We derive most of our revenues from commissions and fees for brokerage and consulting services and we do not determine the insurance premiums on which our commissions are generally based. Fluctuations in these premiums charged by the insurance carriers have a direct and potentially material impact on our results of operations. Commission levels generally trend with such premium levels as they are derived from a percentage of the premiums paid by the insureds. Due to the cyclical nature and impact of other market conditions on insurance premiums, they may vary widely between accounting periods. Such variations can result in a reduction in premium rates leading to downward pressure on commission revenues (a "soft" market) which in turn can have a
In October 2008, we completed the acquisition of HRH, the eighth largest insurance and risk intermediary in the United States. The acquisition doubled our North America revenues and the combined Willis HRH operation has critical mass in key markets including California, Florida, Texas, Illinois, New York, Boston, New Jersey and Philadelphia.
•good cost control, the realization of savings from last year's Shaping our Future initiatives and lower pension costs. A combination of factors, including a reduction in the UK corporate tax rate and a change in our geographical mix of income, enabled us to reduce our effective underlying tax rate to 26 percent in 2008 compared with 30 percent in 2007. This underlying rate excludes the tax effects of the disposal of our London headquarters, gains and losses on disposal of operations and the benefit of the release of tax provisions relating to the resolution of prior period tax positions.
•the benefit of our continued focus on cost controls; partly offset by
•a 2 percentage point reduction in Global's operating margin mainly reflecting the difficult reinsurance trading environment and an adverse impact from foreign exchange, partly offset by the benefit of our productivity initiatives and the benefit of lower charges for pensions and legal provisions. Operating segment margins are discussed further in "Operating Results-Segment Information" below.
The effective tax rate in 2007 was 26 percent compared with 12 percent in 2006. The lower effective tax rate in 2006 is primarily attributable to a $65 million tax credit in 2006 arising following the resolution of complex tax issues associated with the original KKR acquisition structure, together with a low tax rate on the gain on disposal of our previous London headquarters also in 2006.
Operating margin in International was 25 percent in 2007 compared with 20 percent in 2006, with the 5 percentage point improvement reflecting the strong organic revenue growth, particularly in the emerging markets, coupled with sustained cost control and a lower UK pension expense.
During the latter half of 2008 the value of assets held by our pension plans has been significantly adversely affected by the turmoil in worldwide markets. The holdings of equity securities by our UK and US pension plans have been particularly affected.
The mortality assumption at December 31, 2008 is the RP-2000 Mortality Table (blended for annuitants and non-annuitants), projected to 2009 by Scale AA (December 31, 2007: projected to 2008 by Scale AA). As an indication of the longevity assumed, our calculations assume that a US male retiree aged 65 at December 31, 2008, would have a life expectancy of 18 years.
•estimation of future cash flows which is dependent on internal forecasts;
In February 2009, we entered into an agreement with Goldman Sachs Mezzanine Partners to issue 12.875 percent senior unsecured notes due 2016 in an aggregate principal amount of $500 million. The transaction is subject to customary closing conditions and is expected to
In February 2009, the Company entered into an agreement with Goldman Sachs Mezzanine Partners to issue 12.875 percent senior unsecured notes due 2016 in an aggregate principal amount of $500 million. The Company
Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the US dollar are translated into US dollars at the average exchange rate and assets and liabilities are translated at year-end exchange rates. Translation adjustments are presented as a separate
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the year. In the preparation of these consolidated financial statements, estimates and assumptions have been made by management concerning: the valuation of intangible assets (including those acquired through business combinations), the selection of useful lives of fixed and intangible assets; impairment testing; provisions necessary for accounts receivable, commitments and contingencies and accrued liabilities; long-term asset returns, discount rates and mortality rates in order to estimate pension liabilities and pension expense; income tax valuation allowances; and other similar evaluations. Actual results could differ from the estimates underlying these consolidated financial statements.
Cash received from option exercises under all share-based payment arrangements for the year ended December 31, 2008 was $11 million (2007: $21 million; 2006: $10 million). The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $7 million for the year ended December 31, 2008 (2007: $9 million; 2006: $11 million).
Total unrecognized tax benefits as at December 31, 2008 totaled $33 million. During the next 12 months it is reasonably possible that the Company will recognize approximately $9 million of tax benefits related to the release of provisions no longer required due to either settlement through negotiation or closure of the statute of limitations on assessment.
For the year ended December 31, 2008, time-based and performance-based options to purchase 16.9 million and 5.8 million (2007: 15.3 million and 0.2 million; 2006: 15.0 million and 0.4 million) shares of Willis common stock, respectively, and 1.4 million restricted shares (2007: 1.6 million; 2006: 1.1 million), respectively, were outstanding.
Debt securities are classified as available-for-sale. Accordingly, they are recorded at fair market value with unrealized holding gains and losses reported, net of tax, as a component of other comprehensive income. As of December 31, 2008 and 2007, the amortized cost of such securities approximated fair value.
In addition, the credit agreements include covenants relating to the delivery of financial statements, reports and notices, limitations on liens, limitations on sales and other disposals of assets, limitations on indebtedness and other liabilities, limitations on sale and leaseback transactions, limitations on mergers and other fundamental changes, maintenance of property, maintenance of insurance, nature of business, compliance with applicable laws, maintenance of corporate existence and rights, use of proceeds, payment of taxes and access to information and properties. At December 31, 2008, the Company was in compliance with all covenants.
Guarantees issued by certain of Willis Group Holdings' subsidiaries with respect to the senior credit facility and the senior notes are discussed in note 16-Debt in these consolidated financial statements.
During the year ended December 31, 2007, the Company completed the $150 million November 2006 accelerated share repurchase program and started and completed two further accelerated share repurchase programs, one for $50 million and one for $400 million.