In New York, we occupy 205,000 square feet of office space at Brookfield Place under a 20-year lease, expiring September 2026.
In Chicago, we occupy 140,000 square feet at the Willis Tower under a lease expiring February 2025. We sub-let approximately 17,000 square feet to a third party.
In Nashville, we occupy 170,000 square feet under a lease expiring April 2026.
This discussion includes references to non-GAAP financial measures as defined in Regulation G of 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.
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measures should be viewed in addition to, not in lieu of, the consolidated financial statements for the year ended December 31, 2014.
This discussion includes forward-looking statements, including under the headings 'Executive Summary', '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.
For additional information regarding our business, see the more detailed discussion under Part I, Item 1 - 'Business' of this Form 10-K.
Early in 2013, the reinsurance market was generally flat; however, as the year progressed we saw changing market sentiment driven by changes in the sources of capital and increases in capital supply in the reinsurance market, most notably within the North American catastrophe-exposed property market. The influx of third-party capital coupled with changes to reinsurance buying patterns and regulatory complexity is leading to growing complexity in the reinsurance market and a softening of prices.
In the face of this challenging environment, we have adopted a strategy to: (1) invest selectively in growth areas, defined by geography, industry sector, and client segment and (2) better coordinate our business so as to bring our clients greater access to the Company's specialty areas and analytical capabilities, among other things. Our growth strategy also involves increasing our investment in, and deployment of, our analytical capabilities.
Total revenues of $3,802 million increased by $147 million, or 4.0 percent over the prior year. This growth included $134 million increase in commissions and fees, led by our International segment which reported high single digit growth, and a net $26 million increase from the impact of acquisitions and disposals. Foreign exchange negatively impacted total revenues by $30 million.
Total operating expenses of $3,155 million increased by $163 million, or 5.4 percent over the prior year. This growth included $36 million of restructuring costs related to the Operational Improvement Program, a $34 million net increase in expenses from acquisitions and disposals, and $6 million adverse foreign currency movements. The remaining increase was primarily due to higher salaries and benefits expense driven by increased headcount, pay reviews, and higher incentive charges, along with increased travel, accommodation and entertainment expenses, and systems costs.
Net income attributable to Willis Group Holdings was $362 million, or $2.00 per diluted share, a decrease of $3 million, or 0.8 percent, from $365 million, or $2.04 per diluted share, in 2013.
Underlying total revenues of $3,802 million increased $177 million, or 4.9 percent, over the prior year. Excluding the net $26 million increase from acquisitions and disposals, organic total revenues increased $151 million, or 4.2 percent over the prior year. This growth was driven by high commissions and fees growth in our International segment, supported by growth in Willis North America and Global. In addition to this, Other income increased $12 million primarily due to a settlement related to a specialty book of business within Global.
The resultant organic operating margin decreased by 20 basis points to 18.2 percent from 18.4 percent in the prior year.
The program began in the second quarter of 2014 and is expected to be complete by the end of 2017. The program is expecting to deliver cumulative cost savings of at least $420 million through 2017 and annual cost savings of approximately $300 million starting in 2018.
Actual cost savings of approximately $11 million were achieved in 2014, the estimated phasing of future cost savings is as follows: at least $60 million in 2015, approximately $135 million in 2016, and approximately $235 million in 2017. The estimated cost savings are before any potential reinvestment for future growth.
To achieve these savings, the Company expects to incur cumulative spend, including capital expenditure, amounting to approximately $410 million through the end of 2017. Program spend in 2014 was $36 million, with approximately $130 million expected for 2015 and the balance of approximately $240 million expected to be incurred in 2016 and 2017.
Total spend, actual savings, and timing may vary positively or negatively from these estimates due to changes in the scope, underlying assumptions, or execution risk of the restructuring plan throughout its duration.
The Company expects that about 70 percent of the annualized 2018 savings would come from role relocation and reduction, and about 30 percent of the savings from real estate, information technology and other areas.
To assist with the analysis of the effectiveness of the program the Company will provide the following metrics annually:
The restructuring costs of $36 million related to the Operational Improvement Program incurred in 2014 included:
$3 million of termination benefits in the North America segment relating to the elimination of 51 positions across a number of North America retail locations;
$11 million in the Global segment, including $10 million of termination benefits related to the elimination of approximately 181 positions from the Willis Insurance UK and UK Reinsurance divisions, in addition to approximately $1 million of professional fees related to a study on process improvement; and
$17 million in Corporate and other, including approximately $16 million of professional fees, primarily related to advisory services, and approximately $1 million related to system implementation and other core resources supporting the program.
During the year ended December 31, 2014 we made the following material acquisitions in line with our strategy to invest in targeted acquisitions with a focus on earnings accretion, competitive position, and fit.
In the second quarter of 2014, the Company acquired 100 percent of Charles Monat Limited and its subsidiaries (collectively referred to as Charles Monat), a life insurance solutions adviser to high net worth clients based in Hong Kong, for cash consideration of $59 million. Additional consideration estimated at $29 million is payable in annual installments over the next five years, based on a multiple of EBITDA of the entities acquired, during the period from May 25, 2014 until September 2, 2019. This consideration has been assessed to have a fair value of $12 million at the date of acquisition.
During 2014, we made changes to the non-GAAP financial measures that we use to provide additional meaningful methods of evaluating the Company’s operating performance replacing our adjusted measures with new underlying measures and introduced new organic non-GAAP financial measures.
In addition to these certain specified items, we exclude the period-over-period foreign currency movements to calculate our underlying non-GAAP financial measures and further exclude the twelve month impact from acquisitions and disposals to calculate our organic non-GAAP financial measures.
Additionally, prior year total revenues, total expenses and net income (loss) and diluted earnings per share have been rebased to current period exchange rates to eliminate the impact of year over year foreign exchange movements.
The following items have been excluded from total revenues, total expenses, salaries and benefits, other operating expenses, operating income and net income (loss) as applicable:
A reconciliation of reported net income (loss) attributable to Willis Group Holdings, the most directly comparable GAAP measures, to underlying and organic EBITDA, is as follows (in millions, except per share data):
A reconciliation of reported net income (loss) attributable to Willis Group Holdings and reported earnings per diluted share, the most directly comparable GAAP measures, to underlying net income and underlying earnings per diluted share, is as follows (in millions, except per share data):
The following table is a summary of our revenues, operating income (loss), operating margin, net income (loss) and diluted earnings per share (in millions, except per share data and percentages):
The Global segment reported 2.1 percent growth in commissions and fees, comprising 1.4 percent organic growth and a 0.9 percent positive impact from foreign currency translation. This growth was partially offset by a net 0.2 percent decline from acquisitions and disposals primarily due to a disposal in third quarter 2013.
The International segment reported 9.7 percent growth in commissions and fees compared with 2013, comprising 9.0 percent organic growth and 5.8 percent positive impact from the acquisitions of Max Matthiessen and Charles Monat. This was partially offset by a 5.1 percent negative impact from foreign currency translation.
Organic commissions and fees growth by segment is discussed further in 'Review of Segmental Results', below.
Salaries and benefits were $107 million, or 4.8 percent, higher in 2014 compared with 2013 and includes a net $20 million increase from acquisitions and disposals, $3 million of adverse foreign currency movements, and $29 million benefit from the
Depreciation expense was $92 million in 2014, compared with $94 million in 2013. The decrease of $2 million included $5 million benefit from non-recurrence of 2013 expense reduction initiative costs offset by $1 million of adverse foreign currency movements.
a tax benefit of $1 million associated with the $14 million pre-tax expense arising in relation to the Venezuela currency devaluation;
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 2014 was $14 million compared to $nil in 2013. The increase was primarily due to the non-recurrence of charges relating to the 2013 reorganization program and other non-recurring items, with improved underlying financial performance, in Gras Savoye.
Total revenues increased by $175 million, or 5.0 percent, in 2013 compared to 2012. This was primarily due to 4.9 percent growth in organic commissions and fees, partially offset by a 0.3 percent negative impact from foreign exchange and a $3 million decrease in investment income due to continued falling yields on deposits.
Total commissions and fees in 2013 were $3,633 million, up $175 million, or 5.1 percent, from $3,458 million in 2012. This increase was due to organic growth of 4.9 percent and growth through acquisitions and disposals of 0.5 percent partially offset by negative foreign currency movements of $13 million or 0.3 percent.
Investment income in 2013 at $15 million was $3 million lower than in 2012. Organic commissions and fees growth by segment is discussed further in 'Review of Segmental Results', below.
Salaries and benefits increased by $268 million, or 10.8 percent, in 2013 compared with 2012. Foreign currency movements lowered salaries and benefits by $9 million, or 0.4 percent.
Depreciation expense was $94 million in 2013, compared with $79 million in 2012. The increase of $15 million includes $5 million which was incurred in first quarter 2013 relating to the rationalization of property and systems as part of our Expense Reduction Initiative. The remaining $10 million increase is primarily due to a number of significant information technology related projects becoming operational during the year and the write-off of replaced systems and other assets
a net benefit of $4 million associated with a reduction in the corporation tax rate being applied to temporary tax differences in the UK;
a net benefit of $7 million associated with a change in the recognition of unrecognized tax benefits outside of the US; and
a net expense of $1 million associated with tax on profits of prior periods to bring in line the Company’s tax provision to filed tax positions.
Cash flows from operating activities fell to $477 million in 2014 from $561 million in 2013. In addition, $6 million was provided from the disposal of fixed and intangible assets (2013: $12 million), $134 million proceeds from the issue of shares (2013: $155 million), and $86 million proceeds from the disposal of operations (2013: $20 million).
As at December 31, 2014 there was $nil drawn down on all four of our revolving credit facilities (2013: $nil). During the year ended December 31, 2014, we made five drawings totaling $1,175 million and five repayments of $1,175 million on the Willis Securities facility.
The Company is authorized to buy back its ordinary shares by way of redemption, and will consider whether to do so from time
Total debt, total equity and the capitalization ratio at December 31, 2014 and 2013 were as follows (in millions, except percentages):
At December 31, 2014 the only mandatory debt repayments falling due over the next 12 months are $148 million outstanding on our 5.625% senior notes, scheduled repayments on our 7-year term loan totaling $17 million, and $1 million outstanding on our 3-year term loan.
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 $150 million of negative working capital movements.
Net cash used in investing activities in 2013 was $120 million including, capital expenditure of $112 million, cash used to purchase subsidiaries, intangible assets and other investments of $44 million partly offset by $6 million cash received from the sale of fixed and intangible assets and $24 million of proceeds from the disposal of operations and the sale of the Company’s holding in a Spanish associate company.
As of December 31, 2014, we had fiduciary funds of $1.9 billion, compared with $1.7 billion at December 31, 2013.
The Company is authorized to buy back shares, by way of redemption, and will consider whether to do so from time to time, based on many factors, including market conditions. The Company is authorized to purchase up to one billion shares from time to time in the open market (such open market purchases would be effected as redemptions under Irish law) and it may also redeem its shares through negotiated trades with persons who are not affiliated with the Company as long as the cost of the acquisition of the Company's shares does not exceed a certain authorized limit.
In February 2015, the Company announced that, during the year, it intended to buyback approximately $175 million of shares under this authorization, from time to time, depending on many factors including market conditions to offset the increase in shares outstanding resulting from the exercise of employee stock options. The buybacks would be made in the open market or through privately-negotiated transactions, from time to time, depending on market conditions.
Cash dividends paid in 2014 were $210 million compared with $193 million in 2013 and $185 million in 2012. In February 2015, we declared a quarterly cash dividend of $0.31 per share, an annual rate of $1.24 per share, an increase of 3.3 percent over the prior 12 month period.
Our Global operations comprised Willis Re, Willis Insurance UK, Facultative, Risk, and Willis Capital Markets & Advisory (WCMA).
The following table sets out revenues, operating income, organic commissions and fees growth and operating margin for the three years ended December 31, 2014 (in millions, except percentages):
Commissions and fees of $1,386 million were $28 million, or 2.1 percent, higher in 2014 compared with 2013. The increase includes organic growth of 1.4 percent, a positive 0.9 percent impact from foreign currency movements, partially offset by a net 0.2 percent decline due to acquisitions and disposals.
The 1.4 percent organic growth in commissions and fees was driven by strong new business growth and higher client retention levels compared with the year ago period, partially offset by the negative impact of rates and the non-recurrence of significant construction projects in 2013.
Willis Re reported mid single-digit organic commissions and fees growth, with its North America business leading the way with high single-digit results. 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.
Willis Insurance UK reported a low single-digit decline, primarily due to poor performance in the Insolvency and Willis Commercial Network businesses, the non-recurrence of large construction projects in 2013 in the Construction, Property & Casualty business, and the negative impact from the acquisitions and disposals noted above.
Other income of $15 million included a $12 million settlement related to a specialty book of business.
Total operating expenses of $1,058 million were $70 million, or 7.1 percent, higher for 2014 compared with 2013. Excluding the $25 million, or 2.7 percent, impact of adverse foreign currency movements, total operating expenses increased $45 million or 4.4 percent.
The $45 million growth in expenses was due to higher salaries and benefits as a result of the increase in headcount relative to the prior year, annual salary reviews and higher incentives which were linked to commissions and fees performance. 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 a legal claim settlement and higher systems and premises costs.
The 4.3 percent organic growth in commissions and fees was driven by strong new business growth and higher client retention levels compared with the year ago period, partially offset by lost business. Rates had no material impact on commissions and fees.
Willis Insurance UK reported mid single-digit growth, with solid performance in our Financial and Executive Risk, and P&C and Construction. Growth from new business was solid and we saw increased client retention levels compared to 2012.
Operating margin was 27.6 percent in 2013 and 30.5 percent in 2012. The decline was driven additional expenses due to higher salaries and benefits, as a result of increased incentives from the change in remuneration policy and growth in commissions and fees. In addition, this increase also included the impact of the increase in headcount relative to the prior year, annual salary reviews and higher charges for share-based compensation. This was partially offset by solid commissions and fees growth.
Commissions and fees in 2013 included a positive $5 million adjustment to align the recognition of revenue in the North America Personal Lines business with the rest of the Group.
Growth was achieved across most of our North America regions, led by the South, Atlantic and Northeast regions as a result of new business growth.
Total operating expenses of $1,097 million were $12 million or 1.1 percent, lower for 2014 compared to 2013.
Commissions and fees of $1,349 million were $68 million, or 5.3 percent, higher in 2013 compared with 2012.
This increase was primarily due to organic growth of 4.8 percent in 2013 compared with 2012 and a 0.6 percent positive impact from the acquisition of Avalon Actuarial, Inc. in fourth quarter 2012, partially offset by a 0.1 percent negative impact from foreign currency movements.
The 4.8 percent organic growth in commissions and fees was driven by strong new business growth and higher client retention levels compared with the year ago period, partially offset by lost business. Rates had a small positive impact on the full year's commissions and fees.
Our International business comprised our retail operations in Western Europe, Central and Eastern Europe, the United Kingdom, Asia, Australasia, the Middle East, South Africa and Latin America. The services provided are focused according to the characteristics of each market and vary across offices, but generally include direct risk management and insurance brokerage and employee benefits consulting.
Commissions and fees of $1,016 million were $90 million, or 9.7 percent, higher in 2014 compared with 2013.
Client retention rates were largely flat at 93.7 percent for 2014 compared to 93.2 percent for 2013.
Total expenses of $825 million were $70 million, or 9.3 percent, higher for 2014 compared with 2013. Foreign currency movements favorably impacted expenses by $22 million or 3.3 percent; excluding the impact of foreign currency movements total expenses increased $92 million or 12.6 percent.
The $92 million increase in total expenses included $44 million year-over-year net increase from acquisitions, increased growth in Salaries and benefits due to higher headcount numbers relative to the prior year, and pay reviews which included the mandated pay reviews in Latin America. The segment also reported an increase in travel, accommodation and entertaining,
professional fees and irrecoverable VAT. This was partially offset by the $3 million gain on disposal of fixed assets and an E&O provision release.
In addition, the year-on-year growth included $5 million restructuring costs relating the Operational Improvement Program.
Operating margin in International was 19.3 percent in 2014, compared with 19.1 percent in 2013. The increase was driven by the increase in expenses discussed above partially offset by solid commissions and fees growth.
Commissions and fees included the negative impact of a $15 million adjustment to align the recognition of revenue in China with the rest of the Group.
Asia reported low-single digit growth. We recorded good growth throughout the region especially in Hong Kong and Korea, however the negative $15 million revenue recognition adjustment partially offset these results.
The UK reported a low single-digit decline amid a challenging economic environment.
Operating margin in International was 19.1 percent in 2013, compared with 18.9 percent in 2012. The increase was driven by solid commission and fees growth, partially offset by expense growth driven by higher salaries and benefits, as a result of new hires, annual salary reviews, higher incentives due to the change in remuneration policy, and an increased charge for share-based compensation.
Insurance recovery, recorded in Other operating expenses, related to a previously disclosed fraudulent activity in Chicago.
Corporate and Other expenses of $175 million were $35 million higher in 2014 compared with 2013.
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. We also have smaller defined benefit plans in Ireland, Germany, Norway and the Netherlands, a non-qualified plan in the US and an unfunded plan in the UK. These smaller defined benefit plans have combined total assets of $171 million and a combined net liability for pension benefits of $39 million as of December 31, 2014. Elsewhere, pension benefits are typically provided through defined contribution plans.
Based on December 31, 2014 assumptions, we expect the net pension credit in 2015 will increase $31 million for the UK plan. The net pension credit will decrease by $2 million for the US plan and the net pension charge will remain unchanged at $4 million for the other plans.
During 2014 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 2014 was 3.60% a decrease of 80 basis points from the discount rate of 4.40% used at December 31, 2013. During 2014, sterling high-quality corporate bond yields fell significantly at all durations. Consequently, the rate consistent with the expected maturity of the plan's liabilities has also decreased.
The mortality assumption chosen should reflect the long term life expectancy of pension scheme members and represent the best estimate assumptions used as opposed to more prudent assumption used by pension scheme trustees for funding purposes.
As an indication of the longevity assumed, our calculations assume that a UK male retiree aged 65 at December 31, 2014 would have a life expectancy of 24 years.
The discount rate at December 31, 2014 was 3.90%, an decrease of 86 basis points from the discount rate of 4.76% at December 31, 2013. The decrease in the discount rate reflects the decrease in high-quality corporate bond yields during 2014.
As an indication of the longevity assumed, our calculations assume that a US male retiree aged 65 at December 31, 2014, would have a life expectancy of 22 years.
Application of the impairment test involves the use of discounted cash flow models and requires significant judgment, including:
We use comparable market earnings multiple data and our Company's market capitalization to corroborate our reporting unit valuations.
Our annual goodwill impairment analysis is performed each year at October 1. At October 1, 2014 our analysis showed the estimate fair value of each reporting unit was significantly in excess of carrying value, and therefore did not result in an impairment charge (2013: $nil; 2012: $492 million).
At December 31, 2014, we had gross deferred tax assets of $426 million (2013: $383 million) against which a valuation allowance of $280 million (2013: $196 million) had been recognized. To the extent that:
Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. We recognize the benefit of uncertain tax positions in the financial statements when it is more likely than not that the position will be sustained on examination by the tax authorities. The benefit recognized is the largest amount of tax benefit that has a greater than 50% likelihood of being realized on settlement with the tax authority, assuming full knowledge of the position and all relevant facts.
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.
The above excludes $19 million for liabilities for unrecognized tax benefits as we are unable to reasonably predict the timing of settlement of these liabilities.
In addition, based on this agreement, further contributions would be payable based on a profit share calculation (equal to 20 percent of EBITDA in excess of $900 million per annum as defined by the revised schedule of contributions) and an exceptional return calculation (equal to 10 percent of any exceptional returns made to shareholders, for example, share buybacks, and special dividends). We expect to make an exceptional return contribution of $21 million during 2015 as a result of share buyback activity during 2014. Aggregate contributions under the deficit funding contribution and the profit share calculation are capped at £312 million ($486 million) over the six years ended December 31, 2017.
We are currently negotiating a new funding arrangement, which we are required to do every three years, which may further change the contributions we are required to make in the future.
Information regarding new accounting standards and their impact on the financial statements is set forth in Note 2 - ‘Basis of Presentation and Significant Accounting Policies’ 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, the Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on the Company’s financial condition, results of operations or liquidity.
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2014
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2014
We have audited the accompanying consolidated balance sheets of Willis Group Holdings Public Limited Company and subsidiaries (the ‘Company’) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In accordance with the requirements of Accounting Standards Codification 480-10-S99-3A we have determined that the noncontrolling interest in Max Matthiessen Holding AB should be disclosed as a redeemable noncontrolling interest and presented within mezzanine or temporary equity
In May 2014, the FASB issued ASU No. 2014-09, 'Revenue From Contracts With Customers'. The new standard supersedes most current revenue recognition guidance and eliminates industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. Entities have the option of using either a 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 June 2014, the FASB issued guidance on the accounting for stock compensation where share-based payment awards granted to employees required specific performance targets to be achieved in order for employees to become eligible to vest in the awards and such performance targets could be achieved after an employee completes the requisite service period. The amendment in this update requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. The guidance is applicable to the Company for interim and annual reporting periods beginning after December 15, 2015, although earlier adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, 'Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists', a consensus of the FASB Emerging Issues Task Force which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward ('NOL'), or similar tax loss, or a tax credit carryforward exists. Such unrecognized tax benefits are required to be presented as a reduction of a deferred tax asset for a NOL or other tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed.
The period for which the Company holds such funds is dependent upon the date the insured remits the payment of the premium to the Company, or the date the Company receives refunds from the insurers, and the date the Company is required to forward such payment to the insurer, or insured, respectively.
Goodwill represents the excess of the cost of businesses acquired over the fair value of identifiable net assets at the dates of acquisition. The Company reviews goodwill for impairment annually and whenever facts or circumstances indicate that the carrying amounts may not be recoverable. In testing for impairment, the fair value of each reporting unit is compared with its carrying value, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the amount of an
Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
GS & Cie Groupe ('Gras Savoye') is the principal associate of the Company. It is France's leading insurance broker. The Company has a call option to purchase 100 percent of the capital of Gras Savoye, a decision on whether to exercise this or not will be taken by April 30, 2015, for exercise during 2016.
The Company evaluates whether its contracts include clauses or conditions which would be required to be separately accounted for at fair value as embedded derivatives.
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations in the period in which the change is enacted. Deferred tax assets are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company adjusts valuation allowances to measure deferred tax assets at the amount considered realizable in future periods if the Company’s facts and assumptions change. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
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 examination by the tax authorities upon 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, assuming full knowledge of the position and all relevant facts. 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. Such adjustments are reflected as increases or decreases to income taxes in the period in which they are determined.
The Company has two principal defined benefit pension plans which cover approximately half of employees in the United States and United Kingdom. Both these plans are now closed to new entrants. New employees in the United Kingdom are offered the opportunity to join a defined contribution plan and in the United States are offered the opportunity to join a 401(k) plan. In addition to the Company’s UK and US defined benefit pension plans, the Company has several smaller defined benefit pension plans in certain other countries in which it operates including a US non-qualified plan and an unfunded plan in the UK.. Elsewhere, pension benefits are typically provided through defined contribution plans.
to employees and non-employee directors of the Company who perform services for the Company.
The Company expenses all equity-based compensation on a straight-line basis over the requisite service period based upon the fair value of the award on the date of grant, the estimated achievement of any performance targets and anticipated staff retention. The awards under equity-based compensation are classified as equity and included as a component of equity on the 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.
Other income comprises gains on disposal of intangible assets, which primarily arise from settlements through enforcing non-compete agreements in the event of losing accounts through producer defection or the disposal of books of business.
Severance costs that have arisen in the normal course of business amounted to $8 million in the year ended December 31, 2014 (2013: $4 million; 2012: $6 million).
On December 31, 2014, 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, 2014 are described below. The compensation cost that has been recognized for those plans for the year ended December 31, 2014 was $52 million (2013: $42 million; 2012: $32 million). The total income tax benefit recognized in the statement of operations for share-based compensation arrangements for the year ended December 31, 2014 was $12 million (2013: $9 million; 2012: $9 million).
This plan, which was established on April 25, 2012, provides for the granting of incentive stock options, time-based or performance-based non-statutory stock options, share appreciation rights, restricted shares, time-based or performance-based restricted share units ('RSUs'), performance-based awards and other share-based grants or any combination thereof (collectively referred to as 'Awards') to employees, officers, directors and consultants ('Eligible Individuals') of the Company. The Board of Directors also adopted a sub-plan under the 2012 plan to provide an employee sharesave scheme in the United Kingdom.
There are 13,776,935 shares available for grant under this plan. In addition, shares subject to awards that were granted under the Willis Group Holdings 2008 Share Purchase and Option Plan, that terminate, expire or lapse for any reason will be made available for future Awards 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.
Certain options are exercisable in pounds sterling and are converted to dollars using the exchange rate at December 31, 2014.
The weighted average grant-date fair value of time-based options granted during the year ended December 31, 2014 was $5.33 (2013: $7.74; 2012: $6.98). The total intrinsic value of options exercised during the year ended December 31, 2014 was $22 million (2013: $32 million; 2012: $8 million). At December 31, 2014 there was $15 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under time-based stock option plans; that cost is expected to be recognized over a weighted average period of 2 years.
There were no performance-based options granted during the year ended December 31, 2014 or the year ended December 31, 2013. The weighted average grant-date fair value of performance-based options was $7.61 in the year ended December 31, 2012. The total intrinsic value of options exercised during the year ended December 31, 2014 was $15 million (2013: $14 million; 2012: $5 million). At December 31, 2014 there was $2 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.
Cash received from option exercises under all share-based payment arrangements for the year ended December 31, 2014 was $134 million (2013: $155 million; 2012: $53 million). The actual tax benefit recognized for the tax deductions from option exercises of the share-based payment arrangements totaled $20 million for the year ended December 31, 2014 (2013: $28 million; 2012: $8 million).
In April 2014, the Company announced a multi-year operational improvement program designed to strengthen the Company’s client service capabilities and to deliver future cost savings (hereinafter referred to as the Operational Improvement Program). The main elements of the program, which is expected to be completed by the end of 2017, include the following:
lease consolidation in real estate and reductions in ratios of seats per employee and square footage of floor space per employee; and
The reconciliation between US federal income taxes at the statutory rate and the Company’s provision for income taxes on continuing operations is as follows:
Willis Group Holdings 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 a result of certain realization requirements of ASC 718 Compensation - Stock Compensation, the Company recognized $8 million of previously unrecognized deferred tax assets that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity was increased by this $8 million as of December 31, 2014.
The amount charged to tax expense in the table above differs from the effect of $7 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.
At December 31, 2014 the Company had deferred tax assets of $146 million (2013: $187 million), net of the valuation allowance. Management believes, based upon the level of historical taxable income and projections for future taxable income, it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
All UK tax returns have been filed timely and are in the normal process of being reviewed, by HM Revenue & Customs. There are no material ongoing inquiries in relation to filed UK returns. In other tax jurisdictions the Company is currently not subject to any examinations for any year prior to 2004.
Options to purchase 2.4 million shares and 1.5 million restricted stock units for the year ended December 31, 2014, were not included in the computation of the dilutive effect of stock options because the effect was antidilutive (2013: 2.1 million shares and 1.3 million restricted stock units; 2012: 16.7 million shares and 2.5 million restricted stock units).
Additional consideration estimated at $29 million is payable in annual installments over the next 5 years, based on a multiple of EBITDA of the entities acquired, during the period from May 25, 2014 until September 2, 2019. This consideration has been assessed to have a fair value of $12 million at the date of acquisition.
On acquisition the Company recognized acquired intangible assets of $35 million of which $27 million was in respect of client relationships, which are being amortized over an expected life of 11 years. The remaining $8 million of intangible assets relate to carrier relationships and trade names and are both being amortized over 5 years.
In addition to the above acquisitions, the Company completed a number of smaller acquisitions during 2014 for aggregated consideration of $27 million and consequently recognised intangible assets of $16 million and goodwill of $14 million.
An analysis of fixed asset activity for the years ended December 31, 2014 and 2013 are as follows:
The changes in the carrying amount of goodwill by reporting unit for the years ended December 31, 2014 and 2013, are as follows:
The Company reviews goodwill for impairment annually, or whenever events of circumstances indicate impairment may have occurred. In the first step of the impairment test, the fair value of each reporting unit is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the amount of an impairment loss, if any, is
calculated in the second step of the impairment test by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
The aggregate amortization of intangible assets for the year ended December 31, 2014 was $54 million (2013: $55 million; 2012: $59 million). The estimated aggregate amortization of intangible assets for each of the next five years ended December 31 is as follows:
The Company maintains two principal defined benefit pension plans that cover approximately half of the Company's employees in the United States and United Kingdom. Both of these plans are now closed to new entrants and with effect from May 15, 2009, the Company closed the US defined benefit plan to future accrual. New employees in the United Kingdom are offered the opportunity to join a defined contribution plan and in the United States are offered the opportunity to join a 401(k) plan. In addition to the Company’s UK and US defined benefit pension plans, the Company has several smaller defined benefit pension plans in certain other countries in which it operates including a US non-qualified plan and an unfunded plan in the UK. Elsewhere, pension benefits are typically provided through defined contribution plans. It is the Company’s policy to fund pension costs as required by applicable laws and regulations.
At December 31, 2014, the Company recorded, on the Consolidated Balance Sheets:
a pension benefit asset of $314 million (2013: $278 million) representing:
a total liability for pension benefits of $284 million (2013: $136 million) representing:
$245 million (2013: $107 million) in respect of the US defined benefit pension plan; and
$39 million (2013: $29 million) in respect of the international, US non-qualified and UK unfunded defined benefit pension plans.
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 8.86 percent, debt securities 4.38 percent, hedge funds 8.38 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 3.6 percent.
In the United Kingdom, the pension trustees, in consultation with the Company, maintain a diversified asset portfolio and this together with contributions made by the Company is expected to meet the pension scheme’s liabilities as they become due. The UK plan’s assets are divided into 13 separate portfolios according to asset class and managed by 10 investment managers. The broad target allocations are UK and foreign equities (36.5 percent), debt securities (43.5 percent), hedge funds (15 percent) and real estate (5 percent). In the United States, the Company’s investment policy is to maintain a diversified asset portfolio, which together with contributions made by the Company is expected to meet the pension scheme’s liabilities as they become due. The US plan’s assets are currently invested in 18 funds representing most standard equity and debt security classes. The broad target allocations are US and foreign equities (50 percent) and debt securities (50 percent).
The following tables present, at December 31, 2014 and 2013, for each of the fair value hierarchy levels, the Company’s UK pension plan assets that are measured at fair value on a recurring basis.
The following tables present, at December 31, 2014 and 2013, for each of the fair value hierarchy levels, the Company’s US pension plan assets that are measured at fair value on a recurring basis.
For disclosure purposes these smaller additional US and UK plans are combined with the Company's other defined benefit pension plans in the tables below.
Represents the transfer in of the benefit obligation for UK unfunded plan from non-current other liabilities.
The accumulated benefit obligation for the Company’s other defined benefit pension plans was $203 million (2013: $191 million).
The components of the net periodic benefit cost and other amounts recognized in other comprehensive loss for the other defined benefit pension plans are as follows:
The estimated net loss for the other defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $1 million.
The Company’s other defined benefit pension plan asset allocations at December 31, 2014 based on fair values were as follows:
In 2015, the Company expects to contribute $10 million to the other defined benefit pension plans.
agreement to increase the amount of financing and to extend both the end date of the original credit period and the original
April 28, 2016 from March 3, 2016. As of December 31, 2014 $nil was outstanding under this revolving credit facility.
allow Willis Securities to meet or exceed capital requirements of regulatory agencies, self-regulatory agencies and their clearing
equal to (a) for Eurocurrency Loans, LIBOR plus 1.50% to 2.25%, and (b) for base rates Loans, the highest of (i) the Federal
The Company also has available $3 million (2013: $4 million) in lines of credit, of which $1 million was drawn as of December 31, 2014 (2013: $nil).
The claims, lawsuits and other proceedings provision includes E&O cases which represents management’s assessment of liabilities that may arise from asserted and unasserted claims for alleged errors and omissions that arise in the ordinary course of the Group’s business. Where some of the potential liability is recoverable under the Group’s external insurance arrangements, the full assessment of the liability is included in the provision with the associated insurance recovery shown separately as an asset.
The ‘Other’ category includes amounts relating to vacant property provisions of $4 million (2013: $10 million).
Rent expense amounted to $134 million for the year ended December 31, 2014 (2013: $141 million; 2012: $135 million). The Company’s rental income from subleases was $13 million for the year ended December 31, 2014 (2013: $15 million; 2012: $17 million).
In the United Kingdom, the Company is required to agree a funding strategy for the UK defined benefit plan with the plan's trustees. In March 2012, the Company 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 over the six years ended December 31, 2017. Contributions in each of the next three years would total approximately $75 million, of which approximately $19 million relates to on-going contributions calculated as 15.9 percent of active plan members' pensionable salary and approximately $56 million that relates to contributions towards the funding deficit.
In addition, based on this agreement, further contributions would be payable based on a profit share calculation (equal to 20 percent of EBITDA in excess of $900 million per annum as defined by the revised schedule of contributions) and an exceptional return calculation (equal to 10 percent of any exceptional returns made to shareholders, for example, share buybacks, and special dividends). The Company expects to make an exceptional return contribution of $21 million during 2015 as a result of share buyback activity during 2014. Aggregate contributions under the deficit funding contribution and the profit share calculation are capped at £312 million ($486 million) over the six years ended December 31, 2017.
An additional amount of approximately $10 million will be paid annually into the UK defined benefit plan related to employee's salary sacrifice contributions.
In May 2011, the Company made a capital commitment of $10 million to Dowling Capital Partners I, LP. As at December 31, 2014 there had been approximately $7 million of capital contributions.
to time according to developments. These provisions have been recognized in other operating expenses to the extent that losses are deemed probable and reasonably estimable. Matters that are not probable or reasonably estimable have not been provided for and the Company does not believe a reasonable possible range of losses, for these matters, can be estimated.
On the basis of current information, the Company does not expect that the actual claims, lawsuits and other proceedings to
which the Company is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will
ultimately have a material adverse effect on the Company’s financial condition, results of operations or liquidity. Nonetheless,
given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and
disputes with insurance companies, it is possible that an adverse outcome in certain matters could, from time to time, have a
material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
In addition to the note below, see Note 25 - Fair Value Measurements for information about the fair value hierarchy of derivatives.
Through the fourth quarter of 2011, in order to manage interest rate risk relating to Fiduciary funds, the Company entered into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest denominated in the various currencies related to the short-term investments. During the second quarter 2012, the Company closed out its legacy position relating to such instruments. The fair value of these swaps at the close out date was $16 million, representing a cash settlement amount on termination. In connection with the terminated swaps, the Company retained a gain of $15 million in accumulated other comprehensive income. This gain is being reclassified into earnings in line with the forecasted swap transactions. The Company expects approximately $1 million of the gain to be recognized in the consolidated statement of operations in 2015.
At December 31, 2014 and 2013, the Company had no derivative financial instruments that were designated as cash flow hedges of interest rate risk in investments.
The 7-year term loan facility bears interest at LIBOR plus 1.50% and drawings under the revolving credit facility bear interest at LIBOR plus 1.50%. These margins apply while the Company’s debt rating remains BBB-/Baa3. Should the Company’s debt rating change, then the margin will change in accordance with the credit facilities agreements. The fixed rate senior notes bear interest at various rates as detailed in Note 18 - ‘Debt’.
During the year ended December 31, 2013, the Company closed out the above interest rate swaps and received a cash settlement of $13 million on termination.
To hedge against the potential variability in benchmark interest rates in advance of the anticipated debt issuance, the Company entered into two short-term treasury locks during the three months ended June 30, 2013. These were closed out during the three months ended September 30, 2013 following the issue of the new senior notes described in Note 18 - 'Debt'. The fair value of these treasury locks at the close out date was $21 million, received as a cash settlement on termination.
to the extent the UK operations earn significant revenues in Euros and Japanese yen, the Company limits its exposure to changes in the exchange rate between the US dollar and these currencies by the use of forward contracts matched to a
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 interest expense. Amounts held in comprehensive income are reclassified into earnings when the hedged exposure affects earnings.
At December 31, 2014 and 2013, the Company’s foreign currency contracts were all designated as hedging instruments except for those relating to short-term cash flows and hedges of certain intercompany loans.
In addition to forward exchange contracts, we undertake short-term foreign exchange swaps for liquidity purposes. These are not designated as hedges and do not qualify for hedge accounting. The fair values at December 31, 2014 and 2013 were immaterial.
During the year ended December 31, 2014, the Company entered into a number of 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 $352 million (December 31, 2013: $228 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.
In addition during the year ended December 31, 2014, in order to hedge the Company's exposure relating to the purchase price consideration for acquiring a 75.8 percent holding in Max Matthiessen AB, the Company entered into a series of forward exchange contracts. As a result of these transactions the Company recognized a $14 million expense in other income (expense), net, and an equivalent reduction to cash and cash equivalents in the year.
Derivative financial instruments-Market values have been used to determine the fair value of interest rate swaps and forward foreign exchange contracts based on estimated amounts the Company would receive or have to pay to terminate the agreements, taking into account the current interest rate environment or current foreign currency forward rates. Such financial instruments are classified as Level 2 in the fair value hierarchy.
The following table presents the carrying values and estimated fair values of the Company's financial instruments not measured at fair value. 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 accounting policies of the segments are consistent with those described in Note 2 - 'Basis of Presentation and Significant Accounting Policies'.
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, 2014, 2013 and 2012.
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 (previously registered as Trinity Acquisition plc) and Willis Group Limited, collectively the 'Other Guarantors', and with Willis Group Holdings, the 'Guarantor Companies'.
Trinity Acquisition Limited (previously registered as Trinity Acquisition plc) has $525 million senior notes outstanding that were issued on August 15, 2013.
the Other Guarantors, which are all 100 percent directly or indirectly owned subsidiaries 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 100 percent directly or indirectly owned subsidiaries or the issuer;
Trinity Acquisition Limited, which is the issuer and is a 100 percent indirectly owned subsidiary of the parent;