Good afternoon. My name is Zen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Raymond James & Associates conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Greg Peters, you may begin your conference.
Thank you, Zen. Good afternoon, everyone. I'm Greg Peters with Raymond James, I want to thank you for carving out time in your day to participate in this call with the management team of Willis Towers Watson. On the call with me today are a couple members of the Willis Towers Watson management team, including John Haley, who serves as Chief Executive Officer. The format for today's call will include my introductory comments, followed by some brief remarks from John Haley. Afterwards, we will open up the call for Q&A. The call is expected to last no more than 30 minutes. Management has asked me to read the following disclaimer. This call may include forward-looking statements involving risks and uncertainties.
For a discussion of the risks that may cause actual results or events to differ materially, investors should review disclosures in Willis Towers Watson's most recent annual report on Form 10-K. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this call. During the call, certain non-GAAP financial measures may be discussed. For reconciliations of the non-GAAP financial measures, investors should review Willis Towers Watson's most recent earnings press release and associated supplemental slides posted on the Willis Towers Watson website. Finally, I'd like to remind everyone that the call is being recorded, and the details for the replay are available in the company's press release. For background purposes, we asked management last Friday to participate in a call with investors as a result of the surge of inbound calls with questions about Brexit and Willis Towers Watson.
The company agreed and would like to use this call to specifically discuss Brexit and the implications for Willis Towers Watson. Management intends to update us on integration progress and operating results with its normally scheduled earnings press release and conference call in several weeks. With that, I'd like to turn the call over to John.
Thanks very much, Greg, good afternoon, everybody. Joining me on the call today is Nicolas Aubert, the Head of Great Britain for Willis Towers Watson, Roger Millay, our CFO, and [Ida Schukis], our Director of Investor Relations. The decision for the U.K. to leave the European Union may have come as a bit of a surprise for many of us last Friday, it has been a topic that the Willis Towers Watson leadership has been focused on for many months. While it is still early days and the exit negotiations haven't officially started, we understand investors have many questions in this uncertain and groundbreaking environment. While this process is in a great deal of flux, we would like to provide our perspective on Brexit as it concerns Willis Towers Watson. I will make a few points before I open the call for the general question and answer session.
As Greg mentioned earlier, we are not going to be discussing or taking questions about our quarterly results or any guidance on this call. We will address any general business questions during the Q2 earnings call in August. As we assess the impact of Brexit, a key question is what is happening in the economy. Judging from the stock market reaction on Friday and Monday, we could infer a significant macroeconomic impact globally. In that case, Willis Towers Watson would certainly not be immune to any such economic impacts. We believe that the U.K. and EU leadership will be more reasonable in designing the exit strategy and that Brexit should have a modest overall impact on the economy.
We believe the U.K. has good long-term growth opportunities and the impact to Willis Towers Watson will be neutral to slightly positive over the next couple of years, with however some lumpiness in that period. Typically, our business benefits from regulatory change, political risk, or economic uncertainty. Insurance broking generally tracks to the economy, demand for services usually remains in times of uncertainty. We also see the same in our consulting business. We have some lines of business, such as benefits or administration, which can be counter-cyclical during the early period of a significant economic change. Whatever the effect of Brexit, we do not expect that the most serious impacts will be very different for us than for other firms in general. When we look specifically at currency, there are both some pluses and some minuses.
Although approximately 20% of our revenues are generated in Great Britain, only about 12% of these revenues are denominated in sterling, as much of the insurance business is transacted in USD. We have about 20% of our expenses in sterling, there is a general benefit to a weakening pound on our operating earnings. We have a company hedging strategy for this aspect of our business where revenues are generated in currencies different from the currency of the related expenses, which is designed to mitigate significant fluctuations in currency. We also have a pound sterling net asset position that is subject to revaluation through the profit and loss statement. We recognize Brexit may bring more change for Willis Towers Watson, this will not impact our integration, synergy, or marketing efforts. We are committed to focusing on the integration and continuing to make strides towards our merger-related goals.
We'll clearly be paying close attention to the changing regulatory and economic environment in the coming weeks and months. The benefit of having an extensive global footprint with client and market-focused colleagues around the globe is that we can be agile with our resources and keep ahead of market changes. Our legacy organizations have rich histories with almost 190 years of serving clients in many changing environments. I have full faith in our colleagues around the globe that we will continue to serve our clients first and foremost as they navigate this changing landscape. Greg?
Thanks, John, for those comments. Before we turn it over to Q&A, I wanted to take this opportunity to ask a couple questions that I got from some of your investors. Specifically, a number of us are wondering about how the Brexit might impact the organic results by business unit.
When we think about If I go through each business unit, maybe little by little. In HCB, our human capital and benefits, one of the things that'll happen is, in the short term, there could be some real potential for upside on helping companies with some what-if planning. In fact, there was an article in the journal this morning that talked about who are the big winners from Brexit. It talked about consulting companies as being among them. There is the possibility that we will see more work from them. There's also the possibility on the downside that some project work could be deferred until there's more clarity on exit terms.
In the medium term, as the referendum translates into potential changes in trade and talent flow, I think we would expect to see an increase in project work, which relates to either workforce planning, talent assessment in the EU, communication change management programs. We could even see an increase in retirement transactions in both consulting and administration. I think if we think about Human Capital and Benefits overall, again, neutral to slightly positive, I think is what we would say. When we look at Corporate Risk and Broking, insurance broking is impacted by economic turmoil for sure, but generally, demand remains as clients still need to buy insurance. Now, some parts of Corporate Risk and Broking will be more impacted by an economic slowdown than others, but the overall CRB revenue exposure for Great Britain is about 7%.
The London market is exposed to demand and supply pressures, but as a global broker with a fairly extensive footprint, we're well-placed to benefit from businesses wherever they move, we would be able to service them. I think, in an environment where there is economic and political uncertainty, it presents our clients with additional complexities and risks, and we feel we're very well-placed to advise them in those areas. Looking at IRR, I would say most of our revenues are actually not derived from U.K. clients. If it turned out that underwriters were to move to other locations outside of London, that again should not have a material impact on Willis Towers Watson. On the consulting side of IRR, we would anticipate we might get some additional work for the insurance industry as well as on the investment side.
Our final, our fourth segment, Exchange Solutions, I would say we would expect no direct impact from Brexit.
Thanks for that color. Just as a follow-up, I know it's early on, would you think that Brexit might create some challenges with reshaping the cost structure for the combined Willis Towers Watson? Are there any implications on the Ireland domicile for the holding company?
Yeah. First, on the Ireland domicile, we do not believe there are any implications of Brexit on that. We don't think Brexit would have an impact on the current cost and merger-related cost structures. As you know, the operational improvement program is something that has been being implemented for at least a year and a half now. The U.K. was really the first area that we had focused on, we've pretty much concluded the last of the real waves for the U.K. are being concluded in July, by next month.
Perfect. Thanks for the color. Zen, why don't we open up the call for Q&A?
Okay. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question comes from the line of Andrew Kligerman.
Thank you very much, John, and thank you very much for the U.K. team. I did have a question on the OIP as it relates to the U.K. Can you describe the changes that have been made, and can you talk about any investments that, let's say, needed to be made on the customer service side, if any, in the U.K.?
Sure. Thanks very much, Andrew, and I'll ask Nicolas Aubert, who as I said, is our Head of Great Britain, to comment on that. Nicolas?
Thanks, Andrew, for your question. Most of the operational improvement program in the U.K., as John said, was launched last year and going to be finalized by the end of July. That's the last wave. This improvement was essentially based on the back-office activities, I would say administration, placement, and bidding activities. The point was to relocate those activities to lower-cost locations, whether in the U.K., in Ipswich actually, or in Mumbai, in India. That represented something like 20% of the FTE equivalent of the workforce. As a result, we were able to focus our remaining people based in the U.K. on frontline activities, so exactly what you are referring to, essentially customer servicing, business development, placement in terms of broking activities, and of course, business development.
Terrific. Thank you very much.
Right, next question coming from the line of Luke Boding. Line is open.
Hey, thank you, John. Just a question on kind of the competitive dynamics and the industry that you compete in. With Brexit, do you foresee any changes in the strategy that you're going to go to market with these potentially slightly positive changes that are occurring? Is it mostly just going to be business as usual with the go-to-market strategy as they arise?
First of all, let me just reiterate, a lot of this depends on what the overall economic impact is, and while we are both hopeful and optimistic that the various governments involved will act responsibly and get a good deal for everybody, that's sort of where our going-in hypothesis right now, we expect that's what will happen. You never can tell, that could be if there was something that led to a real big global slowdown, as I said, obviously that affects everybody, and that would affect us. Assuming that we get a reasonably benign negotiations for the Brexit, I think we would continue to have pretty much the same strategy. I think one of the things we've seen is that there are other insurance centers opening up or developing around the world. We would expect that to continue.
We've seen London become really one of the centers of innovation in finance. We would expect that to continue. We are very much a company, though, that is focused on being a global presence and being able to serve our clients around the world. Frankly, I think we also pride ourselves on being a company that has the agility and the nimbleness to be able not just to respond to change, but to prosper in it. I think we'll continue along the same lines.
As a follow-up to that question, John, I'm wondering if there are any long-term implications to the U.K. wholesale insurance market from the EU exit.
That's one thing I might turn to Nicolas again to comment on that. Nicolas?
Yeah, sure. I think back to what John was saying in terms of the overall macroeconomic, and I would say macro financial impact coming from Brexit, depending the quality of the negotiation between the EU government and the U.K., we would see more or less of an impact. I think that overall, we see the London market as being quite self-aware of the need to improve on its innovation, on its operational effectiveness, on its talent management. It's quite interesting to see that this self-awareness preexisted the Brexit situation. You can expect the London market stakeholders, whether the large brokers, the large insurers, the Lloyd's, to continue on their plan. I would not expect the London marketplace from an insurance point of view to significantly be weakened by this situation.
As I said, the only thing that would be really challenging would be a situation where there would not be a good negotiation landing. As John said, this is not part of our key estimations.
Perfect. Thank you.
Your next question comes from the line of Ian Gutterman. Line is open.
Hi. Thank you. A little bit related to the prior question, can you talk about how much of the brokerage business out of London is done through passporting for the insurance carrier?
I have that. Nicolas or Roger, do you have that information?
It depends what you mean by passporting. What I can tell you is that when you look at, I'm going to pick the example of the Lloyd's of London figures. That's more or less GBP 20 billion, GBP 27 billion. When you look at that, 5% of that is coming from Europe, 10% of that is coming from U.K. and Ireland, 30% of that is coming from U.S. and Canada. It means that it's a relatively small part, which is directly connected to the European passporting situation. Having said that's for Lloyd's. That would be much more significant when you look at all the European commercial insurers that are based in London because they are both using their corporate paper and their Lloyd's paper. Difficult to tell, because those figures are not public. They are a small part of the overall London market platform.
Your retail Great Britain segment, would that be different, or would it be a different percentage there?
Could you repeat the question? Sorry.
Your retail Great Britain business, outside of Lloyd's. Is that much different than the Lloyd's?
If we talk about the Willis Towers Watson business, we've got only 30% of our broking business, which is coming from U.K. domiciled companies. 70% of our business is coming from the rest of the world. We are very little dependent on the U.K. economy on this point of view.
Got it. Okay. Then just lastly is, to the extent that there were a more adverse outcome as far as the single market access, can you just discuss what options you do have? Obviously, Gras Savoye gives you a beachhead in France. Would that be part of the solution, or do you have an operation in Switzerland that would be part of the solution? Sort of what other options are there if it were a more worst case on the negotiations?
Well, I think we have operations really all throughout Europe. Gras Savoye is clearly one of the crown jewels of the Willis Towers Watson organization, a very strong position there. We have operations in France, Germany, and all these locations. I think it would probably depend on exactly how things played out. I think all of our operations are ready to handle any increase in demand.
Got it. Okay. Thank you.
Your next question's coming from the line of Karan Padki. Line is open.
Hi. Thanks for taking the questions. I was wondering if insurance underwriting and brokerage activity moves out of London to another location, what does it mean from a client perspective for both their in-force policies and new business that they want to purchase? How would they go about actually sort of changing the terms with Willis to be able to service them from some other location? What are the mechanics of that, I guess?
Well, we haven't really faced that before, Nicolas, do you want to speculate on that?
Yeah, I think I will connect this question to John. John's o n the previous point. We've got a fantastic network. Actually, we've got the best international network of any broker from a proprietary network point of view. Our broking operations across the world would be absolutely competent of handling customer relationship, client relationship, whether existing clients or new clients to us. We have no operational or business challenges from this point of view. By the way, whether the client would be serviced and handled through our various network locations, we would still be able to service part of the expertise capabilities from London if it would be necessary.
Thanks.
Okay. Your next question comes from the line of Cliff Gallant. Line is open.
Thank you. Two questions. The first was sort of just general. I'm curious, over the last several days, as you look across your businesses, what kind of questions are your clients asking you? What are their top concerns? My second question was, you talked about Gras Savoye and the strength of that operation. There was a headline that there was a management change there recently. I was wondering if you could comment on that, too.
Okay, Nicolas, do you want to take the first question there?
Yeah. The client's questions actually at the moment, they are much more related to the human capital and benefit part of our business. That's very much connected to areas where we can help them, actually. This is about communication to employees. This is about situations where they would have to reorganize their operations. This is about talent management, and notably would they eventually carry a risk of having some EU citizens, for example, that would not be able to work easily in the U.K. going forward. What kind of retention schemes would be possible? There were questions regarding If you stay in the U.K. for more than five years, you can apply for permanent residence.
They are asking a lot of questions which are connected to employee engagement and employee management, all areas where we've got a very competent team in the Talent and Reward Business Unit, notably. This is essentially centered around that. We've got more global questions which are connected to the regulatory universe, notably the regulatory universe for insurance companies. We've got a lot of competency also in this domain, both through our risk capabilities and also our insurance capabilities.
Finally on the Gras Savoye François Varin, he left as planned. That had been in the works for a while.
Thank you.
Your next question comes from the line of Dmitry Gratvol.
Hi, John and team. Thank you for doing this call. Just a quick question. I'm just wondering if there's any impact from Brexit on the contracts between you and your clients. If there's anything that will impact them, would they expire before the two-year period of transition?
We have not gone through any kind of a detailed inventory of that. I don't think we're expecting any big changes on current contracts. We don't really have things that would be running beyond the two years that we have to worry about here. I think it's really a going forward issue.
Okay, Zen, next question.
Okay. Again, if you have any questions, kindly press star, then the number one on your telephone keypad. There are no further questions at this time.
Well, perfect. John and management team, thank you for joining us with the call. We've hit the 30-minute mark, so it's perfect timing. We'll look forward to hearing from you with your earnings results in several weeks from now.
Well, thanks very much, Greg.
Thank you, Greg.
Yep.
This concludes today's conference call. You may now disconnect.