Business Context and Reporting Period
Company: Willis Group Holdings Limited (Willis Towers Watson)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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). The reporting period reflects the ongoing integration of the Hilb, Rogal & Hobbs (HRH) acquisition completed in October 2008 and the impact of a "soft" insurance market and global economic recession.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (6 Months) | 2008 (6 Months) | Change |
|---|---|---|---|
| Total Revenues | $1,714 million | $1,456 million | +18% |
| Operating Income | $439 million | $302 million | +45% |
| Operating Margin | 26% | 21% | +5 percentage points |
| Net Income (Attributable to Willis) | $280 million | $205 million | +37% |
| Diluted EPS (Continuing Ops) | $1.66 | $1.43 | +16% |
| Net Cash from Operating Activities | $208 million | $42 million | +395% |
| Total Debt | $2,496 million | $2,650 million | -6% |
| Cash and Cash Equivalents | $103 million | $205 million | -50% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 18% year-over-year. This was driven primarily by a 25% benefit from the HRH acquisition. Organic revenue growth was 2%, reflecting growth in Global and International segments offset by declines in North America and UK/Ireland retail operations due to soft market conditions and the economic downturn.
- Profitability: Operating margin improved to 26% from 21%. Key drivers included a $77 million reduction in costs from "Right Sizing Willis" and 2008 expense review initiatives, and a $12 million curtailment gain from closing the US defined benefit pension plan. These gains were partially offset by increased amortization of intangible assets ($41 million increase) related to HRH.
- Interest Expense: Interest expense rose to $81 million from $37 million, reflecting higher average debt levels following the HRH acquisition.
- Investment Income: Declined to $25 million from $42 million due to significantly lower global interest rates.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Market Conditions: Management notes that the first half of 2009 saw a benefit from rate increases in the reinsurance market, but this was offset by a continuing soft market in other sectors and a weakened global economy. North American and UK/Ireland retail operations were particularly impacted.
- HRH Integration: The company anticipates total cost savings of approximately $170 million in 2009 from HRH synergies, the closure of the US pension plan, and other initiatives. Approximately 90% of HRH's contingent commissions have been converted to standard commissions or reaffirmed.
- Gras Savoye: The company is in discussions regarding the potential sale of a portion of its interest in Gras Savoye (French associate) but intends to retain a substantial interest (estimated 30-39%) and acquire a majority interest in the future.
Risks and Contingencies
- Legal Proceedings:
- Reinsurance Market Dispute: Settled a claim with American Reliable Insurance Company (ARIC) for $139 million (covered by E&O insurance). A claim by CNA Insurance Company for approximately $251 million remains pending; a $125 million reserve has been recorded, also expected to be covered by insurance.
- Stanford Financial Group: Multiple putative class actions filed in July/August 2009 alleging the company aided Stanford's fraud. Claims seek damages in excess of $1 billion. The company disputes these allegations.
- Contingent Commissions: Ongoing regulatory investigations and class actions regarding contingent commission practices (e.g., NY AOD, MDL in New Jersey).
- Liquidity: The company believes it has sufficient liquidity to meet needs for the next 12 months, including the $250 million principal payment on notes due in July 2010. However, refinancing depends on market conditions.
- Forward-Looking Statements: Results may differ due to political/economic conditions, credit crisis impacts, integration risks, and exchange rate fluctuations.
Investor Verification Checklist
- HRH Synergies: Verify the realization of the projected $170 million in cost savings and the timeline for converting contingent commissions.
- Legal Reserves: Monitor the status of the CNA reinsurance dispute and the potential for additional claims related to the Stanford Financial Group collapse.
- Debt Refinancing: Track the company's ability to refinance the $250 million notes due in July 2010 and the $500 million notes due in 2010 (if applicable based on specific note terms).
- Organic Growth: Assess whether organic revenue growth can sustain momentum given the "soft" market conditions in key retail sectors (North America, UK/Ireland).
- Pension Obligations: Review future funding requirements for UK and International pension plans, as the US plan has been closed to future accrual.