Well, good afternoon, and welcome to the Willis Investor Conference. I'm Peter Pooley, Director of Investor Relations for Willis Group, and I'd like to thank you for taking the time to join us or listen in during what I'm sure is a very busy earnings season for all of you. I have to tell you that we have a full slate of executive management here, and I think you'll find it very much worth your time for coming. I should tell you that this presentation is being webcast for those unable to join us here at the Plaza Hotel. To start this off with a bang, I'm going to read you the warnings. Here we go. Throughout today's event, we'll be making forward-looking statements. These are based on management's current expectations, estimates, and projections.
All statements that address expectations or projections about the future, including the company's strategy for growth, market position, expected expenditures, and financial results, are forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Many factors, including those discussed more fully in our reports filed with the SEC, such as our most recent Forms 10-K and 10-Q, could cause results to differ materially from those stated. We strongly encourage you to review these filings and obtain additional information about our risk factors. We assume no duty and we will not undertake to update any of the forward-looking statements. Please note that certain financial measures we use throughout this presentation are expressed on a non-GAAP basis. Our GAAP to non-GAAP reconciliations can be found in the appendix to this presentation.
With that, I'd like to introduce Chief Executive Officer of Willis Group, Dominic Casserley.
Good afternoon, everyone. On behalf of Willis, I'm delighted to welcome you to our investor conference. In addition to those of us presenting today, we also have in the audience from Willis, members of our board, including our chairman, Jim McCann, and Wendy Lane. We also have Vic Krauze, Chairman of Willis North America, Peter Hearn, Chairman of Willis Re, and other senior members of our management team, including our Head of Human Resources, Anne Bodnar, and Group General Counsel, Adam Rosman. Since joining Willis at the beginning of the year, I have focused on two items, delivering strong results for 2013 and defining our future strategy. You will have all seen our second quarter earnings last week, a third consecutive quarter of strong organic growth evidencing our continuing momentum. This meeting, though, is about our future beyond 2013. Let me speak plainly.
I see very considerable upside potential in this business. The conversations I have had over recent months with our clients and our people from Hong Kong to Madrid, from Phoenix to Bogota, from Kuala Lumpur to Chicago, have fueled my excitement about the opportunities before us and the talent we have to take advantage of them. Today is about sharing our strategy with you. In shaping that strategy, I have met and heard the views of our investors in one-on-one meetings and in round tables since the start of the year. The essentials of our strategy can be clearly and succinctly stated. Willis is a solid cash generative company, there is significant room for us to grow that cash flow further.
We will grow by being completely focused on where we compete, and that means the areas where we can succeed, and how we compete, which will be centered on meeting the needs of our clients. You are going to hear those two core areas of focus, where and how, as linking themes from me and from the management team presenting to you throughout today. If we get that right, we will grow revenues with positive operating leverage, and we will grow cash flow and generate compelling returns from investors. Let's begin by making sure we are on the same page on who we really are. We are Global. Not North American, not London-centric. We're Global. We have 17,500 people across 400 offices in every major market. Over 21,000 people if you include our affiliated firms.
We are highly cash generative from our $3.5 billion of revenues that we produced in 2012. We've often shown this revenue split between our three business units. Global, our reinsurance brokerage, and our specialty brokerage businesses. North America, our retail activities here and in Canada, and International, our retail activities in the rest of the world. Very roughly a third each. This is a reporting structure. It does not capture the interconnections between these three businesses. Let me give you some examples. Today, clients of Willis North America use products and services from Global specialties businesses. International clients, a Japanese manufacturer, for example, will have their U.S. business taken care of by Willis North America. Clients of our specialty businesses, for instance, an energy client, will also be served by our retail office in Asia. These businesses are all interconnected.
There is more we can and will do here to deliver all of Willis to our clients, and we'll come on to the details of that later. Let me cover the running order for today. I'm going to take you through the high-level strategy. Mike Noonan, our CFO, will drill down on what this means for our cash flow and for our balance sheet. We'll then have some time for initial questions and then take coffee, and after coffee, come back for sessions from Todd Jones, newly appointed CEO of Willis North America, Tim Wright, head of Willis International, and Steve Hearn, our Deputy CEO and head of Global, on how they are going to execute on that strategy on the ground with our clients.
I'll then wrap up, and we'll move to the longer plenary Q&A with plenty of time for you to ask questions of the whole team. Now let's turn to context. We believe there are three key questions. Why risk? Why risk advisory and broking? Why Willis? To the first question, simply put, risk is a good place to be. You're all familiar with the long-term structural drivers of this. Increasing global GDP, the rise of the middle class, many estimating there will be three billion more by 2030. The growth of urbanization, 70 or 80 million people a year, every year, moving to cities for the next 30 years. Aging populations and the associated challenges. At its most basic, more assets to protect, more risks to be managed, and a greater ability and appetite to protect and manage them.
If you believe we may see some more inflation sometime in the future, the value that needs to be protected will increase. A minor return of inflation will be a good thing for risk players and is part of the story driving the forecast increase in the premiums in the long term. In addition, the world is facing an expanding set of risks. Companies are facing increased supply chain complexity. Remember how the Thai floods or the Iceland ash clouds affected those supply chains. In Thailand, the monsoon runoff swamped more than 1,000 factories in a country that supplies a significant part of the world's computer hard drives, driving up the cost of those components by more than 10% in the process. Cybersecurity, whether defending attacks on your information systems or leaks from it, is a major concern around the world.
In the last few weeks, Gartner estimated that global spending on information security systems will soar to $85 billion in 2016 from $65 billion this year. McAfee, working with others, recently estimated the global economic impact of cybercrime and espionage to be between $300 billion and $1 trillion a year. Also in the developing markets, we are seeing increased primary demand for resilience in the face of risks of damage to the recent immense infrastructure investments. From China to Chile, seismic activity is a major concern. The cost of earthquakes today, given the infrastructure and property in place, far exceeds the impact of only a decade or so ago, and these risks are only going to increase. There is the controversial topic of climate change and extreme weather patterns. Now, you don't have to believe in climate change.
You just have to be aware that more extreme weather patterns create new risks and new demand for management of and protection from those risks. All in all, risk management is now a boardroom and CEO issue. Now, I've seen these trends firsthand. For example, I met with the risk manager of a leading German multinational recently. Now, he told me that his clients are the CEO and CFO of the company. He said to me, he said, "Dominic, they don't want to talk about insurance. They don't understand insurance products. They want to talk to me about the risks to the income statement, the balance sheet, and to cash flow, and how as a company, we will be more resilient to those risks.
If you, Dominic, can explain how we can make ourselves more resilient, you will win a client." We live in a richer, riskier world where clients want solutions, not just products. This brings me on to my next point. If you buy into risk as a sector, why should you be interested in a risk advisor and broker? The answer is that the role of the intermediary of advisor in this world of exploding risks is strong, and it is set to become stronger for those that have the skill set to be analytical brokers. Let me go into this a bit further.
At its simplest, the delivery of solutions to risk problems is about understanding the specific risk faced by a client and being able to predict the frequency and severity of those risks. This is about staying close to the client and understanding their risks, and then staying close to the markets that can assume those risks. The classic transaction matching role, a brokerage role. These relationships are changing. Many clients are demanding more resilience as their risks become more complex. As I noted, they want solutions, not just products. In generating those solutions, brokers are and will increasingly become data collectors and analysts for their clients.
As brokers increase their ability to collect and analyze data about clients' risks, they will also develop their understanding of the appetite of different pools of capital in the traditional insurance carrier market for sure, but also in new capital markets to absorb the different classes of risk. We believe we will have the opportunity to expand our role in bringing value to both ends of the chain, in delivering more customized solutions to clients, and providing new investment opportunities to carriers and other providers of capital. In a riskier, more analytical risk world, the analytical broker, the broker that can combine specialty expertise with analytical power for the benefit of clients will win and win on both sides of the equation, helping the corporate client and helping investment capital. Steve will talk more about this later. The third question, why Willis? We have strong fundamentals.
We are a cash generative business. We do not have major capital expenditure or other large balance sheet needs, so EBITDA can turn into cash flow. Although we are a regulated business, we are not subject to significant capital requirements. In many of our best businesses, where we offer distinctive capabilities, we are able to sustain and grow high margins. We are diversified by geography, here estimated across our businesses by line of business and by client. This diversity is very important. I'm often asked the question in investor and other meetings, "What's the outlook for rates?" My question back is, which rates? North American property rates for middle market companies, satellite launch risk rates, Florida cat rates, China healthcare rates, Brazilian facultative reinsurance rates?
All these and many more are of major relevance to Willis, our diversity helps mitigate the impact on our earnings of extreme swings in any one market. On top of these fundamentals, we have distinctive strengths dating back to our birth in 1828. Unlike the other global brokers, we were born around delivering specialty insurance products. We have always been an analytical animal. We can and do focus on the complex, the difficult, and the value added for specific industries or types of risk. Guess what? That DNA makes us perfectly suited to be analytical brokers. In a riskier, more data-driven world, we at Willis are superbly positioned to bring these industry and product skills to more and more clients. In addition, we operate under one flag. Joe Plumeri, my predecessor, did many wonderful things for Willis.
One of them, instituting the concept of operating under one flag, epitomized by the Willis pin we all wear, is a distinctive and long-lasting legacy. This isn't just empty symbolism. I believe and I've found that our culture at Willis is essentially one of collaboration, of pulling together as one team. To connect with clients, you need to be connected as a firm. Now, we need to mobilize that better to drive value. The cultural foundations are there to support a much deeper and broader delivery of the whole firm to our clients. More on this from me shortly. We see a favorable macro and sector outlook and our own strong fundamentals. Let's be upfront about underperformance. There is no denying that recently we have underperformed.
We have not, in the past two years, lived up to our potential, and we have not delivered the revenue or earnings growth our investors expected. Much of our underperformance in the past two years was because of specific problems we had in North America. As you know, in the middle of 2008, we bought Hilb Rogal & Hobbs, HRH, for $2.1 billion. This was difficult timing to make such a deal, of course, as the U.S. economy entered a major recession. In addition, we faced tougher integration problems than expected. A fair number of HRH brokers decided they never aspired to be part of a global broker and left, and in a number of cases, taking their middle-market books of business with them. While all brokers suffered in the U.S. because of the extreme economic conditions, we at Willis were especially hard hit.
Now, we can illustrate this by asking the question, if Willis had merely performed in the U.S. at the same level as a representative average of peers performed over the same period in the U.S., what would we have looked like? Well, the answer is that we would have delivered an extra 2% of revenue growth each year at the group level and been operating in line with our long-term trend. Our overall potential was masked by specific HRH related problems in North America. If we continue to perform in North America in the way we have in the last few quarters, there is clearly upside available. It is one element of a return to the growth we saw in the earlier 2000s. What's the plan?
As I said, there are two fundamental areas we are focusing on, where we compete and how we compete. For where, which geographies we will prioritize, which client segments we will focus on, which sectors we will highlight. How we connect all our capabilities to deliver the best of the firm to each client, how we innovate, capitalizing on our analytical power, and how we invest, always in a selective, disciplined way. Let's start with where we are going to compete and the topic of geography. We will invest in fast growth markets. This slide shows the direction of travel, again, using the same estimated geographic mix I showed before. We expect to rebalance our portfolio over time so that around 30% of our revenues come from higher growth markets, compared with just under 20% today.
This might seem like a bad time to be increasing our investment in emerging markets with all the noise about lower growth in China, maybe only 7%, and Brazil, which is presently struggling to grow at 1% or 2%. The longer term fundamentals remain in place. It is important to remember that these growth rates are for the economy as a whole. With these economies continuing to mature and catch up with the rest of the world, insurance is usually growing much faster than overall GDP, and brokerage of insurance in the corporate sector, often faster still. We firmly believe that we will grow faster as we increase our exposure to these markets where brokerage is simply growing very strongly. Over the past few quarters, you have heard of the double-digit growth we are seeing in many of these markets.
To be clear, when we talk about prioritizing geographies, we do not just mean increasing our exposure to the developing markets. It also means identifying the faster-growing areas within developed markets. We see tremendous potential within North America, and that's about specific states, specific client segments, and specific sectors. Todd Jones will expand on this after the break. In a similar vein, we see specific growth opportunities in an otherwise sluggish Western Europe, and Tim Wright will talk to that later. Let's talk about clients. We will not try to be all things to all clients. We're going to provide distinct offerings to different types of clients. In the large corporate market, the global Fortune 1000 market, we're going to pick our spots based on our geographic relationships and our areas of technical specialty.
We already have a big book of large corporate business, we intend to grow it where we have a right to be successful. This means we will bring substantial analytics, data, and customization to the needs of these clients. Today, we are winning business in this most sophisticated of segments, where we bring our special capabilities to bear, and we're going to invest behind this opportunity. In the middle market, we have developed our proprietary Sales 2.0 approach that is now well tested and rolled out across most markets. It is essentially an industry-based consultative approach to broking for middle market companies that strongly differentiates Willis from the local, regional, and national brokers in this market. We will build on our momentum with Sales 2.0. We're going to change our approach to the SME market. We will pursue two approaches.
Either we will provide an agency and facility model that can provide quality products at affordable cost for these clients, or we will rely upon our network of smaller brokers powered by Willis products to deliver value. In both models, we will provide value at an affordable cost. Insurance companies, the main clients of Willis Re, are an important client base for us. They represent 15% of our total revenues. Willis Re has been so successful in this space over the past few years by building a distinctive position in the market as the supreme analytical brokers, combining sector leading analytics with great technical broking skills. We will continue to distinguish our offering to insurance companies this way. In parallel, in our primary business, we will be providing more capabilities in analyzing how they can serve our corporate clients better, and thereby helping carriers build their propositions further.
We have leadership positions in a number of industry sectors. I put some of the examples on this slide. Take Marine as one example. We have been a leader in the industry for 180 years. Our clients include ship owners, ship builders, third party ship managers, charterers, port and terminal operators, and shipyards. We are currently broker to five of the top 10 global ship owners and broker to the largest shipper in the world, Maersk. We can be smarter with that strength. We can capitalize on our expertise and relationships to build industry insight relevant to multiple clients across the sector. In a competitive market, this is what gives us an edge. Todd's got some great material for you on this later. Benefits and healthcare benefits form part of a particularly interesting sector.
We are not always associated with leadership in healthcare and the related human capital and employee benefit business lines. The reality, this is a significant business where we see massive potential in what is a highly fragmented market with demand trends that play right to our sweet spot. Let me give you the context again. There are demographic challenges across multiple countries, and there is rising demand for healthcare services from the expanding global middle class. Therefore, there is the need for advice on how to satisfy staff demand for these services while still controlling costs. We already have a very interesting and growing position in benefits. Globally, it represents about 15% of the firm and over 20% of what we do in North America. We've carved out a position in employee benefits where we do three things really well.
First, we have a strong domestic position in North America under the banner Human Capital. We have built a $300 million business, and it's growing, recently at nearly 10%. We focus largely on the middle market, where particularly in light of the Affordable Care Act, so-called Obamacare, there is a demand for advice as well as brokerage to navigate the complexity. Our wellness and brokerage proposition does this extremely effectively. The second position we have is in selected international markets, in those markets where the healthcare regulatory structure plays to our strengths. We have strong positions in markets as diverse as Brazil and China, and Denmark and Spain. We're excited about these positions and will continue to build them where we know we can be a distinctive provider. The third position is in serving a number of multinational companies who need on-the-ground capabilities, often outside their home market.
We are one of the four providers who are credible in this space, and we serve over 200 multinational corporations on their international benefit needs on the ground. We will continue to grow that business. For us, Benefits is a set of largely healthcare businesses with real potential, where we have carved out distinctive market positions that we can both defend and grow. We've discussed where we will compete, in which geographies, client segments, and sectors. Now let's turn to how. Three elements. Connection, delivering the best of the firm to each client. Innovation, capitalizing on our analytics power. Investment, deploying our resources in a selective, disciplined way. Let's start with connection. Today, about 25% of our global specialty revenues come from opportunities developed by our retail offices in North America and in International. It should be at least 50%.
Our vast retail relationships should be a funnel to our experts. We have a great opportunity to improve this cross-selling, to leverage our retail businesses to develop opportunities for our industry capabilities across geography, client segment, and sector. Now, a second aspect of connection. We have a global network, and many of our clients take advantage of that network, but too many do not. We believe that there is a large opportunity to increase the global uses of our network by our clients. To go back to my earlier example of the global interconnection of our businesses, I'm talking about a Japanese client seeking North American coverage, for example, or vice versa. In addition, we can increase our market share by converting specialty product areas into industry expertise.
By doing this, we can leverage our client access and industry knowledge to service the totality of the client's requirements, not just specific product requirements. Steve will talk about more of this after the break. If we do a better job of cross-selling our capabilities, we believe we will not only increase revenues from existing clients, we will also improve their retention, and we will also win new clients from delivering an enhanced capability. Those are the outcomes we have highlighted on the left of this slide. How will we make this happen? It's about aligning the organization and how we serve clients. That means providing appropriate training and development for staff and the right incentives.
Unlike banks, who don't come in for a lot of good media these days, unlike banks, who generally do a much better job about this than we do, we do not presently think about products per client. By segment, we're going to focus on exactly such a metric. We will also cross-fertilize skills and personal networks by moving some people across the three business units and enhancing our sales processes and structures. Next, let me turn to innovation. Willis has a proud and successful tradition of innovation, as you can see from some of our most recent introductions to the market across a range of areas. The engine that drives the complex advice solutions that our increasingly sophisticated clients demand and value is analytics. It's not analytics in a vacuum. Anyone can process data.
Analytics must be informed by the detailed specialty knowledge of the sectors, geographies, and broader factors that are relevant to our clients. This is exactly what we are doing, matching our specialty strength with analytical power. More of this from Steve later. We will also innovate more broadly to meet client needs in particular markets. Tim and Todd will have examples on how we're doing that on the ground. A final point here. In my opening remarks outlining our strategy, I made it clear that how we compete, and that includes how we innovate, is centered on meeting the needs of our clients. Having the client at the center of what we do requires us to make important choices on how we operate.
I wanted to spend a moment here on the related issue of market derived income or MDI, an industry rather than Willis specific phenomenon, as you know. MDI is the revenue that Willis can receive from carriers, as opposed to commissions or fees from our insured clients. It's important to understand, and particularly given the pace of innovation in our markets, that MDI can potentially take many forms. It is not just contingent commissions. For example, new analytical tools we develop, and there are some examples on the slide, which significantly improve the pricing efficiency and delivery of client solutions, which is good for our clients, can also give rise to broker income from carriers who use the technology to enhance their product offerings. It's nuanced.
We will, in the face of these new many different forms of MDI, apply a set of criteria to evaluate on a case-by-case basis whether we will take MDI. The criteria we will apply will include, is the offering and payment of the relevant MDI ultimately in the client's interest? Is it transparent to the client? Is it consistent with regulations as appropriate? That's what we will do case by case using those criteria. Let's move on to the final component of how to compete. We are committed to stringent discipline on how we invest. As I've noted earlier, we are in a great industry space, we are naturally strong cash flow generating business. One area we can go wrong in, however, is wasting that cash flow on poor organic or inorganic investments.
To guard against that, we will have a strict and disciplined process to ensure we invest wisely. First, we have a set of three criteria around investment. The underlying economics of the segment we are pursuing, our competitive position, and our ability to deliver on a plan given our infrastructure and the values of our staff. All three have to work for us to consider an investment. We will apply those criteria in assessing how we allocate our resources between opportunities. Clearly, we will equally manage our existing portfolio of businesses just as stringently. If those businesses do not perform over a reasonable timeframe, we will redeploy capital away from them and reinvest in growth areas. A key point, you can see we want to focus on growth opportunities which can be earnings accretive and deliver strongly positive NPV.
That is, they return more cash to us over time than we spent. We will not invest to chase short-term earnings, but then deliver weak long-term cash flows. On the subject of potential acquisitions, let's focus on a moment on Gras Savoye, in which we currently have a 30% stake with an option to acquire 100% of the business exercisable in June 2016. We need to decide if we want to exercise the option by May 2015. Gras Savoye is the leading insurance broker in France. While currently out of favor with some investors, I would remind you that France is the world's fifth largest insurance market. Gras Savoye has a strong position in both the large corporate Paris-based market and in the regions of France through its 28 offices across the country.
The remaining business, again, 30%, is international, with a leading franchise and many long-standing relationships in the growing African markets and also in Eastern Europe, the Middle East, and parts of Asia. This international portfolio has growth potential for long-term growth and is challenging to replicate from scratch or inorganically. We have known and worked closely with Gras Savoye across all of these markets for many years. Looking at this through the lens of the acquisition criteria I summarized just now, the opportunity ticks many boxes. Focusing on economics, there are potential revenue and cost synergies between Willis and Gras Savoye. Additionally, Gras Savoye itself is currently reducing costs. This will lower profits from our associates line in 2013 but should enhance the longer term economics of the business. We have about two more years of working together before we have to decide whether to proceed.
Two more years, if you like, of due diligence. Again, we decide prior to May 2015 whether to exercise our option in June 2016. Summing up, right now we're in a good place. We are holding what we believe is a very attractive option. We will only exercise it if it makes sense across those criteria. Of course, in working through whether to proceed or not, we will also factor in the competitive and economic consequences if one of our major competitors ended up owning the Gras Savoye franchise in France, Africa, and other international markets. I have outlined our strategy on where to compete and how to compete. The detail on execution will come from Todd, Tim, and Steve, but here's the top line. Willis North America is returning to form, but we've only just started.
There is enormous growth potential across specific micro geographies, specific industries, and specific client segments. We've done our homework, we are zoning in on that growth potential on where we can succeed and how we are going to succeed. That includes human capital, as I spoke about earlier. For international, Tim is executing on three broad sets of actions across the network. First, fixing underperforming countries. Second, taking share through aggressive connected strategies so that even in sluggish or difficult markets like Spain and Italy, we can grow. Third, increasing our exposure to the highest growth markets in Latin America, Asia, and Central Europe, the Middle East, and Africa. Global is a strong business. You saw the second quarter numbers. We are continuing to invest in that core strength. We remain very excited about our reinsurance business and its long-term growth prospects.
Within our primary specialty business, we will focus on delivering those capabilities more through Willis North America and Willis International. That's at the heart of the connection piece I spoke about earlier. That statistic again. 25% of current specialty revenue from Willis North America and Willis International. Over the medium term, we will be driving for a significant increase there. I've talked about where and how we will compete in business terms. Let's turn to what that means in terms of the economic framing. In this business, shareholder returns are ultimately driven by the cash flow we generate. You've heard me from my very first quarterly call, place as much emphasis on cash flow as on earnings per share. A reasonable proxy for cash flow over a year is EBITDA.
It's not perfect, you will all have seen how by changing our compensation structures to strip out retention and amortization, we've enhanced retention award amortization, we've enhanced the tracking of EBITDA to cash flow. As we announced in our proxy, we have now focused our management incentives on growing revenues and profits. The management team is incented to grow organic revenues and profits on an annual basis, while the metrics of our long-term incentive plan, or LTIP, work over three years, and in addition, build in the impact of M&A, but will charge a cost of capital to ensure we do not badly buy our way to glory.
The team you are hearing from today and our people across the firm are all tightly incented to deliver value to investors by growing profitably, driving up cash flow that can be used in the short and long term. Growing the revenue line is only half of the equation. To drive EBITDA, a key issue for us and for you is how we manage our costs as revenues grow. Willis is a company that has had a reputation for tight cost control. That's not changing. We will continue to control costs through a number of management actions, and Mike will take you through some of that shortly. We've set ourselves some demanding revenue goals that will require us to invest. The key is that we will be very, very selective. We will only invest where we can generate strong positive operating leverage.
Where the numbers do not work, we will constrain investment, disinvest, or in a few cases, exit. Over time, we do have to invest in some areas for growth. Adding new staff in the emerging markets, upgrading our analytical capabilities, all these things cost money. You should expect us to reduce or control costs elsewhere to deliver growth in revenues and positive operating margin. That is what we are managing towards. As a midterm aspiration, you should think about the management team being focused on delivering revenues that grow in the order of mid-single digits. If you look at the last three quarters, for example, we have grown in the range of 4%-7%. We will also be focused on ensuring that revenues outpace costs by more than 70 basis points. These would be good medium-term objectives.
Let me be very clear about what I am saying and what I'm not saying. There's volatility in the world. Any individual quarter may be outside the range either way, above or below. Over the medium term, these are the numbers we are aiming for. We're not going to start providing formal quarterly or annual guidance. Our job is to set the strategy and to execute hard. I will leave the experts on the sell side to do the quarter-by-quarter forecasting. I do think it is right that we are transparent with our owners about our ambitions for this business, about where our aspirations lie. If we deliver mid-single digits annualized growth over the medium term with an over 70 basis point spread to costs, then we believe that we can grow organic EBITDA at a good rate.
Add in our growing dividends and we see the opportunity, accepting that there will be ups and downs in the market from valuation multiples, factors beyond our control. We see the opportunity over the medium term to deliver mid-teens total return to shareholders. Again, in any one year, we could be performing either side of that range. For instance, year-to-date, to last night's close, the Willis TSR was around 29% versus approximately 20% for the S&P 500. As we grow our cash flow generation, we will then have options as how to spend it wisely to deliver returns to shareholders. Here, we will be balancing delivering short-term cash back to shareholders and investing some of the cash to grow the pie even further.
First, we will be focusing on growing the business on a sustainable basis over the medium term, using some of our cash flow to drive organic growth. After that, we can contemplate acquisitions. I've talked you through the criteria we will use and our disciplined focus using NPV analysis. That is a focus on the cash we will get back over time for the cash we will expend. In parallel, we will also be looking to redeploy some cash from exiting businesses better owned by others on good terms. We want to have a growing dividend. I would like us to see us growing our dividend steadily every year. In managing all these steps, we will be keeping an eye on our leverage. Mike will take you through some of the numbers in our recent work here, but I want to be clear.
We are convinced that we are best placed by being an investment-grade company, and we will manage to that end. That means we will have a leveraged balance sheet and will continue to use debt judiciously, but within the guidelines of remaining investment grade. We also will see, as the company grows, opportunities for share repurchases. To be clear, we will not drive share repurchases at the expense of very solid, stress-tested, NPV-positive investment opportunities. As we grow our cash flow, I would expect we will have room for share repurchases, too. In sum, we will be aiming to deliver cash back to investors on a sustainable basis. That means we will be balancing the need to invest for the future while sustaining our investment-grade rating with the opportunity to increase dividends and make share repurchases.
You should expect us to be making those trade-offs every year. On a related point, we have analyzed the composition of our investor base and seen that about 90% are U.S.-based, and that's great. Given the global nature of the firm and our U.K. listing heritage, we believe there is an opportunity to broaden our investor base, and we will be taking specific actions to do so to provide a broader base of liquidity and interest in our stock. I've covered a lot of ground, so let me recap. Willis is a diversified cash flow generating business. If we grow revenues steadily and keep a gap between revenues and expenses, we will see growing cash flow. The management team is focused and incented on making that happen. In what we see as an exciting world of intermediating risk capital, Willis is well-positioned globally to grow.
What does success look like over the medium term? Significant improvement in revenues and EBITDA, driven by deeper exposure to emerging markets, new leading market positions, and significantly enhanced cross-selling. We see substantial upside available. We're going after that upside with ambition and urgency, laser focused on where we will compete and how we compete. That's our strategy. There will be an opportunity for questions about all that shortly. First, I wanted Mike Noonan, our CFO, to put some flesh on the bones on some of the numbers I've spoken about. Mike.
Thank you, Dominic. Good afternoon, everyone. I want to be very clear around the financial drivers that will create shareholder value. I'm going to cover five themes. First, Willis is a growing, profitable company that generates strong cash flow. There is good momentum behind the recent increases to our top line growth. Second, we bring disciplined approach to managing our costs to grow operating margins. Third, as we grow, a significant proportion of the increased cash flow will be available for value creating opportunities. Fourth, we have a very healthy balance sheet, and we're taking steps to make it even stronger. Finally, I want to reemphasize our priorities for capital allocation. So let me flesh out these points. I want to underscore the strength of the Willis franchise over a long time frame and its ability to sustain growth through changing economic cycles.
Dominic showed you this chart before. It shows our total revenues, which comprise commissions and fees together with investment income and other income. We've also included historical organic commission and fee growth. If you look at the 5-year period through 2008, when we acquired HRH, we grew organically, on average, 5% annually. As Dominic stated, in the 4 years following 2009 through 2012, we contended with an unprecedented recession and together with disruptions to Willis North America, our largest business, we had underperformance. Even with those headwinds, we sustained organic growth of 3% on average over that period. Finally, with the challenges of HRH behind us and a better North American economy, we saw an inflection point in our results at the end of 2012.
Through the first half of 2013, we have started to revert back to the higher growth rate that was achieved in the past. Now, with a new senior management team driving fresh strategic initiatives, we are excited about the opportunity to build on the recent momentum and to achieve even greater potential. You've seen our results over the last few quarters, and you've heard Dominic discuss the initiatives for moving growth forward. One other factor to consider is interest income. Back in 2007, our interest income was $96 million. In 2012, it was $18 million. If you believe that we might see higher interest rates in the future, you should expect some increase in our interest income too.
Our focus on revenue growth needs to be paired equally with strict expense management if we are to achieve a positive spread of 70 basis points per year on average. As most of you know, we have not grown our margin consistently over the past few years. As shown on the prior slide, this has largely been a revenue issue, weak organic commission and fee growth and declining investment income. While we have increased our spending on talent, compliance, and technology significantly over the past few years, our focus on expense management is unchanged. I would like to talk about how our ongoing cost control will drive operating leverage by having expenses grow slower than revenues. On the left side of the screen is a pie chart plotting our expenses by category. You can see that our costs fall into two major buckets.
The first bucket is Salaries and Benefits, including incentives. For 2012, we had approximately $2.1 billion of S&B expense, representing 75% of our total cost base. The second bucket is other operating expenses, which totaled approximately $600 million. Some of the larger items in this category are premises, systems and communications, travel, and business development. The strategic framework that we have in place for managing our expense base is built around three principles. First, our culture of cost discipline has been well-established in Willis dating back many years. One example of this discipline is our monthly business review process. Those reviews are tough and designed to challenge managers on their expenses across the board, and also to offer advice and support on how to manage and control the cost base. In short, expense control is part of our DNA.
The second item is productivity and efficiency improvements, and we achieve this through increased utilization of our lower-cost hub locations in Mumbai, Nashville, and Ipswich, England. Today, we have approximately 20% of our employees located in these hubs, where we standardize and streamline processes to reduce costs and to enhance delivery of our client service. Our goal is to increase that percentage in the future. Finally is prioritization of investments. We focus on putting our capital and incurring costs in offerings in regions where we see strong demand and have a competitive advantage. Conversely, we will pull back from those areas where growth opportunities are not attractive. You will hear more about this from Todd, Tim, and Steve later this afternoon.
To sum up, it is our cost discipline, efficiencies driven by low-cost hubbing, and prioritized investment that will allow us to achieve at least a 70-basis-point spread between revenue growth and expense growth. With an improved strategy for growth and our continued emphasis on expense management, we are in a position to generate increased cash flow from operations that can be deployed in value-creating opportunities. We expect to grow cash in two ways. First, cash flow will grow through increased profits from our revenue initiatives and our expense management, as just discussed. Second, we expect the proportion, I repeat, the proportion of cash flow allocated to pension funding and capital expenditures to decline over time.
Let me expand a bit on that First, with regard to capital expenditures, during the past three years, we have invested heavily to support our business growth in relatively expensive IT projects, such as a new European data center, our new placement system we refer to as WILLPlace, three new brokerage systems, a new general ledger, and a new management information system. These projects are expected to be largely complete by the end of 2014. As these projects roll off, new projects will roll on. For example, I expect that we will next invest in a global human resources management system to support the delivery of talent to clients and a company-wide data repository to support our analytics strategies, just to name two. I do not expect that the new projects will result in increased capital expenditures in the future.
Secondly, we contribute approximately $140 million annually to our defined benefit plans, much of that, about $100 million here in 2013, to fund pension deficits in the U.K. and the U.S. The primary driver of those deficits was the steep decline in interest rates over the past several years. All other things remaining equal, rising interest rates will have a very positive impact on our pension funding as a higher discount rate reduces our pension liabilities. For example, a 15 basis point increase in long-term gilt rates reduces our U.K. pension liability by approximately GBP 50 million.
If you make the simple and possibly conservative assumption that capital expenditures and pension funding going forward stay relatively flat, then as we grow, a higher proportion of the additional cash flow will be available for further value-creating activities, such as investments in our core businesses, M&A, increased dividends, maintaining our strong balance sheet, and share repurchases. I'd like to give you some perspective on our capitalization. As a business that generates a significant amount of cash, we are very comfortable with our capitalization, both in terms of our leverage ratios and our maturity schedule. We carry an investment-grade rating, which, as Dominic stated earlier, we believe is very important to maintain. Since we bought HRH in late 2008, our leverage has declined from 3.8 times adjusted EBITDA and has remained between 2.5 and 2.7 times over the last couple of years.
The ratio leveled off as the denominator adjusted EBITDA did not grow during those years. Going forward, we believe that our leverage ratio will naturally decline as our profits grow relative to our steady debt level. While our leverage naturally will decline as our profits grow, we're continuing to work to enhance our capitalization so that we can support our business growth strategy. For example, last week, we took action to improve our credit facility. We pushed out the maturity on our term loan and revolver from the end of 2016 to the middle of 2018. We also increased the size of our revolver from $500 million to $800 million, which simply provides us with more financial flexibility as we move forward. You're also probably aware that we launched a waterfall tender offer for up to $500 million of our notes that are due in 2015, 2017, and 2019.
This action will reduce debt costs while extending those maturities. We're comfortable with the current maturity schedule, but having less debt come due during that time frame will give us more flexibility to utilize our cash flows once again for greater shareholder value-enhancing activities. Now, we've been talking a lot about shareholder value-enhancing activities, and you probably naturally want to know how we will approach deploying the cash that we expect to generate. Dominic gave you an overall perspective. I'm going to drill down in more detail and specify our priorities. First and foremost, we must be focused on opportunities to strategically invest in our core businesses. Some of this will, of course, require cash flow.
That can be in the form of talent, that can be in the form of systems analytics development, and also in the form of compliance initiatives, all of which are designed to improve our service to existing clients and to attract new business to drive growth and build shareholder value. Beyond organic investments, M&A, of course, has the potential to accelerate the pace of strategic development. Given the industry's experience with acquisitions and our respect for shareholders' capital, we intend to be very disciplined. I'll give you a few elements that would factor into our decision-making. You should expect us to be very selective in how we invest Our assessment criteria focuses on net present value, return on invested capital, and earnings accretion. First, as Dominic commented on earlier, an acquisition would have to be strategically important.
From a financial perspective, it must have the opportunity for revenue growth, at least in the mid-single digits, and EBIT growth at least in the high single digits. We may accept lower growth in those metrics if the target company is accretive to our margin. Let's say we'd look for margins in the mid-20s or better. Whichever is the mix, we will focus on cash flow from the acquisition after all synergies. The acquisition must deliver positive net present value from the cash dispensed. Additionally, the return on invested capital will be meaningfully higher than our cost of equity capital. Of course, the businesses should require little or no capital. We are not interested in entering businesses where we take principal risk. Let me offer a brief commentary on dividends.
Our dividend offers a stable current return and is a material component to the total shareholder return that Dominic laid out. Taking a look back a few years, our dividend was flat at $1.04 per share from 2008 through 2012, when we increased it to $1.08 per share. We raised it again in the first part of this year to an annualized rate of $1.12 per share. Our goal is to steadily increase the dividend over time. Importantly, we understand that we are competing for investors' capital, so we need to maintain a dividend and a payout ratio that is competitive and represents a yield that is attractive relative to the overall market. Finally, let's turn to our use of cash to pay down debt or to repurchase shares. In terms of our debt, as I noted earlier, maintaining an investment-grade rating is a high priority.
There is a natural improvement in our coverage ratios over time as our EBITDA grows. We will make debt repayment if necessary for our leverage ratios to fall safely within the applicable range to support this goal. Share repurchases have been modest since the HRH acquisition due to constraints around leverage and our cash position. Going forward, however, our expected increased cash flow provides us with the potential opportunity to consider share repurchases. Let me emphasize, however, that we will buy shares only if the valuation is well below what we believe to be the range of intrinsic value of our cumulative future cash flows, and if doing so represents a more attractive use of our capital compared to the other options I just listed. Let me wrap up by reiterating the points about Willis that I made at the beginning of my presentation.
Willis is a growing, profitable company that generates strong and stable cash flows. We bring a disciplined approach to managing costs in order to drive operating margins. Accelerating earnings, combined with peaking or flattening expenditures on capital expenditures and pension funding, will allow us to have greater capital to deploy in value-creating opportunities. We have a healthy balance sheet, but we're taking specific steps to make it even stronger. Finally, in laying out our priorities for capital allocation, we have provided a plan to deliver both long-term growth and short-term cash to our investors. At this point in the agenda, Dominic and I will answer a few questions before our break. Thank you.
Thank you, Mike. We have about 10 minutes for questions, and then we're going to go for coffee. If you could raise your hand, and then somebody will bring you a microphone, and then we can go from there. I've got a gentleman in the front, and then I note the gentleman in the back. Why don't we go here?
Thank you. Jay Gelb from Barclays. On the gap between revenue growth and expense growth, you knew this one was coming, right? That doesn't necessarily translate into 70 basis points of margin expansion annually, correct?
No. Let's be very clear. What we want to see is, do the math simply. If our revenues were 6% growth, we'd like to see costs of 5.3% or better.
Okay. Right. Now, when we talk about over the intermediate term, that's what, roughly five years or so?
No, we're talking about in the medium term, we would like to see that on an annual basis.
Right. Should we expect that every year over the timeframe?
I think I made clear that we live in a volatile world, right? That revenues go, things happen. That's our target, and we will manage towards that target. In some years, we may do better than that. In some years, we may not quite do so well. That's our medium-term projection. That's what we'd like to do. Absolutely.
Okay. On Gras Savoye, can you give us a sense of where the margin is currently and where it may need to be for you to be interested in that acquisition.
Again, obviously, what I'm interested, what we are interested in is how much we're going to spend and how much cash we'll get back, okay? The steps they are taking now, which as we said, will depress our associates line in 2013, are to take out a good chunk of cost to improve margin. What we're then obviously going to be focused on is let's look at from 2016, when we would take over 100%, what the cash flows look like going forward, and how they're going to grow versus the cash we're expending. We're going to look at this thing on a very tough earnings accretion NPV basis, as you'd expect. The steps they're taking now are wise steps to reinforce the business, improve its margin, improve its profitability. After that, obviously, we want to see its growth, too. We want to see both.
Right. You mentioned very briefly in the commentary that you're taking into account that a competitor could buy it if Willis chooses not to. How could that come into play in the decision-making process?
Obviously we have to think about, as we think about the cash flows coming to us, we have to think through, well, if we didn't own it and someone else did, how might that affect our business? As you can imagine, natural scenario planning.
Thank you.
That was question eight. Do you have any more? The nice gentleman in the back, I think, had a question.
Scott Braman, Champlain Investment Partners.
We chatted beforehand.
Yes. Yes. Thank you.
That's fine.
You alluded to the heavy spending on technology in prior years, and that might be easing up. Can you talk about specifics that you're doing in terms of the technology spending, the strategy around that to lessen the burden? Because it could be a bit of a black hole.
Let me have a go at that, then I might turn over to Mike. I think what we were trying to explain is we have a rolling set of technology investment priorities. They take cash. We're looking at it from a cash point of view. They take cash. A number of those are now coming to fruition. Mike outlined some new ones that we think we should do, which are strategically important for the business to serve our clients better, to drive revenue growth. We don't think that the sum of those will be any higher in terms of cash outflow than the ones we've been doing, so that as our overall cash flow grows, the proportion available beyond that will increase. Yep. Sorry. Yep.
Is there an opportunity to do things differently and not spend as much money on technology, or is this just going to be a technology-intensive business?
I think I said, we strongly believe that our positioning as the analytical broker, the broker who manages data, who has data at his fingertips to really help our clients and has a very robust infrastructure of its own, is very important to us. I think we just say we don't see a need for that spending to increase from its present levels, which gives operating leverage, if you like, as we grow. I assure you, we look at all these investment opportunities with a very tough, again, NPV. I've seen the work we've done in the past and going forward, I can assure you how we're going to think about these projects. Personally, I'm not a great fan of very big projects.
I like to see them broken up into smaller components with clear deliverables along the way so that we can chunk them up to make sure we're actually seeing impact as we move along. I think what we're telling you is we should invest. You'd expect us to invest, the level of investment is unlikely to increase. The gentleman at the front here.
Hi, John Harris, Ruane, Cunniff & Goldfarb.
Hi.
I wanted to just drill in for a second on a comment that I can't remember which one of you made earlier, which was that the progression of margins in the past and the fact that the margin had not been increasing in the past was more a revenue issue than a cost issue, and that you've always been disciplined on cost. I just wanted to explore that for a second because I think there would be a line of thinking, sort of in the general perception about the company that obviously predates your arrival, that maybe part of the revenue issue was related to the cost management, and that costs were managed so tightly around here that it had an impact on the revenue, and the two in this business are very much linked.
I wonder, as you go forward, even if the revenue growth comes through okay, how can you be so certain that you will have the ability to grow the revenues faster than the costs and that it would even be prudent, only because talent moves around so easily in this business, and you may have competitors that are comfortable not seeing their margins grow at the levels you might like to see yours grow to?
It's a very good question. I've obviously spent quite some time analyzing what happened in the past with Mike's help and many colleagues. It's pretty clear that the effects of the challenges in North America, both the macro challenges in North America and our specific HRH related issues, which by the way, the team did a spectacular job led by Dick and Todd to manage through to get us to where we are today. It's pretty clear that impacted our top line, as we showed you, we think broadly by about 2% a year. That had also a bit of a knock-on effect to a need to both control costs in North America and elsewhere. Your question has some validity to it.
I do think, however, as I've gone into looking at the business, we've managed to maintain our investment around some of our most important revenue-generating businesses. Look at our performance in Willis Re. We've actually become the market leader in many cases in being the analytical reinsurance broker. What Peter Hearn, who's with us today, and others have done, required a lot of investment during this period. We've continued to build out our specialty capabilities. We've continued to expand our international footprint, growing the China business that you heard about. That I have found, though I heard that myself before I came, that was the rumor I'd heard about Willis.
When I actually got in here, I found a bit of it, but actually now that enough investment did take place during that period, some of it I've outlined, that as you see, our revenue engine seems to be pretty robust to me. I think as we have more sustainable revenue growth-
You talked about doing positive NPV projects and how you would evaluate them. Then as it relates to share repurchase, one of you added the kind of caveat, we have to make sure we buy it at a significant discount to intrinsic value, and it has to at least be NPV in the same NPV as these other projects. I guess my question would be, quite simply, if you have a high NPV project and share repurchase is a higher NPV, does it matter what the discount-
What we said. Let me try and go over it again. We think we'll have, hopefully, growing cash flow available to invest. We're obviously going to look at ways to make sure that we have medium-term growth so we can continue to grow dividends, continue to grow the business. We will look at M&A, but in a very disciplined way. I hope you understood what we said about that. We are committed to growing our dividend because we think that's a long-term commitment to our shareholders rather than one-off. It's a long-term commitment which we're going to deliver on. With the comments on debt, where we think that frankly, we can just grow easily into our debt load. We'll think about share repurchases.
I think the constraint on share repurchases at that point would be if for some reason the stock was trading in a way because the market had a period of time where multiples had gone to very high levels, we might look at whether, hmm, that's an interesting level for the stock. We wonder whether that's the best use of our cash at this point. On the other hand, there would have to be other better alternatives. We're not against share repurchases, we just want to make sure we do them sensibly. I'm going to take one more question, then we're going to go coffee, and then, as I said, after the next three presentations, we'll have plenty of time for more questions. Yes, sir.
Cliff Gallant with Nomura.
Hi.
My impression of your comments today have been that when you've come to Willis, you found a company with a lot of organizational strengths in an industry which is a good industry to be in.
Perhaps that's good. I guess I'm trying to get a sense, though, of the changes that you're trying to affect above, saying settings and goals and targets. Has anything about the company that you found was where the company was going in the wrong direction, where you need to fix things or change things? Any sort of low-hanging fruit, if you will, in terms of where Willis needs to be fixed?
No, I did not find any low-hanging fruit. I found lots of opportunities, many of which are actually going to require some of the things I talked about. Redeploying our resources over time towards higher growth markets is an easy thing to say. I just did. Right? Actually making it happen on the ground, building our business in Brazil, building our business in other emerging markets. For Todd to drive allocation of resources within Willis North America with the team to higher growth markets, that's quite complicated actually. I talked, I think, quite a lot about the connection theme talked about. Bringing together the different parts of Willis, so that we really, really operate as one team, is no mean trick. We think we know how to do it.
We think we've seen how others have done it. I'm lucky enough to have come from a professional service environment where that has been the lifeblood of what we've done. I think we can do this. I think it's a great opportunity, but it is a change. It is a change. I think it's one that if we pull it off, is very hard to replicate. Very hard to replicate. Right. Coffee beckons. We're going to go outside, grab some coffee, then we'll come back and we're going to hear from the three business leaders, then we'll have plenty of time for questions thereafter. Thanks very much