$98 million of severance costs (including $9 million relating to the waiver of retention awards) relating to approximately 1,200 positions which have been, or are in the process of being, eliminated;
$45 million of other operating expenses, including: property and systems rationalization costs; related accelerated systems depreciation of $5 million; and re-negotiation of sourcing contracts.
The statements under ‘2011 Operational Review’ constitute forward-looking statements. Please see ‘Forward-Looking Statements’ for certain cautionary information regarding forward-looking statements and a list of factors that could cause actual results to differ materially from those predicted in the forward-looking statements.
The associates in question, who have been placed on administrative leave pending completion of the investigation, have not been members of Willis executive management or played a significant role in internal control over financial reporting. Based on the results of our investigation to date, we do not believe that any client or carrier funds were misappropriated or that any other business units were affected.
Revenue increased by $115 million, or 3%, in 2011 compared to 2010. Commissions and fees increased by $121 million or 4%, including organic growth in commissions and fees of 2%, which comprised 4% net new business growth driven by solid new business generation and higher retention of existing clients, and a 2% negative impact from renewal fluctuations and other market factors.
We own an interest in a number of associates, such as Gras Savoye, where we do not exercise management control and we are therefore unable to direct or manage the business to realize the anticipated benefits that we can achieve through full integration. Interest in earnings of associates, net of tax, was $12 million in 2011, compared with $23 million in 2010. The decline was mainly driven by a reduction in net income reported by our principal associate, Gras Savoye, following recent refinancing actions taken by the company, ongoing restructuring activity and the negative impact on their results from adverse economic conditions in France and other parts of Europe.
Amortization of intangible assets declined by $18 million in 2010 compared to 2009 due to the declining charge for the HRH customer relationship intangible and the year-on-year benefit from a $7 million accelerated amortization in 2009 relating to the HRH brand name.
Interest in earnings of associates, net of tax, in 2010 of $23 million was $10 million lower than in 2009, primarily due to the reduction from 49% to 31% in our ownership interest in Gras Savoye, as part of the reorganization of their capital structure in December 2009. Interest receivable on the vendor financing we provided as part of the capital reorganization is recorded under this caption.
We will make cash contributions of approximately $40 million to the US plan in 2012, compared to contributions of $30 million in 2011. We also intend to make lump sum payments to specific classes of US plan members in settlement of
Productivity in our International business, measured in terms of revenue per FTE employee, increased to $150,000 for 2010 compared with $147,000 for 2009.
The Company evaluates the performance of its operating segments based on organic commissions and fees growth and operating income. For internal reporting and segmental reporting, items for which segmental management are not held responsible for are held within ‘Corporate & Other’.
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of operations in the period in which the enactment date changes. Deferred tax assets are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. 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.
In addition to the severance incurred as part of the 2011 Operational Review, an additional charge of $9 million in the year ended December 31, 2011 was recognized within salaries and benefits relating to the write-off of retention awards held on the balance sheet for the approximately 1,200 positions that have been eliminated.
As part of the Company’s incentive compensation, the Company makes annual cash retention awards to its employees. Employees must repay a proportionate amount of these awards if they voluntarily leave the Company’s employ (other than in the event of retirement or permanent disability) before a certain time period, currently up to three years. The Company makes cash payments to its employees in the year it grants these retention awards and recognizes these payments ratably over the period they are subject to repayment, beginning in the quarter in which the award is made. The unamortized portion of cash retention awards is recorded within other current assets and other non-current assets.
The weighted average grant-date fair value of time-based options granted during the year ended December 31, 2011 was $9.49 (2010: $5.25; 2009: $5.87). The total intrinsic value of options exercised during the year ended December 31, 2011 was $17 million (2010: $8 million; 2009: $3 million). At December 31, 2011 there was $7 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.
For the year ended December 31, 2011, time-based and performance-based options to purchase 9.2 million and 7.3 million (2010: 11.5 million and 9.4 million; 2009: 13.4 million and 8.9 million) shares, respectively, and 1.2 million restricted stock units (2010: 1.8 million; 2009: 2.2 million), were outstanding.
As of December 31, 2011 and 2010, the Company’s other investments in associates, individually and in the aggregate, were not material to the Company’s operations.
$12 million (2010: $13 million) in respect of the international defined benefit pension plans.
The following tables present, at December 31, 2011 and 2010, 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, 2011 and 2010:
In 2012, the Company expects to make contributions to the UK plan approximately equal to those made in 2011 of $92 million, of which approximately $12 million is in respect of salary sacrifice contributions, and $40 million to the US plan.
The agreements relating to our 5-year term loan facility expiring 2016 and the revolving $500 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, 2011, the Company was in compliance with all covenants.
Rupert, et al. v. Winter, et al., Case No. 2009C115137, was filed on September 14, 2009 on behalf of 97 Stanford investors against Willis Group Holdings plc, Willis of Colorado, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). The complaint alleges claims under the Securities Act of 1933, Texas and Colorado statutory law and Texas common law and seeks special, consequential and treble damages of more than $300 million, attorneys’ fees and costs. On October 20, 2009, certain defendants, including Willis of Colorado, Inc., (i) removed Rupert to the U.S. District Court for 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 April 1, 2010, the JPML issued a final transfer order for the transfer of Rupert to the Northern District of Texas. On January 24, 2012, the Court remanded Rupert to Texas State Court (Bexar County), but stayed these cases until further order of the court. The defendants have not yet responded to the complaint in Rupert.
In addition to the note below, see Note 26 for information about the fair value hierarchy of derivatives.
The Company’s principal financial instruments, other than derivatives, comprise the fixed rate senior notes, the 5-year term loan, a revolving credit facility, fiduciary assets and liabilities, and cash deposits.
Commissions and fees are attributed to countries based upon the location of the subsidiary generating the revenue.
The Company may offer debt securities, preferred stock, ordinary stock and other securities pursuant to the Willis Shelf. On March 17, 2011, the Company issued senior notes totaling $800 million under its existing registration statement. These debt securities are issued by Willis Group Holdings (‘Holdings Debt Securities’) and are guaranteed by certain of the Company’s subsidiaries. Therefore, the Company is providing the condensed consolidating financial information below. The following 100 percent directly or indirectly owned subsidiaries fully and unconditionally guarantee the Holdings Debt Securities on a joint and several basis: Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Trinity Acquisition plc, Willis Group Limited and Willis North America (the ‘Guarantors’).