In London we occupy a prime site comprising 491,000 square feet spread over a 28 story tower and adjoining 10 story building. We have a 25-year lease on this property, which expires June 2032 and we sub-let the 10-story adjoining building.
In North America outside of New York and Chicago, we lease approximately 2.0 million square feet over 120 locations. In 2009, we integrated the
In New York, we occupy 200,000 square feet of office space at One World Financial Center under a 20 year lease, expiring September 2026.
Outside of North America and London we lease approximately 1.3 million square feet of office space in over 190 locations.
and provide a measure against which our businesses may be assessed in the future. These financial measures should be viewed in addition to, not in lieu of, the Company’s consolidated financial statements for the year ended December 31, 2009.
This discussion includes forward-looking statements, including under the headings ‘Business Overview and Market Outlook’, ‘Executive Summary’, ‘Operating Results - Group, Revenues’, ‘Interest in Earnings of Associates’, ‘Operating Results - Segment Information’, ‘Liquidity and Capital Resources’ and ‘Contractual obligations - pensions’. Please see ‘Information Concerning 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 the forward-looking statements.
On September 24, 2009, Willis-Ireland was incorporated in Ireland to facilitate the redomicile of the Group’s parent company from Bermuda to Ireland. Willis-Ireland operated as a wholly-owned subsidiary of Willis-Bermuda until the Effective Time, when the outstanding common shares of Willis-Bermuda were canceled and Willis-Ireland issued ordinary shares, with substantially the same rights and preferences, on a one-for-one basis to the holders of the Willis-Bermuda common shares that were canceled. Upon completion of this transaction, Willis-Ireland replaced Willis-Bermuda as the ultimate parent company of the Group and Willis-Bermuda became a wholly-owned subsidiary of
We derive most of our revenues from commissions and fees for brokerage and consulting services and do not determine the insurance premiums on which our commissions are generally based. Fluctuations in these premiums charged by the insurance carriers have a direct and potentially material impact on our results of operations. Commission levels generally
continued into 2008 with further premium rate declines averaging 10% across our markets. The soft market had an adverse impact on our commission revenues and operating margin from 2005 through 2008.
Our North America and UK and Irish retail operations have been particularly impacted by the weakened economic climate and continued soft market with no material improvement in rates across most sectors. This has resulted in declines in 2009 revenues in these operations, particularly amongst our smaller clients who are especially vulnerable to the economic downturn.
Operating margin for full year 2009 was 21 percent compared with 18 percent for 2008. The increase over 2008 was attributable to organic growth in commissions and fees, continuing control of costs and favorable foreign exchange movements, offset by increased pension costs and amortization of intangible assets.
Organic revenue growth of 2 percent comprised 5 percent net new business growth (which constitutes the revenue growth from business won over the course of the year net of the revenue from existing business lost) and a 3 percent negative impact from declining premium rates and other market factors.
the realization of savings from prior years’ Shaping Our Future initiatives and disciplined cost control;
HRH’s fourth quarter results, net of related funding costs and intangible asset amortization, contributed $0.04 per diluted share. New shares issued as part
the $92 million charge for the 2008 expense review, equivalent to 4 percentage points;
increased productivity, with revenues per full time equivalent (‘FTE’) employee increasing to $190,000 in 2008 compared with $186,000 in 2007;
HRH’s $38 million operating income in fourth quarter 2008, equivalent to 1 percentage point; and
good cost control, the realization of savings from 2007’s Shaping Our Future initiatives and lower pension costs.
Income from discontinued operations relates to the disposals of our Bliss & Glennon and Managing Agency Group US-based wholesale insurance operations in the second and third quarters of 2009, respectively. There were no net gains or losses recognized on these disposals. These disposals were made as part of our plan to dispose of non-core HRH activities.
On October 1, 2008, we completed the acquisition of HRH, at the time the eighth largest insurance and risk management intermediary in the United States.
greatly strengthens our position as a middle market broker and adds critical mass in the large account, Employee Benefits, small commercial and private client areas; and
enables our North America operation to deliver enhanced value to clients through a more robust and diversified platform.
reduced our expense base through synergies and other cost savings. On a combined basis, we achieved approximately $205 million of cost savings in 2009; and
we received cash proceeds, less costs, of $155 million which we used to pay down debt;
we reduced our ownership interest from 49 percent to 31 percent;
the previous put option exercisable by the Gras Savoye shareholders until 2011 has been eliminated; and
We believe that the revised structure enhances our financial flexibility, while at the same time retaining Gras Savoye as a key strategic partner.
Our Shaping Our Future strategy is a series of initiatives designed to deliver profitable growth. As part of this we have invested in key hires and initiatives in 2008 and 2009 and we have funded these initiatives from a thorough review in 2008 of all businesses to identify additional opportunities to rationalize our expense base.
In 2009 we incurred pre-tax severance costs of $24 million relating to approximately 450 positions which have been eliminated ($17 million net of tax), equivalent to $0.11 per diluted share, in connection with our Right Sizing Willis initiatives.
$42 million to buy out remuneration packages that no longer align with the Group’s overall remuneration strategy;
In light of the current global economic uncertainty, we continue to vigorously manage our cost base in order to fund further growth initiatives. Our current funding for growth initiatives emphasize cost discipline including talent management, location optimization and robust management of discretionary spending.
approximately $30 million from global placement, which reflects increased commissions from working closely with our carrier partners;
approximately $20 million from client profitability, which aims to achieve increased remuneration from our clients in return for the value we deliver; and
Cash at December 31, 2009 was $191 million, $15 million higher than at December 31, 2008.
due July 2010 at a premium of $27.50 per $1,000 face value. Notes totaling $160 million were tendered and repurchased on September 29, 2009.
The Board has authorized a share buyback program for $1 billion, of which $925 million remains available.
In 2008, we repurchased 2.3 million shares at a cost of $75 million. We did not make any repurchases in 2009.
We currently target a debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortization) ratio of below 2.5 times. Once we are in a position to remain at or below this ratio, we would consider recommencing our stock buy back program. At December 31, 2009 the actual ratio was 2.6 times. However, there can be no assurance that we will achieve our target debt to EBITDA ratio or recommence our stock buyback program.
Organic revenue growth excludes the impact of foreign currency translation, the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, market remuneration, including contingent commissions related to the HRH acquisition, investment income and other income from reported revenues.
Our International and Global operations earn a significant portion of their revenues in currencies other than the US dollar. For the year ended December 31, 2009, reported revenues were adversely impacted by the year over year effect of foreign currency translation: in particular due to the strengthening of the US dollar against the pound sterling and against the euro, compared with 2008.
Acquisitions and disposals includes the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, and contingent commissions related to the HRH acquisition.
From fourth quarter 2008, we have changed our methodology for the calculation of organic growth in commissions and fees. Previously, organic growth included growth from acquisitions from the date of acquisition. Under the new method, the first twelve months of commissions and fees generated from acquisitions are excluded from organic growth in commissions and fees.
Investment income was $81 million for 2008, $15 million lower than in 2007, with the decrease reflecting lower average interest rates in 2008.
Organic growth in commissions and fees in 2008 was 4 percent compared with 2007, reflecting:
net new business growth of 6 percent which comprised good growth in our International and Global Specialties businesses offset by lower revenues in North America and Reinsurance;
a negative 2 percent impact from premium rates and other market factors in 2008. The impact of significant rate decreases in both periods was tempered by the benefit of other market factors, including higher commission rates, client profitability analyses, higher insured values and changes in limits or exposures.
$414 million impact from HRH, equivalent to approximately 18 percentage points; and
the $92 million reduction in costs associated with our 2008 expense review, equivalent to 4 percentage points, of which $66 million related to salaries and benefits and $26 million to other expenses; and
disciplined control of all discretionary costs, with significant savings in travel and entertaining, advertising, printing and a number of other areas.
a $12 million curtailment gain realized on the closure of our US defined benefit pension plan to accrual of benefit for future service, equivalent to approximately 0.5 percentage points (see below);
a $66 million increase in pension costs, mainly driven by lower asset levels in our UK pension plan and excluding the $12 million US curtailment gain and the impact of the UK salary sacrifice scheme.
We have also suspended the company match for our US 401(k) plan which benefited 2009 by $9 million compared with 2008.
a reduction in discretionary expenses driven by our Right Sizing Willis initiatives;
foreign currency translation losses of $40 million arising on forward contracts maturing in 2009, compared with losses on the equivalent contracts in 2008 of $12 million.
General and administrative expenses at $2,241 million for 2008 were $333 million, or 18 percent, higher than in 2007 of which:
$92 million, or 5 percentage points, was attributable to the charge for the 2008 expense review, of which $66 million related to salaries and benefits and $26 million to other expenses; and
the $66 million charge relating to the 2008 expense review; and
continued hiring in targeted development areas including selected US regions; targeted International growth areas such as Spain, Italy, Denmark and Brazil; and a number of our London specialty businesses;
increased productivity: average revenues per FTE employee were approximately $190,000 in 2008 compared with $186,000 in 2007;
the benefits of cost controls and previous Shaping Our Future initiatives; and
Other expenses were 21 percent of revenues in 2008 compared with 18 percent in 2007, with the increase reflecting:
$33 million additional other expenses in fourth quarter 2008 as a result of the HRH acquisition, equivalent to approximately 1 percentage point;
the $26 million charge relating to the 2008 expense review, equivalent to approximately 1 percentage point; and
We have a program that hedges our sterling cash outflows from our London market operations, a part of which hedges the sterling denominated cash contributions into the UK pension plan. However, we do not hedge against the pension benefits asset or liability recognized for accounting purposes.
The effects of the above increases were partly mitigated by the benefits of our continued focus on cost controls.
The significant year over year increase was primarily attributable to additional charges of $58 million in 2009 in respect of intangible assets recognized on the HRH acquisition, including $7 million of accelerated amortization relating to the HRH brand name. Following the success of our integration of HRH into our previously existing North America operations, we announced on October 1, 2009 that we were changing the name of
our North America operations from Willis HRH to Willis North America. Consequently the intangible asset recognized on the acquisition of HRH relating to the HRH brand name has been fully amortized.
a reduction in costs associated with our 2008 expense review from $92 million in 2008 to $24 million for severance costs in 2009;
the $12 million US pension curtailment gain recognized in second quarter 2009; and
a further improvement in productivity, with revenues per FTE employee increasing to $191,000 in 2009 compared with $190,000 in 2008;
our continued investments in targeted new hires and Shaping Our Future initiatives; and
increased productivity, with revenues per FTE employee increasing to $190,000 in 2008 compared with $186,000 in 2007;
a $38 million benefit from the operating income contribution of HRH in the fourth quarter; and
good cost control, the realization of savings from Shaping Our Future initiatives and lower pension costs.
Interest expense in 2009 of $174 million was $69 million higher than in 2008. This increase primarily reflects higher average debt levels following the HRH acquisition, but also includes $5 million of premium and costs relating to the early repurchase in September 2009 of $160 million of our 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value.
We are currently reviewing opportunities to reduce future interest costs, in the short-term, through a fixed / floating interest rate swap.
The effective tax rate in 2009 was 18 percent compared with 24 percent in 2008. The decrease in rate reflects:
a change in the geographical mix of profits with a greater proportion of profits being earned outside the United States;
49 percent to 31 percent following the reorganization of that company’s capital in December 2009. As a result of this transaction we currently estimate that the interest in earnings of associates will be approximately $10 million lower in 2010 compared with 2009.
Diluted earnings per share from continuing operations for 2009 increased to $2.58 compared to $2.04 in 2008 as the benefit of the increased net income was partly offset by a 21 million increase in average diluted shares outstanding due primarily to the shares issued on October 1, 2008 for the HRH acquisition. The additional shares issued had a negative $0.36 impact on earnings per diluted share in 2009.
Net income for 2008 was $302 million, or $2.04 per diluted share, compared to $409 million, or $2.78 per diluted share, in 2007 with the decrease mainly reflecting the impact of:
the $66 million post-tax charges associated with the 2008 expense review, equivalent to $0.45 per diluted share; and
a year over year accounting loss of $0.27 per diluted share primarily relating to the retranslation of our sterling denominated UK pension benefits asset;
a year over year benefit from a lower effective tax rate of $0.09 per diluted share; and
HRH’s fourth quarter results, net of related funding costs and intangible amortization, contributed $0.04 per diluted share.
arising from specific industries and activities. North America and International comprise our retail operations and provide services to small, medium and major corporations.
The following table is a summary of our operating results by segment for the three years ended December 31, 2009:
Our Global operations comprise Global Specialties, Reinsurance and Faber & Dumas, our wholesale brokerage division launched in fourth quarter 2008 on completion of the HRH acquisition. Faber & Dumas comprises HRH’s London-based wholesale operation, Glencairn, together with our previously
existing Fine Art, Jewelry and Specie; Special Contingency Risk and Hughes-Gibb units. The following table sets out revenues, organic revenue growth and operating income and margin for the three years ended December 31, 2009:
In 2008, the Company changed its basis of segmental allocation for central costs. All accounting adjustments for foreign exchange hedging activities and foreign exchange movements on the UK pension plan asset or liability are held at the Corporate level, together
Commissions and fees of $822 million were $38 million, or 5 percent, higher in 2009 compared with 2008 of which 4 percent was attributable to the acquisition of the HRH UK wholesale business, Glencairn and 4 percent to organic revenue growth. These were partly offset by a 3 percent negative impact from foreign exchange movements.
Net new business growth was 5 percent and there was a 1 percent adverse impact from rates and other market factors. Reinsurance led the growth in net new business. Global Specialties organic revenues were slightly higher than in 2008, as growth in Marine, Aerospace and Financial and Executive Risks was offset by reductions elsewhere. There was continued softness in most specialty rates although there were signs of stabilization and firming in some areas, including Aerospace and Energy. The Faber & Dumas businesses continue to be adversely impacted by the weakening economic environment.
There was a sharp decline in investment income in 2009 compared with 2008 as global interest rates fell markedly in the latter half of 2008 and early 2009.
Organic revenue growth in Reinsurance in 2008 was adversely impacted by a combination of declining rates and a reduction in amounts reinsured. We continue to make investments in Reinsurance to strengthen capital markets and analytics capabilities throughout the soft market and are beginning to see the positive results of this investment as we moved into 2009.
Operating margin in our Global operations was 29 percent in 2008 compared with 28 percent in 2007, as the benefit of organic revenue growth in Global Specialties was partly offset by the impact of lower revenues in Reinsurance and an adverse impact from foreign exchange.
Operating margin in Global Specialties increased in 2008 compared with 2007 as the benefit from organic revenue growth, lower pension costs and our Shaping Our Future initiatives more than offset
Other income represents gains on disposals of intangible assets, including books of business. Prior to January 1, 2008 these gains were reported within total commissions and fees but were excluded from organic revenue growth with effect from April 1, 2007. As a result of this change, $17 million previously reported within North America’s commissions and fees in 2007, has been transferred to other income.
Commissions and fees in North America were 51 percent higher in 2009 compared with 2008 reflecting the uplift from the additional revenues of HRH, partly offset by 3 percent negative organic growth. Our North America operations were significantly adversely impacted by soft market conditions, the weakened US economy and a reduction in project based revenues which more than offset a positive impact from net new business. In particular, our Construction division has seen significant declines. However, we saw the rate of decline moderate in the third quarter of 2009 and North America reported 1 percent organic growth
for the fourth quarter of 2009, despite a 6 percent rate headwind.
Despite the difficult market conditions, our productivity measured in terms of revenue per FTE employee remained high and with a marginal increase to $226,000 for 2009 compared with $225,000 for 2008.
Chicago, Atlanta, Houston, Boston and Knoxville all generated growth in excess of 5 percent, though several offices recorded significant declines in the difficult market conditions.
Operating margin in North America was 24 percent in 2009 compared with 15 percent in 2008. The higher margin reflected:
The integration of HRH into our existing operations is now substantially complete and, reflecting this success, we changed the name of our North America retail operations from Willis HRH to Willis North America on October 1, 2009. Progress to date includes:
as of December 31, 2009, for over 90 percent of HRH’s contingent commissions we have either converted them into higher standard commissions or we have reaffirmed with carriers that the existing agreements will remain in force for so long as permitted by the regulatory authorities or until the commissions are converted, whichever occurs first.
a $15 million decrease in other income compared with 2007 which benefited from higher than usual proceeds from the sale of books of business; and
the acquisition of HRH which contributed $37 million of operating income in fourth quarter 2008; and
the benefit of increased revenue per FTE employee and other cost savings.
Other income represents gains on disposals of intangible assets, including books of business. Prior to January 1, 2008 these gains were reported within total commissions and fees but were excluded from organic revenue growth with effect from April 1, 2007. As a result of this change, $2 million previously reported within International’s commissions and fees in 2007, has been transferred to other income.
In 2008, the Company changed its basis of segmental allocation for central costs. All accounting adjustments for foreign exchange hedging activities and foreign exchange movements on the UK pension plan asset or liability are held at the Corporate level, together with legal costs that are managed centrally. As a result of this change, $1 million net operating loss for full year 2007 previously allocated to the International segment, has been reported within Corporate.
Organic revenue growth excludes the impact of foreign currency translation, the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, market remuneration, including contingent commissions related to the HRH acquisition, investment income and other income from reported revenues. Our method of calculating this measure may differ from that used by other companies and therefore comparability may be limited.
A significant part of International’s revenues are earned in currencies other than the US dollar which has strengthened significantly, on average, on a year over year basis against a number of these currencies, most notably the euro, pound sterling, Danish kroner and Australian dollar, consequently reducing International revenues on a year over year basis when reported in US dollars.
Despite the slowdown of the global economy, International continued its organic growth. Excluding our UK and Irish retail divisions, organic revenue growth was 8 percent in 2009, with Latin America and Asia, led by Brazil, Columbia and China, all reporting strong organic growth. However, our UK and Irish retail division, which
represents approximately 20 percent of International’s operations, saw a 6 percent revenue decline, reflecting weak local economic conditions.
Productivity in International continues to improve with revenues per FTE employee increasing by 4 percent in 2009 compared with 2008.
focused expense management including savings in discretionary costs driven by our Right Sizing Willis initiatives;
a sharp reduction in investment income reflecting lower global interest rates; and
On January 8, 2010 the Venezuelan government announced its intention to devalue its currency (Bolivar). Effective January 1, 2010, the Venezuelan economy has been designated as hyper-inflationary and, consequently, all future exchange movements will flow through the income statement.
We maintain defined benefit pension plans for employees in the US and UK. Both 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 entrants in the UK 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. We also have smaller defined benefit schemes in Ireland, Germany, Norway and the Netherlands. These schemes have combined total assets of $120 million and a combined net liability for pension benefits of $30 million as of December 31,
We recorded a net pension charge on our UK and US defined benefit pension plans in 2009 of $32 million, compared to a net pension credit of $25 million in 2008, an increased expense of $57 million.
Based on December 31, 2009 assumptions, we expect the net pension charge in 2010 to increase by $2 million for the UK plan and decrease by $6 million for the US plan.
During the latter half of 2008 the value of assets held by our pension plans was significantly adversely affected by the turmoil in worldwide markets. The holdings of equity securities by our UK and US pension plans were particularly affected in 2008, but have recovered, to some extent, in 2009.
Rates used to discount pension plan liabilities at December 31, 2009 were based on yields prevailing at that date of high quality corporate bonds of appropriate maturity. The selected rate used to discount UK plan liabilities was 5.8 percent compared with 6.5 percent at December 31, 2008
The expected long-term rate of return used for determining the net US pension scheme expense in 2009 was 8.0 percent, consistent with 2008. The rate used to discount US plan liabilities at December 31, 2009 was 6.1 percent, determined based on expected plan cash flows discounted using
a corporate bond yield curve, a small reduction from 6.3 percent at December 31, 2008. The expected and actual returns on US plan assets for the three years ended December 31, 2009 were as follows:
The mortality assumption at December 31, 2009 is the RP-2000 Mortality Table (blended for annuitants and non-annuitants), projected to 2010 by Scale AA (December 31, 2008: projected to 2009 by Scale
AA). As an indication of the longevity assumed, our calculations assume that a US male retiree aged 65 at December 31, 2009, would have a life expectancy of 18 years.
Client relationships acquired on the HRH acquisition are amortized over twenty years in line with the pattern in which the economic benefits of the client relationships are expected to be consumed. Over 80 percent of the client relationships intangible will have been amortized after 10 years. Non-compete agreements acquired in connection with the HRH acquisition are amortized
over two years on a straight line basis. Intangible assets acquired in connection with other acquisitions are amortized over their estimated useful lives on a straight line basis. Goodwill is not subject to amortization.
To determine the allocation of intangible assets between goodwill and other intangible assets and the estimated useful lives in respect of the HRH acquisition we considered a report produced by a qualified independent appraiser. The calculation of the allocation is subject to a number of estimates and assumptions. We base our allocation on assumptions we believe to be reasonable. However, changes in these estimates and assumptions could affect the allocation between goodwill and other intangible assets.
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 percent likelihood of being 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. In 2009, $11 million was released relating to uncertain tax positions due to the closure of the statute of limitations on assessments for previously unrecognized tax benefits. There was a similar $5 million release of uncertain tax positions in 2008.
New accounting standards issued during the year that would have a significant impact on the
Company’s reporting are described in Note 2 to the Consolidated Financial Statements.
repurchased on the open market a further $7 million of July 2010 bonds; and
repaid the full value of $9 million in respect of a fixed rate loan note due 2010.
In the short term, our capital management priority is debt reduction and we are currently targeting a debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortization) ratio of below 2.5 times. Once we are in a position to remain at or below this ratio, we would consider recommencing our stock buyback program. At December 31, 2009 the actual ratio was 2.6 times. However, there can be no assurance that we will achieve our target debt
In an effort to reduce future cash interest payments as well as future amounts due at maturity, we may from time to time seek to retire or purchase our outstanding debt through tender offers, cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such actions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
In September 2009, Standard and Poor’s and Moody’s revised their outlook on the Company to Stable from Negative. We believe that the improved
As an intermediary, we hold funds generally in a fiduciary capacity for the account of third parties, typically as the result of premiums received from clients that are in transit to insurers and claims due to clients that are in transit from insurers. We report premiums, which are held on account of, or due from, clients as assets with a corresponding liability due to the insurers. Claims held by, or due to, us which are due to clients are also shown as both assets and liabilities. All of these balances due or payable are included in accounts receivable and accounts payable on the balance sheet. We earn interest on these funds during the time between the receipt of the cash and the time the cash is paid out. Fiduciary cash must be kept in certain regulated bank accounts subject to guidelines, which generally emphasize capital preservation and liquidity, and is not generally available to service our debt or for other corporate purposes.
Net cash provided by operations was $418 million in 2009 compared with $224 million in 2008. The $194 million increase between 2008 and 2009 mainly reflects:
a $198 million increase in net income before the non-cash charge for amortization of intangible assets; and
a reduction in pension scheme contributions to $82 million in 2009, compared with $154 million in 2008;
Net cash from operations in 2008 was $51 million lower than in 2007, mainly reflecting:
an $81 million decrease in net income before the non-cash charge for amortization of intangible assets; and
the benefit of a $14 million reduction in taxes paid; and
$113 million cash received in 2009 in respect of investments in associates, compared with $31 million paid in 2008. The 2009 receipt includes $155 million from the reorganization of Gras Savoye, less $42 million settled in January 2009 for an additional investment in Gras Savoye made in December 2008; and
a reduction in proceeds from disposals of operations, investments and other assets of $14 million;
In March 2009, we issued $500 million of senior notes due 2016 at 12.875%.
We used the $482 million net proceeds of the notes, together with $208 million cash generated from operating activities and $60 million cash in hand, to pay down the $750 million outstanding on our interim credit facility as of December 31, 2008.
In September 2009, we issued $300 million of 7.0% senior notes due 2019. We then launched a tender offer on September 22, 2009 to repurchase any and all of our $250 million 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value. Notes totaling $160 million were tendered and repurchased on September 29, 2009.
In December 2009, we applied the net cash proceeds of $155 million from the Gras Savoye transaction, together with other cash in hand, to reduce the balance outstanding on the 5-year term loan by approximately $180 million to
We did not buyback any shares in 2009. There remains $925 million under the current buyback authorization.
In 2009, the Company filed a Tender Offer Statement with the SEC to repurchase for cash options to purchase Company shares. The tender offer expired on August 6, 2009. Approximately 1.6 million options to purchase Company shares were repurchased at an average per share price of $2.04.
The $28 million increase primarily reflects dividend payments on the 24 million additional shares issued in connection with the fourth quarter 2008 acquisition of HRH. In February 2010, we declared a quarterly cash dividend of $0.26 per share, an annual rate of $1.04 per share, subject to the Irish High Court approving a reduction of our share capital in order to create distributable reserves, (which under Irish law are required to facilitate the payment of a dividend), and compliance generally with the requirements of the Irish Companies Act relating to the payment of dividends.
In March 2009, we issued 12.875% senior notes due 2016 in an aggregate principal amount of $500 million to Goldman Sachs Mezzanine Partners which generated net proceeds of $482 million. These proceeds, together with $208 million cash generated from operating activities and cash in hand, were used to pay down the $750 million outstanding on our interim credit facility as of December 31, 2008.
In September 2009, we issued $300 million of 7.0% senior notes due 2019. We then launched a tender offer on September 22, 2009 to repurchase any and all of our $250 million 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value. Notes totaling approximately $160 million were tendered and repurchased on September 29, 2009.
In the UK, we are required to agree a funding strategy for our UK defined benefit plan with the plan’s trustees. In February 2009, we agreed to make full year contributions to the UK plan of $40 million for 2009 through 2012, excluding amounts in respect of the salary sacrifice scheme. In addition, as certain funding targets have not been met at the beginning of 2010, a further contribution
of $40 million is required for 2010. A similar, additional contribution may also be required for 2011, depending on actual performance against funding targets at the beginning of 2011.
The total contributions for all plans are currently estimated to be approximately $120 million in 2010 excluding amounts in respect of the salary sacrifice scheme.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2009
Consolidated Statements of Changes in Equity and Comprehensive Income for each of the three years in the period ended December 31, 2009
We have audited the accompanying consolidated balance sheets of Willis Group Holdings Public Limited Company and subsidiaries (the ‘Company’) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Willis Group Holdings Public Limited Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2009, the Company adopted the noncontrolling interest guidance from Accounting Standards Codification 810, Consolidations (formerly Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB 51). The Company has retrospectively adjusted all periods presented in the consolidated financial statements for the effect of this change.
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, 2009, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
In its capacity as an advisor and insurance broker, the Company acts as an intermediary between clients and insurance carriers by advising clients on risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance risk with insurance carriers through the Company’s global distribution network.
These consolidated financial statements conform to accounting principles generally accepted in the United States of America (‘US GAAP’). Presented below are summaries of:
recognizes and measures the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree;
determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination.
The income tax provisions pertaining to changes in the valuation allowance of deferred tax assets and uncertain tax positions are applicable prospectively to business combinations occurring prior to the effective date. Reductions to the valuation allowance of acquired deferred tax assets and all changes to acquired uncertain tax positions occurring after the measurement period are now recorded in the statement of operations in the period of reversal.
New accounting guidance related to noncontrolling interests was effective from January 1, 2009. The guidance established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. It clarified that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity in the Consolidated Financial Statements.
The impact of this change on the Company’s balance sheet is outlined below:
enterprise is the primary beneficiary of the VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics:
the power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and
the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
The Company does not believe that the implementation of this guidance will have a material effect on its financial position or results of operations.
Included in fiduciary funds - restricted are cash and cash equivalents consisting primarily of time deposits. The debt securities are classified as available-for-sale. Accordingly, they are recorded at fair market value with unrealized holding gains and losses reported, net of tax, as a component of other comprehensive income.
In its capacity as an insurance agent or broker, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurers; the Company also collects claims or refunds from insurers on behalf of insureds. Uncollected premiums from insureds and uncollected claims or refunds from insurers are recorded as accounts receivable on the Company’s consolidated balance sheets. Unremitted insurance premiums and claims are held in a fiduciary capacity. The obligation to remit these funds is recorded as accounts payable on the Company’s consolidated balance sheets. 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 and the date the Company is required to forward such payment to the insurer. Balances arising from insurance brokerage transactions are reported as separate assets or liabilities unless such balances are due to or from the same party and a right of offset exists, in which case the balances are recorded net.
The Company uses derivative financial instruments for other than trading purposes to alter the risk profile of an existing underlying exposure. Interest rate swaps are used to manage interest risk exposures. Forward foreign currency exchange contracts are used to manage currency exposures arising from future income and expenses. The fair values of derivative contracts are recorded in other assets and other liabilities. Changes in the fair value of derivatives that qualify for hedge accounting are recorded in other comprehensive income. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings. Changes in fair value of derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness, are recorded in other operating expenses or interest expense as appropriate.
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 enactment date changes. 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.
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. 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.
Contributions to the Company’s defined contribution plans are recognized as they fall due. Differences between contributions payable in the year and contributions actually paid are shown as either other assets or other liabilities in the consolidated balance sheets.
This plan, which was established on December 18, 1998, provides for the granting of time-based and performance-based options to employees of the Company. There are 30,000,000 shares available for grant under this plan, provided, however, that in no event shall the total number of shares subject to options and other equity for current and future participants exceed 25 percent of the equity of Willis Group Holdings on a fully diluted basis. All options granted under this plan are exercisable at £2 per share ($3.22 using the year-end exchange rate of £1 = $1.61) except for 111,111 time-based options which are exercisable at $13.50. No further grants are to be made under this plan, which expired on December 18, 2008. Outstanding grants will not be affected.
This plan, which was established on May 3, 2001, provides for the granting of time-based options and various other share-based grants at fair market value to employees of the Company. There are 25,000,000 shares
available for grant under this plan. Options are exercisable on a variety of dates, including from the first, second, third, sixth or eighth anniversary of grant, although for certain options the exercisable date may accelerate depending on the achievement of certain performance goals. Unless terminated sooner by the Board of Directors, the 2001 Plan will expire 10 years after the date of its adoption. That termination will not affect the validity of any grant outstanding at that date.
This plan, which was established on April 23, 2008, provides for the granting of time and performance-based options and various other share-based grants at fair market value to employees of the Company. There are 8,000,000 shares available for grant under this plan. Options are exercisable on a variety of dates, including from the third, fourth or fifth anniversary of grant. Unless terminated sooner by the Board of Directors, the 2008 Plan will expire 10 years after the date of its adoption. That termination will not affect the validity of any grant outstanding at that date.
The weighted average grant-date fair value of time-based options granted during the year ended December 31, 2009 was $5.87 (2008: $6.20; 2007: $11.06). The total intrinsic value of options exercised during the year ended December 31, 2009 was $3 million (2008: $7 million; 2007: $24 million). At December 31, 2009 there was $31 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 1 year.
On September 27, 2006, Willis Group Services Limited, a subsidiary of Willis Group Holdings, completed the sale of Ten Trinity Square, the Company’s London headquarters building. The building was then leased back at an annual rental of $13 million until the Company occupied its new London headquarters in April 2008. Gross proceeds were $202 million of which 25 percent was received in cash on completion and 75 percent was received on November 27, 2006. Of the total pre-tax gain on disposal, $102 million was recognized in 2006; $14 million in 2007; and $7 million in 2008.
vendor loans and convertible bonds issued by Gras Savoye. An analysis of the proceeds and the calculation of the gain is as follows:
Total proceeds for 2008 were $11 million, comprising $7 million relating to 2008 disposal of operations and $4 million of deferred proceeds relating to prior years. There was no net gain on disposal in the consolidated statements of operations.
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.
Total unrecognized tax benefits as at December 31, 2009, totaled $17 million. During the next 12 months it is reasonably possible that the Company will recognize approximately $10 million of tax benefits related to the release of provisions no longer required due to either settlement through negotiation or closure of the statute of limitations on assessment.
All of the unrecognized tax benefits at December 31, 2009 would, if recognized, favorably affect the effective tax rate in future periods.
Bliss & Glennon’s net assets at April 15, 2009 were $39 million, of which $34 million related to identifiable intangible assets and goodwill. In addition, there were costs and income taxes relating to the transaction of $2 million. No gain or loss was recognized on this disposal.
On September 1, 2009, the Company disposed of Managing Agency Group (‘MAG’), another US-based wholesale insurance operation acquired as part of the HRH acquisition. Gross proceeds were $5 million.
MAG’s net assets at September 1, 2009 were $3 million, all of which related to identifiable intangible assets and goodwill. In addition there were costs and income taxes relating to the transaction of $2 million. No gain or loss was recognized on this disposal.
Amounts of revenue and pre-tax income reported in discontinued operations include the following:
This balance sheet has been updated for adjustments agreed at the time of the disposal.
issue shares were exercised or converted into shares or resulted in the issue of shares that then shared in the net income of the Company.
For the year ended December 31, 2009, time-based and performance-based options to purchase 13.4 million and 8.9 million (2008: 16.9 million and 5.8 million; 2007: 15.3 million and 0.2 million) shares, respectively, and 2.2 million restricted shares (2008: 1.4 million; 2007: 1.6 million), respectively, were outstanding.
The acquisition of HRH was accounted for using the purchase method. Under the purchase method of accounting, the assets and liabilities of HRH were recorded at their fair values at the acquisition date. The financial statements and reported results of the operations of Willis after the completion of the acquisition reflect these fair values. The results of HRH are included within the consolidated statement of operations from October 1, 2008.
As a result of the Company finalizing the purchase price allocation, an additional $12 million was recognized in the Customer Relationships intangible asset.
Customer relationships were identified as the key intangible asset as approximately 95 percent of HRH’s revenue was historically generated by existing customer relationships. The fair value of customer relationships was estimated using the discounted cash flow income approach. This involved calculating the present value of future cash flows arising from customer relationships existing at the acquisition date.
Following the successful integration of HRH into the Company’s North America operations, it was announced on October 1, 2009 that the North America retail operations would change their operating name from Willis HRH to Willis North America. Consequently, the intangible asset recognized on the acquisition of HRH relating to the HRH brand has been fully amortized.
Among the assets and liabilities acquired is tax deductible goodwill in HRH of $325 million that arose in a previous business combination by HRH. The tax basis in this historical goodwill of HRH continues to have tax basis after the acquisition of HRH by Willis, and will continue to be amortized for tax purposes. At the transaction date there is no temporary difference relating to the historical tax deductible goodwill, and therefore no deferred taxes. A temporary difference will arise in future periods as the tax deductible goodwill is amortized for tax purposes. Goodwill arising on the transaction above the historical HRH goodwill is not deductible for tax purposes and will not generate a temporary difference currently or in the future.
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of HRH occurred at January 1, 2007.
An adjustment to recognize the interest expense of $104 million and $132 million for the year to December 31, 2008 and 2007 respectively, to reflect the interest expense and amortization of debt fees associated with the $1 billion interim credit facility and $700 million 5-year term loan facility drawn down for the purpose of financing the acquisition of HRH.
An adjustment to eliminate the interest expense in HRH on existing long-term debt that was repaid by Willis on acquisition.
Once the proposed acquisition of HRH was announced, the Company worked with HRH management to develop a plan to integrate HRH and its existing North America operations. This plan was substantially complete at the time of the acquisition. The plan sought to centralize HRH’s dispersed back office processes and integrate these with Willis’ existing service hubs and to close down HRH’s Richmond Head Office. The plan also identified locations where office space was duplicated or could be rationalized. In implementing the integration plan, the Company has incurred $23 million of predominantly severance expenses and vacant space provisions relating to HRH staff and premises. This has been recognized as a liability assumed in the purchase business combination within accounts payable and accrued expenses.
The Company’s fiduciary funds - restricted and short-term investments consist mainly of cash and time deposits. Accrued interest on investments is recorded as other assets.
Debt securities are classified as available-for-sale. Accordingly, they are recorded at fair market value with unrealized holding gains and losses reported, net of tax, as a component of other comprehensive income. As of December 31, 2009 and 2008, the amortized cost of such securities approximated fair value.
Total marketable securities - due within 1 year through 5 years
The Company’s principal investment as of December 31, 2009 and 2008 is GS & Cie Groupe (‘Gras Savoye’), France’s leading insurance broker.
The carrying amount of the Gras Savoye investment as of December 31, 2009 includes goodwill of $94 million (2008: $141 million) and interest bearing vendor loans and convertible bonds issued by Gras Savoye of $45 million and $75 million respectively.
At December 31, 2009, the Company recorded, on the Consolidated Balance Sheets:
a pension benefit asset of $69 million (2008: $111 million) in respect of the UK defined benefit pension plan; and
a total liability for pension benefits of $187 million (2008: $237 million) representing:
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 8.85 percent, debt securities 5.10 percent and real estate 5.80 percent. The expected returns on: US plan assets are US and foreign equities 10.25 percent and debt securities 4.75 percent.
common stock and preferred stock which are valued using quoted market prices; and
The following table summarizes the changes in the UK pension plan’s Level 3 assets for the year ended December 31, 2009:
Willis North America has a 401(k) plan covering all eligible employees of Willis North America and its subsidiaries. The plan allows participants to make pre-tax contributions which the Company, at its discretion may match. During 2009, the Company has decided not to make any matching contributions other than for former HRH employees whose contributions were matched up to 75 percent under the terms of the acquisition. All investment assets of the plan are held in a trust account administered by independent trustees. The Company’s 401(k) matching contributions for 2009 were $5 million (2008: $8 million; 2007: $6 million).
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. Prior to 2008, management determined that these international plans were not material to the Company’s results of operations, financial condition or liquidity: as at December 31, 2007 the net pension liability in respect of these schemes was $2 million. Consequently such plans were not included in the Company’s pension plan disclosures, prior to 2008.
The following schedules provide information concerning the Company’s international defined benefit pension plans:
The accumulated benefit obligation for the Company’s international defined benefit pension plans was $133 million (2008: $104 million).
The Company’s international pension plan asset allocations at December 31, 2009 based on fair values were as follows:
The following tables present, at December 31, 2009, for each of the fair-value hierarchy levels, the Company’s International pension plan assets that are measured at fair value on a recurring basis.
unit linked funds which are valued at their net asset values as calculated by the investment manager and typically have daily liquidity.
Assets classified as Level 3 investments did not materially change during the year ended December 31, 2009.
full the $9 million loan note due 2010 and repurchased $6.7 million of the senior notes due 2010. 1 month LIBOR at December 31, 2009 was 0.231%.
In March 2009, the Company issued 12.875% senior notes due 2016 in an aggregate principal amount of $500 million to Goldman Sachs Mezzanine Partners which generated net proceeds of $482 million. These proceeds were used to refinance part of the interim credit facility.
On October 1, 2008, the Company funded the HRH acquisition with $1 billion from an interim credit facility and $525 million from a $700 million 5-year term loan facility. In addition, the Company repaid the outstanding balance on its existing revolving credit facility and replaced this with a new $300 million revolving credit facility. During fourth quarter 2008, the Company repaid $250 million of the interim credit facility and drew down the $175 million balance under the 5-year term loan.
The $1 billion interim credit facility bore interest at LIBOR plus 2.250% and was repayable on September 30, 2009. The interim credit facility was fully paid down by June 2009 using proceeds from further debt issuances, together with cash generated from operating activities during 2009.
All direct obligations under the credit agreements and under the senior notes listed above are guaranteed by Willis Group Holdings, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, Trinity Acquisition plc, Willis Group Limited, TA I Limited, TA II Limited, TA III Limited and TA IV Limited.
Excluding the $300 million revolving credit facility, the Company also has available $7 million (2008: $10 million) in lines of credit, of which $nil million was drawn as of December 31, 2009 (2008: $1 million).
Certain of Willis Group Holdings’ 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 $903 million and $804 million at December 31, 2009 and 2008, respectively.
In addition, the Company has given guarantees to bankers and other third parties relating principally to letters of credit amounting to $5 million and $4 million at December 31, 2009 and 2008, respectively.
In connection with the investigation commenced by the New York State Attorney General in April 2004 concerning, among other things, contingent commissions paid by insurers to insurance brokers, in April 2005, the Company entered into an Assurance of Discontinuance (‘NY AOD’) with the New York State Attorney General and the Superintendent of the New York Insurance Department and paid $50 million to eligible customers. As part of the NY AOD, the Company also agreed not to accept contingent compensation and to disclose to customers any compensation the Company will receive in connection with providing policy placement services to the customer. The Company also resolved similar investigations commenced by the Minnesota Attorney General, the Florida Attorney General, the Florida Department of Financial Services and the Florida Office of Insurance Regulation for amounts that were not material to the Company. Similarly, in August 2005 HRH entered into an agreement with the Attorney General of the State of Connecticut (the ‘CT Attorney General’) and the Insurance Commissioner of the State of Connecticut to resolve all issues related to their investigations into certain insurance brokerage and insurance agency practices and to settle a lawsuit brought in August 2005 by the CT Attorney General alleging violations of the Connecticut Unfair Trade Practices Act and the Connecticut Unfair Insurance Practices Act. As part of this settlement, HRH agreed to take certain actions including establishing a $30 million national fund for distribution to certain clients,
enhancing disclosure practices for agency and broker clients, and declining contingent compensation on brokerage business. The Company has co-operated fully with other similar investigations by the regulators and/or attorneys general of other jurisdictions, some of which have been concluded with no indication of any finding of wrongdoing.
On February 16, 2010, Willis Group Holdings entered into the Amended and Restated Assurance of Discontinuance with the Attorney General of the State of New York and the Amended and Restated Stipulation with the Superintendent of Insurance of the State of New York (the ‘Amended and Restated AOD’) on behalf of itself and its subsidiaries named therein (‘Willis’). The Amended and Restated AOD is effective February 11, 2010 and supersedes and replaces the Assurance of Discontinuance with the Attorney General of the State of New York, dated April 7, 2005, and the Stipulation with the Superintendent of Insurance of the State of New York, dated April 8, 2005, each as amended from time to time (collectively, the ‘AOD’).
In 2006, the European Commission issued questionnaires pursuant to its Sector Inquiry or, in respect of Norway, the European Free Trade Association Surveillance Authority, related to insurance business practices, including compensation arrangements for brokers, to at least 150 European brokers including our operations in nine European countries. The Company responded to the European Commission questionnaires and has filed responses with the European Free Trade Association Surveillance Authority for two of its Norwegian entities. The European Commission reported on a final basis on September 25, 2007, expressing concerns over potential conflicts of interest in the industry relating to remuneration and binding authorities when assuming a dual role for clients and insurers and also over the nature of the coinsurance market. The Company continues to co-operate with both the European Commission and the European Free Trade Association Surveillance Authority.
Since August 2004, the Company and HRH (along with various other brokers and insurers) have been named as defendants in purported class actions in various courts across the United States. All of these actions have been consolidated into a single action in the US District Court for the District of New Jersey (‘MDL’). There are two amended complaints within the MDL, one that addresses employee benefits (‘EB Complaint’) and one that addresses all other lines of insurance (‘Commercial Complaint’). HRH was a named defendant in the EB Complaint, but has since been voluntarily dismissed. HRH is a named defendant in the Commercial Complaint. The Company is a named defendant in both MDL complaints. Each of the EB Complaint and the Commercial Complaint seeks monetary damages, including punitive damages, and equitable relief and makes
Various legal proceedings are pending, have concluded or may commence between reinsurers, reinsureds and in some cases their intermediaries, including reinsurance brokers, relating to personal accident excess of loss reinsurance for the years 1993 to 1998. The proceedings principally concern allegations by reinsurers that they have sustained substantial losses due to an alleged abnormal ‘spiral’ in the market in which the reinsurance contracts were placed, the existence and nature of which, as well as other information, was not disclosed to them by the reinsureds or their reinsurance broker. A ‘spiral’ is a market term for a situation in which reinsureds and reinsurers reinsure each other with the effect that the same loss or portion of that loss moves through the market multiple times.
The reinsurers concerned have taken the position that, despite their decisions to underwrite risks or a group of risks, they are no longer bound by their reinsurance contracts. As a result, they have stopped settling claims and are seeking to recover claims already paid. The Company also understands that there have been at least two arbitration awards in relation to a ‘spiral’, among other things, in which the reinsurer successfully argued that it was no longer bound by parts of its reinsurance program. Willis Limited, the Company’s principal insurance brokerage subsidiary in the United Kingdom, acted as the reinsurance broker or otherwise as intermediary, but not as an underwriter, for numerous personal accident reinsurance contracts, including two contracts that were involved in one of the arbitrations. Due to the small number of reinsurance brokers generally, Willis Limited also utilized other brokers active in this market as sub-agents, including brokers who are parties to the legal proceedings described above, for certain contracts and may be responsible for any errors and omissions they may have made. In July 2003, one of the reinsurers received a judgment in the English High Court against certain parties, including a sub-broker Willis Limited used to place two of the contracts involved in this trial. Although neither the Company nor any of its subsidiaries were a party to this proceeding or any arbitration, Willis Limited entered into tolling agreements with certain of the principals to the reinsurance contracts tolling the statute of limitations pending the outcome of proceedings between the reinsureds and reinsurers.
Two former clients of Willis Limited, American Reliable Insurance Company and one of its associated companies (collectively, ‘ARIC’), and CNA Insurance Company Limited and two of its associated companies (‘CNA’) terminated their respective tolling agreements with Willis Limited and commenced litigation in September 2007 and January 2008, respectively, in the English Commercial Court against Willis Limited. ARIC alleged conspiracy between a former Willis Limited employee and the ARIC underwriter as well as negligence and CNA alleged deceit and negligence by the same Willis Limited employee both in connection
with placements of personal accident reinsurance in the excess of loss market in London and elsewhere. ARIC asserted a claim of approximately $257 million (plus unspecified interest and costs). On June 9, 2009, Willis Limited entered into a settlement agreement with American Reliable Insurance Company and Assurant General Insurance Limited pursuant to which Willis Limited agreed to pay a total of $139 million to ARIC in two installments. All installments have been paid by the Company. Each party has also released and waived all claims it may have against any of the other parties arising out of or in connection with the subject matter of the litigation. The settlement includes no admission of wrongdoing by any party. The $139 million required to fund the settlement agreement was covered by errors and omissions insurance.
In March 2008, the Company settled an action in the United States District Court for the Southern District of New York commenced against the Company in 2001 on behalf of an alleged nationwide class of present and former female officer and officer equivalent employees alleging that the Company discriminated against them on the basis of their gender and seeking injunctive relief, money damages, attorneys’ fees and costs. Although the Court had denied plaintiffs’ motions to certify a nationwide class or to grant nationwide discovery, it did certify a class of approximately 200 female officers and officer equivalent employees based in the Company’s offices in New York, New Jersey and Massachusetts. The settlement agreement provides for injunctive relief and a monetary payment, including the amount of attorney fees plaintiffs’ counsel are entitled to receive, which was not material to the Company. In December 2006, a former female employee, whose motion to intervene in the class action was denied, filed a purported class action in the United States District Court, Southern District of New York, with almost identical allegations as those contained in the suit that was settled in 2008, except seeking a class period of 1998 to the time of trial (the class period in the settled suit was 1998 to the end of 2001). The Company’s motion to dismiss this suit was denied and the Court did not grant the Company permission to immediately file an appeal from the denial of its motion to dismiss. The parties are in the discovery phase of the litigation. The suit was amended to include one additional plaintiff and another has filed an arbitration demand that includes a class allegation. The Court has decided that, to the extent a class is ever certified, the class period will end at the end of 2007 and not up to the time of trial as plaintiffs had sought. The Company cannot predict at this time what, if any, damages might result from this action.
The Company acted as the insurance broker, but not as an underwriter, for the placement of both property and casualty insurance for a number of entities which were directly impacted by the September 11, 2001, destruction of the World Trade Center complex, including Silverstein Properties LLC, which acquired a 99-year leasehold interest in the twin towers and related facilities from the Port Authority of New York and
On July 2, 2009, a putative class action complaint, captioned Troice, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:09-CV-01274-N, was filed in the U.S. District Court for the Northern District of Texas against Willis Group Holdings, Willis of Colorado, Inc. and a Willis associate, among others, relating to the collapse of The Stanford Financial Group (“Stanford”), for which Willis of Colorado, Inc. acted as broker of record on certain lines of insurance. The complaint generally alleged that the defendants actively and materially aided Stanford’s alleged fraud by providing Stanford with certain letters regarding coverage that they knew would be used to help retain or attract actual or prospective Stanford client investors. The complaint alleged that these letters, which contain statements about Stanford and the insurance policies that the defendants placed for Stanford, contained untruths and omitted material facts and were drafted in this manner to help Stanford promote and sell its allegedly fraudulent certificates of deposit. The putative class consisted of Stanford investors in Mexico and the complaint asserted various claims under Texas statutory and common law and sought actual damages in excess of $1 billion, punitive damages and costs. On August 12, 2009, the plaintiffs filed an amended complaint, which, notwithstanding the addition of certain factual allegations and Texas common law claims, largely mirrored the original and sought the same relief.
On September 14, 2009, a complaint, captioned Rupert, et al. v. Winter, et al., Case No. 2009C115137, was filed on behalf of 97 Stanford investors against Willis Group Holdings, Willis of Colorado, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). Based on substantially the same allegations as the Troice complaint, the Rupert complaint asserts claims under the Securities Act of 1933, as well as various Texas statutory and common law claims, and seeks rescission, damages, special damages and consequential damages of $79.1 million, treble damages of $237.4 million under the Texas Insurance Code, attorneys’ fees and costs. On October 20, 2009, certain defendants, including Willis of Colorado, Inc., (i) removed the Rupert action to the U.S. District Court for the Western District of Texas, (ii) notified the JPML of the pendency of this additional “tag-along” action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. In November 2009, the JPML issued a conditional transfer order (the “CTO”) for the transfer of the Rupert action to the Northern District of Texas. On December 22, 2009, the plaintiffs filed a motion to vacate, or alternatively stay, the CTO, to which Willis of Colorado, Inc. responded on January 4, 2010. That motion is also currently pending. On December 18, 2009, the parties to the Troice and Canabal actions stipulated to the consolidation of those actions and, on December 31, 2009, the plaintiffs therein, collectively, filed a Second Amended Class Action Complaint, which largely mirrors the Troice and Canabal predecessor complaints, but seeks relief on behalf of a worldwide class of Stanford investors. Also on December 31, 2009, the plaintiffs in the Canabal action filed a Notice of Dismissal, dismissing the Canabal action without prejudice. On February 25, 2010, the defendants filed motions to dismiss the Second Amended Class Action Complaint in the consolidated Troice/Canabal action.
The defendants have not yet responded to the Ranni or Rupert complaints.
The components of accumulated other comprehensive loss, net of tax, are as follows:
Under the terms of the programs, the shares were subject to a price adjustment based on the volume weighted average share price of Willis’ stock and dividend payments during the term of the program.
The interest rates applicable to the borrowings under the 5-year term loan and the revolving credit facility vary according to LIBOR on the date of individual drawdowns.
As a result of the Company’s operating activities, the Company receives cash for premiums and claims which it deposits in short-term investments denominated in US dollars and other currencies. The Company earns interest on these funds, which is included in the Company’s financial statements as investment income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity. In order to manage interest rate risk arising from these financial assets, the Company enters into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest fixed in the various currencies related to the short-term investments. The use of interest rate contracts essentially converts groups of short-term variable rate investments to fixed rates.
The Company’s objective is to ensure that it has the ability to generate sufficient cash either from internal or external sources, in a timely and cost-effective manner, to meet its commitments as they fall due. The Company’s management of liquidity risk is embedded within its overall risk management framework. Scenario analysis is continually undertaken to ensure that the Company’s resources can meet its liquidity requirements. These resources are supplemented by a $300 million revolving credit facility which expires on October 1, 2013, all of which was available to draw as at December 31, 2009.
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, 2009.
Cash and Cash Equivalents - The estimated fair value of these financial instruments approximates their carrying values due to their short maturities.
Fiduciary Funds - Restricted and Short-Term Investments - Fair values are based on quoted market values.
gains and losses on the disposal of operations and major properties;
costs associated with the redomicile of the Company’s parent company from Bermuda to Ireland; and
Willis Group Holding was incorporated on September 24, 2009 and, as discussed in Note 2, replaced Willis-Bermuda as the ultimate parent company on December 31, 2009. Willis Netherlands Holdings B.V. was incorporated on November 27, 2009.
The entities included in the Other Guarantors column are Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, Trinity Acquisition plc, TA I Limited, TA II Limited, TA III Limited, TA IV Limited and Willis Group Limited.
In March 2009, Trinity Acquisition plc issued senior notes totaling $500 million in a private transaction (Note 17 - Debt). The debt securities are jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Group Holdings, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, TA II Limited, TA III Limited, TA IV Limited, Willis Group Limited and Willis North America.
This debt has not been registered with the Securities Exchange Commission. If and when registered, any necessary financial statements will be provided.
The Company filed a shelf registration on Form S-3 under which Willis Group Holdings may offer debt securities, preferred stock, ordinary stock and other securities. In addition, Trinity Acquisition plc may offer debt securities (‘the Subsidiary Debt Securities’). The Subsidiary Debt Securities, if issued, will be guaranteed by certain of the Company’s subsidiaries.
The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets of Willis Group Holdings, the Other Guarantors and the Issuer. Investments in subsidiaries in the condensed consolidating balance sheet for Other, represents the cost of investment in subsidiaries recorded in the parent companies of the non-guarantor subsidiaries.