WILLIS TOWERS WATSON PLC quarterly report, Q3 FY2011

Business context and reporting period

Willis Group Holdings plc filed this unaudited Form 10-Q for the quarter ended September 30, 2011. It provides insurance and reinsurance brokerage, risk-management and consulting services worldwide. The supplied company label, WILLIS TOWERS WATSON PLC, does not match the registrant name in this historical filing.

Financial results and key metrics

Unless indicated otherwise, amounts are in U.S. dollars; financial statement amounts are in millions.

• Q3 revenue rose 4%, including 2% organic commissions-and-fees growth and a 2% foreign-exchange benefit. Nine-month revenue rose 5%, including 3% organic growth and a 2% currency benefit.
• Q3 segment revenue was $237 Global, $318 North America and $207 International; nine-month revenue was $872, $1,004 and $757, respectively. International and Global grew organically, while North America organic commissions and fees declined 4% in Q3 and 2% year to date.
• At September 30, cash was $363, total debt $2,399 (including $114 current and $2,285 long-term), and equity $2,717. Total debt was $2,267 at December 31, 2010. The capitalization ratio remained 47%.
• Cash increased $47 from year-end. Investing activities used $72 in the first nine months; financing activities used $150. Fiduciary assets and liabilities were each $10,090 and are not available for corporate purposes.

Material changes, outlook and commentary

• Profitability weakened despite revenue growth: nine-month operating income fell $91 and margin declined five percentage points. Results included $130 of 2011 Operational Review costs, a $171 debt-refinancing charge, an $11 UK regulatory fine, and higher amortization of cash-retention awards. The 2010 comparison included a $12 Venezuela currency-devaluation charge.
• The Operational Review had eliminated or was eliminating about 800 positions. Management estimated full-year review costs of approximately $160, expected 2011 savings of about $75, and annualized savings of $115–$125 beginning in 2012.
• Management expected 2011 investment income of approximately $30, full-year intangible amortization of approximately $69, fourth-quarter depreciation of approximately $17, and approximately $34 of interest expense for the remainder of 2011. It stated liquidity was sufficient for at least 12 months.
• In March 2011, Willis issued $800 of notes at 4.125% due 2016 and 5.750% due 2021, using proceeds in part to retire $500 of 12.875% notes due 2016. The transaction incurred a $158 make-whole payment and a $13 write-off of debt issuance costs. Revolving facilities were undrawn at quarter-end; $520 was available across facilities, subject to stated restrictions.
• Management cited persistent soft insurance markets and challenging economic conditions, particularly in North America and UK/Ireland retail, alongside modest pricing improvements in catastrophe-exposed property and reinsurance. It estimated Loan Protector would reduce North America 2011 pretax earnings by $27–$30.
• Risks include insurance-premium and market-cycle sensitivity, client and employee retention, debt and refinancing, foreign-exchange and interest-rate movements, pension funding, regulatory compliance, litigation, errors-and-omissions claims and technology/security interruptions. The FSA imposed an £7 million (about $11 million) fine in July 2011; further internal review and U.S. regulator discussions were ongoing.
• The company said it did not expect known claims and proceedings to materially harm its financial condition, results or liquidity, while acknowledging that adverse outcomes could affect results or cash flows in particular periods. In Stanford-related litigation, the class claims in Troice were dismissed with prejudice in October 2011, while individual claims were dismissed without prejudice; further claims remained possible.

Important facts for investors to verify

• Whether the projected Operational Review savings materialized and how final costs compared with the approximately $160 estimate.
• Whether North America and Loan Protector performance improved, and whether organic growth persisted across segments.
• Debt repayment requirements, leverage covenant headroom, refinancing needs and access to subsidiary cash; fiduciary funds are restricted.
• Developments in U.S. regulatory discussions, the internal payments review, Stanford litigation and other material contingencies.
• Whether the stated investment-income, expense and liquidity expectations were achieved.