How did Willis perform financially in 2004?

Total revenues were $2,275 million, up 10% from $2,076 million, and net income was $427 million, up from $414 million. Diluted earnings per share rose to $2.54 from $2.45. Operating income increased to $666 million from $620 million, although the operating margin fell to 29.3% from 29.9%.

What are the main legal risks disclosed in the filing?

The most significant matter is the New York Attorney General's investigation into contingent compensation arrangements between insurers and brokers, which led to a suit against one broker and investigations by eighteen other states and the District of Columbia. Purported class actions alleging RICO violations have also been filed, and the company disputes these allegations. Other matters include the Sovereign/WFUM reinsurance matter, World Trade Center placements, personal accident reinsurance disputes, and the Pender captive litigation, with trial scheduled for October 2005.

How is the company returning capital to shareholders?

In 2004 the company repurchased 9,288,100 shares at a cost of $339 million under a buyback program whose authorization was raised to $500 million. Dividends paid totaled $115 million, and the Board increased the quarterly dividend to $0.215 per share, payable April 15, 2005.

What is the outlook for the business?

Management expects the soft premium-rate market to continue in 2005 and anticipates some pressure on net cash from the loss of contingent commissions, which it hopes to offset through market share growth and expense control. It expects the pace of acquisitions to continue at the 2004 rate, and expects salary and benefits as a percentage of revenues may increase slightly in 2005.

What divestitures and acquisitions occurred around the filing date?

In February 2005 the company agreed to sell its US wholesale unit, Stewart Smith Group, which contributed $77 million of revenues in 2004, with closing expected at the end of the first quarter of 2005. During 2004 it made several acquisitions, including Coyle Hamilton, Willis A/S in Denmark, Ital Re, and Opus Holdings, and it acquired Essence Insurance Broker in January 2005.

WTW 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 8, 2005. Cited figures are marked; the original filing is the authoritative source.

Willis Group Holdings Limited, a Bermuda-incorporated holding company whose operating business traces its history to 1828, reported 2004 total revenues of $2,275 million^a, up from $2,076 million in 2003, and net income of $427 million, or $2.54 per diluted share, compared with $414 million and $2.45 in 2003.

Operating income rose to $666 million^b from $620 million, though operating margin slipped to 29.3% from 29.9%, which management attributed to higher recruitment, retention, legal, investigative and regulatory compliance costs. Organic revenue growth was 4%, comprising about 6% net new business growth offset by a 2% reduction from declining premium rates. The filing describes 2004 as a challenging year in which insurance premium rates fell as the market softened, with Property and Casualty rates falling 10 to 30 percent, and management expects the soft market to continue in 2005.

The company's principal risk disclosures center on the New York Attorney General's investigation into contingent compensation arrangements, which led Willis to abolish those arrangements in October 2004. Related state investigations, purported class actions alleging RICO violations, and other proceedings (including the Sovereign/WFUM matter, World Trade Center placements, the personal accident reinsurance disputes, and the Pender captive litigation) are described as ongoing, and the company states it cannot predict their resolution. Volume and profit-based contingent commissions, which totaled $71 million^c in 2004, will no longer be earned in 2005 and later years.

Management also flagged a pending $893 million^d headquarters lease commitment and a put arrangement on its 33% stake in Gras Savoye that could require substantial payments. Capital allocation was shareholder-oriented in 2004: the company repurchased 9.3 million shares for $339 million, paid $115 million in dividends, and spent $147 million on acquisitions, funded in part by a new $600 million credit facility that refinanced the 9% senior subordinated notes.

The Board raised the quarterly dividend 15% to $0.215 per share, an annual rate of $0.86, effective April 2005. Stewart Smith, the US wholesale unit that contributed $77 million of revenues in 2004, was announced for sale in February 2005.

02—Key points

Key Highlights

Total revenues rose 10% to $2,275 million in 2004 from $2,076 million in 2003; organic revenue growth was 4%.
Net income increased to $427 million ($2.54 per diluted share) from $414 million ($2.45) in 2003.
Operating margin declined to 29.3% from 29.9%, reflecting higher recruitment, retention, legal and compliance expenses.
Premium rates fell sharply in 2004, with Property and Casualty rates down 10 to 30 percent; management expects the soft market to continue in 2005.
Volume and profit-based contingent commissions of $71 million in 2004 were abolished; the company expects none to be earned in 2005 and later years.
The New York Attorney General investigation and related state inquiries and class actions over contingent compensation arrangements remain unresolved, and the company cannot predict their outcome.
Share repurchases of $339 million in 2004 and a 15% dividend increase to $0.215 per quarter ($0.86 annually) signal a shareholder-return focus.

03—Questions

Frequently Asked Questions

How did Willis perform financially in 2004?
Total revenues were $2,275 million, up 10% from $2,076 million, and net income was $427 million, up from $414 million. Diluted earnings per share rose to $2.54 from $2.45. Operating income increased to $666 million from $620 million, although the operating margin fell to 29.3% from 29.9%.
What are the main legal risks disclosed in the filing?
The most significant matter is the New York Attorney General's investigation into contingent compensation arrangements between insurers and brokers, which led to a suit against one broker and investigations by eighteen other states and the District of Columbia. Purported class actions alleging RICO violations have also been filed, and the company disputes these allegations. Other matters include the Sovereign/WFUM reinsurance matter, World Trade Center placements, personal accident reinsurance disputes, and the Pender captive litigation, with trial scheduled for October 2005.
How is the company returning capital to shareholders?
In 2004 the company repurchased 9,288,100 shares at a cost of $339 million under a buyback program whose authorization was raised to $500 million. Dividends paid totaled $115 million, and the Board increased the quarterly dividend to $0.215 per share, payable April 15, 2005.
What is the outlook for the business?
Management expects the soft premium-rate market to continue in 2005 and anticipates some pressure on net cash from the loss of contingent commissions, which it hopes to offset through market share growth and expense control. It expects the pace of acquisitions to continue at the 2004 rate, and expects salary and benefits as a percentage of revenues may increase slightly in 2005.
What divestitures and acquisitions occurred around the filing date?
In February 2005 the company agreed to sell its US wholesale unit, Stewart Smith Group, which contributed $77 million of revenues in 2004, with closing expected at the end of the first quarter of 2005. During 2004 it made several acquisitions, including Coyle Hamilton, Willis A/S in Denmark, Ital Re, and Opus Holdings, and it acquired Essence Insurance Broker in January 2005.

04—Continue

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