In North America, outside of New York, Chicago and Nashville, we lease approximately 1.4 million square feet around 100 locations.
In Nashville, we occupy 160,000 square feet under a lease expiring April 2026.
Our Global business provides specialist brokerage and consulting services to clients worldwide arising from specific industries and activities including Aerospace; Energy; Marine; Construction, Property and Casualty; Financial and Executive Risks; Financial Solutions; Faber Global; Fine Art, Jewelry and Specie; Special Contingency Risks; Hughes-Gibbs; Willis Capital Markets & Advisory; Placement and Reinsurance.
North America and International comprise: our retail operations and provide services to small, medium and large corporations; and the Human Capital practice, our largest product-based practice group, provides health, welfare and human resources consulting and brokerage services.
We derive most of our revenues from commissions and fees for brokerage and consulting services and do not determine the insurance premiums on which our commissions are generally based. Commission levels generally follow the same trend as premium levels as they are derived from a percentage of the premiums paid by the insureds. Fluctuations in these premiums charged by the insurance carriers can therefore have a direct and potentially material impact on our results of operations.
Market conditions in our industry are generally defined by factors such as the strength of the economies in the various geographic regions in which we serve around the world, insurance rate movements, and insurance and reinsurance buying patterns of our clients.
Early in 2013 the reinsurance market was generally flat, however, as the year progressed we saw changing market sentiment driven by changes in the sources of capital and increases in capital supply in the reinsurance market, most notably within the North American catastrophe-exposed property market. The influx of third party capital coupled with changes to reinsurance buying patterns and regulatory complexity is leading to growing complexity in the reinsurance market and a softening of prices.
The 2013 total expenses included $46 million related to the Expense Reduction Initiative (see 'Expense Reduction Initiative' section below) conducted earlier in the year. The 2012 total expenses included a $492 million non-cash goodwill impairment charge related to our North American reporting unit, a $200 million write-off of unamortized cash retention awards following the decision to eliminate the repayment requirement of past awards, and a $252 million expense related to the accrual for 2012 cash bonuses paid in 2013. Foreign currency movements had a $9 million positive impact on total expenses in 2013.
Excluding the items noted above, total expenses in 2013 were $188 million, or 6.8 percent, higher than in 2012. The largest driver of this was the increase in salaries and benefits due to annual salary reviews, higher charges for share-based compensation and new hires and investments in targeted businesses and geographies. In addition to these, we recorded higher incentives as a result of growth in commissions and fees, and the change in remuneration policy. Other operating expenses also increased due to travel, accommodation and client entertaining costs to support business development, marketing costs, strategic review charges and higher professional fees.
The Company incurred a loss on extinguishment of debt of $60 million from the refinancing that was completed during 2013.
The tax rate for the full year was affected by an incremental US tax expense of $9 million recorded after taking into account the impact of adjustments to the valuation allowance placed against our US deferred tax assets.
Earnings from associates were down $5 million, net of tax, mainly due to costs of a reorganization program in our principal associate, Gras Savoye.
Total expenses in 2012 of $3,689 million increased $808 million compared to 2011, primarily due to the recognition of a $492 million non-cash goodwill impairment charge related to our North American reporting unit, a $200 million write-off of unamortized cash retention awards following the decision to eliminate the repayment requirement of past awards, and a $252 million expense related to the accrual for 2012 cash bonuses paid in 2013.
Net loss attributable to Willis shareholders from continuing operations was $446 million or a loss of $2.58 per diluted share in 2012 compared to a profit of $203 million or $1.15 per diluted share in 2011. The $649 million decrease in net income compared to 2011 primarily reflects the increase in total expenses described above and the $113 million charge to establish a valuation allowance against deferred tax assets in our US operations, partially offset by the non-recurrence of the $131 million post-tax cost in 2011 relating to the make-whole amounts on the repurchase and redemption of $500 million of our senior debt and the write-off of related unamortized debt issuance costs and by the revenue growth achieved during the year. Net income in 2012 was also adversely impacted by a $7 million reduction in interest in earnings of associates, net of tax, mainly due to declining performance in our principal associate, Gras Savoye.
write-off of unamortized cash retention awards following the decision to eliminate the repayment requirement on past awards;
We believe that excluding these items, as applicable, from operating income (loss), net income (loss) from continuing operations and earnings per diluted share from continuing operations provides a more complete and consistent comparative analysis of our results of operations. We use these and other measures to establish Group performance targets and evaluate the performance of our operations.
Write-off of unamortized cash retention awards following the decision to eliminate the repayment requirement on past awards.
Additional incentive accrual recognized following the replacement of annual cash retention awards with annual cash bonuses which will not feature a repayment requirement.
Insurance recovery related to the previously disclosed fraudulent activity in Chicago. See 'Correction of Commissions and Fees Overstatement Relating to 2011 and Prior Periods', below.
Regulatory settlement with the UK Financial Services Authority (FSA), now the Financial Conduct Authority (FCA).
Charge related to the assessment of the Company's organizational design. See 'Expense Reduction Initiative' section below.
In 2012 an impairment charge for the North America reporting unit was required and amounted to $492 million. There was no impairment for the Global and International reporting units, as the fair values of these units were significantly in excess of their carrying value.
We concluded that the total $40 million of overstatement did not materially affect our previously issued financial statements for any of the prior periods and we corrected the misstatement by recognizing a charge to Other operating expenses to write off the uncollectible receivable (a) of $13 million (including legal expenses) in the first quarter of 2012 and (b) of $22 million in the fourth quarter of 2011. In the fourth quarter 2011 we also reversed a $6 million balance of Commissions and fees which had been recorded during 2011 and $2 million of Salaries and benefits expense representing an over-accrual of production bonuses relating to the overstated revenue. During 2012, we recorded within Other operating expenses a $10 million insurance settlement from insurers in respect of our claim under Group insurance policies, for compensation paid out in the years 2005 to 2010 on the fraudulently overstated revenues discussed above.
$29 million of severance and other staff related costs towards the elimination of 207 positions; and
The actions taken resulted in total cost savings of approximately $20 million exclusive of the costs incurred in 2013. It is also anticipated that we will achieve prospective annualized cost savings of approximately $25 million to $30 million.
The following table sets out the amount of cash retention awards made and the related amortization of those awards for the three years ended December 31, 2013.
In December 2012, the Company decided to eliminate the repayment requirement from past annual cash retention awards and, as a result, recognized a non-cash, pre-tax charge of $200 million which represents the write-off of the unamortized balance of past awards at that date.
The movement to $5 million income on the UK plan in 2012 from a $6 million cost in 2011 was primarily due to higher asset returns partially offset by higher amortization of unrecognized actuarial losses and increased interest cost.
On the US plan, the movement to a $4 million income in 2013 from a $3 million cost in 2012 was primarily due to higher asset returns.
In first quarter 2014 the Company agreed to acquire Charles Monat Limited, a market-leading life insurance solutions adviser to high net worth clients. The acquisition represents a key enhancement to our expanding Global Wealth Solutions practice, particularly in Asia, however completion of the transaction is currently subject to regulatory approval.
During first quarter 2014 the Company disposed of Insurance Noodle, a small online wholesale business in Willis North America, to Insureon.
In third quarter 2013, the Company disposed of the trade and assets associated with CBT, our book of small commercial clients in the UK, to Chesham Insurance Brokers.
In first quarter 2013, the Company acquired 100 percent of CBC Broker Srl, an Italian broker, at a cost of $1 million.
During first quarter 2014 we announced changes to the structure of our UK-based insurance operations, combining our Global Specialty insurance business with the Willis UK retail business to create a market leading client proposition. Following this change, effective January 1, 2014, UK retail, previously reported as part of our International reporting segment will be reported in our Global reporting segment.
In addition, effective January 1, 2014 Mexico which was previously reported within our North America reporting segment, will be reported in our International reporting segment, Placement which was previously reported as part of our Global reporting segment will be reported within Corporate and other, and our US Captive consulting business and Facultative reinsurance businesses, which were previously reported as part of our North America reporting segment will be reported in our Global reporting segment.
Today we operate in attractive growth markets with a diversified platform across geographies, industries, segments and lines of business. We aim to become the risk advisor, insurance and reinsurance broker of choice globally.
Client Segmentation - we will segment our client offering to provide distinct offerings to different types of client, focusing on the value we provide to our clients
How we compete which will be centered on meeting the needs of our client by:
North America commissions and fees in 2013 included the positive impact of a $5 million adjustment to align the recognition of revenue in the North America Personal Lines business with the rest of the Group.
International commissions and fees in 2013 included the negative impact of a $15 million adjustment to align the recognition of revenue in China with the rest of the Group.
Total revenues increased by $175 million, or 5.0 percent, in 2013 compared to 2012. This was primarily due to 5.1 percent growth in commissions and fees and an increase of $3 million in other income arising from the disposal of books of business, partially offset by a $3 million decrease in investment income due to continued falling yields on deposits.
Organic growth of 4.9 percent was driven by low double-digit new business growth tempered by lost business.
The North America segment reported 5.4 percent growth in commissions and fees compared to 2012. This comprised organic growth of 4.9 percent and acquisitions of 0.6 percent from Avalon Actuarial Inc., which was acquired at the end of fourth quarter 2012, partially offset by a negative 0.1 percent impact from foreign currency translation. Organic growth in commissions and fees was positively impacted by a $5 million adjustment to align the recognition of revenue in the North America Personal Lines business with the rest of the Group.
Organic growth was driven by double-digit new business growth and increased client retention levels compared to 2012. Growth was achieved across all of our North America regions, led by the Metro, Midwest, Canada and CAPPPS regions.
Similarly, most of the major practice groups recorded positive growth including mid-single digit growth in our two largest practices, Human Capital and Construction.
The International segment reported 3.9 percent growth in commissions and fees compared with 2012, comprising 4.1 percent organic growth slightly offset by a 0.2 percent negative impact from foreign currency translation. Organic growth in commissions and fees included the negative impact of a $15 million adjustment to align the recognition of revenue in China with the rest of the Group.
In 2012 we recorded a $452 million charge as a result of the change in remuneration policy for future incentive awards and the elimination of the repayment requirement on past awards. Excluding the impact of this change and foreign currency movements, salaries and benefits were up by $193 million or 9.5 percent. This increase is primarily due to annual salary reviews, increased headcount due to targeted investments, increased incentives from the change in remuneration policy and growth in commissions and fees, and an additional charge to increase the 401(k) match. It also includes $29 million relating to the Expense Reduction Initiative that was undertaken in first quarter 2013 (see 'Executive Summary - Expense Reduction Initiative' section above for further details).
Other operating expenses were $35 million, or 6.0 percent, higher in 2013 compared with 2012. The $35 million increase includes $12 million of costs that were incurred in first quarter 2013 as part of our Expense Reduction Initiative (see 'Executive Summary - Expense Reduction Initiative' above for details).
The remaining $23 million increase was primarily due to higher business development costs, consulting and professional fees to assist us in our growth initiatives, and marketing costs.
New business growth was in the double-digits and there were modest benefits in the year from improving rates in certain business lines and geographies; these positive movements were however, offset by a slight increase in lost business.
The Global segment reported 4.8 percent growth in commissions and fees, comprising 6.1 percent organic growth in commissions and fees and a 1.3 percent negative impact from foreign currency translation. Organic commissions and fees growth of 6.1 percent was led by high single-digit growth across Reinsurance and Willis Faber & Dumas. Global Specialties reported low single-digit growth as strong growth from our Marine, Energy, Financial Solutions, and Construction specialties were partially offset by declines in Aerospace, which continues to be hampered by competitive pricing and a soft rate environment.
The North America segment reported a 0.6 percent decline in organic commissions and fees, compared to 2011. Whilst new business levels were higher than in 2011 resulting in growth in certain regions and business segments, these were more than offset by lower Loan Protector revenues, the impact of the weakened economy, which negatively impacted our Construction and Human Capital practice groups, and a modest decrease in client retention levels.
The International segment reported essentially flat growth in commissions and fees compared with 2011, comprising 4.9 percent organic commissions and fees growth and a 4.8 percent negative impact from foreign currency translation. Organic growth in commissions and fees was led by double digit growth in our Latin America region, supported by high single-digit growth in Asia and Eastern Europe. Our Western Europe operations reported low single-digit growth despite the continued weakness of economies within the Eurozone.
Excluding the impact of foreign exchange, salaries and benefits increased by $422 million, or 20.2 percent, compared with 2011 primarily due to the $452 million expense recognized as a result of the change in remuneration policy for future incentive awards and the elimination of the repayment requirement on past awards; an approximate $55 million increase in salaries, including associated taxes and benefits, resulting from new hires and annual pay reviews; increases in incentives linked to production; long term incentive plans and the amortization of cash retention awards. These increases were partially offset by the $135 million expense recognized in salaries and benefits associated with the 2011 Operational Review and lower defined benefit pension plan expenses.
Amortization of intangible assets was $59 million in 2012, a reduction of $9 million compared to 2011. The decrease primarily reflects the ongoing reduction in the HRH acquisition amortization.
Net loss on disposal of operations of $3 million was related principally to the dissolution of a joint venture operation in India and loss recognized on disposal of Mauritian reinsurance operation.
Similar to many businesses located in the Eurozone, Gras Savoye's operations are being pressured by the economic conditions. In addition, Gras Savoye appointed a new CEO and began undergoing a business review that was designed to drive growth in revenues and improve operational efficiencies.
Our principal sources of liquidity are cash from operations, available cash and cash equivalents and amounts available under our three revolving credit facilities, excluding the UK facility which is solely for use by our main regulated UK entity in certain exceptional circumstances.
As at December 31, 2013 cash and cash equivalents were $796 million, an increase of $296 million compared to December 31, 2012. Included within cash and cash equivalents is $707 million available for corporate purposes and $89 million held within our regulated UK entities for regulatory capital adequacy requirements.
Cash flows from operating activities increased to $561 million in 2013 from $525 million in 2012. In addition, funds were also provided from the disposal of fixed and intangible assets $12 million (2012: $5 million), $155 million proceeds from the issue of shares (2012: $53 million), and $20 million proceeds from the disposal of operations (2012: $nil).
The Company is authorized to buy back its ordinary shares by way of redemption, and intends to buy back $200 million shares in 2014 to offset the increase in shares from the exercise of employee stock options.
Total debt, total equity and the capitalization ratio at December 31, 2013 and 2012 were as follows (in millions, except percentages):
The agreements relating to our 7-year term loan facility expiring 2018 and the revolving $800 million credit facility contain requirements to maintain maximum levels of consolidated funded indebtedness in relation to consolidated EBITDA and minimum level of consolidated EBITDA to consolidated cash interest expense, subject to certain adjustments. In addition, the agreements relating to our credit facilities and senior notes include, in the aggregate covenants relating to the delivery of financial statements, reports and notices, limitations on liens, limitations on sales and other disposals of assets, limitations on indebtedness and other liabilities, limitations on sale and leaseback transactions, limitations on mergers and other fundamental changes, maintenance of property, maintenance of insurance, nature of business, compliance with applicable laws, maintenance of corporate existence and rights, payment of taxes and access to information and properties. At December 31, 2013, the Company was in compliance with all covenants.
(December 31, 2012: $nil). At December 31, 2013 the only mandatory debt repayments falling due over the next 12 months are scheduled repayments on our 7-year term loan totaling $15 million.
Contributions to the UK defined benefit pension plan in 2014 are expected to total $83 million, of which approximately $23 million relates to on-going contributions calculated as 15.9 percent of active plan members’ pensionable salaries and approximately $60 million relates to contributions towards funding the deficit. Additionally $12 million will be made in respect of employees' salary sacrifice contributions.
The schedule of contributions is automatically renegotiated after three years and at any earlier time jointly agreed by the Company and the Trustee. During 2014 we will be required to negotiate a new funding arrangement which may change the contributions we are required to make in the future.
In 2014, we expect to contribute approximately $9 million to these schemes.
The non-cash adjustments included depreciation, amortization of intangible assets, share-based compensation, gain on derivative instruments, provision for deferred income taxes and the tender premium on early redemption of our debt, which is presented as a financing cash item.
Net cash used in investing activities in 2013 was $120 million including, capital expenditure of $112 million, cash used to purchase subsidiaries, intangible assets and other investments of $44 million partly offset by $12 million cash received from the sale of fixed and intangible assets and $24 million of proceeds from the disposal of operations and the sale of the Company’s holding in a Spanish associate company.
Net cash used in financing activities in 2013 was $137 million primarily due to total dividends paid, including dividends paid to noncontrolling interests, of $203 million, a net $72 million outflow in relation to the refinancing in the third quarter 2013, discussed below, and $15 million of mandatory repayments against the term loan offset by cash receipts of $155 million from the issue of shares.
Total net cash provided by continuing operating activities was $525 million in 2012, compared with $441 million in 2011. The increase of $84 million primarily reflects a $100 million reduction in cash outflows relating to the 2011 Operational Review and a higher volume of collections made on higher revenues and accounts receivable compared with 2011, partially offset by the modest decline in operating earnings, adjusted for non-cash items; and the $11 million year-on-year increase in payments for cash retention awards.
Total net cash used in continuing investing activities was $172 million in 2012 compared to $101 million in 2011. The $71 million increase in net outflow was due to higher capital spend, including; the fit-out and refurbishment of certain leasehold properties, including the completion of the European Data Center; development and implementation of a number of information technology projects including, financial systems and trading platforms; a $23 million increase in payments to acquire subsidiaries, primarily related to the acquisition of Avalon Actuarial, Inc, a Canadian actuarial consulting firm; and the non-recurrence of proceeds from the disposal of certain businesses during 2011.
Total net cash used in continuing financing activities was $214 million in 2011 compared with $293 million in 2010. We issued $800 million of new debt in March 2011 and net proceeds of approximately $787 million were used to repurchase and redeem $500 million of 12.875% senior notes due 2016. As part of this debt refinancing we made a $158 million make-whole payment on the redemption of our 12.875% senior notes due 2016. Other significant financing activities in 2011 included refinancing our bank facility in December 2011, dividend payments of $180 million and receipt of $60 million from the issue of shares.
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. As of December 31, 2013, we had fiduciary funds of $1.7 billion, compared with $1.8 billion at December 31, 2012.
The Company is authorized to buy back shares, by way of redemption, and will consider whether to do so from time to time, based on many factors, including market conditions. The Company is authorized to purchase up to one billion shares from time to time in the open market (such open market purchases would be effected as redemptions under Irish law) and it may also redeem its shares through negotiated trades with persons who are not affiliated with the Company as long as the cost of the acquisition of the Company's shares does not exceed $824 million.
The Company intends to buy back $200 million in shares in 2014 to offset the increase in shares outstanding resulting from the exercise of employee stock options. The buybacks will be made in the open market or through privately-negotiated transactions, from time to time, depending on market conditions.
Cash dividends paid in 2013 were $193 million compared with $185 million in 2012 and $180 million in 2011. In February 2014, we declared a quarterly cash dividend of $0.30 per share, an annual rate of $1.20 per share, an increase of 7.1 percent over the prior 12 month period.
Our Global operations comprise Global Specialties, Willis Re, Placement, and Willis Capital Markets & Advisory (WCMA).
The following table sets out revenues, operating income, organic commissions and fees growth and operating margin for the three years ended December 31, 2013 (in millions, except percentages):
The 5.6 percent organic growth in commissions and fees was driven by strong new business growth and higher client retention levels compared with the year ago period, partially offset by lost business. Rates had no material impact on commissions and fees.
Client retention levels improved to 91.9 percent for 2013, compared with 90.3 percent for 2012.
The year-on-year growth in expenses was primarily due to higher salaries and benefits as a result of increased incentives
from the change in remuneration policy and growth in commissions and fees. In addition, this increase also included the impact of the increase in headcount relative to the prior year, annual salary reviews and higher charges for share-based compensation.
Other expenses also increased compared to 2012 due to higher travel, accommodation and client entertaining costs to support business development and increased professional fees related to the strategic review of the segment.
Reinsurance reported mid single-digit growth in 2012, as growth in the International, Specialty and North America divisions was partially offset by the non-recurrence of a fee related to a 2011 profitability initiative. Rates had a modest positive impact on commission and fees in the year.
Willis Faber & Dumas also reported mid-single digit growth in 2012.WCMA is a transaction-oriented business and its results are more variable than some of our other businesses. In 2012 we reported significantly higher organic commissions and fees than in 2011. Growth in the WCMA business was positively impacted by a higher volume of advisory and catastrophe bond deals closing during the year.
Operating margin was 32.9 percent in 2012 and 32.5 percent in 2011. The organic growth in commissions and fees discussed above, and lower defined benefit pension costs were offset by higher salary and benefit expense due to the impact of annual salary increases and new hires, higher production linked incentives and increases to discretionary costs.
This increase was primarily due to organic growth of 4.9 percent and 0.6 percent positive impact from the acquisition of Avalon Actuarial, Inc. in fourth quarter 2012 partially offset by a 0.1 percent negative impact from foreign currency movements.
The 4.9 percent organic growth in commissions and fees was driven by strong new business growth and higher client retention levels compared with the year ago period, partially offset by lost business. Rates had a small positive impact on the full year's commissions and fees.
Growth was achieved across all our North America regions, led by the Metro, Midwest, Canada and CAPPPS regions. This was attributed to new business growth as well as increased client retention rates in almost all regions.
Similarly, most of the major practice groups recorded positive growth. Our two largest practices, Human Capital and Construction, recorded mid single-digit growth and in our other practices we recorded high single-digit growth in Real Estate and low single-digit growth in Financial & Executive Risks, Healthcare and Manufacturing.
In addition, there was an increase in other expenses due to a $6 million write-off of a receivable related to a non-E&O settlement, professional fees related to the strategic review of the segment, and higher travel and accommodation expense to support revenue growth and client retention, partially offset by a $4 million insurance premium accrual reversal.
Operating margin in North America was 19.4 percent in 2013 compared with 18.3 percent in 2012 driven by solid commissions and fees growth.
The decline in the financial performance of our Loan Protector business had a 0.8 percent negative impact on North America organic growth in commissions and fees and negatively impacted the segment's revenue by $10 million. The Loan Protector decline was driven by the loss of clients through attrition and M&A activity, industry-wide commission pressures and a slowdown in business in its specialized market in the US in 2011.
Commissions and fees in 2013 included a negative $15 million adjustment to align the recognition of revenue in China with the rest of the Group.
Organic commissions and fees growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; and (iii) the net commission and fee revenues related to operations disposed of in each period presented.
Client retention rates were largely flat at 93.1 percent for 2013 compared to 93.3 percent for 2012.
In addition to this, we incurred professional fees related to the strategic review of the segment, higher travel and accommodation expense to support business development, and a $5 million VAT related charge. These charges were partially offset by a reduced bad debt expense and non-recurring 2012 legal claims settlements.
Commissions and fees of $1,028 million were $1 million, or 0.1 percent, higher in 2012 compared with 2011. Organic commissions and fees growth of 4.9 percent was partially offset by negative foreign exchange movements of 4.8 percent. Organic growth included double digit new business growth, partly offset by slight increases to lost business. Rates and other market factors had no significant impact on commissions and fees in the year.
Additional incentive accrual recognized following the replacement of annual cash retention awards with annual cash bonuses which do not feature a repayment requirement.
Write-off of uncollectible accounts receivable balance relating to periods prior to January 1, 2011, see 'Correction of Commissions and Fees Overstatement Relating to 2011 and Prior Periods' discussed above.
Management has discussed its critical accounting estimates and associated disclosures with our Audit Committee.
We recorded a $5 million and a $4 million net periodic benefit income on our UK and US defined benefit pension scheme respectively in 2013, compared with a net periodic benefit income of $5 million on the UK scheme and a net periodic benefit cost of $3 million on the US scheme in 2012. On our international defined benefit pension plans, US non-qualified plan and UK unfunded plan, we recorded a net periodic benefit cost of $5 million in 2013, compared with $4 million in 2012.
Based on December 31, 2013 assumptions (except for one update - the expected rate of return in the UK pension plan changed from 7.25% to 7.00%), we expect the net pension credit in 2014 will increase $7 million for the UK plan. The net pension credit will increase by $4 million for the US plan and the net pension charge will decrease by $1 million for the other plans.
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 2013 was 7.25% (2012: 7.50%), equivalent to an expected return in 2013 of $191 million (2012: $181 million). Effective January 1, 2014, the expected long-term rate of return was decreased to 7.00%. The decrease in the expected long-term rate of return followed a change in the underlying target asset mix, which reflects the actions taken during 2013 in accordance with the de-risking strategy proposed by the Trustees which will lead to a strategic target asset allocation with a greater weighting to non-return seeking assets.
The expected and actual returns on UK plan assets for the three years ended December 31, 2013 were as follows:
The mortality assumption used during 2013 is the 90/105% PNA00 table for males and females, and is unchanged from the assumptions used during 2012.
As an indication of the longevity assumed, our calculations assume that a UK male retiree aged 65 at December 31, 2013 would have a life expectancy of 24 years.
The expected long-term rate of return used for determining the net US pension scheme expense in 2013 was 7.25% (2012: 7.25%)
The expected and actual returns on US plan assets for the three years ended December 31, 2013 were as follows:
The mortality assumption at December 31, 2013 is the RP-2000 Mortality Table (blended for annuitants and non-annuitants), projected by Scale AA to 2021 for annuitants and 2029 for non-annuitants (December 31, 2012: RP-2000 Mortality Table (blended for annuitants and non-annuitants), projected by Scale AA to 2020 for annuitants and 2028 for non-annuitants).
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include estimations of future cash flows which are dependent on internal forecasts, long-term rate of growth for our business and determination of our weighted average cost of capital.
The goodwill impairment analysis as of October 1, 2012 concluded that an impairment charge was required to reduce the carrying value of the goodwill associated with the Company's North America reporting unit. The goodwill impairment charge for the North America reporting unit amounted to $492 million. There was no impairment for the Global and International reporting units, as the fair values of these units were significantly in excess of their carrying value.
As previously disclosed, the North America reporting unit had been hampered by the declining Loan Protector business results, the effect of the soft economy in the U.S., which had significantly impacted the Construction and Human Capital sectors, and declining retention rates primarily related to M&A activity and lost legacy HRH business.
At December 31, 2013, we had gross deferred tax assets of $383 million (2012: $451 million) against which a valuation allowance of $196 million (2012: $221 million) had been recognized. To the extent that:
we 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.
Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. We recognize the benefit of uncertain tax positions in the financial statements when it is more likely than not that the position will be sustained on examination by the tax authorities. The benefit recognized is the largest amount of tax benefit that has a greater than 50% likelihood of being realized on settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company adjusts its recognition of these uncertain tax benefits in the period in which new information is available impacting either the recognition or measurement of its uncertain tax positions. In 2013, there was a net increase in uncertain tax positions of $4 million compared to a net increase of $21 million in 2012. The Company recognizes interest relating to unrecognized tax benefits and penalties within income taxes. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet.
The Company’s contractual obligations as at December 31, 2013 are presented below:
The above excludes $41 million for liabilities for unrecognized tax benefits as we are unable to reasonably predict the timing of settlement of these liabilities.
This facility is in addition to the remaining availability of $22 million under the Company’s two other previously existing revolving credit facilities.
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 March 2012, the Company agreed to a revised schedule of contributions towards on-going accrual of benefits and deficit funding contributions the Company will make to the UK plan over the six years ended December 31, 2017. Contributions in each of the next four years are expected to total approximately $83 million, of which approximately $23 million relates to on-going contributions calculated as 15.9 percent of active plan members' pensionable salary and approximately $60 million that relates to contributions towards the funding deficit.
In addition, further contributions will be payable based on a profit share calculation (equal to 20 percent of EBITDA in excess of $900 million per annum as defined by the revised schedule of contributions) and an exceptional return calculation (equal to 10 percent of any exceptional returns made to shareholders, for example, share buybacks, and special dividends). Upon finalization of these calculations the Company made a further contribution in 2013 of $10 million, calculated as 10 percent of the $100 million share buy-back program completed during 2012. Aggregate contributions under the deficit funding contribution and the profit share calculation are capped at £312 million ($517 million) over the six years ended December 31, 2017.
We made total cash contributions to our US defined benefit pension plan of $40 million in 2013, compared with $40 million in 2012 and $30 million in 2011.
We expect to make contributions of approximately $30 million in 2014 through 2019.
In May 2011, the Company made a capital commitment of $10 million to Dowling Capital Partners I, LP. As at December 31, 2013 there have been approximately $4 million of capital contributions.
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income to revise the manner in which entities present comprehensive income in their financial statements. These changes require that components of comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.This guidance is effective for interim and annual periods beginning after December 15, 2011 and has been applied retrospectively.
a net operating loss carryforward, a similar tax loss or a tax credit carryfoward is not available at the reporting date under the governing tax laws to settle taxes that would result from the disallowance of the tax position; or
are effective prospectively for annual and interim periods beginning after December 15, 2013 although early adoption is permitted; and
Other than the changes described above, there were no new accounting standards issued during 2013 that would impact on the Company’s reporting.
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2013
Consolidated Statements of Comprehensive Income for the three years in the period ended December 31, 2013
Consolidated Statements of Changes in Equity for each of the three years in the period ended December 31, 2013
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists a consensus of the FASB Emerging Issues Task Force. The ASU does not affect the recognition or measurement of uncertain tax positions under US GAAP.
However, under the ASU, unrecognized tax benefits, or portions of unrecognised tax benefits, must be presented in the financial statements as a reduction to deferred tax assets when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists except when:
the entity does not intend to use the deferred tax asset for this purpose, provided that the tax law permits a choice.
Certain reclassifications have been made to prior year amounts to conform to current year presentation.
liabilities of changes in tax rates is recognized in the statement of operations in the period in which the change is enacted. Deferred tax assets are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company adjusts valuation allowances to measure deferred tax assets at the amount considered realizable in future periods if the Company’s facts and assumptions change. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
Fees for risk management and other services are recognized as the services are provided. Consideration for negotiated fee arrangements for an agreed period covering multiple insurance placements, the provision of risk management and/or other services are allocated to all deliverables on the basis of their relative selling prices. The Company establishes contract cancellation reserves where appropriate: at December 31, 2013, 2012 and 2011, such amounts were not material.
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, 2013, 2012 and 2011:
In December 2012, the Company decided to eliminate the repayment requirement from the past annual cash retention awards and, as a result, recognized a one-time, non-cash, pre-tax charge of $200 million which represented the write-off of the unamortized balance of past awards at that date.
There were however, a number of off-cycle awards with a fixed guarantee attached, for which the Company has not waived the repayment requirement. The unamortized portion of retention awards amounted to $15 million at December 31, 2013 (2012: $9 million; 2011: $196 million).
In addition, in 2012, the Company replaced annual cash retention awards with annual cash bonuses which did not include a repayment requirement. As at December 31, 2012, the Company had accrued $252 million for these bonuses.
On December 31, 2013, the Company had a number of open share-based compensation plans, which provide for the grant of time-based options and performance-based options, time-based restricted stock units and performance-based restricted stock units, and various other share-based grants to employees. All of the Company’s share-based compensation plans under which any options, restricted stock units or other share-based grants are outstanding as at December 31, 2013 are described below. The compensation cost that has been recognized for those plans for the year ended December 31, 2013 was $42 million (2012: $32 million; 2011: $41 million). The total income tax benefit recognized in the statement of operations for share-based compensation arrangements for the year ended December 31, 2013 was $9 million (2012: $9 million; 2011: $11 million).
The Company has adopted the Willis Group Holdings 2001 North America Employee Share Purchase Plan, which expired on May 31, 2011 and the Willis Group Holdings 2010 North America Employee Stock Purchase Plan, which expires on May 31, 2020. 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.
A summary of option activity under the plans at December 31, 2013, and changes during the year then ended is presented below:
The weighted average grant-date fair value of time-based options granted during the year ended December 31, 2013 was $7.74 (2012: $6.98; 2011: $9.49). The total intrinsic value of options exercised during the year ended December 31, 2013 was $32 million (2012: $8 million; 2011: $17 million). At December 31, 2013 there was $20 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under time-based stock option plans; that cost is expected to be recognized over a weighted average period of 2 years.
There were no performance-based options granted during the year ended December 31, 2013. The weighted average grant-date fair value of performance-based options was $7.61 in the year ended December 31, 2012 (2011: $10.26). The total intrinsic value of options exercised during the year ended December 31, 2013 was $14 million (2012: $5 million; 2011: $1 million). At
December 31, 2013 there was $7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under performance-based stock option plans; that cost is expected to be recognized over a weighted-average period of 1 year.
A summary of restricted stock unit activity under the Plans at December 31, 2013, and changes during the year then ended is presented below:
The total number of restricted stock units vested during the year ended December 31, 2013 was 873,670 shares at an average share price of $41.10 (2012: 408,005 shares at an average share price of $35.82). At December 31, 2013 there was $82 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 3 years.
A loss on disposal of $3 million is recorded in the consolidated statements of operations for the year ended December 31, 2012. This principally relates to the termination of a joint venture arrangement in India.
A gain on disposal of $4 million is recorded in the consolidated statements of operations for the year ended December 31, 2011 following conclusion of the accounting for the Gras Savoye December 2009 leveraged transaction - see Note 15 - 'Investments in Associates'.
The amount charged to tax expense in the table above differs from the effect of $nil disclosed in the rate reconciliation primarily because the movement in this table includes effects of state taxes, which are disclosed separately in the rate reconciliation. The impact of Other movements is primarily recorded in other comprehensive income.
At December 31, 2013 the Company had deferred tax assets of $187 million (2012: $230 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.
Total unrecognized tax benefits as at December 31, 2013, totaled $41 million. During the next 12 months it is reasonably possible that the Company will recognize approximately $1 million of tax benefits related to the release of provisions for potential inter company pricing adjustments no longer required due to either settlement through negotiation or closure of the statute of limitations on assessment.
$12 million of the unrecognized tax benefits at December 31, 2013 would, if recognized, favorably affect the effective tax rate in future periods.
All UK tax returns have been filed timely and are in the normal process of being reviewed, with HM Revenue & Customs making inquiries to obtain additional information. There are no material ongoing inquiries in relation to filed UK returns. In other jurisdictions the Company is no longer subject to examinations prior to 2004.
In periods where losses are reported the weighted average shares outstanding excludes potentially issuable shares described above, because their inclusion would be antidilutive.
On December 31, 2012 the Company acquired Avalon Actuarial Inc., a Canadian actuarial consulting firm for cash consideration of $25 million. Additional consideration of up to approximately $5 million is payable in 2016 based on the achievement of certain revenue targets.
Fiduciary funds, consisting primarily of time deposits with original maturities of less than or equal to three months, were $1,662 million as of December 31, 2013 (2012: $1,796 million). Accrued interest on funds is recorded as other assets.
The Company has determined that its reporting units are consistent with its operating segments: North America; International and Global. Goodwill is allocated to these reporting units based on the original purchase price allocation for acquisitions within the reporting units. When a business entity is sold, goodwill is allocated to the disposed entity based on the fair value of that entity compared to the fair value of the reporting unit in which it is included.
The Company's goodwill impairment test for 2013 has not resulted in an impairment charge (2012: $492 million; 2011: $nil).
The decline in the fair value of the North America reporting unit, as well as differences between fair values and carrying values for other assets and liabilities in the second step of the goodwill impairment test, resulted in an implied fair value of goodwill substantially below the carrying value of the goodwill for the reporting unit. As a result, the Company recorded a goodwill impairment charge of $492 million as of October 1, 2012.
As previously disclosed, the North America reporting unit had been hampered by the declining Loan Protector business results, the effect of the soft economy in the U.S., which had significantly impacted the Construction and Human Capital sectors, and declining retention rates primarily related to merger and acquisition activity and lost legacy HRH businesses.
The aggregate amortization of intangible assets for the year ended December 31, 2013 was $55 million (2012: $59 million; 2011: $68 million). The estimated aggregate amortization of intangible assets for each of the next five years ended December 31 is as follows:
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 amended and the Company now has a call option to purchase 100 percent of the capital of Gras Savoye. If the Company does not waive the call option before April 30, 2015, then it must exercise the call option in 2016 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 2016. At the end of this period, shareholders are entitled to pre-emptive and tag-along rights.
The carrying amount of the Gras Savoye investment as of December 31, 2013 includes goodwill of $84 million (2012: $83 million) and interest bearing vendor loans and convertible bonds issued by Gras Savoye of $46 million and $110 million respectively (2012: $47 million and $96 million, respectively).
Condensed financial information for associates, in the aggregate, as of and for the three years ended December 31, 2013, 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.
The Company maintains two principal defined benefit pension plans that cover approximately half of our employees in the United States and United Kingdom. Both of these plans are now closed to new entrants and with effect from May 15, 2009, the Company closed the US defined benefit plan to future accrual. New employees in the United Kingdom are offered the opportunity to join a defined contribution plan and in the United States are offered the opportunity to join a 401(k) plan. In addition to the Company’s UK and US defined benefit pension plans, the Company has several smaller defined benefit pension plans in certain other countries in which it operates including a US non-qualified plan and an unfunded plan in the UK. Elsewhere, pension benefits are typically provided through defined contribution plans. It is the Company’s policy to fund pension costs as required by applicable laws and regulations.
At December 31, 2013, the Company recorded, on the Consolidated Balance Sheets:
a pension benefit asset of $278 million (2012: $136 million) representing:
The accumulated benefit obligations for the Company’s UK and US defined benefit pension plans were $2,701 million and $864 million, respectively (2012: $2,519 million and $958 million, respectively).
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 9.27 percent, debt securities 4.42 percent, hedge funds 7.86 percent and real estate 6.53 percent. The expected returns on US plan assets are: US and foreign equities 10.40 percent and debt securities 4.10 percent.
The following tables present, at December 31, 2013 and 2012, for each of the fair value hierarchy levels, the Company’s UK pension plan assets that are measured at fair value on a recurring basis.
The following tables present, at December 31, 2013 and 2012, for each of the fair value hierarchy levels, the Company’s US pension plan assets that are measured at fair value on a recurring basis.
The following table summarizes the changes in the UK pension plan’s Level 3 assets for the years ended December 31, 2013 and 2012:
These smaller additional US and UK plans are incorporated with the Company's other defined benefit pension plans.
In total, a $27 million net pension benefit liability (2012: $30 million) has been recognized in respect of these other schemes.
The following benefit payments, which reflect expected future service, as appropriate, are estimated to be paid by the other defined benefit pension plans:
All direct obligations under the 4.625% and 6.125% senior notes are guaranteed by Willis Group Holdings, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Willis North America Inc. and Willis Group Limited.
All direct obligations under the 4.125% and 5.750% senior notes are guaranteed by Trinity Acquisition plc, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Willis North America Inc. and Willis Group Limited.
On August 15, 2013 the Company issued $250 million of 4.625% senior notes due 2023 and $275 million of 6.125% senior notes due 2043. The effective interest rates of these senior notes are 4.696% and 6.154%, respectively, which include the impact of the discount upon issuance.
In 2013, Other includes $nil (2012: $nil; 2011:$10 million ) relating to the write-off of unamortized debt issuance fees.
The ‘Other’ category includes amounts relating to vacant property provisions of $10 million (2012: $13 million).
The above excludes $41 million of liabilities for unrecognized tax benefits as the Company is unable to reasonably predict the timing of settlement of these liabilities.
On July 23, 2013 we entered into an amendment to our existing credit facilities to extend the amount of financing of the facilities. As a result of this amendment, our revolving credit facility was increased from $500 million to $800 million. As at December 31, 2013 $nil was outstanding under the revolving credit facility.
As of December 31, 2013, the aggregate future minimum rental commitments under all non-cancellable operating lease agreements are as follows:
In the UK, we are required to agree a funding strategy for our UK defined benefit plan with the plan's trustees. In March 2012, the Company agreed to a revised schedule of contributions towards on-going accrual of benefits and deficit funding contributions the Company will make to the UK plan over the six years ended December 31, 2017. Contributions in each of the next four years are expected to total approximately $83 million, of which approximately $23 million relates to on-going contributions calculated as 15.9 percent of active plan members' pensionable salary and approximately $60 million that relates to contributions towards the funding deficit.
In addition, further contributions will be payable based on a profit share calculation (equal to 20 percent of EBITDA in excess of $900 million per annum as defined by the revised schedule of contributions) and an exceptional return calculation (equal to 10 percent of any exceptional returns made to shareholders, for example, share buybacks, and special dividends). Aggregate contributions under the deficit funding contribution and the profit share calculation are capped at £312 million ($517 million) over the six years ended December 31, 2017.
During 2014 we will be required to negotiate a new funding arrangement which may further change the contributions we are required to make during 2014 and beyond.
Guarantees issued by certain of Willis Group Holdings’ subsidiaries with respect to the senior notes and revolving credit facilities are discussed in Note 20 - Debt in these consolidated financial statements.
In addition, the Company has given guarantees to bankers and other third parties relating principally to letters of credit amounting to $11 million and $10 million at December 31, 2013 and 2012, respectively. Willis Group Holdings also guarantees certain of its UK and Irish subsidiaries’ obligations to fund the UK and Irish defined benefit plans.
In July 2010, the Company made a capital commitment of $25 million to Trident V Parallel Fund, LP, an investment fund managed by Stone Point Capital. This replaced a capital commitment of $25 million that had been made to Trident V, LP in December 2009. As at December 31, 2013 there have been approximately $15 million of capital contributions.
In May 2011, the Company made a capital commitment of $10 million to Dowling Capital Partners I, LP. As at December 31, 2013 there had been approximately $4 million of capital contributions.
On the basis of current information, the Company does not expect that the actual claims, lawsuits and other proceedings to which the Company is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will ultimately have a material adverse effect on the Company’s financial condition, results of operations or liquidity. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and disputes with insurance companies, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
The material actual or potential claims, lawsuits, and other proceedings, of which the Company is currently aware, are:
On October 28, 2011, the plaintiffs in Troice filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. Subsequently, Troice, Roland and a third action captioned Troice, et al. v. Proskauer Rose LLP, Civil Action No. 3:09-CV-01600-N, which also was dismissed on the grounds set forth in the Roland decision discussed above and on appeal to the U.S. Court of Appeals for the Fifth Circuit, were consolidated for purposes of briefing and oral argument. Following the completion of briefing and oral argument, on March 19, 2012, the Fifth Circuit reversed and remanded the actions. On April 2, 2012, the defendants-appellees filed petitions for rehearing en banc. On April 19, 2012, the petitions for rehearing en banc were denied. On July 18, 2012, defendants-appellees filed a petition for writ of certiorari with the United States Supreme Court regarding the Fifth Circuit's reversal in Troice. On January 18, 2013, the Supreme Court granted our petition. Opening briefs were filed on May 3, 2013 and the Supreme Court heard oral argument on October 7, 2013. On February 26, 2014, the Supreme Court affirmed the Fifth Circuit’s decision.
Ranni v. Willis of Colorado, Inc., et al., C.A. No. 9-22085, was filed on July 17, 2009 against Willis Group Holdings plc and Willis of Colorado, Inc. in the U.S. District Court for the Southern District of Florida. The complaint was filed on behalf of a putative class of Venezuelan and other South American Stanford investors and alleges claims under Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 thereunder) and Florida statutory and common law and seeks damages in an amount to be determined at trial. On October 6, 2009, Ranni was transferred, for consolidation or coordination with other Stanford-related actions (including Troice), to the Northern District of Texas by the U.S. Judicial Panel on Multidistrict Litigation (the ‘JPML’). The defendants have not yet responded to the complaint in Ranni.
Rishmague, et ano. v. Winter, et al., Case No. 2011CI2585, was filed on March 11, 2011 on behalf of two Stanford investors, individually and as representatives of certain trusts, against Willis Group Holdings plc, Willis of Colorado, Inc., Willis of Texas, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). The complaint alleges claims under Texas and Colorado statutory law and Texas common law and seeks special, consequential and treble damages of more than $37 million and attorneys’ fees and costs. On April 11, 2011, certain defendants, including Willis of Colorado, Inc., (i) removed Rishmague to the Western District of Texas, (ii) notified the JPML of the pendency of this related action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. On August 8, 2011, the JPML issued a final transfer order for the transfer of Rishmague to the Northern District of Texas, where it is currently pending. The defendants have not yet responded to the complaint in Rishmague.
Janvey, et al. v. Willis of Colorado, Inc., et al., Case No. 3:13-CV-03980-D, was filed on October 1, 2013 also in the Northern District of Texas against Willis Group Holdings plc, Willis Limited, Willis North America Inc., Willis of Colorado, Inc. and the same Willis associate. The complaint was filed (i) by Ralph S. Janvey, in his capacity as Court-Appointed Receiver for the Stanford Receivership Estate, and the Official Stanford Investors Committee (the ‘OSIC’) against all defendants and (ii) on behalf of a putative, worldwide class of Stanford investors against Willis North America Inc. Plaintiffs Janvey and the OSIC allege claims under Texas common law and the court’s Amended Order Appointing Receiver, and the putative class plaintiffs allege claims under Texas statutory and common law. Plaintiffs seek actual damages in excess of $1 billion, punitive damages and costs. On November 15, 2013, plaintiffs filed the operative First Amended Complaint, which added certain defendants unaffiliated with Willis. On February 28, 2014, the defendants will file motions to dismiss the First Amended Complaint.
In order to manage interest rate risk arising from these financial assets, the Company entered into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest denominated in the various currencies related to the short-term investments. The use of interest rate contracts essentially converted groups of short-term variable rate investments to fixed rate investments. The fair value of these contracts was recorded in other assets and other liabilities. For contracts that qualified as cash flow hedges for accounting purposes, the effective portions of changes in fair value were recorded as a component of other comprehensive income, to the extent that the hedge relationships were highly effective.
During the year ended December 31, 2010, the Company entered into a series of interest rate swaps for a total notional amount of $350 million to receive a fixed rate and pay a variable rate on a semi-annual basis, with a maturity date of July 15, 2015. The Company had previously designated these instruments as fair value hedges against its $350 million 5.625% senior notes due 2015 and had accounted for them accordingly until the first quarter of 2013 at which point these swaps, although remaining as economic hedges, no longer qualified for hedge accounting.
Following the partial extinguishment of the 5.625% senior notes due 2015 on August 15, 2013, we have recorded a credit of $7 million to remove a corresponding partial amount of the fair value adjustment to the carrying values of the notes originally recognized in connection with the interest rate swaps. The remaining $5 million fair value adjustment as at that date will be amortized through interest expense over the period to maturity.
The Company had designated the Treasury locks as effective hedges of the anticipated transaction and had recognized a gain of $19 million in other comprehensive income in relation to the effective element that qualified for hedge accounting. This amount will be reclassified into earnings consistent with the recognition of interest expense on the 4.625% senior notes due 2023 and the 6.125% senior notes due 2043. In addition, the Company recognized a $2 million gain in interest expense for the portion of the treasury locks determined as ineffective.
During the year ended December 31, 2013, the Company entered into a number of foreign currency transactions in order to hedge certain intercompany loans. These derivatives were not designated as hedging instruments and were for a total notional amount of $228 million (December 31, 2012: $63 million). In respect of these transactions, an immaterial amount has been recognized as an asset within other current assets and a nominal gain has been recognized in income within other operating expenses for the period.
At December 31, 2013 the Company estimates there will be $20 million of net derivative gains reclassified from accumulated comprehensive income into earnings within the next twelve months as the forecasted transactions affect earnings.
(i) The net gain was included entirely in interest expense, except for $7 million in the year ended December 31, 2013 which formed part of the loss on extinguishment of debt.
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
The Company maintains a policy providing for the diversification of cash and cash equivalent investments and places such investments in an extensive number of financial institutions to limit the amount of credit risk exposure. These financial institutions are monitored on an ongoing basis for credit quality predominantly using information provided by credit agencies.
The Company used the income approach to measure the fair value of the North America reporting unit which involves calculating the fair value of a reporting unit based on the present value of the estimated future cash flows. Cash flow projections were based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions and the uncertainty related to the business's ability to execute on the projected cash flows. The discount rate used was based on the weighted-average cost of capital adjusted for the relevant risk associated with the market participant
During the periods presented, the Company operated through three reporting segments: Global, North America and International. Global provides specialist brokerage and consulting services to clients worldwide for specific industrial and commercial activities and is organized by specialism. North America and International predominantly comprise our retail operations which provide services to small, medium and large corporations, accessing Global’s specialist expertise when required.
The Company evaluates the performance of its segments based on organic commissions and fees growth and operating income. For internal reporting and segmental reporting, the following items for which segmental management are not held accountable are excluded from segmental expenses:
The accounting policies of the 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.
$1 million of fees associated with the extinguishment of debt completed on August 15, 2013.
None of the Company’s customers represented more than 10 percent of the Company’s consolidated commissions and fees for the years ended December 31, 2013, 2012 and 2011.
Regulation S-X, Article 3, Rule 3-10, allows for the presentation of condensed consolidating financial information. In accordance with these rules, the condensed consolidating financial information should be presented in accordance with U.S. GAAP, except that (i) the guarantor and non-guarantor information is presented on a combined rather than consolidated basis, which requires the elimination of intra-entity activity and (ii) investments in subsidiaries are required to be presented under the equity method of accounting. Subsequent to the issuance of our 2012 financial statements, management determined that certain balances were not presented in accordance with the above principles and have therefore restated our condensed consolidating financial information to reflect (i) gross, rather than net, presentation of intercompany balance sheet positions, (ii) dividends received from subsidiaries as reductions to the equity method investment balances opposed to as component of investment income from group undertakings, and (iii) appropriate push down accounting for goodwill.
The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets for the year ended December 31, 2013 of Willis Group Holdings and the Guarantors.
The guarantor structure described above differs from the guarantor structure associated with the senior notes issued by the Company and Willis North America (the ‘Willis North America Debt Securities’) in that Trinity Acquisition plc is the issuer and not a subsidiary guarantor, and Willis North America, Inc. is a subsidiary guarantor.