WILLIS TOWERS WATSON PLC quarterly report, Q3 FY2010

Business context and reporting period

Willis Group Holdings Public Limited Company filed this unaudited Form 10-Q for the quarter ended September 30, 2010. It provides insurance and reinsurance broking, risk management, and consulting services through Global, North America, and International segments. The filing’s registrant is Willis Group Holdings; the request metadata names Willis Towers Watson.

Financial performance and position

• Commissions and fees were $723 million in Q3, up 1%; organic growth was 4%, partly offset by a 3% adverse currency-translation effect. Nine-month commissions and fees rose 3% reported and 4% organically.
• At September 30, cash was $141 million; restricted fiduciary funds were $1.76 billion and are generally unavailable for corporate purposes. Total debt was $2.312 billion ($110 million short-term and $2.202 billion long-term), versus $2.374 billion at year-end 2009. Total equity was $2.498 billion.
• The company reported $405 million of availability under revolving facilities: $95 million drawn on the existing $300 million facility and none drawn on the new $200 million facility. Management said liquidity should cover needs for at least 12 months.
• Cash dividends declared were $0.26 per share quarterly; $132 million of dividends were paid in the first nine months.

Material changes versus comparable periods

• Q3 revenue increased modestly, while operating income improved $24 million and margin rose three percentage points. Shareholder income and diluted EPS nevertheless declined, principally reflecting much higher tax expense versus Q3 2009 tax benefits and lower associate earnings.
• Nine-month revenue increased $65 million and operating income rose $55 million, but continuing-operations income attributable to shareholders was unchanged at $357 million. Lower interest expense and stronger operating income were offset by higher tax expense and reduced earnings from associates.
• Q3 organic commissions and fees grew in all segments: International 6%, Global 4%, and North America 2%. For nine months, Global and International each grew 6%; North America grew 1%.
• Debt declined by $62 million from year-end, despite $95 million drawn on the existing revolver. The company repaid the remaining $90 million of 2010 senior notes and made $82 million of mandatory term-loan repayments.

Outlook, commentary, risks, and unusual items

• Management said difficult market conditions continued and saw little near-term sign of improvement absent major loss activity. Priorities included sales growth, cost discipline, Shaping Our Future initiatives, investment in growth, and reducing debt relative to EBITDA. No specific earnings or revenue guidance was provided.
• Management attributed margin improvement to organic growth, favorable currency effects on expenses, lower intangible amortization, cost control, and a $7 million release of a previously established legal reserve. Higher incentive compensation and growth spending partly offset these benefits.
• A $12 million charge followed the January 2010 Venezuelan currency devaluation and hyperinflation designation. The Q3 2010 tax charge included a $7 million benefit from release of an uncertain-tax-position provision; Q3 2009 had benefited from $27 million of UK tax-law-related credits and an $11 million uncertain-tax-position release.
• Cash retention awards paid in the first nine months were $189 million, versus $143 million a year earlier; unamortized awards were $193 million at quarter-end. The company identified about 450 positions for elimination in 2010.
• Legal exposures include a remanded RICO claim in insurance-broker litigation, Stanford investor lawsuits, a gender-discrimination action, and the St. Jude insurance dispute. Willis said outcomes could not be predicted and that it did not expect known claims to have a material adverse effect overall, while acknowledging possible material effects in individual periods. Prior ARIC and CNA reinsurance disputes were settled; the ARIC settlement was covered by errors-and-omissions insurance, and Willis said it believed insurers would fund the CNA settlement.
• Key risks include soft insurance pricing, economic weakness, foreign-exchange and interest-rate movements, debt management, pension funding, client and employee retention, regulatory changes, litigation and errors-and-omissions claims, and reliance on information systems. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures.

Important facts for investors to verify

• Confirm the registrant and applicable security: this filing is for Willis Group Holdings Public Limited Company, not an entity named Willis Towers Watson.
• Review the drivers and sustainability of organic growth and margin gains, including currency effects, the legal-reserve release, incentives, and lower amortization.
• Assess cash availability independently: fiduciary balances are restricted, and the company had $2.312 billion of debt alongside $141 million of cash.
• Track retention-award cash payments and the timing and cost of planned workforce reductions and growth investments.
• Monitor the pending legal matters, pension funding requirements, and the effect of continued soft insurance-market conditions on commissions and margins.