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. Effective December 31, 2010, uncollected premiums from insureds and uncollected claims or refunds from insurers, previously held within accounts receivable, are recorded as fiduciary assets on the Company’s consolidated balance sheets. Unremitted insurance premiums and claims (‘fiduciary funds’) are also recorded within fiduciary assets. Fiduciary funds represent unremitted premiums
We provide a broad range of insurance broking, risk management and consulting services to our clients worldwide. Our core specialty businesses include Aerospace; Energy; Marine; Construction; Financial and Executive Risks; Fine Art, Jewelry and Specie; Special Contingency Risks; and Reinsurance. Our retail operations provide services to small, medium and major corporations and the employee benefits practice, our largest product-based practice group, provides health, welfare and human resources consulting and brokerage services.
From 2000 through 2003 we benefited from a hard market with premium rates stable or increasing. During 2004, we saw a rapid transition from a hard market to a soft market, with premium rates falling in most markets. Rates continued to decline in most sectors through 2005 and 2006, with the exception
of catastrophe-exposed markets. In 2007, the market softened further with decreases in many of the market sectors in which we operated and this continued into 2008 with further premium rate declines across our markets. The soft market had an adverse impact on our commission revenues and operating margin from 2005 through 2008.
In 2009, modest stabilization of rates in the reinsurance market and some specialty markets was offset by the continuing soft market in other sectors and the adverse impact of the weakened economic environment across the globe.
In 2010, the soft market continued across many sectors including the reinsurance market.
Our North America and UK and Irish retail operations have been particularly impacted by the weakened economic climate and continued soft market throughout both 2009 and 2010 with no material improvement in rates across most sectors.
This resulted in declines in 2009 revenues in these operations with only modest improvement in 2010, particularly amongst our smaller clients who have been especially vulnerable to the economic downturn.
reviewing all businesses to better align resources with our growth strategies and enable related long-term expense savings; and
Organic revenue growth was driven by our Global and International operations which both reported 6 percent organic growth, whilst revenues in our North America operations were broadly in line with 2009, as this segment continued to be adversely
Operating margin was 23 percent in 2010, compared with 21 percent in 2009. The year on year improvement mainly reflected the benefit of organic growth in commissions and fees, continuing disciplined management of costs and a small favorable effect from foreign currency movements, partly offset by increased incentive costs.
Net income from continuing operations in 2010 was $455 million, or $2.66 per diluted share, compared with $436 million, or $2.58 per diluted share, in 2009.
commissions assumed as part of the HRH acquisition and a $14 million decrease in investment and other income.
a $60 million increase in incentive expenses including: a $31 million increase in the amortization of cash retention awards; and a $29 million increase in the accrual for producer and other incentive compensation reflecting improved performance across many regions;
an $8 million increase in share-based compensation charge, largely due to the non-recurrence of a $5 million credit in first quarter 2009.
Earnings from associates were $23 million in 2010 compared with $33 million in 2009 with the decrease primarily reflecting our reduced ownership of Gras Savoye.
Net income from continuing operations in 2009 was $436 million, or $2.58 per diluted share, compared with $302 million, or $2.04 per diluted share, in 2008. This increase included organic growth in commissions and fees, a reduction in costs associated with our 2008 expense review from $0.45 per diluted share in 2008 to $0.11 per diluted share for severance costs in 2009 and a one-time tax release in 2009 relating to a change in UK tax law in 2009 equivalent to $0.16 per diluted share.
Organic revenue growth of 2 percent comprised 5 percent net new business growth (which
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;
a $64 million increase in the amortization of intangible assets, including additional charges in respect of intangible assets recognized on the HRH acquisition.
Willis aims to be the broker and risk adviser of choice globally by aligning our business model to the needs of each client segment and maintaining a focus on growth: this is our value proposition which we call the ‘Willis Cause’.
In addition to these costs, we will continue to invest in technology, advanced analytics, product innovation, and industry talent and expertise to support the growth strategy and continued execution of the Willis Cause through 2011 and beyond.
In connection with this review, we anticipate that we will incur pre-tax charges of approximately $110 million to $130 million, primarily recorded in the first quarter of 2011. We also anticipate that the operational review will result in cost savings of approximately $65 million to $80 million in 2011, reaching annualized savings of approximately $90 million to $100 million in 2012.
As a result of the 2011 operational review and the continued investment in our business model, we expect to deliver:
modest adjusted margin expansion (operating margin excluding net gains and losses on disposals and other one-time items) and modest
The statements under ‘2011 Operational Review’ and ‘Outlook’ constitute forward-looking statements.
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 the forward-looking statements.
an additional 39 percent of our Chinese operations at a total cost of approximately $17 million, bringing our ownership to 90 percent as at December 31, 2010; and
Net cash generated from operating activities in 2010 of $489 million was used to fund debt repayments of $209 million; dividends to stockholders of $176 million; and fixed asset additions of $83 million.
division. In addition, Mexico, which was previously reported within our International segment, is now reported in our North America segment.
Revenues for 2010 at $3,339 million were $76 million, or 2 percent higher than in 2009, reflecting organic growth in commissions and fees of 4 percent, offset by a 1 percent adverse year over year impact from foreign currency translation and decreased investment and other income.
Investment income was $38 million for 2010, $12 million lower than 2009 with the impact on investment income of lower interest rates across the globe, particularly on our Euro-denominated deposits, only partially mitigated by our forward hedging program. While we expect this forward hedging program to generate additional income in 2011 compared to current LIBOR based rates, there will be a lower benefit than in 2010 as older, more beneficial hedges, continue to expire. Consequently, we expect investment income to be closer to $30 million in 2011.
Our International and Global operations earn a significant portion of their revenues in currencies other than the US dollar, including the Euro and Pound Sterling. For the year ended December 31,
2010, 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 Euro, Venezuelan Bolivar Fuerte and Pound Sterling, partly offset by its weakening against the Australian dollar.
Included in North America reported commissions and fees were legacy HRH contingent commissions of $27 million in 2009, compared with $50 million in 2008.
Investment income was $50 million for 2009, $31 million lower than 2008, with the decrease reflecting significantly lower average interest rates in 2009. The impact of rate decreases on our investment income was partially mitigated by our forward hedging program.
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.
Organic growth in commissions and fees was 2 percent for 2009, despite a negative 3 percent impact from declining premium rates and other market factors. Our overall organic growth comprised good growth in our Global operations and many of our International operations, partly offset by declines in our North America, UK and Irish retail operations reflecting the weak economic environments and soft market conditions experienced in these territories.
Salaries and benefits were 56 percent of revenues for both 2010 and 2009, as the benefits of:
an $8 million increase in share-based compensation mainly reflecting the non-recurrence of a $5 million credit in first quarter 2009. The credit in 2009 related to accumulated compensation expense for certain 2008 awards which were dependent upon performance targets which the Company did not achieve; and
We have a cash retention award program in place. We started making cash retention awards in 2005 to a small number of employees. With the success of the program, we have expanded it over time to include more staff and we believe it is a contributing factor to the reduction in employee turnover we have seen in recent years.
During 2010, we made $196 million of cash retention payments compared with $148 million in 2009. Salaries and benefits in 2010 include $119 million of amortization of cash retention payments made on or before December 31, 2010 compared with $88 million in 2009. As of December 31, 2010 and December 31, 2009, we included $173 million and $98 million, respectively, in other assets on the balance sheet, which represented the unamortized portion of cash retention payments made on or before those dates.
Other expenses were 17 percent of revenues in 2010, compared with 18 percent in 2009, reflecting the benefits of:
significantly lower losses on our forward rate hedging program in 2010 of $15 million, compared with $40 million in 2009;
the $12 million first quarter 2010 charge relating to the devaluation of the Venezuelan currency; and
good cost controls, including our previous Shaping our Future and 2008 expense review initiatives, together with the initial benefits from our Right Sizing Willis initiatives in 2009;
a year over year benefit from foreign currency translation driven primarily by the significant strengthening of the US dollar against the Pound Sterling (in which our London market based operations incur the majority of their expenses); and
a $12 million curtailment gain realized on the closure of our US defined benefit pension plan to accrual of benefit for future service (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 $8 million impact of the introduction of a UK salary sacrifice scheme. The increase attributable to the salary sacrifice scheme was marginally more than offset by a reduction in salaries and payroll taxes.
We expect the amortization of intangible assets expense in 2011 to further decrease to approximately $65 million.
Amortization of intangible assets of $100 million in 2009 was $64 million higher than in 2008. 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 was fully amortized.
Operating margin was 23 percent for 2010, compared with 21 percent for 2009, reflecting the benefits of:
a favorable year over year impact from foreign currency translation, excluding the impact from the devaluation of the Venezuelan currency. This reflects the net benefit of: significantly lower losses on our forward rate hedging program and a weaker year over year Pound Sterling which decreases the US dollar value of our net Pound Sterling expense base; partly offset by the weakening of the Euro against the US dollar, reducing the US dollar value of our net Euro income;
an $8 million increase in share-based compensation charge, largely due to the non-
Operating margin was 21 percent for 2009 compared with 18 percent for 2008. This increase reflected the benefit of:
the year over year benefit of $92 million of costs incurred in 2008 associated with our 2008 expense review;
Interest expense in 2010 of $166 million was $8 lower than in 2009, as the benefit of the interest expense savings arising from the year over year reduction in average term loan and revolving credit facility balances was partly offset by the effect of the higher coupon payable on the $500 million of 12.875% senior unsecured notes issued in March 2009.
The effective tax rate for 2010 of 24 percent was impacted by:
the tax impact of the net loss on disposal of operations.
repatriated without additional tax cost and, consequently, the provision was released; and
Interest in earnings of associates, net of tax, was $33 million in 2009, $11 million higher than in 2008, reflecting a year over year increased ownership share in Gras Savoye. As described above, our interest in Gras Savoye subsequently reduced in December 2009 following the reorganization of that company’s capital.
the $59 million net increase in operating income discussed above; and
the year over year increase in tax charge of $44 million, primarily attributable to the 2009 one-off tax benefits of $38 million;
Foreign currency translation, excluding the impact of the Venezuelan currency devaluation, had a $0.04 favorable impact on diluted earnings per share. This was more than offset by the $0.07 per diluted share negative impact from the Venezuela currency devaluation in January 2010.
Average share count for 2010 was 171 million compared with 169 million in 2009. The increased share count had a negative $0.03 impact on diluted earnings per share.
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
Our Global business comprise Global Specialties, Willis Re, London Market Wholesale, and as of 2010, Willis Capital Markets & Advisory (WCMA).
The following table sets out revenues, organic revenue growth and operating income and margin for the three years ended December 31, 2010:
Commissions and fees of $873 million were $51 million, or 6 percent, higher in 2010 compared with 2009 which was driven by 6 percent organic revenue growth, with a 1 percent benefit from acquisitions and disposals offset by the impact of foreign currency translation.
Our Reinsurance and Global Specialties businesses both reported mid-single digit organic growth in 2010, driven by good net new business generation despite the adverse impact of the continued difficult rate environment and soft market in many of the specialty classes.
Reinsurance reported strong new business growth across all segments in 2010 and client retention levels remained high. Despite high loss levels earlier in the year, rates remain soft except for Marine and Energy.
Organic growth in Global Specialties was led by strong contributions from Financial and Executive Risks, Construction and Energy, reflecting strong new business, improved retention, targeted hiring of producer talent and global connectivity. However, the operating environment remains tough with depressed world trade and transit volumes, industry
As a result of strong reinsurance underwriting profits in 2009, with the exception of marine and energy, there has been a general but disciplined softening of rates in 2010 which remain a significant headwind for growth.
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.
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 some 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.
Operating margin was 30 percent in 2010 compared with 31 percent in 2009. This decrease primarily reflected the adverse impact of foreign currency translation, as the positive effect on our Pound Sterling expense base of a strengthening US dollar, was more than offset by the adverse impact of foreign currency movements on sterling-denominated balances.
Excluding the impact of this foreign currency translation, Global’s operating margin remained flat as the benefits of good organic revenue growth and disciplined cost control were offset by the impact of costs associated with continued support of current and future growth.
Operating margin was 31 percent in 2009 compared with 29 percent in 2008. This improvement reflected a significant benefit from foreign currency translation, together with organic revenue growth, particularly driven by our Reinsurance business, and
Organic revenue growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; (iii) the net commission and fee revenues related to operations disposed of in each period presented; (iv) in North America, legacy contingent commissions assumed as part of the HRH acquisition and that had not been converted into higher standard commission; and (v) investment income and other income from reported revenues.
3 per cent growth in our employee benefits practice, which represents approximately 25 percent of North America’s commission and fee base, despite the soft labor market; and
a negative 2 percent impact from rate declines and other market factors;
Net new business growth includes the benefit of higher standard commissions where these have been negotiated in lieu of contingent commissions. These
Despite the small decline in revenues, productivity in North America, measured in terms of revenue per FTE employee, increased to $238,000 for 2010 compared with $227,000 for 2009.
Client retention levels increased to 92 percent for 2010, compared with 91 percent for 2009.
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 saw significant declines.
lower pension expense in 2010, excluding the second quarter 2009 curtailment gain, following the closure of the US pension plan to future accrual in second quarter 2009;
the reduction in legacy HRH contingent commissions of $16 million in 2010;
the non-recurrence of a $9 million benefit in 2009 from the curtailment of the US pension plan relating to our North America retail employees; and
the decline in organic revenues against the backdrop of the soft market and weak economic conditions discussed above.
Organic revenue growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; (iii) the net commission and fee revenues related to operations disposed of in each period presented; and (iv) investment income and other income from reported revenues.
There were strong contributions to our organic growth from most regions, led by growth in Latin
Organic revenue growth was also positive in our UK and Irish retail operations, driven by new business growth in the UK as we begin to see signs of an improving economy. Our employee benefits practice, which represents approximately 10 percent of International commissions and fees, continued to perform well in 2010 with growth in the mid single digits.
A significant part of International’s revenues are earned in currencies other than the US dollar which strengthened significantly in 2009 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
a reduction in investment income, driven by lower interest rates, particularly in the Euro zone; and
Operating margin in International was 26 percent in 2009 compared with 28 percent in 2008, as the benefits of:
Our accounting policies are described in Note 2 to the Consolidated Financial Statements. Management considers that the following accounting estimates or assumptions are the most important to the
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 International schemes have combined total assets of $125 million and a combined net liability for pension benefits of $10 million as of December 31, 2010. Elsewhere, pension benefits are typically provided through defined contribution plans.
We make a number of assumptions when determining our pension liabilities and pension expense which are reviewed annually by senior management and changed where appropriate. The discount rate will be changed annually if underlying rates have moved whereas the expected long-term return on assets will be changed less frequently as
The UK plan charge was $3 million higher as the benefit of higher asset returns from higher asset levels was more than offset by:
the first full year’s benefit from closing the scheme to future accrual in May 2009;
Mortality assumptions at December 31, 2010 were unchanged from December 31, 2009. The mortality assumption is the 100 percent PNA00 table without an age adjustment. As an indication of the longevity assumed, our calculations assume that a UK male retiree aged 65 at December 31, 2010 would have a life expectancy of 22 years.
based on expected plan cash flows discounted using a corporate bond yield curve, a small reduction from 6.1 percent at December 31, 2009.
As for the UK plan, the 2008 actual return on assets was adversely impacted by the turmoil in worldwide markets.
The mortality assumption at December 31, 2010 is the RP-2000 Mortality Table (blended for annuitants and non-annuitants), projected to 2011 by Scale AA
(December 31, 2009: projected to 2010 by Scale AA). As an indication of the longevity assumed, our calculations assume that a US male retiree aged 65 at December 31, 2010, would have a life expectancy of 19 years.
To determine the allocation of intangible assets between goodwill and other intangible assets and the estimated useful lives in respect of the HRH
assumptions we believe to be reasonable. However, changes in these estimates and assumptions could affect the allocation between goodwill and other intangible assets.
The fair value of each reporting unit is estimated using a discounted cash flow methodology and, in aggregate, validated against our market capitalization. This analysis requires significant judgments, including:
We base our fair value estimates on assumptions we believe to be reasonable. However, changes in these estimates and assumptions could materially affect the determination of fair value and result in a goodwill impairment.
Our annual goodwill impairment analysis, which we performed during the fourth quarter of 2010, showed the estimated fair value of our reporting units was in excess of their carrying values, and therefore did not result in an impairment charge (2009: $nil, 2008: $nil).
There were no new accounting standards issued during the year that would have a significant impact on the Company’s reporting.
Effective December 31, 2010, we changed the presentation of certain items on our balance sheet. Uncollected premiums from insureds and uncollected claims or refunds from insurers, previously reported within accounts receivable, are now recorded as fiduciary assets on the Company’s consolidated balance sheets. Unremitted insurance premiums and
claims (‘fiduciary funds’) are also recorded within fiduciary assets. The obligations to remit these funds, previously reported within accounts payable, are now recorded as fiduciary liabilities on the Company’s consolidated balance sheets. Accordingly, prior year comparatives and commentary below have been recast to reflect this revised presentation.
Total debt as of December 31, 2010 decreased to $2.3 billion, compared with $2.4 billion at December 31, 2009.
to the remaining availability under our previously existing $300 million revolving credit facility.
Our principal sources of liquidity are cash from operations, cash and cash equivalents of $316 million at December 31, 2010 and remaining availability of $430 million under our revolving credit facilities.
We continue to identify and implement further actions to control costs and enhance our operating performance, including future cash flow.
of the total $520 million under our revolving credit facilities remained available to draw.
Net cash provided by operations was $419 million in 2009 compared with $253 million in 2008. The $166 million increase between 2008 and 2009 mainly reflects:
a $161 million increase in net income before the non-cash charges for: amortization of intangible assets; amortization of cash retention award payments; provision for deferred taxation; and share-based compensation; and
the timing of cash collections and other working capital movements, including a year over year negative impact from foreign currency translation.
We made total cash contributions to our UK defined benefit pension plan of $88 million in 2010, (including amounts in respect of the salary sacrifice contributions) compared with $49 million in 2009 and $140 million in 2008.
We made total cash contributions to our US defined benefit pension plan of $30 million in 2010, compared with $27 million in 2009 and $8 million in 2008.
US pension legislation based on our December 31, 2010 balance sheet position. We currently expect to contribute $30 million in 2011.
We made cash contributions to our International defined benefit pension plans of $12 million in 2010, compared with $6 million in both 2009 and 2008.
Total net cash outflow from investing activities was $94 million in 2010 compared with an inflow of $102 million in 2009 mainly reflecting:
a $21 million increase in cash payments in 2010 for acquisitions of subsidiaries, mainly reflecting payments in respect of prior year acquisitions.
Total net cash inflow from investing activities was $102 million in 2009 compared with an outflow of $1,033 million in 2008, primarily reflecting:
$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 $40 million increase in net proceeds from sale of operations, mainly attributable to the second quarter 2009 disposal of Bliss & Glennon.
Net cash used in financing activities was $293 million in 2010 compared with $516 million in 2009.
The net decrease in cash used in financing activities of $223 million was mainly attributable to:
a $90 million increase in the drawdown against our revolving credit facilities; and
a $880 million reduction in debt repayments, largely due to the 2009 repayment/refinancing of
Net cash used in financing activities was $516 million in 2009 compared with an inflow of $808 million in 2008.
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.
We did not buyback any shares in 2010 or 2009. There remains $925 million under the current buyback authorization.
In 2008, we repurchased 2.3 million shares at a cost of $75 million.
The $2 million increase in 2010, compared with 2009 is driven by the small increase in share count during the year.
The $28 million increase in 2009, compared with 2008, primarily reflects dividend payments on the 24 million additional shares issued in connection with the fourth quarter 2008 acquisition of HRH.
In February 2011, we declared a quarterly cash dividend of $0.26 per share, an annual rate of $1.04 per share.
The Company’s contractual obligations as at December 31, 2010 are presented below:
These facilities are in addition to the remaining availability of $210 million (2009: $300 million)
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 $39 million for 2009 through 2012, excluding amounts in respect of the salary sacrifice scheme. In addition, if certain funding targets were not met at the beginning of any of the following years, 2010 through 2012, a further contribution of $39 million would be required for that year. In 2010, the
The total contributions for all plans are currently estimated to be approximately $125 million in 2011, including amounts in respect of the salary sacrifice scheme.
Apart from commitments, guarantees and contingencies, as disclosed in Note 20 to the Consolidated Financial Statements, the Company has no off-balance sheet arrangements that have, or
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2010
To the Board of Directors and Stockholders of Willis Group Holdings Public Limited Company
We have audited the accompanying consolidated balance sheets of Willis Group Holdings Public Limited Company and subsidiaries (the ‘Company’) as of December 31, 2010 and 2009, 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, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
The 2009 balance sheet has been recast to conform to the current year presentation. See Note 2 - Basis of Presentation and Significant Accounting Policies for details
The accompanying consolidated financial statements include the accounts of Willis Group Holdings and its subsidiaries, which are controlled through the ownership of a majority voting interest. Intercompany balances and transactions have been eliminated on consolidation.
Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the US dollar are translated into US dollars at the average exchange rate and assets and liabilities are translated at year-end exchange rates. Translation adjustments are presented as a separate component of other comprehensive income in the financial statements and are included in net income only upon sale or liquidation of the underlying foreign subsidiary or associated company.
The obligations to remit these funds to insurers or insureds are recorded as fiduciary liabilities 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.
Fiduciary funds represent unremitted premiums received from insureds and unremitted claims received from insurers. Fiduciary funds are generally required to be kept in certain regulated bank accounts subject to guidelines which emphasize capital preservation and liquidity; such funds are not available to service the Company’s debt or for other corporate purposes. Notwithstanding the legal relationships with clients and insurers, the Company is entitled to retain investment income earned on fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds.
Included in fiduciary funds 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.
effective fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. Changes in fair value of derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness on those that do qualify, are recorded in other operating expenses or interest expense as appropriate.
The Company recognizes interest and penalties relating to unrecognized tax benefits within income taxes.
The Company has two principal defined benefit pension plans which cover the majority of employees in the United States and United Kingdom. Both these plans are now closed to new entrants. New entrants in the
compensation cost is not recognized for awards that do not vest because service or performance conditions are not satisfied.
Fees for risk management and other services are recognized as the services are provided. Negotiated fee arrangements for an agreed period covering multiple insurance placements, the provision of risk management and/or other services are determined, contract by contract, on the basis of the relative fair value of the services completed and the services yet to be rendered. The Company establishes contract cancellation reserves where appropriate: at December 31, 2010, 2009 and 2008, such amounts were not material.
The Company incurred severance costs of $15 million in the year ended December 31, 2010 (2009: $24 million; 2008: $26 million) relating to approximately 550 positions (2009: 450 positions; 2008: 100 positions) that have been, or are in the process of being, eliminated as part of the Company’s continuing focus on managing expense. Severance costs for these employees were recognized pursuant to the terms of their existing benefit arrangements or employment agreements.
The Company makes annual cash retention awards to its employees. Employees must repay a proportionate amount of these awards if they voluntarily leave the Company’s employ (other than in the event of retirement or permanent disability) before a certain time period, currently up to three years. The Company makes cash payments to its employees in the year it grants these retention awards and recognizes these payments ratably over the period they are subject to repayment, beginning in the quarter in which the award is made. The unamortized portion of cash retention awards is recorded within other assets.
The following table sets out the amount of cash retention awards made and the related amortization of those awards for the years ended December 31, 2010, 2009 and 2008:
The Company has adopted the Willis Group Holdings 2001 North America Employee Share Purchase Plan, expiring May 31, 2011 and the Willis Group Holdings 2010 North America Employee Stock Purchase Plan. They provide certain eligible employees to the Company’s subsidiaries in the US and Canada the ability to contribute payroll deductions to the purchase of Willis Shares at the end of each offering period.
The weighted average grant-date fair value of performance-based options granted during the year ended December 31, 2010 was $7.11 (2009: $5.89; 2008: $9.37). The total intrinsic value of options exercised during the year ended December 31, 2010 was $nil (2009: $1 million; 2008: $3 million). At December 31, 2010 there was $37 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 2 years.
A summary of restricted stock unit activity under the Plans at December 31, 2010, and changes during the year then ended is presented below:
The total number of restricted stock units vested during the year ended December 31, 2010, was 744,633 shares at an average share price of $32.17 (2009: 550,224 shares at an average share price of $24.53). At December 31, 2010 there was $15 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under the plan: that cost is expected to be recognized over a weighted average period of 1 year.
Cash received from option exercises under all share-based payment arrangements for the year ended December 31, 2010 was $37 million (2009: $19 million; 2008: $11 million). The actual tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements totaled $10 million for the year ended December 31, 2010 (2009: $5 million; 2008: $7 million).
Fees for the audits of the Company’s annual financial statements and reviews of the financial statements included in the Company’s quarterly reports for that fiscal year, services relating to the Company’s registration statements and US Generally Accepted Accounting Principles (‘US GAAP’) accounting consultations and Sarbanes-Oxley Section 404 work.
All other fees relate primarily to assistance with regulatory inquiries and other advisory services.
Total proceeds for 2010 were $4 million, comprising $2 million relating to 2010 disposals of operations and $2 million of deferred proceeds relating to prior year. A loss on disposal of $2 million is recorded in the consolidated statements of operations for the year ended December 31, 2010.
Total proceeds from the disposal of operations for 2009 were $315 million, including $281 million for 18 percent of the Group’s 49 percent interest in Gras Savoye and $39 million for 100 percent of Bliss & Glennon. A gain on disposal of $13 million is recorded in the statement of consolidated operations for the year ended December 31, 2009, of which $10 million relates to Gras Savoye as shown below.
On December 17, 2009, the Company completed a leveraged transaction with the original family shareholders of Gras Savoye and Astorg Partners, a private equity fund, to reorganize the capital of Gras Savoye (‘December 2009 leveraged transaction’), its principal investment in associates. The Company, the family shareholders and Astorg now own equal stakes of 31 percent in Gras Savoye and have equal representation of one third of the voting rights on its board. The remaining shareholding is held by a large pool of Gras Savoye managers and minority shareholders.
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 statement of operations.
At December 31, 2010, the Company had valuation allowances of $87 million (2009: $92 million) to reduce its deferred tax assets to estimated realizable value. The valuation allowances at December 31, 2010 relate to the deferred tax assets arising from UK capital loss carryforwards ($49 million) and other net operating losses ($1 million), which have no expiration date and to the deferred tax assets arising from US State net operating losses ($37 million). Capital loss carryforwards can only be offset against future UK capital gains.
At December 31, 2010, the Company had deferred tax assets of $207 million (2009: $298 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.
The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when the Company expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. The Company does not, however, provide for income taxes on the unremitted earnings of certain other subsidiaries where, in management’s opinion, such earnings have been indefinitely reinvested in those operations, or will be remitted either in a tax free liquidation or as dividends
with taxes substantially offset by foreign tax credits. It is not practical to determine the amount of unrecognized deferred tax liabilities for temporary differences related to these investments.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
All UK tax returns have been filed timely and are in the normal process of being reviewed, with HM Revenue & Customs making enquiries to obtain additional information. There are no material ongoing enquiries in relation to filed UK returns other than in relation to the quantification of foreign tax reliefs available on the remittance of foreign earnings.
For the year ended December 31, 2010, time-based and performance-based options to purchase 11.5 million and 9.4 million (2009: 13.4 million and 8.9 million; 2008: 16.9 million and 5.8 million) shares, respectively, and 1.8 million restricted stock units (2009: 2.2 million; 2008: 1.4 million), respectively, were outstanding.
Options to purchase 13.9 million shares for the year ended December 31, 2010 were not included in the computation of the dilutive effect of stock options because the effect was antidilutive (2009: 16.1 million shares; 2008: 22.1 million shares).
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 (‘fiduciary receivables’) are recorded as fiduciary assets on the Company’s consolidated balance sheets. Unremitted insurance premiums and claims (‘fiduciary funds’) are also recorded within fiduciary assets.
The financial statements as at December 31, 2010 and 2009 reflect the consolidation of one Variable Interest Entity (‘VIE’), a UK non-statutory trust that was established in January 2005 following the introduction of statutory regulation of insurance in the UK by the Financial Services Authority. The regulation requires that all fiduciary funds collected by an insurance broker such as the Company be paid into a non-statutory trust designed to give additional credit protection to the clients and insurance carriers of the Company. This trust restricts the financial instruments in which such funds may be invested and affects the timing of transferring commission from fiduciary funds to own funds.
Included within land and buildings are assets held under capital leases. At December 31, 2010, cost and accumulated depreciation were $23 million and $1 million respectively (2009: $nil and $nil respectively; 2008: $nil and $nil respectively). Depreciation in the year ended December 31, 2010 was $1 million (2009: $nil; 2008: $nil).
The Company’s principal investment as of December 31, 2010 and 2009 is GS & Cie Groupe (‘Gras Savoye’), France’s leading insurance broker.
A put option that was in place prior to the December 2009 leveraged transaction, and which could have increased the Company’s interest to 90 percent, has been canceled and the Company now has a new call option to purchase 100 percent of the capital of Gras Savoye. If the Company does not waive the new call option before April 30, 2014, then it must exercise the new call option in 2015 or the other shareholders may initiate procedures to sell Gras Savoye. Except with the unanimous consent of the supervisory board and other customary exceptions, the parties are prohibited from transferring any shares of Gras Savoye until 2015. At the end of this period, shareholders are entitled to pre-emptive and tag-along rights.
As a result of the December 2009 leveraged transaction the Company recognized a gain of $10 million in the consolidated statement of operations for the year ended December 31, 2009 from the reduction of its interest in Gras Savoye from 49 percent to 31 percent. The Company received total proceeds of $281 million, comprising cash and interest bearing vendor loans and convertible bonds issued by Gras Savoye. See Note 6 - Net (Loss) Gain on Disposal of Operations for an analysis of the proceeds and the calculation of the gain.
The carrying amount of the Gras Savoye investment as of December 31, 2010 includes goodwill of $88 million (2009: $94 million) and interest bearing vendor loans and convertible bonds issued by Gras Savoye of $44 million and $78 million respectively (2009: $46 million and $78 million, respectively).
Unaudited condensed financial information for associates, in the aggregate, as of and for the three years ended December 31, 2010, is presented below. For convenience purposes: (i) balance sheet data has been translated to US dollars at the relevant year-end exchange rate, and (ii) condensed statements of operations data has been translated to US dollars at the relevant average exchange rate.
Disclosure is based on the Company’s best estimate of the results of its associates and is subject to change upon receipt of their financial statements for 2010.
For the year ended December 31, 2010, the Company recognized $5 million (2009: $12 million; 2008: $9 million) in respect of dividends received from associates.
The Company maintains two principal defined benefit pension plans that cover the majority of our employees in the United States and United Kingdom. Both of these plans are now closed to new entrants. New entrants 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
a pension benefit asset of $179 million (2009: $69 million) in respect of the UK defined benefit pension plan; and
a total liability for pension benefits of $164 million (2009: $187 million) representing:
$154 million (2009: $157 million) in respect of the US defined benefit pension plan; and
$10 million (2009: $30 million) in respect of the International defined benefit pension plans.
The following schedules provide information concerning the Company’s UK and US defined benefit pension plans as of and for the years ended December 31:
The following schedule provides other information concerning the Company’s UK and US 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 8.85 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.
The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value:
The following table summarizes the changes in the UK pension plan’s Level 3 assets for the years ended December 31, 2010 and 2009:
The estimated net loss for the international defined benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $nil million.
Assets classified as Level 3 investments did not materially change during the year ended December 31, 2010. In 2011, the Company expects to contribute $7 million to the international plans.
The following benefit payments, which reflect expected future service, as appropriate, are estimated to be paid by the international defined benefit pension plans:
Short-term debt and current portion of the long-term debt consists of the following:
Until December 22, 2010, all direct obligations under the 12.875% senior notes listed above were 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 Inc., and all direct obligations under the 5.625%, 6.200% and 7.000% senior notes were guaranteed by Willis Group Holdings, Willis Netherland Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, TA II Limited, TA III Limited, Trinity Acquisition plc, TA IV Limited and Willis Group Limited.
On that date and in connection with a group reorganization, TA II Limited, TA III Limited and TA IV Limited transferred their obligations as guarantors to the other Guarantor Companies. TA II Limited, TA III Limited and TA IV Limited entered member’s voluntary liquidation on December 31, 2010.
the currency of the loan. This margin applies while the Company’s debt rating remains BBB-/Baa3. This facility expires on October 1, 2013. As at December 31, 2010 no drawings had been made on the facility.
In March 2009, Trinity Acquisition plc 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 an interim credit facility.
The Company also has available $2 million (2009: $7 million) in lines of credit, of which $nil was drawn as of December 31, 2010 (2009: $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. Insurance recoveries recognised at December 31, 2010 amounted to $15 million (2009: $63 million).
These facilities are in addition to the remaining availability of $210 million (2009: $300 million) under the Company’s previously existing $300 million revolving credit facility.
Rent expense amounted to $131 million for the year ended December 31, 2010 (2009: $154 million; 2008: $151 million). The Company’s rental income from subleases was $22 million for the year ended December 31, 2010 (2009: $21 million; 2008: $22 million).
Contractual obligations for our pension plans reflect the contributions we expect to make over the next five years into our US and UK plans. These contributions are based on current funding positions and may increase or decrease dependent on the future performance of the two plans.
In addition, the Company has given guarantees to bankers and other third parties relating principally to letters of credit amounting to $11 million and $5 million at December 31, 2010 and 2009, respectively. Willis Group Holdings also guarantees certain of its UK and Irish subsidiaries’ obligations to fund the UK and Irish defined benefit pension plans.
Other contractual obligations at December 31, 2010 also include the capital lease on the Company’s Nashville property of $63 million, payable from 2012 onwards.
Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance. The terms of this insurance vary by policy year and self-insured risks have increased significantly in recent years. In respect of self-insured risks, the Company has established provisions which are believed to be adequate in the light of current information and legal advice, and the Company adjusts such provisions from time to time according to developments.
In connection with the investigation launched 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 (‘Original AOD’) with the New York State Attorney General and the Superintendent of the New York Insurance Department and paid $50 million to
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 to accept contingent compensation on brokerage business. The Company has cooperated 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.
The Amended and Restated AOD specifically recognizes that the Company has substantially met its obligations under the Original AOD and ends many of the requirements previously imposed. It relieves the Company of a number of technical compliance obligations that have imposed significant administrative and financial burdens on its operations. The Amended and Restated AOD no longer limits the types of compensation the Company can receive and has lowered the compensation disclosure requirements.
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 filed responses to the European Commission and the European Free Trade Association Surveillance Authority questionnaires. 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 and also over the nature of the coinsurance market. The Company co-operated with both the European Free Trade Association Surveillance Authority and the European Commission to resolve issues raised in its final report regarding coinsurance as required of the industry by the European Commission.
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 allegations regarding the practices and conduct that have been the subject of the investigation of state attorneys general and insurance commissioners, including allegations that the brokers have breached their duties to their clients by entering into contingent compensation agreements with either no disclosure or limited disclosure to clients and participated in other improper activities. The complaints also allege the existence of a conspiracy among insurance carriers and brokers and allege violations of federal antitrust laws, the federal Racketeer Influenced and Corrupt Organizations (‘RICO’) statute and the Employee Retirement Income Security Act of 1974 (‘ERISA’). In separate decisions issued in August and September 2007, the antitrust and RICO Act claims were dismissed with prejudice and the state claims were dismissed without prejudice from the Commercial Complaint. In January 2008, the Judge dismissed the ERISA claims with prejudice from the EB Complaint and the state law claims without prejudice.
Plaintiffs filed a notice of appeal regarding the dismissal of the antitrust and RICO claims and oral arguments on this appeal were heard in April 2009. In August 2010, the United States Court of Appeals for the Third Circuit issued its decision on plaintiffs’ appeal. The Court upheld the dismissal of all claims against HRH and the Company, with the exception of one RICO related claim. The Court remanded the RICO claim to the District Court for further consideration. The District Judge is allowing HRH and the Company (and the other affected defendants) to submit new motions to dismiss the remanded RICO claim. The motion has been filed, but a decision is not expected until sometime in 2011. Additional actions could be brought in the future by individual policyholders. The Company disputes the allegations in all of these suits and has been and intends to continue to defend itself vigorously against these actions. The outcomes of these lawsuits, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.
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.
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 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. 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
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. On June 9, 2009, Willis Limited entered into a settlement agreement under which Willis Limited paid a total of $139 million to ARIC, which was covered by errors and omissions insurance. On September 11, 2009, Willis Limited entered into a settlement agreement under which Willis Limited paid a total of $130 million to CNA. The Company has substantially collected and believes it will collect in full the $130 million required under the CNA settlement agreement from errors and omissions insurers. The settlements include no admission of wrongdoing by any party. Each party also realized 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.
Various arbitrations relating to reinsurance continue and, from time to time, the principals request co-operation from the Company and suggest that claims may be asserted against the Company. Such claims may be made against the Company if reinsurers do not pay claims on policies issued by them. The Company cannot predict at this time whether any such claims will be made or the damages that may be alleged.
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 August 6, 2009, a putative class action complaint, captioned Canabal, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:09-CV-01474-D, was filed against Willis Group Holdings, Willis of Colorado, Inc. and the same Willis associate, among others, also in the Northern District of Texas, relating to the same alleged course
On September 16, 2010, a complaint, captioned Casanova, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:10-CV-01862-O, was filed on behalf of seven Stanford investors against Willis Group Holdings, Willis Limited, Willis of Colorado, Inc. and the same Willis associate, among others, also in the Northern District of Texas. Although this is not a class action, the Casanova complaint is based on substantially the same allegations as the Second Amended Class Action Complaint in the consolidated Troice/Canabal action. The Casanova complaint asserts various claims under Texas statutory and common law and seeks actual damages in excess of $5 million, punitive damages, attorneys’ fees and costs.
Additional actions could be brought in the future by other investors in certificates of deposit issued by Stanford and its affiliates. The Company disputes these allegations and intends to defend itself vigorously
against these actions. The outcomes of these actions, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.
In January 2009, Willis of Minnesota, Inc. was named as a third party defendant in a lawsuit between American Insurance Company (‘AIC’) and St. Jude Medical, Inc. (‘St. Jude’) pending in the United States District Court, District of Minnesota, that arose out of a products liability insurance program for St. Jude in which AIC provided one layer of insurance and the Company acted as the broker. St. Jude sought a judgment against AIC requiring AIC to pay its policy limits of $50 million plus interest and costs for certain personal injury claims filed against St. Jude and denied by AIC. To the extent there was a finding that AIC does not have to provide coverage for these claims, St. Jude alternatively alleged standard errors and omissions claims against the Company for the same amount.
In addition to the note below, see Note 25 for information about the fair value hierarchy of derivatives.
The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and credit risk. The Company’s board of directors reviews and agrees policies for managing each of these risks as summarized below.
The Company enters into derivative transactions (principally interest rate swaps and forward foreign currency contracts) in order to manage interest rate and currency risks arising from the Company’s operations and its sources of finance. The Company does not hold financial or derivative instruments for trading purposes.
At December 31, 2010 and 2009, the company had the following derivative financial instruments that were designated as cash flow hedges of interest rate risk:
The Company’s operations are financed principally by $1,750 million fixed rate senior notes and $411 million under a 5-year term loan facility. Of the fixed rate senior notes $350 million are due 2015, $500 million are due 2016, $600 million are due 2017 and $300 million are due 2019. The Company also has access to $520 million under three revolving credit facilities; as of December 31, 2010 $90 million was drawn from the 5-year $300 million revolving credit facility. All debt is issued by subsidiaries of the Company.
At December 31, 2010 and 2009, the Company’s interest rate swaps were all designated as hedging instruments.
from changes in the exchange rate between US dollars and pounds sterling as its London market operations earn the majority of their revenues in US dollars and incur expenses predominantly in pounds sterling, and may also hold a significant net sterling asset or liability position on the balance sheet. In addition, the London market operations earn significant revenues in euros and Japanese yen; and
To the extent that the net sterling asset or liability position in its London market operations relate to short-term cash flows, the Company limits its exposure by the use of forward purchases and sales. These forward purchases and sales are not effective hedges for accounting purposes.
At December 31, 2010 and 2009, the Company’s foreign currency contracts were all designated as hedging instruments.
Excludes accrued interest of $3 million (2009: $4 million), which is recorded in prepayments and accrued income, in other assets.
Excludes accrued interest of $3 million (2009: $nil), which is recorded in accrued interest payable in other liabilities.
The table below presents the effects of derivative financial instruments in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity for years ended December 31, 2010, 2009 and 2008:
OCI means other comprehensive income. Amounts above shown gross of tax.
For interest rate swaps all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For foreign exchange contracts only the changes in fair value resulting from movements in the spot exchange rate are included in this assessment.
Excludes accrued interest of $6 million (2009: $4 million); $3 million (2009: $4 million) is recorded in prepayments and accrued income, and $3 million (2009: $nil) is recorded in accrued interest payable.
Fiduciary Funds - Restricted - Fair values are based on quoted market values
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.
costs associated with the redomicile of the Company’s parent company from Bermuda to Ireland.
The accounting policies of the operating segments are consistent with those described in Note 2 - Basis of Presentation and Significant Accounting Policies. There are no inter-segment revenues, with segments operating on a revenue-sharing basis equivalent to that used when sharing business with other third-party brokers.
Other than in the United Kingdom and the United States, the Company does not conduct business in any country in which its commissions and fees and/or fixed assets exceed 10 percent of consolidated commissions and fees and/or fixed assets, respectively.
Until December 22, 2010, all direct obligations under the senior notes were 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, Trinity Acquisition plc, TA III Limited, TA IV Limited, and Willis Group Limited, the Guarantor Companies. On that date and in connection with an internal group reorganisation, TA II Limited, TA III Limited and TA IV Limited transferred their obligations
The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets for the year ended December 31, 2010 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.
The entities included in the Other Guarantors column for the year ended December 31, 2010 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. See the discussion above describing the liquidation of certain of these entities.
The 2008 Consolidated Statements of Cash Flows has been recast to conform to the new balance sheet presentation. See Note 2 - Basis of Presentation and Significant Accounting Policies for details