The fixed assets owned by Legacy Willis represented approximately 3% of total assets as of December 31, 2015 and consisted primarily of computer equipment and software, office furniture and leasehold improvements.
Underlying total revenues, underlying total expenses, underlying salaries and benefits, underlying other operating expenses, underlying operating income, underlying operating margin, underlying EBITDA, underlying net income and underlying earnings per diluted share (hereinafter referred to collectively as the ‘underlying measures’) are calculated by excluding the impact of certain items and period over period movements in foreign currency, from the most directly comparable GAAP measures.
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measures should be viewed in addition to, not in lieu of, the consolidated financial statements for the year ended December 31, 2015.
Willis Towers Watson is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has approximately 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance.
In our capacity as risk advisor and insurance broker, we act as an intermediary between our clients and insurance carriers by advising our clients on their risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance with insurance carriers through our global distribution network. We also offer clients a broad range of services to help them to identify and control their risks. These services range from strategic risk consulting (including providing actuarial analysis), to a variety of due diligence services, to the provision of practical on-site risk control services (such as health and safety or property loss control consulting) as well as analytical and advisory services (such as hazard modeling and reinsurance optimization studies). We assist clients in planning how to manage incidents or crises when they
For additional information regarding our business, see the more detailed discussion under Part I, Item 1 - ‘Business’ of this Form 10-K.
Pursuant to the Merger Agreement, Merger Sub merged with and into Towers Watson & Co. with Towers Watson & Co. continuing as the surviving corporation and a wholly-owned subsidiary of Willis on January 4, 2016.
Immediately following the Merger, Willis effected (i) a consolidation (i.e., a reverse stock split under Irish law) of Willis ordinary shares whereby every 2.6490 Willis ordinary shares were consolidated into one Willis ordinary share (the ‘Consolidation’) and (ii) an amendment to its Constitution and other organizational documents to change its name from Willis Group Holdings Public Limited Company to Willis Towers Watson Public Limited Company.
We are integrating Legacy Willis and Legacy Towers Watson (‘Legacy Companies’, collectively) and creating a unified platform for global growth, including positioning the Company to leverage our mutual distribution strength to enhance market penetration, expand our global footprint and create a strong platform for further innovation. The fully integrated Company will have a more comprehensive offering of services and solutions to provide to clients across four business segments: Corporate Risk and Broking; Exchange Solutions; Human Capital and Benefits; and Investment, Risk and Reinsurance.
Until we are integrated, we will continue to manage our business through the Legacy Company platforms. Legacy Willis has four reportable operating segments: Willis GB; Willis Capital, Wholesale & Reinsurance (‘Willis CWR’); Willis North America; and Willis International. Legacy Towers Watson has four reportable operating segments: Benefits; Exchange Solutions; Risk and Financial Services; and Talent and Rewards. From April 1, 2016, we expect to manage our business across four integrated reportable operating segments: Corporate Risk and Broking; Exchange Solutions; Human Capital and Benefits; and Investment, Risk and Reinsurance.
The following describes market conditions impacting Legacy Willis operations in the periods ended December 31, 2015 and 2014.
In 2015 we saw an easing of both reinsurance and primary insurance rates across most lines of business, although the rate of decline varies significantly by market and geography, and the marketplace continues to both favor and offer opportunities for the buyers of (re)insurance. Markets clearly continue to face significant over-capacity and competitive pricing conditions, and
In the face of this challenging economic environment, we have adopted a strategy to (1) invest selectively in growth areas, defined by geography, industry sector, and client segment and (2) better coordinate our segments so as to bring our clients greater access to the Company’s specialty areas and analytical capabilities. Our growth strategy also involves increasing our investment in, and deployment of, our analytical capabilities.
With respect to the Legacy Towers Watson operations, the market for our services is subject to change as a result of economic, regulatory and legislative changes, technological developments, and increased competition from established and new competitors. Regulatory and legislative actions, along with continuously evolving technological developments, will likely have the greatest impact on the overall market for our exchange products. We believe the primary factors in selecting a human resources or risk management consulting firm include reputation, the ability to provide measurable increases to stockholder value and return on investment, global scale, quality of service and the ability to tailor services to clients’ unique needs. With regard to the market for exchanges, we believe that clients base their decisions on a variety of factors that include the ability of the provider to deliver measurable cost savings for clients, a strong reputation for efficient execution, a provider's capability in delivering a broad number of configurations to serve various population segments and financing options, and an innovative service delivery model and platform. For our traditional consulting and risk management services and the rapidly evolving exchange products, we believe we compete favorably with respect to these factors.
Total operating expenses of $3,402 million increased by $247 million, or 7.8 percent over the prior year. This growth included a $90 million increase in restructuring costs related to the Operational Improvement Program, a $77 million increase in M&A related-transaction costs, a $70 litigation provision, a $181 million net increase in expenses from acquisitions and disposals, partially offset by $197 million favorable foreign currency movements.
Net income attributable to Willis Towers Watson was $373 million, or $5.41 per diluted share, an increase of $11 million, or 3.0 percent, from $362 million, or $5.32 per diluted share, in 2014.
Underlying total revenues of $3,829 million increased $257 million, or 7.2 percent, over the prior year. Excluding the net $157 million increase from acquisitions and disposals, organic total revenues increased $100 million, or 2.8 percent over the prior year. This growth was driven by high commissions and fees growth in our International segment, supported by growth in Willis North America; partially offset by an $11 million decrease in other income due to the non-recurrence of a settlement related to a specialty book of business within Willis CWR.
Underlying total expenses of $3,122 million increased $207 million, or 7.1 percent, over the prior year. Excluding the net $181 million increase from acquisitions and disposals, organic total operating expenses of $2,912 million increased $26 million, or 0.9 percent, over the prior year.
Legacy Willis continued to successfully deliver on its measured acquisition strategy, which has been focused on high quality, specialized firms with leading market positions, and has continued to contribute to the Company’s overall growth rate.
The following are the key Legacy Willis acquisitions completed during 2015:
On December 29, 2015, Legacy Willis acquired substantially all of the remaining share capital of GS & Cie Group (‘Gras Savoye’), the leading insurance broker in France. Gras Savoye has access to high-growth markets through a comprehensive network that spans Central and Eastern Europe, Africa and the Middle East.
Carsa Consultores, Agente de Seguros y de Fianzas de CV and its group companies, a leading insurance broker in Mexico;
the trade and assets of Evolution Benefits Consulting, Inc., a human capital practice in Pennsylvania;
Actual cost savings of approximately $123 million were achieved in 2014 and 2015, taken together, and the estimated phasing of future cost savings is as follows: up to approximately $150 million in 2016, and up to approximately $250 million in 2017. The estimated cost savings are before any potential reinvestment for future growth.
To achieve these savings, the Company now expects to incur restructuring charges amounting up to approximately $440 million through the end of 2017. Program spend in 2014 and 2015, taken together, was $162 million, with approximately $140 million expected for 2016 and the balance of approximately $125 million expected to be incurred in 2017.
The Company expects that about 75 percent of the annualized 2018 savings would come from role relocation and reduction, and about 25 percent of the savings from real estate, information technology and other areas.
ratio of full time employees (FTEs) in higher cost geographies to lower cost near-shore and off-shore centers as at December 31, 2015 was 75:25 (December 31, 2014 ratio was 78:22; March 31, 2014 ratio was 80:20);
indexed ratio of square footage of real estate per FTE as at December 31, 2015 was 95 (December 31, 2014 ratio was 98; March 31, 2014 ratio was 100); and
By releasing 93,000 square feet of space since March 2014, we have been able to have more employees occupy a smaller area. We are still adding employees to our new office in Tampa, Florida, completed in the fourth quarter of 2015, which has impacted the desk per FTE ratio, as have the additional desks required throughout the business for contractors and consultants not included in the FTE headcount.
$33 million in Corporate and other, comprising $3 million termination benefits and $30 million professional services and other program costs.
On March 6, 2015, Legacy Willis announced to members of the UK defined benefit pension plan that, with effect from June 30, 2015, future salary increases would not be pensionable (the ‘salary freeze’). The Company has recognized the salary freeze as a plan amendment at the announcement date. The impact of the salary freeze is to reduce the plan’s projected benefit obligation by approximately $215 million and create a prior service credit which is recognized in other comprehensive income (loss) and then amortized to the Statement of Operations over the remaining expected service life of active employees.
We believe that the understanding of the Company’s performance and comparative analysis of our results is enhanced by our disclosure of the following non-GAAP financial measures. We use these and other measures to establish Group performance targets and evaluate the performance of our operations.
In light of our review of facts and circumstances relating to the Stanford Financial Group litigation matters discussed under ‘Legal Proceedings’ in this 10-K report (which are non-ordinary course litigation matters), we added $70 million to our provisions for loss contingencies relating to the Stanford litigation. In conducting such a review, we take into account a variety of factors in accordance with applicable accounting standards. The ultimate resolution of these matters may differ from the amount provided for.
A reconciliation of reported net income (loss) attributable to Willis Towers Watson, the most directly comparable GAAP measures, to underlying and organic EBITDA, is as follows (in millions):
A reconciliation of reported net income (loss) attributable to Willis Towers Watson and reported earnings per diluted share, the most directly comparable GAAP measures, to underlying net income and underlying earnings per diluted share, is as follows (in millions, except earnings per share data):
The following table is a summary of our revenues, operating income, operating margin, net income and diluted earnings per share (in millions, except earnings per share data and percentages):
Total revenues by segment for 2015 and 2014 are shown below (millions, except percentages):
The foreign currency impact was as a result of the strengthening of the US dollar against a number of currencies, most significantly the Euro and the Pound Sterling.
Organic commissions and fees growth of 1.8 percent was primarily due to growth in Financial Lines, Property & Casualty and Aerospace.
Willis Capital, Wholesale & Reinsurance reported 8.3 percent growth in commissions and fees, comprising 1.0 percent organic growth and an 11.5 percent positive impact from acquisitions and disposals primarily driven by the acquisition of Miller Insurance Services in the first half of 2015. This growth was partially offset by a 4.2 percent negative impact from foreign currency translation.
Willis North America reported 1.5 percent decline in commissions and fees compared to 2014 including organic growth of 2.4 percent partially offset by 3.5 percent negative impact from the disposal of non-strategic low growth offices, and a negative 0.4 percent impact from foreign currency translation.
Willis International reported growth of 2.4 percent in commissions and fees compared with 2014, comprising 7.6 percent organic growth and 13.5 percent positive acquisitions impact, largely from the acquisition of Max Matthiessen. This was partially offset by an 18.7 percent negative impact from foreign currency translation.
Other income reported a decrease of $11 million compared with 2014. This decrease was due to a $15 million decrease in settlements, partially offset by a $4 million increase in income from sales of US books of business.
Other operating expenses were $140 million, or 21.2 percent, higher in 2015 compared with 2014. This growth included a net increase of $2 million in organic other operating costs, a net $36 million increase from acquisitions and disposals, a $70 million increase relating to litigation provisions and a $74 million increase in M&A transaction-related costs. Growth was partially offset by $42 million of favorable foreign currency movements.
Restructuring costs related to our operational improvement program were $126 million in 2015, compared with $36 million in 2014. This is discussed in further detail in the ‘Operational improvement program’ section in the Executive Summary section above.
Other income (expense), net increased by $49 million compared to 2014. This increase was primarily due to a $59 million gain on the remeasurement of the previously equity accounted investment in Gras Savoye and increased gains on disposals of operations partially offset by an increase in the foreign currency loss in Venezuela.
a tax benefit of $nil associated with the $30 million pre-tax expense arising in relation to the Venezuela currency devaluation;
a tax benefit of $10 million associated with M&A transaction-related costs of $84 million;
Total revenues of $3,802 million increased by $147 million, or 4.0 percent, in 2014 compared to 2013. This was primarily due to 3.7 percent growth in commissions and fees.
The foreign currency impact was as a result of the strengthening of the US dollar against a number of currencies that our commissions and fees are earned in, most significantly the Euro, Australian dollar and Brazilian real, partially offset by the year-on-year weakening of the US dollar against the Pound Sterling.
The Willis GB segment reported 0.5 percent decline in commissions and fees, as negative 1.5 percent organic growth and 0.4
Willis CWR reported 4.6 percent growth in commissions and fees, which includes organic growth of 4.3 percent, 0.2 percent
organic growth and 5.6 percent positive impact from the acquisitions of Max Matthiessen and Charles Monat during 2014. This
was partially offset by a 4.9 percent negative impact from foreign currency movements.
Organic commissions and fees growth by segment is discussed further in ‘Review of Segmental Results’, below.
settlement related to a specialty book of business within the Willis CWR segment.
Salaries and benefits were $107 million, or 4.8 percent, higher in 2014 compared with 2013 and include a net $20 million increase from acquisitions and disposals and $3 million of adverse foreign currency movements, offset by a $29 million benefit from the non-recurrence of 2013 expense reduction initiative costs. The remaining increase of $113 million was driven by increased headcount, pay reviews, and higher incentives.
Other operating expenses were $23 million, or 3.6 percent, higher in 2014 compared with 2013. This growth included a net $9 million increase from acquisitions and disposals and $2 million of adverse foreign currency movements, offset by a $12 million benefit from the non-recurrence of 2013 expense reduction initiative costs and marketing costs. The remaining increase of $25 million was primarily due to higher travel, accommodation and entertainment expenses, along with increased systems costs.
a tax expense of $10 million associated with pre-tax gains of $12 million related to business disposals;
Consistent with our liquidity position, management considers various alternative strategic uses of cash reserves. As part of the integration of Willis, Towers Watson and Gras Savoye, the Company is considering restructuring its debt financing in 2016, dependent on market and other conditions at the time. The Company will also consider buying back shares in the open market or through privately negotiated transactions, depending on market conditions.
Legacy Willis’ principal sources of liquidity are cash from operations, available cash and cash equivalents and amounts available under our revolving credit facilities, excluding the UK facility which is solely for use by our main regulated UK entity in certain exceptional circumstances, and the Willis Securities facility, which is solely used for regulatory capital and securities underwriting purposes only.
Included within cash and cash equivalents as at December 31, 2015 is a proportion held for regulatory capital adequacy requirements, including $82 million held within our regulated UK entities for regulatory capital adequacy requirements.
Cash flows from operating activities fell to $243 million in 2015 from $477 million in 2014. In addition, $13 million was provided from the disposal of fixed and intangible assets (2014: $6 million), $124 million proceeds from the issue of shares (2014: $134 million), and $44 million proceeds from the disposal of operations (2014: $86 million).
Legacy Willis suspended its previously authorized share buyback program on June 30, 2015, pending the completion of the Merger with Towers Watson. During 2015, Legacy Willis bought back approximately 1,710,000 shares for a total cost of $82 million, of its intended $175 million 2015 buyback program, to offset the increase in shares outstanding resulting from the exercise of employee stock options.
The impact of movements in liquidity, debt and EBITDA in 2015 had a positive impact on the interest coverage ratio and a negative impact on the leverage ratio. On December 29, 2015, we exercised our right to request that the leverage ratio be automatically increased as a result of acquisitions, including the acquisition of Gras Savoye. Both these Legacy Willis ratios remain within the requirements of the relevant debt covenants.
Legacy Willis total debt, total equity and the capitalization ratio at December 31, 2015 and 2014 were as follows (in millions, except percentages):
This summary consolidated cash flow should be viewed in addition to, not in lieu of, the Company’s consolidated financial statements.
Net cash provided by operating activities in 2015 decreased by $234 million to $243 million compared with 2014.
The non-cash adjustments included a net gain on disposals, depreciation, amortization of intangible assets, net defined benefit pension costs, share-based compensation, provisions for deferred income taxes and the effect of exchange rate changes.
Net cash used in investing activities in 2015 was $943 million. This included cash used to purchase subsidiaries and intangible assets of $857 million and capital expenditure of $146 million, partly offset by $44 million of proceeds from the disposal of operations and $13 million cash received from the sale of fixed and intangible assets.
The non-cash adjustments included depreciation, amortization of intangible assets, share-based compensation and provisions for deferred income taxes.
Net cash used in investing activities in 2014 was $276 million. This included capital expenditure of $113 million, cash used to purchase subsidiaries, intangible assets and other investments of $255 million partly offset by $6 million cash received from the sale of fixed and intangible assets and $86 million of proceeds from the disposal of operations.
As an intermediary, Legacy Willis holds funds generally in a fiduciary capacity for the account of third parties, typically as the result of premiums received from clients that are in transit to insurers and claims due to clients that are in transit from insurers. We report premiums, which are held on account of, or due from, clients as assets with a corresponding liability due to the insurers. Claims held by, or due to, us which are due to clients are also shown as both assets and liabilities.
The Company will also consider buying back shares in the open market or through privately negotiated transactions, depending on market conditions. The maximum number of shares that may be purchased under the existing share buyback program based on the Company’s closing stock price on December 31, 2015 of $128.66 was 4,111,475.
Cash dividends paid by Legacy Willis in 2015 were $277 million compared with $210 million in 2014 and $193 million in 2013. In February 2016, Willis Towers Watson declared a quarterly cash dividend of $0.48 per share, an annual rate of $1.92 per share.
Due to the closing date of the Merger on January 4, 2016, after the end of the fiscal year, Legacy Towers Watson results of operations and financial position are not presented in this Form 10-K. Please see Note 31 - Subsequent Events for additional information.
Willis GB, our Great Britain-based specialty and retail business, comprised the following business units: Property & Casualty; Financial Lines; Transport; and Retail Networks.
The following table sets out the components of Willis GB’s revenues, and its organic commissions and fees growth, operating income and margin for the three years ended December 31, 2015 (in millions, except percentages):
The 1.8 percent organic growth in commissions and fees was primarily due to growth in Financial Lines, Property & Casualty and Aerospace.
The turnaround efforts in this segment are starting to come to fruition as management continues to re-engineer the cost base while reinvesting in growth.
Organic expenses, which exclude the impact from foreign currency movements, acquisitions and disposals, restructuring costs and M&A transaction-related costs, decreased by $14 million, or 2.9 percent, compared with 2014, again driven by lower salaries and benefits as a result of efficiency savings from the Operational Improvement Program, and lower other operating expenses as a result of cost management initiatives.
Operating margin was 22.3 percent in 2015, up 20 basis points from 22.1 percent in 2014, reflecting the underlying improvement from organic revenue growth and expense reduction, partially offset primarily by net adverse foreign exchange movements and the restructuring costs of the Operational Improvement Program.
The 1.5 percent negative organic growth in commissions and fees was driven by the negative impact of rates and the non-recurrence of significant construction projects in 2014. The low single-digit decline was primarily due to poor performance in the Insolvency and Willis Commercial Network businesses of Retail Networks and Property & Casualty partially offset by mid-single digit growth in Financial Lines.
The 0.4 percent decline from acquisitions and disposals was related to the disposal of a small commercial business from the UK Retail division during 2013 partially offset by the acquisition of Prime Professions in second quarter 2013.
Other income of $3 million included a legal settlement related to the departure of an Aerospace producer.
Full year operating margin was 22.1 percent in 2014 and 27.0 percent in 2013. The decline was driven by expense growth of 7.4 percent, which includes significant investment in specialist and client advocacy capability, exceeding the 0.5 percent total revenue growth.
The following table sets out the components of Willis CWR’s revenues, and its organic commissions and fees growth, operating income and margin for the three years ended December 31, 2015 (in millions, except percentages):
Organic commissions and fees growth, which excludes a net 11.5 percent favorable impact from acquisitions and disposals, partially offset by an adverse 4.2 percent impact from foreign currency movements, was 1.0 percent.
The $11 million decrease in other income was primarily due to a $12 million settlement received in 2014 relating to a specialty book of business.
The adverse foreign currency movements were primarily due to the weakening of the Euro and Pound sterling against the US dollar.
Organic total expenses, which exclude a $97 million increase due to acquisitions and disposals, an $8 million increase in restructuring costs related to the Operational Improvement Program and a $7 million increase in M&A transaction-related costs, partially offset by $20 million of favorable foreign currency movements, increased $23 million, or 4.5 percent, compared with 2014.
The $23 million, or 4.5 percent, increase in organic total expenses was due to a higher salaries and benefits expense due to annual pay increases and higher charges for incentives, and higher business development costs.
Operating margin was 19.4 percent in 2015, down 980 basis points from 29.2 percent in 2014. The decline was due to: the impact of acquisitions and disposals, including the effects of acquiring Miller part way through the year (388 basis points); business unit performance, mainly related to organic wholesale business, and increases in staff compensation (233 basis points); decrease arising from one-off investments as part of the Operational Improvement Program and from M&A transaction-related costs (228 basis points); and net adverse foreign currency movements during the year (131 basis points).
Commissions and fees of $749 million were $33 million, or 4.6 percent, higher in 2014 compared with 2013. The increase includes organic growth of 4.3 percent, a positive 0.1 percent impact from foreign currency movements and a 0.2 percent increase due to acquisitions and disposals.
The 4.3 percent organic growth in commissions and fees was driven by strong new business growth and higher client retention levels compared with the year ago period.
The $42 million growth in expenses was due to adverse foreign currency movements and higher salaries and benefits as a result of the increase in headcount relative to the prior year, annual salary reviews and higher incentives which were linked to commissions and fees performance, and a legal claim settlement.
Our North America business provided risk management, insurance brokerage, related risk services and employee benefits brokerage and consulting to a wide array of industry and client segments in the United States and Canada.
Organic commissions and fees growth, which excludes a 3.5 percent adverse net impact from acquisitions and disposals and a 0.4 percent adverse impact from foreign currency movements, was 2.4 percent.
The 3.5 percent adverse impact from acquisitions and disposals was primarily due to the disposal of non-strategic low growth offices.
Underlying total expenses, which exclude a $28 million increase in restructuring costs related to the Operational Improvement Program, partially offset by $5 million of favorable foreign currency movements, increased $4 million, or 0.4 percent, compared with 2014.
Operating margin was 14.3 percent in 2015, down 320 basis points from 17.5 percent in 2014. Divestiture and restructuring costs were large contributors to the decline.
Our International business comprised our retail operations in Western Europe, Central and Eastern Europe, Asia, Australasia, the Middle East, South Africa and Latin America. The services provided are focused according to the characteristics of each market and vary across offices, but generally include direct risk management and insurance brokerage and employee benefits consulting.
The 7.6 percent organic growth in commissions and fees included strong double-digit growth in Latin America, mid-single digit growth in Western Europe and strong single-digit growth in Asia.
The 13.5 percent favorable impact from acquisitions and disposals was primarily due to the acquisition of Max Matthiessen in the fourth quarter of 2014.
The 18.7 percent adverse impact from foreign currency movements was due to the weakening of a number of currencies versus the US dollar.
Total expenses of $903 million were $54 million, or 6.4 percent, higher for 2015 compared with 2014.
The favorable foreign currency movements were primarily due to the weakening of multiple currencies against the US dollar.
See the ‘Operational Improvement Program’ section above for further details of the restructuring costs.
Operating margin was 15.4 percent in 2015, down 330 basis points from 18.7 percent in 2014. Excluding the impact of foreign exchange movements, and restructuring expenses incurred under the Operational Improvement Program, the International division achieved strong operating income growth and margin improvement.
Western Europe reported mid single-digit growth driven by Iberia, Germany, Denmark and Ireland.
Double digit growth in Asia was primarily due to the non-recurrence of an adjustment recorded in 2013 to align the recognition of revenue in China with the rest of the Group.
Total expenses of $849 million were $75 million, or 9.7 percent, higher for 2014 compared with 2013. Foreign currency movements favorably impacted expenses by $28 million or 4.1 percent; excluding the impact of foreign currency movements total expenses increased $103 million or 13.8 percent.
Corporate and Other expenses of $226 million were $74 million higher in 2015 compared with 2014.
Corporate and Other expenses of $152 million were $28 million higher in 2014 compared with 2013.
The $28 million growth included a $69 million increase due to higher costs of group functions including projects, leadership and increased professional fees and the adverse impact of changes to the methodology used to allocate Corporate function costs to Willis GB, Willis CWR, Willis North America and Willis International. In addition to this, Corporate recognized $17 million of restructuring costs related to the Operational Improvement Program.
Our Legacy Willis accounting policies are described in Note 2 to the Consolidated Financial Statements. Management considers that the following accounting estimates or assumptions are the most important to the presentation of our financial condition or operating performance:
intangible assets and goodwill impairment (determination of reporting units, fair value of reporting units and annual goodwill impairment analysis);
We recorded a $75 million and a $6 million net periodic benefit income on our UK and US defined benefit pension schemes respectively in 2015, compared with a net periodic benefit income of $13 million on the UK scheme and a net periodic benefit income of $8 million on the US scheme in 2014. On our international defined benefit pension plans, US non-qualified plan and UK unfunded plan, we recorded a net periodic benefit cost of $3 million in 2015, compared with $4 million in 2014.
Expected long-term rates of return on plan assets are developed from the expected future returns of the various asset classes using the target asset allocations. As part of the salary freeze negotiations with the Scheme Trustee, we agreed to the Trustee’s de-risking strategy which will lead to a strategic target asset allocation with a greater weighting to fixed income assets. Consequently, with effect from March 6, 2015, the expected return on assets assumption was reduced by 50 basis points from 7.00% to 6.50%. The expected long-term rate of return used for determining the net UK pension expense was equivalent to an expected return in 2015 of $222 million (2014: $213 million).
The discount rate at December 31, 2015 was 4.19%, an increase of 29 basis points from the discount rate of 3.90% at December 31, 2014. The increase in the discount rate reflects the modest increase in high-quality corporate bond yields during 2015.
The expected long-term rate of return used for determining the net US pension scheme expense in 2015 was 7.25% (2014: 7.25%)
At December 31, 2015, the mortality table was changed from the RP-2014 Mortality table projected using MP-2014 improvement scale on a fully generational basis (which was used at December 31, 2014) to the RP-2014 Mortality table (rolled back to 2006 using MP-2014) projected using Towers Watson BB-2D adjusted improvement scale on a fully generational basis.
The impact of this change decreased the projected benefit obligation by approximately $55 million.
We test goodwill for impairment annually or whenever events or circumstances indicate impairment may have occurred.
material changes occur in actual tax rates or loss carry-forward time limits,
Excludes any potential ‘funding level’ contributions given these are dependent on future funding level assessments.
Acquisition liabilities includes deferred and contingent consideration of $153 million payable in relation to the acquisition of Miller Insurance Services LLP in May 2015.
The above excludes $22 million for liabilities for unrecognized tax benefits as we are unable to reasonably predict the timing of settlement of these liabilities.
The Company’s debt and related interest obligations at December 31, 2015 are shown in the above table.
Mandatory repayments of debt over the next 12 months include expiration of the 1-year term loan facility expiring 2016, maturity of the 4.125% senior notes due 2016 and the scheduled repayment of the current portion of the Company’s 7-year term loan. The Company also has the right, at its option, to prepay indebtedness under the credit facility without further penalty and to redeem the senior notes by paying a ‘make-whole’ premium as provided under the applicable debt instrument.
Information regarding these operating leases and their impact on the financial statements is set forth in Note 20 - ‘Commitments and Contingencies’ to the Consolidated Financial Statements appearing under Part II, Item 8 of this report and incorporated herein by reference.
Included in the Legacy Willis UK plan contributions, above, are deficit funding contributions expected in 2016 of $53 million (2015: $54 million and 2014: $59 million), on-going contributions of approximately $22 million (2015: $19 million and 2014: $22 million) and contingent contributions of approximately $8 million following share buybacks made (2015: $21 million and 2014: $nil).
On December 31, 2015, Legacy Willis agreed a revised schedule of contributions towards on-going accrual of benefits and deficit funding contributions the Company will make to the UK Plan to the end of 2024. Based on this agreement, deficit funding contributions in 2016 will total approximately $53 million.
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2015
Consolidated Statements of Equity for each of the three years in the period ended December 31, 2015
We have audited the accompanying consolidated balance sheets of Willis Towers Watson Public Limited Company and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Willis Towers Watson Public Limited Company and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
In accordance with the requirements of Accounting Standards Codification 480-10-S99-3A we have determined that the noncontrolling interest in Max Matthiessen Holding AB should be disclosed as a redeemable noncontrolling interest and presented within mezzanine or temporary equity.
The nominal value of ordinary shares and number of ordinary shares issued in 2015 and 2014 have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See note 31 - Subsequent Events for further details.
As a result of the acquisition of Gras Savoye, we acquired the remaining noncontrolling interest in Willis Iberia Correduria de Seguros y Reaseguros SA, resulting in an approximate $50 million adjustment to APIC.
This is the first Annual Report on Form 10-K that Willis Towers Watson Public Limited Company has filed since the completion of the merger between Willis Group Holdings Public Limited Company and Towers Watson and Company on January 4, 2016. Due to the closing date of the merger on January 4, 2016 and after the end of the fiscal year, Legacy Towers Watson results of operations and financial position are not presented in this 10-K and therefore are not reflected in the consolidated financial statements or those notes to the financial statements.
In May 2014, the Financial Accounting Standards Board (‘FASB’) issued Accounting Standard Update (‘ASU’) No. 2014-09, ‘Revenue From Contracts With Customers’. The new standard supersedes most current revenue recognition guidance and eliminates industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The ASU was originally scheduled to become effective for the Company at the beginning of its 2017 fiscal year; early adoption was not initially permitted. However, in August 2015, the FASB issued ASU No. 2015-14 ‘Revenue from Contracts from Customers: Deferral of the Effective Date’ deferring the effective date but permitting early adoption at the original effective date. Consequently, the guidance will now become mandatorily effective for the Company at the beginning of its 2018 fiscal year. Entities have the option of using either a
In June 2014, the FASB issued ASU No. 2014-12, ‘Stock Compensation’, which sets out the guidance where share-based payment awards granted to employees required specific performance targets to be achieved in order for employees to become eligible to vest in the awards and such performance targets could be achieved after an employee completes the requisite service period. The amendment in this update requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. The guidance is applicable to the Company for interim and annual reporting periods beginning after December 15, 2015, although earlier adoption is permitted. Adoption of this update is not expected to materially affect the Company’s consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU No. 2015-16, ‘Simplifying the Accounting for Measurement-Period Adjustments’ in relation to business combinations, which requires that an acquirer recognize adjustments to provisional amounts that are identified in the measurement period in the reporting period in which the adjustment amounts are determined. The ASU becomes effective for the Company at the beginning of the 2016 fiscal year; early adoption is permitted. The Company is required to apply the new guidance prospectively.
In January 2016, the FASB issued ASU No. 2016-01 ‘Recognition and Measurement of Financial Assets and Financial Liabilities’, which, among other things, amends the classification and measurement requirements for investments in equity securities and amends the presentation requirements for certain fair value changes for certain financial liabilities measured at fair value. The ASU becomes effective for the Company at the beginning of the 2018 fiscal year; only partial early adoption is permitted. The Company is required to apply a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 ‘Leases’, which requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The ASU becomes effective for the Company at the beginning of the 2019 fiscal year; early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17 ‘Balance Sheet Classification of Deferred Taxes’, which requires that deferred tax liabilities and assets be classified as non-current in the balance sheet, which simplifies the presentation. This standard is mandatorily effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. The Company has opted to early-adopt this update and to apply it retrospectively to all prior periods.
There was no effect on the consolidated results of operations, consolidated cash flows or consolidated equity for the year ended December 31, 2015 or any earlier year.
These consolidated financial statements conform to accounting principles generally accepted in the United States of America (‘US GAAP’). Presented below are summaries of significant accounting policies followed in the preparation of the consolidated financial statements.
The accompanying consolidated financial statements include the accounts of Willis Towers Watson and its subsidiaries, which are controlled through the ownership of a majority voting interest. Intercompany balances and transactions have been eliminated on consolidation.
Cash and cash equivalents primarily consist of time deposits with original maturities of 90 days or less. Willis Limited, our UK brokerage subsidiary regulated by the Financial Conduct Authority, is currently required to maintain $126 million in unencumbered and available funds, of which at least $79 million must be in cash, for regulatory purposes.
In its capacity as an insurance agent or broker, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurers; the Company also collects claims or refunds from insurers which it then remits to insureds.
Depreciation on buildings and long leaseholds is calculated over the lesser of 50 years or the lease term. Depreciation on leasehold improvements is calculated over the lesser of the useful life of the assets or the remaining lease term. Depreciation on furniture and equipment is calculated based on a range of 3 to 10 years. Freehold land is not depreciated.
Goodwill represents the excess of the cost of businesses acquired over the fair value of identifiable net assets at the dates of acquisition. The Company reviews goodwill for impairment annually and whenever facts or circumstances indicate that the carrying amounts may not be recoverable. In testing for impairment, the fair value of each reporting unit is compared with its carrying value, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the amount of an impairment loss, if any, is calculated by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
Investments are accounted for using the equity method of accounting if the Company has the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an equity ownership in the voting stock of the investee between 20 and 50 percent, although other factors, such as representation on the Board of Directors and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting the investment is carried at cost of acquisition, plus the Company’s equity in undistributed net income since acquisition, less any dividends received since acquisition.
GS & Cie Groupe (‘Gras Savoye’), was the principal associate of the Company. It is France’s leading insurance broker. On April 22, 2015, the Company exercised its call option to purchase 100 percent of the capital of Gras Savoye. The Company entered into a Share Purchase Agreement with Gras Savoye’s other shareholders dated June 25, 2015. The transaction closed on December 29, 2015. See Note 10 - Acquisitions, for further details.
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations in the period in which the change is enacted. Deferred tax assets are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company adjusts valuation allowances to measure deferred tax assets at the amount considered realizable in future periods if the Company’s facts and assumptions change. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and the results of recent financial operations.
The Company is subject to various actual and potential claims, lawsuits and other proceedings. The Company records liabilities for such contingencies including legal costs when it is probable that a liability has been incurred before the balance sheet date and the amount can be reasonably estimated, or, in certain cases, where a range of loss exists, the Company accrues the minimum amount in the range if no amount within the range is a better estimate than any other amount. To the extent such losses can be recovered under the Company’s insurance programs, estimated recoveries are recorded when losses for insured events are realized. Significant management judgment is required to estimate the amounts of such contingent liabilities and the related insurance recoveries. The Company analyzes its litigation exposure based on available information, including consultation with outside counsel handling the defense of these matters, to assess its potential liability. Contingent liabilities are not discounted.
The Company has equity-based compensation plans that provide for grants of restricted stock units and stock options
The Company expenses all equity-based compensation on a straight-line basis over the requisite service period based upon the fair value of the award on the date of grant, the estimated achievement of any performance targets and anticipated staff retention. The awards under equity-based compensation are classified as equity and included as a component of equity on the
Brokerage income and fees negotiated in lieu of brokerage are recognized at the later of the policy inception date or when the policy placement is complete. Commissions on additional premiums and adjustments are recognized when approved by or agreed between the parties and collectability is reasonably assured.
Severance costs that have arisen in the normal course of business amounted to $7 million in the year ended December 31, 2015 (2014: $8 million; 2013: $4 million).
During the year ended December 31, 2013, the Company incurred additional salaries and benefits costs of $29 million of which $28 million related to severance costs, in relation to an Expense Reduction Initiative in the first quarter. These costs related to 207 positions that were eliminated.
This plan, which was established on April 25, 2012, provides for the granting of incentive stock options, time-based or performance-based non-statutory stock options, share appreciation rights, restricted shares, time-based or performance-based restricted share units (‘RSUs’), performance-based awards and other share-based grants or any combination thereof (collectively referred to as ‘Awards’) to employees, officers, directors and consultants (‘Eligible Individuals’) of the Company. The Board of Directors also adopted a sub-plan under the 2012 plan to provide an employee sharesave scheme in the United Kingdom.
This plan, which was established on April 23, 2008, provides for the granting of time and performance-based options, restricted stock units and various other share-based grants at fair market value to employees of the Company. The 2008 plan was terminated as at April 25, 2012 and no further grants will be made under this plan. Any shares available for grant under the 2008 plan were included in the 2012 Equity Incentive Plan availability.
The Company adopted the Willis Group Holdings 2001 North America Employee Share Purchase Plan, which expired on May 31, 2011 and the Willis Group Holdings 2010 North America Employee Stock Purchase Plan, which expires on May 31, 2020. These plans provide certain eligible employees in the United States and Canada the ability to contribute payroll deductions to the purchase of Willis Group Holdings plc shares at the end of each offering period.
The weighted average grant-date fair value of time-based options granted during the year ended December 31, 2015 was $14.77 (2014: $14.12; 2013: $20.50). The total intrinsic value of options exercised during the year ended December 31, 2015 was $17 million (2014: $22 million; 2013: $32 million). At December 31, 2015 there was $8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under time-based stock option plans; that cost is expected to be recognized over a weighted average period of 2 years.
Cash received from option exercises under all share-based payment arrangements for the year ended December 31, 2015 was $124 million (2014: $134 million; 2013: $155 million). The actual tax benefit recognized for the tax deductions from option exercises of the share-based payment arrangements totaled $25 million for the year ended December 31, 2015 (2014: $20 million; 2013: $28 million).
An analysis of the cost for restructuring recognized in the statement of operations in the year ended December 31, 2015 and December 31, 2014, by segment, are as follows:
At December 31, 2015, the Company’s liability under the Operational Improvement Program is as follows:
On December 31, 2015 the Company began using the SIMADI rate for the Venezuelan Bolivar (approximately Venezuelan bolivars 198.7 = US dollar 1) instead of the SICAD I auction rate (approximately Venezuelan bolivars 13.5 = US dollar 1) to translate on Venezuelan retail operations.
An analysis of income before income taxes and interest in earnings of associates by location of the taxing jurisdiction is as follows:
The reconciliation between US federal income taxes at the statutory rate and the Company’s provision for income taxes is as follows:
Included within US deferred tax assets are assets of $82 million in respect of US state net operating losses. These losses will expire as follows: $13 million from 2016 to 2019, $15 million from 2020 to 2024 and $54 million from 2025 to 2035. Capital loss carryforwards can only be offset against future UK capital gains.
At December 31, 2015 the Company had deferred tax assets of $299 million (2014: $146 million), net of the valuation allowance. Management believes, based upon the level of historical taxable income and projections for future taxable income, it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
$22 million of the unrecognized tax benefits at December 31, 2015 would, if recognized, favorably affect the effective tax rate in future periods.
The number of shares outstanding and per share data have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See Note 31 - Subsequent Events for further details.
Options to purchase 0.6 million shares and 0.5 million restricted stock units for the year ended December 31, 2015, were not included in the computation of the dilutive effect of stock options because the effect was antidilutive (2014: 0.9 million shares and 0.6 million restricted stock units; 2013: 0.8 million shares and 0.5 million restricted stock units).
The union combines the Company’s global insurance broking footprint with Gras Savoye’s particularly strong presence in France, Central and Eastern Europe, and across Africa. Gras Savoye’s expertise in high-growth markets and industry sectors complements the Company’s global strengths, creating value for clients and carriers.
The following table presents the Company’s preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values:
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Gras Savoye occurred at January 1, 2014:
The unaudited pro forma financial information above reflects certain pro forma adjustments. Significant adjustments are as follows:
Amortization of intangible assets is based on the fair value of intangibles determined on acquisition, assuming the transaction had closed on January 1, 2014 .
Rent costs are adjusted to fair value at the acquisition date and adjustments made for existing lease commitments.
An estimated adjustment was made to the income tax expense reflective of other adjustments made.
On May 31, 2015, the Company completed the transaction to acquire an 85 percent interest in Miller Insurance Services LLP and its subsidiaries (‘Miller’), a leading London wholesale specialist insurance broking firm, for total consideration of $401 million including cash consideration of $232 million.
As part of the transaction, selected broking activities were transferred between existing Willis Towers Watson businesses and Miller and vice-versa. The transaction combined businesses of both WTW and Miller creating a platform for future growth and added further strength and depth to the Company’s client proposition.
The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analysis is completed and additional information about the value of assets acquired, liabilities assumed, and contingent consideration become available.
On April 1, 2015, the Company acquired 100 percent of the share capital of Carsa Consultores, Agente de Seguros y de Fianzas de CV and its group companies (‘Carsa’), a leading insurance broker in Mexico. The Company paid initial cash consideration on closing and additional contingent consideration is payable after three years depending on future revenue achieved from the acquired businesses.
On August 7, 2015, the Company completed the transaction to acquire 100 percent interest in Elite Risk Services, Taiwan for cash consideration paid on closing.
On October 1, 2015, the Company completed the transaction to acquire 100 percent interest in Sparsam, Sweden. The Company paid initial cash consideration on closing. Further contingent consideration is payable at the end of the third anniversary of the acquisition and is contingent on specified performance targets for revenue growth over the three years prior to October 2018.
On October 7, 2015, the Company completed the transaction to acquire 100 percent interest in PMI Group, UK (Private Medicine Intermediaries). Cash consideration was paid on closing. There is no deferred or contingent consideration.
On October 29, 2015 the Company completed the transaction to acquire the remaining percentage of Miller do Brasil, bringing its ownership to 100%. The Company paid initial cash consideration on closing and deferred consideration is due after 18 months.
initial cash and other consideration paid on closing of $163 million; and
discounted deferred and contingent consideration, based on best estimates, of $25 million.
In aggregate, the Company recognized assets and liabilities acquired of $115 million and $35 million, respectively. Included within the acquired assets are intangible assets relating to client relationships and other intangibles of $82 million with a weighted average useful economic life of 14 years.
The amount of revenue and earnings, for all the acquisitions discussed above, included in the Company’s consolidated income statement for the year ended December 31, 2015, was $99 million and $3 million respectively.
On May 26, 2014, the Company acquired 100 percent of Charles Monat Limited and its subsidiaries, a life insurance solutions adviser to high net worth clients based in Hong Kong, for cash consideration of $59 million.
At December 31, 2015, the Company was organized into four reporting units which are consistent with its operating segments: Willis GB, Willis CWR, Willis North America and Willis International - see Note 26 - ‘Segment Information’ for detailed descriptions of the segments. Goodwill is allocated to these reporting units based on the original purchase price allocation for acquisitions within the reporting units. When a business entity is sold, goodwill is allocated to the entity disposed of based on the relative fair value of that entity compared with the fair value of the reporting unit in which it is included.
The changes in the carrying amount of goodwill by reporting unit for the years ended December 31, 2015 and 2014, are as follows:
The Company reviews goodwill for impairment annually, or whenever events of circumstances indicate impairment may have occurred. In the first step of the impairment test, the fair value of each reporting unit is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the amount of an impairment loss, if any, is calculated in the second step of the impairment test by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The Company’s goodwill impairment test for 2015 has not resulted in an impairment charge.
The aggregate amortization of intangible assets for the year ended December 31, 2015 was $76 million (2014: $54 million; 2013: $55 million). The estimated aggregate amortization of intangible assets for each of the next five years ended December 31 and thereafter is as follows:
Current portion of Incentives from lessors line includes $3 million of Unfavorable leases acquired as part of the Gras Savoye acquisition which has been disclosed in the Other intangible assets, net note.
Non-current portion of Incentives from lessors line includes $20 million of Unfavorable leases acquired as part of the Gras Savoye acquisition which has been disclosed in the Other intangible assets, net note.
At December 31, 2015, Legacy Willis maintained two principal defined benefit pension plans that covered approximately one third of the Legacy Willis employees in the United States and United Kingdom. Both of these plans are now closed to new entrants and with effect from May 15, 2009, the US defined benefit plan was closed to future accrual. New employees in the United Kingdom are offered the opportunity to join a defined contribution plan and in the United States are offered the opportunity to join a 401(k) plan. In addition to the Legacy Willis UK and US defined benefit pension plans, Legacy Willis has several smaller defined benefit pension plans in certain other countries in which it operates including a US non-qualified plan and an unfunded plan in the UK. Elsewhere, pension benefits are typically provided through defined contribution plans. It is the Legacy Willis’s policy to fund pension costs as required by applicable laws and regulations.
a pension benefit asset of $623 million (2014: $314 million) representing:
$617 million (2014: $314 million) in respect of the UK defined benefit pension plan; and
a total liability for pension benefits of $279 million (2014: $284 million) representing:
The accumulated benefit obligations for the Legacy Willis UK and US defined benefit pension plans were $2,677 million and $962 million, respectively (2014: $3,017 million and $1,051 million, respectively).
In the United Kingdom, the pension trustees, in consultation with Legacy Willis, maintain a diversified asset portfolio and this together with contributions made by Legacy Willis is expected to meet the pension scheme’s liabilities as they become due. The UK plan’s assets are divided into 12 separate portfolios according to asset class and managed by 9 investment managers. The broad target allocations are UK and foreign equities (32.5 percent), debt securities (50 percent) and diversifying assets (17.5 percent). In the United States, the Legacy Willis investment policy is to maintain a diversified asset portfolio, which together with contributions made by it is expected to meet the pension scheme’s liabilities as they become due. The US plan’s assets are currently invested in 18 funds representing most standard equity and debt security classes. The broad target allocations are US and foreign equities (50 percent) and debt securities (50 percent).
ordinary shares and preferred shares which are valued using quoted market prices; and
The following schedules provide information concerning Legacy Willis’ international, US non-qualified and UK unfunded defined benefit pension plans:
The accumulated benefit obligation for the Legacy Willis’ other defined benefit pension plans was $390 million (2014: $203 million).
As described in Note 2, following retrospective application of ASU 2015-03, ‘Simplifying the Presentation of Debt Issuance Costs’, debt issuance costs related to a recognized debt liability are now reported in the balance sheet as a direct deduction from the face amount of that liability. 2014 balances have been reclassified accordingly.
All direct obligations under the 5.625%, 6.200% and 7.000% senior notes are guaranteed by Willis Towers Watson, Willis Netherlands B.V., Willis Investment UK Holdings Limited, TA I Limited, Trinity Acquisition Limited and Willis Group Limited.
All direct obligations under the 4.625% and 6.125% senior notes are guaranteed by Willis Towers Watson, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Willis North America Inc. and Willis Group Limited.
The 7-year term loan facility expiring 2018 bears interest at LIBOR plus 1.50% and is repayable in quarterly installments and a final repayment of $186 million is due in the third quarter of 2018. In 2015, Legacy Willis made $17 million of mandatory repayments against this 7-year term loan (2014: $15 million).
On November 20, 2015, Legacy Willis entered into a 1-year term loan facility. The 1-year term loan has two tranches: one of €550 million, of which €544 million ($592 million) has been utilized, and the other of $400 million which was not utilized at December 31, 2015. The €550 million tranche was used to finance the acquisition of Gras Savoye and the $400 million tranche was drawn on January 4, 2016 (i.e. after the balance sheet date) and used to re-finance debt held by Legacy Towers Watson which became due on acquisition (refer to Note 31, Subsequent Events for further details). The term loan facility matures one year following the first date that either tranche of term loans is made, which will be on December 19, 2016. Advances under the credit facility bear interest at a rate equal to, for Eurocurrency Rate Loans in US dollars, LIBOR or EURIBOR, plus an applicable margin of 1.25% to 2.00%, based upon the Company’s guaranteed, senior-unsecured long term debt rating. A 1.50% margin applies while the Company’s debt rating remains BBB-/Baa3. The amount outstanding as of December 31, 2015 was $592 million and is included in the current portion of long-term debt on the consolidated balance sheets. $592 million outstanding amount is gross of $5 million debt fees related to the 1-year term loan facility.
On February 27, 2015, WSI entered into a second amendment to the revolving note and cash subordination agreement. This amendment included all of the following: (i) the end date of the credit period was extended to April 28, 2016 and the repayment date was extended to April 28, 2017; (ii) WSI was permitted to incur up to $400 million in indebtedness under the $800 million revolving credit facility held by Trinity Acquisition Limited, and (iii) WSI now has the ability to borrow in Euro, Japanese yen and other approved currencies subject to a reserve for foreign currency fluctuation.
Proceeds under the credit facility will be used for regulatory capital purposes related to securities underwriting only, which will
allow WSI to meet or exceed capital requirements of regulatory agencies, self-regulatory agencies and their clearing
equal to LIBOR plus a margin of 1.50% to 2.25%, plus 1.00%, plus 0.5% to 1.25%, in each case, based upon the Company’s guaranteed senior-unsecured long-term debt rating. A margin of 1.75% applies while the Company’s debt rating remains BBB-/Baa3.
As of December 31, 2015 $nil was outstanding under this credit facility (December 31, 2014: $nil).
The agreements relating to Legacy Willis’ 7-year term loan facility expiring 2018, the revolving credit facility, and the 1-year term loan facility expiring 2016 contain requirements not to exceed certain levels of consolidated funded indebtedness in relation to consolidated EBITDA and to maintain a minimum level of consolidated EBITDA to consolidated cash interest expense, subject to certain adjustments. In addition, the agreements relating to Legacy Willis’ credit facilities and senior notes include, in the aggregate, 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, payment of taxes and access to information and properties. At December 31, 2015, Legacy Willis was in compliance with all financial covenants.
Legacy Willis incurred total losses on extinguishment of debt of $60 million during the year ended December 31, 2013. This was made up of a tender premium of $65 million, the write-off of unamortized debt issuance costs of $2 million and a credit for the reduction of the fair value adjustment on 5.625% senior notes due 2015 of $7 million.
The Company also has available $2 million (2014: $3 million) in lines of credit, of which $1 million was drawn as of December 31, 2015 (2014: $1 million).
An analysis of movements on provisions for liabilities is as follows:
In light of our review of facts and circumstances relating to ongoing non-ordinary course litigation arising out of Legacy Willis’ operations, particularly the Stanford Financial Group litigation matters discussed under “Legal Proceedings” in this 10-K report (which are non-ordinary course litigation matters), we added $70 million to our provisions for loss contingencies relating to the Stanford litigation. In conducting such a review, we take into account a variety of factors in accordance with applicable accounting standards. The ultimate resolution of these matters may differ from the amount provided for.
The above excludes $22 million of liabilities for unrecognized tax benefits as the Company is unable to reasonably predict the timing of settlement of these liabilities.
The Company leases its main London building under a 25-year operating lease, which expires in 2032. The Company’s contractual obligations in relation to this commitment included in the table above total $562 million (2014: $645 million). Annual rentals are $34 million (2014: $36 million) per year and the Company has subleased approximately 44 percent (2014: 29 percent) of the premises under leases up to 15 years. The amounts receivable from subleases, included in the table above, total $100 million (2014: $51 million).
Guarantees issued by certain of Willis Towers Watson’s subsidiaries with respect to the senior notes and revolving credit facilities are discussed in Note 18 - Debt.
For certain subsidiaries and associates, the Company has the right to purchase shares (a call option) from co-shareholders at various dates in the future. In addition, the co-shareholders of certain subsidiaries and associates have the right to sell their shares (a put option) to the Company at various dates in the future. Generally, the exercise price of such put options and call options is formula-based (using revenues and earnings) and is designed to reflect fair value. Based on current projections of profitability and exchange rates and assuming the put options are exercised, the potential amount payable from these options is not expected to exceed $88 million (2014: $72 million).
Other contractual obligations at December 31, 2015, also include certain capital lease obligations totaling $59 million (2014: $64 million), primarily in respect of the Company’s Nashville property.
In the ordinary course of business, the Company is subject to various actual and potential claims, lawsuits, and other
proceedings relating principally to alleged errors and omissions in connection with the placement of insurance and reinsurance.
Similar to other corporations, the Company is also subject to a variety of other claims, including those relating to the
Company’s employment practices. Some of the claims, lawsuits and other proceedings seek damages in amounts which could,
professional indemnity or other appropriate insurance. The terms of this insurance vary by policy year. Regarding self-insured risks, the Company has established provisions which are believed to be adequate in light of current information and legal advice, or, in certain cases, where a range of loss exists, the Company accrues the minimum amount in the range if no amount within the range is a better estimate than any other amount. The Company adjusts such provisions from time to time according to developments. These provisions have been recognized in other operating expenses to the extent that losses are deemed probable and reasonably estimable or a reasonably possible range of loss exists. Matters that are not probable or reasonably estimable have not been provided for and the Company does not believe a reasonably possible range of losses, for these matters, can be estimated.
On the basis of current information, the Company does not expect that the actual claims, lawsuits and other proceedings to which the Company is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will ultimately have a material adverse effect on the Company’s financial condition, results of operations or liquidity. Nonetheless,
The material actual or potential claims, lawsuits, and other proceedings, relating to Legacy Willis, of which the Company is currently aware, are as follows:
The Company has been named as a defendant in 13 similar lawsuits relating to the collapse of The Stanford Financial Group (‘Stanford’), for which Willis of Colorado, Inc. acted as broker of record on certain lines of insurance. The complaints in these actions generally allege that the defendants actively and materially aided Stanford’s alleged fraud by providing Stanford with certain letters regarding coverage that they knew would be used to help retain or attract actual or prospective Stanford client investors. The complaints further allege that these letters, which contain statements about Stanford and the insurance policies that the defendants placed for Stanford, contained untruths and omitted material facts and were drafted in this manner to help Stanford promote and sell its allegedly fraudulent certificates of deposit. For a detailed description of the litigation related to Stanford see Part 1 Item 3 - ‘Legal Proceedings’ of this Form 10-K.
The plantiffs in the lawsuits against the Company seek overlapping damages, representing either the entirety or a portion of the total alleged collective losses incurred by investors in Stanford certificates of deposit, notwithstanding the fact that Legacy Willis acted as broker of record for only a portion of time that Stanford issued certificates of deposit. Additional actions could be brought in the future by other investors in certificates of deposit issued by Stanford and its affiliates seeking some or all of the same alleged losses. Given the stage of the proceedings, and notwithstanding the broadest allegation of some plantiffs, the Company is currently unable to provide an estimate of the reasonably possible maximum loss or range of loss. In the fourth quarter of 2015, the Company recognised a $70 million litigation provision for loss contingencies relating to the Stanford matters based on its ongoing review of a variety of factors as required by accounting standards. The ultimate resolution of these matters may differ from the amount provided for. The Company continues to dispute the allegations and to defend itself against the lawsuits vigorously.
Amounts reclassified out of accumulated other comprehensive income into the statement of operations are as follows:
The effects on equity of changes in Willis Towers Watsons’ ownership interest in its subsidiaries are as follows:
As a result of the Company’s operating activities, the Company holds Fiduciary funds. The Company earns interest on these funds, which is included in the Company’s financial statements as investment income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity.
changes in the exchange rate between US dollars and Pounds sterling as its London market operations earn the majority of their revenues in US dollars and incur expenses predominantly in Pounds sterling, and may also hold a significant net sterling asset or liability position on the balance sheet. In addition, the London market operations earn significant revenues in Euros and Japanese yen; and
The foreign exchange risks in its London market operations are hedged to the extent that:
the UK operations earn significant revenues in Euros and Japanese yen, the Company limits its exposure to changes in the exchange rate between the US dollar and these currencies by the use of forward contracts matched to a percentage of forecast cash inflows in specific currencies and periods. In addition, we are also exposed to foreign exchange risk on any net sterling asset or liability position in our London market operations.
The table below summarizes by major currency the contractual amounts of the Company’s forward contracts to exchange foreign currencies for Pounds sterling in the case of US dollars and US dollars for euro and Japanese yen. The forward contracts held as of December 31, 2015 range in maturity from 2015 to 2018. Foreign currency notional amounts are reported in US dollars translated at contracted exchange rates.
In addition to forward exchange contracts, the Company undertakes short-term foreign exchange swaps for liquidity purposes. These are not designated as hedges and do not qualify for hedge accounting. The fair values at December 31, 2015 and 2014 were immaterial.
For interest rate swaps all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For foreign exchange contracts, only the changes in fair value resulting from movements in the spot exchange rate are included in this assessment. In instances where the timing of expected cash flows can be matched exactly to the maturity of the foreign exchange contract, then changes in fair value attributable to movement in the forward points are also included.
The following table presents, for each of the fair-value hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis.
Fair value information about financial instruments not measured at fair value
We are integrating Willis and Towers Watson (together, the ‘Legacy Companies’) and creating a unified platform for global growth, including to position the Company to leverage the Legacy Companies’ mutual distribution strength to enhance market penetration, expand our global footprint and create a strong platform for further innovation. The fully integrated Company will have four business segments: Corporate Risk and Broking; Exchange Solutions; Human Capital and Benefits; and Investment, Risk and Reinsurance.
Willis had four reportable operating segments: Willis CWR; Willis GB; Willis North America; and Willis International. Towers Watson had four reportable operating segments: Benefits; Exchange Solutions; Risk and Financial Services; and Talent and Rewards.
The accounting policies of the segments are consistent with those described in Note 2 - ‘Basis of Presentation and Significant Accounting Policies’.
There are no inter-segment revenues, with segments operating on a revenue-sharing basis equivalent to that used when sharing business with other third-party brokers.
The following table reconciles total consolidated operating income, as disclosed in the operating segment tables above, to consolidated income before income taxes and interest in earnings of associates.
Other than in the United Kingdom and the United States, the Company does not conduct business in any country in which its commissions and fees and or fixed assets exceed 10 percent of consolidated commissions and fees and or fixed assets, respectively.
The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets for the year ended December 31, 2015 of Willis Towers Watson, the Other Guarantors and the Issuer.
The entities included in the Other Guarantors column as of December 31, 2015 are Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Trinity Acquisition Limited and Willis Group Limited.
The guarantor structure described above differs from the guarantor structure associated with the senior notes issued by Willis North America (the ‘Willis North America Debt Securities’) (and for which condensed consolidating financial information is presented in Note 28) in that Willis Towers Watson is the Parent Issuer and Willis North America is a subsidiary guarantor.
The entities included in the Other Guarantors column as of December 31, 2015 are Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Trinity Acquisition Limited, Willis Group Limited and Willis North America, Inc.
29. FINANCIAL INFORMATION FOR PARENT ISSUER, GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
FINANCIAL INFORMATION FOR ISSUER, PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES
The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets as of December 21, 2015 of Willis Towers Watson, the Other Guarantors and the Issuer.
Towers Watson & Co. is a leading global professional services firm operating throughout the world, dating back more than 100 years. The Merger will allow the combined firm to go to market with complementary strategic product and services offerings.
On December 29, 2015, the third business day immediately prior to the closing date, Towers Watson declared and paid the Towers Watson pre-merger special dividend, in an amount of $10.00 per share of Towers Watson common stock, approximately $694 million in the aggregate based on approximately 69 million Towers Watson shares issued and outstanding at December 29, 2015.
On December 30, 2015, all Towers Watson treasury stock was canceled.
The tables below presents the preliminary calculation of aggregate Merger Consideration.
Represents both debt due upon change of control of $400 million borrowed under Towers Watson’s term loan ($188 million) and revolving credit facility ($212 million) and an additional draw down under a new term loan of $340 million. The $400 million debt was repaid by Willis borrowings under the 1-year term loan facility on January 4, 2016. The $340 million new term loan partially funded the $694 million Towers Watson pre-merger special dividend.
would result in total revenues being higher by $435 million (2014: $506 million) and net income being lower by $2 million (2014: lower by $23 million).