01—Abstract
Summary
Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.
Willis Group Holdings Limited, the ultimate holding company of the Willis Group and one of the largest insurance brokers in the world, reported strong results for 2003.
Total revenues rose 20% to $2,076 milliona, with the filing attributing roughly 12% to net new business growth and about 3% to higher premium rates, and general and administrative expenses (excluding non-cash compensation) were $1,408 million. Operating income increased 48% to $620 million, and net income increased 97% to $414 million ($2.45 per diluted share). Operating margin rose to 30% from 24% on a reported basis, or 28% when adjusted for the non-cash performance-option charge, and net cash provided by operations was $493 million.
The company used its cash flow to expand its global network, acquiring 100% ownership of subsidiaries in Germany, Italy, Spain and Portugal, and it retired its 9% senior subordinated notes in February 2004 using a new $600 millionb credit facility. It also began paying quarterly dividends in April 2003, and the Board raised the quarterly dividend to $0.1875 per share in February 2004. Management flagged a number of risks, including the cyclical nature of premiums, errors and omissions claims, intense competition from Marsh & McLennan and Aon, currency exposure on sterling-denominated expenses, and put arrangements tied to its 33% stake in Gras Savoye, which could require substantial payments through 2011.
The filing also details legal matters, including the run-off of Sovereign/WFUM liabilities, World Trade Center insurance litigation, and personal accident reinsurance disputes, none of which management expects to have a material adverse effect. Pending regulatory changes in the UK, effective January 2005, are expected to reduce 2004 operating cash flow by about $150 millionc. The company is now known as Willis Towers Watson.
02—Key points
Key Highlights
- Total revenues increased 20% to $2,076 million in 2003, with net new business growth of approximately 12% and higher premium rates contributing approximately 3%.
- Operating income rose 48% to $620 million; operating margin increased to 30% from 24% in 2002 on a reported basis.
- Net income increased 97% to $414 million, or $2.45 per diluted share, versus $210 million ($1.28 per diluted share) in 2002.
- Net cash provided by operations was $493 million in 2003, up from $343 million in 2002.
- In February 2004, the company redeemed all $370 million of its 9% senior subordinated notes and repurchased 4 million shares at a cost of $148 million.
- The quarterly dividend was raised to $0.1875 per share in February 2004, with an annual rate of $0.75 per share.
- Put arrangements tied to the 33% interest in Gras Savoye could require payments of up to $319 million at December 31, 2003 based on the formula, and the put rights may be exercised through 2011.
03—Questions
Frequently Asked Questions
How much of the 2003 revenue growth came from new business versus pricing?
The filing estimates that approximately 12% of the 20% revenue increase came from net new business growth and approximately 3% from higher insurance premium rates, with the remainder attributed to foreign exchange and acquisitions and disposals.
What is the company's largest contingent exposure related to its investments?
The filing identifies the put arrangement for the Gras Savoye shares as significant. The co-shareholders could put shares, potentially increasing the company's ownership from 33% to 90%, and the incremental 57% may be put at a price of approximately $319 million at December 31, 2003 under the contractual formula, with payments in 2004 under these options not expected to exceed $330 million.
How did the company finance its debt refinancing in early 2004?
In December 2003 the company entered into a new $600 million facility, consisting of a $450 million amortizing term loan and a $150 million revolving credit facility. In February 2004 it drew $300 million of the term loan to help redeem the $370 million of 9% senior subordinated notes, funding the balance and the call premium of about $17 million from cash from operations.
What regulatory changes could affect the company's cash flow?
New UK regulations for fiduciary funds held by insurance intermediaries take effect in January 2005. The company expects these to increase fiduciary funds by approximately $100 million to $200 million, and expects 2004 operating cash flow to be about $150 million lower than it otherwise would have been as the rules are phased in.
Who are the company's main competitors and what is its market position?
The filing states the industry is led by three global participants: Marsh & McLennan Companies, with approximately 31% of the worldwide market in 2002; Aon Corporation, with approximately 23%; and Willis, with approximately 7%. The next largest broker holds approximately 4%.
04—Continue