Business Context and Reporting Period
Company: Willis Group Holdings Limited (Willis)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Willis provides insurance brokerage, reinsurance, and risk management consulting services globally. The company operates through three segments: Global (specialist brokerage), North America (retail), and International (retail). In September 2009, the Board approved a reorganization to change the place of incorporation from Bermuda to Ireland, effective December 31, 2009.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2009) | Value ($ Millions) | Prior Period (2008) |
|---|---|---|
| Total Revenues | 2,439 | 2,035 |
| Operating Income | 521 | 368 |
| Net Income Attributable to Willis | 359 | 241 |
| Diluted EPS (Continuing Ops) | $2.13 | $1.70 |
| Operating Margin | 21% | 18% |
| Cash and Cash Equivalents | 203 | 176 |
| Total Debt | 2,606 | 2,650 |
| Net Cash Provided by Operating Activities | 286 | 122 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20% year-over-year. This was driven by a 27% benefit from net acquisitions (primarily the HRH acquisition in Q4 2008) and 2% organic growth, partially offset by a 7% negative impact from foreign currency translation.
- Profitability: Net income from continuing operations rose 48% to $357 million. This increase was fueled by higher operating income and a significant $38 million net tax credit (including a $27 million release of a tax provision due to UK law changes and an $11 million release of uncertain tax positions).
- Expense Management: Despite the HRH acquisition adding to the expense base, the company achieved cost savings through "Right Sizing Willis" initiatives and HRH synergies. Salaries and benefits as a percentage of revenue decreased to 56% from 59% in the prior year.
- Amortization: Amortization of intangible assets increased significantly to $76 million (from $12 million in 2008) due to the HRH acquisition.
- Segment Performance:
- Global: Revenues up 5%; Operating margin improved to 35%.
- North America: Revenues up 83% (driven by HRH); Organic revenue declined 5% due to soft market conditions. Operating margin improved to 23%.
- International: Revenues down 8% (impacted by foreign exchange); Operating margin remained stable at 25%.
Guidance, Outlook, Risks, and Unusual Items
- Reorganization: The company is proceeding with a re-domestication from Bermuda to Ireland. Shareholders will vote on December 11, 2009. The company expects no material impact on financial results but notes changes in shareholder rights and potential tax implications.
- HRH Integration: The company expects to deliver total synergies and cost savings in excess of $180 million in 2009 from the HRH acquisition. Over 90% of HRH's contingent commissions have been converted or reaffirmed.
- Gras Savoye: Willis is in exclusive discussions to sell a portion of its interest in Gras Savoye (French associate) to Astorg Partners. The transaction is expected to generate $100-$150 million in cash proceeds to pay down debt and reduce ownership to 33%.
- Legal Proceedings:
- Reinsurance Disputes: Settled claims with American Reliable Insurance Company ($139 million) and CNA Financial Corporation ($130 million) regarding personal accident reinsurance. The company believes these amounts are covered by errors and omissions insurance.
- Stanford Financial Group: Multiple class action lawsuits filed alleging Willis aided Stanford's fraud. The company disputes the allegations and intends to defend vigorously.
- Market Outlook: The company notes a continuing "soft market" in many sectors and a weakened global economic environment, which negatively impacts premium rates and revenues, particularly in North America and UK/Ireland retail operations.
- Capital Management: The company targets a debt-to-EBITDA ratio below 2.5 to 1 before resuming share buybacks. No shares were repurchased in the first nine months of 2009.
Investor Verification Checklist
- Tax Credit Sustainability: Verify the non-recurring nature of the $38 million tax credit and its impact on the effective tax rate (26% excluding credits).
- HRH Synergy Realization: Monitor the achievement of the projected $180 million in cost savings and the integration progress of HRH operations.
- Gras Savoye Transaction: Confirm the finalization of the sale of the Gras Savoye interest and the actual cash proceeds received.
- Legal Exposure: Track the status of the Stanford Financial Group litigation and the adequacy of insurance coverage for the reinsurance dispute settlements.
- Reorganization Approval: Confirm shareholder and regulatory approval for the Bermuda-to-Ireland re-domestication and any associated tax or legal changes.
- Debt Maturity Profile: Review the company's ability to service its $2.6 billion debt load, particularly the mandatory repayments on the term loan and the remaining 2010 notes.