What drove the increase in 2006 net income?

Net income rose to $449 million from $281 million. The filing attributes this to good organic revenue growth, improved operating margin, and a $71 million tax credit in Q4 2006 that primarily related to resolving prior-year tax matters. Results also include a $102 million gain on the sale of the Ten Trinity Square head office, partly offset by $105 million of Shaping Our Future expenditure.

How does the company plan to improve profitability going forward?

Under its Shaping Our Future strategy, Willis targets salaries and benefits below 54 percent of revenues, an adjusted operating margin of 28 percent or better, and industry-leading organic revenue growth by the end of 2010. For 2007, it expects to continue growing organic revenue and expand operating margin modestly, with an adjusted effective tax rate of about 31 percent. It estimates net benefits of about $20 million in 2007, $30 million in 2008 and $45 million by 2009 after real estate costs.

What are the most significant legal and financial exposures?

The company faces investigations by more than 20 US states, Canada and Australia into contingent compensation, plus consolidated class actions in federal and state courts. A European Commission sector inquiry is ongoing, with a final report expected in September 2007. The Silverstein World Trade Center suit, in which juries awarded $4.6 billion in coverage against $7 billion sought, is on appeal. Willis also faces a potential put obligation for the remaining 52 percent of Gras Savoye, valued at approximately $337 million from 2007 onwards.

How is the company returning capital to shareholders?

In 2006 Willis repurchased 5.4 million shares for $211 million and paid dividends of $145 million. A $1 billion open-ended buyback was authorized in July 2006, leaving $789 million remaining at year-end, which management expects to use over the next two years or sooner. The quarterly dividend was increased to $0.25 per share in February 2007, an annual rate of $1.00, with 2007 dividend costs expected to be about $150 million.

WTW 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

Willis Group Holdings Limited (WSH), a Bermuda-incorporated insurance broker that traces its history to 1828, reported 2006 total revenues of $2.43 billion^a, up $161 million or 7 percent from $2.27 billion in 2005, with organic revenue growth of 8 percent.

Net income rose to $449 million^b, or $2.84 per diluted share, from $281 million, or $1.72 per diluted share, in 2005. The improvement was aided by a $102 million gain on the sale of the Ten Trinity Square head office and a $71 million fourth-quarter tax credit, partly offset by $105 million of expenditure on the "Shaping Our Future" strategic initiatives. Operating margin improved to 23 percent from 20 percent, and salaries and benefits fell to 60 percent of revenues from 61 percent.

The company set 2010 targets of salaries and benefits below 54 percent of revenues, an adjusted operating margin of 28 percent or better, and industry-leading organic revenue growth. It expects to continue growing organic revenue and expand operating margin modestly in 2007, with an adjusted effective tax rate of about 31 percent. Management plans to use the remaining $789 million^c of its $1 billion share repurchase authorization over the next two years, and the quarterly dividend was raised to $0.25 per share.

The filing also highlights ongoing risks. Willis is subject to investigations by more than 20 state attorneys general and insurance departments, plus Canada and Australia, concerning contingent compensation, along with consolidated class actions in federal and state courts, and a European Commission sector inquiry. Other exposures include the Silverstein World Trade Center insurance litigation, in which the jury verdicts awarded $4.6 billion^d in coverage against the $7 billion sought, the Sovereign/WFUM run-off, reinsurance market disputes, and a put arrangement for the remaining 52 percent of associate Gras Savoye, valued at approximately $337 million.

02—Key points

Key Highlights

Total revenues of $2,428 million in 2006, up 7 percent from $2,267 million, with organic revenue growth of 8 percent
Net income of $449 million, or $2.84 per diluted share, versus $281 million, or $1.72 per diluted share, in 2005
Operating margin of 23 percent in 2006 versus 20 percent in 2005, aided by a $102 million gain on the sale of the UK head office and a $71 million tax credit in Q4 2006
Strategic initiative expenditure of $105 million in 2006 under the 'Shaping Our Future' program, with expected annualized pre-tax benefits of about $65 million by 2009
Targets for 2010 include salaries and benefits below 54 percent of revenues and adjusted operating margin of 28 percent or better
Share repurchases of $211 million in 2006 leave $789 million remaining under a $1 billion authorization; quarterly dividend increased to $0.25 per share
Ongoing regulatory investigations and class actions over contingent compensation, plus the Silverstein World Trade Center insurance litigation, represent the principal legal and reputational risks

03—Questions

Frequently Asked Questions

What drove the increase in 2006 net income?
Net income rose to $449 million from $281 million. The filing attributes this to good organic revenue growth, improved operating margin, and a $71 million tax credit in Q4 2006 that primarily related to resolving prior-year tax matters. Results also include a $102 million gain on the sale of the Ten Trinity Square head office, partly offset by $105 million of Shaping Our Future expenditure.
How does the company plan to improve profitability going forward?
Under its Shaping Our Future strategy, Willis targets salaries and benefits below 54 percent of revenues, an adjusted operating margin of 28 percent or better, and industry-leading organic revenue growth by the end of 2010. For 2007, it expects to continue growing organic revenue and expand operating margin modestly, with an adjusted effective tax rate of about 31 percent. It estimates net benefits of about $20 million in 2007, $30 million in 2008 and $45 million by 2009 after real estate costs.
What are the most significant legal and financial exposures?
The company faces investigations by more than 20 US states, Canada and Australia into contingent compensation, plus consolidated class actions in federal and state courts. A European Commission sector inquiry is ongoing, with a final report expected in September 2007. The Silverstein World Trade Center suit, in which juries awarded $4.6 billion in coverage against $7 billion sought, is on appeal. Willis also faces a potential put obligation for the remaining 52 percent of Gras Savoye, valued at approximately $337 million from 2007 onwards.
How is the company returning capital to shareholders?
In 2006 Willis repurchased 5.4 million shares for $211 million and paid dividends of $145 million. A $1 billion open-ended buyback was authorized in July 2006, leaving $789 million remaining at year-end, which management expects to use over the next two years or sooner. The quarterly dividend was increased to $0.25 per share in February 2007, an annual rate of $1.00, with 2007 dividend costs expected to be about $150 million.

04—Continue

← View all 10-K filings