As of December 31, 2015, we operated offices in more than 120 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 Kingdom and the United States. 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.
This discussion includes references to non-GAAP financial measures as defined in the rules of the Securities and Exchange Commission (‘SEC’). We present such non-GAAP financial measures, specifically underlying and organic non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis, and these provide a measure against which our businesses may be assessed in the future.
Organic commissions and fees, total revenues, organic total expenses, organic salaries and benefits, organic other operating expenses, organic operating income, organic operating margin and organic EBITDA (hereinafter referred to collectively as the ‘organic measures’) further adjust underlying measures to exclude the twelve month impact from acquisitions and disposals from the most directly comparable GAAP measures.
This discussion includes forward-looking statements, including under the headings ‘Executive Summary’, ‘Review of consolidated results’, ‘Liquidity and Capital Resources’, and ‘Critical Accounting Estimates’. Please see ‘Forward-Looking Statements’ for certain cautionary information regarding forward-looking statements and a list of factors that could cause actual results to differ materially from those predicted in those statements.
We bring together professionals from around the world - experts in their areas of specialty - to deliver the perspectives that give organizations a clear path forward. We do this by offering risk management, insurance broking, consulting, technology and solutions and private exchanges.
In our capacity as a consultant, technology and solutions, and private exchange company we help our clients enhance business performance by improving their ability to attract, retain and motivate qualified employees. We focus on delivering consulting services 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 operate the largest private Medicare exchange in the United States. Through this exchange, we help our clients move to a more sustainable economic model by capping and controlling the costs associated with retiree healthcare benefits.
occur. These services include contingency planning, security audits and product tampering plans. We are not an insurance company and therefore we do not underwrite insurable risks for our own account.
Due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenues 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 revenues and can have a material adverse impact on our commission revenues and operating margin. A ‘hard’ or ‘firming’ market, during which premium rates rise, generally has a favorable impact on our commission revenues 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.
overall underwriting margins remain under substantial pressure. Although we are beginning to see the return of more normal market conditions, these challenging and uneven market conditions may result in quarterly volatility in actual financial performance in comparison to our 2015 strategic and financial goals.
The following is a summary of Legacy Willis’ 2015 GAAP financial results:
Total revenues of $3,829 million increased by $27 million, or 0.7 percent over the prior year. This growth comprised $115 million organic growth in commissions and fees, led by our International segment which reported high single digit growth, and a net $157 million increase from the impact of acquisitions and disposals, partially offset by $15 million organic decline in other revenues and $230 million adverse foreign currency movements.
Operating margin decreased 580 basis points to 11.2 percent from 17.0 percent in the prior year, as the increase in total operating expenses exceeded the increase in total revenues, primarily due to the $90 million increase in restructuring costs related to the Operational Improvement Program, the $70 million litigation provision referred to above, and the increase in expenses due to the mid-year acquisition of Miller initially exceeding the increase in revenues generated by the acquisition, due the seasonal profile of the business.
Cash flows from operating activities were $243 million in 2015, a decrease of $234 million, or 49.1 percent from $477 million in 2014. The $234 decrease was largely due to the following: higher cash outflow for restructuring costs and M&A transaction-related costs; higher cash outflow for incentives; and increase in accounts receivable from growth in the business and the timing of cash collections.
The resultant organic operating margin increased by 150 basis points to 19.5 percent from 18.0 percent in the prior year.
Revenues from the twelve-month impact of acquisitions (net of disposals) have increased total revenues by $157 million more in 2015 than in 2014. Additionally, the twelve-month impact of acquisitions (net of disposals) has contributed approximately $12 million more to EBITDA compared with 2014.
On May 31, 2015, Legacy Willis acquired an 85 percent interest in Miller Insurance Services LLP and its subsidiaries, a leading London wholesale specialist insurance broking firm.
In April 2014, Legacy Willis announced an operational improvement program that would allow it to continue to strengthen its client service, realize operational efficiencies, and invest in new capabilities for growth.
The program began in the second quarter of 2014 and is expected to be complete by the end of 2017. The program was expecting to deliver cumulative cost savings of at least $420 million through 2017 and annual cost savings of approximately $300 million starting in 2018. However, due to strong execution against the overall strategy to date, the Company has increased
indexed ratio of desks per FTE as at December 31, 2015 was 101 (December 31, 2014 ratio was 99 (March 31, 2014 ratio was 100).
The restructuring costs of $126 million related to the Operational Improvement Program incurred in 2015 were:
$31 million in the Willis North America, comprising $8 million termination benefits and $23 million professional services and other program costs;
$27 million in Willis GB, comprising $10 million termination benefits and $17 million professional services and other program costs;
$26 million in Willis International, comprising $8 million termination benefits and $18 million professional services and other program costs;
On December 31, 2015, Legacy Willis agreed to a revised schedule of contributions towards on-going accrual of benefits and deficit funding contributions the Company will make to the UK Plan to the end of 2024. The revised schedule of contributions replaces the previous agreement and therefore eliminates the clauses over profit share contributions and exceptional return contributions that became payable in certain circumstances.
Based on the revised agreement, contributions in 2016 will total approximately $83 million being deficit funding contributions of approximately $53 million, on-going contributions of approximately $22 million and the final contingent contribution of approximately $8 million following the share buybacks made in 2015.
Our method for calculating these measures may differ from those used by other companies and therefore comparability may be limited. Our calculation methods are:
Our underlying non-GAAP measures are calculated by excluding restructuring costs relating to the Operational Improvement Program, the impact of the Venezuelan Bolivar devaluation, certain litigation provisions, gains (losses) on disposal of operations, remeasurement of previously held equity interests, non-recurring changes in deferred tax valuation allowances and, from the second quarter of 2015, merger and acquisition (‘M&A’) transaction-related costs, as relevant, from total revenues, total expenses, salaries and benefits, other operating expenses, operating income, net income, and diluted earnings per share, the most directly comparable GAAP measures. As a result of excluding merger and acquisition transaction-related costs from the second quarter of 2015, underlying non-GAAP measures for 2014 have been restated.
Additionally, prior year total revenues, total expenses, net income and diluted earnings per share have been rebased to current period exchange rates to eliminate the impact of year-over-year foreign exchange movements.
Our organic non-GAAP measures are calculated by further excluding the twelve-month impact from acquisitions and disposals from our underlying measures.
As set out in the tables below, underlying operating income increased $50 million, or 7.6 percent, to $707 million in 2015 compared with $657 million in 2014. Underlying operating margin at 18.5 percent in 2015 was up 10 basis points compared with 2014, while 2015 underlying net income was $441 million, $44 million higher than in 2014. Underlying earnings per diluted share were $6.39 in 2015, compared with $5.83 in 2014.
As set out in the tables below, organic operating income increased $74 million, or 11.7 percent, to $706 million in 2015 compared with $632 million in 2014. Organic operating margin at 19.5 percent in 2015 was up 150 basis points compared with 2014.
(b) In light of our review of facts and circumstances relating to the Stanford Financial Group litigation matters discussed under ‘Legal Proceedings’ in this 10-K report (which are non-ordinary course litigation matters), we added $70 million to our provisions for loss contingencies relating to the Stanford litigation. In conducting such a review, we take into account a variety of factors in accordance with applicable accounting standards. The ultimate resolution of these matters may differ from the amount provided for.
(c) For prior periods, underlying measures have been rebased to current period exchange rates to remove the impact of foreign currency movements when comparing periods.
(b) For prior periods, underlying measures have been rebased to current period exchange rates to remove the impact of foreign currency movements when comparing periods.
A reconciliation of reported net income attributable to Willis Towers Watson, the most directly comparable GAAP measures, to underlying and organic EBITDA, is as follows (in millions):
Total revenues of $3,829 million increased by $27 million, or 0.7 percent, in 2015 compared to 2014. This was primarily due to 1.1 percent growth in commissions and fees.
Total commissions and fees in 2015 were $3,809 million, up $42 million, or 1.1 percent, from $3,767 million in 2014. This increase was comprised of organic growth of $115 million, or 3.3 percent, and growth through acquisitions and disposals of $155 million, or 4.3 percent, partially offset by negative foreign currency movements of $228 million or 6.5 percent.
Organic commissions and fees growth of 1.0 percent was primarily due to growth in Reinsurance and new business wins in Willis Capital Markets & Advisory.
Salaries and benefits were $2,306 million, or 0.3 percent, lower in 2015 compared with 2014 and include a net $109 million increase from acquisitions and disposals offset by $148 million of favorable foreign currency movements. The remaining increase of $31 million was driven by increased headcount, pay reviews, and higher incentives, partially offset by lower benefits.
Depreciation expense was $95 million in 2015, compared with $92 million in 2014. The increase of $3 million included an organic increase of $4 million and a net $4 million increase from acquisitions and disposals, partially offset by $5 million of favorable foreign currency movements.
Amortization of intangible assets was $76 million in 2015, an increase of $22 million compared to 2014. The increase primarily reflects the increased charge relating to recent acquisitions including Charles Monat and Max Matthiessen, partially offset by the ongoing reduction in the HRH acquisition amortization
After adjusting for certain items, as listed below, the tax rate for 2015 was 22 percent:
a tax benefit of $28 million associated with charges of $126 million incurred in relation to the Operational Improvement Program;
a tax expense of $4 million associated with pre-tax gains of $25 million related to business disposals;
a tax benefit of $96 million relating to a partial release of the US valuation allowance;
a tax benefit of $28 million associated with a $70 million litigation provision; and
a tax expense of $nil associated with the $59 million gain on remeasurement of equity interests.
The majority of our interest in earnings of associates relates to our share of ownership of Gras Savoye, the leading broker in France. Interest in earnings of associates, net of tax, in 2015 was $11 million compared with $14 million in 2014. Following the acquisition of substantially all of the remaining share capital of Gras Savoye on December 29, 2015, interest in earnings of associates from that date no longer includes earnings from Gras Savoye, as we now consolidate Gras Savoye.
Organic commissions and fees growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; and (iii) the net commission and fee revenues related to operations disposed of in each period presented. Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited.
Total commissions and fees in 2014 were $3,767 million, up $134 million, or 3.7 percent, from $3,633 million in 2013. This increase comprised organic growth of $134 million, or 3.8 percent, and growth through acquisitions and disposals of $28 million, or 0.8 percent, partially offset by negative foreign currency movements of $30 million or 0.9 percent.
positive impact from acquisitions and 0.1 percent favorable movement from foreign currency movements.
Willis North America segment reported 1.1 percent growth in commissions and fees compared to 2013 including organic
growth of 2.7 percent which was partially offset by 1.6 percent negative impact from the disposal of non-strategic low growth
offices. Foreign currency movements had no impact on commissions and fees.
Willis International segment reported 9.5 percent growth in commissions and fees compared with 2013, comprising 8.8 percent
Other income reported an increase of $12 million compared to 2013. This increase was primarily due to a $12 million
Amortization of intangible assets was $54 million in 2014, a reduction of $1 million compared to 2013. The decrease primarily reflects the ongoing reduction in the HRH acquisition amortization partially offset by the increased charge relating to the acquisition of Charles Monat and Max Matthiessen.
Restructuring costs related to our operational improvement program were $36 million in 2014, compared with $nil in 2013. This is discussed in further detail in the ‘Operational improvement program’ section in the executive summary section above.
After adjusting for certain items, as listed below, the tax rate for 2014 was 25 percent:
a tax benefit of $9 million associated with charges incurred in relation to the Operational Improvement Program;
an expense of $21 million relating to an increase in US valuation allowance. The increase is attributable to a change in the US deferred tax position following resolution of uncertain tax positions from prior periods.
Legacy Willis funded the cash consideration for the acquisition of Gras Savoye with a 1-year term loan.
Legacy Willis’ principal sources of liquidity are funds generated by operating activities, available cash and cash equivalents and amounts available under revolving credit facilities. Legacy Towers Watson’s principal sources of liquidity are funds generated by operating activities, available cash and cash equivalents, and amounts available under a revolving credit facility.
Based on our combined balance sheets, combined cash flows, current market conditions and information available to us at this time, including a potential refinancing of our debt financing in 2016, 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, making scheduled debt repayments, and making contemplated dividend payments.
Legacy Willis’ long-term liquidity requirements, as of December 31, 2015, consisted of the repayment of the principal amount of outstanding notes; borrowings under our term loan facility expiring in 2018 and under our $800 million revolving credit facility; and funding defined benefit pension plans as discussed below.
As at December 31, 2015 cash and cash equivalents were $532 million, a decrease of $103 million compared to December 31, 2014.
As at December 31, 2015 there was $467 million drawn down on our revolving credit facilities (2014: $nil). During the year ended December 31, 2015, we made 17 drawings totaling $1,120 million and 14 repayments totaling $651 million on the $800 million Trinity Acquisition facility and 2 drawings totaling $704 million and 3 repayments totaling $704 million on the $400 million Willis Securities facility. In the fourth quarter of 2015, Legacy Willis took out a $592 million 1-year term loan to fund the acquisition of Gras Savoye.
The primary uses of funds during 2015 included: $857 million payments of consideration for acquisitions (of operations and intangible assets), primarily Gras Savoye and Miller; $439 million cash payments of incentive awards, primarily relating to
(i) As described in Note 2, following retrospective application of ASU 2015-03, ‘Simplifying the Presentation of Debt Issuance Costs’, debt issuance costs related to a note are now reported in the balance sheet as a direct deduction from the face amount of that note. 2014 balances have been reclassified accordingly.
The $179 million negative movement in working capital included $439 million of incentive payments and $118 million cash contributions (including $9 million for employees’ salary sacrifice and $21 million contingent contributions) to our defined benefit pension schemes. Additionally, there was a $155 million increase in accounts receivable, as revenue recognized in 2015 was greater than cash collection, and $495 million positive movement in other liabilities which includes incentives accrued during 2015 that will be paid in 2016.
The $234 million decrease in cash provided by operating activities in 2015 compared to 2014 was largely due to the following: higher cash outflow for restructuring costs and M&A transaction-related transaction costs; higher cash outflow for incentives; increase in accounts receivable from growth in the business; and the timing of cash collections.
Net cash provided by financing activities in 2015 was $641 million, primarily due to $469 million drawings on our $800 million revolving credit facility, a new $592 million term loan drawn down in the fourth quarter of 2015 to fund the acquisition of Gras Savoye and $124 million proceeds from the issue of shares, partly offset by dividends paid, including to noncontrolling interests, of $293 million, $82 million to repurchase approximately 1,710,000 shares and $166 million of debt repayments.
The $477 million cash from operations comprises net income of $373 million, net $257 million of non-cash adjustments to reconcile net income to cash provided by operating activities and $153 million of negative working capital movements.
Net cash used in financing activities in 2014 was $323 million primarily due to dividends paid, including to noncontrolling interests, of $227 million, $213 million to repurchase approximately five million shares and $15 million of mandatory repayments against the term loan offset by cash receipts of $134 million from the issue of shares.
As of December 31, 2015, Legacy Willis had cash and cash equivalents of $532 million, compared with $635 million at December 31, 2014. Additionally, $755 million was available to draw under Legacy Willis revolving credit facilities at December 31, 2015, compared with $1,222 million at December 31, 2014, and $400 million was available to draw under Legacy Willis’ 1-year term loan facility at December 31, 2015. The $400 million available under the the 1-year term loan facility was subsequently drawn, on January 4, 2016, in connection with the Merger.
As of December 31, 2015, Legacy Willis had fiduciary funds of $2.3 billion, compared with $1.9 billion at December 31, 2014.
We are integrating the Legacy Companies of Willis and Towers Watson and creating a unified platform for global growth, including positioning the Company to leverage our mutual distribution strength to enhance market penetration, expand our global footprint and create a strong platform for further innovation. The fully integrated Company will have a more comprehensive offering of services and solutions to provide to clients across four business segments: Corporate Risk and Broking; Exchange Solutions; Human Capital and Benefits; and Investment, Risk and Reinsurance.
Until we are integrated, we will continue to manage our business through the Legacy Company platforms. Legacy Willis had four reportable operating segments: Willis GB; Willis Capital, Wholesale & Reinsurance; Willis North America; and Willis International. Legacy Towers Watson had four reportable operating segments: Benefits; Exchange Solutions; Risk and Financial Services; and Talent and Rewards. From April 1, 2016, we expect to manage our business across four integrated reportable operating segments: Corporate Risk and Broking; Exchange Solutions; Human Capital and Benefits; and Investment, Risk and Reinsurance.
The following table is a summary of our operating results by segment for the three years ended December 31, 2015 (in millions except percentages):
Commissions and fees of $637 million were $25 million, or 3.8 percent, lower in 2015 compared with 2014.
Organic commissions and fees growth, which excludes an adverse 5.4 percent impact from foreign currency movements and a net 0.2 percent decline due to acquisitions and disposals, was 1.8 percent compared with 2014.
The 0.2 percent decline from acquisitions and disposals was related to the disposal of our niche classic car business and
Preston and Dundee retail operations, partially offset by the acquisition of PMI and certain Miller businesses.
Total operating expenses of $498 million were $23 million, or 4.4 percent, lower for 2015 compared with 2014.
Underlying total expenses, which exclude $29 million of favorable foreign currency movements, partially offset by a $17 million increase in restructuring costs related to the Operational Improvement Program and a $2 million increase in M&A transaction-related costs, decreased $13 million, or 2.7 percent, compared with 2014.
The $13 million, or 2.7 percent, decrease in underlying total expenses was primarily due to lower salaries and benefits, as a result of efficiency savings from the Operational Improvement Program, and lower other operating expenses as a consequence of cost management initiatives.
The favorable foreign currency movements were primarily due to the weakening of the Euro and Pound sterling against the US dollar.
Commissions and fees of $662 million were $3 million, or 0.5 percent, lower in 2014 compared with 2013. The decrease includes negative organic growth of 1.5 percent and a 0.4 percent adverse impact from acquisitions and disposals partially offset by 1.4 percent positive impact from foreign currency movements.
Total operating expenses of $521 million were $36 million, or 7.4 percent, higher for 2014 compared with 2013.
The $36 million growth in expenses was due to adverse foreign currency movements and higher salaries and benefits as a result of the increase in headcount relative to the prior year and annual salary reviews. This increase was offset by the decline in Other operating expenses primarily due to lower allocation of corporate costs and an E&O provision release partially offset by higher systems and premises costs.
In addition, the year-on-year growth included $10 million restructuring costs relating the Operational Improvement Program.
Willis CWR operations comprised Willis Re, Willis Capital Markets & Advisory, our Wholesale business; and Portfolio and Underwriting Services.
Commissions and fees of $811 million were $62 million, or 8.3 percent, higher in 2015 compared with 2014.
The 11.5 percent increase from acquisitions and disposals was primarily due to the acquisition of Miller Insurance Services LLP in the second quarter of 2015.
Total operating expenses of $657 million were $115 million, or 21.2 percent, higher for 2015 compared with 2014.
Reinsurance reported mid single-digit organic commissions and fees growth, with its North America business again leading the way with high single-digit growth. New business was strong across all three divisions and we reported increased client retention levels compared to the prior year. Growth however was tempered by the negative impact of premium rate movements.
Other income of $12 million related to a settlement for a specialty book of business.
Total operating expenses of $542 million were $42 million, or 8.4 percent, higher for 2014 compared with 2013.
In addition, the year-on-year growth included $1 million restructuring costs relating to the Operational Improvement Program.
Full year operating margin was 29.2 percent in 2014 and 30.7 percent in 2013. The decline was driven by expense growth of 8.4 percent exceeding the 6.2 percent total revenue growth.
The 2.4 percent organic growth in commissions and fees included growth in the Construction business.
Total operating expenses of $1,118 million were $27 million, or 2.5 percent, higher for 2015 compared with 2014.
Commissions and fees of $1,318 million were $14 million, or 1.1 percent, higher in 2014 compared with 2013.
This increase was primarily due to organic growth of 2.7 percent partially offset by a 1.6 percent negative impact from acquisitions and disposals.
The acquisitions and disposals impact was primarily due to the disposal of non-strategic low growth offices in the second and fourth quarters of 2014 partially offset by the acquisition of the employee benefits consulting division of Capital Strategies in fourth quarter 2013.
The 2.7 percent organic growth in commissions and fees was driven by strong new business growth compared with the year ago period, partially offset by lost business and the non-recurrence of a positive $5 million adjustment in 2013 to align the recognition of revenue in the North America Personal Lines business with the rest of the Group. Rates had a small negative impact on the full year’s commissions and fees.
Total operating expenses of $1,091 million were $17 million or 1.5 percent, lower for 2014 compared to 2013.
The $17 million reduction in expenses was due to lower incentives as a result of one-off adjustments, the reduction to the amortization of intangible assets and the disposal of certain non-strategic low growth locations partially offset by higher salaries, due to annual salary reviews, and higher business development expenses.
Operating margin in North America was 17.5 percent in 2014 compared with 15.6 percent in 2013 driven by solid commissions and fees growth and expense reduction discussed above.
The following table sets out revenues, operating income, organic commissions and fees growth and operating margin for the three years ended December 31, 2015 (in millions, except percentages):
Commissions and fees of $1,063 million were $25 million, or 2.4 percent, higher in 2015 compared with 2014.
Organic commissions and fees growth, which excludes a 13.5 percent net favorable impact from acquisitions and disposals, partially offset by an 18.7 percent adverse impact from foreign currency movements, was 7.6 percent.
The $45 million, or 6.3 percent, increase in organic total expenses was due to investments in growth businesses and increased salaries and benefits from annual pay reviews, including mandatory pay rises in many Latin American countries.
Commissions and fees of $1,038 million were $90 million, or 9.5 percent, higher in 2014 compared with 2013.
Organic growth included double-digit new business growth and a positive impact from rates, partly offset by lost business. Growth was positively impacted by the non-recurrence of an adjustment recorded in 2013 to align the recognition of revenue in China with the rest of the Group.
Latin America reported double-digit growth arising primarily from Brazil and Venezuela which was partially offset by decline in Colombia.
Eastern Europe reported low double digit growth arising primarily from Russia and Poland.
Operating margin in International was 18.7 percent in 2014, compared with 19.0 percent in 2013. The decrease was driven by the increase in expenses discussed above partially offset by solid commissions and fees growth.
The Company evaluates the performance of its segments based on organic commissions and fees growth and operating income. For internal reporting and segmental reporting, items for which segmental management are not held responsible for are held within ‘Corporate and Other’.
The $74 million growth included a $70 million increase in litigation provision, for loss contingencies relating to the Stanford litigation, and a $58 million increase in M&A transaction-related costs, primarily due to the merger with Towers Watson, partially offset by a $57 million increase in the gain from non-servicing elements of defined benefit pensions, including the effect of the UK defined benefit pension plan salary freeze.
We maintain defined benefit pension plans for employees in the US and UK. Both of these plans are now closed to new entrants and, with effect from May 15, 2009 we closed our US defined benefit plan to future accrual. New employees in the UK are offered the opportunity to join a defined contribution plan and in the US are offered the opportunity to join a 401(k) plan. On June 30, 2015, we implemented a salary freeze for our UK defined benefit pension plan. We also have several smaller defined benefit pension plans in certain other countries in which we operate, including a non-qualified plan in the US and an unfunded plan in the UK. These smaller defined benefit plans have combined total assets of $342 million and a combined net liability for pension benefits of $60 million as of December 31, 2015. Elsewhere, pension benefits are typically provided through defined contribution plans.
Based on December 31, 2015 assumptions, as updated for the ‘spot rate’ approach to determining service cost and interest cost with effect from January 1, 2016, we expect the net pension credit in 2016 will remain broadly flat for the UK plan despite the benefit from adopting the spot rate approach of approximately $12 million. The net pension credit will increase by $2 million for the US plan despite the approximate $6 million benefit from adopting the spot rate approach and the net pension charge will remain unchanged at $3 million for the other plans.
We make a number of assumptions when determining our pension liabilities and pension expense which are reviewed annually by senior management and changed where appropriate. The discount rate will be changed annually if underlying rates have moved whereas the 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. Other material assumptions include rates of participant mortality, the expected long-term rate of compensation and pension increases and rates of employee termination. Our approach to determining appropriate assumptions for our UK and US pension plans is set out below.
During 2015 we continued to use a duration-based approach, which more closely matches the actual timing of expected cash flows to the applicable discount rate. The selected rate used to discount UK plan liabilities in 2015 was 3.80%, an increase of 20 basis points from the discount rate of 3.60% used at December 31, 2014. During 2015, sterling high-quality corporate bond yields rose slightly at almost all durations. Consequently, the rate consistent with the expected maturity of the plan’s liabilities has also increased.
There have been no further changes to the strategic target asset allocation therefore, management considers that 6.50% continues to be an appropriate long-term rate of return assumption.
The expected and actual returns on UK plan assets for the three years ended December 31, 2015 were as follows:
At December 31, 2014, the Company updated the mortality assumption based on analysis carried out by the Scheme Actuary for the December 31, 2013 funding valuation. However, to reflect Scheme experience, we adjusted the base tables such that there is no change in the overall strength of the assumption. For 2015, we have continued with the same assumption and, as a result, the liabilities are unchanged.
As an indication of the longevity assumed, our calculations assume that a UK male retiree aged 65 at December 31, 2015 would have a life expectancy of 24 years.
As an indication of the longevity assumed, our calculations assume that a US male retiree aged 65 at December 31, 2015, would have a life expectancy of 20 years.
Our annual goodwill impairment analysis is performed each year at October 1. At October 1, 2015 our analysis showed the estimated fair value of each reporting unit was significantly in excess of carrying value, and therefore did not result in an impairment charge (2014: $nil; 2013: $nil).
At December 31, 2015, we had gross deferred tax assets of $486 million (2014: $426 million) against which a valuation allowance of $187 million (2014: $280 million) had been recognized. To the extent that:
the actual amount or character of future taxable income differs from our current projections in the periods;
Considering our recent US earnings experience and projections of future income, a possibility exists that we may release a portion of the valuation allowance against our US deferred tax assets in the next twelve months. Release of the US valuation allowance would result in the recognition of deferred tax assets and a decrease to income tax expense for the period the release is recorded. Our US valuation allowance, excluding that related to state separate taxes, is $69 million as at December 31, 2015. The exact timing and amount of future valuation release is subject to change on the basis of the level of profitability we are able to achieve.
The Company adjusts its recognition of these uncertain tax benefits in the period in which new information is available impacting either the recognition or measurement of its uncertain tax positions. In 2015, there was a net increase in unrecognized tax benefits of $3 million compared to a net decrease of $22 million in 2014. The Company recognizes interest relating to unrecognized tax benefits and penalties within income taxes. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet.
We have established provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in connection with the placement of insurance and reinsurance in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also claims that have been incurred but not reported. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in the 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.
In addition, the accounting standards require us to take into account a variety of factors with respect to loss contingencies. As a result, in the fourth quarter of 2015, we accrued $70 million, before tax, in connection with the litigation related to the Stanford Financial Group. We continue to dispute the allegations and to defend ourselves vigorously. See Part I, Item 3 - ‘Legal Proceedings’ of this Form 10-K.
The Company’s contractual obligations as at December 31, 2015 are presented below:
The above excludes $79 million short-term borrowings incurred by Gras Savoye in the ordinary course of business. These borrowings were repaid on January 11, 2016.
Contractual obligations for the Company’s pension plans reflect the contributions the Company expects to make over the next five years into the Legacy Willis US, UK and Other defined benefit plans. These contributions are based on current funding positions and may increase or decrease dependent on the future performance of the plans.
Total contributions made in 2015 and 2014, and the contributions we expect to make in 2016, in respect of the Legacy Willis UK, US and Other defined benefit pension schemes are as follows:
Annual deficit funding contributions will reduce to approximately $22 million for 2017 through 2020 although additional ‘funding level’ contributions may become payable based on funding level assessments made between December 31, 2017 and 2024. Such annual funding level contributions are capped at approximately $15 million. From 2021 annual deficit funding contributions may be ceased, and instead paid into escrow, if the Scheme is ahead of its funding plan.
Information regarding claims, lawsuits and other proceedings, including Stanford Financial Group litigation, and their impact on the financial statements is set forth in Note 20 - ‘Commitments and Contingencies’ to the Consolidated Financial Statements appearing under Part II, Item 8 of this report and incorporated herein by reference.
Apart from commitments, guarantees and contingencies, as disclosed in Note 20 - ‘Commitments and Contingencies’ to the Consolidated Financial Statements appearing under Part II, Item 8 of this report and incorporated herein by reference, as of December 31, 2015 the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations or liquidity.
Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2015
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2015
To the Board of Directors and Stockholders of Willis Towers Watson Public Limited Company
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
(i) Basic and diluted earnings per share, and cash dividends declared per share, have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See Note 31 - Subsequent Events for further details.
(i) The nominal value of ordinary shares and number of ordinary shares issued in 2015 and 2014 have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See Note 31 - Subsequent Events for further details.
Willis Towers Watson is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. The Company provides both specialized risk management advisory and consulting services on a global basis to clients engaged in specific industrial and commercial activities, and services to small, medium and large corporations through its retail operations. 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 help organizations improve performance through effective people, risk and financial management by focusing on providing human capital and financial consulting services.
Our unique perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance.
Due to the closing date of the Merger on January 4, 2016, and after the end of the fiscal year, Legacy Towers Watson results of operations and financial position are not presented in this Form 10-K. Please see Note 31 - Subsequent Events for additional information.
full retrospective or a modified retrospective approach for the adoption of the new standard. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03 ‘Simplifying the Presentation of Debt Issuance Costs’, which requires that debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of that note and that amortization of debt issuance costs shall be reported as interest expense. The Company has opted to early-adopt this update, which it has applied retrospectively, as of December 31, 2015. This has resulted in ‘Other assets’ and ‘Debt’ each being reported, after reclassifications, as $12 million lower as of December 31, 2014 than they were originally reported and as $16 million lower as of December 31, 2015 than they would otherwise have been reported. There was no effect on the consolidated results of operations, consolidated cash flows or consolidated equity for the year ended December 31, 2015 or any earlier year.
In addition, in August 2015, the FASB issued the related ASU No. 2015-15 ‘Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements’, which states that the Securities and Exchange Commission (‘SEC’) staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The Company has opted to continue to defer and present debt issuance costs related to a line-of-credit arrangement as an asset, subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.
The effects of the accounting change on the prior year are shown below:
On January 4, 2016, the Company effected a 1 to 2.6490 reverse stock split to shareholders of record as of January 4, 2016. All share and per share information has been retroactively adjusted to reflect the reverse stock split and show the new number of shares.
Rentals payable on operating leases are charged straight line to expenses over the lease term as the rentals become payable.
The carrying amounts of the Gras Savoye investment as of December 31, 2014 for the interest bearing vendor loans and convertible bonds issued by Gras Savoye were $41 million and $106 million, respectively.
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. 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 as, and qualifies as, an effective fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to 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 operating expenses or interest expense as appropriate.
Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. The Company recognizes the benefit of uncertain tax positions in the financial statements when it is more likely than not that the position will be sustained on the basis of the technical merits of the position assuming the tax authorities have full knowledge of
the position and all relevant facts. Recognition also occurs upon either the lapse of the relevant statute of limitations, or when positions are effectively settled. The benefit recognized is the largest amount of tax benefit that is greater than 50 percent likely to be realized on settlement with the tax authority. The Company adjusts its recognition of uncertain tax benefits in the period in which new information is available impacting either the recognition or measurement of its uncertain tax positions. Such adjustments are reflected as increases or decreases to income taxes in the period in which they are determined.
Company’s consolidated balance sheets, as the ultimate payment of such awards will not be achieved through use of the Company’s cash or other assets.
Fees for risk management and other services are recognized as the services are provided. Consideration for negotiated fee arrangements for an agreed period covering multiple insurance placements, the provision of risk management and/or other services are allocated to all deliverables on the basis of their relative selling prices. The Company establishes contract cancellation reserves where appropriate. At December 31, 2015, 2014 and 2013, such amounts were not material.
The average number of persons, including Executive Directors, employed by Legacy Willis is as follows:
On December 31, 2015, the Company had a number of open share-based compensation plans, which provide for the grant of time-based options and performance-based options, time-based restricted stock units 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 or other share-based grants are outstanding as at December 31, 2015 are described below. The compensation cost that has been recognized for those plans for the year ended December 31, 2015 was $64 million (2014: $52 million; 2013: $42 million). The total income tax benefit recognized in the statement of operations for share-based compensation arrangements for the year ended December 31, 2015 was $15 million (2014: $12 million; 2013: $9 million).
There were approximately 23 million shares available for grant under this plan. Options are exercisable on a variety of dates, including from the second, third, fourth or fifth anniversary of grant. Unless terminated sooner by the Board of Directors, the 2012 Plan will expire 10 years after the date of its adoption. That termination will not affect the validity of any grants outstanding at that date.
A summary of option activity under the plans at December 31, 2015, and changes during the year then ended is presented below:
Certain options are exercisable in pounds sterling and are converted to dollars using the exchange rate at December 31, 2015.
The number of options outstanding and other per share data have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See Note 31 - Subsequent Events for further details.
There were no performance-based options granted during the three years ended December 31, 2015, December 31, 2014 or December 31, 2013. The total intrinsic value of options exercised during the year ended December 31, 2015 was $25 million (2014: $15 million; 2013: $14 million). At December 31, 2015 there was less than $1 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under performance-based stock option plans; that cost is expected to be recognized over a weighted-average period of 1 year.
A summary of restricted stock unit activity under the Plans at December 31, 2015, and changes during the year then ended is presented below:
The number of nonvested shares outstanding and other per share data have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See Note 31 - Subsequent Events for further details.
The total number of restricted stock units vested during the year ended December 31, 2015 was 471,212 shares at an average share price of $117.74 (2014: 323,746 shares at an average share price of $116.79; 2013: 329,811 shares at an average price of $108.87). At December 31, 2015 there was $111 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under the plan; that cost is expected to be recognized over a weighted average period of 2 years.
movement of more than 3,500 Legacy Willis support roles from higher cost locations to Legacy Willis facilities in lower cost locations, bringing the ratio of employees in higher cost versus lower cost near-shore and off-shore centers from approximately 80:20 to approximately 60:40;
The Company recognized restructuring costs of $126 million in the year ended December 31, 2015, related to its Operational Improvement Program (2014: $36 million).
An analysis of the total cumulative restructuring costs recognized for the Operational Improvement Program from commencement to December 31, 2015 by segment is as follows:
Willis Towers Watson plc is a non-trading holding company tax resident in Ireland where it is taxed at the statutory rate of 25%. The provision for income tax on continuing operations has been reconciled above to the US federal statutory tax rate of 35% due to significant operations in the US.
As described in Note 2, following retrospective application of ASU 2015-17 ‘Balance Sheet Classification of Deferred Taxes’, all deferred tax liabilities and assets are now classified as non-current in the balance sheet. 2014 balances within ‘Net deferred tax liabilities’ have been reclassified accordingly.
At December 31, 2015, the Company had valuation allowances of $187 million (2014: $280 million) to reduce its deferred tax assets to estimated realizable value. The valuation allowances at December 31, 2015, relate to deferred tax assets arising from UK capital loss carryforwards ($33 million) and other net operating losses ($6 million), which have no expiration date, and to the deferred tax assets in the United States ($148 million).
The amount charged to tax expense in the table above differs from the effect of $(104) million disclosed in the rate reconciliation primarily because the movement in this table includes effects of state taxes, which are disclosed separately in the rate reconciliation. The impact of Other movements is primarily recorded in other comprehensive income.
Total unrecognized tax benefits as at December 31, 2015, totaled $22 million. During the next 12 months the Company does not expect a significant increase or decrease to the unrecognized tax benefits due to either settlement through negotiation or closure of the statute of limitations on assessment.
The Company files tax returns in the various tax jurisdictions in which it operates. US tax returns have been filed timely. Although tax years 2008 and 2009 are closed, the IRS could make adjustments (but not assess additional tax) up to the amount of the net operating losses carried forward from those years.
In periods where losses are reported the weighted average shares outstanding excludes potentially issuable shares described above, because their inclusion would be anti-dilutive.
For the year ended December 31, 2015, time-based and performance-based options to purchase 1.6 million and 0.6 million shares (2014: 2.1 million and 1.4 million; 2013: 3.0 million and 2.0 million), respectively, and 1.3 million restricted stock units (2014: 1.3 million; 2013: 1.1 million) were outstanding.
On December 29, 2015, the Company completed the transaction to acquire the remaining 70% of the outstanding share capital of Gras Savoye, the leading insurance broker in France, for total consideration of €544 million ($592 million) of which, $582 million was paid in cash. Additionally, the previously held equity interest in Gras Savoye was remeasured to a fair value of €221 million ($241 million) giving a total fair value on a 100% basis of €765 million ($833 million). The resulting remeasurement gain on the previously held equity interest was €54 million ($59 million) and has been recorded in Other income (expense), net, in the Consolidated Statement of Operations.
The Company funded the cash consideration with a one year term loan. The amount outstanding as of December 31, 2015 was $592 million and is included in the line item Short-term debt and current portion of long-term debt on the consolidated balance sheets.
Deferred consideration is payable on the first and second anniversary of the acquisition. The discounted fair value of the deferred consideration is $10 million. None of the goodwill recognized on the transaction is tax deductible.
The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision within the purchase price allocation period as more detailed analysis is completed and additional information about the value of assets acquired and liabilities assumed become available. Given the short time-frame between the acquisition date and balance sheet date, all aspects of the initial purchase price allocation may be subject to revision within the purchase price allocation period.
Interest costs on debt positions which were repaid on acquisition have been removed and replaced with an estimated incremental annual cost of borrowings taken to finance the acquisition.
The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been consummated as of that time, nor is it intended to be indicative of future results.
Deferred consideration is payable at the end of the first, second and third anniversary of the acquisition. Contingent consideration is payable at the end of the third anniversary of the acquisition and is contingent on meeting EBITDA performance targets. The discounted fair value of the deferred and contingent consideration, based on best estimates, is $124 million and $29 million respectively.
The Company recognized assets and liabilities acquired of $1,122 million and $844 million respectively. Included within the acquired assets are intangible assets of $231 million of which $217 million relates to client relationships with a weighted average useful economic life of 14 years and $14 million relates to trade names with a useful economic life of 15 years.
Goodwill of $184 million was recognized on the transaction and is not included in the assets acquired figure above. The amount of goodwill that was tax deductible was $22 million.
On May 31, 2015, the Company acquired the trade and assets of Evolution Benefits Consulting, Inc. (‘Evolution’), a human capital practice in Pennsylvania. The Company paid initial cash consideration on closing and additional contingent consideration is payable in three years and is contingent on the future revenue growth of the acquired business.
On August 19, 2015, the Company completed the transaction to acquire 100 percent interest in CKA Risk Solutions, Australia. The Company paid initial cash consideration on closing. Further deferred consideration is payable at the end of the first, second and third anniversary of the acquisition. Contingent consideration is payable at the end of the third anniversary of the acquisition and is contingent on specified performance targets for revenue growth over the three years prior.
In aggregate, total consideration for these other acquisitions was approximately $188 million representing:
Goodwill in aggregate of $108 million was recognized on these other transactions based on the preliminary purchase price allocations.
Supplemental pro forma results of operations have not been presented for Miller individually, or for all of the other acquisitions described above in aggregate, because the effects were not material to consolidated results of operations.
On October 8, 2014, the Company acquired 75.8 percent of Max Matthiessen Holding AB and subsidiaries, a leading employee benefits adviser in Sweden, for cash consideration of $204 million. There is no deferred or contingent consideration.
On acquisition the Company recognized acquired intangible assets of $134 million of which $56 million was in relation to client relationships and $76 million was in relation to fund management contracts, which are being amortized over 12 years and 18 years respectively. The remaining $2 million of intangible assets relate to the Max Matthiessen trade name and is being amortized over 4 years.
An analysis of fixed asset activity for the years ended December 31, 2015 and 2014 are as follows:
Included within land and buildings are assets held under capital leases: At December 31, 2015, cost and accumulated depreciation were $32 million and $10 million respectively (2014: $32 million and $8 million, respectively; 2013: $31 million and $6 million respectively). Depreciation in the year ended December 31, 2015 was $2 million (2014: $2 million; 2013: $2 million).
As described in Note 2, following retrospective application of ASU 2015-03, ‘Simplifying the Presentation of Debt Issuance Costs’, debt issuance costs related to a recognised debt liability are now reported in the balance sheet as a direct deduction from the face amount of that liability. 2014 balances have been reclassified accordingly.
$213 million (2014: $245 million) in respect of the US defined benefit pension plan; and
$66 million (2014: $39 million) in respect of the international, US non-qualified and UK unfunded defined benefit pension plans.
The following schedules provide information concerning the Legacy Willis UK and US defined benefit pension plans as of and for the years ended December 31:
Amounts recognized in accumulated other comprehensive loss as of December 31, consist of:
The components of the net periodic benefit income and other amounts recognized in other comprehensive (income) loss for the UK and US defined benefit plans are as follows:
On March 6, 2015, Legacy Willis announced to members of the UK defined benefit pension plan that with effect from June 30,
2015, future salary increases would not be pensionable (the ‘salary freeze’). Legacy Willis recognized the salary freeze as a plan amendment at the announcement date. The impact of the salary freeze is to reduce the plan’s projected benefit obligation by approximately $215 million and create a prior service credit which is recognized in other comprehensive income and then
amortized to the statement of operations over the remaining expected service life of active employees.
The following schedule provides other information concerning the Legacy Willis UK and US defined benefit pension plans:
As part of the salary freeze negotiations with the Scheme Trustee, Legacy Willis agreed to the UK plan Trustee’s de-risking strategy which will lead to a strategic target asset allocation with a greater weighting to fixed income assets. Consequently, with effect from March 6, 2015, the expected return on assets assumption was reduced by 50 basis points from 7.00% to 6.50%.
The expected 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 8.75 percent, debt securities 4.30 percent, hedge funds 8.43 percent and real estate 6.53 percent. The expected returns on US plan assets are: US and foreign equities 11.0 percent and debt securities 3.5 percent.
Legacy Willis’ pension plan asset allocations based on fair values were as follows:
The following tables present, at December 31, 2015 and 2014, for each of the fair value hierarchy levels, Legacy Willis’ UK pension plan assets that are measured at fair value on a recurring basis.
The following tables present, at December 31, 2015 and 2014, for each of the fair value hierarchy levels, Legacy Willis’ US pension plan assets that are measured at fair value on a recurring basis.
The following table summarizes the changes in the UK pension plan’s Level 3 assets for the years ended December 31, 2015 and 2014:
Legacy Willis North America has a 401(k) plan covering all eligible employees of Legacy Willis North America and its subsidiaries. The plan allows participants to make pre-tax contributions which Legacy Willis, at its discretion may match. All investment assets of the plan are held in a trust account administered by independent trustees. The Legacy Willis 401(k) matching contributions for 2015 were $16 million (2014: $15 million; 2013: $15 million), matching contributions were increased 1 percent during 2013.
In addition to the Legacy Willis UK and US defined benefit pension plans, it has several smaller defined benefit pension plans in certain other countries in which it operates together with a non-qualified defined benefit pension plan in the United States and an unfunded defined benefit pension plan in the United Kingdom.
In total, a $60 million net pension benefit liability (2014: $39 million) has been recognized in respect of these other schemes.
Represents the transfer in of $224 million and $24 million of benefit obligation as a result of acquiring Miller Insurance Services LLP and Gras Savoye.
Amounts recognized in accumulated other comprehensive loss consist of a net actuarial loss of $27 million (2014: $42 million).
Legacy Willis’ other defined benefit pension plan asset allocations at December 31, 2015 based on fair values were as follows:
The following tables present, at December 31, 2015 and 2014, for each of the fair value hierarchy levels, Legacy Willis’ other defined benefit pension plan assets that are measured at fair value on a recurring basis.
Fixed income securities comprise overseas and UK Government bonds, index linked loan stock and UK and other corporate bonds which are typically valued using quoted market prices. Certain of these investments are classified as Level 2 investments on the basis that the assets are valued at their net asset values calculated by the investment manager and liquidity is not daily.
Level 3 investments, other than $23 million acquired from Miller Insurance Services LLP, did not materially change during the year ended December 31, 2015.
In 2016, Legacy Willis expects to contribute $14 million to its other defined benefit pension plans.
On July 23, 2013, Legacy Willis entered into an amendment to its existing credit facilities to extend both the amount of financing and the maturity date of the facilities. As a result of this amendment, the revolving credit facility was increased from $500 million to $800 million. The maturity date on both the revolving credit facility and the $300 million term loan was extended to July 23, 2018, from December 16, 2016, respectively. At the amendment date, Legacy Willis owed $281 million on the term loan and there was no change to this amount as a result of the refinancing. On February 27, 2015, Trinity Acquisition Limited, a wholly-owned subsidiary of Willis Towers Watson plc, entered into an amendment to the $800 million revolving credit facility permitting Willis Securities, Inc. (‘WSI’), another wholly-owned subsidiary of Willis Towers Watson, to incur up to $400 million of indebtedness under this facility for the purpose of investing in certain underwritten securities in the ordinary course of WSI’s business. Drawings under the $800 million revolving credit facility bear interest at LIBOR plus a margin of 1.25% to 2.00% based upon the Company’s guaranteed senior unsecured long-term debt. A 1.50% margin applies while the Company’s debt rating remains BBB-/Baa3. As of December 31, 2015, $467 million was outstanding under this revolving credit facility (December 31, 2014: $nil).
On March 3, 2014, WSI entered into a $300 million revolving note and cash subordination agreement available for drawing from March 3, 2014 through March 3, 2015. The aggregate unpaid principal amount of all advances is repayable on or before March 3, 2016.
On April 28, 2014, WSI. entered into an amendment to the $300 million revolving note and cash subordination
repayment date. As a result of this amendment, the revolving credit facility was increased from $300 million to $400 million.
houses, including the Financial Industry Regulatory Authority. Advances under the credit facility bear interest at a rate
On August 15, 2013, Legacy Willis issued $250 million of 4.625% senior notes due 2023 and $275 million of 6.125% senior notes due 2043. The effective interest rates of these senior notes are 4.696% and 6.154%, respectively, which include the impact of the discount upon issuance.
On July 25, 2013, Legacy Willis commenced an offer to purchase for cash any and all of its 5.625% senior notes due 2015 and a portion of its 6.200% senior notes due 2017 and its 7.000% senior notes due 2019 for an aggregate purchase price of up to $525 million. On August 22, 2013, the proceeds from the issue of the senior notes due 2023 and 2043 were used to fund the purchase of $202 million of 5.625% senior notes due 2015, $206 million of 6.200% senior notes due 2017 and $113 million of 7.000% senior notes due 2019.
On December 31, 2015, Legacy Willis consolidated $79 million under a bank overdraft arrangement undertaken by Gras Savoye. This borrowing had been entered into by Gras Savoye in the ordinary course of its insurance broking operations and was repaid on January 11, 2016.
(i) Other interest expense for the year ended December 31, 2015 includes an $11 million unwind of the discount on contingent and deferred consideration (2014: $3 million, 2013:$nil ).
The ‘Other’ category includes amounts that principally relate to post placement service provisions, property and employee-related provisions.
Provisions held in the UK for dilapidation on UK properties all previously recognized within Deferred Revenue and Accrued Expenses were transferred to Provisions for Liabilities during 2014.
The above excludes $79 million of short-term borrowings incurred by Gras Savoye in the ordinary course of its business. These borrowings were repaid on January 11, 2016.
Mandatory repayments of debt over the next 12 months include expiration of the 1-year term loan facility expiring December, 2016, maturity of the 4.125% senior notes due March, 2016 and the scheduled repayment of the current portion of the Company’s 7-year term loan. The Company also has the right, at its option, to prepay indebtedness under the credit facility without further penalty and to redeem the senior notes by paying a ‘make-whole’ premium as provided under the applicable debt instrument.
Rent expense amounted to $142 million for the year ended December 31, 2015 (2014: $134 million; 2013: $141 million). The Company’s rental income from subleases was $17 million for the year ended December 31, 2015 (2014: $13 million; 2013: $15 million).
On December 31, 2015, the Company agreed a revised schedule of contributions towards on-going accrual of benefits and deficit funding contributions the Company will make to the UK Plan to the end of 2024. Based on this agreement, contributions in 2016 will total approximately $83 million, of which approximately $53 million relates to contributions towards funding the deficit, approximately $22 million relates to on-going contributions and approximately $8 million to the final contingent contribution following the share buybacks made in 2015.
Annual deficit funding contributions will reduce to approximately $22 million for 2017 through 2020 although additional ‘funding level’ contributions may become payable based on funding level assessments made between December 31, 2017 and 2024. Such annual funding level contributions are capped at approximately $15 million. From 2021 annual deficit funding contributions may be ceased, and instead paid into escrow, if the Scheme is ahead of its funding plan. The Company has also agreed to guarantee the payments under the plan in a standard Pension Protection Fund format.
An additional amount of approximately $9 million will be paid annually into the UK defined benefit plan related to employee’s salary sacrifice contributions.
The total contracted contributions for all plans in 2016 are expected to be approximately $97 million, excluding approximately $9 million in respect of the salary sacrifice contributions.
Certain of Willis Towers Watson’s subsidiaries have given the landlords of some leasehold properties occupied by the Company in the United Kingdom and the United States guarantees in respect of the performance of the lease obligations of the subsidiary holding the lease. The operating lease obligations subject to such guarantees amounted to $676 million and $756 million at
December 31, 2015 and 2014, respectively. The capital lease obligations subject to such guarantees amounted to $10 million as at December 31, 2015 (2014: $11 million).
In addition, the Company has given guarantees to bankers and other third parties relating principally to letters of credit amounting to $24 million and $20 million at December 31, 2015 and 2014, respectively. Willis Group Holdings also guarantees certain of its UK and Irish subsidiaries’ obligations to fund the UK and Irish defined benefit plans.
In May 2011, the Company made a capital commitment of $10 million to Dowling Capital Partners I, LP. As at December 31, 2015 there had been approximately $7 million of capital contributions.
Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by
During the year ended December 31, 2015, the Company, in order to manage interest rate risk arising from these financial assets, entered into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest. The use of interest rate contracts essentially converted groups of short-term variable rate investments to fixed rates. These derivatives were designated as hedging instruments and were for a total notional amount of $300 million.
The Company’s operations are financed principally by $1,906 million fixed rate senior notes maturing through 2043 (shown gross of debt issuance costs) and $240 million under a 7-year term loan facility. The Company has access to (i) $800 million under a revolving credit facility expiring July 23, 2018, (ii) $400 million under a revolving credit facility expiring April 28, 2016 and a repayment date of April 28, 2017, which will be available for regulatory capital purposes related to securities underwriting only, and (iii) $22 million under two further revolving credit facilities, of which $20 million is also only available for specific regulatory purposes. As of December 31, 2015 $467 million (2014: $nil) was drawn on these facilities. Additionally, the Company has access to a 1-year term loan in two tranches of €550 million ($598 million) and $400 million. The €550 million tranche was used to finance the acquisition of Gras Savoye and the $400 million tranche was used to re-finance debt currently held by Legacy Towers Watson & Co which became due on acquisition. As of December 31, 2015 the equivalent of €544 million ($592 million) was utilized on the €550 million tranche and the $400 million tranche was not utilized.
The interest rates of the fixed rate senior notes, revolving credit facilities and the term loans are detailed in Note 18 - ‘Debt’.
forecast Pound sterling expenses exceed Pound sterling revenues, the Company limits its exposure to this exchange rate risk by the use of forward contracts matched to specific, clearly identified cash outflows arising in the ordinary course of business; and
Miller Insurance Services LLP, which is a sterling functional entity, earns significant non-functional currency revenues, the Company limits its exposure to exchange rate changes by the use of forward contracts matched to a percentage of forecast cash inflows in specific currencies and periods.
The fair value of foreign currency contracts is recorded in other assets and other liabilities. For contracts that qualify as accounting hedges, changes in fair value resulting from movements in the spot exchange rate are recorded as a component of other comprehensive income whilst changes resulting from a movement in the time value are recorded in interest expense. For contracts that do not qualify for hedge accounting, the total change in fair value is recorded in other income (expense), net. Amounts held in comprehensive income are reclassified into earnings when the hedged exposure affects earnings.
At December 31, 2015 and 2014, the Company’s foreign currency contracts were predominantly designated as hedging instruments, those not designated as hedging instruments include certain Miller Insurance Services LLP foreign currency contracts and those relating to short-term cash flows and hedges of certain intercompany loans.
The above table includes forward contracts acquired as part of Miller Insurance Services LLP which are not designated as hedging instruments. At December 31, 2015, such contracts had a negative fair value of $3 million.
The Company also enters into foreign currency transactions in order to hedge certain intercompany loans. These derivatives were not designated as hedging instruments and were for a total notional amount of $532 million (December 31, 2014: $352 million). In respect of these transactions, an immaterial amount has been recognized as an asset within other current assets and an equivalent gain has been recognized in other income (expense), net, for the period.
The above table does not include the Miller Insurance LLP non-designated forward contracts which had a fair value of negative $3 million.
The table below presents the effects of derivative financial instruments in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity for years ended December 31, 2015, 2014 and 2013:
At December 31, 2015 the Company estimates, based on current interest and exchange rates, there will be $10 million of net derivative losses on forward exchange rates, interest rate swaps, and treasury locks reclassified from accumulated comprehensive income into earnings within the next twelve months as the forecasted transactions affect earnings.
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, 2015.
The fair values of long-term debt instruments (excluding related fair value hedges) are based on quoted market values and are classified as Level 1 measurements, with the exception of the 7-year term loan facility and drawings under our $800 million revolving credit facility where fair value is determined using observable market data for similar debt instruments of comparable maturities (Level 2 measure).
The following table discloses the Company’s financial instruments where the carrying amount and estimated fair value differ. The fair value amounts shown below are not necessarily indicative of 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 remeasurement of goodwill is classified as non-recurring level 3 fair value assessment due to the significance of unobservable inputs developed using company-specific information, see Note 12 - Goodwill.
Due to the closing date of the Merger, Towers Watson segment results are not presented in this Form 10-K. The combined company segment information is presented to assist the reader in understanding our ongoing integrated company. Please see Item 1 - Business and Note 31 - Subsequent Events for additional information.
For internal reporting and segmental reporting, the following items for which segmental management are not held accountable are excluded from segmental expenses:
See the following table for an analysis of the ‘Corporate and other’ line.
None of the Company’s customers represented more than 10 percent of the Company’s consolidated commissions and fees for the years ended December 31, 2015, 2014 and 2013.
FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES
All direct obligations under the senior notes are jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Trinity Acquisition Limited and Willis Group Limited, collectively the ‘Other Guarantors’, and with Willis Towers Watson, the ‘Guarantor Companies’.
The debt securities that were issued by Willis North America and guaranteed by the entities described above, and for which the disclosures set forth below relate and are required under applicable SEC rules, were issued under an effective registration statement.
Willis Towers Watson, which is a guarantor, on a parent company only basis;
28. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
On March 17, 2011, the Company issued senior notes totaling $800 million in a registered public offering. These debt securities were issued by Willis Towers Watson (‘WTW Debt Securities’) and are guaranteed by certain of the Company’s subsidiaries. Therefore, the Company is providing the condensed consolidating financial information below. The following wholly owned subsidiaries (directly or indirectly) fully and unconditionally guarantee the WTW Debt Securities on a joint and several basis: Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Trinity Acquisition Limited, Willis Group Limited and Willis North America (the ‘Guarantors’).
The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets for the year ended December 31, 2015 of Willis Towers Watson and the Guarantors.
Trinity Acquisition Limited has $525 million senior notes outstanding that were issued on August 15, 2013.
The guarantor structure described above differs from the guarantor structure associated with the senior notes issued by the Company and Willis North America (the ‘Willis North America Debt Securities’) in that Trinity Acquisition Limited is the issuer and not a subsidiary guarantor, and Willis North America, Inc. is a subsidiary guarantor.
the Other Guarantors, which are all wholly owned subsidiaries (directly or indirectly) of the parent. Willis Netherlands Holdings B.V, Willis Investment UK Holdings Limited and TA I Limited are all direct or indirect parents of the issuer and Willis Group Limited and Willis North America Inc., are direct or indirect wholly owned subsidiaries or the issuer;
The entities included in the Other Guarantors column as of December 31, 2015 are Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, Willis North America Inc.,TA I Limited and Willis Group Limited.
At the effective time of the Merger (the ‘Effective Time’), each issued and outstanding share of Towers Watson common stock (the ‘Towers Watson shares’), was converted into the right to receive 2.6490 validly issued, fully paid and nonassessable ordinary shares of Willis (the ‘Willis ordinary shares’), $0.000304635 nominal value per share, other than any Towers Watson shares owned by Towers Watson, Willis or Merger Sub at the Effective Time and the Towers Watson shares held by stockholders who are entitled to and who properly exercised dissenter’s rights under Delaware law.
The Merger was accounted for using the acquisition method of accounting with Willis considered the accounting acquirer of Towers Watson.
A summary of the preliminary fair values of the identifiable assets acquired, and liabilities assumed, of Towers Watson at January 4, 2016 are summarized in the following table.
Represents identified finite-lived intangible assets; primarily relates to customer relationships and core/developed technology and other marketing related intangibles.
Upon completion of the fair value assessment following the Merger, the Company anticipates the ultimate fair values of the net assets acquired will differ from the preliminary assessment outlined above. Generally, changes to the initial estimates of the fair value of assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. Goodwill is calculated as the difference between the acquisition date fair value of the net assets acquired, and represents the value of the Legacy Towers Watson assembled workforce and the future economic benefits that we expect to achieve as a result of the Merger.
The following unaudited pro forma financial information is intended to reflect the impact of the Merger on Willis’ consolidated financial statements as if the Merger had taken place on January 1, 2014 and presents the results of operations of Willis based on the historical financial statements of Willis and Towers Watson after giving effect to the Merger and pro forma adjustments. Pro forma adjustments are included only to the extent they are (i) directly attributable to the Merger, (ii) factually supportable and (iii) with respect to the statement of income, expected to have a continuing impact on the combined results. The accompanying unaudited pro forma financial information is presented for illustrative purposes only and has not been adjusted to give effect to certain expected financial benefits of the Merger, such as revenue synergies, tax savings and cost synergies, or the anticipated costs to achieve these benefits, including the cost of integration activities. The unaudited pro forma results are not indicative of what would have occurred had the Merger taken place on the indicated date.