sorry. Is there a difference with what's going on with respect to commercial lines pricing as far as small commercial or stuff maybe going through the Insurance Noodle versus as you work your way up to middle and larger commercial?
No, not markedly that I can tell you that there's a difference, no.
Great. Thank you.
Our next question comes from Meyer Shields with Stifel Nicolaus. Your line is open.
Hi, Meyer.
Good morning, everyone. How are you?
Good, thank you.
A few questions, I guess, segment by segment. On the global side.
Could you speak a little louder, please? I'm sorry, I can't hear you.
Sure. Is this any better?
Yeah, that's better. Thank you.
Okay. The potentially non-recurring revenues that we saw in the global segment, are those basically 100% margin?
I would say for the most part, they are very high margin, if not 100%, yes.
Okay. The North American side, I think last quarter, you said that excluding Loan Protector, there was positive organic growth, and this quarter it was flat. I was wondering, given the, I guess, at least anecdotal improvement in the rate picture, what changed on a sequential basis?
I think what I heard you say is that, excluding Loan Protector, we were flat in this quarter, and we were up last quarter, and what could we expect going forward? Is that what you said?
Yeah. I'm also trying to understand the deterioration.
I would expect that excluding Loan Protector, if you look at our underlying business in North America, that I would be very enthusiastic about what's going on.
Okay, any thoughts on why the ex Loan Protector organic growth was slower this quarter than last?
I just think we're looking at the business, as I said, flat, in North America simply because of rate and so forth. The new business growth has been good. We've had some regions that have been very good, I think given rate and the economy and everything else, I look at that to be pretty good. When I look at the competitors and I see what's going on with them, I'm fairly happy on a relative basis. I'll be much happier when I see real growth with or without Loan Protector. I got to look at the underlying business as such. Vic, you want to add anything to that?
I think we're obviously still working very hard to achieve organic growth. Loan Protector aside, the second quarter obviously has a lot more activity with the 7/1 business in it, that there's opportunities to go chase stuff. The third quarter is traditionally our slowest quarter. Going forward, we still believe we can achieve organic growth. It'll be moderate, and we'll continue to work hard with all our other initiatives to do that.
I would also add that Sales 2.0, which Grahame mentioned, is now fully rolled out in North America. It's not something that clicks on the next day, but as next year evolves, quarter after quarter, you should start to see the effects of Sales 2.0 and the new business that's generated from it, A, and B, the cross-selling that's generated from it. Sales 2.0 is just not a vehicle for new business. It's one to go back to accounts to do diagnostics for, that we already have as accounts at Willis. I'm looking at next year, if we have an environment where the economy is decent, not great, not terrible, decent, and you got at least a flat environment on a rate basis, our expectation is that we should grow excluding Loan Protector.
Okay. That's very thorough. Last question, I guess, for Michael, if property casualty rate increases are 100 basis points higher next year than the assumptions you have baked in right now, what would be the incremental impact on operating expenses?
The operating expenses should not go up if it's 100 basis points, is what your example is. You should be able to absorb the 100 basis points in revenue increase with the cost base that you already have. Other than the payout to the producer in North America or whatever you got to pay out for the additional business, everything else is embedded from a cost point of view in the business already. Most of that'll drop to the bottom line.
Oh, fantastic. Okay, thank you very much.
Thank you.
Our next question comes from Mark Hughes with SunTrust. Your line is open.
Yeah, thank you. Just to clarify on the cost situation, I think you said you expect operating expenses up three to 4% in 2012. Was that going to be offset by the $40 million-$50 million from the operational review, or was that already inclusive of the $40 million-$50 million?
That was already inclusive with an I of the $40 million-$50 million.
Right. The operating expenses would have been up faster but for the operational review.
Yes, that's correct.
Thank you.
There are no further questions at this time.
Okay, everybody. Thank you very much. Have a good day.
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