Business Context and Reporting Period
Company: Willis Group Holdings Public Limited Company (formerly Willis Group Holdings Limited)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Willis is a global insurance broker and risk management advisor. The company operates through three segments: Global (specialist brokerage), North America (retail), and International (retail). In 2009, the company completed a "Redomicile," changing its place of incorporation from Bermuda to Ireland effective December 31, 2009. The company also completed the integration of its 2008 acquisition of Hilb Rogal & Hobbs (HRH), renaming its North American operations "Willis North America."
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $3,263 million | $2,827 million |
| Operating Income | $694 million | $503 million |
| Operating Margin | 21% | 18% |
| Net Income (Continuing Ops) | $436 million | $302 million |
| Diluted EPS (Continuing Ops) | $2.58 | $2.04 |
| Net Income (Total) | $438 million | $303 million |
| Total Debt | $2,374 million | $2,650 million |
| Cash and Cash Equivalents | $191 million | $176 million |
| Operating Cash Flow | $418 million | $224 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% to $3.263 billion. This was driven by a 19% benefit from net acquisitions (primarily HRH) and 2% organic growth in commissions and fees. These gains were partially offset by a 4% negative impact from foreign currency translation and a $31 million decrease in investment income due to lower interest rates.
- Profitability: Operating margin improved to 21% from 18%. This increase was driven by organic revenue growth, cost control initiatives ("Right Sizing Willis"), and favorable foreign exchange movements. These were offset by a $66 million increase in pension costs and a $64 million increase in intangible asset amortization related to HRH.
- Segment Performance:
- Global: Revenues increased 5% with organic growth of 4%, driven by Reinsurance and Global Specialties.
- North America: Revenues increased 51% due to the inclusion of HRH, though organic revenue declined 3% due to soft market conditions and the economic downturn.
- International: Revenues decreased 3% due to an 8% adverse foreign currency impact, despite 4% organic growth.
- Debt Reduction: Total debt decreased to $2.374 billion from $2.650 billion. The company issued $500 million in senior notes in March 2009 and $300 million in September 2009, using proceeds to pay down an interim credit facility and repurchase $160 million of senior notes due in 2010.
Guidance, Outlook, and Risks
- Outlook: Management expects 2010 earnings from associates to be approximately $10 million lower than 2009 due to the reorganization of Gras Savoye. The company targets a debt-to-adjusted EBITDA ratio of below 2.5 times (actual was 2.6 times at year-end) before resuming share buybacks.
- Capital Allocation: The company has a $1 billion share buyback program with $925 million remaining. No shares were repurchased in 2009. A quarterly dividend of $0.26 per share was declared in February 2010.
- Key Risks:
- Market Conditions: Continued soft market conditions and declining premium rates in North America and UK/Irish retail operations.
- Debt: Significant indebtedness ($2.4 billion) limits financial flexibility and increases vulnerability to adverse economic conditions.
- Pension Liabilities: Increased funding requirements for UK and US defined benefit plans, with estimated contributions of $122 million for 2010.
- Legal/Regulatory: Ongoing litigation regarding contingent commissions, reinsurance disputes (e.g., CNA and ARIC settlements totaling $269 million), and the Stanford Financial Group collapse.
- Foreign Exchange: Significant exposure to currency fluctuations, particularly the strength of the US dollar against the pound sterling and euro.
Investor Verification Checklist
- Debt Covenants: Verify compliance with debt covenants, specifically the maximum funded indebtedness to consolidated EBITDA ratio, given the high leverage.
- Pension Funding: Confirm the adequacy of cash flow to meet the estimated $122 million in 2010 pension contributions and monitor actuarial assumptions for the UK and US plans.
- HRH Integration: Assess the realization of cost synergies (targeted at $205 million in 2009) and the conversion of contingent commissions to standard commissions.
- Legal Contingencies: Monitor the status of the Stanford Financial Group litigation and other errors and omissions claims, as outcomes could materially impact results.
- Organic Growth: Scrutinize the 2% organic growth rate in the context of a soft market and economic downturn to gauge underlying business health.