WTW

Business Context and Reporting Period

Company: Willis Group Holdings Limited (Willis Towers Watson Plc)

Filing Type: Form 6-K (Report of Foreign Private Issuer)

Reporting Period: Quarter and nine months ended September 30, 2001

Business Overview: The Company provides risk management consulting and insurance brokering services globally. The financial statements reflect a "reverse acquisition" accounting treatment following the redomiciling of the ultimate parent company from the UK to Bermuda in May 2001. The Company operates through North American, International, and Global Business segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11% in Q3 2001 and 8% for the nine-month period compared to 2000. On a constant currency basis excluding acquisitions/disposals, growth was 13% (Q3) and 12% (9M), driven by higher premium rates and volumes.
• Non-Cash Compensation Charge: A significant non-cash charge of $145 million was recorded in Q3 2001 for performance-based stock options. Management determined it was probable the maximum performance conditions would be met. This charge was the primary driver of the reported operating loss of $72 million in Q3 2001.
• Adjusted Performance: Excluding the $145 million stock option charge, gains on disposal, and restructuring costs, operating income for Q3 2001 was $51 million, a 96% increase over Q3 2000.
• Debt Reduction: Long-term debt decreased by $122 million year-to-date. The Company used proceeds from its June 2001 IPO ($282 million net) to redeem $273 million in preference shares and repurchased $99 million of senior subordinated notes.
• Disposals: The Company sold its 51% interest in Willis National Holdings Limited in July 2001, recognizing a gain of $22 million.

Outlook, Risks, and Management Commentary

• September 11 Impact: Management states Q3 results were relatively unaffected by the September 11 events as most renewals occurred prior to the date. However, the insurance market faces reduced capacity and higher rates, particularly in airline, energy, and property sectors. Some Q4 2001 business may be deferred to 2002, though management expects higher commission rates to offset potential revenue losses.
• Liquidity: The Company holds $120 million in cash and has an undrawn $150 million revolving credit facility. Management expects internally generated funds to meet foreseeable requirements.
• Contingencies:
  • UK Pension Review: A remaining provision of $35 million exists for potential compensation related to personal pension plans sold between 1988 and 1994. Final exposure remains uncertain.
  • Errors and Omissions: A provision of $55 million remains for asserted and unasserted claims. Most claims are covered by professional indemnity insurance.
  • Run-off Operations: Provisions exist for the run-off of former UK underwriting operations.
• Accounting Changes: The Company is evaluating the impact of new FASB standards (SFAS 141 and 142) regarding business combinations and goodwill impairment, effective in 2002.

Investor Verification Checklist

• Stock Option Valuation: Verify the assumptions used for the $145 million non-cash compensation charge, specifically the probability of performance conditions and the stock price used ($23.39).
• Post-9/11 Market Exposure: Assess the extent of deferred business from Q4 2001 to 2002 and the sustainability of higher premium rates in the airline and energy sectors.
• UK Pension Liability: Monitor the resolution of the UK pension review contingency, as the ultimate exposure depends on future interest rates and regulatory assumptions.
• Debt Covenants: Confirm compliance with debt covenants given the reduction in long-term debt and the shift in capital structure following the IPO and preference share redemption.
• Goodwill Impairment: Watch for the impact of SFAS 142 (effective Jan 1, 2002) on the $1,200 million goodwill balance, as amortization will cease and annual impairment testing will begin.