We own and lease a number of properties for use as offices throughout the world and believe that our properties are generally suitable and adequate for the purposes for which they are used. The principal properties are located in the United Kingdom and the United States.
On September 27, 2006, Willis Group Services Limited, a subsidiary of Willis Group Holdings Limited, 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 on Lime Street in April 2008.
In New York, we occupy 200,000 sq ft of office space at One World Financial Center under a 20 year lease.
This discussion includes references to non-GAAP financial measures as defined in Regulation G of SEC rules. We present such non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company's operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. 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, 2008.
This discussion includes forward-looking statements, including under the heading "Summary-2008 Expense Review," "-Market outlook" and "-Financial Targets". 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.
A "hard" market occurs when premium uplifting factors, including a greater than anticipated loss experience or capital shortages, more than offset any downward pressures on premiums. This usually has a favorable impact on our commission revenues and operating margin.
However, these potential benefits may be offset in whole or in part by potential changes in the
also negatively affecting some of the international economies that have supported the strong growth in our International operations. Our employee benefits practice may also be adversely affected as businesses continue to downsize during this period of economic turmoil.
Total revenues at $2,834 million were $256 million, or 10 percent, higher than in 2007. Organic revenue growth of 4 percent, a 7 percent benefit from net acquisitions and disposals primarily reflecting the HRH acquisition and a 1 percentage point benefit from foreign currency translation were partly offset by lower investment and other income. Organic revenue growth of 4 percent reflected net new business growth of 6 percent and a 2 percent negative impact from declining rates and other market factors. Net new business growth benefitted from a 1 percentage point improvement in client retention rate to 91 percent, compared with 90 percent in 2007.
Operating margin at 18 percent in 2008 was 6 percentage points lower than in 2007 with the decrease mainly reflecting:
•the $102 million gain on disposal of our London headquarters in 2006, equivalent to approximately a 4 percentage point decrease in margin;
•the $105 million expenditure in 2006 to launch our Shaping our Future strategy, equivalent to approximately a 4 percentage point increase in margin;
•the benefit of 2007 cost savings relating to our Shaping our Future strategy and lower charges for pensions and legal provisions; and
•an adverse year on year impact from foreign currency translation, equivalent to approximately a 1 percentage point decrease in margin. HRH acquisition
On October 1, 2008, we completed the acquisition of HRH, the eighth largest insurance and risk management intermediary in the United States.
Assuming the acquisition had occurred on January 1, 2007, pro forma combined revenues for the Group for full year 2008 would have been $3,451 million (2007: $3,378 million), of which $1,546 million, or 45 percent (2007: $1,586 million, or 47 percent), would be attributable to North America operations.
Total consideration paid by Willis for HRH was approximately $1.8 billion, which comprised approximately 24.4 million shares of common stock valued at $792 million and $982 million of cash. The total purchase price of approximately $2.1 billion included the assumption of approximately $340 million of HRH existing debt. The funding of the HRH transaction is discussed in "Cash and financing" below.
Customer relationships were identified as the key intangible asset as HRH has historically generated approximately 95 percent of its revenues from existing customers. The charge for HRH's intangible amortization was $21 million in fourth quarter 2008; we expect the full year 2009 charge relating to HRH's intangibles to be $82 million.
We recognized goodwill on the acquisition of $1.6 billion. However, we are still in the process of finalizing the valuation of certain assets and liabilities, thus the purchase price allocation is still subject to refinement.
Additionally in 2008, we acquired a further 10 percent of voting rights in Gras Savoye & Cie, our French associate at a cost of approximately $70 million, bringing our ownership share of voting rights to approximately 48 percent as at December 31, 2008.
Our Shaping our Future strategy is a series of initiatives designed to deliver profitable growth. As previously announced, we decided:
•to invest in further key hires and initiatives in 2008 and 2009; and, in order to fund a portion of these initiatives,
•to conduct a thorough review in 2008 of all businesses to identify additional opportunities to rationalize our expense base. In 2008, we incurred a pre-tax charge of $92 million ($66 million net of tax, equivalent to $0.45 per diluted share) comprising:
Cash at December 31, 2008 was $176 million; $24 million lower than at December 31, 2007.
•acquisitions of $978 million, of which $926 million related to HRH;
On October 1, 2008, we 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, we repaid the outstanding balance on our existing revolving credit facility and replaced this with a new 5-year $300 million line of credit.
given favorable market conditions, future borrowings or refinancing. However, our cash requirements could be materially affected by a deterioration in our results of operations, as well as various uncertainties discussed in this section and elsewhere in this document, which could require us to pursue other financing options, including, but not limited to, additional borrowings, debt refinancing, asset sales or other financing alternatives. With the current tightening in the credit markets, the amount and terms, if any, of these financing sources cannot be assured.
On November 1, 2007, the Board authorized a new share buyback program for $1 billion. This replaced our previous $1 billion buyback program and its remaining $308 million
authorization. In addition the board authorized in June 2008, the repurchase of up to the number of shares issued by the Company in connection with the acquisition of HRH.
We completed the move from Ten Trinity Square into our new London headquarters on Lime Street in April 2008. We entered into an agreement to lease the Lime Street building in November 2004, and took control of the building in June 2007, under a 25 year lease. Annual rentals are approximately $35 million per year and we have subleased or agreed to sublease approximately 30 percent of the site under leases with terms up to 15 years. The outstanding contractual obligation for lease rentals at December 31, 2008 was $720 million and the amounts receivable from committed subleases were $106 million.
(i)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, 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.
(ii)Effective October 1, 2008, we changed how we calculate 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.
Our 2008 total revenues at $2,834 million were $256 million, or 10 percent, higher than in 2007, reflecting a 7 percent benefit from net acquisitions and disposals principally attributable to HRH, organic commissions and fee growth of 4 percent and a 1 percentage point benefit from foreign currency translation, partly offset by lower investment and other income.
Investment income was $81 million for 2008, $15 million lower than in 2007, with the decrease reflecting lower average interest rates in 2008. We expect investment income to decrease by approximately $20 million in 2009 compared with 2008 as interest rates have continued to experience sharp declines across the globe. This estimated decrease includes the mitigating effect of our forward hedging program, from which we expect to generate significant savings compared to LIBOR based rates.
Other income was $2 million for 2008, $17 million lower than in 2007 which benefited
•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. Net new business growth also included the benefit of our Shaping our Future growth initiatives and a 1 percentage point improvement in client retention rates to 91 percent for 2008 compared with 90 percent for 2007; partly offset by
•a negative 2 percent impact from premium rates and other market factors in 2008. The impact of significant rate decreases in both periods has been tempered by the benefit of other market factors, including higher commission rates, client profitability analyses, higher insured values and changes in limits or exposures. Organic revenue growth by segment is discussed further in "Operating Results-Segment Information" below.
For the year ended December 31, 2007, reported revenues in International benefited significantly from the year on year effect of foreign currency translation, in particular due to the weakening of the dollar against both sterling and the euro, compared with 2006.
•$141 million, or 7 percentage points, was attributable to the fourth quarter acquisition of HRH;
•the $66 million charge relating to the 2008 expense review; and
•a $15 million reduction in pension charges. This decrease was mainly attributable to an increase in the expected return on assets in the UK pension plan reflecting higher opening asset levels due to the significant additional contributions we have made. Net headcount on an FTE basis at December 31, 2008 was approximately 17,000 compared with approximately 13,000 at December 31, 2007, with the increase primarily reflecting the acquisition of HRH. The increase in average revenues per FTE employee discussed above reflected growth
across all business units, particularly driven by our International business which has continued its record of outstanding growth.
•$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
•a $34 million foreign exchange loss related to the revaluation of our UK pension benefits asset. This asset is a sterling denominated asset but a portion of the asset is held within our UK London market operations, which are US dollar denominated for accounting purposes. As the dollar strengthened significantly against sterling in 2008, the revaluation of the sterling pension benefits asset gave rise to a foreign exchange loss. We have a program that hedges our sterling cash outflows from our London market operations, as part of which we hedge 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.
•a 4 percent adverse impact from foreign currency translation. Salaries and benefits were 56 percent of 2007 revenues, compared with 60 percent in 2006, with the decrease reflecting:
•the benefits of cost controls and our Shaping our Future initiatives; and
•a negative 2 percentage point impact from foreign exchange movements as discussed in "General and administrative expenses" above;
•a $38 million benefit from the operating income contribution of HRH in the fourth quarter; and
Operating margin was 24 percent in 2007 compared with 23 percent in 2006. This increase reflected the impact of:
•the $105 million of expenditure in 2006 in support of the Shaping our Future strategic initiatives, equivalent to 4 percentage points; and
•a 4 percentage point improvement in our retail margin, reflecting the increased margins in both North America and International as a result of our focus on productivity and profitable growth, together with the benefit of lower charges for pensions and legal provisions in our UK and US operations; partly offset by
Interest expense in 2008 of $105 million was $39 million higher than in 2007 with the increase reflecting:
•$18 million additional interest expense in 2008 relating to our new term loan and interim credit facilities connected with the HRH acquisition;
•$9 million additional interest expense in 2008 due to fixed term $600 million senior notes issued in March 2007; and
•a change in the geographical mix of profits with a greater proportion of profits being earned outside the United States;
•non-taxable exchange gains arising from the significant movement in the exchange rate between the US dollar and sterling; and
•the benefit of a $10 million release of tax provisions in 2007 compared to a $2 million release in 2008. Both 2008 and 2007
benefited from the release of tax provisions relating to prior tax periods following the resolution of tax issues surrounding prior debt refinancing; and
•the $66 million post-tax impact of charges associated with the 2008 expense review, equivalent to $0.45 per diluted share; and
•a year on year accounting loss of $0.27 per diluted share primarily relating to the retranslation of our sterling denominated UK pension benefits asset as discussed in
•a year on year benefit from a lower effective tax rate of $0.09 per diluted share. HRH's fourth quarter results, net of related funding costs and intangible amortization, contributed $0.04 per diluted share.
Average diluted sharecount increased from 147 million in 2007 to 148 million in 2008 as the impact of the 11.5 million shares
Net income for 2007 was $409 million, or $2.78 per diluted share, compared with $449 million, or $2.84 per diluted share, in 2006 with the decrease mainly reflecting the impact of:
•the $94 million post-tax gain on the sale of our London headquarters in 2006, equivalent to $0.59 per diluted share;
•a $20 million post-tax increase in interest expense in 2007 reflecting increased long-term borrowing to fund share buybacks and
•increased revenues and the improved margin in 2007 as discussed above. Foreign currency translation had a $0.06 negative year on year impact on diluted earnings per share in 2007.
Average diluted sharecount reduced from 158 million in 2006 to 147 million in 2007 primarily reflecting the impact of the 15 million shares repurchased under accelerated share repurchase programs in November 2006 and March 2007. After taking into account incremental funding costs, there was a $0.09 benefit to diluted earnings per share from these share buybacks for 2007.
comprise our retail operations and provide services to small, medium and major corporates.
operating income and margin for the three years ended December 31, 2008:
(i)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 profit for full year 2007 and $10 million net operating loss for full year 2006, previously allocated to the Global segment, has been reported within Corporate.
(ii)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, 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.
Organic revenue growth was 2 percent as the benefit of good growth in Global Specialties was partly offset by lower commissions and fees in Reinsurance.
Global Specialties revenue growth reflected the benefit of good growth in Marine, Financial Institutions, Bloodstock, Jewelry, Specie and Global Markets and was achieved despite significant rate reductions.
Organic revenues in Reinsurance in 2008 were 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 move into 2009.
Commissions and fees were $13 million, or 2 percent, higher in 2007 compared with 2006 of which 1 percent was attributable to the net impact of acquisitions and disposals and 1 percent to foreign currency translation. Organic revenue growth was flat in 2007 with the benefit of a 6 percent increase in Global
Global Specialties revenue growth reflected the benefit of one-time income from satellite launches and strong growth in Construction, especially in global infrastructure projects, together with good performances from Energy, Financial Institutions and Niche. This revenue growth was achieved despite significant rate reductions with rates decreasing in: Aerospace by some 15 to 20 percent year on year; Marine Hull by 15 to 20 percent; Marine cargo by 25 to 40 percent; and Financial Institutions, Energy and Niche by some 10 to 15 percent.
Organic revenues in Reinsurance declined in 2007 and were adversely impacted by a combination of declining rates, a reduction in amounts reinsured and other changes, including recent changes in Florida legislation which significantly increased capacity and reduced prices.
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 further spend on targeted hires and strategic initiatives.
Operating margin in Reinsurance in 2008 was broadly in line with 2007 as the impact of lower
Operating margin in Global Specialties decreased in 2007 compared with 2006 as the moderate revenue growth achieved against the backdrop of a very tough rate environment was more than offset by expense growth. The expense growth reflected an adverse impact from foreign exchange and continued hiring in targeted areas such as Construction, Energy and Financial Institutions, partly offset by the benefits of Shaping our Future initiatives, lower charges for pension costs and legal provisions and good cost control.
Reinsurance's operating margin in 2007 was broadly in line with 2006 as the decline in revenues, an adverse impact from foreign exchange and our continued investment in analytics were offset by the benefit of lower charges for pension costs and legal provisions, and good cost control.
(ii)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, $nil in 2007 and $3 million net operating profit for full year 2006, previously allocated to the North America segment, has been reported within Corporate.
(iii)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, 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.
Client retention levels improved to 91 percent in 2008, an increase of 3 percentage points from 2007, and productivity continued to improve with an approximately 2 percent rise in revenues per FTE employee in 2008 compared with 2007.
The rate of organic revenue growth moderated in 2007 compared to previous years as the focus was on profitable growth. From mid-2006 we moderated the pace of hiring and at the same time managed out under performers. Consequently, while there was a year on year decline in producers, revenue per FTE employee was 5 percent higher in 2007 compared with 2006.
•continued spend on targeted new hires and other initiatives; partly offset by
Operating margin in North America was 19 percent in 2007 compared with 17 percent in 2006 and reflected the benefit of the increased revenue per employee and effective expense control, together with a $5 million increase in proceeds from the sale of books of business. Margin improvement was most significant in our New York and Central regions.
(i)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 (2006: $1 million).
(ii)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 and $5 million net operating loss for full year 2006, previously allocated to the International segment, has been reported within Corporate.
A significant part of International's revenues are earned in currencies other than the US dollar and foreign currency translation benefited 2008 revenues by 1 percent compared with 2007.
Productivity in International continued to improve with revenues per FTE employee rising by 6 percent in 2008 compared with 2007 and average client retention levels remaining high at 91 percent.
Organic growth in 2008 was driven by the emerging markets, particularly Latin America, China and Asia, all of which continued to generate strong double-digit growth. The emerging market growth was complemented by good growth in mainland Europe, especially in the Nordic region, Spain, Italy and Eastern Europe. However, there was a modest decline in our UK and Irish operations revenues compared with 2006 primarily due to the declining rates environment, with decreases averaging between 15 and 20 percent.
Operating margin in International was 28 percent in 2008 compared with 25 percent in 2007, with the 3 percentage point improvement reflecting the strong organic revenue growth, increased productivity and continued expense discipline partly offset by significant investment in targeted hires and the adverse impact of declining rates in most countries.
We maintain defined benefit pension plans that cover a majority of our employees in the United States and United Kingdom. Both 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. We also have smaller defined benefit schemes in Ireland, Germany, Denmark
The UK plan increase was $17 million mainly reflecting an increase in the expected return on assets in the UK plan due to higher asset levels following significant additional contributions in 2007 and 2008 and increased member contributions in 2008. The US pension charge was $2 million higher in 2008 compared with 2007.
Expected long-term rates of return on plan assets are developed from the expected future returns of the various asset classes using the target asset allocations. The expected long-term rate of return used for determining the net UK pension expense in 2008 remained unchanged at 7.75 percent, equivalent to an expected return in 2008 of $184 million. The expected and actual returns on UK plan assets for the three years ended December 31, 2008 were as follows:
The expected long-term rate of return used for determining the net US pension scheme expense in 2008 was 8.0 percent, consistent with 2007. The rate used to discount US plan liabilities at December 31, 2008 was 6.3 percent, determined based on expected plan cash flows discounted using a corporate bond yield curve, an increase from 6.0 percent at December 31, 2007. The expected and actual returns on US plan assets for the three years ended December 31, 2008 were as follows:
•"Contract based, Technology and Other" includes all other purchased intangible assets. 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.
•determination of fair value of each reporting unit. 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:
•determination of our weighted average cost of capital. 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 goodwill impairment for each reporting unit.
We recognize deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carryforwards. We estimate deferred tax assets and liabilities and assess the need for any valuation allowances using enacted rates in effect for the year in which the differences are
At December 31, 2008, the Company had gross deferred tax assets of $362 million (2007: $184 million) against which a valuation allowance of $85 million (2007: $69 million) had been recognized. To the extent that:
•material changes occur in actual tax rates or loss carry forward time limits, the Company may adjust the deferred tax asset considered realizable in future periods. Such adjustments could result in a significant increase or decrease in the effective tax rate and have a material impact on our net income.
been incurred but not reported. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in the light of current information and legal advice.
Company's reporting are described in Note 2 to the Consolidated Financial Statements.
Under the terms of the definitive merger agreement, we acquired all of the outstanding shares of common stock of HRH for $46.00 per share, with approximately 55 percent of the total consideration being paid in cash and 45 percent being paid in our stock. The total purchase price of approximately $2.1 billion included the assumption of approximately $340 million of HRH existing debt.
During fourth quarter 2008, we repaid $250 million of the then outstanding $1 billion balance on the interim credit facility funded by using free cash flow of $75 million together with the drawdown of the remaining $175 million available under the 5-year term loan facility.
Total long term debt at December 31, 2008 was $1,865 million and total short term debt was $785 million. Included in total long-term debt is $250 million of 5.125% senior notes due 2010.
We believe that existing cash and cash equivalents at December 31, 2008 of $176 million, the consummation of the agreement with Goldman Sachs Mezzanine Partners to issue $500 million of senior unsecured notes, availability under our $300 million revolving credit facility together with future generation of free cash flow and proceeds from the sale of non-core businesses should be adequate to meet our cash needs for at least the next 12 months. These sources of liquidity should also be adequate to finance full repayment of the interim credit facility, current portions of our long-term debt and other contractual obligations and presently known operating needs.
Long-term liquidity for debt service and other contractual obligations will be dependent on continued generation of free cash flow and, given favorable market conditions, future borrowings or refinancing. However, our cash requirements could be materially affected by a deterioration in our results of operations, as well as various uncertainties discussed in this section and elsewhere, which could require us to pursue other financing options, including, but not limited to, additional borrowings, debt refinancing, asset sales or other financing alternatives. With the current tightening in the
We continue to identify and implement further actions to control costs and enhance our operating performance, including cash flow. These actions include the rationalization of our cost base through the 2008 expense review and our ongoing right-sizing initiatives to achieve best fit within the current environment.
Net cash provided by operations was $211 million in 2008 compared with $268 million in 2007 and $147 million in 2006. Net cash provided by operations has been significantly impacted by the accelerated funding of our pensions schemes over the last three years, with additional contributions of $107 million in 2008, $153 million in 2007 and $211 million in 2006.
•an $81 million decrease in net income before gains relating to investment activities; and
•a $65 million increase in cash payments for interest reflecting higher average debt levels, particularly following the funding of the HRH acquisition; partly offset by
•a $58 million reduction in additional contributions to our UK and US defined benefit pension plans; and
The net increase in cash used in investing activities of $819 million in 2008 compared with 2007 was attributable to:
•a reduction in proceeds from disposals of operations, investments and other assets of $14 million; partly offset by
•cash proceeds on disposal of fixed and intangible assets of $27 million in 2007 compared with $205 million in 2006, primarily reflecting the $202 million proceeds on sale of our London headquarters in 2006. In 2008 we completed the acquisition of HRH with approximately 55 percent of the total consideration being paid in cash, as described above. This payment for acquisitions of $926 million was in addition to a payment of $31 million to acquire an additional 4 percent of voting rights in Gras Savoye & Cie, our French associate. We also acquired a further 5.5 percent of Gras Savoye & Cie effective fourth quarter 2008 for which the $41 million in cash was paid in January 2009. The Gras Savoye acquisitions were pursuant to put arrangements, see "Contractual Obligations" below.
Cash provided by financing activities amounted to $828 million in 2008 compared with outflows of $146 million in 2007 and $129 million in 2006.
In connection with the HRH acquisition on October 1, 2008, we drew down $1 billion from an interim credit facility and a further $525 million from a 5-year term loan facility. During fourth quarter 2008, we subsequently repaid $250 million of the outstanding balance on the interim credit facility using $175 million proceeds from an additional drawdown of the 5-year term loan facility together with $75 million from free cash flow.
In February 2009, we entered into an agreement with Goldman Sachs Mezzanine Partners to issue 12.875 percent senior unsecured notes due 2016 in an aggregate principal amount of $500 million. The transaction is subject to customary closing conditions and is expected to close during March 2009. We expect the net proceeds of the issue to be used to repay approximately a further $480 million of the $750 million outstanding balance on the interim credit facility as at December 31, 2008.
In addition, we repaid the outstanding balance on our previously existing revolving credit facility and replaced it with a new 5-year $300 million line of credit.
In March 2007, we issued $600 million of 10 year senior notes at 6.20 percent. We used the proceeds of the notes to fund share buybacks and to repay a net $150 million on our then existing revolving credit facility.
We repurchased 2.3 million shares for $75 million of cash in the first quarter of 2008 compared with 11.5 million shares for $480 million of cash in 2007 and 5.4 million shares for $211 million of cash in 2006.
Cash dividends paid in 2008 were $146 million compared with $143 million in 2007 and $145 million in 2006. In February 2009, we declared a quarterly cash dividend of $0.26 per share, an annual rate of $1.04 per share.
(ii)Based on the earliest dates on which options could be exercised.
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 $37 million for 2009 through 2012. However, if certain funding targets are not met at the beginning of 2010 and 2011, full year contributions for these years will increase to $74 million.
For the US plan, expected contributions are the contributions we will be required to make under US pension legislation based on our December 31, 2008 balance sheet position. We currently expect to contribute $18 million in 2009 and between $45 and $50 million per year from 2010 to 2013.
As part of the 1997 acquisition of our initial 33 percent shareholding of Gras Savoye, we entered into a put arrangement, whereby the other shareholders in Gras Savoye (primarily two families, two insurance companies and Gras Savoye's executive management team) could put their shares to us. Until 2011, we will be obligated to buy the shares of certain
shareholders to the extent those shareholders put their shares, potentially increasing our ownership from the 48 percent holding at December 31, 2008 to 90 percent if all shareholders put their shares, at a price determined by a contractual formula based on earnings and revenue.
We believe that, should the aggregate amount of Gras Savoye shares be put to us, sufficient funds would be available to satisfy this obligation. In addition, we have a call option to move to majority ownership under certain circumstances and in any event by December 2009. Upon exercising this call option, the remaining Gras Savoye shareholders have a put option.
•AXA will agree to extend the date for payment of the amount due in respect of the AXA shares and that Gras Savoye itself will buy back all the AXA shares on the agreed date for payment. In these circumstances we believe that Gras Savoye will buy back all the AXA shares and would agree to pay the amount due in respect of the shares into an
escrow account to be paid to AXA upon completion of the acquisition of the shares. Again, as a result, we would not be required to acquire any of the shares; or
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Willis Group Holdings Limited and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, 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.
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.
•Significant accounting policies followed in the preparation of the consolidated financial statements.
•applies to certain assets and liabilities that are being measured and reported on a fair value basis;
•defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements; and
FAS 157 requires that assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
The Company's fiduciary funds-restricted and short-term investments consist mainly of cash and time deposits. Fair values are based on quoted market values.
The fair value of the Company's derivative financial instruments is computed based on a market approach using information generated by market transactions involving comparable instruments.
Derivative financial instruments are included within 'other assets' and 'other liabilities' on the balance sheet.
Although the Company is not in the business of selling intangible assets (mainly books of business), from time to time the Company will dispose of a book of business (a customer list) or other intangible asset that does not produce adequate margins or fit with the Company's strategy.
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.
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
Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. The Company reviews goodwill for impairment annually and whenever facts or circumstances indicate that the carrying amounts may not be recoverable. As part of the evaluation the estimated future discounted cash flows associated with the underlying business operation are compared to the carrying amount of goodwill to determine if a write-down is required. If such an assessment indicates that the discounted future cash flows are not sufficient, the carrying amount is reduced to the estimated fair value. Acquired intangible assets are
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 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, there are some smaller plans in Ireland, Germany, Denmark and the Netherlands. Elsewhere, pension benefits are typically provided through defined contribution plans.
Contributions to the Company's defined contribution plans is 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.
•the cost resulting from all equity awards is recognized in the financial statements at fair value estimated at the grant date;
•the fair value is recognized (generally as compensation cost) over the requisite service period for all awards that vest; and
•compensation cost is not recognized for awards that do not vest because service or performance conditions are not satisfied.
Revenue includes insurance commissions, fees for services rendered, certain commissions receivable from insurance carriers and investment income earned on fiduciary balances.
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, 2008, 2007 and 2006, such amounts were not material.
As part of the Company's 2008 expense review, the Company incurred $24 million of severance costs in the year ended December 31, 2008 relating to approximately 350 positions that have been eliminated. Severance costs for these employees were recognized pursuant to the terms of their existing benefit arrangements or employment agreements.
The Company has also incurred or expects to incur severance expenses as it integrates HRH into its previously existing North America operations. Severance costs of $2 million relating to the elimination of approximately 100 positions in the Company's previously existing operations were recognized through the consolidated statement of operations in 2008. In addition, $16 million of severance expenses relating to 900 HRH positions that will be eliminated as part of the integration plan have been recognized as a liability on acquisition (see Note 9-Acquisition of Hilb Rogal & Hobbs).
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 ($2.92 using the year-end exchange rate of £1 = $1.46) 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 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 fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company's stock. With effect from January 1, 2006, the Company uses the simplified method set out in Staff Accounting Bulletin No. 107 to derive the expected term of options granted. The risk-free rate for periods within the expected life of the option is based on the US Treasury yield curve in effect at the time of grant.
The weighted average grant-date fair value of performance based options granted during the year ended December 31, 2008 was $9.37 (2007: $nil; 2006: $nil). The total intrinsic value of options exercised during the year ended December 31, 2008 was $3 million (2007: $7 million; 2006: $18 million). At December 31, 2008 there was $42 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.
The total of restricted stock units vested during the year ended December 31, 2008 was 435,855 shares at an average share price of $32.78 (2007: 123,139 shares at an average share price of $41.21). At December 31, 2008 there was $25 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.
On September 27, 2006 Willis Group Services Limited, a subsidiary of Willis Group Holdings Limited, 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 on Lime Street. The move was completed 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.
Total proceeds for 2006 were $6 million, inclusive of $3 million relating to 2006 dispositions of subsidiaries and associates and $3 million of deferred proceeds relating to prior years, with a loss on disposal of $4 million recorded in the consolidated statements of operations.
Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on its income, profits or capital gains. The following table reconciles the income taxes in these financial statements to that which would be expected at the US federal statutory income tax rate:
The Company files tax returns in the various tax jurisdictions in which it operates. The 2004 US tax year closed in 2008 upon the expiration of the statute of limitations on assessment. US tax returns have been timely filed. The Company has not received notice that the IRS will be conducting an audit of the open years. Texas and Wisconsin are the only states with an active income tax audit. The Company has not extended the federal statute of limitations for assessment in the US.
All UK tax returns have been timely filed 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.
On October 1, 2008, Willis completed the acquisition of HRH in a transaction involving both cash and stock consideration. The acquisition was effected by merging Willis HRH Inc, an indirect wholly owned subsidiary of Willis, with and into HRH.
•substantially improve Willis' position in important areas in North America including California, Florida, Texas, Illinois, New York, Boston, New Jersey and Philadelphia, and in key business lines. In particular, the acquisition will more than double Willis' North America revenues in Employee Benefits, an already strong area of expertise that Willis has targeted for further growth. In addition, it will further strengthen key practice areas including personal lines, real estate, health care, environmental, construction, complex property and executive risk;
•greatly strengthen Willis' leadership as a middle market broker and reinforce its large account presence. We also believe that the acquisition will further expand the range of Willis' specialty expertise and complement Willis' substantial presence in the London market;
•enable the combined company to deliver greatly enhanced value to clients through a more robust and diversified platform;
The Company also expects to extract significant cost savings through synergies between the two companies.
The following table presents the Company's preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values:
(i)After 5 years $320 million will have been amortized on a cumulative basis; after 10 years $486 million; and after 15 years $582 million. Customer relationships were identified as the key intangible asset as approximately 95 percent of HRH's revenue has historically been generated by existing customer relationships. The fair value of customer relationships has been estimated using the discounted cash flow income approach. This involves calculating the present value of future cash flows arising from customer relationships existing at the acquisition date.
Non compete agreements have also been valued by estimating the present value of the cashflows protected by the non-compete arrangement over their expected enforcement period of 3 years.
The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been consummated as of that time, nor is it intended to be indicative of future results.
The Company's annual goodwill impairment test which was performed during the fourth quarter of 2008, did not result in an impairment charge (2007: $nil, 2006: $nil).
•"Contract based, Technology and Other" includes all other purchased intangible assets.
Of those listed above, the Company's principal investment as of December 31, 2008 and 2007 is Gras Savoye, France's leading insurance broker. Included in the carrying amount of the Gras Savoye investment as of December 31, 2008 is goodwill of $141 million (2007: $93 million). Of this total, $21 million was recognized in respect of an additional 4.3 percent purchased in January 2008 and $27 million was recognized in December 2008 in respect of an additional 5.5 percent. The additional acquisition increases the Company's total voting interest to 48%.
On July 23, 1997, the Company entered into an agreement with Gras Savoye whereby, among other things, the co-shareholders of Gras Savoye (other than management) have the right to sell "put option" their shares to the Company, possibly increasing the Company's ownership interest from 48 percent to 90 percent. Management shareholders of Gras Savoye, representing approximately 10 percent of the outstanding shares, do not have general put rights before 2011, but have certain put rights on their death, disability or retirement. The option expires at the end of 2011 and Gras Savoye's eligible co-shareholders may exercise their rights from January 1, 2001. In addition, the Company has the right to purchase (call option) at least 50.1 percent of Gras Savoye's shares from the co-shareholders. The call option is exercisable from December 1, 2009 until February 1, 2010. The exact amount payable by the Company under the put option and call option is based on formula-based price contingent on Gras Savoye's future results.
For the year ended December 31, 2008, the Company recognized $9 million (2007: $6 million; 2006: $5 million) in respect of dividends received from associates.
•a pension benefit asset of $111 million (2007: $404 million) in respect of the UK defined benefit pension plan; and
•a total liability for pension benefits of $237 million (2007: $43 million) representing:
•$208 million (2007: $43 million) in respect of the US defined benefit pension plan; and
•$29 million (2007: nil) in respect of the International defined benefit pension plans.
The following schedule provides other information concerning the Company's UK and US defined benefit pension plans:
The Company's pension plan asset allocations based on fair values were as follows:
The Company's investment policy includes a mandate to diversify assets and the Company invests in a variety of asset classes to achieve that goal. The UK plan's assets are divided into 10 separate portfolios according to asset class and managed by 12 investment managers. The broad target allocations are UK and foreign equities (75 percent), debt securities (20 percent) and real estate (5 percent). The US plan's assets are currently invested in 17 funds representing most standard equity and debt security classes. The broad target allocations are US and foreign equities (64 percent) and debt securities (36 percent).
In 2009, the Company expects to contribute $37 million to the UK plan and $18 million to the US plan.
However, as a result of the turmoil in worldwide equity markets in the latter half of 2008 and consequent declines in pension plan asset values, a $29 million pension benefit liability has been recognized in respect of these schemes. Accordingly, the Company is now providing pension plan disclosures for these schemes.
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 $2 million (using the year-end exchange rate of £1 = $1.46).
The following schedule provides other information concerning the Company's International defined benefit pension plans:
The determination of the expected long-term rate of return on the International plan assets is dependent upon the specific circumstances of each individual plan. The assessment may include analyzing historical investment performance, investment community forecasts and current market conditions to develop expected returns for each asset class used by the plans.
The Company's International pension plan asset allocations at December 31, 2008 based on fair values were as follows:
In 2009, the Company expects to contribute $6 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:
The agreements relating to the new senior credit facilities and revolving credit facility contain numerous operating and financial covenants, including requirements to maintain minimum ratios of consolidated adjusted EBITDA to consolidated fixed charges and maximum levels of consolidated funded indebtedness in relation to consolidated EBITDA, in each case subject to certain adjustments.
In February 2009, the Company entered into an agreement with Goldman Sachs Mezzanine Partners to issue notes in an aggregate principal amount of $500 million. The Company anticipates that the net proceeds of this issuance of approximately $480 million will be applied towards the balance of the interim credit facility. Consummation of the issuance, which is subject to customary closing conditions, is expected to take place in March 2009.
As of December 31, 2008, the aggregate future minimum rental commitments under all non-cancellable operating lease agreements are as follows:
Rent expense amounted to $151 million for the year ended December 31, 2008 (2007: $132 million; 2006: $93 million). The Company's rental income from subleases was $22 million for the year ended December 31, 2008 (2007: $14 million; 2006: $11 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 $804 million and $1,035 million at December 31, 2008 and 2007, respectively.
In addition, the Company has given guarantees to bankers and other third parties relating principally to letters of credit amounting to $4 million and $4 million at December 31, 2008 and 2007, respectively.
For certain subsidiaries and associates, the Company has the right to purchase shares (a call option) from co-shareholders at various dates in the future. In addition, the co-shareholders of certain subsidiaries and associates have the right to sell (a put option) their shares to the Company at various dates in the future. Generally, the exercise price of such put options and call options is formula-based (using revenues and earnings) and is designed to reflect fair value. Based on current projections of profitability and exchange rates, the potential amount payable from these options is not expected to exceed $434 million. Of this balance, $359 million relates to Gras Savoye.
The most significant actual or potential claims, lawsuits and other proceedings, of which we are currently aware are:
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.
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 country. All of these actions have been consolidated or are in the process of being consolidated into a single action in the U.S. 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 seek monetary damages, including punitive damages, and equitable relief and make 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 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 claims were dismissed with prejudice and the state claims were dismissed without prejudice from both Complaints. Plaintiffs have filed a notice of appeal regarding these dismissal rulings and oral arguments on this appeal are scheduled to be heard in April 2009. In January 2008, the Judge dismissed the ERISA claims with prejudice from the EB Complaint. 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
Various legal proceedings are pending, have been 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.
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 ("ARIC") and CNA Insurance Company Limited and two of its associated companies ("CNA") have each 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 has alleged conspiracy between a former Willis Limited employee and the ARIC underwriter as well as negligence and CNA has 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. The Company disputes these allegations and is vigorously defending itself in these actions. ARIC's asserted claim is approximately $257 million (plus unspecified interest and costs) and CNA's asserted claim is approximately $251 million (plus various unspecified claims for exemplary damages, interest and costs). Pleadings have been exchanged in both actions and the parties have been and continue to be engaged in extensive discovery prior to the trial which the Court has fixed on a preliminary basis for ten weeks commencing October 7, 2009. The Company
cannot predict at this time what, if any, damages might result from these claims but has kept its errors and omissions insurance carrier fully informed of developments in the claims. The Company believes that any amounts required to resolve the claims will be covered by errors and omissions insurance. Various arbitrations continue to be active 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.
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 suit was recently amended to include two additional plaintiffs. The parties are in the discovery phase of the litigation. The Company cannot predict at this time what, if any, damages might result from this action.
We 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 New Jersey in July 2001. Although the World Trade Center complex insurance was bound at or before the July 2001 closing of the leasehold acquisition, consistent with standard industry practice, the final policy wording for the placements was still in the process of being finalized when the twin towers and other buildings in the complex were destroyed on September 11, 2001. There have been a number of lawsuits in the United States between the insured parties and the insurers for several placements and other disputes may arise in respect of insurance placed by us which could affect the Company including claims by one or more of the insureds that we made culpable errors or omissions in connection with our brokerage activities. However, we do not believe that our role as broker will lead to liabilities which in the aggregate would have a material adverse effect on our results of operations, financial condition or liquidity.
It is estimated that $37 million of net derivative losses included in accumulated other comprehensive loss will be reclassified into earnings within the next twelve months.
During the year ended December 31, 2008, the Company repurchased 2.3 million shares for a total consideration of $75 million at an average price of $33.12. Repurchased shares were subsequently canceled. There was also a $1 million adjustment in 2008 relating to prior year price adjustments.
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's operations are financed principally by $1,200 million fixed rate senior notes, $700 million under a new 5-year term loan facility and $750 million under an interim credit facility that expires on September 30, 2009. Of the fixed rate senior notes $250 million are due 2010, $350 million are due 2015 and $600 million are due 2017. The Company also has a new 5-year $300 million revolving credit facility which was undrawn as of December 31, 2008. All debt is issued by a subsidiary of the Company.
The interest rate applicable to the borrowings under the new facilities varies according to LIBOR on the date of individual drawdowns. In addition, duration fees of $9 million are payable on the interim credit facility.
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.
(1)Notional amounts represent US dollar equivalents translated at the spot rate as of December 31.
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, 2008. As of the year end the Company had exposure of $750 million under an interim credit facility that expires on September 30, 2009. In February 2009, the Company entered into an agreement to issue $500 million 12.875% senior unsecured notes due 2016. The net proceeds of approximately $480 million will be applied towards the balance on the interim credit facility. The Company expects to repay the balance on the facility of approximately $270 million out of free cash flow and from the sale of non-core businesses.
•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
•from the translation into US dollars of the net income and net assets of its foreign subsidiaries, excluding the London market operations which are US dollar denominated.
•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.
(1)Prior to 2008, the changes in fair value on contracts that did not qualify for hedge accounting were recorded within other operating expenses. The table below summarizes by major currency the contractual amounts of the Company's forward contracts to exchange foreign currencies for pounds sterling. Foreign currency notional amounts are reported in US dollars translated at spot rates at December 31.
Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform as contracted and from movements in interest rates and foreign exchange rates. The Company does not anticipate non-performance by counterparties. The Company generally does not require
Concentrations of credit risk that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments on the balance sheet that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and derivatives which are recorded at fair value.
The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments:
ii)foreign exchange hedging activities and foreign exchange movements on the UK pension plan asset or liability;
(1)Prior to January 1, 2008, the Company reported "Other Income" within "Commissions and Fees", as described in Note 2-Basis of Presentation and Significant Accounting Policies. Comparatives have been adjusted accordingly.
(2)Corporate and Other includes the $92 million cost of the 2008 expense review (2007: $nil, 2006: $101 million of expenditure on second half 2006 Shaping our Future initiatives); $47 million relating to foreign exchange hedging activities and foreign exchange movements on the UK pension plan asset or liability (2007: $7 million, 2006: $10 million); $36 million relating to the amortization of intangible assets (2007: $14 million, 2006: $12 million); and in 2006 a $99 million gain on disposal of the Company's London headquarters net of leaseback costs.
(2)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 long-lived assets exceed 10 percent of consolidated commissions and fees and/or long-lived assets, respectively.
On July 1, 2005, Willis North America Inc. ("Willis North America") issued debt securities totaling $600 million under its April 2003 registration statement. On March 28, 2007, Willis North America issued further debt securities totaling $600 million under its June 2006 registration statement (Note 16-Debt). The debt securities are jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Group Holdings, Willis Investment UK Holdings Limited, Willis Group Limited, Trinity Acquisition Limited, TA I Limited, TA II Limited, TA III Limited and TA IV Limited.
The entities included in the Other Guarantors column are Willis Investment UK Holdings Limited, Trinity Acquisition Limited, TA I Limited, TA II Limited, TA III Limited, TA IV Limited and Willis Group Limited.
23. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
24. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES
The entities included in the Other Guarantors column are Willis Investment UK Holdings Limited, TA I Limited, TA II Limited and TA III Limited.
24. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
In February 2009, the Company entered into an agreement with Goldman Sachs Mezzanine Partners to issue notes in an aggregate principal amount of up to $500 million. The Company anticipates that the net proceeds of this issuance of approximately $480 million will be applied towards the balance of the interim credit facility. Consummation of the issuance, which is subject to customary closing conditions, is expected to take place in March 2009.