XNYS:WSH Willis Group Holdings PLC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-16503

 

 

WILLIS GROUP HOLDINGS PUBLIC

LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

Ireland   98-0352587

(Jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o Willis Group Limited

51 Lime Street, London, EC3M 7DQ, England

(Address of principal executive offices)

(011) 44-20-3124-6000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes  þ        No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes  þ        No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ‘large accelerated filer’, ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    þ   Accelerated filer    ¨   Non-accelerated filer    ¨   Smaller reporting company    ¨
  (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes  ¨        No  þ

As of May 4, 2012, there were outstanding 173,538,549 ordinary shares, nominal value $0.000115 per share, of the Registrant.

 

 

 


Table of Contents

Table Of Contents

 

     Page  

Forward-Looking Statements

     4   

PART I — Financial Information

  

    Item 1

  — Financial Statements      6   

    Item 2

  — Management’s Discussion and Analysis of Financial Condition and Results of Operations      51   

    Item 3

  — Quantitative and Qualitative Disclosures about Market Risk      69   

    Item 4

  — Controls and Procedures      69   

PART II — Other Information

  

    Item 1

  — Legal Proceedings      70   

    Item 1A

  — Risk Factors      70   

    Item 2

  — Unregistered Sales of Equity Securities and Use of Proceeds      70   

    Item 3

  — Defaults upon Senior Securities      70   

    Item 4

  — Mine Safety Disclosures      70   

    Item 5

  — Other Information      71   

    Item 6

  — Exhibits      71   

Signatures

       72   

 

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Certain Definitions

The following definitions apply throughout this quarterly report unless the context requires otherwise:

 

‘We’, ‘Us’, ‘Company’, ‘Group’, ‘Willis’, ‘Willis Group Holdings’ or ‘Our’

   Willis Group Holdings and its subsidiaries.

‘Willis Group Holdings’ or ‘Willis Group Holdings plc’

 

   Willis Group Holdings Public Limited Company, a company organized under the laws of Ireland.

‘shares’

   The ordinary shares of Willis Group Holdings Public Limited Company, nominal value $0.000115 per share.

‘HRH’

   Hilb Rogal & Hobbs Company, a 100 percent owned subsidiary acquired in 2008.

 

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Willis Group Holdings plc

 

FORWARD-LOOKING STATEMENTS

We have included in this document ‘forward-looking statements’ within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts that address activities, events or developments that we expect or anticipate may occur in the future, including such things as our future capital expenditures, growth in commissions and fees, business strategies, competitive strengths, goals, the benefits of new initiatives, growth of our business and operations, plans and references to future successes, are forward-looking statements. Also, when we use the words such as ‘anticipate’, ‘believe’, ‘estimate’, ‘expect’, ‘intend’, ‘plan’, ‘probably’, or similar expressions, we are making forward-looking statements.

There are important uncertainties, events and factors that could cause our actual results or performance to differ materially from those in the forward-looking statements contained in this document, including the following:

 

 

the impact of any regional, national or global political, economic, business, competitive, market, environmental or regulatory conditions on our global business operations;

 

 

the impact of current financial market conditions on our results of operations and financial condition, including as a result of those associated with the current Eurozone sovereign debt crisis any insolvencies of or other difficulties experienced by our clients, insurance companies or financial institutions;

 

 

our ability to implement and realize anticipated benefits of the 2011 Operational Review or any revenue generating initiatives;

 

 

the volatility or declines in insurance markets and premiums on which our commissions are based, but which we do not control;

 

 

our ability to continue to manage our significant indebtedness;

 

 

our ability to compete effectively in our industry, including the impact of our refusal to accept contingent commissions from carriers in the non-Employee Benefit areas of our retail brokerage business;

 

 

material changes in commercial property and casualty markets generally or the availability of insurance products or changes in premiums resulting from a catastrophic event, such as a hurricane, or otherwise;

 

 

our ability to retain key employees and clients and attract new business;

 

 

the timing and ability to carry out share repurchases and redemptions;

 

 

the timing or ability to carry out refinancing or take other steps to manage our capital and the limitations in our long-term debt agreements that may restrict our ability to take these actions;

 

 

any fluctuations in exchange and interest rates that could affect expenses and revenue;

 

 

the potential costs and difficulties in complying with a wide variety of foreign laws and regulations and any related changes, given the global scope of our operations;

 

 

rating agency actions that could inhibit our ability to borrow funds or the pricing thereof;

 

 

a significant decline in the value of investments that fund our pension plans or changes in our pension plan liabilities or funding obligations;

 

 

our ability to achieve the expected strategic benefits of transactions;

 

 

the impairment of the goodwill of one of our reporting units, in which case we may be required to record significant charges to earnings;

 

 

our ability to receive dividends or other distributions in needed amounts from our subsidiaries;

 

 

changes in the tax or accounting treatment of our operations;

 

 

any potential impact from the US healthcare reform legislation;

 

 

our involvements in and the results of any regulatory investigations, legal proceedings and other contingencies;

 

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Table of Contents

About Willis

 

 

underwriting, advisory or reputational risks associated with non-core operations as well as the potential significant impact our non-core operations (including our Loan Protector operations) can have on our financial results;

 

 

our exposure to potential liabilities arising from errors and omissions and other potential claims against us; and

 

 

the interruption or loss of our information processing systems or failure to maintain secure information systems.

The foregoing list of factors is not exhaustive and new factors may emerge from time to time that could also affect actual performance and results. For more information see the section entitled ‘Risk Factors’ included in Willis’ Form 10-K for the year ended December 31, 2011. Copies are available online at http://www.sec.gov or www.willis.com or on request from the Company as set forth in Part I, ‘Business — Available Information’ in Willis’ Form 10-K.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included in this document, our inclusion of this information is not a representation or guarantee by us that our objectives and plans will be achieved.

Our forward-looking statements speak only as of the date made and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document may not occur, and we caution you against unduly relying on these forward-looking statements.

 

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Willis Group Holdings plc

 

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

            Three months ended
March 31,
 
         Note              2012             2011      
            (millions, except
per share data)
 

REVENUES

       

Commissions and fees

      $ 1,005      $ 999   

Investment income

        5        8   

Other income

        3          
     

 

 

   

 

 

 

Total revenues

        1,013        1,007   
     

 

 

   

 

 

 

EXPENSES

       

Salaries and benefits

     3         (506     (583

Other operating expenses

        (156     (152

Depreciation expense

        (19     (20

Amortization of intangible assets

        (15     (17

Net gain on disposal of operations

               4   
     

 

 

   

 

 

 

Total expenses

        (696     (768
     

 

 

   

 

 

 

OPERATING INCOME

        317        239   

Make-whole on repurchase and redemption of senior notes and write-off of unamortized debt issuance costs

     14                (171

Interest expense

        (32     (40
     

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES

        285        28   

Income taxes

     4         (68     (1
     

 

 

   

 

 

 

INCOME BEFORE INTEREST IN EARNINGS OF ASSOCIATES

        217        27   

Interest in earnings of associates, net of tax

        15        16   
     

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS

        232        43   

Discontinued operations, net of tax

               (1
     

 

 

   

 

 

 

NET INCOME

        232        42   

Less: net income attributable to noncontrolling interests

        (7     (8
     

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS

      $ 225      $ 34   
     

 

 

   

 

 

 

AMOUNTS ATTRIBUTABLE TO WILLIS GROUP HOLDINGS SHAREHOLDERS

       

Income from continuing operations, net of tax

        225        35   

Loss from discontinued operations, net of tax

               (1
     

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS

      $ 225      $ 34   
     

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS

     16       $ 256      $ 66   
     

 

 

   

 

 

 

EARNINGS PER SHARE — BASIC AND DILUTED

       

 — Basic earnings per share — continuing operations

     5       $ 1.29      $ 0.20   

 — Diluted earnings per share — continuing operations

     5       $ 1.28      $ 0.20   
     

 

 

   

 

 

 

CASH DIVIDENDS DECLARED PER SHARE

      $       0.27      $       0.26   
     

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Financial statements

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     Note      March 31,
2012
     December 31,
2011
 
            (millions, except share data)  

ASSETS

        

CURRENT ASSETS

        

Cash and cash equivalents

      $ 464       $ 436   

Accounts receivable, net

        1,009         910   

Fiduciary assets

        10,368         9,338   

Deferred tax assets

        51         44   

Other current assets

     12         325         259   
     

 

 

    

 

 

 

Total current assets

        12,217         10,987   
     

 

 

    

 

 

 

NON-CURRENT ASSETS

        

Fixed assets, net

        426         406   

Goodwill

     10         3,308         3,295   

Other intangible assets, net

     11         406         420   

Investments in associates

        187         170   

Deferred tax assets

        24         22   

Pension benefits asset

        170         145   

Other non-current assets

     12         353         283   
     

 

 

    

 

 

 

Total non-current assets

        4,874         4,741   
     

 

 

    

 

 

 

TOTAL ASSETS

      $         17,091       $         15,728   
     

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

CURRENT LIABILITIES

        

Fiduciary liabilities

      $ 10,368       $ 9,338   

Deferred revenue and accrued expenses

        285         320   

Income taxes payable

        62         15   

Short-term debt and current portion of long-term debt

     14         17         15   

Deferred tax liabilities

        25         26   

Other current liabilities

     13         334         282   
     

 

 

    

 

 

 

Total current liabilities

        11,091         9,996   
     

 

 

    

 

 

 

NON-CURRENT LIABILITIES

        

Long-term debt

     14         2,435         2,354   

Liability for pension benefits

        261         270   

Deferred tax liabilities

        47         32   

Provisions for liabilities

        182         196   

Other non-current liabilities

     13         371         363   
     

 

 

    

 

 

 

Total non-current liabilities

        3,296         3,215   
     

 

 

    

 

 

 

Total liabilities

        14,387         13,211   
     

 

 

    

 

 

 
(Continued on next page)         

 

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Willis Group Holdings plc

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

     Note      March 31,
2012
    December 31,
2011
 
            (millions, except share data)  

COMMITMENTS AND CONTINGENCIES

     7        

EQUITY

       

Ordinary shares, $0.000115 nominal value; Authorized: 4,000,000,000; Issued 173,696,854 shares in 2012 and 173,829,693 shares in 2011

                 

Ordinary shares, €1 nominal value; Authorized: 40,000; Issued 40,000 shares in 2012 and 2011

                 

Preference shares, $0.000115 nominal value; Authorized: 1,000,000,000; Issued nil shares in 2012 and 2011

                 

Additional paid-in capital

        1,072        1,073   

Retained earnings

        2,319        2,160   

Accumulated other comprehensive loss, net of tax

     16         (713     (744

Treasury shares, at cost, 46,408 shares in 2012 and 2011 and 40,000 shares, €1 nominal value, in 2012 and 2011

        (3     (3
     

 

 

   

 

 

 

Total Willis Group Holdings stockholders’ equity

     17         2,675        2,486   

Noncontrolling interests

     17         29        31   
     

 

 

   

 

 

 

Total equity

        2,704        2,517   
     

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

      $         17,091      $         15,728   
     

 

 

   

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Financial statements

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

            Three months ended
March 31,
 
     Note      2012     2011  
            (millions)  

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net income

      $     232      $         42   

Adjustments to reconcile net income to total net cash provided by operating activities:

       

Loss from discontinued operations

               1   

Net gain on disposal of operations and fixed and intangible assets

        (3     (4

Depreciation expense

        19        20   

Amortization of intangible assets

        15        17   

Amortization of cash retention awards

     3         62        44   

Net periodic cost of defined benefit pension plans

     6         1        3   

Provision for doubtful debts

        4        1   

Benefit for deferred income taxes

        (2     (8

Excess tax benefits from share-based payment arrangements

               (1

Share-based compensation

        9        14   

Make-whole on repurchase and redemption of senior notes and write-off of unamortized debt issuance costs

               171   

Undistributed earnings of associates

        (15     (16

Effect of exchange rate changes on net income

        (5     (8

Change in operating assets and liabilities, net of effects from purchase of subsidiaries:

       

Accounts receivable

        (80     (140

Fiduciary assets

        (924     (780

Fiduciary liabilities

        924        780   

Cash retention awards paid

     3         (192     (195

Funding of defined benefit pension plans

        (33     (30

Other assets

        (7     (2

Other liabilities

        74        93   

Movement on provisions

        (17     5   
     

 

 

   

 

 

 

Net cash provided by continuing operating activities

        62        7   
     

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

       

Proceeds on disposal of fixed and intangible assets

        3        2   

Additions to fixed assets

        (36     (20

Acquisitions of subsidiaries, net of cash acquired

        (2     (3

Acquisition of investments in associates

               (2

Payments to acquire other investments

        (2     (1
     

 

 

   

 

 

 

Net cash used in continuing investing activities

        (37     (24
     

 

 

   

 

 

 

(Continued on next page)

 

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Willis Group Holdings plc

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

            Three months ended
March 31,
 
     Note      2012     2011  
            (millions)  

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM OPERATING AND INVESTING ACTIVITIES

      $     25      $ (17

CASH FLOWS FROM FINANCING ACTIVITIES

       

Proceeds from draw down of revolving credit facility

     14         85        10   

Senior notes issued

     14                794   

Debt issuance costs

     14                (6

Repayments of debt

     14         (2     (492

Make-whole on repurchase and redemption of senior notes

     14                (146

Repurchase of shares

     17         (19       

Proceeds from issue of shares

        11        19   

Excess tax benefits from share-based payment arrangements

               1   

Dividends paid

        (46     (45

Proceeds from sale of noncontrolling interests

        3          

Acquisition of noncontrolling interests

        (29     (7

Dividends paid to noncontrolling interests

        (3     (1
     

 

 

   

 

 

 

Net cash provided by continuing financing activities

               127   
     

 

 

   

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

        25        110   

Effect of exchange rate changes on cash and cash equivalents

        3        6   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

        436        316   
     

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

      $ 464      $     432   
     

 

 

   

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Notes to the financial statements

(Unaudited)

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    NATURE OF OPERATIONS

Willis provides a broad range of insurance and reinsurance broking and risk management consulting services to its clients worldwide, both directly and indirectly through its associates. The Company provides both specialized risk management advisory and consulting services on a global basis to clients engaged in specific industrial and commercial activities, and services to small, medium and large corporations through its retail operations.

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.

2.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements (‘Interim Financial Statements’) have been prepared in accordance with accounting principles generally accepted in the United States of America (‘US GAAP’).

The Interim Financial Statements are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company’s management considers necessary for a fair presentation of the financial position as of such dates and the operating results and cash flows for those periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three month period ended March 31, 2012 may not necessarily be indicative of the operating results for the entire fiscal year.

These Interim Financial Statements should be read in conjunction with the Company’s consolidated balance sheets as of December 31, 2011 and 2010, and the related consolidated statements of operations, cash flows and changes in equity for each of the three years in the period ended December 31, 2011 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012.

In May 2011, the Financial Accounting Standards Board (‘FASB’) issued an Accounting Standards Update to disclosure requirements for common fair value measurement. These amendments, which became effective for us in the first quarter of 2012, result in common definition of fair value and common requirements for measurement of and disclosure requirements between US GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance had an immaterial impact on our consolidated financial statements.

In June 2011, the FASB issued an Accounting Standards Update that increases the prominence of items reported in other comprehensive income in the financial statements. This update requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. This requirement became effective for us beginning with the first quarter of 2012, and we have included the required presentation in this Form 10-Q.

3.    SALARIES AND BENEFITS EXPENSE

Severance Costs

Severance costs arising in the normal course of business amounted to a nominal amount in the three months ended March 31, 2012 (2011: $nil).

During 2011, the Company incurred severance costs of $89 million relating to the Company’s 2011 Operational Review. These costs related to approximately 1,200 positions that were eliminated.

 

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Willis Group Holdings plc

 

3.    SALARIES AND BENEFITS EXPENSE (Continued)

 

At March 31, 2012, the Company’s severance liability under the 2011 Operational Review was:

 

     Severance  
     (millions)  

Balance at January 1, 2011

   $   

Severance costs accrued

     89   

Cash payments

     (64

Foreign exchange

     (1
  

 

 

 

Balance at December 31, 2011

   $ 24   

Cash payments

     (9

Foreign exchange

       
  

 

 

 

Balance at March 31, 2012

   $         15   
  

 

 

 

Cash Retention Awards

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 redundancy, 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 following table sets out the amount of cash retention awards made and the related amortization of those awards for the three months ended March 31, 2012 and 2011:

 

     Three months ended
March  31,
 
     2012      2011  
     (millions)  

Cash retention awards made

   $      192       $      195   

Amortization of cash retention awards included in salaries and benefits

     62         44   

Unamortized cash retention awards totaled $334 million as of March 31, 2012 (December 31, 2011: $196 million; March 31, 2011: $328 million).

4.    INCOME TAXES

The tables below reflect the components of the three months ended March 31, 2012 and 2011 tax charge:

 

    Income
before tax
    Tax     Effective
tax rate
 
Three months ended March 31, 2012   (millions, except percentages)  

Ordinary income taxed at estimated annual effective tax rate

  $ 297      $ (73     25

Items where tax effect is treated discretely:

     

Write-off of uncollectible accounts receivable balance in North America

    (12             5        41
 

 

 

   

 

 

   

 

 

 

As reported

  $         285      $ (68             24
 

 

 

   

 

 

   

 

 

 
    Income
before tax
    Tax     Effective
tax rate
 
Three months ended March 31, 2011   (millions, except percentages)  

Ordinary income taxed at estimated annual effective tax rate

  $ 195      $ (48     25

Items where tax effect is treated discretely:

     

Make-whole expense on repurchase and redemption of senior notes and write-off of unamortized debt issuance costs

    (171     47        27

Non-taxable gain on disposal of operations

    4              
 

 

 

   

 

 

   

 

 

 

As reported

  $ 28      $ (1     4
 

 

 

   

 

 

   

 

 

 

 

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Notes to the financial statements

(Unaudited)

 

4.    INCOME TAXES (Continued)

 

For interim income tax reporting purposes, the Company generally determines its best estimate of an annual effective tax rate and applies that rate on a year-to-date basis applicable to its ordinary income. The Company’s estimated annual effective tax rate excludes significant, unusual or infrequently occurring items and certain other items excluded pursuant to the US GAAP authoritative guidance where applicable. The income tax expense (or benefit) related to all other items is individually computed and recognized when the items occur.

5.    EARNINGS PER SHARE

Basic and diluted earnings per share are calculated by dividing net income attributable to Willis Group Holdings by the average number of shares outstanding during each period. The computation of diluted earnings per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue shares were exercised or converted into shares or resulted in the issue of shares that then shared in the net income of the Company.

At March 31, 2012, time-based and performance-based options to purchase 8.8 million and 7.1 million (2011: 10.7 million and 9.4 million) shares, respectively, and 1.2 million restricted stock units (2011: 1.7 million), were outstanding.

Basic and diluted earnings per share are as follows:

 

     Three months ended
March  31,
 
     2012     2011  
     (millions, except per
share data)
 

Net income attributable to Willis Group Holdings

   $ 225      $ 34   
  

 

 

   

 

 

 

Basic average number of shares outstanding

     174        171   

Dilutive effect of potentially issuable shares

     2        3   
  

 

 

   

 

 

 

Diluted average number of shares outstanding

     176        174   
  

 

 

   

 

 

 

Basic earnings per share:

    

Continuing operations

   $ 1.29      $ 0.20   

Discontinued operations

              
  

 

 

   

 

 

 

Net income attributable to Willis Group Holdings shareholders

   $ 1.29      $ 0.20   
  

 

 

   

 

 

 

Dilutive effect of potentially issuable shares

     (0.01       
  

 

 

   

 

 

 

Diluted earnings per share:

    

Continuing operations

   $ 1.28      $ 0.20   

Discontinued operations

              
  

 

 

   

 

 

 

Net income attributable to Willis Group Holdings shareholders

   $     1.28      $     0.20   
  

 

 

   

 

 

 

Options to purchase 5.9 million shares were not included in the computation of the dilutive effect of stock options for the three months ended March 31, 2012 because the effect was antidilutive (2011: 3.0 million).

 

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Willis Group Holdings plc

 

6.    PENSION PLANS

The components of the net periodic benefit (income) cost of the UK, US and international defined benefit plans are as follows:

 

     Three months ended March 31,  
     UK Pension
Benefits
    US Pension
Benefits
    Intl Pension
Benefits
 
     2012     2011     2012     2011     2012     2011  
     (millions)  

Components of net periodic benefit (income) cost:

            

Service cost

   $ 8      $ 9      $      $      $ 1      $ 1   

Interest cost

     27        26        10        10        2        2   

Expected return on plan assets

     (45     (40     (11     (11     (2     (2

Amortization of unrecognized prior service gain

     (1     (1                            

Amortization of unrecognized actuarial loss

     10        8        2        1                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (income) cost

   $ (1   $ 2      $ 1      $      $     1      $ 1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2012, the Company had made contributions of $24 million (including amounts in respect of the salary sacrifice contributions), $7 million and $2 million to the UK, US and international defined benefit pension plans (2011: $21 million, $8 million and $1 million), respectively.

On March 30, 2012, the Company agreed a revised schedule of contributions with the UK pension Trustee which sets out the contributions toward on-going accrual of benefits and deficit funding contributions the Company will make to the UK plan over the next six years ended December 31, 2017. Contributions in 2012 are expected to total $81 million (excluding amounts in respect of the salary sacrifice contributions), of which approximately $23 million relates to on-going contributions calculated as 15.9 percent of active plan members’ pensionable salaries and $58 million relates to contributions towards funding the 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). In respect of 2012, any such contributions will be paid in 2013 on finalization of the calculations. Aggregate contributions under the deficit funding contribution and the profit share calculation are capped at £312 million ($499 million) over the six years ended December 31, 2017.

The schedule of contributions is automatically renegotiated after three years and at any earlier time jointly agreed by the Company and the Trustee.

The Company also expects to contribute approximately $40 million to the US plan and $12 million to the international plans for the full year 2012 (inclusive of amounts contributed in the first quarter).

7.    COMMITMENTS AND CONTINGENCIES

Contractual Obligations

Pensions

Changes to the Company’s pension funding obligations are set out in Note 6 – ‘Pension Plans’ to the Condensed Consolidated Financial Statements.

Other Contractual Obligations

In July 2010, the Company made a capital commitment of $25 million to Trident V Parallel Fund, LP. As of March 31, 2012 there had been approximately $7 million of capital contributions.

In May 2011, the Company made a capital commitment of $10 million to Dowling Capital Partners I, LP. As of March 31, 2012 there had been approximately $1 million of capital contributions.

 

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Notes to the financial statements

(Unaudited)

 

7.    COMMITMENTS AND CONTINGENCIES (Continued)

 

Claims, Lawsuits and Other Proceedings

In the ordinary course of business, the Company is subject to various actual and potential claims, lawsuits, and other proceedings relating principally to alleged errors and omissions in connection with the placement of insurance and reinsurance. Similar to other corporations, the Company is also subject to a variety of other claims, including those relating to the Company’s employment practices. Some of the claims, lawsuits and other proceedings seek damages in amounts which could, if assessed, be significant.

Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance. The terms of this insurance vary by policy year and self-insured risks have increased significantly in recent years. Regarding self-insured risks, the Company has established provisions which are believed to be adequate in the light of current information and legal advice, and the Company adjusts such provisions from time to time according to developments.

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:

Assurance of Discontinuance

In connection with the investigation launched by the New York State Attorney General in April 2004 concerning, among other things, contingent commissions paid by insurers to insurance brokers, in April 2005, the Company entered into an Assurance of Discontinuance (‘Original AOD’) with the New York State Attorney General and the Superintendent of the New York Insurance Department and paid $50 million to eligible clients. As part of the Original 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 launched 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 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 Connecticut Attorney General alleging violations of the Connecticut Unfair Trade Practices Act and the Connecticut Unfair Insurance Practices Act. As part of this settlement, HRH agreed to take certain actions including establishing a $30 million national fund for distribution to certain clients; enhancing disclosure practices for agency and broker clients; and declining to accept contingent compensation on brokerage business.

On February 16, 2010, the Company entered into the Amended and Restated Assurance of Discontinuance with the Attorney General of the State of New York and the Amended and Restated Stipulation with the Superintendent of Insurance of the State of New York (the ‘Amended and Restated AOD’) on behalf of itself and its named subsidiaries. The Amended and Restated AOD was effective February 11, 2010 and supersedes and replaces the Original AOD.

 

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Willis Group Holdings plc

 

7.    COMMITMENTS AND CONTINGENCIES (Continued)

 

The Amended and Restated AOD specifically recognizes that the Company has substantially met its obligations under the Original AOD and ends many of the requirements previously imposed. It relieves the Company of a number of technical compliance obligations that have imposed significant administrative and financial burdens on its operations. The Amended and Restated AOD no longer limits the types of compensation the Company can receive and has lowered the compensation disclosure requirements. The Amended and Restated AOD requires the Company, among other things to: (i) in New York, and each of the other 49 states of the United States, the District of Columbia and U.S. territories, provide compensation disclosure that will, at a minimum, comply with the terms of the applicable regulations, as may be amended from time to time, or the provisions of the AOD that existed prior to the adoption of the Amended and Restated AOD; and (ii) maintain its compliance programs and continue to provide appropriate training to relevant employees in business ethics, professional obligations, conflicts of interest, and antitrust and trade practices compliance.

European Commission Sector Inquiry

In 2006, the European Commission issued questionnaires pursuant to its Sector Inquiry or, in respect of Norway, the European Free Trade Association Surveillance Authority, related to insurance business practices, including compensation arrangements for brokers, to at least 150 European brokers including our operations in nine European countries. The Company filed responses to the European Commission and the European Free Trade Association Surveillance Authority questionnaires. The European Commission reported on September 25, 2007, expressing concerns over potential conflicts of interest in the industry relating to remuneration and binding authorities and also over the nature of the coinsurance market.

The Company cooperated with both the European Free Trade Association Surveillance Authority and the European Commission to resolve issues raised in its final report regarding coinsurance as required of the industry by the European Commission. The European Commission has appointed Ernst & Young to conduct a review of the coinsurance market and we anticipate that, along with our competitors and insurers, our European subsidiaries will receive further questionnaires on this matter this year.

Contingent Compensation Class Action

Since August 2004, the Company and HRH (along with various other brokers and insurers) have been named as defendants in purported class actions in various courts across the United States. All of these actions have been consolidated into a single action in the US District Court for the District of New Jersey (‘MDL’). These actions allege that the brokers 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. Plaintiffs seek monetary damages, including punitive damages, and certain equitable relief. In May 2011, the majority of defendants, including the Company and HRH, entered into a written settlement agreement with plaintiffs. On June 28, 2011, the Judge entered an Order granting preliminary approval to the settlement agreement. Notice of the settlement was sent to all members of the class and each member was given the opportunity to opt out of the settlement and pursue its own individual claim against any defendant. A total of 84 members of the class have opted out of the settlement. A Fairness Hearing to decide if the settlement should be given final approval took place on September 14, 2011. The Court approved the settlement on March 30, 2012. The amount of the settlement paid by the Company and HRH is immaterial and was previously reserved.

Additional actions could be brought in the future by individual policyholders. The Company disputes the allegations in all of these suits and has been and intends to continue to defend itself vigorously against these actions. The outcomes of these lawsuits, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.

 

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Notes to the financial statements

(Unaudited)

 

7.    COMMITMENTS AND CONTINGENCIES (Continued)

 

Gender Discrimination Class Action

In December 2006, a purported class action was filed against the Company in the United States District Court, Southern District of New York, alleging that the Company discriminated against female officers and officer equivalent employees on the basis of their gender and seeking injunctive relief, monetary damages and attorneys’ fees and costs. In January 2011, the Company reached a settlement with plaintiffs that resolves all individual and class claims. The amount of this settlement is not material. The Court has given preliminary approval to the settlement. As part of the settlement, Willis of New York has agreed to implement certain injunctive measures, including having an independent monitor review compensation decisions for certain groups of employees during the next three years. On December 19, 2011, the Court granted final approval of the settlement, and during the quarter ended March 31, 2012 the settlement payments were distributed to class members.

World Trade Center

The Company acted as the insurance broker, but not as an underwriter, for the placement of both property and casualty insurance for a number of entities which were directly impacted by the September 11, 2001 destruction of the World Trade Center complex, including Silverstein Properties LLC, which acquired a 99-year leasehold interest in the twin towers and related facilities from the Port Authority of New York and 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. 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 the Company made culpable errors or omissions in connection with our brokerage activities. However, the Company does 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.

Stanford Financial Group Litigation

The Company has been named as a defendant in six similar lawsuits relating to the collapse of The Stanford Financial Group (‘Stanford’), for which Willis of Colorado, Inc. acted as broker of record on certain lines of insurance. The complaints in these actions generally allege that the defendants actively and materially aided Stanford’s alleged fraud by providing Stanford with certain letters regarding coverage that they knew would be used to help retain or attract actual or prospective Stanford client investors. The complaints further allege that these letters, which contain statements about Stanford and the insurance policies that the defendants placed for Stanford, contained untruths and omitted material facts and were drafted in this manner to help Stanford promote and sell its allegedly fraudulent certificates of deposit.

The six actions are as follows:

 

 

Troice, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:09-CV-01274-N, was filed on July 2, 2009 in the U.S. District Court for the Northern District of Texas against Willis Group Holdings plc, Willis of Colorado, Inc. and a Willis associate, among others. On April 1, 2011, plaintiffs filed the operative Third Amended Class Action Complaint individually and on behalf of a putative, worldwide class of Stanford investors, adding Willis Limited as a defendant and alleging claims under Texas statutory and common law and seeking damages in excess of $1 billion, punitive damages and costs. On May 2, 2011, the defendants filed motions to dismiss the Third Amended Class Action Complaint, arguing, inter alia, that the plaintiffs’ claims are precluded by the Securities Litigation Uniform Standards Act of 1998 (‘SLUSA’).

 

 

Ranni v. Willis of Colorado, Inc., et al., C.A. No. 09-22085, 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.

 

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Willis Group Holdings plc

 

7.    COMMITMENTS AND CONTINGENCIES (Continued)

 

 

Canabal, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:09-CV-01474-D, was filed on August 6, 2009 against Willis Group Holdings plc, Willis of Colorado, Inc. and the same Willis associate named as a defendant in Troice, among others, also in the Northern District of Texas. The complaint was filed individually and on behalf of a putative class of Venezuelan Stanford investors, alleged claims under Texas statutory and common law and sought damages in excess of $1 billion, punitive damages, attorneys’ fees and costs. On December 18, 2009, the parties in Troice and Canabal stipulated to the consolidation of those actions (under the Troice civil action number), and, on December 31, 2009, the plaintiffs in Canabal filed a notice of dismissal, dismissing the action without prejudice.

 

 

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.

 

 

Casanova, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:10-CV-01862-O, was filed on September 16, 2010 on behalf of seven Stanford investors against Willis Group Holdings plc, Willis Limited, Willis of Colorado, Inc. and the same Willis associate, among others, also in the Northern District of Texas. The complaint alleges claims under Texas statutory and common law and seeks actual damages in excess of $5 million, punitive damages, attorneys’ fees and costs. The defendants have not yet responded to the complaint in Casanova.

 

 

Rishmague, et ano. v. Winter, et al., Case No. 2011CI02585, 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.

On May 10, 2011, the court presiding over the Stanford-related actions in the Northern District of Texas entered an order providing that it would consider the applicability of SLUSA to the Stanford-related actions based on the decision in a separate Stanford action not involving a Willis entity, Roland v. Green, Civil Action No. 3:10-CV-0224-N. On August 31, 2011, the court issued its decision in Roland, dismissing that action with prejudice under SLUSA.

On October 27, 2011, the court in Troice entered an order (i) dismissing with prejudice those claims asserted in the Third Amended Class Action Complaint on a class basis on the grounds set forth in the Roland decision discussed above and (ii) dismissing without prejudice those claims asserted the Third Amended Class Action Complaint on an individual basis. Also on October 27, 2011, the court entered a final judgment in the action.

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.

 

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Notes to the financial statements

(Unaudited)

 

7.    COMMITMENTS AND CONTINGENCIES (Continued)

 

Additional actions could be brought in the future by other investors in certificates of deposit issued by Stanford and its affiliates. The Company disputes these allegations and intends to defend itself vigorously against these actions. The outcomes of these actions, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.

Regulatory Investigation

Given the increased interest expressed by US and UK regulators in the effectiveness of compliance controls relating to financial crime in our market sector in particular, we began a voluntary internal review of our policies and controls four years ago. This review includes analysis and advice from external experts on best practices, review of public regulatory decisions, and discussions with government regulators in the US and UK. In addition, during 2010 and 2011 the UK Financial Services Authority (the ‘FSA’) conducted an investigation of Willis Limited’s, our UK brokerage subsidiary, compliance systems and controls between 2005 and 2009. On July 21, 2011, we and the FSA announced a settlement under which the FSA concluded its investigation by assessing a £7 million ($11 million) fine on Willis Limited for lapses in its implementation and documentation of its controls to counter the risks of improper payments being made to non-FSA authorized overseas third parties engaged to help win business, particularly in high risk jurisdictions. Our discussions with US regulators have concluded with no enforcement action.

As a result of the FSA settlement, we are conducting a further internal review of all payments made between 2005 and 2009. We do not believe that this review will result in any material fines or sanctions, but there can be no assurance that any resolution will not have an adverse impact on our ability to conduct our business in certain jurisdictions. While we believe that our current systems and controls are adequate and in accordance with all applicable laws and regulations, we cannot assure that such systems and controls will prevent any violations of applicable laws and regulations.

8.    DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Fair Value of Derivative Financial Instruments

In addition to the note below, see Note 9 for information about the fair value hierarchy of derivatives.

Primary Risks Managed by Derivative Financial Instruments

The main risks arising from the Company’s financial instruments are interest rate risk and foreign currency risk. The Company’s board of directors reviews and approves policies for managing each of these risks as summarized below.

The Company enters into derivative transactions (principally interest rate swaps and forward foreign currency contracts) in order to manage interest rate and currency risks arising from the Company’s operations and its sources of finance. The Company does not hold financial or derivative instruments for trading purposes.

Interest Rate Risk — Investment Income

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 denominated 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.

 

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Willis Group Holdings plc

 

8.    DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

 

The fair value of these contracts is recorded in other assets and other liabilities. For contracts that qualify as cash flow hedges for accounting purposes, the effective portions of changes in fair value are recorded as a component of other comprehensive income.

At March 31, 2012, the Company had the following derivative financial instruments that were designated as cash flow hedges of interest rate risk:

 

            Notional
Amount(i)
     Fair value  
            (millions)  

US dollar

     Receive fixed-pay variable       $         740       $         10   

Pounds sterling

     Receive fixed-pay variable         225         3   

Euro

     Receive fixed-pay variable         148         2   

 

(i) 

Notional amounts represent US dollar equivalents translated at the spot rate as of March 31, 2012.

Interest Rate Risk — Interest expense

The Company has debt consisting of $2,050 million fixed rate senior notes and $298 million under a 5-year term loan facility. The Company also has access to $520 million under two revolving credit facilities; as of March 31, 2012 $85 million was drawn on these facilities.

The 5-year term loan facility bears interest at LIBOR plus 1.50%. Drawings under the revolving $500 million credit facility bear interest at LIBOR plus 1.50%. These margins apply while the Company’s debt rating remains BBB-/Baa3. Should the Company’s debt rating change, then the margin will change in accordance with the credit facilities agreements. The fixed rate senior notes bear interest at various rates as detailed in Note 14 — Debt.

During the three months ended March 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 has designated and accounts for these instruments as fair value hedges against its $350 million 5.625% senior notes due 2015. The fair values of the interest rate swaps are included within other assets or other liabilities and the fair value of the hedged element of the senior notes is included within long-term debt.

At March 31, 2012 and December 31, 2011, the Company’s interest rate swaps were all designated as hedging instruments.

Foreign Currency Risk

The Company’s primary foreign exchange risks arise:

 

 

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.

 

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Notes to the financial statements

(Unaudited)

 

8.    DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

 

The foreign exchange risks in its London market operations are hedged as follows:

 

 

to the extent that forecast Pounds sterling expenses exceed Pounds sterling revenues, the Company limits its exposure to this exchange rate risk by the use of forward contracts matched to specific, clearly identified cash outflows arising in the ordinary course of business; and

 

 

to the extent the UK operations earn significant revenues in Euros and Japanese yen, the Company limits its exposure to changes in the exchange rate between the US dollar and these currencies by the use of forward contracts matched to a percentage of forecast cash inflows in specific currencies and periods.

The Company does not hedge net income earned within foreign subsidiaries outside of the UK.

The fair value of foreign currency contracts is recorded in other assets and other liabilities. For contracts that qualify as accounting hedges, changes in fair value resulting from movements in the spot exchange rate are recorded as a component of other comprehensive income whilst changes resulting from a movement in the time value are recorded in interest expense. For contracts that do not qualify for hedge accounting, the total change in fair value is recorded in interest expense. Amounts held in comprehensive income are reclassified into earnings when the hedged exposure affects earnings.

At March 31, 2012 and December 31, 2011, the Company’s foreign currency contracts were all designated as hedging instruments except for those relating to short-term cash flows in its London market operations.

The table below summarizes by major currency the contractual amounts of the Company’s forward contracts to exchange foreign currencies for Pounds sterling in the case of US dollars and US dollars for Euro and Japanese yen.

 

     Sell(i)       Fair value   
     (millions)         

US dollar

   $       204       $             3   

Euro

     112         4   

Japanese yen

     49         (1

 

(i) 

Foreign currency notional amounts are reported in US dollars translated at contracted exchange rates.

In addition to forward exchange contracts we undertake short-term foreign exchange swaps for liquidity purposes, these are not designated as hedges and do not qualify for hedge accounting. Both the fair value and the year to date gain/loss at March 31, 2012 and December 31, 2011 were immaterial.

 

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Willis Group Holdings plc

 

8.    DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

 

Derivative Financial Instruments

The table below presents the fair value of the Company’s derivative financial instruments and their balance sheet classification at March 31, 2012 and December 31, 2011:

 

          Fair value  

Derivative financial instruments designated as hedging instruments:

   Balance sheet
classification
   March 31,
2012
     December 31,
2011
 
          (millions)  

Assets:

        

Interest rate swaps (cash flow hedges)

   Other assets      15         15   

Interest rate swaps (fair value hedges)

   Other assets      23         26   

Forward exchange contracts

   Other assets      9         11   
     

 

 

    

 

 

 

Total derivatives designated as hedging instruments

      $             47       $             52   
     

 

 

    

 

 

 

Liabilities:

        

Interest rate swaps (cash flow hedges)

   Other liabilities                

Forward exchange contracts

   Other liabilities      3         11   
     

 

 

    

 

 

 

Total derivatives designated as hedging instruments

      $ 3       $ 11   
     

 

 

    

 

 

 

Cash Flow Hedges

The table below presents the effects of gains/(losses) on derivative financial instruments in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity for the three months ended March 31, 2012 and 2011:

 

Derivatives in cash flow

hedging relationships

  Amount of
gain (loss)
recognized
in OCI(i)
(Effective
element)
    Location of gain (loss)
reclassified from
accumulated OCI(i) into
income (Effective element)
  Amount of
gain (loss)
reclassified
from
accumulated
OCI(i) into
income
(Effective
element)
    Location of gain (loss)
recognized in income
(Ineffective hedges and ineffective
element of effective hedges)
  Amount of
gain (loss)
recognized
in income
(Ineffective
hedges and
ineffective
element of
effective
hedges)
 
    (millions)         (millions)         (millions)  

Three months ended March 31, 2012

         

Interest rate swaps

  $ (2   Investment income   $         2      Other operating expenses   $         —   

Forward exchange contracts

    3      Other operating expenses     2      Interest expense     1   
 

 

 

     

 

 

     

 

 

 

Total

  $ 1        $ 4        $ 1   
 

 

 

     

 

 

     

 

 

 

Three months ended March 31, 2011

         

Interest rate swaps

  $ (2   Investment income   $ (4   Other operating expenses   $   

Forward exchange contracts

    2      Other operating expenses     (1   Interest expense     1   
 

 

 

     

 

 

     

 

 

 

Total

  $         —        $ (5     $ 1   
 

 

 

     

 

 

     

 

 

 

 

Amounts above shown gross of tax.

(i) 

Other Comprehensive Income.

 

22


Table of Contents

Notes to the financial statements

(Unaudited)

 

8.    DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

 

For interest rate swaps all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For foreign exchange contracts, only the changes in fair value resulting from movements in the spot exchange rates are included in this assessment. In instances where the timing of expected cash flows can be matched exactly to the maturity of the foreign exchange contract then changes in fair value attributable to movement in the forward points are also included.

At March 31, 2012 the Company estimates there will be $7 million of net derivative gains reclassified from accumulated comprehensive income into earnings within the next twelve months.

Fair Value Hedges

The table below presents the effects of derivative financial instruments in fair value hedging relationships on the consolidated statements of comprehensive income for the three months ended March 31, 2012 and 2011.

 

Derivatives in fair value hedging relationships

   Hedged item in fair value
hedging relationship
     (Gain)/ loss
recognized
for derivative
    Gain/ (loss)
recognized
for hedged
item
     Ineffectiveness
recognized in
interest
expense
 
            (millions)  

Three months ended March 31, 2012

          

Interest rate swaps

     5.625% senior notes due 2015       $               —      $             —       $               —   
     

 

 

   

 

 

    

 

 

 

Three months ended March 31, 2011

          

Interest rate swaps

     5.625% senior notes due 2015       $ (11   $ 10       $ (1
     

 

 

   

 

 

    

 

 

 

All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

9.    FAIR VALUE MEASUREMENT

The following table presents, for each of the fair-value hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis:

 

     March 31, 2012  
     Quoted
prices in
active
markets
for
identical
assets
     Significant
other
observable
inputs
     Significant
other
unobservable
inputs
    

 

 
     Level 1      Level 2      Level 3      Total  
     (millions)  

Assets at fair value:

           

Cash and cash equivalents

   $ 464       $     —       $       $ 464   

Fiduciary funds (included within Fiduciary assets)

     1,763                         1,763   

Derivative financial instruments

             47                 47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $   2,227       $ 47       $         —       $   2,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities at fair value:

           

Derivative financial instruments

   $       $ 3       $       $ 3   

Changes in fair value of hedged debt(i)

             20                 20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $       $ 23       $       $ 23   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(i) 

Changes in the fair value of the underlying hedged debt instrument since inception of the hedging relationship are included in long-term debt.

 

23


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Willis Group Holdings plc

 

9.    FAIR VALUE MEASUREMENT (Continued)

 

     December 31, 2011  
     Quoted
prices in
active
markets
for
identical
assets
     Significant
other
observable
inputs
     Significant
other
unobservable
inputs
    

 

 
     Level 1      Level 2      Level 3      Total  
     (millions)  

Assets at fair value:

           

Cash and cash equivalents

   $ 436       $       —       $       $ 436   

Fiduciary funds (included within Fiduciary assets)

     1,688                         1,688   

Derivative financial instruments

             52                 52   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $   2,124       $ 52       $       —       $   2,176   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities at fair value:

           

Derivative financial instruments

   $       $ 11       $       $ 11   

Changes in fair value of hedged debt(i)

             20                 20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $       $ 31       $       $ 31   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(i) 

Changes in the fair value of the underlying hedged debt instrument since inception of the hedging relationship are included in long-term debt .

The estimated fair value of the Company’s financial instruments held or issued to finance the Company’s operations is summarized below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that the Company would realize upon disposition nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

 

     March 31, 2012      December 31, 2011  
     Carrying
amount
     Fair
value
     Carrying
amount
     Fair
value
 
     (millions)  

Assets:

           

Cash and cash equivalents

   $ 464       $ 464       $ 436       $ 436   

Fiduciary funds (included within Fiduciary assets)

     1,763         1,763         1,688         1,688   

Derivative financial instruments

     47         47         52         52   

Liabilities:

           

Short-term debt

   $ 17       $ 17       $ 15       $ 15   

Long-term debt

         2,435             2,610             2,354             2,499   

Derivative financial instruments

     3         3         11         11   

The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments:

Cash and Cash Equivalents — The estimated fair value of these financial instruments approximates their carrying values due to their short maturities.

Fiduciary Funds — Fair values are based on quoted market values.

Long-Term Debt excluding the fair value hedge — Fair values are based on quoted market values and so classified as Level 1 measurements.

Derivative Financial Instruments — Market values have been used to determine the fair value of interest rate swaps and forward foreign exchange contracts based on estimated amounts the Company would receive or have to pay to terminate the agreements, taking into account the current interest rate environment or current foreign currency forward rates.

 

24


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Notes to the financial statements

(Unaudited)

 

10.    GOODWILL

Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. Goodwill is not amortized but is subject to impairment testing annually and whenever facts or circumstances indicate that the carrying amounts may not be recoverable.

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 changes in the carrying amount of goodwill by operating segment for the three months ended March 31, 2012 and the year ended December 31, 2011 are as follows:

 

     Global     North
America
    International     Total  
     (millions)  

Balance at January 1, 2011

   $ 1,063      $ 1,783      $ 448      $ 3,294   

Purchase price allocation adjustments

                   2        2   

Goodwill acquired during the year

                   10        10   

Goodwill disposed of during the year

            (3            (3

Other movements (i) (ii)

     60        2        (61     1   

Foreign exchange

     (1            (8     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 1,122      $ 1,782      $ 391      $ 3,295   

Purchase price allocation adjustments

                   3        3   

Goodwill disposed of during the period

                            

Other movements(i)

                            

Foreign exchange

     3               7        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $     1,125      $     1,782      $         401      $     3,308   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(i)

North America — $nil tax benefit arising on the exercise of fully vested HRH stock options (2011: $1 million) which were issued as part of the acquisition of HRH in 2008.

(ii) 

Effective January 1, 2011, the Company changed its internal reporting structure; Global Markets, previously reported within the International segment, is now reported in the Global segment; and Mexico Retail, which was previously reported within the International segment, is now reported in the North America segment. As a result of these changes, goodwill of $60 million has been reallocated from the International segment into the Global segment for Global Markets International, and $1 million has been reallocated from the International segment into the North America segment for Mexico Retail. Goodwill has been reallocated between segments using the relative fair value allocation approach.

11.    OTHER INTANGIBLE ASSETS, NET

Other intangible assets are classified into the following categories:

 

 

‘Customer and Marketing Related’, including:

 

   

client relationships;

   

client lists;

   

non-compete agreements;

   

trade names; and

 

 

‘Contract based, Technology and Other’ includes all other purchased intangible assets.

 

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Willis Group Holdings plc

 

11.    OTHER INTANGIBLE ASSETS, NET (Continued)

 

The major classes of amortizable intangible assets are as follows:

 

     March 31, 2012      December 31, 2011  
     Gross
carrying
amount
     Accumulated
amortization
    Net
carrying
amount
     Gross
carrying
amount
     Accumulated
amortization
    Net
carrying
amount
 
     (millions)  

Customer and Marketing Related:

               

Client Relationships

   $ 692       $ (289   $ 403       $ 686       $ (269   $ 417   

Client Lists

     5         (4     1         8         (7     1   

Non-compete Agreements

     36         (36             36         (36       

Trade Names

     11         (10     1         11         (10     1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Customer and Marketing Related

     744         (339     405         741         (322     419   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Contract based, Technology and Other

     4         (3     1         4         (3     1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

   $     748       $ (342   $     406       $     745       $ (325   $     420   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The aggregate amortization of intangible assets for the three months ended March 31, 2012 was $15 million (2011: $17 million). The estimated aggregate amortization of intangible assets for each of the next five years ended December 31 is as follows:

 

     Remainder of
2012
     2013      2014      2015      2016      Thereafter      Total  
     (millions)  

Amortization of intangible assets

   $             44       $     52       $     45       $     38       $     33       $       194       $     406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

12.    OTHER ASSETS

An analysis of other assets is as follows:

 

     March 31,
2012
     December 31,
2011
 
     (millions)  

Other current assets

     

Unamortized cash retention awards

   $ 193       $ 120   

Prepayments and accrued income

     61         45   

Income tax receivable

     25         30   

Derivatives

     9         14   

Debt issuance costs

     3         3   

Other receivables

     34         47   
  

 

 

    

 

 

 

Total other current assets

   $ 325       $ 259   
  

 

 

    

 

 

 

Other non-current assets

     

Unamortized cash retention awards

   $ 141       $ 76   

Deferred compensation plan assets

     107         89   

Derivatives

     38         38   

Prepayments and accrued income

     20         28   

Debt issuance costs

     14         15   

Other receivables

     33         37   
  

 

 

    

 

 

 

Total other non-current assets

   $ 353       $ 283   
  

 

 

    

 

 

 

Total other assets

   $         678       $         542   
  

 

 

    

 

 

 

 

26


Table of Contents

Notes to the financial statements

(Unaudited)

 

13.    OTHER LIABILITIES

An analysis of other liabilities is as follows:

 

     March 31,
2012
     December 31,
2011
 
     (millions)  

Other current liabilities

     

Accounts payable

   $ 84       $ 59   

Accrued dividends payable

     49         46   

Other taxes payable

     107         45   

Accrued interest payable

     7         37   

Derivatives

     3         7   

Other payables

     84         88   
  

 

 

    

 

 

 

Total other current liabilities

   $ 334       $ 282   
  

 

 

    

 

 

 

Other non-current liabilities

     

Incentives from lessors

   $ 170       $ 165   

Deferred compensation plan liability

     111         106   

Capital lease obligation

     25         26   

Other payables

     65         66   
  

 

 

    

 

 

 

Total other non-current liabilities

   $ 371       $ 363   
  

 

 

    

 

 

 

Total other liabilities

   $         705       $         645   
  

 

 

    

 

 

 

14.    DEBT

Short-term debt and current portion of the long-term debt consists of the following:

 

     March 31,
2012
     December 31,
2011
 
     (millions)  

Current portion of 5-year term loan facility expires 2016

   $ 13       $ 11   

6.00% loan notes due 2012

     4         4   
  

 

 

    

 

 

 
   $          17       $              15   
  

 

 

    

 

 

 

Long-term debt consists of the following:

 

     March 31,
2012
     December 31,
2011
 
     (millions)  

5-year term loan facility expires 2016

   $ 285       $ 289   

Revolving $500 million credit facility

     85           

5.625% senior notes due 2015

     350         350   

Fair value adjustment on 5.625% senior notes due 2015

     20         20   

4.125% senior notes due 2016

     299         299   

6.200% senior notes due 2017

     600         600   

7.000% senior notes due 2019

     300         300   

5.750% senior notes due 2021

     496         496   
  

 

 

    

 

 

 
   $     2,435       $         2,354   
  

 

 

    

 

 

 

 

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Willis Group Holdings plc

 

14.    DEBT (Continued)

 

In December 2011 we refinanced our bank facility, comprising a 5-year $300 million term loan and a 5-year $500 million revolving credit facility. The $300 million term loan replaced the $328 million balance on our $700 million 5-year term loan facility and the $500 million revolving facility replaced our $300 million and our $200 million revolving credit facilities. Unamortized debt issuance costs of $10 million relating to these facilities were written off in December 2011 following completion of the refinancing.

The 5-year term loan facility expiring 2016 bears interest at LIBOR plus 1.50% and is repayable in quarterly installments and a final repayment of $225 million is due in the fourth quarter of 2016. Drawings under the new revolving $500 million credit facility bear interest at LIBOR plus 1.50% and the facility expires on December 16, 2016. As of March 31, 2012 $85 million was outstanding under the revolving credit facility. These margins apply while the Company’s debt rating remains BBB-/Baa3.

In 2011, the Company issued $300 million of 4.125% senior notes due 2016 and $500 million of 5.750% senior notes due 2021. The effective interest rates of these senior notes were 4.240% and 5.871% respectively, which included the impact of the discount upon issuance. The proceeds were used to repurchase and redeem $500 million of 12.875% senior notes due 2016 including a make-whole payment (representing a slight discount to the contractual make-whole amount) of $158 million. Following the repurchase the Company wrote off $13 million of unamortized debt issuance costs.

15.    SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Supplemental disclosures regarding cash flow information and non-cash flow investing and financing activities are as follows:

 

     Three months ended
March 31,
 
     2012      2011  
     (millions)  

Supplemental disclosures of cash flow information:

     

Cash payments for income taxes, net

   $ 9       $ 24   

Cash payments for interest

     57         60   
  

 

 

    

 

 

 

Supplemental disclosures of non-cash flow investing and financing activities:

     

Write-off of unamortized debt issuance costs

   $       $ (13

Accrued debt fees

             (3

Make-whole on redemption of senior notes

             (12

Acquisitions:

     

Fair value of assets acquired

   $       $ 1   

Less: Liabilities assumed

               
  

 

 

    

 

 

 

Net assets acquired, net of cash acquired

   $             —       $             1   
  

 

 

    

 

 

 

 

28


Table of Contents

Notes to the financial statements

(Unaudited)

 

16.    COMPREHENSIVE INCOME

 

a) The components of comprehensive income are as follows:

 

     Three months ended
March 31,
 
     2012     2011  
     (millions)  

Net income

   $ 232      $ 42   

Other comprehensive income, net of tax:

    

Foreign currency translation adjustment (net of tax of $nil; 2011: $nil)

     35        41   

Pension funding adjustment (net of tax of $3 million; 2011: $(1) million)

     (7     (5

Net loss on derivative instruments (net of tax of $(1) million; 2011: $2 million)

     4        (3
  

 

 

   

 

 

 

Other comprehensive income (net of tax of $2 million; 2011: $1 million)

     32        33   
  

 

 

   

 

 

 

Comprehensive income

     264        75   

Noncontrolling interest

     (8     (9
  

 

 

   

 

 

 

Total comprehensive income attributable to Willis Group Holdings

   $         256      $         66   
  

 

 

   

 

 

 

 

b) The components of accumulated other comprehensive loss, net of tax, are as follows:

 

     March 31,
2012
    December 31,
2011
 
     (millions)  

Net foreign currency translation adjustment

   $ (48   $ (83

Pension funding adjustment

     (682     (675

Net unrealized gain on derivative instruments

               15                    11   
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (715   $ (747

Noncontrolling interest

     2        3   
  

 

 

   

 

 

 

Accumulated other comprehensive loss, attributable to Willis Group Holdings, net of tax

   $ (713   $ (744
  

 

 

   

 

 

 

 

29


Table of Contents

Willis Group Holdings plc

 

17.    EQUITY AND NONCONTROLLING INTERESTS

The components of stockholders’ equity and noncontrolling interests are as follows:

 

     March 31, 2012     March 31, 2011  
     Willis
Group
Holdings
stockholders
    Noncontrolling
interests
    Total
equity
    Willis
Group
Holdings
stockholders
    Noncontrolling
interests
    Total
equity
 
     (millions)  

Balance at beginning of period

   $ 2,486      $ 31      $ 2,517      $ 2,577      $ 31      $ 2,608   

Comprehensive income:

            

Net income

     225        7        232        34        8        42   

Other comprehensive income, net of tax

     31        1        32        32        1        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     256        8        264        66        9        75   

Dividends

     (47     (5     (52     (45     (1     (46

Additional paid-in capital

     (1            (1     32               32   

Repurchase of shares(i)

     (19            (19                     

Additional noncontrolling interests

            1        1                        

Purchase of subsidiary shares from noncontrolling interests

            (6     (6                     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $         2,675      $                 29      $     2,704      $         2,630      $                 39      $     2,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(i)

Based on settlement date we repurchased 540,000 shares at an average share price of $35.27 in the three months ended March 31, 2012.

The effects of changes in Willis Group Holdings ownership interest in its subsidiaries on equity are as follows:

 

     March 31,
2012
    March 31,
2011
 
     (millions)  

Net income attributable to Willis Group Holdings

   $         225      $           34   
  

 

 

   

 

 

 

Transfers from noncontrolling interest:

    

Change in Willis Group Holdings paid-in capital for purchase and sale of noncontrolling interests

     (22       
  

 

 

   

 

 

 

Net transfers to noncontrolling interests

     (22       
  

 

 

   

 

 

 

Change from net income attributable to Willis Group Holdings and transfers from noncontrolling interests

   $ 203      $ 34   
  

 

 

   

 

 

 

 

30


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Notes to the financial statements

(Unaudited)

 

18.    SEGMENT INFORMATION

During the periods presented, the Company operated through three 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 operating 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:

 

  (i) costs of the holding company;

 

  (ii) foreign exchange hedging activities, foreign exchange movements on the UK pension plan asset and foreign exchange gains and losses from currency purchases and sales;

 

  (iii) amortization of intangible assets;

 

  (iv) gains and losses on the disposal of operations;

 

  (v) significant legal and regulatory settlements which are managed centrally;

 

  (vi) costs associated with the 2011 Operational Review; and

 

  (vii) write-off of uncollectible accounts receivable balance and associated legal fees arising in a stand-alone business due to fraudulent overstatement of commissions and fees.

The accounting policies of the operating segments are consistent with those described in Note 2 — Basis of Presentation and Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. 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.

Selected information regarding the Company’s operating segments is as follows:

 

     Three months ended March 31, 2012  
     Commissions
and fees
     Investment
income
     Other
income
     Total
revenues
     Depreciation
and
amortization
     Operating
income
    Interest in
earnings
of
associates,
net of tax
 
     (millions)  

Global

   $ 370       $ 2       $       $ 372       $ 7       $ 179      $   

North America

     346                 3         349         8         82          

International

     289         3                 292         4         81        15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Retail

     635         3         3         641         12         163        15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Segments

     1,005         5         3         1,013         19         342        15   

Corporate and Other(i)

                                     15         (25       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Consolidated

   $         1,005       $             5       $         3       $     1,013       $             34       $         317      $         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

31


Table of Contents

Willis Group Holdings plc

 

18.    SEGMENT INFORMATION (Continued)

 

 

     Three months ended March 31, 2011  
     Commissions
and fees
     Investment
income
     Other
income
     Total
revenues
     Depreciation
and
amortization
     Operating
income
    Interest in
earnings of
associates,
net of tax
 
     (millions)  

Global

   $             357       $             3       $       —       $ 360       $ 4       $ 176      $   

North America

     356         2                 358         7         85          

International

     286         3                 289         5         86        16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Retail

     642         5                 647         12         171        16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Segments

     999         8                 1,007         16         347        16   

Corporate and Other(i)

                                     21         (108       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Consolidated

   $ 999       $ 8       $       $     1,007       $             37       $         239      $           16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(i) 

See the following table for an analysis of the ‘Corporate and Other’ line.

 

     Three months
ended
March 31,
 
     2012     2011  
     (millions)  

Amortization of intangible assets

   $ (15   $ (17

Foreign exchange hedging

             2                1   

Foreign exchange on the UK pension plan asset

     1        1   

Net gain on disposal of operations

            4   

2011 Operational Review

            (97

Write-off of uncollectible accounts receivable balance in North America and associated legal fees(a)

     (13       
  

 

 

   

 

 

 

Total Corporate and Other

   $ (25   $ (108
  

 

 

   

 

 

 

  

 

(a)

In early 2012 the Company identified an uncollectible accounts receivable balance in a stand-alone business unit due to fraudulent overstatements of Commissions and Fees. For the year ended December 31, 2011, the Company recorded an estimate of the misstatement of Commissions and Fees from prior periods by recognizing in the fourth quarter of 2011 a charge to Other Operating Expenses to write off the uncollectible receivable at January 1, 2011, see Note 27 of our Financial Statements in the Company’s 2011 Annual Report on Form 10-K, and by reversing the balance of Commissions and Fees which had been recorded during 2011.

 

   The Company concluded its internal investigation into these matters in the three months ended March 31, 2012 and identified an additional fraudulent overstatement of Commissions and Fees, and has corrected the additional misstatement by recognizing a charge (including legal expenses) to Other Operating Expenses in the first quarter of 2012. The above amount represents the additional charge taken.

The following table reconciles total consolidated operating income, as disclosed in the operating segment tables above, to consolidated income before income taxes and interest in earnings of associates:

 

     Three months
ended
March 31,
 
     2012     2011  
     (millions)  

Total consolidated operating income

   $     317      $     239   

Make-whole on repurchase and redemption of senior notes and write-off of unamortized debt issuance costs

            (171

Interest expense

     (32     (40
  

 

 

   

 

 

 

Income before income taxes and interest in earnings of associates

   $ 285      $ 28   
  

 

 

   

 

 

 

 

32


Table of Contents

Notes to the financial statements

(Unaudited)

 

19. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES

Willis North America Inc. (‘Willis North America’) has $350 million senior notes outstanding that were issued on July 1, 2005. Willis North America issued a further $600 million of senior notes on March 28, 2007 and $300 million on September 29, 2009.

Until December 22, 2010, all direct obligations under the senior notes were jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Group Holdings, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, TA II Limited, Trinity Acquisition plc, TA III Limited, TA IV Limited and Willis Group Limited, the Guarantor Companies. On that date and in connection with an internal group reorganization, TA II Limited, TA III Limited and TA IV Limited transferred their obligations as guarantors to the other guarantor companies. TA II Limited, TA III Limited and TA IV Limited entered voluntary liquidation on December 31, 2010. The assets of these companies were distributed to the other guarantor companies described below (‘Other Guarantors’), either directly or indirectly, as a final distribution paid prior to their entering voluntary liquidation. As such, these transactions did not have a material impact on the guarantees of the senior notes and did not require the consent of the noteholders under the applicable indentures.

The debt securities that were issued by Willis North America and guaranteed by the entities described above, and for which the disclosures set forth below relate and are required under applicable SEC rules, were issued under a ‘shelf’ registration statement on Form S-3, including our current June 2009 registration statement (the ‘Willis Shelf’).

Presented below is condensed consolidating financial information for:

 

  (i) Willis Group Holdings, which is a guarantor, on a parent company only basis;

 

  (ii) the Other Guarantors, which are all 100 percent directly or indirectly owned subsidiaries of the parent and are all direct or indirect parents of the issuer;

 

  (iii) the Issuer, Willis North America;

 

  (iv) Other, which are the non-guarantor subsidiaries, on a combined basis;

 

  (v) Consolidating adjustments; and

 

  (vi) the Consolidated Company.

The equity method has been used for investments in subsidiaries in the unaudited condensed consolidating balance sheets for the period ended March 31, 2012 of Willis Group Holdings, the Other Guarantors and the Issuer. Investments in subsidiaries in the unaudited condensed consolidating balance sheet for Other, represents the cost of investment in subsidiaries recorded in the parent companies of the non-guarantor subsidiaries.

The entities included in the Other Guarantors column as of March 31, 2012 are Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, Trinity Acquisition plc, TA I Limited, and Willis Group Limited.

 

33


Table of Contents

Willis Group Holdings plc

 

19. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)

 

Condensed Consolidating Statement of Comprehensive Income

 

     Three months ended March 31, 2012  
     Willis
Group
Holdings
    The Other
Guarantors
    The Issuer     Other     Consolidating
adjustments
    Consolidated  
     (millions)  

REVENUES

            

Commissions and fees

   $            —      $          —      $            —      $       1,005      $          —      $        1,005   

Investment income

            3               5        (3     5   

Other income

                          96        (93     3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

            3               1,106        (96     1,013   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

            

Salaries and benefits

     (1            (16     (489            (506

Other operating expenses

     3        3        (22     (141     1        (156

Depreciation expense

                   (3     (16            (19

Amortization of intangible assets

                          (17     2        (15

Net loss on disposal of operations

                          (16     16          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     2        3        (41     (679     19        (696
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     2        6        (41     427        (77     317   

Investment income from Group undertakings

            93        64        (5     (152       

Interest expense

     (11     (63     (37     (69     148        (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(LOSS) INCOME BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES

     (9     36        (14     353        (81     285   

Income taxes

     2        2        5        (76     (1     (68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(LOSS) INCOME BEFORE INTEREST IN EARNINGS OF ASSOCIATES

     (7     38        (9     277        (82     217   

Interest in earnings of associates, net of tax

                          13        2        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME

     (7     38        (9     290        (80     232   

Less: Net income attributable to noncontrolling interests

                          (7            (7

EQUITY ACCOUNT FOR SUBSIDIARIES

     232        193        35               (460       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS

   $ 225      $ 231      $ 26      $ 283      $ (540   $ 225   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS

   $ 256      $ 260      $ 27      $ 343      $ (630   $ 256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

Notes to the financial statements

(Unaudited)

 

19. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)

 

Condensed Consolidating Statement of Comprehensive Income

 

     Three months ended March 31, 2011  
     Willis
Group
Holdings
    The Other
Guarantors
    The Issuer     Other     Consolidating
adjustments
    Consolidated  
     (millions)  

REVENUES

            

Commissions and fees

   $      $      $      $ 999      $      $ 999   

Investment income

            3               8        (3     8   

Other income

                                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

            3               1,007        (3     1,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

            

Salaries and benefits

                   (14     (578     9        (583

Other operating expenses

     1        24        (31     (147     1        (152

Depreciation expense

                   (4     (16            (20

Amortization of intangible assets

                          (17            (17

Net gain on disposal of operations

                          6        (2     4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1        24        (49     (752     8        (768
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     1        27        (49     255        5        239   

Investment income from Group undertakings

     34        81        63        (7     (171       

Make-whole on repurchase and redemption of senior notes and write-off of unamortized debt issuance costs

            (171                          (171

Interest expense

     (2     (65     (36     (106     169        (40
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES

     33        (128     (22     142        3        28   

Income taxes

            43        13        (50     (7     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INTEREST IN EARNINGS OF ASSOCIATES

     33        (85     (9     92        (4     27   

Interest in earnings of associates, net of tax

                          14        2        16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

     33        (85     (9     106        (2     43   

Discontinued operations, net of tax

                          (1            (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     33        (85     (9     105        (2     42   

Less: Net income attributable to noncontrolling interests

                          (8            (8

EQUITY ACCOUNT FOR SUBSIDIARIES

     1        124        5               (130       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO WILLIS GROUP HOLDINGS

   $ 34      $ 39      $ (4   $ 97      $ (132   $ 34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO WILLIS GROUP HOLDINGS

   $               66      $            67      $            (4   $            124     $            (187   $               66   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

Willis Group Holdings plc

 

19. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)

 

Condensed Consolidating Balance Sheet

 

     As at March 31, 2012  
     Willis
Group
Holdings
    The Other
Guarantors
    The
Issuer
     Other     Consolidating
adjustments
    Consolidated  
     (millions)  

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $             —      $           —      $          —       $          464      $          —      $             464   

Accounts receivable, net

     1               11         968        29        1,009   

Fiduciary assets

                           11,069        (701     10,368   

Deferred tax assets

                           53        (2     51   

Other current assets

     4        84        21         335        (119     325   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     5        84        32         12,889        (793     12,217   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Investments in subsidiaries

     (774     3,983        1,338         3,822        (8,369       

Amounts owed by (to) Group undertakings

     4,285        (4,607     602         (273     (7       

NON-CURRENT ASSETS

             

Fixed assets

            5        59         364        (2     426   

Goodwill

                           1,707        1,601        3,308   

Other intangible assets, net

                           513        (107     406   

Investments in associates

                           (46     233        187   

Deferred tax assets

                           28        (4     24   

Pension benefits asset

                           170               170   

Other non-current assets

     6        152        53         276        (134     353   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total non-current assets

     6        157        112         3,012        1,587        4,874   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 3,522      $ (383   $ 2,084       $ 19,450      $ (7,582   $ 17,091   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

CURRENT LIABILITIES

             

Fiduciary liabilities

   $      $      $       $ 11,069      $ (701   $ 10,368   

Deferred revenue and accrued expenses

     3                       282               285   

Income taxes payable

            51                87        (76     62   

Short-term debt and current portion of long-term debt

            13                4               17   

Deferred tax liabilities

            2        1         24        (2     25   

Other current liabilities

     49        2        33         285        (35     334   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     52        68        34         11,751        (814     11,091   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

NON-CURRENT LIABILITIES

             

Long-term debt

     795        370        1,270                       2,435   

Liabilities for pension benefits

                           261               261   

Deferred tax liabilities

            4        48         (1     (4     47   

Provisions for liabilities

                           187        (5     182   

Other non-current liabilities

            4        10         356        1        371   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total non-current liabilities

     795        378        1,328         803        (8     3,296   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 847      $ 446      $ 1,362       $ 12,554      $ (822   $ 14,387   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(continued on next page)

 

36


Table of Contents

Notes to the financial statements

(Unaudited)

 

19. FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)

 

Condensed Consolidating Balance Sheet (Continued)

 

     As at March 31, 2012  
     Willis
Group
Holdings
     The Other
Guarantors
    The Issuer      Other      Consolidating
adjustments
    Consolidated  
     (millions)  

EQUITY

               

Total Willis Group Holdings stockholders’ equity

     2,675         (829     722         6,867         (6,760     2,675   

Noncontrolling interests