01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Willis Group Holdings Limited, one of the largest insurance brokers in the world, reported 2008 total revenues of $2,834 milliona, up $256 million or 10 percent from 2007, and net income of $303 million, or $2.05 per diluted share, down from $409 million, or $2.78 per diluted share, in 2007.
The decline mainly reflected a $92 millionb pre-tax charge for the 2008 expense review ($0.45 per diluted share), a $0.27 per diluted share foreign exchange impact, and higher amortization. Organic commissions and fee growth was 4 percent, with 6 percent net new business growth partly offset by a negative 2 percent impact from premium rates. Operating margin fell to 18 percent from 24 percent.
The defining event of the year was the October 1, 2008 acquisition of Hilb Rogal & Hobbs (HRH), the eighth largest insurance and risk management intermediary in the United States, for a total purchase price of approximately $2.1 billionc including assumed debt. The acquisition doubled North America revenues and was funded with a $1 billion interim credit facility and a $525 million draw on a $700 million 5-year term loan. Total debt rose to $1,865 million long-term and $785 million short-term, and the capitalization ratio increased to 59 percent from 48 percent.
In February 2009 the company agreed to issue $500 milliond of 12.875 percent senior unsecured notes to repay about $480 million of the interim facility, and it suspended annual earnings guidance and its previously stated EPS targets. Key risks highlighted include premium softness and potential commission rate cuts, the integration of HRH and the targeted $140 million of synergies by 2010, leverage and refinancing of the interim facility, pension funding needs (about $55 million expected in 2009), put obligations tied to the Gras Savoye associate, and substantial legal exposure from contingent compensation investigations, a reinsurance market dispute with claims of approximately $257 million and $251 million, and other proceedings the company says it is vigorously defending.
02—Key points
Key Highlights
- Total revenues of $2,834 million in 2008, up 10 percent from $2,578 million, including a 7 percent benefit from net acquisitions primarily from HRH and 4 percent organic commissions and fee growth.
- Net income of $303 million, or $2.05 per diluted share, versus $409 million, or $2.78 per diluted share, in 2007, reflecting a $92 million pre-tax expense review charge and foreign exchange headwinds.
- Operating margin declined to 18 percent from 24 percent, with the expense review accounting for 4 percentage points.
- Acquisition of HRH completed October 1, 2008 for approximately $1.8 billion in consideration (about $2.1 billion including assumed debt), with goodwill of $1.6 billion and intangible assets of $639 million recognized; targeted synergies of approximately $140 million by 2010.
- Total consolidated debt of approximately $2.7 billion at December 31, 2008; $750 million remained outstanding on the $1 billion interim credit facility, with a planned $500 million note issuance in March 2009 expected to repay about $480 million.
- Board declared a quarterly dividend of $0.26 per share for February 2009 and suspended annual earnings guidance and prior EPS targets due to economic uncertainty.
- Significant contingent exposure: put arrangements for Gras Savoye (48 percent owned) could reach $434 million potential payable across all put options, and litigation includes claims of about $257 million (ARIC) and $251 million (CNA) in the reinsurance market dispute.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
| Revenue | $2.83B |
| Operating Expenses | $2.32B |
| Operating Income | $503.00M |
| Interest Expense | $105.00M |
| Net Income | $303.00M |
| EPS (Basic) | $2.04 |
| EPS (Diluted) | $2.04 |
05—Questions
Frequently Asked Questions
Why did Willis's 2008 net income decline despite revenue growth?
Revenues rose 10 percent to $2,834 million, but net income fell to $303 million from $409 million. The main drivers were a $92 million pre-tax charge for the 2008 expense review ($0.45 per diluted share), a $0.27 per diluted share year-on-year foreign exchange loss related to the revaluation of the UK pension benefits asset, and higher intangible amortization, partly offset by strong organic growth and a lower effective tax rate.
How was the HRH acquisition financed and how did it affect leverage?
The acquisition was funded with a $1 billion interim credit facility and a $525 million draw on a $700 million 5-year term loan, and the company repaid HRH debt of about $340 million and its existing revolver. Long-term debt rose to $1,865 million and short-term debt to $785 million, and the capitalization ratio increased to 59 percent from 48 percent. The company planned to refinance part of the interim facility with $500 million of 12.875 percent senior unsecured notes, subject to closing conditions expected in March 2009.
What are the main risks to future earnings?
The filing cites softening insurance premium rates and possible commission rate reductions by carriers, intense competition from Marsh & McLennan and Aon, and the risk of not achieving HRH integration synergies. It also flags refinancing risk on the interim credit facility, which matures September 30, 2009, and pension funding needs, with about $55 million of contributions expected in 2009.
What legal and contingent liabilities does the company disclose?
The company disclosed investigations by more than 20 state attorneys general and other regulators regarding contingent compensation, a multidistrict class action in New Jersey, a reinsurance market dispute with asserted claims of approximately $257 million and $251 million, and a gender discrimination class action. Management stated it does not expect these matters to have a material adverse effect, while acknowledging that outcomes cannot be predicted and that the company intends to vigorously defend itself.
What is the Gras Savoye put and call exposure?
Willis owned 48 percent of Gras Savoye & Cie, and co-shareholders may put shares to the company through 2011 at formula-based prices, potentially raising its stake to 90 percent. The potential amount payable across all put options was not expected to exceed $434 million, of which $359 million related to Gras Savoye. AXA Corporate Solutions also gave notice of its intent to put about 4 percent of Gras Savoye shares, which could require a payment of approximately $25 million on March 23, 2009 if none of the alternative arrangements are agreed.
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