As of December 31, 2018, we operated offices in many countries throughout the world and believe that our properties are generally suitable and adequate for the purposes for which they are used. The principal properties are located in the United States and the United Kingdom. Operations of each of our segments are carried out in owned or leased offices under operating leases that typically do not exceed 10 years in length except for certain properties in key locations. We do not anticipate difficulty in meeting our space needs at lease expiration.
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, 2018.
Willis Towers Watson is a 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 more than 43,000 employees and services clients in more than 140 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. We believe our unique perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance.
We offer clients a broad range of services to help them to identify and control their risks, and to enhance business performance by improving their ability to attract, retain and engage a talented workforce. Our risk control 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 occur. These services include contingency planning, security audits and product tampering plans. We help our clients enhance their business performance by delivering consulting services, technology and solutions that help organizations anticipate, identify and capitalize on emerging opportunities in human capital management as well as investment advice to help our clients develop disciplined and efficient strategies to meet their investment goals.
We derive the majority of our revenue from either commissions or fees for broking or consulting services. No single client represented a significant concentration of our consolidated revenue for any of the periods presented.
Due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenue may vary widely between accounting periods. A period of low or declining premium rates, generally known as a ‘soft’ or ‘softening’ market, generally leads to downward pressure on commission revenue and can have a material adverse impact on our revenue and operating margin. A ‘hard’ or ‘firming’ market, during which premium rates rise, generally has a favorable impact on our revenue and operating margin. Rates, however, vary by geography, industry and client segment. As a result, and due to the global and diverse nature of our business, we view rates in the aggregate.
The markets for our consulting, technology and solutions, and marketplace services are subject to changes as a result of economic, regulatory and legislative changes, technological developments, and increased competition from established and new competitors. We believe that the primary factors in selecting a human resources or risk management consulting firm include reputation, the ability to provide measurable increases to shareholder 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 and an innovative service delivery model and platform. Part of the employer-sponsored insurance market has matured and become more fragmented while other segments remain in the entry phase. As these market segments continue to evolve, we may experience growth in intervals, with periods of accelerated expansion balanced by periods of modest growth. In recent years, growth in the market for exchanges has slowed, and we expect this trend may continue during 2019.
The following table details our top five markets based on percentage of consolidated revenue (in U.S. dollars) from the countries where work was performed for the year ended December 31, 2018. These figures do not represent the currency of the related revenue, which is presented in the next table.
Divestitures in the latter part of 2017 and in the first quarter of 2018 reduced revenue for the year ended December 31, 2018. There were no significant impacts to revenue resulting from any acquisitions for the year ended December 31, 2018.
For the year ended December 31, 2017, currency translation decreased our consolidated revenue by $27 million. The decrease was driven primarily by a weaker Pound sterling during the first half of the year, partially offset by increases in the Pound sterling, Euro, the Brazilian real and Canadian dollar in the second half of the year.
Definitions of Constant Currency Change and Organic Change are included in the section entitled ‘Non-GAAP Financial Measures’ elsewhere within this Form 10-K.
HCB segment revenue for the years ended December 31, 2017 and 2016 was $3.2 billion and $3.1 billion, respectively. Retirement revenue increased in Western Europe, International and Great Britain and was partially offset by a decline in North America. The decline in North America was expected as bulk lump sum projects declined year over year. Actuarial consulting projects in Great Britain increased due to regulation changes. The growth in Talent & Rewards was flat. Healthcare consulting revenue in Health and Benefits was up significantly for all markets globally. North America grew due to increased consulting and product demand and Great Britain grew due to global benefits management implementations. Revenue in the Technology and Administration Solutions business in Great Britain experienced strong growth as a result of new administration clients and project activity.
Transport - Transport provides specialist expertise to the transportation, aerospace, marine and inspace industries.
The following table sets forth CRB segment revenue for the years ended December 31, 2018 and 2017, and the components of the change in revenue for the year ended December 31, 2018 from the year ended December 31, 2017.
Underwriting and Capital Management - Underwriting and Capital Management, formerly Portfolio and Underwriting Services, acts on behalf of our insurance carrier partners and self-insured entities in product marketing and distribution, risk underwriting and selection, claims management and other general administrative responsibilities.
Willis Towers Watson Securities - Willis Towers Watson Securities provides capital markets services to companies involved in the insurance and reinsurance industries.
IRR segment revenue for the years ended December 31, 2018 and 2017 was $1.6 billion and $1.5 billion, respectively. Reinsurance revenue increased, reflecting strong new business and renewal performance. Insurance Consulting and Technology, Wholesale, Investment, and Max Matthiessen also posted revenue growth resulting from a combination of increased sales and favorable market returns. Underwriting and Capital Management experienced a decline as a result of the divestiture of a portion of the U.S. programs business in 2017 and the Loan Protector businesses in the first quarter of 2018.
nature, driven by either the commissions from the policies we sell, or from long-term service contracts with our clients that typically range from three to five years. Revenue across this segment may be seasonal, driven by the magnitude and timing of client enrollment activities, which often occur during the fourth quarter, with increased membership levels typically effective January 1, after calendar year-end benefits elections.
BDA generated approximately 9% of our segment revenue for the year ended December 31, 2018. BDA provides services across four integrated or related offerings to customers primarily in the U.S.:
Individual Marketplace - This business provides solutions through a proprietary technology platform, Via Benefits Retiree, formerly OneExchange Retiree, which enables our employer clients to transition their retirees to individual, defined contribution health plans that provide individuals with a tax-free allowance or contribution to spend on healthcare services at an annual cost that the employer controls, as opposed to group-based, defined benefit health plans that provide groups of individuals with healthcare benefits at uncertain annual costs.
Group Marketplace - This business is focused on delivering group benefit exchanges, serving the active employees of employers across the United States through our proprietary BenefitConnect or Bright Choices exchange platforms.
Benefits Accounts - This business uses its SaaS-based technology and related services to deliver consumer-driven healthcare and reimbursement accounts, including health savings accounts, health reimbursement arrangements and other consumer-directed accounts.
The following table sets forth BDA segment revenue for the years ended December 31, 2018 and 2017, and the components of the change in revenue for the year ended December 31, 2018 from the year ended December 31, 2017.
The following table sets forth BDA segment revenue for the years ended December 31, 2017 and 2016, and the components of the change in revenue for the year ended December 31, 2017 from the year ended December 31, 2016.
BDA segment revenue for the years ended December 31, 2017 and 2016 was $734 million and $660 million, respectively. Individual Marketplace revenue increased by 10%, and the rest of the segment grew by 14%, led by Group Marketplace and
Benefits Outsourcing. Growth in the Individual and Group Marketplaces resulted from the additional 2017 enrollments, and Benefits Outsourcing’s growth was a result of new client wins and special projects.
Total costs of providing services were $7.7 billion for the year ended December 31, 2018, compared to $7.7 billion for the year ended December 31, 2017, an increase of $18 million. Total costs of providing services were $7.7 billion for the year ended December 31, 2017, compared to $7.5 billion for the year ended December 31, 2016, an increase of $147 million. See the following discussion for further details.
Salaries and benefits for the year ended December 31, 2018 were $5.1 billion, compared to $5.0 billion for the year ended December 31, 2017, an increase of $156 million. This increase was primarily a result of higher base salary adjustments, increased medical benefits costs and incentive accruals. Salaries and benefits for the year ended December 31, 2017 were $5.0 billion, compared to $4.8 billion for the year ended December 31, 2016, an increase of $118 million. The increase was primarily due to higher incentive accruals as compared to the prior year.
Other operating expenses for the year ended December 31, 2018 were $1.6 billion, compared to $1.5 billion for the year ended December 31, 2017, an increase of $103 million, or 7%. This increase was primarily due to higher professional services expenses, partially offset by lower occupancy costs. Other operating expenses for the year ended December 31, 2017 was $1.5 billion, compared to $1.6 billion for the year ended December 31, 2016, a decrease of $17 million, or 1%. The decrease was due primarily to the Stanford litigation provision of $50 million in 2016, partially offset by reserves for the City of Houston and CalPERS litigations and increases in other litigation reserves and professional services in 2017.
Amortization includes amortization of acquired intangible assets, including acquired internally developed software. Amortization for the year ended December 31, 2018 was $534 million, compared to $581 million for the year ended December 31, 2017, a decrease of $47 million, or 8%. Amortization for the year ended December 31, 2017 was $581 million, compared to $591 million for the year ended December 31, 2016, a decrease of $10 million. Our intangible amortization is more heavily weighted to the initial years of the useful lives of the related intangibles, and therefore amortization expense will decrease over time.
Restructuring costs were $132 million and $193 million for the years ended December 31, 2017 and 2016, respectively.
Refer to Note 6 - Restructuring Costs within Item 8 of this Annual Report on Form 10-K for additional information regarding these costs.
Interest expense for the years ended December 31, 2018, 2017 and 2016 was $208 million, $188 million and $184 million, respectively. Interest expense is primarily related to interest on our senior notes and term loans. Interest expense increased by $20 million for the year ended December 31, 2018, which resulted from higher average outstanding debt balances during the year, higher interest rates attributable to the variable-rate portion of our outstanding debt, and higher fixed-rate interest associated with the issuance of new senior notes during the current year. Interest expense increased by $4 million for the year ended December 31, 2017 over the prior year, which primarily resulted from additional levels of indebtedness.
(Provision for)/benefit from income taxes for the year ended December 31, 2018 was a provision of $136 million, compared with benefits of $100 million and $96 million for the years ended December 31, 2017 and 2016, respectively. The benefit in 2017 was primarily due to the impact of U.S. Tax Reform, which included a net benefit of $204 million due to the reduction in the federal corporate tax rate and re-measurement of net U.S. deferred tax liabilities primarily related to acquisition-based intangibles. The benefit from income taxes in 2016 was primarily due to the release of a portion of U.S. valuation allowances and shifts in the global mix of income as a result of the Merger. This shift resulted in additional deductions in jurisdictions with high statutory income tax rates, which reduced the global effective tax rate. The effective tax rates for the years ended
December 31, 2018, 2017 and 2016 were 16.0%, (20.5)% and (28.1)%, respectively. These effective tax rates are calculated using extended values from our consolidated statements of comprehensive income, and are therefore more precise tax rates than can be calculated from rounded values.
Net income attributable to Willis Towers Watson for the year ended December 31, 2018 was $695 million, compared to $568 million for the year ended December 31, 2017, an increase of $127 million, or 22%. Adjusting for the impact of ASC 606, which reduced net income in 2018 by $80 million, net income attributable to Willis Towers Watson would have increased by $207 million. This increase was due to strong organic revenue growth across all segments. Net income attributable to Willis Towers Watson for the year ended December 31, 2017 was $568 million, compared to $420 million for the year ended December 31, 2016. The increase was primarily driven by an improvement of $168 million in income from operations, partially offset by a $14 million decrease in other income, net.
Revenue and operating expense amounts differ due to the adoption of ASC 606 as well as how the new standard reflects the timing of our operating results. Therefore, the following significant changes may also reflect differences between quarters as well as fiscal years:
Revenue for certain affinity broking arrangements that was recognized at a point in time on the effective date of the policy is now being recognized over the policy year to reflect the ongoing nature of our services.
The most significant change in our IRR segment results is due to the change in accounting for our proportional treaty reinsurance broking arrangements. The revenue recognition for proportional treaty reinsurance broking commissions has moved from recognition upon the receipt of the monthly or quarterly treaty statements from the ceding insurance carriers, to the recognition of an estimate of expected commissions upon the policy effective date. For the year ended December 31, 2018, ASC 606 revenue was higher than ASC 605 revenue by approximately $2 million related to this adjustment.
System implementation activities - For those portions of the business that previously deferred costs, the length of time over which we amortize those costs will extend to a longer estimated contract term. For the 2017 calendar year and prior, these costs were amortized over a typical period of 3-5 years in accordance with the initial stated terms of the customer agreements. Additionally, the composition of deferred costs has been adjusted to reflect the guidance in ASC 606. These adjustments resulted in an increase in expense of $6 million for the year ended December 31, 2018.
Other Arrangements - This guidance now applies to our broking arrangements. The costs deferred for our broking arrangements will typically be amortized within one year. For the year ended December 31, 2018, these changes resulted in a decrease in expense of approximately $8 million.
While the measurement period under SAB 118 is now closed, the Company may in future periods need to further refine its U.S. federal and state calculations related to U.S. Tax Reform as the taxing authorities provide additional guidance and clarification. However, as of December 31, 2018, the Company's accounting for U.S. Tax Reform is complete based on its interpretation of the guidance issued as of the balance sheet date.
Executive compensation - Starting with compensation paid in 2018, Section 162(m) will limit the Company from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers. The only exception to this rule is for compensation that is paid pursuant to a
binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million deduction limit if paid to a covered executive. The Company recorded a provisional income tax expense of $8 million relating to our compensation plans not qualifying as a binding contract exception. During the fourth quarter the Company finalized its analysis and review of the executive compensation plans and IRS guidance released throughout the year. The Company has concluded that the reviewed plans are not subject to future limitation under the binding contract exception and grandfathering rules. This resulted in the re-establishment of the deferred tax asset through the recording of an income tax benefit of $8 million. The effect of the measurement period adjustment on the 2018 effective tax rate is approximately 1%.
Based on our balance sheets, cash flows, current market conditions and information available to us at this time, we believe that Willis Towers Watson has sufficient liquidity, which includes our undrawn revolving credit facilities, to meet our cash needs for the next twelve months, including investing in the business for growth, creating value through the integration of Willis, Towers Watson and Gras Savoye, scheduled debt repayments, dividend payments, and contemplated share repurchases, subject to market conditions and other factors.
Additionally, at December 31, 2018, $1.1 billion was available to draw against our $1.25 billion revolving credit facility as compared to $362 million, which was available to draw against the facility at December 31, 2017.
The following table presents the summarized consolidated cash flow information for the years ended:
Cash flows from operating activities were $933 million for 2016, compared to cash flows from operating activities of $244 million for 2015. The $933 million net cash from operating activities for 2016 included net income of $438 million, adjusted for $590 million of non-cash adjustments, partially offset by changes in operating assets and liabilities of $95 million. The $590 million of non-cash adjustments primarily include depreciation, amortization, net defined benefit pension credits, share-based compensation, and the benefit from deferred income taxes. The $689 million increase in cash from operations in 2016 compared to 2015 was primarily due to cash from operations from Legacy Towers Watson and Gras Savoye.
Cash flows from investing activities for 2016 were $195 million, largely driven by $476 million of cash acquired as a result of our Merger with Towers Watson, which was a non-cash transaction as it was consummated through the issuance of shares. Cash inflows were partially offset by $303 million of fixed assets and software for internal use and capitalized software costs.
Cash flows used in financing activities for 2017 were $479 million. The significant financing activities included the payment of $177 million related to the cancellation of Towers Watson shares in connection with the settlement of the Merger-related appraisal demand lawsuit (consisting of the portion of the settlement equal to the value of consideration that would have been due to the shareholders at the closing of the Merger if they had exchanged their shares), share repurchases of $532 million and dividend payments of $277 million, which were partially offset by net borrowings of $580 million.
Cash flows used in financing activities in 2016 were $775 million. The primary drivers during the period were debt issuance of $2.0 billion, debt repayments of $1.9 billion, net payments on the revolving credit facility of $237 million, dividend payments of $199 million, and share repurchases of $396 million.
At December 31, 2018, our mandatory debt repayment over the next twelve months is a scheduled repayment of $186 million on our outstanding 7.000% senior notes due in 2019.
In September 2018, we completed an offering of $600 million of 4.500% senior notes due 2028 and $400 million of 5.050% senior notes due 2048. Net proceeds of $989 million were used to prepay in full the amount outstanding under our term loan due December 2019, and to repay a portion of the amount outstanding under our revolving credit facility.
At December 31, 2018 and December 31, 2017, we were in compliance with all financial covenants.
At both December 31, 2018 and 2017, we had fiduciary funds of $3.3 billion.
On April 20, 2016, the Willis Towers Watson board reconfirmed, reapproved and reauthorized the remaining portion of the Legacy Willis program to repurchase the Company’s ordinary shares on the open market or by way of redemption or otherwise.
On November 10, 2016, the Company announced the board of directors approved an increase to the existing share repurchase program of $1 billion. The $1 billion increase was in addition to the remaining authority on the Legacy Willis program discussed in the preceding paragraph.
At December 31, 2018, approximately $399 million remained on the current repurchase authority. The maximum number of shares that could be repurchased based on the closing price of our ordinary shares on December 31, 2018 of $151.86 was 2,627,728.
There are no expiration dates for these repurchase plans or programs. The following table presents specified information about the Company’s repurchases of ordinary shares for the year ended December 31, 2018:
The Company has no material commitments for capital expenditures. Our capital expenditures for fixed assets and software for internal use were $268 million for the year ended December 31, 2018. Expected capital expenditures for fixed assets and software for internal use are approximately $250 million for the year ended December 31, 2019. We expect cash from operations to adequately provide for these cash needs.
Total cash dividends of $306 million were paid during the year ended December 31, 2018. In February 2019, the board of directors approved a quarterly cash dividend of $0.65 per share ($2.60 per share annualized rate), which will be paid on or about April 15, 2019 to shareholders of record as of March 31, 2019.
The Company’s material contractual obligations as of December 31, 2018 are as follows:
Uncertain Tax Positions - The table above does not include liabilities for uncertain tax positions under ASC 740, Income Taxes. The settlement period for the $49 million liability, which excludes interest and penalties, cannot be reasonably estimated since it depends on the timing and possible outcomes of tax examinations with various tax authorities.
Guarantees, Acquisition Liabilities and Other Contractual Obligations - Information regarding guarantees and other contractual obligations and their impact on the financial statements is set forth in Item 8, Note 14 - Commitments and Contingencies in this Annual Report on Form 10-K.
Claims, Lawsuits and Other Proceedings, including Stanford Financial Group Litigation - Information regarding claims, lawsuits and other proceedings, including the Stanford Financial Group litigation, and their impact on the consolidated financial statements is set forth in Item 8, Note 14 - Commitments and Contingencies in this Annual Report on Form 10-K.
Restructuring costs and transaction and integration expenses - Management believes it is appropriate to adjust for restructuring costs and transaction and integration expenses when they relate to a specific significant program with a defined set of activities and costs that are not expected to continue beyond a defined period of time, or one-time Merger-related transaction expenses. We believe the adjustment is necessary to present how the Company is performing, both now and in the future when these programs will have concluded.
Provisions for significant litigation - We will include provisions for litigation matters which we believe are not representative of our core business operations.
Tax effects of U.S. Tax Reform - Relates to the (1) U.S. income tax adjustment of deferred taxes upon the change in the federal corporate tax rate, (2) the impact of the one-time transition tax on accumulated foreign earnings net of foreign tax credits, and (3) the re-measurement of our net deferred tax liabilities associated with the U.S. tax on certain foreign earnings offset with a write-off of deferred tax assets that will no longer be realizable under U.S. Tax Reform.
Deferred tax valuation allowance - Adjustment to remove the effects of a release of the valuation allowance against certain U.S. deferred tax assets.
We evaluate our revenue on an as reported (U.S. GAAP), constant currency and organic basis. We believe presenting constant currency and organic information provides valuable supplemental information regarding our comparable results, consistent with how we evaluate our performance internally.
Organic Change - Excludes the impact of fluctuations in foreign currency exchange rates as described above, the period-over-period impact of acquisitions and divestitures and the impact of adopting ASC 606 on 2018 revenue. We believe that excluding transaction-related items from our U.S. GAAP financial measures provides useful supplemental information to our investors, and it is important in illustrating what our core operating results would have been had we not included these transaction-related items, since the nature, size and number of these transaction-related items can vary from period to period.
A reconciliation of revenue to adjusted revenue and reconciliation of the reported changes to the constant currency and organic changes for the years ended December 31, 2017 and 2016 is as follows:
Adjusted operating income is defined as income from operations adjusted for amortization, restructuring costs, transaction and integration expenses, and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results.
Adjusted operating income without the adoption of ASC 606 increased for the year ended December 31, 2018 to $1.6 billion, from $1.5 billion for the year ended December 31, 2017, as a result of strong organic revenue growth from increased client demand across all segments. Additionally, on a year-to-date basis, salaries and benefits expense as a percentage of revenue decreased.
Adjusted EBITDA is defined as net income adjusted for provision for income taxes, interest expense, depreciation and amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results.
Reconciliations of net income to adjusted EBITDA for the years ended December 31, 2018, 2017 and 2016 are as follows:
Adjusted EBITDA without the adoption of ASC 606 for the year ended December 31, 2018 was $2.2 billion, compared to $1.9 billion for the year ended December 31, 2017. This increase was primarily due to organic revenue growth across all segments, increased pension credits and lower foreign exchange losses on a year-to-date basis.
Reconciliations of net income attributable to Willis Towers Watson to adjusted diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 are as follows:
Adjusted income before taxes is defined as income from operations before income taxes adjusted for amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted income before taxes is used solely for the purpose of calculating the adjusted income tax rate.
Adjusted income taxes/tax rate is defined as the provision for income taxes adjusted for taxes on certain items of amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations, the tax effects of internal reorganizations and U.S. Tax Reform and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results, divided by adjusted income before taxes. Adjusted income taxes is used solely for the purpose of calculating the adjusted income tax rate.
Our U.S. GAAP tax rate is lower than the U.S. statutory tax rate of 21%. Prior to U.S. Tax Reform, this was primarily due to our global mix of income and deductions in jurisdictions with high statutory income tax rates. For 2018, while the U.S. federal corporate income tax rate has decreased as a result of U.S. Tax Reform, certain deferred tax benefits realized as a result of both the Merger and deductions in jurisdictions with high statutory income tax rates have now been reduced as well. This offsets, in part, the benefit of U.S. Tax Reform, thus increasing our income tax rate.
Our U.S. GAAP tax rates without the adoption of ASC 606 were 16.2%, (20.5)% and (28.1)% for the years ended December 31, 2018, 2017 and 2016, respectively.
Our adjusted income tax rates without the adoption of ASC 606 were 19.4%, 21.9% and 20.8% for the years ended December 31, 2018, 2017 and 2016, respectively.
These consolidated financial statements conform to U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. The areas that we believe are critical accounting policies include revenue recognition, costs to fulfill broking contracts, valuation of billed and unbilled receivables from clients, discretionary compensation, income taxes, commitments, contingencies and accrued liabilities, pension assumptions, and goodwill and intangible assets. The critical accounting policies discussed below involve making difficult, subjective or complex accounting estimates that could have a material effect on our financial condition and results of operations. These critical accounting policies require us to make assumptions about matters that are highly uncertain at the time of the estimate or assumption. Different estimates that we could have used, or changes in estimates that are reasonably likely to occur, may have a material effect on our financial condition and results of operations.
We use significant estimates related to revenue recognition most commonly during our estimation of the transaction prices or where we recognize revenue over time on a proportional performance basis. A brief description of these policies and estimates is included below:
We maintain allowances for doubtful accounts to reflect estimated losses resulting from a client’s failure to pay for the services after the services have been rendered, which are recorded in other operating expenses. We also maintain allowances related to our unbilled receivables for such items as client disputes, the related provision for which is recorded as a reduction to revenue. Our allowance policy is based on the aging of the billed and unbilled client receivables and has been developed based on our write-off history. Facts and circumstances such as the average length of time the receivables are past due, general market conditions, current economic trends and our clients’ ability to pay may cause fluctuations in our valuation of billed and unbilled receivables.
We maintain defined benefit pension plans for employees in several countries, with the most significant defined benefit plans offered in the U.S. and U.K. Our disclosures in Note 13 - Retirement Benefits contain additional information about our other less significant but material retirement plans. Within our critical accounting policy discussion, we have excluded analysis for plans outside of those noted in the description below, as any variance of recorded information based on management’s estimates would be immaterial.
The determination of the Company’s obligations and annual expense under the plans is based on a number of assumptions that, given the longevity of the plans, are long-term in focus. A change in one or a combination of these assumptions could have a material impact on our projected benefit obligation. However, certain of these changes, such as changes in the discount rates and other actuarial assumptions, are not recognized immediately in net income, but are instead recorded in other comprehensive income. The accumulated gains and losses not yet recognized in net income are amortized into net income as a component of the net periodic benefit cost/(income) generally based on the average working life expectancy of each of the plan’s active participants to the extent that the net gains or losses as of the beginning of the year exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation.
Economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear.
Goodwill is tested at the reporting unit level, and the Company had nine reporting units as of October 1, 2018.
techniques to estimate the fair value of a reporting unit that fall under income or market approaches. Under the discounted cash flow method, an income approach, the business enterprise value is determined by discounting to present value the terminal value which is calculated using debt-free after-tax cash flows for a finite period of years. Key estimates in this approach were internal financial projection estimates prepared by management, business risk, and expected rates of return on capital. The guideline company method, a market approach, develops valuation multiples by comparing our reporting units to similar publicly-traded companies. Key estimates and determination of valuation multiples rely on the selection of similar companies, obtaining forecast revenue and EBITDA estimates for the similar companies and selection of valuation multiples as they apply to the reporting unit characteristics. Under the similar transactions method, a market approach, actual transaction prices and operating data from companies deemed reasonably similar to the reporting units are used to develop valuation multiples as an indication of how much a knowledgeable investor in the marketplace would be willing to pay for the business units.
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. Additional ASUs have since been issued which provide amended and additional guidance for the implementation of ASU No. 2016-02. All related guidance has been codified into, and is now known as, ASC 842, Leases (‘ASC 842’). ASC 842 became effective for the Company at the beginning of its 2019 calendar year, at which time the Company adopted it.
As a result of finalizing and analyzing our inventory of lease agreements to determine the full impact this standard will have on our consolidated financial statements, processes and systems, the Company has determined the following:
We will reflect additional operating lease liabilities at the transition date of approximately $1.2 billion, as well as right-of-use assets of approximately $1.0 billion, and an immaterial adjustment to retained earnings.
Separation of lease and non-lease components - We have elected the practical expedient to not separate the cash flows associated with lease and non-lease components in our lease accounting and resulting amounts recorded in our consolidated financial statements.
Additionally, to prepare for the other required disclosures and new accounting treatment, the Company has implemented additional tools for its lease accounting and data collection processes, which were in place and effective on January 1, 2019.
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2018
To the Shareholders and Board of Directors of Willis Towers Watson Public Limited Company
Equity includes (a) Ordinary shares $0.000304635 nominal value; Authorized 1,510,003,775; Issued 128,921,530 (2018) and 132,139,581 (2017); Outstanding 128,921,530 (2018) and 132,139,581 (2017); (b) Ordinary shares, €1 nominal value; Authorized and Issued 40,000 shares in 2018 and 2017; and (c) Preference shares, $0.000115 nominal value; Authorized 1,000,000,000 and Issued none in 2018 and 2017.
Willis Towers Watson plc is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. The Company has more than 43,000 employees and services clients in more than 140 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. We believe our broad perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance.
Fair Value of Financial Instruments - The carrying values of our cash and cash equivalents, accounts receivable, accrued expenses, revolving lines of credit and term loans approximate their fair values because of the short maturity and liquidity of those instruments. We consider the difference between carrying value and fair value to be immaterial for our senior notes. The fair value of our senior notes are considered Level 2 financial instruments as they are corroborated by observable market data. See Note 12 - Fair Value Measurements for additional information about our measurements of fair value.
Cash and Cash Equivalents - Cash and cash equivalents primarily consist of time deposits with original maturities of 90 days or less. In certain of the countries in which we conduct business, we are subject to capital adequacy requirements. Most significantly, Willis Limited, our U.K. brokerage subsidiary regulated by the Financial Conduct Authority, is currently required to maintain $140 million in unencumbered and available financial resources, of which at least $79 million must be in cash, for regulatory purposes. Term deposits and certificates of deposits with original maturities greater than 90 days are considered to be short-term investments. There is no restricted cash included in our cash and cash equivalents balance, as these amounts are included in fiduciary assets.
Fiduciary assets on the consolidated balance sheets are comprised of both fiduciary funds and fiduciary receivables:
which emphasize capital preservation and liquidity. Such funds are not available to service the Company’s debt or for other corporate purposes. Notwithstanding the legal relationships with insureds and insurers, the Company is entitled to retain investment income earned on fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds. The period for which the Company holds such funds is dependent upon the date the insured remits the payment of the premium to the Company, or the date the Company receives refunds from the insurers, and the date the Company is required to forward such payments to the insurer or insured, respectively.
The Company recognizes interest and penalties relating to unrecognized tax benefits within income taxes. See Note 7 - Income Taxes for additional information regarding the Company’s income taxes.
Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates and assets and liabilities are translated at year-end exchange rates. Translation adjustments are presented as a separate component of other comprehensive income in the
financial statements and are included in net income only upon sale or liquidation of the underlying foreign subsidiary or associated company.
Derivatives - The Company uses derivative financial instruments for other than trading purposes to alter the risk profile of an existing underlying exposure. Interest rate swaps have been used to manage interest risk exposures. Forward foreign currency exchange contracts are used to manage currency exposures arising from future income and expenses. The fair values of derivative contracts are recorded in other assets and other liabilities in the consolidated balance sheets. The effective portions of changes in the fair value of derivatives that qualify for hedge accounting as cash flow hedges are recorded in other comprehensive income. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings. If the derivative is designated and qualifies as an effective fair value hedge, the changes in the fair value of the derivative and of the hedged item associated with the hedged risk are both recognized in earnings. The amount of hedge ineffectiveness recognized in earnings is based on the extent to which an offset between the fair value of the derivative and hedged item is not achieved. Changes in fair value of derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness on those that do qualify, are recorded in other income, net or interest expense as appropriate.
Commitments, Contingencies and Provisions for Liabilities - The Company establishes provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also unasserted claims and related legal fees. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in light of current information and legal advice. In certain cases, where a range of loss exists, we accrue 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 recognized and the recoveries are likely to be realized. Significant management judgment is required to estimate the amounts of such unasserted claims 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. These contingent liabilities are not discounted. See Note 14 - Commitments and Contingencies and Note 15 - Supplementary Information for Certain Balance Sheet Accounts for additional information about our commitments, contingencies and provisions for liabilities.
See Note 18 - Share-based Compensation for additional information about the Company’s share-based compensation.
Fixed Assets - Fixed assets are stated at cost less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of assets.
Long-lived assets are tested for recoverability whenever events or changes in circumstance indicate that their carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. Recoverability is determined based on the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. See Note 8 - Fixed Assets for additional information about our fixed assets.
Operating Leases - Rentals payable on operating leases are charged on a straight-line basis to Other operating expenses in the consolidated statements of comprehensive income over the lease terms. See Note 14 - Commitments and Contingencies for additional information about our operating leases.
Due to the nature of the majority of our broking arrangements, no single document constitutes the contract for ASC 606 purposes. Our services may be governed by a mixture of different types of contractual arrangements depending on the jurisdiction or type of coverage, including terms of business agreements, broker-of-record letters, statements of work or local custom and practice. This is then confirmed by the client’s acceptance of the underlying insurance contract. Prior to the policy inception date, the client has not accepted nor formally committed to perform under the arrangement (i.e. pay for the insurance coverage in place). Therefore in the majority of broking arrangements, the contract date is the date the insurance policy incepts. However, in certain instances such as Medicare broking or Affinity arrangements, where the employer or sponsoring organization is our customer, client acceptance of underlying individual policy placements is not required, and therefore the date at which we have a contract with a customer is not dependent upon placement.
Consulting - We earn revenue for advisory and consulting work that may be structured as different types of service offerings, including annual recurring projects, projects of a short duration or stand-ready obligations. Collectively, our consulting arrangements represent approximately 34% of customer contract revenue for the year ended December 31, 2018.
In assessing our performance obligations, our consulting work is typically highly integrated, with the various promised services representing inputs of the combined overall output. We view these arrangements to represent a single performance obligation. To the extent we do not integrate our services, as is the case with unrelated services that may be sourced from different areas of our business, we consider these separate performance obligations.
We use different progress measures to determine our revenue depending on the nature of the engagement:
Outsourced Administration - We provide customized benefits outsourcing and co-sourcing solutions services in relation to the administration of defined benefit, defined contribution, and health and welfare plans. These plans are sponsored by our clients to provide benefits to their active or retired employees. Additionally, these services include operating call centers, and may include providing access to, and managing a variety of consumer-directed savings accounts. The operation of call centers and consumer-directed accounts can be provisioned as part of an ongoing administration or solutions service, or separately as part of a broking arrangement. The products and services available to all clients are the same, but the selections by the client can vary and portray customized products and services based on the customer’s specific needs. Our services
Implementation phase. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer, and therefore costs are deferred during this phase of the arrangement. Since these arrangements are longer term in nature and subject to more changes in scope as the project progresses, our contracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of implementation.
Ongoing administration phase. The ongoing administration phase includes a variety of plan administration services, system hosting and support services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our health and welfare arrangements, annual onboarding and enrollment support. While there are a variety of activities performed, the overall nature of the obligation is to provide an integrated outsourcing solution to the customer. The arrangement represents a stand-ready obligation to perform these activities on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or each benefits cycle in our health and welfare arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services represent a ‘series’ in accordance with ASC 606 and are deemed one performance obligation.
We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. Fees for these arrangements can be fixed, per-participant-per-month, or in the case of call center services provided in conjunction with our broking services, an allocation based on commissions. Our fees are not typically payable until the commencement of the ongoing administration phase. However, in our health and welfare arrangements, we begin transferring services to our customers approximately four months prior to payments being due as part of our annual onboarding and enrollment work. Although our per-participant-per-month and commission-based fees are considered variable, they are typically predictable in nature, and therefore we generally do not ‘constrain’ any portion of our transaction price estimates. Once fees become payable, payment is typically due on a monthly basis as we perform under the contract, and are entitled to be reimbursed for work performed to date in the event of termination.
Reimbursed expenses - Client reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included in revenue, and an equivalent amount of reimbursable expenses is included in other operating expenses as a cost of revenue as incurred. Reimbursed expenses represented approximately 1% of customer contract revenue for the year ended December 31, 2018. Taxes collected from customers and remitted to government authorities are recorded net and are excluded from revenue.
including those relating to travel, other out-of-pocket expenses and any third-party costs, were included in revenue, and an equivalent amount of reimbursable expenses was included in other operating expenses as a cost of revenue. Taxes collected from customers and remitted to government authorities were recorded net and were excluded from revenue.
Consulting revenue. The majority of our consulting revenue consisted of fees earned from providing consulting services. We recognized revenue from these consulting engagements when hours were worked, either on a time-and-expense basis or on a fixed-fee basis, depending on the terms and conditions defined at the inception of an engagement with a client. We had engagement letters with our clients that specified the terms and conditions upon which the engagements were based. These terms and conditions could only be changed upon agreement by both parties. Individual billing rates were principally based on a multiple of salary and compensation costs.
Hosted software. We develop various software programs and technologies that we provide to clients in connection with consulting services. In most instances, such software is hosted and maintained by us and ownership of the technology and rights to the related code remain with us. We deferred costs for software developed to be utilized in providing services to a client, but for which the client did not have the contractual right to take possession, during the implementation stage. We recognized these deferred costs from the go-live date, signaling the end of the implementation stage, until the end of the initial term of the contract with the client. We determined that the system implementation and customized ongoing administrative services were one combined service. Revenue was recognized over the service period, after the go-live date, on a straight-line basis. As a result, we did not recognize revenue during the implementation phase of an engagement.
relative fair value. For software arrangements in which initial fees were received in connection with mandatory maintenance for the initial software license to remain active, we determined that the initial maintenance period was substantive. Therefore, we recognized the fees for the initial license and maintenance bundle ratably over the initial contract term, which was generally one year. Each subsequent renewal fee was recognized ratably over the contractually-stated renewal period.
Costs to fulfill include costs incurred by the Company that are expected to be recovered within the expected contract period. The costs associated with our system implementation activities and consulting contracts are recorded through time entry.
the monthly timing of underlying insurance and reinsurance policy inception dates.
As a result of finalizing and analyzing our inventory of lease agreements to determine the full impact this standard will have on the consolidated financial statements, processes and systems, the Company has determined the following:
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which provides amendments under six specific objectives to better align risk management activities and financial reporting, and to simplify disclosure, presentation, hedging and the testing and measurement of ineffectiveness. The ASU became effective for the Company on January 1, 2019, at which time we adopted it. The Company does not believe adopting this ASU will have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers. The new standard supersedes most current revenue recognition guidance and eliminates most 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. Entities had the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. Additional ASUs have since been issued which provide further guidance, examples and technical corrections for the implementation of ASU No. 2014-09. All related guidance has been codified into, and is now known as, ASC 606. The guidance was effective for, and was adopted by, the Company as of January 1, 2018 using the modified retrospective method, and has a material impact on the consolidated financial statements and their accompanying
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities to (1) disaggregate the current service-cost component from the other components of net benefit cost (the ‘other components’) and present it in the income statement with other current compensation costs for related employees and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented or included in appropriately-described separate lines. The ASU became effective for the Company on January 1, 2018, and it has applied the standard retrospectively in this Annual Report on Form 10-K. As a result of adopting this ASU, the Company classified or reclassified net periodic pension and postretirement benefit credits totaling $280 million, $222 million and $203 million for the years ended December 31, 2018, 2017 and 2016, respectively, from salaries and benefits expense to other income, net, in the consolidated statements of comprehensive income.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU requires that an entity should account for the effects of a modification unless the fair value (or calculated value or intrinsic value, if used), vesting conditions and classification (as equity or liability) of the modified award are all the same as for the original award immediately before the modification. The ASU became effective for the Company on January 1, 2018 and will be applied prospectively to any award modified on or after this date. There is no immediate impact to the accompanying consolidated financial statements, until such time as an award may be modified in 2019 or beyond.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which amends guidance on presentation and classification of eight specific cash flow issues with the objective of reducing diversity in practice. The ASU became effective for the Company on January 1, 2018 on a prospective basis. While there was no impact to the consolidated statement of cash flows for the year ended December 31, 2018, the Company will reflect the new guidance prospectively as applicable transactions occur.
The following paragraphs describe significant transactions during the three year period ending December 31, 2018. There have been other less significant transactions during this time period which have not been discussed.
The Company acquired cash and cash equivalents of $476 million as a result of the Merger.
included in the tables found in Note 15 - Supplementary Information for Certain Balance Sheet Accounts to these consolidated financial statements as Other current assets and Other non-current assets.
We adopted ASC 606 using the modified retrospective approach, and elected to apply the following ‘practical expedients’ during adoption:
We elected to apply the new standard only to contracts that were not completed as of the transition date. This had the net effect of reducing revenue recognized under ASC 606 due to the change in method in our Health and Benefits broking business. See a further discussion and quantification for the annual results below.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 were as follows:
In accordance with the modified retrospective adoption requirements of ASC 606, the following disclosures represent the impact of adoption on our consolidated statement of comprehensive income, balance sheet and statement of cash flows:
The adoption of ASC 606 had the following impacts to our balance sheets at January 1, 2018 and December 31, 2018:
Accounts receivable, net, now includes receivables that have been billed, not yet billed and short-term contract assets. This adjustment is the result of the cumulative adjustments to revenue that have not yet been collected from our customers, but are expected to be collected within the next twelve months. The most significant increases to this balance result from revenue acceleration under ASC 606 for Medicare and proportional treaty broking commissions.
Prepaid and other current assets include the impact of costs deferred in connection with our broking pre-placement activities. These costs are being deferred while the related pre-placement work is performed, and amortized as the related revenue is recognized, typically upon policy inception. Since the amortization period associated with these fulfillment costs is less than one year, these deferred costs have been classified as a current asset.
Prior to the adoption of ASC 606, costs that we deferred related to certain system implementation activities had been included in fixed assets, net. These costs, adjusted based on the guidance in ASC 606, have now been included in other non-current assets. Additionally we have included less significant impacts of adjustments to deferred tax assets and have classified non-current contract assets within non-current assets.
Deferred revenue has been adjusted primarily to reflect revenue acceleration in our Medicare broking business. Additional adjustments were included to accelerate the license component of certain software arrangements and to net deferred revenue with contract assets.
Provision for liabilities has been adjusted for additional reserves for long-term post-placement obligations in our broking business.
Retained earnings has been adjusted for the net impact of the adoption of ASC 606. See the discussion of the significant pre-tax changes by revenue in the following section.
Medicare broking - The majority of revenue recognition for this offering, within our Individual Marketplace business, has moved from monthly ratable recognition over the policy period, to recognition upon placement of the policy. Consequently, the Company will now recognize approximately two-thirds of one calendar year of expected commissions during its fourth quarter of the preceding calendar year. The remainder of the revenue is recognized consistently with methods used prior to the adoption of ASC 606. Therefore, at the adoption date, we have reflected a $271 million pre-tax increase to retained earnings for the portion of the revenue that would otherwise have been recognized during our 2018 calendar year since our earnings process was largely completed during the fourth quarter of 2017. Additionally, we have reflected a $40 million pretax adjustment to increase retained earnings related to previously deferred contingent revenue from placements made prior to 2018 because the earnings process was complete under ASC 606. During the year ended December 31, 2018, the accounting for this revenue stream under ASC 606 represented a reduction of revenue from ASC 605, Revenue Recognition (‘ASC 605’) accounting methods of $38 million.
Salaries and benefits and depreciation expense have been impacted by the guidance for deferred costs. Our accounting for these deferred costs has changed for certain revenue streams with system implementation activities, and other types of arrangements with associated costs, that now meet the criteria for cost deferral under ASC 606:
The provision for income taxes for the year ended December 31, 2018 was $18 million lower than our provision on an ASC 605 basis. The income tax expense was calculated based on the U.S. and foreign statutory rates applicable to adjustments made. Where applicable, a U.S. statutory rate of 21% was used. There was a $101 million net tax reduction to retained earnings upon adoption of ASC 606.
As part of the changes in accounting for deferred costs, amounts capitalized relating to system implementation activities are now classified as operating cash flows. Prior to 2018, those costs capitalized under previous guidance were included in Capitalized software costs as an investing cash outflow.
The Company reports revenue by segment in Note 5 - Segment Information. The following table presents revenue by service offering and segment, as well as a reconciliation to total revenue for the year ended December 31, 2018. Along with reimbursable expenses and other, total revenue by service offering represents our revenue from customer contracts. See Note 5 - Segment Information for further information.
The following table presents revenue by the geography where our work was performed for the year ended December 31, 2018. The reconciliation to total revenue on our consolidated statements of comprehensive income and to segment revenue is shown in the table above.
Accounts receivable are stated at estimated net realizable values. The following table presents the changes in our allowance for doubtful accounts for the years ended December 31, 2018, 2017 and 2016.
During the year ended December 31, 2018, the Company recognized no material revenue related to performance obligations satisfied in a prior period.
To better align our business within our segments, we (1) moved portions of our Insurance, Consulting and Technology business from IRR to CRB; (2) moved certain resources that support our outsourced administration offerings from HCB to BDA; and (3) moved our CEEMEA-based strategy study business from our Health and Benefits business in HCB to CRB.
The following table presents segment revenue and segment operating income for our reportable segments for the years ended December 31, 2018, 2017 and 2016.
The following table presents reconciliations of the information reported by segment to the Company’s consolidated amounts reported for the years ended December 31, 2018, 2017 and 2016.
The Company had two major elements of the restructuring costs included in its consolidated financial statements, which were the Operational Improvement Program and the Business Restructure Program. Costs for each program were fully accrued and completed by the end of 2017 and 2016, respectively. No additional costs for either program were incurred during 2018.
The Company recognized restructuring costs of $134 million and $145 million for the years ended December 31, 2017 and 2016, respectively, related to the Operational Improvement Program. The Company spent a cumulative amount of $441 million on restructuring costs for this program.
Business Restructure Program - In the second quarter of 2016, we began planning targeted staffing reductions in certain portions of the business due to a reduction in business demand or change in business focus (hereinafter referred to as the Business Restructure Program). The main element of the program included workforce reductions, and was completed in 2016, however, cash payments pertaining to the program were made primarily in 2017. During the year ended December 31, 2017, the Company recognized a $2 million reversal of expense related to an estimate of previously incurred termination benefits. The Company recognized restructuring costs of $48 million for the year ended December 31, 2016.
The changes in the Company’s liability under the Business Restructure Program from its commencement to December 31, 2018, are as follows:
While the measurement period under SAB 118 is now closed, the Company may in future periods need to further refine its U.S. federal and state calculations related to U.S. Tax Reform as the taxing authorities provide additional guidance and
Bonus Depreciation - The Company completed its determination of all capital expenditures that qualify for immediate expensing. For the year ended December 31, 2017, the Company recorded a provisional deduction of $40 million based on its current intent to fully expense all qualifying expenditures. This resulted in an increase of approximately $14 million to the Company's U.S. federal current income taxes receivable and a corresponding increase in its net deferred tax liabilities of approximately $14 million. However, as a result of further analysis on assets placed in service after September 27, 2017, the Company concluded its tax deduction to be $8 million. The tax benefit was reflected on the Company’s 2017 U.S. federal corporate income tax return filed on October 12, 2018. The effect of the measurement-period adjustment on the 2018 effective tax rate is included in the reduction of the federal corporate tax rate above.
Included in the changes in valuation allowance for 2018, the Company recorded a deferred income tax benefit for approximately $71 million related to the valuation allowance release of certain state deferred tax assets.
In 2017, in connection with our initial analysis of U.S. Tax Reform, the Company recorded a provisional net tax benefit of $204 million, which consisted of a net benefit of $208 million due to the reduction of the federal corporate tax rate and re-measurement of our net U.S. deferred tax liabilities primarily related to acquisition-based intangibles, and a $76 million benefit related to the release of a deferred tax liability we had previously recorded on the accumulated earnings of certain Towers Watson subsidiaries. These net benefit items were offset by provisional expenses of $8 million recognized as a write-off of a deferred tax asset the Company had previously recorded on executive compensation as well as the U.S. federal and state income tax expense of $72 million associated with the one-time transition tax on foreign earnings of our subsidiaries.
At December 31, 2018, we had U.S. federal and non-U.S. net operating loss carryforwards amounting to $288 million of which $239 million can be indefinitely carried forward under local statutes. The remaining $49 million of net operating loss carryforwards will expire, if unused, in varying amounts from 2019 through 2038. In addition, we had U.S. state net operating loss carryforwards of $515 million, which will expire in varying amounts from 2019 to 2038.
The liability for unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016 can be reduced by $2 million, $3 million and $4 million, respectively, of offsetting deferred tax benefits associated with timing differences, foreign tax credits and the federal tax benefit of state income taxes. If these offsetting deferred tax benefits were recognized, there would have been a favorable impact on our effective tax rate. There are no material balances that would result in adjustments to other tax accounts.
Tax expense for the years ended December 31, 2018 and 2017 included immaterial interest benefits.
The Company believes that the outcomes which are reasonably possible within the next 12 months may result in a reduction in the liability for unrecognized tax benefits in the range of $1 million to $3 million, excluding interest and penalties.
The following table reflects changes in the net carrying amount of the components of fixed assets for the year ended December 31, 2018 and 2017:
Depreciation expense included here does not equal the depreciation expense on the statements of comprehensive income for the years ended December 31, 2018 and 2017 due to the inclusion of $5 million and $49 million, respectively, which have been classified as transaction and integration expenses.
The components of goodwill are outlined below for the years ended December 31, 2018 and 2017:
The following table reflects changes in the net carrying amounts of the components of finite-lived intangible assets for the year ended December 31, 2017:
We recorded amortization related to our finite-lived intangible assets, exclusive of the amortization of our favorable lease agreements, of $534 million, $581 million and $591 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table reflects the carrying values of finite-lived intangible assets and liabilities at December 31, 2018 and December 31, 2017:
The table below reflects the future estimated amortization expense for amortizable intangible assets and the rent offset resulting from amortization of the net lease intangible assets and liabilities for the next five years and thereafter:
As a result of its operating activities, the Company holds fiduciary funds. The Company earns interest on these funds, which is included in its consolidated financial statements in revenue. These funds are regulated in terms of access as are the instruments in which they may be invested, most of which are short-term in nature.
We also enter into foreign currency transactions, primarily to hedge certain intercompany loans. These derivatives are not generally designated as hedging instruments and at December 31, 2018 and December 31, 2017, we had notional amounts of $909 million and $971 million, respectively, and had a net fair value asset of $3 million at both December 31, 2018 and 2017.
The effects of derivatives that have not been designated as hedging instruments on the consolidated statements of comprehensive income for the years ended December 31, 2018, 2017 and 2016 are as follows:
All direct obligations under the 7.000%, 3.600%, 4.500% and 5.050% senior notes are issued by Willis North America Inc. and guaranteed by Willis Towers Watson and each of the subsidiaries that guarantees the Company notes, except for Willis North America Inc. itself.
All direct obligations under the 4.625%, 6.125%, 3.500%, 4.400%, and 2.125% senior notes are issued by Trinity Acquisition plc and guaranteed by Willis Towers Watson and each of the subsidiaries that guarantees the Company notes, except for Trinity Acquisition plc itself. See Note 22 - Financial Information for Issuers and Other Guarantor Subsidiaries.
On March 7, 2017, Trinity Acquisition plc (see Note 22 for further information) entered into a $1.25 billion amended and restated revolving credit facility (the ‘RCF’), that will mature on March 7, 2022. The RCF replaced the previous $800 million revolving credit facility (see below for further information). Amounts outstanding under the RCF shall bear interest at LIBOR plus a margin of 1.00% to 1.75%, or alternatively, the base rate plus a margin of 0.00% to 0.75%, based upon the Company’s guaranteed senior unsecured long-term debt rating.
In September 2009, Willis North America Inc. issued $300 million of 7.000% senior notes due 2019. The effective interest rate of these senior notes is 7.081%, which includes the impact of the discount upon issuance. A portion of the proceeds were used to repurchase and redeem other previously-issued senior notes. In August 2013, $113 million of the 7.000% senior notes due 2019 were repurchased.
Additional Information Regarding Fully Repaid Revolving Credit Facility, Term Loan Facilities and Senior Notes
In March 2011, the Company issued $300 million of 4.125% senior notes due 2016. The effective interest rate of the senior notes was 4.240%, which included the impact of the discount upon issuance. The proceeds were used to repurchase and redeem other previously issued senior notes. The 4.125% senior notes were repaid in March 2016.
On March 28, 2007, we issued $600 million of 10-year senior notes at 6.200%. The effective interest rate of these senior notes was 6.253%. In August 2013, $206 million of the 6.200% senior notes was repurchased. The final balance was repaid on March 28, 2017 from the RCF as discussed above.
The following table summarizes the maturity of our debt, interest on senior notes and excludes any reduction for debt issuance costs:
Other primarily includes debt issuance costs, interest expense on capitalized leases and accretion on deferred and contingent consideration.
Level 2: refers to fair values estimated using observable market-based inputs or unobservable inputs that are corroborated by market data; and
Market values for our derivative instruments have been used to determine the fair values of interest rate swaps and forward foreign exchange contracts based on estimated amounts the Company would receive or have to pay to terminate the agreements, taking into account observable information about the current interest rate environment or current foreign currency forward rates. Such financial instruments are classified as Level 2 in the fair value hierarchy.
The following tables present our assets and liabilities measured at fair value on a recurring basis at December 31, 2018 and December 31, 2017:
See Note 10 - Derivative Financial Instruments for further information on our derivative instruments.
Probability weightings are based on our knowledge of the past and planned performance of the acquired entity to which the contingent consideration applies. The weighted-average discount rates used on our material contingent consideration calculations were 9.92% and 9.64% at December 31, 2018 and December 31, 2017, respectively. Using different probability weightings and discount rates could result in an increase or decrease of the contingent consideration payable.
The following table summarizes the change in fair value of the Level 3 liabilities:
The following tables present our liabilities not measured at fair value on a recurring basis at December 31, 2018 and 2017:
Netherlands (Legacy Towers Watson) - This plan was terminated during the year ended December 31, 2018. Benefits under the plan accrued on a final pay basis on earnings up to a maximum amount each year, however this accrual stopped at December 31, 2010. The accrued benefits received conditional indexation each year prior to the plan termination.
The following table presents the projected benefit obligation and fair value of plan assets for our plans that have a projected benefit obligation in excess of plan assets as of December 31, 2018 and 2017:
The following table presents the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for our plans that have an accumulated benefit obligation in excess of plan assets as of December 31, 2018 and 2017.
As a result of adopting ASU 2017-07, within the consolidated statements of comprehensive income, service cost is included within salaries and benefits expense. The remainder of the components of net periodic benefit income of $280 million, $222 million and $203 million for the years ended December 31, 2018, 2017 and 2016, respectively, are included within other income, net. These reclassifications include amounts for those plans which are immaterial for disclosure.
During the years ended December 31, 2018 and 2017, as a result of past changes in UK legislation and the low interest rate environment, the amount of transfer payments from the Legacy Willis UK pension plan exceeded the plan’s service and interest cost. This triggers settlement accounting which requires immediate recognition of a portion of the obligations associated with the plan transfers. Consequently, the Company recognized a non-cash expense of $40 million and $36 million for the years ended December 31, 2018 and 2017, respectively.
The estimated net actuarial loss and prior service credit for the defined benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are:
The Company considers several factors prior to the start of each fiscal year when determining the appropriate annual assumptions, including economic forecasts, relevant benchmarks, historical trends, portfolio composition and peer company comparisons. These assumptions, used to determine our pension liabilities and pension expense, are reviewed annually by senior management and changed when appropriate. A discount rate will be changed annually if underlying rates have moved, whereas an expected long-term return on assets will be changed less frequently as longer term trends in asset returns emerge or long-term target asset allocations are revised. To calculate the discount rate, we use the granular approach to determining service and interest costs. The expected rate of return assumptions for all plans are supported by an analysis of the weighted-average yield expected to be achieved based upon the anticipated makeup of the plans’ investments. Other material assumptions include rates of participant mortality, and the expected long-term rate of compensation and pension increases.
The following assumptions were used in the valuations of Willis Towers Watson’s defined benefit pension plans and PRW plan. The assumptions presented for the U.S. plans represent the weighted-average of rates for all U.S. plans. The assumptions presented for the U.K. plans represent the weighted-average of rates for the U.K. plans. The assumptions presented for the Other plans represent the weighted-average of rates for the Canada, France, Germany, Ireland, and Netherlands plans. The Netherlands plan is excluded from the 2018 disclosures due to the plan termination during the year.
The assumptions used to determine net periodic benefit cost for the fiscal years ended December 31, 2018, 2017, and 2016 were as follows:
The expected return on plan assets was determined on the basis of the weighted-average of the expected future returns of the various asset classes, using the target allocations shown below. The Company’s pension plan asset target allocations as of December 31, 2018 were as follows:
The Legacy Willis plan in Germany is invested in insurance contracts. Consequently, the asset allocations of the plans are managed by the respective insurer. The Legacy Gras Savoye plan in France is unfunded.
The fair values of our U.K. plan assets by asset category at December 31, 2018 and 2017 are as follows:
Our PRW plan invests only in short-term investments and mutual funds and is not included within this fair value hierarchy table.
Insurance contracts: The fair values are determined using model-based techniques that include option-pricing models, discounted cash flow models and similar techniques.
The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the fiscal year ended December 31, 2018:
The Legacy Towers Watson U.K. pension plan has a money purchase component to which we make core contributions plus additional contributions matching those of the participants up to a maximum rate. Contribution rates depend on the age of the participant and whether or not they arise from salary sacrifice arrangements through which the participant has elected to receive a pension contribution in lieu of additional salary.
We had defined contribution plan expense for the years ended December 31, 2018, 2017, and 2016 amounting to $150 million, $154 million and $152 million, respectively.
The Company leases certain land, buildings and equipment under various operating lease commitments. The total amount of the minimum rent is expensed on a straight-line basis over the term of the lease. Rental expenses and sub-lease rental income for operating leases are recorded as part of other operating expenses in the consolidated statements of comprehensive income. Rental expense, exclusive of sublease income, was $295 million, $302 million, and $302 million for the years ended December 31, 2018, 2017 and 2016, respectively. We have entered into sublease agreements for some of our excess leased space. Sublease income was $15 million, $21 million and $17 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company has deferred and contingent consideration due to be paid on existing acquisitions until 2021 totaling $83 million at December 31, 2018. Most notably, our liabilities for the acquisitions of Alston Gayler and Miller Insurance Services LLP in December 2018 and May 2015, respectively, for which deferred and contingent consideration, including interest, was $73 million at December 31, 2018. Total deferred and contingent consideration paid during the year ended December 31, 2018 was $50 million.
Additionally, the Company has capital commitments with Trident V Parallel Fund, LP, an investment fund managed by Stone Point Capital, and Dowling Capital Partners I, LP. At December 31, 2018, the Company is obligated to make capital contributions of approximately $2 million, collectively, to these funds.
Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance. See Note 15 - Supplementary Information for Certain Balance Sheet Accounts for the amounts accrued at December 31, 2018 and December 31, 2017 in the consolidated balance sheets. 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.
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, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and disputes with insurance companies, it is possible that an adverse outcome or settlement in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods. In addition, given the early stages of some litigation or regulatory proceedings
described below, it is not possible to predict their outcome or resolution, and it is possible that these events may have a material adverse effect on the Company.
On November 21, 2017, a purported former stockholder of Legacy Towers Watson filed a putative class action complaint on behalf of a putative class consisting of all Legacy Towers Watson stockholders as of October 2, 2015 against the Company, Legacy Towers Watson, Legacy Willis, ValueAct Capital Management (‘ValueAct’), and certain current and former directors and officers of Legacy Towers Watson and Legacy Willis (John Haley, Dominic Casserley, and Jeffrey Ubben), in the United States District Court for the Eastern District of Virginia. The complaint asserted claims against certain defendants under Section 14(a) of the Securities Exchange Act of 1934 (the ‘Exchange Act’) for allegedly false and misleading statements in the proxy statement for the Merger; and against other defendants under Section 20(a) of the Exchange Act for alleged ‘control person’ liability with respect to such allegedly false and misleading statements. The complaint further contended that the allegedly false and misleading statements caused stockholders of Legacy Towers Watson to accept inadequate Merger consideration. The complaint sought damages in an unspecified amount. On February 20, 2018, the court appointed the Regents of the University of California (‘Regents’) as Lead Plaintiff and Bernstein Litowitz Berger & Grossman LLP (‘Bernstein’) as Lead Counsel for the putative class, consolidated all subsequently filed, removed, or transferred actions, and captioned the consolidated action ‘In re Willis Towers Watson plc Proxy Litigation,’ Master File No. 1:17-cv-1338-AJT-JFA. On March 9, 2018, Lead Plaintiff filed an Amended Complaint. On April 13, 2018, the defendants filed motions to dismiss the Amended Complaint, and, on July 11, 2018, following briefing and argument, the court granted the motions and dismissed the Amended Complaint in its entirety. On July 30, 2018, Lead Plaintiff filed a notice of appeal from the court’s July 11, 2018 dismissal order to the United States Court of Appeals for the Fourth Circuit, and, on December 6, 2018, the parties completed briefing on the appeal.
Troice, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:9-CV-1274-N, was filed on July 2, 2009 in the U.S. District Court for the Northern District of Texas against Willis Group Holdings plc, Willis of Colorado, Inc. and a Willis associate, among others. On April 1, 2011, plaintiffs filed the operative Third Amended Class Action Complaint individually and on behalf of a putative, worldwide class of Stanford investors, adding Willis Limited as a defendant and alleging claims under Texas statutory and common law and seeking damages in excess of $1 billion, punitive damages and costs. On May 2, 2011, the defendants filed motions to dismiss the Third Amended Class Action Complaint, arguing, inter alia, that the plaintiffs’ claims are precluded by the Securities Litigation Uniform Standards Act of 1998 (‘SLUSA’).
Rupert, et al. v. Winter, et al., Case No. 2009C115137, was filed on September 14, 2009 on behalf of 97 Stanford investors against Willis Group Holdings plc, Willis of Colorado, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). The complaint alleges claims under the Securities Act of 1933, Texas and Colorado statutory law and Texas common law and seeks special, consequential and treble damages of more than $300 million, attorneys’ fees and costs. On October 20, 2009, certain defendants, including Willis of Colorado, Inc., (i) removed Rupert to the U.S. District Court for the Western District of Texas, (ii) notified the JPML of the pendency of this related action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. On April 1, 2010, the JPML issued a final transfer order for the transfer of Rupert to the Northern District of Texas. On January 24, 2012, the court remanded Rupert to Texas state court (Bexar County), but stayed the action until further order of the court. On August 13, 2012, the plaintiffs filed a motion to lift the stay, which motion was denied by the court on September 16, 2014. On October 10, 2014, the plaintiffs appealed the court’s denial of their motion to lift the stay to the U.S. Court of Appeals for the Fifth Circuit. On January 5, 2015, the Fifth
Florida suits: On February 14, 2013, five lawsuits were filed against Willis Group Holdings plc, Willis Limited and Willis of Colorado, Inc. in Florida state court (Miami-Dade County), alleging violations of Florida common law. The five suits are: (1) Barbar, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05666CA27, filed on behalf of 35 Stanford investors seeking compensatory damages in excess of $30 million; (2) de Gadala-Maria, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05669CA30, filed on behalf of 64 Stanford investors seeking compensatory damages in excess of $83.5 million; (3) Ranni, et ano. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05673CA06, filed on behalf of two Stanford
investors seeking compensatory damages in excess of $3 million; (4) Tisminesky, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05676CA09, filed on behalf of 11 Stanford investors seeking compensatory damages in excess of $6.5 million; and (5) Zacarias, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05678CA11, filed on behalf of 10 Stanford investors seeking compensatory damages in excess of $12.5 million. On June 3, 2013, Willis of Colorado, Inc. removed all five cases to the Southern District of Florida and, on June 4, 2013, notified the JPML of the pendency of these related actions. On June 10, 2013, the court in Tisminesky issued an order sua sponte staying and administratively closing that action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation and coordination with the other Stanford-related actions. On June 11, 2013, Willis of Colorado, Inc. moved to stay the other four actions pending the JPML’s transfer decision. On June 20, 2013, the JPML issued a conditional transfer order for the transfer of the five actions to the Northern District of Texas, the transmittal of which was stayed for seven days to allow for any opposition to be filed. On June 28, 2013, with no opposition having been filed, the JPML lifted the stay, enabling the transfer to go forward.
On March 31, 2016, the Company entered into a settlement in principle for $120 million relating to this litigation, and increased its provisions by $50 million during that quarter. Further details on this settlement in principle are given below.
On or about August 31, 2016, the parties to the settlement signed a formal Settlement Agreement memorializing the terms of the settlement as originally set forth in the Settlement Term Sheet. The parties to the Settlement Agreement are Ralph S. Janvey (in his capacity as the Court-appointed receiver (the ‘Receiver’) for The Stanford Financial Group and its affiliated entities in receivership (collectively, ‘Stanford’)), the Official Stanford Investors Committee, Samuel Troice, Martha Diaz, Paula Gilly-Flores, Punga Punga Financial, Ltd., Manuel Canabal, Daniel Gomez Ferreiro and Promotora Villa Marina, C.A. (collectively, ‘Plaintiffs’), on the one hand, and Willis Towers Watson Public Limited Company (formerly Willis Group Holdings Public Limited Company), Willis Limited, Willis North America Inc., Willis of Colorado, Inc. and the Willis
On September 7, 2016, Plaintiffs filed with the Court a motion to approve the settlement. On October 19, 2016, the Court preliminarily approved the settlement. Several of the plaintiffs in the other actions above objected to the settlement, and a hearing to consider final approval of the settlement was held on January 20, 2017, after which the Court reserved decision. On August 23, 2017, the Court approved the settlement, including the bar orders. Several of the objectors appealed the settlement approval and bar orders to the Fifth Circuit. The briefing related to the appeals is now completed and oral argument on the appeals was heard on December 3, 2018. There is no date certain for when the appeals will be decided.
On August 1, 2014, the City of Houston (‘plaintiff’) filed suit against Legacy Towers Watson in the United States District Court for the Southern District of Texas, Houston Division. On March 8, 2016, plaintiff filed its First Amended Complaint.
In May 2014, the court denied the motions to dismiss filed by CalPERS and Towers Perrin addressed to the sufficiency of the complaint. On January 28, 2016, the court granted plaintiffs’ motion for class certification. The certified class as currently defined includes those long term care policy holders whose policies were ‘subject to’ the 85% Increase. The court thereafter set an October 2, 2017 trial date.
On March 1, 2017, Towers Perrin and Plaintiffs participated in a mediation and reached a settlement in principle. Pursuant to the settlement in principle, in exchange for a dismissal of the claims of all class members and a release of Towers Perrin by all class members, Towers Perrin would pay a total of $9.75 million into an interest-bearing settlement fund, to be used to reimburse class counsel's costs, and for later distribution to class members as approved by the Court. This proposed settlement amount was accrued during the three months ended March 31, 2017. At the hearing on final approval held on January 26, 2018, the Court granted final approval of the settlement. Class members who properly objected to the settlement had standing to appeal by April 9, 2018. No class members filed an appeal and, therefore, the judgment is now final.
The settlement amount of $9.75 million was paid on June 5, 2018.
In May 2018, the Korea Fair Trade Commission (‘KFTC’) disclosed to us that it is investigating alleged cartels in the insurance broking industry. The KFTC has since requested information related to, among other topics, the aviation and aerospace insurance brokerage market and exchanges of information between brokers about insurance policies.
In January 2019, the Brazil Conselho Administrativo de Defesa Economica (‘CADE’) launched an administrative proceeding to investigate alleged sharing of competitive and commercially sensitive information in the insurance and reinsurance brokerage industry for aviation and aerospace and related ancillary services. The CADE identified 11 entities under investigation, including Willis Group Limited, one of our U.K. subsidiaries.
individual firms on a number of related issues and would continue to assess specific firms’ compliance with regulatory obligations, including conflict of interest, as part of its normal supervisory function.
Beginning in 2018, the Company retrospectively reclassified the pre-tax effect of its interest in earnings of associates from its own line item to other income, net within its consolidated statements of comprehensive income.
Changes in the components of accumulated other comprehensive loss, net of tax, are included in the following table. This table excludes amounts attributable to non-controlling interests, which are not material for further disclosure.
On December 31, 2018, the Company had a number of open share-based compensation plans, which provide for the grant of time-based and performance-based options, time-based and performance-based restricted stock units, and various other share-based grants to employees. All of the Company’s share-based compensation plans under which any options, restricted stock units (‘RSUs’) or other share-based grants are outstanding as of December 31, 2018 are described below. The compensation cost that has been recognized for these plans for the years ended December 31, 2018, 2017 and 2016 was $50 million, $67
million and $123 million, respectively. The total income tax benefits recognized in the consolidated statements of comprehensive income for share-based compensation arrangements for the years ended December 31, 2018, 2017, and 2016 were $10 million, $22 million and $35 million, respectively.
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 RSUs, performance-based awards and other share-based grants or any combination thereof (collectively referred to as ‘Awards’) to employees, officers, non-employee directors and consultants (‘Eligible Individuals’) of the Company (‘2012 Plan’). The board of directors also adopted a sub-plan under the 2012 plan to provide an employee sharesave scheme in the U.K.
In January 2016, in connection with the Merger, we assumed the Towers Watson & Co. 2009 Long-Term Incentive Plan (‘LTIP’) and converted the outstanding unvested restricted stock units and options into Willis Towers Watson RSUs and options using a conversion ratio stated in the Merger Agreement. We determined the fair value of the portion of the outstanding RSUs and options related to pre-acquisition employee service using the straight-line methodology from the date of grant to the acquisition date to be $37 million, which was added to the transaction consideration. The fair value of the remaining portion of RSUs and options related to the post-acquisition employee services was $45 million, and was recorded over the subsequent vesting periods. For the years ended December 31, 2018, 2017 and 2016, we recorded $3 million, $11 million and $31 million of non-cash stock based compensation expense, respectively.
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s shares. The Company uses the simplified method set out in ASC 718 - Compensation - Stock Compensation to derive the expected term of options granted as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions noted in the table below represent the weighted-average of each assumption for each grant during the year.
The weighted-average grant-date fair values of time-based options granted during the years ended December 31, 2017 and 2016 were $27.69 and $16.88, respectively. The total intrinsic values of time-based options exercised during the years ended December 31, 2018, 2017 and 2016 were $12 million, $19 million and $25 million, respectively. At December 31, 2018, there was $1 million of total unrecognized compensation cost under the time-based stock option plans; that cost is expected to be recognized over a weighted-average period of less than one year.
The total intrinsic values of performance-based options exercised during the years ended December 31, 2018, 2017 and 2016 were $8 million, $10 million and $9 million, respectively. At December 31, 2018, there is no unrecognized compensation cost related to the performance-based stock option plans.
Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2018, 2017 and 2016 was $45 million, $61 million and $63 million, respectively. The actual tax benefit recognized for the tax deductions from option exercises of the share-based payment arrangements totaled $4 million, $7 million and $6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
A summary of time-based and performance-based RSU activity under the plans at December 31, 2018, and changes during the year then ended, is presented below:
The total number of time-based RSUs that vested during the year ended December 31, 2018 was 164,728 shares at an average share price of $156.14. The total number of time-based RSUs that vested during the year ended December 31, 2017 was 178,574 shares at an average share price of $150.81. The total number of time-based RSUs that vested during the year ended December 31, 2016 was 459,838 shares at an average share price of $120.42. At December 31, 2018 there was $2 million of total unrecognized compensation cost related to the time-based RSU plan; that cost is expected to be recognized over a weighted-average period of 1.4 years.
There were no anti-dilutive options for the years ended December 31, 2018 and 2017. Options to purchase 0.5 million shares for the year ended December 31, 2016 were not included in the computation of the dilutive effect of stock options because their effect was anti-dilutive. For the year ended December 31, 2018, 0.2 million RSUs were not included in the computation of the dilutive effect of potentially issuable shares because their effect was anti-dilutive. There were no anti-dilutive RSUs for the years ended December 31, 2017 and 2016.
Willis Towers Watson plc (the parent company) has $500 million senior notes outstanding, which were issued on March 15, 2016;
The notes issued by Willis North America are guaranteed on a joint and several basis by the Company and each of the subsidiaries that guarantees the Company notes, except for Willis North America itself.
For the purposes of this footnote, the companies that guarantee the Company notes, the Willis North America notes and the Trinity Acquisition plc notes, other than Willis North America and Trinity Acquisition plc, are referred to as the ‘other guarantors.’
The presentation of the financial information for issuers and other guarantor subsidiaries has been changed from prior filings in that the three previously disclosed separate notes that presented the three different issuer and related guarantor scenarios have been combined into one note. This new presentation still includes all of the financial information of the appropriate issuing and guarantor entities, with some immaterial reclassifications from what had been previously disclosed for each entity. We believe that this presentation will help to reduce the complexity of the information and offer a more meaningful analysis for the reader.
Willis Towers Watson plc, which is both an issuer and guarantor, on a parent company only basis;
Other guarantors, which are all wholly owned direct or indirect subsidiaries of the parent, on a combined basis;
Non-guarantors, which are all wholly owned direct or indirect subsidiaries of the parent, on a combined basis;