Willis Group Holdings plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Willis Group Holdings plc, an insurance and reinsurance broker and risk-management adviser. Financial amounts are in U.S. dollars; tables report millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $754 | $760 | $2,609 | $2,628 |
| Commissions and fees | $749 | $753 | $2,591 | $2,604 |
| Operating income | $70 | $90 | $566 | $485 |
| GAAP operating margin | 9.3% | 11.8% | 21.7% | 18.5% |
| Net income attributable to Willis | $26 | $60 | $359 | $179 |
| Diluted continuing-operations EPS | $0.15 | $0.34 | $2.03 | $1.02 |
| Adjusted operating margin | 10.9% | 13.8% | 22.5% | 23.7% |
| Adjusted continuing-operations EPS | $0.22 | $0.41 | $2.13 | $2.30 |
Q3 organic commissions-and-fees growth was 2%, offset by a 3% adverse currency effect. Nine-month organic growth was also 2%, with a 2% adverse currency effect. Q3 operating income and earnings declined as expenses rose and income from associates fell; nine-month GAAP operating income and net income benefited from lower expenses and the absence of the prior-year debt-refinancing charge. On an adjusted basis, nine-month earnings were lower year over year.
Segment results highlighted diverging trends: Q3 organic commissions-and-fees growth was 3% in Global, flat in North America and 5% in International. International recorded a Q3 operating loss of $9 million (versus $4 million income a year earlier), while North America operating income fell to $53 million from $62 million. For the first nine months, operating income was $325 million in Global, $183 million in North America and $112 million in International.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $310 million, versus $272 million; investing cash outflow was $99 million, versus $72 million; financing cash outflow was $224 million, versus $150 million. Cash declined $13 million to $424 million.
- At September 30, total debt was $2.379 billion, including $15 million current debt, compared with $2.369 billion at year-end 2011. Long-term debt was $2.364 billion. Stockholders’ equity was $2.674 billion; the reported capitalization ratio was 47.1%, down from 48.8%.
- The company had $424 million cash and $480 million available under revolving credit facilities, excluding a separate $20 million UK facility. Management said liquidity should meet cash needs for at least 12 months. Fiduciary assets and matching liabilities were each $10.425 billion; fiduciary funds are not available for corporate use.
- Cash dividends paid were $139 million in the first nine months. The company completed $100 million of share repurchases, buying 2.80 million shares at an average $35.87 per share.
Material changes, outlook and risks
- Goodwill impairment: Management expected a potentially material, non-cash, one-time impairment charge for the North America reporting unit in Q4 2012. North American goodwill was $1.782 billion. The annual test was not complete at filing; management expected Global and International fair values to remain significantly above carrying values.
- Business conditions: Management described the outlook as challenging amid soft insurance markets and difficult economic conditions, particularly in parts of Europe. It noted some rate firming in catastrophe-exposed and selected business lines, but did not expect a broad market turn without a significant catastrophe loss or industry capital impairment. A continued Eurozone crisis or major euro devaluation could adversely affect results.
- Expense and earnings expectations: Management estimated full-year 2012 depreciation expense of approximately $80 million and intangible amortization of approximately $60 million. It expected income from associates to be about $6–$7 million lower for full-year 2012 than 2011. No broad revenue or EPS guidance was provided.
- Pensions: The revised UK pension funding schedule calls for ongoing and deficit contributions; expected 2012 UK contributions were approximately $92 million, including employee salary-sacrifice contributions. The company expected about $10 million of international contributions and no further U.S. plan contributions in 2012.
- Unusual items: Q3 included an $11 million settlement with former India joint-venture partners and a $1 million disposal loss. The company also recorded a $13 million 2012 charge, including legal costs, to correct an uncollectible receivable related to fraudulent revenue overstatement in Chicago; it reported a $5 million insurance recovery in the first half. The company said the approximately $40 million historical overstatement did not materially affect any previously issued period and described enhanced controls.
- Contingencies and controls: The company disclosed ongoing Stanford-related litigation, including claims with large stated damages; outcomes could not be predicted. It said ordinary-course claims were not expected to materially harm overall financial condition, results or liquidity, though an adverse outcome could affect a particular period. A European Commission coinsurance-market review was underway. The UK FSA had previously imposed an £7 million ($11 million) fine, and a further internal review of historical payments continued. Management concluded disclosure controls were effective.
Most important facts for investors to verify
- Outcome and amount of the Q4 North America goodwill impairment test.
- Underlying North America revenue, retention and margin trends, and whether International’s Q3 operating loss is temporary.
- Reconciliation of GAAP and adjusted earnings, including the treatment of unusual and prior-period items.
- Progress and potential exposure in Stanford litigation and the European Commission review.
- Cash generation after pension funding, capital spending, dividends and repurchases, and available borrowing capacity.