Feb 4, 2010
Willis Group Holdings Ltd (WSH)
F2Q 2010 Earnings Call
Executives
Kerry Calaiaro - Director, Investor Relations Joseph J. Plumeri - Chairman & Chief Executive Officer Patrick C.
Regan - Chief Financial Officer & Chief Operating Officer Donald J. Bailey - Chairman & Chief Executive Officer Grahame J.
Millwater - President - Willis Group
Analysts
Mark Hughes - SunTrust Robinson Humphrey Keith Walsh - Citi Jay Gelb - Barclays Capital Thomas Mitchell - Miller Tabak & Co., Llc. Meyer Shields - Stifel Nicolaus & Company, Inc.
Cliff Gallant - KBW Matthew Heimermann - JP Morgan Jay Cohen - Banc of America/Merrill Lynch Brian Meredith - UBS
Operator
Welcome and thank you for standing by. At this time all participants are in a listen-only mode.
To ask a question during the question-and-answer session please press star then one on your touchtone phone. Today’s conference is being recorded, if you have any objections you may disconnect.
Now I’d like to turn the meeting over to Ms. Kerry Calaiaro, Director, Investor Relations.
You may begin.
Kerry Calaiaro
Thank you, and welcome to our fourth quarter 2009 earnings conference call and webcast. Our call today is hosted by Joe Plumeri, Willis Group Holdings PLC, Chairman & Chief Executive Officer.
A replay of the call will be available through March 6, 2010 at 11:59 PM Eastern Time by calling 877 611 5293 from within the U.S. or 1203 369 4862 from outside the U.S., no pass code is needed.
Alternatively the webcast replay can be accessed on our web site at 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 and we undertake no obligation to revise or publicly release the results of any revision 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, 2009, which we expect to file by the end of February, as well as our earnings press release for more detailed discussion of the risk factors that may affect our results.
Copies may also be obtained from the SEC or by visiting the Investor Relation section of our website. Also please note, that certain financial measures we use on the call are expressed on a non-GAAP basis.
Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release. I'll now turn the call over to Joe.
Joseph Plumeri
Hi! Everybody.
Welcome and thank you for joining us for our fourth quarter 2009 earnings call. Here with me today are Pat Regan, Co-Chief Operating Officer and CFO, Grahame Millwater, President, and Don Bailey, CEO of North America.
This is Pat Regan's last official conference call, earnings call, as you know who will be leaving on the 19th of February. I want to thank him for his great efforts in helping Willis and all of its fortunes and we wish you well in the future, Patrick.
Patrick Regan
Thank you, Joseph.
Joseph Plumeri
Stephen Wood, which has been announced, who is our Willis Group Controller has been named Interim CFO, as we continue our search and someone who knows our company very well and knows our business very well, and we feel very, very comfortable in working with Stephen going forward. Other members of our management team are here to answer any questions that you have after our remarks.
Well, the best thing I could do is to say that 2009 was an amazing year as we tackled the number of external and internal challenges in the middle of a global recession and soft market environment we delivered. Adjusted earnings were diluted -- per diluted share from continuing operations was $2.67.
Adjusted operating margin of 22%, 2% organic growth in commissions and fees and Shaping our Future initiative that has been going on now for a couple of years had a net benefit of approximately $60 million. We began a major integration of an acquisition that closed in the middle of the financial crisis with bridge financing, substantially completed the integration with North America’s synergies, and cost savings of $205 million in 2009, an astonishing achievement.
Earned improved stable outlook for Moody’s and S&P and repaid bridge financing, pre-funded 2010 maturities at 7%, and strengthened the balance sheet debt to adjusted EBITDA is now down to 2.6 times, and completed the re-capitalization of Gras Savoye, remove Gras Savoye, put and used net proceeds for debt reduction. So all the boxes that needed to be checked at the beginning of the year from balance sheet readjustment to what we’re going to do with Gras Savoye to the integration of HRH into Willis has all been checked off and that’s why I started my comment by saying this was truly an amazing year.
Now let me drill down into the story line a little bit if I may. In the fourth quarter, the adjusted earnings per diluted share from continuing operations was $0.47 with a negative $0.3 from foreign currency in the quarter giving $0.50 excluding FX.
We had 2% organic growth in commissions and fees with positive contribution from each segment. North American segment grew 1%, which included, I’ll remind you HRH was the first quarter, if we included HRH in our report in our calculation as we closed the transaction a year ago, a sequential improvement from the third quarter of 2009.
So we’re really pleased with that accomplishment, the integration is over. We talked about the integration all last year being a distraction, the integration was completed; we started to concentrate on growth.
Don will talk about that, and those were the results. National segment grew at 3% and the global segment grew 1%.
In North America, I'm extremely pleased with the 1% growth in organic commissions and fees and significant margin expansion in the fourth quarter. With the integration of HRH substantially completed and renewed focus on top line growth, we generated a significant increase in the amount of new business in the fourth quarter compared to a year ago.
HRH has been a great strategic fit and we have more than exceeded our synergy targets creating significant operating leverage as we continue to navigate the recession and the soft market environment. I want to, for the first time, turn the rest of the discussion of Willis in North America over to Donald Bailey, the CEO of North America to run you through, a bit more color and progress that we made in the last year because as I said we couldn't be more pleased with that effort and the accomplishments of Willis in North America.
Don?
Donald Bailey
Thank you, Joe. Good morning everybody.
First, it's probably helpful for me to remind you the strategy for HRH and why we did the transaction. It brought us critical math in key regions in the United States.
I can include in that list markets such as New York, Atlanta, California, Texas, Chicago, Boston and Florida. It also brought us some critical market share in key locations such as Amarillo, Gainesville, Appleton, Wisconsin, Columbus, Wichita, Richmond, Okalahoma City, Savannah, Georgia, and Bangor, Maine where I was last week with one of our great construction plants.
All of this literally brings Willis closer to our clients than anybody. That proximity allows us to deliver even more value to our clients through the local model that we run, which is global resources delivered locally.
This will also create a welcome diversity to our client portfolio. It bolstered our core middle market business and added critical mass in the large account space, employee benefits, small commercial and private clients.
Finally on the strategy, we could have made many small acquisitions but we chose to do it all in one transaction and create a single unified team. That strategy is tougher in the short term no doubt, but clearly creates a better business for the client and shareholders in the long run.
Let me offer you some comments now about the integration itself. Integration as Joe talked about was clearly the focus for 2009 and is now largely complete.
With the aim of driving margin improvement of the business, our four main priorities during the integration process were expense reduction from synergies, retaining the producers and clients, implementing the integration plan and converting the contingent commissions. I can tell you today that we are succeeding and exceeding our expectations on all fronts, combined synergy and rightsizing savings of approximately $60 million in the fourth quarter of 2009 and approximately $205 million in the full year of 2009.
That’s the year it doubled our original targets. We continue to identify additional savings opportunities and expect to maintain similar level of total synergies and savings in full year 2010.
Our producer and client retention remain high. We've had limited loss of producers.
Only about 3% of North America acquired revenues are tied to producers leaving. Client retention at around 91% for Willis North America in 2009, that’s consistent with recent years and in the midst of integration that’s not easily achieved.
We've had good progress on all integration work streams. In the end, we've created a strong combined operation, the organizational structure and leadership is in place.
All office and staff moves are completed. We had over 5,400 associates that were impacted by real estate moves.
This is a very impressive achievement to get done in 2009. We have improved our business planning and processes as well throughout 2009.
Finally on converting contingent commissions, over 90% have been converted or predicted [ph]. Now let me address Q4 results in North America, the improvement in organic commissions and fee growth, the positive 1% in fourth quarter was driven by an increase in new business generation.
We were up 17% over the fourth quarter of 2008 on new business, and while doing it maintained steady client retention rates. We felt a more pronounced rate headwind of negative 6% for the quarter, which is up from negative 4% in Q3.
In the end, Q4's organic growth improvement was a result of realizing the benefit of a more rigorous new business strategy. That strategy included a renewed focus on pipelines and differentiation as well as retaining those producers by creating a fair compensation plan and creating an environment that facilitate the creation and delivery of value to our clients all over North America and the world.
The operating margin in North America was 25.6% in fourth quarter 2009, which is up 670 basis points from 18.9% one year ago and was 23.7% for the year, up 830 basis points. With the integration substantially complete with HRH, we have laid a terrific foundation and are now focused on running a great business in North America.
Let me turn things back over to Joe.
Joseph Plumeri
Thanks, Donald, and hopefully you could see why we are excited about the future of North America and why we are now on a growth mode doing business and not being distracted by the integration, which I think was done very well. Internationally, our international unit, organic growth and commissions in fees was 3% for the fourth quarter as it continues its record of impressive growth across many regions in the face of some slowing economic conditions.
Excluding, U.K. and Ireland, the retail businesses, international grew 7% and the reason I say excluding Ireland and U.K., as you know they have been beset, especially Ireland with some economic woe, so if I take all of our businesses around the world excluding those, they grew an impressive 7%.
We had impressive growth in both Latin America and Asia led by Venezuela, Brazil, Colombia and China. U.K.
and Ireland retail declined 9% as they both faced some of the same economic challenges that we are seeing in the U.S. New business generation remains double digit, while absorbing a negative four-point rate impact.
Productivity per FTE rose 4% from last year to 166,000 on a trailing 12-month basis. Now let me talk about our global businesses.
The global business segment comprised of Global Specialties, Faber & Dumas, and reinsurance had 1% organic growth in commissions and fees in the quarter in the face of a four-point rate headwind. The positive growth in specs and reinsurance was muted by a decline in the more economic sensitive Faber & Dumas.
Global Specialties, the revenue drivers, Marine, Aerospace, Financial Solutions and FINEX Financial and executive risk specialties. The rate environment continued the softness in a number of areas in Global Specialties, although stabilization in aerospace.
Reinsurance had a solid single-digit growth in the quarter, primarily North America and specialties, and this growth was driven by exceptionally high new business generation. The productivity per FTE rose 3% from last year to $358,000 on a trailing 12-month basis.
Now let me turn things over to Grahame Millwater to update you on our priorities for 2010, Shaping our Future, and driving growth. Grahame?
Grahame Millwater
Thank you, Joe, and firstly let me turn to Shaping our Future. We have again exceeded our targets in the fourth quarter.
We delivered $33 million worth of gross benefits for the full quarter. These results included continued contribution of $10 million from our global placement effort, just to remind you that reflects increased commissions from working closely with our carrier partners.
With a contribution of $6 million from client profitability, where we justify increased remuneration from our clients in line with the value we deliver and $3 million sold (inaudible) program in reinsurance. Since we started this program several years ago -- couple of years ago we have delivered gross benefits of $179 million and net benefits after investment of a $101 million.
Therefore by the year-end 2009 we have already exceeded the benefits we originally estimated that we’d achieve by the end of 2010. And as we deliver success, we continue to see more opportunity.
The continued rolling investment we are funding from the program will again continue to drive benefits throughout 2010 and beyond. We believe that Shaping our Future has delivered everything we expected from it and the initiatives contained within it have now largely become a way of life for the business units.
I mentioned last quarter that we began our program in North America rolling out an integrated processing platform that we have entitled EPIC. The synergies that Don and this team have captured through the integration process to date have been remarkable, and this is without this platform in place.
This new platform will help growing our synergies to the next level and the next stage of improvement in our North American results. Now, let me turn to driving and funding growth.
In the past few quarters, we have commented that our renewed focus on driving revenue growth. We've also commented that much of this was focused initially outside North America given the huge integration effort that was underway there.
However, in the last six months, our attention has shifted to include North America in this effort and we believe this is reflected in the fourth quarter organic revenue numbers. We believe this focus on growth is building in momentum, delivering benefit and continues to be essential in an environment that is still facing substantial economic and insurance market headwinds.
In interest of time on this particular call, I'll not go to the -- all of the specifics of our growth program other than to say segmentation, the value proposition, disciplined sales and client management processes and a relentless focus on retention will continue to be the major themes globally. We are also continuing to be increasingly aggressive in our recruitment efforts and we continue to mobilize the organization to systematically identify and attract the best talent in the industry.
And we refer the rightsizing effort throughout this call and its impact in 2009. And this is critical because we have to enable ourselves to fund this recruitment effort.
And expense management continues absolutely critical to our efforts in 2010. Managing our cost basis become a way of life and is necessary in this challenging economic and soft insurance pricing environment to enable us to continue to be able to build our talent base and by doing so enhance our foundation for sector leading revenue growth.
With that I’ll return the call over to Pat Regan, our COO and CFO to review the financial results.
Patrick Regan
As Joe mentioned earlier, the fourth quarter, in fact the whole year saw significant execution across a number of fronts, certainly that included significant strengthening of our balance sheet to $205 million of synergies and rightsizing savings in North America, expense size right across business and overall delivery of results in what was a very challenging environment. Adjusted earnings from continuing operations for the quarter were $80 million or $0.47 per share up from $0.36 per share for the fourth quarter of 2008.
Excluding the impact of the FX the adjusted earnings per share were $0.50 for the fourth quarter of 2009. For full year of 2009, adjusted earnings per share from continuing ops were $2.67, up from $2.55 in 2008.
On the operating margin, the adjusted operations margin for the quarter was 21.1%, up 430 basis points from 16.8% a year ago. Distortion in the [ph] margin for the quarter was very similar to what we’ve seen in each of the quarters in 2009.
Revenue growth despite what was a very tough pricing and economic environment in fact the impact of rate is still significant and negative five [ph] averaged across the group. Margin impacted by high pension costs and lower investment income, but all of this offset by consistent straight cost controls and again we generated underlying margin expansion in the quarter.
We have not arrived at these results by accident though. Throughout the year, we executed on the $205 million of synergies in North America, and as Don said and worth repeating, despite a very tough revenue environment, we've grown our operating margin in North America from 15% to nearly 24% in the full year of 2009.
On an adjusted basis, salary and benefits for the year remained relatively flat at about 56% of revenues in '09 compared to a year ago. This was despite absorbing nearly 300 basis points of increase at higher pension and some $20 million out of severance costs through the year.
We systematically managed our group headcount.
Just talking for a second on the financial headwinds we saw in 2009, many of those headwinds we’re facing at this time of last year have now stabilized. So taken together, we expect investment income, pension expense, and interest expense to be relatively inline flat for 2010 compared to 2009.
On foreign exchange, in absolute terms, foreign currency movements had a negative $0.03 absolute impact in earnings per share in the quarter. There is some gain on the dollar sterling offset by hedging.
Obviously, compared to 2008, foreign exchange is a positive due to the foreign currency loss on the pension scheme assets last year. On discontinued ops, we sold Bliss & Glennon early in the year so obviously we stripped that out of the comparative revenue, there is obviously no impact on organic.
On tax, reported income tax for the quarter was $32 million compared to $23 million for the comparable period a year ago. The effective underlying tax rate for the year was approximately 26% again the same as for 2008 full year revenue.
On our redomicile to Ireland, I'm very pleased to say we completed the change of in corporation of the group’s parent company from Bermuda to Ireland all on track and on time. On associates, as a result of our recapitalization of Gras Savoye which completed in December, our ownership has now changed to 31.8% down from the 46.2% we owned before.
And therefore purely looking at the associates line, as I think we talked about before, we currently estimate the associates line will be approximately $10 million lower in 2010 compared to right now. Turning to capital management overall then.
I'm obviously very pleased by our progress on capital management throughout 2009. As Joe mentioned we obtained an improved outlook to stable from both Moody's and Standard & Poors.
That gave us a great path forward from which we launched our September bond issue for $300 million which we eventually priced at 7%. We use that to tender for what ended up in a $160 million of our 2010 bonds.
We then apply the next proceeds in the Gras Savoye transaction together with operating cash flow we generated to reduce our term loan by a $180 million to $520 million at year end. These actions together significantly improved our debt maturity profile.
Once that remaining $90 million of the 2010 bonds is paid, only the mandatory repayments, the only amount remains for next five years of the quarterly scheduled payments of $27 million a quarter on that $700 million five year term loan. Total debt therefore is now down to 2.37 billion, compared to 2.65 billion at the start of the year.
Debt to adjusted EBITDA at year-end was down to 2.6 times, well on the way to our comfort level of 2.5 times whereas we mentioned before we will start considering share buybacks. Cash and cash equivalents were $191 million on December 31, 2009.
With that I’ll turn the call back to Joe.
Joseph Plumeri
Thank you Pat. So we’ve had a busy and productive 2009 delivering I think a great result and along the way we checked an awful lot of boxes.
Our adjusted earnings per diluted share from continuing operations $2.67, organic growth and commissions and fees 2%, adjusted operating margin of 22%. We obviously had to check off the box called HRH integration, which I think substantially was completed and North America organic growth turned positive.
The other box was to complete the reorganization of the capital of Gras Savoye, we did that and did that successfully and strengthened our balance sheet with debt adjusted EBITDA down to about 2.6 times well on our way to our target of 2.5 times when we will consider as I said in the past buybacks again. We remain very vigilant about our priorities while the external environment remains a challenging one.
With continued slow global economies and the soft insurance market, will have to continue to do the following and I think we do the following very well. Improve and reinforce our sales and revenue culture to drive growth, further execute shaping our future, whatever things we have left to fully integrate HRH like putting in a system that will now be constant throughout all the offices in North America, whether it be legacy HRH or Willis will be completed, and continue to grow the top line of North America and of course maintain the expense management to fund growth.
And I think these efforts really position us well for continued success in the future. Now I will turn the call back to the moderator to take any questions that you may have, thank you.
Operator
(Operator Instructions) Your first question comes from Mark Hughes - SunTrust Robinson Humphrey.
Mark Hughes - SunTrust Robinson Humphrey
The North American new business activity obviously quite strong. Was there anything unusual in that, any reason why that wouldn’t be sustainable going forward and to what extent did the compensation structure play into that?
Joseph Plumeri
I will answer that and then Don can offer his comments. As we said all year last year, the integrations of businesses, especially that large takes a lot of time.
There is a lot of distraction. If you take that distraction, plus the soft market, plus the economy, it is just hard to do, but with the integration substantially out of the way, we talked about on the last call, that our full attention was to growing our business and as result of pipelines and as a result of everybody now concentrating on that subject you saw what the growth of new business could be and I actually think that -- with the way our pipelines are, it looks like it’s a harbinger of things to come.
Secondly, we took care of telling everybody what the pay-out would be very early in the game. We took care of all the guessing, people knew who was going, where all this is going to be merged together, we told people what their pay-out structure would be, we did that early in the game.
So as a result, people’s minds were fresh with the thought of actually doing business. So when I think you take all of those considerations, even despite the headwinds in the fourth quarter, I think what you saw was what we expected and hoped for which is very solid growth in North America.
Don, you want to add anything to it?
Donald Bailey
I would reiterate, Mark, I guess the plan was pretty simple, but not simple to execute. It was as Joe said, keep the producers, there is no way we would have achieved 17% growth in new business in Q4 if we didn’t keep the people.
We put a good comp plan out, we did that early, now we gave them something to sell. So they felt like they had a good opportunity to deliver value to the client and then we put rigor around the pipelines and got very, very serious about accountability in new business.
Mark Hughes - SunTrust Robinson Humphrey
How about, just one follow-up, the reinsurance segment, what should we think about that in Q1 with kind of great dynamics recently?
Joseph Plumeri
Peter Hearn will answer that question, Peter?
Peter Hearn
Mark, rates obviously split in the first quarter, based on the one-one renewals anywhere from 5% to 10% depending on the segment, depending on the line of business, but again overall the delta between insurance and reinsurance results are still significant. There will be pressure on reinsurance rates in 2010.
Operator
Our next request from Keith Walsh - Citi.
Keith Walsh - Citi
First for Pat, just a clarification around organic growth, I just want to know, how are you accounting for the $50 million of HRH contingent commissions in the organic growth calculation, since they have been converted to regular commissions. So I just want to get some clarification around that.
Patrick Regan
The impact in Q4 of any of those “conversions” wouldn't be significant on the overall organic growth rate for North America.
The impact in Q4 of any of those “conversions” wouldn't be significant on the overall organic growth rate for North America.
Joseph Plumeri
As we said, Keith, that we were very successful in converting over 90% of the contingency fees. Most of that contingents you saw in the first quarter because we just began the process.
But by the time we got to fourth quarter, if the underlying question is that, was there a lot of contingents in the fourth quarter that came from HRH which bolstered the growth in North America, the answer is no. There were very little contingents by the fourth quarter.
Most of them you saw on the first quarter of last year, so there were very, very small contingents left. As I said, we converted 90 plus percent of them.
So this was pure organic growth.
Keith Walsh - Citi
I guess the question what I'm getting at is the year-over-year comparison, if in 4Q '08, there was a lot of contingents in the way HRH choose to, they used– to conclude the contingents from their organic growth calculation and now these are regular commissions, are we doing an apples to apples comparison is what I'm trying to get at.
Patrick Regan
Yes, to answer your question specifically, there is not a big impact on what was MDI [ph] converting into our commission in fixed [ph].
Keith Walsh - Citi
For Joe, around compensation I think you touched on this a little bit, but just converting the HRH producers to the Willis compensation plan, when did that go into effect and is this is a source of upside for margin in 2010 as I think you’ve articulated when the deal was first done and the HRH Plan was richer than the Willis plan?
Joseph Plumeri
We put it into effect January 1, so we announced what we were going to do, but early or mid year last year, but it became effective January 1.
Keith Walsh - Citi
If you can quantify maybe how this could potentially be a benefit to your margins in 2010?
Joseph Plumeri
I think it could be a benefit because I think we put more emphasis on growth and we reconfigure the compensation so that I think a, everybody was happy. I believe they were because you saw our attrition was rather low for deal of this size.
And secondly, we reconfigured it so people got paid very well for growth and we started to see the ramifications of that, hopefully that will continue.
Keith Walsh - Citi
Just a follow up a little bit there, just assuming no growth, you got the same revenue year-over-year, the Willis plan versus HRH plan, which is better?
Patrick Regan
It’s not as simple to say as what was X percentage now, Y percent. What Donald and team did was take the best of both plans, blend it into different price in different segments.
So it isn’t as simple as saying, it used to X percent and now it is Y percent thing. We do believe in the right areas it will drive better growth, but it’s not a simple answer to say it will…
Joseph Plumeri
It is true though Keith that if there is no growth in a producer’s book they won’t get paid for that growth for lack of growth.
Operator
Your next question comes from Jay Gelb - Barclays Capital.
Jay Gelb - Barclays Capital
Joe or Don, the rate impact that you mentioned I believe down 5% or 6% in the fourth quarter?
Donald Bailey
6%.
Jay Gelb - Barclays Capital
Down 6%?
Donald Bailey
Yes.
Jay Gelb - Barclays Capital
It's just a lot different from what we’re hearing from some of the large primary commercial insurers, any thoughts in terms of what that disparity could be driven by?
Joseph Plumeri
Well first of all, I think that's always the case. Just nothing unusual, you'll always hear carriers say that they’re more disciplined and all those kind of stuff.
All I can tell you is that we tracked this and have been tracking this for quite a long time, you've been covering us for a long time and the fact that remains is, it's a 6%. Don?
Donald Bailey
The only thing I would add, Jay, on it is, and what you'll see from a carriers typically is no contemplation of new business in their rate calculations, which are a significant piece of what happens out there. So if they are acquiring a piece of business at a lower rate than what it is going for at current, it's not going to be reflected in their numbers.
So I think you'll see some of delta be reflected in that dynamic.
Jay Gelb - Barclays Capital
That’s a good point and then just the numbers point, the interest income was $15 million in the fourth quarter versus $10 million in the third, but you’re saying it’ll still be the same as it was for the full year around $50 million in 2009. Why is that?
Patrick Regan
We took the items together, you remember what I said was interest income, pensions and interest payable taken together will be flat versus 2009. I would expect that we would be around $50 million or slightly lower in 2010.
Jay Gelb - Barclays Capital
Sorry you broke up a little there, what was that?
Patrick Regan
I said we should be around $50 million or slightly lower in 2010. Part of it is two factors.
One is obviously the interest rate prevailing at that time but also as we've talked about, we have a forward hedging program that kind of has provided us with a significant increment to that in the past. We have some of those contracts rolling into 2010, so I would expect net-net that we would get a little less than 50 million in 2010.
Jay Gelb - Barclays Capital
And overall the anticipated impact or benefits from foreign exchange in 2010, what would that be?
Patrick Regan
Not expecting any significant impact one-way or the other in 2010 versus 2009.
Operator
Your next question comes from Thomas Mitchell - Miller Tabak & Co., Llc.
Thomas Mitchell - Miller Tabak & Co., Llc.
The two sort of offline sort of interest and earnings of associates and net income attributable to non controlling interest, after a number of transactions have been done, I'm wondering if there's some way you can give us guidance as to what we should use for those two figures on a regular basis quarter-by-quarter?
Patrick Regan
Well, on the associates line, as I mentioned following the Gras Savoye transaction, we will be about $10 million lower on that line in 2010 versus 2009. The seasonal pattern, again Gras Savoye like Willis has significant seasonality, so it will be a similar seasonal pattern to 2009 and 2008, that makes sense.
On non-controlling interest, there shouldn't be enormous difference in 2010 versus 2009, that fact is what we used to call minority interest and no great new news on that really.
Operator
Your next question comes from Meyer Shields - Stifel Nicolaus & Company, Inc
Meyer Shields - Stifel Nicolaus & Company, Inc.
I guess, Pat, can you talk a little bit about why interest expense individually ramped up in the quarter?
Patrick Regan
Versus last year obviously, the pieces we got there were 300 million of bonds we issued in the third quarter. Obviously it was a little bit more of that than we had in earlier quarters and now versus last year we got the Goldman money which we didn’t have in the fourth quarter of ‘08.
Meyer Shields - Stifel Nicolaus & Company, Inc.
I'm asking I guess about the previous quarter in 2009, that 300 million is the difference?
Patrick Regan
Yes, as you know, the only rate -- all of our debt is fixed apart from actually the term loan and revolver, which are floating. So the rest of it takes the only new debt flowing in versus other quarters the 300 million which we issued earlier in the year.
Meyer Shields - Stifel Nicolaus & Company, Inc.
A couple of questions on North America, I guess, aside from converting HRH contingent to more standard commissions, my understanding is that there was a difference between HRH’s overall competition and what Willis had been able to get from carriers, has that been reduced?
Donald Bailey
I don’t understand your question. If you mean that we were able to get higher commissions from carriers than HRH had been able to get, the answer is yes, which is why in large part we have been able to eliminate the contingents.
Meyer Shields - Stifel Nicolaus & Company, Inc.
But, was there a difference beside that?
Donald Bailey
No, it’s basically a much more focused plan that we had that addressed differences in the way we were paid by carriers on a branch-by-branch basis. And we said very early in the game that the discrepancies were great between HRH and Willis, which gave us a great deal of comfort and confidence that we were able to convert the contingents to commissions.
And as a result, we actually have almost completed 100% in a year that we said we would take three years to do, we have done it in a year, so you can check that box off. And secondly, we believe going forward, irrespective of what happens to contingents that we will be able to get paid our fair share of what we deserve, because we will not take contingents, if they are sunsetted in the future does not mean we don’t expect to get paid.
Meyer Shields - Stifel Nicolaus & Company, Inc.
Now that Willis combined with HRH is a much bigger North American player does that itself mean that on the Legacy-Willis business there are higher commission rates possible?
Joseph Plumeri
That means that obviously we are bigger, but our philosophy is that we coordinate our buying under our global placement strategy that we have carrier relationships where we are very deliberate and directed to where our business goes as it relates to where our clients get the most and best service and how well we are paid. And so, if we are bigger and we consolidate and coordinate that effort, our chances of getting paid more are better.
Meyer Shields - Stifel Nicolaus & Company, Inc.
One question for Grahame, if I can. Is there less sensitivity to rate trends in reinsurance than on the primary side in terms of how it impacts Willis’ revenues?
Grahame Millwater
Well, I think that is probably for Peter, you are on the reinsurance side, Peter. I mean I can answer that, but it would be difficult for me.
Peter Hearn
The problem with (inaudible) is that it can change quarter-to-quarter, it cam change from line of business to line of business, it can change based on revisions in model output. So, yes there is a sensitivity to it, the same way there is on the retail side, but again, since our business is more about rate and retention than it is about loss to competitors, it is more growth driven than it sensitivities to rate.
Operator
Your next question comes from Cliff Gallant - KBW.
Cliff Gallant - KBW
I have two questions about North American operations. One, the rate information you just - you said rates were down 6% in this quarter compared to 4% in the third quarter.
I was curious is that a trend that you are continuing to see, not just softening but an acceleration of that? My second question was just about the new business generation, I am assuming if you had 6% down on rates and then whatever economic pressures you might be facing that the way you get to 1% organic is through, that new business generation I think you said was 13%.
Is there anything in that new business, in particular that’s driving that, is there a certain class of business or geography or a particular competitor perhaps that’s loosing business to you? Just more color on how you are doing that.
Joseph Plumeri
I’ll answer the rate question. It’s early in the first quarter and obviously we don’t have any statistical evidence as it relates to what the rates are doing in this quarter this year.
But we haven’t seen any evidence and I’m at looking at Don as I talk, I am answering you that it’s any different now than it was at the end of the fourth quarter. So, stay tuned, it looks like it’s about the same.
One thing I add before Don talks about the growth rate is that, it’s more than just new business. There is a lots of things called one offs in there, lots of other adjusted factors that make up the net effective of new business.
Don?
Donald Bailey
On the new business, Cliff, I guess from a geographic standpoint, there is nothing I would highlight to you as being focus point of where the new business came from. I’d probably speak to more just in terms of specialization.
Where we specialize, we have higher growth rate, so in particular if you looked at our executive risk business had a terrific year, healthcare, environmental, M&A and where we specialize in industry and product, we experienced very healthy new business rates in Q4 and throughout all of 2009.
Operator
Your next question comes from Matthew Heimermann - JP Morgan.
Matthew Heimermann - JP Morgan
Could you just clarify on the comment regarding cost saved in 2010, I thought I heard you say that the 205 that you were striving for something similar in '010 but I just wanted, I thought I'm not sure that's where you hit?
Patrick Regan
Matthew Heimermann - JP Morgan
So read 205?
Patrick Regan
Yes, something at that level, yeah.
Matthew Heimermann - JP Morgan
Donald Bailey
You mean shopping for rate?
Matthew Heimermann - JP Morgan
Donald Bailey
,
Matthew Heimermann - JP Morgan
Correct.
Peter Hearn
The answer, Matt, is, yeah, there's a ton of shopping going on. I think the economic environment that we're operating in along with the rate environment which is very accommodating to shopping frankly has created a lot of activity in that respect.
So it's -- keeping business is probably more challenging than ever -- maintaining a retention rate is probably more challenging than ever because your clients certainly are looking for you to drive economies from a premium perspective within their portfolio. So, we see an enhanced level of shopping that goes on and we continue to do that I think as we go forward.
Donald Bailey
People are trying to save money because of the economy and that’s a global issue, and as a result, they’re shopping around whereas they might not have done that before. Peter?
Peter Hearn
Yeah, Matt, I think there are couple of things you have on the rate side. You have balance sheets are stronger, people are feeling better about their ability to retain more risk, underlying income basis are depressed based on the overall global economy and reinsurance budgets are constrained.
Having said that, the reinsurance market I think has responded favorably to their clients. So there is less shopping by market and from a business standpoint, absent there is Sarbanes Oxley’s requirements, there is nothing unusual about the level of tenders and RFPs that we see around the world.
Matthew Heimermann - JP Morgan
Just a follow up on the primary side, is there any difference or any distinction you would draw between your specialized businesses and maybe the more flow or more traditional business?
Donald Bailey
Well, there is no doubt that there are certain aspects of your business that are probably more undifferentiated than others. And to your question, Matt, yes there probably is more shopping that goes in the less differentiated areas of our business than in the specialized areas, where we deliver a more pronounced clear and quantifiable value proposition, which gets to -- some of the commentary we heard already on the call, which is where we specialize, we tend to do a lot better.
We tend to have higher retention rates and it’s the better way for us to run this business going forward.
Matthew Heimermann - JP Morgan
Could we just get the pension expense in the quarter?
Patrick Regan
The pension expense for the quarter was a little over -- $17 million. I was going to tell little over 15 -- $17 million.
Operator
Your next question comes from Jay Cohen - Banc of America/Merrill Lynch
Jay Cohen - Banc of America/Merrill Lynch
Three questions, two just number questions. First is, can you give us a sense, given the changes in the data over the past year, what should we think about for a run rate quarterly for interest expense in 2010?
Patrick Regan
The run rate we had in the fourth quarter was a pretty representative run rate. Now we are pretty much at that old run rate for all of the elements of it.
So as I mentioned earlier (inaudible) 600 is floating, so the rest of it is fixed. So the run rate in the fourth quarter is pretty representative now.
Jay Cohen - Banc of America/Merrill Lynch
That’s helpful. And then secondly, I also assumed that the, we should assume the tax rate stays around where it has been about 26%.
Patrick Regan
Yes, so I think as I said, there are some opportunities we’ve got and we’ll continue to obviously look at things on this tax rate of around 26% is a right assumption.
Jay Cohen - Banc of America/Merrill Lynch
Are you getting any sense based on your business that the economy is showing any improvement, whether it is in the U.S. or U.K.
or parts of Europe. Any early signs?
Joseph Plumeri
Nothing significant. I'm looking around the room to make sure my answer is correct, that my colleagues know something I don’t, but nothing that I can report that is worth reporting.
Operator
Your next question comes from Brian Meredith - UBS.
Brian Meredith - UBS
Just a quick question on capital management. Joe, what do you think share buyback versus continuing to pay down debt here, what would be your preference?
Joseph Plumeri
Well, as I said earlier, and I said a call ago or so that, we’d likely get down comfortably around 2.5, we are about 2.6 now. I like to get to 2.5 maybe a little bit under than, but I am hoping and it’s our objective that we will begin to buyback stock this year.
When that will happen, I can’t tell you. But the strategy stays in place, pay down the debt, get to a comfortable level, buyback stock, next plan, that continues to be a plan, where any acquisitions that we make will be very, very small.
We already are where we need to be and now it’s capital management and paying the debt down and buying back stock and that’s what we’re going to continue to do. Grow the top line, maintain our expense discipline, pay down more debt, buy stock back and hopefully we have as good year in 2010 as we did in 2009.
Brian Meredith - UBS
Do you know what free cash flow was during 2009?
Donald Bailey
It’ll be obviously in the Q when that’s published.
Operator
Your final question comes from Mark Hughes - SunTrust Robinson Humphrey
Mark Hughes - SunTrust Robinson Humphrey
The international operating margin down a little bit last couple of quarters, obviously U.K., Ireland currency, should we start to see that stabilize, what’s the outlook there?
Patrick Regan
Yeah, don’t read too much into that. The little bit of FX impacts, a couple of timing items in the fourth quarter and then obviously the U.K.
and Ireland, but no, don’t read too much into that as you look forward.
Mark Hughes - SunTrust Robinson Humphrey
Well, will it stay stable, perhaps improve a little bit going forward?
Patrick Regan
Yes.
Donald Bailey
Yes, that’s accurate.
Operator
Thank you. As I have no further requests, I’d like to turn conference back to management.
Patrick Regan
Just a quick clarification, just to be crystal clear. The $205 million of integration and savings I referred to earlier, the same 205 that Don referred to earlier, was non incremental 205, just to be crystal clear on it.
Kerry Calaiaro
Any other questions? Okay, thank you very much.
Thank you very much everybody. Have a good day.
Bye, bye.