Business Context and Reporting Period
Company: Willis Group Holdings Public Limited Company (Willis Towers Watson)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2011
Business Overview: Willis provides insurance broking, risk management, and consulting services globally. Operations are organized into three segments: Global (specialist brokerage), North America (retail), and International (retail). The company acts as an intermediary between clients and insurance carriers.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Total Revenues | $863 | $1,871 |
| Operating Income | $157 | $395 |
| Operating Margin | 18% | 21% |
| Net Income (Attributable to Willis) | $85 | $119 |
| Diluted EPS | $0.48 | $0.68 |
| Cash and Cash Equivalents | $317 | $317 |
| Total Debt | $2,421 | $2,421 |
| Capitalization Ratio | 47% | 47% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8% in Q2 2011 and 6% in the first half of 2011 compared to the same periods in 2010. This was driven by 3% organic growth in commissions and fees and a favorable foreign currency translation impact (5% in Q2, 3% in H1).
- Profitability Decline: Net income decreased significantly year-over-year. Q2 net income fell from $89 million to $85 million. H1 net income dropped from $293 million to $119 million.
- Margin Compression: Operating margin decreased to 18% in Q2 (from 21% in Q2 2010) and 21% in H1 (from 27% in H1 2010).
- Segment Performance:
- Global: Revenue up 9% (Q2) and 8% (H1); Organic growth of 3% (Q2) and 6% (H1).
- International: Revenue up 21% (Q2) and 13% (H1); Organic growth of 6% in both periods.
- North America: Revenue down 1% (Q2) and 2% (H1); Organic growth was flat (Q2) and negative 1% (H1) due to soft market conditions.
Guidance, Outlook, and Unusual Items
Unusual Items and Expenses
- 2011 Operational Review: A significant restructuring initiative incurred $18 million in Q2 and $115 million in H1 2011. This includes severance costs for approximately 600 positions and buyouts of incentive schemes. Management expects full-year costs to be approximately $130 million.
- Debt Refinancing Charges: A $171 million charge was recorded in Q1 2011 (impacting H1 results) related to the make-whole payment on the repurchase of $500 million of senior notes and the write-off of unamortized debt issuance costs.
- Regulatory Settlement: An $11 million non-tax-deductible expense was recorded in Q2 2011 for a settlement with the UK Financial Services Authority (FSA) regarding compliance controls.
- Cash Retention Awards: Increased amortization of cash retention awards contributed to higher salary and benefits expenses ($12 million increase in Q2; $28 million increase in H1).
Outlook and Management Commentary
- Market Conditions: The company continues to face a "soft" insurance market with downward pressure on premium rates, particularly in North America and the UK. However, catastrophe-exposed property markets saw modest price increases in H1 2011.
- Strategic Priorities: Focus remains on the "Willis Cause" strategy to align business models with client needs, investment in technology and analytics, and completing the 2011 Operational Review to achieve long-term expense savings.
- Future Savings: Management anticipates annualized savings from the Operational Review to reach between $95 million and $105 million beginning in 2012.
- Liquidity: The company believes it has sufficient liquidity to meet cash needs for at least the next 12 months, supported by $317 million in cash and $500 million in available revolving credit facilities.
Key Facts for Investor Verification
- Debt Structure: Verify the impact of the March 2011 debt refinancing, where $800 million in new notes (4.125% due 2016 and 5.750% due 2021) replaced higher-cost debt, lengthening the maturity profile but incurring a $171 million immediate charge.
- Operational Review Costs: Monitor the realization of the projected $95-$105 million in annualized savings starting in 2012 against the $130 million total cost of the 2011 review.
- Regulatory Risks: Track the outcome of the ongoing internal review of payments made between 2005 and 2009 following the FSA settlement, and any potential additional fines from US regulators.
- North America Performance: Assess the ability of the North America segment to reverse negative organic growth trends amidst continued soft market conditions and economic weakness.
- Foreign Exchange Exposure: Evaluate the sensitivity of future earnings to currency fluctuations, as the company benefits from a weaker US dollar against the Euro and Pound Sterling but incurs significant expenses in Sterling.