Business context and reporting period
This filing is the audited Form 10-K of Willis Group Holdings Public Limited Company for the fiscal year ended December 31, 2013—not a filing under the name Willis Towers Watson plc. The company was a global insurance and reinsurance broker and risk-management adviser, reporting through Global, North America and International segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Total revenue | $3,655 million | $3,480 million | Up 5.0% |
| Commissions and fees | $3,633 million | $3,458 million | Up 5.1%; organic growth 4.9% |
| GAAP operating income (loss) | $685 million | $(209) million | 2012 included a $492 million goodwill impairment and other exceptional charges |
| Adjusted operating income | $730 million | $752 million | Down $22 million |
| GAAP operating margin | 18.7% | (6.0)% | Adjusted margin was 20.0%, versus 21.6% |
| Net income attributable to Willis shareholders | $365 million | $(446) million | 2013 diluted EPS was $2.04; adjusted diluted EPS was $2.64, versus $2.58 |
| Cash from operating activities | $561 million | $525 million | Up $36 million; management attributed improvement mainly to working-capital movements |
| Capital expenditures | $112 million cash additions | $137 million cash additions | 2013 included technology, property and transformation spending |
| Cash and cash equivalents | $796 million | $500 million | $707 million available for corporate purposes; $89 million held for UK regulatory requirements |
| Total debt | $2,326 million | $2,353 million | 2013 interest expense was $126 million; no revolving-facility borrowings were outstanding |
| Equity / capitalization ratio | $2,243 million / 51.2% | $1,725 million / 58.1% | Capitalization ratio improved |
Cash flows from investing and financing activities were net outflows of $120 million and $137 million, respectively. The balance sheet includes $8.4 billion of fiduciary assets matched by fiduciary liabilities; these funds are held for clients or insurers and are not available for corporate purposes. Reported current assets and liabilities therefore should not be read as ordinary corporate liquidity measures.
Material changes versus prior periods
- Organic commissions-and-fees growth was positive in all segments: Global 5.6%, North America 4.9% and International 4.1%. Reported 2013 revenue included a positive $5 million North America and negative $15 million China revenue-recognition adjustment.
- Segment operating margins diverged: Global fell to 28.0% from 32.9%; North America rose to 19.4% from 18.3%; International fell to 16.8% from 17.6%.
- 2013 expenses included $46 million for an Expense Reduction Initiative. Management reported approximately $20 million of cost savings to date and expected annualized savings of $25–$30 million.
- The company refinanced debt, issuing $525 million of new senior notes due 2023 and 2043 and repurchasing portions of earlier notes. The transaction generated a $60 million loss on extinguishment of debt and extended the revolving-credit and term-loan maturity to 2018.
- The 2012 comparison was significantly affected by the $492 million non-cash North America goodwill impairment, a $200 million write-off of unamortized cash retention awards and a $252 million incentive accrual. No goodwill impairment was recorded in 2013.
- The company restated 2011 and 2012 condensed consolidating information for presentation of intercompany balances, subsidiary dividends and goodwill; the filing states this did not change the consolidated results presented. The financial-statement audit opinion was unqualified.
Outlook, commentary and risks
Management described the outlook as challenging. Added reinsurance capacity, third-party capital and strong 2013 underwriting results were contributing to softening prices, with softening extending beyond catastrophe-exposed property into other lines. The company also cited signs of improving economic conditions in the United States and some European countries.
At its 2013 investor conference, management set medium-term (five-year) goals of mid-single-digit revenue growth, revenue growth exceeding expense growth by more than 70 basis points, and mid-teens total shareholder return. These are targets, not guarantees. The company intended to repurchase $200 million of shares in 2014 and declared a February 2014 quarterly dividend of $0.30 per share.
- Major risks include insurance-premium and commission softness, intense competition, economic weakness, foreign-exchange movements, employee and client retention, execution of growth and cost initiatives, debt and refinancing constraints, pension funding, tax-asset realizability, regulatory compliance, technology and data-security incidents, and errors-and-omissions claims.
- 2014 pension contributions were expected to be approximately $122 million excluding employee salary-sacrifice contributions; the UK funding arrangement was due for negotiation in 2014 and could change future contributions.
- Willis faced multiple lawsuits related to the Stanford Financial Group collapse, with plaintiffs seeking substantial or indeterminate damages. The company disputed the allegations; outcomes could not be predicted. The filing states that claims were not expected to have a material adverse effect overall, while acknowledging an adverse result could materially affect a particular period.
- Goodwill was $2.84 billion at year-end, including North America goodwill previously impaired by $492 million. Future impairment remains possible if estimates or business performance deteriorate.
Important facts for investors to verify
- Confirm the issuer and reporting period: this is Willis Group Holdings plc’s 2013 annual report, not a Willis Towers Watson plc filing or a standalone fourth-quarter report.
- Assess the quality and recurrence of earnings and cash flow, including non-GAAP adjustments, the working-capital contribution to operating cash flow and the pace of expense growth.
- Monitor organic growth, retention and margins by segment, and the effects of continued insurance-market price softening.
- Review corporate-available cash separately from fiduciary funds, as well as debt maturities, interest costs, covenants and planned shareholder returns.
- Track pension-funding negotiations, Stanford litigation developments, deferred-tax-asset assumptions and the sensitivity of goodwill to forecasts.