•charges relating to claims and costs associated with the government initiated review of personal pension plans sold between 1988 and 1994 of $40 million for the year ended December 31, 1999.
(b)As an intermediary, we hold funds in a fiduciary capacity for the account of third parties, typically as a result of premiums received from clients that are in transit to insurance carriers and claims due to clients that are in transit from insurance carriers. We report premiums, which are held on account of, or due from policyholders, as assets with a corresponding liability due to the insurance carriers. Claims held by, or due to, us which are due to clients are also shown as both assets and liabilities of ours. All those balances due or payable are included in insurance and reinsurance balances receivable and payable on the balance sheet. We earn interest on those funds during the time between the receipt of the cash and the time the cash is paid out. Fiduciary cash must be kept in certain regulated bank accounts subject to guidelines, which generally emphasize capital preservation and liquidity and is not generally available to service our debt or for other corporate purposes.
Net income per diluted share in 2003 was up 91% over 2002 on a reported basis and 41% if adjusted for non-cash compensation charges for performance-based stock options and a one-time UK income tax benefit as described below.
From the late 1980s through late 2000, insurance premium rates generally trended downwards as a result of a number of factors, including the expanded underwriting capacity of insurance carriers; consolidation of both insurance intermediaries and insurance carriers; and increased competition among insurance carriers. Following several years of underwriting losses, the falls in world equity markets and lower interest rates, many insurance carriers began to increase premium rates in 2000. The tragic events of September 11, 2001 acted as a catalyst, especially in areas such as aerospace, and rates generally continued to rise through 2003.
The Company's accounting policies are described in Note 2 to the consolidated financial statements. Management considers that the following accounting estimates or assumptions are the most important to the presentation of the Company's financial condition or operating performance.
We maintain defined benefit pension plans that cover almost all our employees in the US and UK. Elsewhere, pension benefits are typically provided through defined contribution plans. The key assumptions in determining pension expense for the defined benefit plans are the expected long-term rate of return on plan assets, the expected long-term rate of compensation increase and the discount rate applicable to the plan liabilities.
Net pension expense for our defined benefit pension plans in 2003 was $18 million compared with $2 million in 2002 and a credit of $6 million in 2001. We expect our pension expense in 2004 will
At December 31, 2003, the Company had gross deferred tax assets of $308 million (2002: $302 million) against which a valuation allowance of $114 million (2002: $100 million) had been recognized. To the extent that the actual future taxable income in the periods during which the temporary differences are expected to reverse differs from current projections, or assumed prudent and feasible tax planning strategies fail to materialize, or new tax planning strategies are developed, or material changes occur in actual tax rates or loss carry forward time limits, the Company may adjust the deferred tax asset considered realizable in future periods. Such adjustments could result in a significant increase or decrease in the effective tax rate and have a material impact on our net income, although management does not believe that this is likely.
During 2003, several long-outstanding contingencies were either resolved or moved closer to final resolution. As we have previously reported, we were required by the UK Financial Services Authority, in common with many other companies selling personal pension plans in the UK, to review certain categories of personal pensions sold by a former subsidiary of ours between 1988 and 1994. This review was substantially completed in 2003 and we also reached agreement with some of our insurers for a partial recovery of cost incurred in the review. The cost of the review was within the provision established.
We continue to fund the run-off administration costs of our former UK underwriting operations, which ceased underwriting in 1991. Towards the end of 2003, the amounts previously committed to funding the run-off were exhausted. We are continuing to fund the run-off costs and, pending final resolution of this matter with the various parties involved, have increased the provisions for future costs.
At the date of our merger with Corroon & Black in 1990 a provision was established in respect of a former US underwriting subsidiary that was sold in 1986 and put into liquidation in 1994. During 2003 we reached a full and final settlement with the liquidators.
Global: Revenues generated by our Global business increased by 25% to $1,018 million in 2003. Approximately 9% of the increase in revenues arose from the effects of foreign currency exchange rate movements. The effect of acquisitions and disposals was not significant. Adjusting for these effects, revenues on an underlying basis increased by 16%. All business units, Global Specialties, Global Markets, Willis Reinsurance and Willis UK contributed to this growth, continuing to work closely with North America and International business units to leverage UK-based capabilities and resources throughout the distribution network.
In the comparison above, revenues previously reported for 2002 have been restated (Global revenue decreased and North America revenue increased) by $80 million to reflect changes in the Company's reporting structure effective from January 1, 2003.
General and administrative expenses (excluding non-cash compensation for performance-based stock options) were $1,408 million for 2003, up 16% from 2002. Approximately 6% of the reported increase in general and administrative expenses was attributable to foreign currency exchange rate movements and approximately (3)% was attributable to the effect of acquisitions and disposals. Adjusting for these items, general and administrative expenses grew by 13% in 2003 compared with 2002.
Most of this increase was attributable to salaries and benefits, including incentive-based compensation, and reflects the increased number of employees. Salaries and benefits, including incentive-based compensation, amounted to 50% of revenues in 2003, the same proportion as in 2002. Depreciation expense increased in 2003 compared with 2002 and we expect this trend will continue in 2004 due to the ongoing investment in our global systems.
North America: Revenues generated by our North America business increased by 16% to $585 million in 2002. The acquisition of Goldman and the disposal of the third-party administration units had a (1)% impact on revenues. Adjusting for these items, North America's revenues increased by 17% on an underlying basis. Middle market and upper middle market experienced significant premium rate increases across all lines.
International: Revenues generated by our International business increased by 46% to $258 million in 2002. Approximately 25% of the increase arose from our increased investment in Willis GmbH, which resulted in its full consolidation as a subsidiary from January 1, 2002, and other acquisitions. The impact of foreign currency exchange rate movements was not significant. Adjusting for these acquisitions, International's revenues increased by 21% on an underlying basis, led by good performance in Continental Europe, Eastern Hemisphere (especially Australia) and Latin America. Many new business wins resulted from coordinated efforts with our Global specialty businesses.
Since 2001, our results have been impacted by non-cash compensation charges for performance-based stock options. These options were granted to management as part of the leveraged buyout in 1998 for meeting or exceeding specified performance targets for the years ended December 31, 2001 and 2002. The actual results for those years exceeded the specified performance targets and, accordingly, all the outstanding performance options were earned in full.
These performance options are accounted for under the variable plan method, which required us to record non-cash compensation charges commencing from the third quarter of 2001, the quarter in which it became probable that the performance targets would be met. As a result, we recorded a non-cash compensation charge of $158 million ($132 million, net of tax) in 2001 and a further $80 million ($67 million, net of tax) in 2002. These charges were based on the difference between the price of our stock at the respective year-ends and the exercise price, with the total cost being spread in accordance with the vesting schedule through the end of 2004.
We recorded a further $20 million ($14 million, net of tax) in 2003 based on the vesting schedule and the stock price at the end of the performance period on December 31, 2002 of $28.67.
On a cumulative basis at the end of 2003, we had recognized $258 million, or approximately 95% of the estimated total charge. The remaining charge of approximately $15 million will be recognized quarterly in accordance with the vesting schedule through the end of 2004, when substantially all the performance options will have vested.
In April 2003, we disposed of the retail property and casualty and employee benefits operations based in Salt Lake City, Utah, recognizing a gain on disposal of $3 million. In June 2003, we disposed of the remaining 49% interest in Buck & Willis Healthcare Limited, a small healthcare specialist in the UK, recognizing a $2 million gain on disposal. In July 2003, we disposed of our office in Chattanooga, Tennessee, recognizing a $5 million gain on disposal.
In June 2002, we sold Safety Solutions, a small health and safety consulting business in the UK, recognizing a $1 million loss on disposal. In November 2002, we completed the sale of our life and health third-party administration unit, based in Nashville, Tennessee, and Wichita, Kansas, recognizing a gain on disposal of $14 million.
In July 2001, we sold our 51% interest in Willis National, a UK-based independent financial advisor, recognizing a gain on disposal of $22 million. In December 2001, we incurred a $5 million loss, including a net goodwill write-off of $3 million, on restructuring Willis Italia Holdings S.p.A., which involved the disposal of part of that business in exchange for an increase in our ownership of the remainder from 50.1% to 67%.
Interest expense in 2003 was $53 million compared with $65 million in 2002 and $82 million in 2001, reflecting lower principal amounts of debt outstanding during the three-year period following early repayment of term loans under our senior credit facilities and the repurchase in the open market, and subsequent cancellation, of senior subordinated notes.
Following repayment of all the outstanding senior subordinated notes in February 2004, we expect interest expense in 2004 will be approximately one-third of the 2003 interest expense, although this depends on the level of future interest rates and the extent of hedging entered into. In addition, 2004 will include a $17 million expense for the premium payable on redemption of the notes and related fees.
Income tax expense for 2003 amounted to $159 million, an effective rate of 28%. In the third quarter of 2003, certain changes to UK tax legislation were enacted regarding the taxation of employee stock options. When UK-based employees exercise their stock options, the Company now obtains a corporate tax deduction equal to the market price of the Company's shares on the date of exercise less the option exercise price paid by the employee. This change largely brings UK tax legislation into line with US tax legislation. Non-cash compensation amounting to $116 million in respect of UK performance options had been expensed in periods prior to January 1, 2003 without any income tax benefit being recognized. Accordingly, following the change in UK tax legislation, a one-time income tax benefit of $35 million, and a corresponding deferred asset, was recognized in 2003.
Adjusting for the one-time income tax benefit arising from the change in UK tax legislation, that part of the non-cash performance option charge which is not tax deductible and the net gain on disposal of operations, the underlying tax rate for 2003 was 34%.
Income tax expense for 2001 amounted to $62 million, an effective rate of 78%. This exceptionally high rate arose because tax deductions were not available for approximately 60% of the non-cash performance options charge and 100% of the goodwill amortization charge. Also, during 2001, there was a tax credit of $11 million which arose from the restructuring of certain subsidiary companies. Adjusting for these items, and the $6 million tax charge which arose from the disposal of operations, the underlying tax rate for 2001 was 36%.
Net income in 2003 increased by 97% to $414 million ($2.45 per diluted share) from $210 million ($1.28 per diluted share) in 2002 and from $2 million ($0.01 per diluted share) in 2001. Net income for
The average number of diluted shares outstanding for the fourth quarter of 2003 was 170 million, as calculated under the treasury stock method. We expect the average number of diluted shares will continue to trend upwards in 2004 depending on the number of share options exercised and our average stock price. We expect that the impact of the 4 million shares bought back in February 2004 on the average number of diluted shares outstanding for the first quarter of 2004 will be entirely offset by the impact of option exercises and higher prevailing average stock prices in the quarter.
In December 2003, we replaced our existing senior credit facilities with a new $600 million facility, consisting of a $450 million amortizing five-year term loan and a $150 million revolving credit facility. These new facilities are unsecured. Both the term loan and the revolving credit facility will bear interest at an initial rate of LIBOR plus 95 basis points, subject to adjustment based on future changes in interest coverage, leverage and credit ratings.
On February 2, 2004, we redeemed all the $370 million then outstanding of 9% Senior Subordinated Notes. To finance the repayment, we drew down $300 million of our new term loan facility with the remaining balance of $70 million and call premium of approximately $17 million being financed using cash from operations. Also in February 2004, we repurchased and cancelled 4 million shares of common stock at a cost of $148 million.
We will become subject to new regulations in the UK in January 2005 regarding fiduciary funds held by insurance intermediaries. These regulations will require fiduciary funds to be held in designated trust accounts, restrict the financial instruments in which such funds may be invested and affect the timing of transferring commissions from fiduciary funds to own funds.
We do not anticipate any material impact on revenues or net income from these new regulations although there may be some one-off costs associated with system changes, depending on the precise details of the final regulations. However, the new regulations will have the effect of deferring the withdrawal of commissions from fiduciary funds with a consequential increase in the balances held in fiduciary funds. We anticipate that the increase in fiduciary funds as a result of the new regulations will vary by between approximately $100 million and approximately $200 million in line with the seasonality of revenues. Own funds will decrease by an equivalent amount.
Net cash provided by operations, which excludes fiduciary cash movements, increased to $493 million in 2003 from $343 million in 2002 and $221 million in 2001. These increases were due mainly to increasing revenue and widening operating margins over the three-year period.
In February 2003, we declared an initial quarterly cash dividend of $0.125 per share; this was increased in July 2003 by 30% to $0.1625 per share, an annual rate of $0.65 per share. The cash dividends paid during 2003 amounted to $63 million. The quarterly cash dividend was increased in February 2004 by a further 15% to $0.1875 per share, an annual rate of $0.75 per share. At this rate, the expected annual cost of dividends payable in 2004 will be approximately $118 million. We have
As of December 31, 2003, we had cash and cash equivalents of $364 million, an increase of $153 million from December 31, 2002. We expect that internally generated funds will be sufficient to meet our foreseeable operating cash requirements, capital expenditures and dividend payments. In addition, as part of our new credit facilities, we have an undrawn $150 million revolving credit facility.
(1)Based on the earliest dates on which options could be exercised.
In addition, we have a call option to move to majority ownership under certain circumstances and in any event by 2009. Upon exercising this call option, the remaining Gras Savoye shareholders have a put.
To the Board of Directors and Stockholders of Willis Group Holdings Limited, Hamilton, Bermuda
We have audited the accompanying consolidated balance sheets of Willis Group Holdings Limited and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The financial statement schedule contained in Item 15 on page S-1 of this annual report is presented for the purpose of additional analysis and is not a required part of the consolidated financial statements. The financial statement schedule is the responsibility of the Company's management. Such schedule has been subjected to the auditing procedures applied in our audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the consolidated financial statements taken as a whole.
Business-Willis Group Holdings Limited ("Willis Group Holdings") and subsidiaries (collectively, the "Company") provide a broad range of value-added risk management consulting and insurance brokerage services, both directly and indirectly through its associates, to a diverse base of clients internationally. The Company provides specialized risk management advisory and other services on a global basis to clients in various industries, including the construction, aerospace, marine and energy industries. In its capacity as an advisor and insurance broker, the Company acts as an intermediary between clients and insurance carriers by advising clients on their risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance risk with insurance carriers through the Company's global distribution network. The Company also provides other value-added services.
Use of Estimates-The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the year. In the preparation of these consolidated financial statements, estimates and assumptions have been made by management concerning the selection of useful lives of fixed assets and intangible assets, provisions necessary for trade receivables and liabilities, the carrying value of investments, income tax valuation allowances and other similar evaluations. Actual results could differ from those estimates.
Short-Term Investments-The Company classifies all short-term investments as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standard ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. These securities are carried at fair market value, with unrealized gains and losses reported in other comprehensive income. Realized gains and losses on investments sold are included in net income and are derived using the specific identification method for determining the cost of securities.
Goodwill and other intangible assets-Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. The Company reviews goodwill for impairment annually and whenever facts or circumstances indicate that the carrying amounts may not be recoverable. As part of the evaluation the estimated future undiscounted cash flows associated with the underlying business operation are compared to the carrying amount of goodwill to determine if a write-down is required. If such an assessment indicates that the undiscounted future cash flows will not be recovered, the carrying amount is reduced to the estimated fair value. Acquired intangible assets are being amortized on a straight-line basis over their estimated useful life.
Derivative Financial Instruments-The Company uses derivative financial instruments for other than trading purposes to alter the risk profile of an existing underlying exposure. Interest rate swaps are used to manage interest risk exposures. Forward foreign currency exchange contracts are used to manage currency exposures arising from future income. The fair value of derivative contracts are recorded in other assets and other liabilities with changes in fair value of derivatives that qualify for hedge accounting recorded in other comprehensive income and changes in fair value of derivatives that do not qualify for hedge accounting recorded in general and administrative expenses. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings.
Accounting Changes and Recent Accounting Pronouncements-In January 2003, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). This Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. The Company has assessed the potential impact of FIN 46 and concluded that there is no impact to its financial position or results of operations.
A reconciliation table is provided to exclude the effect of goodwill amortization in accordance with the transitional disclosures relating to SFAS 142. Results for the years ended December 31, 2003 and 2002 have been prepared in accordance with SFAS 142.
Acquisitions-On January 1, 2003 the Company acquired the remaining 22% interest, in addition to the 78% already owned, in Willis GmbH, Germany's third largest insurance broker. The aggregate cash purchase price was $17 million, all of which was recorded as goodwill.
On January 1, 2003 the Company also acquired an additional 23% interest in Willis Iberia to add to the 54% already owned. The remaining 23% of Willis Iberia is owned by the Company's associate, Gras Savoye. The aggregate consideration was $38 million, which included $6 million of common shares. The Company has recorded goodwill of $35 million in relation to this acquisition. During 2003 the Company acquired further interests totalling 33% in Willis Italia to add to the 67% already owned taking its ownership to 100%. The aggregate consideration for these interests was $25 million, which included $5 million of common shares. The Company has recorded goodwill of $21 million in relation to these acquisitions.
During 2003, in addition to the acquisitions of Willis GmbH, Willis Iberia and Willis Italia the Company also acquired, or increased its investments in, a number of other businesses. The aggregate purchase price of these acquisitions approximated $14 million, inclusive of deferred payments amounting to $4 million and common shares of $1 million.
During 2002 and 2001, the Company acquired, or increased its investments in, a number of businesses. The aggregate purchase price of all acquisitions completed during 2002 and 2001 approximated $32 million and $25 million, respectively, inclusive of deferred payments amounting to $9 million in 2002.
Dispositions-Total proceeds relating to 2003 dispositions of subsidiaries and associates amounted to $16 million, inclusive of deferred proceeds amounting to $2 million, with a gain of $11 million recorded in the consolidated statement of operations.
In November 2002, the Company completed the sale of its Life and Health third-party administration business. The gain on disposal of $14 million included a goodwill write off of $3 million and has been recorded in the statement of operations. Total proceeds relating to other disposals in 2002 were not material.
In July 2001, the Company completed the sale of its 51% interest in Willis National Holdings Limited. The gain on disposal amounted to $22 million and has been recorded in the statement of operations. In December 2001, the Company completed a restructuring of Willis Italia Holdings S.p.A. in which a subsidiary of that entity was disposed of in exchange for an increase in the Company's investment in Willis Italia Holdings S.p.A. from 50.1% to 67%. The loss on disposal of $5 million included a net goodwill write-off of $3 million.
(1)In 2003, certain changes to UK tax legislation were enacted regarding the taxation of employee stock options. When UK-based employees exercise their stock options, the Company now obtains a corporate tax deduction equal to the market price of the Company's shares on the date of exercise less the option exercise price paid by the employee. This change largely brings UK tax legislation into line with US tax legislation.
(1)Includes the income tax benefit of $35 million arising from the changes in UK tax legislation referred to above.
(1)On January 1, 2004, the Company acquired the remaining 70% in Willis A/S (see Note 20). Of those listed above, the Company's principal investment as of December 31, 2003 and 2002 is Gras Savoye, France's leading insurance broker. Included in the carrying amount of the Gras Savoye investment is goodwill of $72 million and $72 million, net of accumulated goodwill amortization of $7 million and $7 million as of December 31, 2003 and 2002, respectively. As of December 31, 2003 and 2002, the Company's other investments in associates individually and in the aggregate were not material to the Company's operations.
Senior Credit Facility (retired December 4, 2003)-During 1998, the Company entered into a credit agreement providing up to $450 million in term loans and $150 million in revolving credit facilities. The Company repaid in full the outstanding term loans under this facility.
Senior Credit Facility (entered into December 4, 2003)-On December 4, 2003 ("the effective date"), the Company entered into a new credit agreement providing up to $450 million in term loans and $150 million in revolving credit facilities. At December 31, 2003, no amount had been drawn down under this facility. Although to finance the redemption of the 9% senior subordinated notes (see below), Willis North America drew down $300 million of the new facilities.
The new revolving credit facility is available for working capital requirements and general corporate purposes, subject to certain limitations, until December 4, 2008. The revolving credit facility is available for loans denominated in US dollars, pounds sterling and certain other currencies.
All obligations of Willis North America Inc. ("Willis North America") (the borrower) under the credit agreement are guaranteed by Willis Group Holdings Limited, Trinity Acquisition Limited, Willis Group Limited, Willis Partners, TA I Limited, TA II Limited, TA III Limited and TA IV Limited.
During 2003 and 2002, Willis North America bought back and canceled Notes totaling $40 million and $29 million, respectively. The difference between the market price paid and the book value was not material.
Scheduled Debt Repayments-The Notes were due to mature in 2009, however, as noted above, the Company redeemed the Notes in full on February 2, 2004. Under the new credit agreement, the Company is due to make loan repayments of $150 million on the third, fourth and fifth anniversary of the effective date, assuming that the term loans under the new credit facility are drawn down in full.
Lines of Credit-The Company also has available $2 million in lines of credit, of which $nil (2002: $nil) was drawn as of December 31, 2003 (excluding the $150 million revolving credit facility).
The following schedule provides information for the Company's UK and US defined benefit pension plans with an accumulated benefit obligation in excess of plan assets:
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 expected returns on UK plan assets are UK and foreign equities 8.0%, debt securities 4.8% and real estate 6.4%. The expected returns on US plan assets are US and foreign equities 9.75% and debt securities 6.0%.
Performance-based options became exercisable, subject to the fulfilment of vesting requirements with effect from January 1, 2003, upon the achievement of cash flow and EBITDA (as defined in the plan agreements) targets of Willis Group Limited. Options are generally exercisable in equal instalments of 25% per year over a four-year period commencing on or after December 18, 2001.
Willis Award Plan-This plan, which was established on July 13, 2000, provides for the granting of time-based options to selected employees who have been identified as superior performers. There are 5,000,000 shares available for grant under this plan provided, however, that in no event the total number of shares subject to options and other equity for current and future participants exceed 25% of the equity of Willis Group Holdings on a fully diluted basis. All options granted under this plan are exercisable at £2 per share ($3.58 using the year-end exchange rate of £1 = $1.79). The options vest immediately on the grant date and are exercisable any time up to July 13, 2010.
quoted market price, subsequent to the initial public offering. Accordingly, pursuant to APB 25 no compensation expense has been recognized for fixed option plans in the statements of operations.
Management determined in the third quarter of 2001 that it was probable that the maximum performance condition would be attained. The measurement date under APB 25 was December 31, 2002. Accordingly, compensation expense for the year ended December 31, 2003 of $20 million ($16 million, net of tax) (2002: $80 million ($67 million, net of tax); 2001: $158 million ($132 million, net of tax)) was recognized based on the 10.9 million (2002: 11.1 million; 2001: 11.3 million) unforfeited performance options outstanding at that date, a quoted market price of $28.67 (2002: $28.67; 2001: $23.55) and an average elapsed performance period of 95% (2002: 85%; 2001: 68%).
The pro forma disclosures in Note 2 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
The weighted-average remaining contractual life of performance-based options outstanding at December 31, 2003, was five years.
The Company's principal financial instruments, other than derivatives, comprise bank loans, the new Senior Credit Facility and the Notes, cash deposits and short-term investments. The Company also enters into derivative transactions (principally interest rate swaps and forward foreign currency contracts) in order to manage interest rate and currency risks arising from the Company's operations and its sources of finance. The Company does not hold financial instruments for trading purposes.
The main risks arising from the Company's financial instruments are interest rate risk, liquidity risk, foreign currency risk and credit risk. The Company's board of directors reviews and agrees policies for managing each of these risks as summarized below. The Company has applied SFAS 133, as amended by SFAS 149, in accounting for these financial instruments.
Interest Rate Risk-Until November 2003, the Company's operations were financed principally through the former Senior Credit Facility, which was retired in December 2003 and had a variable interest rate and the Notes, which had a 9% fixed interest rate. Interest rate swaps were used to generate the desired interest rate profile and to manage the Company's exposure to interest rate fluctuations.
As of December 31, 2003, there were no amounts drawn down under the new Senior Credit Facility.
Concentrations of credit risk that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments on the balance sheet that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and derivatives which are recorded at fair value. The Company maintains a policy providing for the diversification of cash and cash equivalent investments and places such investments in an extensive number of high quality financial institutions to limit the amount of credit risk exposure. Concentrations of credit risk with respect to receivables are limited due to the large number of clients and markets in which the Company does business, as well as the dispersion across many geographic areas. Management does not believe significant risk exists in connection with the Company's concentrations of credit as of December 31, 2003.
the amounts that the Company would realize upon disposition nor do they indicate the Company's intent or ability to dispose of the financial instrument.
The components of accumulated other comprehensive (loss) income are as follows:
In addition, the Company has given guarantees to bankers and other third parties relating principally to letters of credit amounting to $9 million and $8 million at December 31, 2003 and 2002, respectively.
Put and Call Options Relating to Subsidiaries and Associates-For certain subsidiaries and associates, the Company has the right to purchase shares (a call option) from co-shareholders at various dates in the future. In addition, the co-shareholders of certain subsidiaries and associates have the right to sell (a put option) their shares to the Company at various dates in the future. Generally, the exercise price of such puts and calls is formula-based (using revenues and earnings) and is designed to reflect fair value. Based on current projections of profitability and exchange rates, the potential amount payable in 2004 from these options is not expected to exceed $330 million. Of this balance, $319 million relates to Gras Savoye, as disclosed in Note 6.
Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by professional indemnity or other appropriate insurance. In respect of self-insured deductibles, the Company has established provisions against these items which are believed to be adequate in the light of current information and legal advice, and 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 outcome of the claims, lawsuits and proceedings to which the Company is subject or of which it is aware, either individually or in the aggregate, will have a material adverse effect on the Company's financial condition, results of operations or liquidity.
The Company conducts its worldwide insurance brokerage activities through three operating segments: Global, North America and International. Each operating segment exhibits similar economic characteristics, provides similar products and services and distributes same through common distribution channels to a common type or class of customer. In addition, the regulatory environment in each region is similar. Consequently, for financial reporting purposes the Company has aggregated these three operating segments into one reportable segment.
None of the Company's customers represented more than 10% of the Company's consolidated commissions and fees for the years ended December 31, 2003, 2002 and 2001.
(3)Other than in the UK and the US, the Company does not conduct business in any country in which its commissions and fees and/or long-lived assets exceed 10% of consolidated commissions and fees and/or long-lived assets, respectively.
KKR 1996 Fund (Overseas), Limited Partnership beneficially owned approximately 22% of Willis Group Holdings share capital at December 31, 2003. Effective as of February 25, 2004 the percentage beneficially owned reduced to 7.5%. The general partner of KKR 1996 Fund (Overseas), Limited Partnership is KKR Associates II (1996), Limited Partnership, a limited partnership of which the general partner is KKR 1996 Overseas, Limited, a company owned by Messrs. Kravis, Roberts, Golkin and T.A. Fisher and other members of the limited liability company which is the general partner of Kohlberg Kravis Roberts & Co. L.P. KKR 1996 Overseas has sole voting and investment power with respect to the share capital owned by KKR 1996 Fund (Overseas).
The Trinity Acquisition Limited debt securities registered in April 2003 will be, if issued, jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Group Holdings, TA I Limited, TA II Limited and TA III Limited.
On January 1, 2004, the Company acquired a further 70%, in addition to the 30% already owned, in Willis A/S, Denmark's largest insurance broker, to improve the Company's market position and broaden its global offering and capabilities on behalf of its clients. Accordingly, Willis A/S will be accounted for as a subsidiary from the date of acquisition. The aggregate purchase price was $57 million which included $17 million of common shares. The aggregate purchase price also includes $6 million of deferred consideration, of which $2 million is payable in common shares.
On February 25, 2004, concurrent with the offering of common stock by certain shareholders of the Company, Willis Group Holdings purchased 4 million common shares directly from the selling shareholders at the underwritten price of $37.03 per share. The total payment of $148 million was funded from cash generated by operations. Upon completion of the transaction the common shares were canceled.