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WSH > SEC Filings for WSH > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for WILLIS GROUP HOLDINGS PLC

Form 10-Q for WILLIS GROUP HOLDINGS PLC


9-May-2014

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion includes references to non-GAAP financial measures as defined in Regulation G of the rules of the Securities and Exchange Commission ('SEC'). We present such non-GAAP financial measures, specifically, organic growth in commissions and fees, adjusted operating margin, adjusted operating income, adjusted net income and adjusted earnings per diluted share, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company's operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. Organic growth in commissions and fees excludes the impact of acquisitions and disposals, period over period movements in foreign currency movements, and investment and other income from growth in revenues. Adjusted operating income, adjusted net income and adjusted earnings per diluted share are calculated by excluding the impact of certain specified items from operating income, net income, and earnings per diluted share, respectively, the most directly comparable GAAP measures. Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measures should be viewed in addition to, not in lieu of, these condensed consolidated financial statements for the three months ended March 31, 2014.
This discussion includes forward-looking statements included under the heading 'Executive Summary'. Please see 'Forward-Looking Statements' for certain cautionary information regarding forward-looking statements and a list of factors that could cause actual results to differ materially from those predicted in those statements.

EXECUTIVE SUMMARY
Business Overview
We provide a broad range of insurance broking, risk management and consulting services to our clients worldwide and organize our business into three segments:
Global, North America and International.
Our Global business provides specialist brokerage and consulting services to clients worldwide arising from specific industries, activities and risks including Property, Casualty and Construction, Natural Resources; Transport, which incorporates our Aerospace and Marine businesses; People, Political and Terrorism risk; Fine Art, Jewelry and Specie; Hughes-Gibbs; Financial and Executive risks; Willis Capital Markets & Advisory; UK retail operations; Facultative and Wholesale solutions; Reinsurance; and Captives management. North America and International comprise our retail operations, excluding the UK. Our retail operations provide services to small, medium and large corporations. Included in our retail operations is the Human Capital and Benefits practice, our largest product-based practice group, which provides health, welfare and human resources consulting and brokerage services. In our capacity as advisor and insurance broker, we act as an intermediary between our clients and insurance carriers by advising our clients on their risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance with insurance carriers through our global distribution network.
We derive most of our revenues from commissions and fees for brokerage and consulting services and do not determine the insurance premiums on which our commissions are generally based. Commission levels generally follow the same trend as premium levels as they are derived from a percentage of the premiums paid by the insureds. Fluctuations in these premiums charged by the insurance carriers can therefore have a direct and potentially material impact on our results of operations.
Due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenues may vary widely between accounting periods. A period of low or declining premium rates, generally known as a 'soft' or 'softening' market, generally leads to downward pressure on commission revenues and can have a material adverse impact on our commission revenues and operating margin. A 'hard' or 'firming' market, during which premium rates rise, generally has a favorable impact on our commission revenues and operating margin. Rates, however, vary by geography, industry and client segment. As a result and due to the global and diverse nature of our business, we view rates holistically.


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Willis Group Holdings plc

Market Conditions

Market conditions in our industry are generally defined by factors such as the strength of the economies in the various geographic regions in which we serve around the world, insurance rate movements, and insurance and reinsurance buying patterns of our clients.
The industry and market in general throughout 2011 and early 2012 experienced modest increase in catastrophe-exposed property insurance and reinsurance pricing levels driven by significant catastrophe losses including the Japanese earthquake and tsunami, the New Zealand earthquake and, late in 2012, Super Storm Sandy. Also during that period, direct carriers in North America, facing persistent low investment returns, started to modestly raise rates in certain products. This firming rate environment, however, generally did not extend beyond North America to impact our International retail business. Early in 2013 the reinsurance market was generally flat, however, as the year progressed we saw changing market sentiment driven by changes in the sources of capital and increases in capital supply in the reinsurance market, most notably within the North American catastrophe-exposed property market. The influx of third party capital coupled with changes to reinsurance buying patterns and regulatory complexity is leading to growing complexity in the reinsurance market and a softening of prices.
We have noted a continuation of this trend, and signs of acceleration, towards softening reinsurance rates across almost all classes of business and geographies as positive 2013 results for traditional reinsurers and the supply of capital from third party investors have added further to the oversupply of capacity. Whilst we are feeling the impact of the softening rates to a degree we are helping to guide clients through complex decisions in an evolving marketplace.
The outlook for our business, operating results and financial condition continues to be challenging due to the global economic condition. There are signs of improving conditions both in the US, and within certain European Union countries, including a return to sustained GDP growth in certain countries. However, if conditions in the Global economy, including the US, the UK and the Eurozone deteriorate, there will likely be a negative effect on our business as well as the businesses of our clients.
In the face of this challenging economic environment we have adopted a strategy to invest selectively in growth areas, defined by geography, industry sector and client segment, and to better coordinate our three segments so as to, among other things, bring our clients greater access to the Company's specialty areas and analytical capabilities. Our growth strategy also involves increasing our investment in, and deployment of, our analytical capabilities. Financial Performance
Consolidated Financial Performance
Results: first quarter 2014
Total revenues of $1,097 million for first quarter 2014 were $46 million, or 4.4 percent, higher than in first quarter 2013. Total commissions and fees for first quarter 2014 were $1,090 million, up $44 million or 4.2 percent, from $1,046 million in the prior year quarter. The increase includes organic commissions and fees growth of 4.2 percent and a positive 0.3 percent impact from foreign currency movements partially offset by a negative 0.3 percent impact from acquisitions and disposals.
Organic growth in commissions and fees was driven by positive growth in each of our operating segments, with 7.2 percent growth in International, 4.7 percent growth in North America and 2.0 percent growth in Global compared with first quarter 2013.
Total revenues also included Investment income of $4 million in both first quarter 2014 and first quarter 2013, and Other income of $3 million in first quarter 2014, up $2 million from first quarter 2013.
Total expenses in first quarter 2014 of $771 million were $1 million, or 0.1 percent, higher than in first quarter 2013. Foreign currency movements negatively impacted total expenses by $7 million.
The $1 million increase in total expenses in first quarter 2014 versus the year ago quarter was due to higher salary and benefit expense, due to increased headcount and annual pay reviews, higher business development expenses, increased spend on systems related projects and the negative impact of foreign exchange partially offset by the non-recurrence of the $46 million charge for the expense reduction initiative incurred in first quarter 2013. The income tax charge increased by $15 million due to higher income and an increased estimated annual effective tax rate. The tax rate for the first quarter 2014 was approximately 21 percent, compared to approximately 19 percent for the first quarter


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Business discussion

2013. Whilst both the current and prior year periods are impacted by the requirement to maintain a valuation allowance against US deferred tax assets, the first quarter 2014 tax rate was higher primarily due to the expectation of paying current taxes in the US in 2014, which resulted in a higher tax charge on US income in the current period compared with the prior period.
Interest in earnings of associates increased by $4 million mainly due to the year-on-year improvement in the results of our associates, primarily Gras Savoye, our principal associate.
Net income attributable to Willis shareholders was $246 million or $1.35 per diluted share in first quarter 2014 compared with net income of $219 million or $1.24 per diluted share in first quarter 2013. The $27 million increase was primarily due to increased commissions and fees in the first quarter 2014 and the non-recurrence of the $46 million expense reduction initiative in first quarter 2013, partially offset by higher operating expenses, negative foreign exchange movements and the increase in the tax charge in the first quarter 2014. Foreign currency movements had a $0.03 negative impact on earnings per diluted share in first quarter 2014 compared with first quarter 2013.
Adjusted Operating Income, Adjusted Operating Margin, Adjusted Net Income and Adjusted Earnings per Diluted Share
Our non-GAAP measures of adjusted operating income, adjusted net income and adjusted earnings per diluted share are calculated by excluding the impact of certain items (as detailed below) from operating income, net income, and earnings per diluted share, respectively, the most directly comparable GAAP measures.
The following items are excluded from operating income and net income as applicable:
(i) costs associated with the 2013 Expense Reduction Initiative; and

(ii) gains and losses on the disposal of operations.

We believe that excluding these items, as applicable, from operating income, net income and earnings per diluted share provides a more complete and consistent comparative analysis of our results of operations. We use these and other measures to establish Group performance targets and evaluate the performance of our operations.
As set out in the tables below, adjusted operating income was essentially flat at $326 million in first quarter 2014 compared to $327 million in first quarter 2013. Adjusted operating margin at 29.7 percent in first quarter 2014 was down 140 basis points compared with first quarter 2013, while first quarter 2014 adjusted net income was $248 million, $9 million lower than in first quarter 2013. Adjusted earnings per diluted share were $1.36 in first quarter 2014, compared with $1.46 in first quarter 2013.
A reconciliation of reported operating income, the most directly comparable GAAP measure, to adjusted operating income for the three months ended March 31, is as follows (in millions, except percentages):

                                                                      Three months ended March 31,
                                                                         2014                2013
Operating income, GAAP basis                                       $        326         $        281
Excluding:
Expense Reduction Initiative (a)                                              -                   46
Adjusted operating income                                          $        326         $        327

Operating margin, GAAP basis, or operating income as a percentage
of total revenues                                                          29.7 %               26.7 %
Adjusted operating margin, or adjusted operating income as a
percentage of total revenues                                               29.7 %               31.1 %


 _________________________________


(a) Charge related to the assessment of the Company's organizational design. See '2013 Expense Reduction Initiative' section below.


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Willis Group Holdings plc


A reconciliation of reported net income and reported earnings per diluted share,
the most directly comparable GAAP measures, to adjusted net income and adjusted
earnings per diluted share, is as follows (in millions, except per share data):
                                                                                    Per diluted share
                                         Three months ended March 31,         Three months ended March 31,
                                         2014         2013     % Change        2014         2013     % Change
Net income attributable to Willis
Group Holdings plc, GAAP basis        $     246     $  219       12.3  %   $     1.35     $ 1.24        8.9  %
Excluding:
Expense Reduction Initiative, net of
tax ($nil, $8) (a)                            -         38                          -       0.22
Loss on disposal of operations, net
of tax ($1, $nil)                             2          -                       0.01          -
Adjusted net income                   $     248     $  257       (3.5 )%   $     1.36     $ 1.46       (6.8 )%

Average diluted shares outstanding,
GAAP basis                                  182        176


_____________________________


(a) Charge related to the assessment of the Company's organizational design. See '2013 Expense Reduction Initiative' section below.

2013 Expense Reduction Initiative
The Company recorded a pre-tax charge of $46 million in the first quarter of 2013 related to the assessment of the Company's organizational design. In connection with this assessment, we incurred the following pre-tax charges:
$29 million of severance and other staff-related costs towards the elimination of 207 positions; and

$17 million of Other operating expenses and Depreciation resulting from the rationalization of property and systems.

The Company did not incur any further charges related to this review.

Pension Expense
We recorded net pension income on our UK defined benefit pension plan of $3 million in first quarter 2014 and $1 million in first quarter 2013. The $2 million increase was due to higher expected returns on plan assets, partially offset by higher interest and service costs.
On our US defined benefit pension plan we recorded a net pension income of $2 million in first quarter 2014 compared with $1 million in first quarter 2013. This increase was due to a lower cost relating to amortization of unrecognized actuarial losses in first quarter 2014 compared to first quarter 2013. On our other defined benefit pension plans, we recorded a net pension cost of $1 million in both first quarter 2014 and 2013. Associates
The Company currently owns approximately 30 percent of Gras Savoye, as does the private equity firm Astorg Partners and the original family shareholders. The previous Shareholders' Agreement provided a call option for us to acquire full ownership of the company in 2015. An amended Agreement, which we signed on April 15, 2013, extends the exercise date of the call option by one year to June 2016, providing additional time for all parties to plan for the proposed transition in 2016. Additionally, the call option is based on an agreed-upon formula for determining enterprise and equity value of Gras Savoye in 2016 based on Gras Savoye's 2014 and 2015 consolidated accounts. The formula is based on a weighting of revenue and EBITDA averaged over a one-to-two year period to which certain pre-determined market multiples would be applied, the potential range of market multiples having been narrowed from the previous agreement.


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Business discussion

Acquisitions and Disposals
In first quarter 2014 the Company agreed to acquire Charles Monat Limited, a market-leading life insurance solutions adviser to high net worth clients. The acquisition represents a key enhancement to our expanding Global Wealth Solutions practice, particularly in Asia. Completion of the transaction is subject to regulatory approval.
During first quarter 2014 the Company disposed of Insurance Noodle, a small online wholesale business in Willis North America and Philadelphia Benefits, LLC a small local service-oriented wholesale agency.

Operational Improvement Program
In April 2014, the Company announced an operational improvement program that will allow the Company to continue to strengthen its client service, realize operational efficiencies, and invest in new capabilities for growth. The program will begin in the second quarter of 2014 and is expected to be complete by the end of 2017. This program is expected to deliver cumulative cost savings of approximately $420 million through 2017 and annual cost savings of approximately $300 million starting in 2018. The estimated phasing of cost savings is: approximately $5 million in 2014, approximately $45 million in 2015, approximately $135 million in 2016 and approximately $235 million in 2017. The estimated cost savings are before any potential reinvestment. However, the Company expects the majority of savings to be reflected in earnings. To achieve these savings, the Company expects to incur cumulative charges amounting to approximately $410 million through the end of 2017.
Total charges, actual savings and timing may vary positively or negatively from these estimates due to changes in the scope, underlying assumptions or execution risk of the restructuring plan throughout its duration. The main elements of the program will include:
Movement of more than 3,500 support roles from higher cost locations to Willis facilities in lower cost locations, bringing the ratio of employees in higher cost versus lower cost locations from approximately 80:20 to approximately 60:40;

Net workforce reductions in support positions;

Lease consolidation in real estate and reductions in ratios of seats per employee and square footage of floor space per employee; and

Information technology systems simplification and rationalization.

The Company expects that about 70 percent of the annualized 2018 savings will come from role relocation and reduction, and about 30 percent of the savings from real estate, information technology and other areas.
As the program proceeds, we will provide regular updates on the associated savings from the program as well as the charge. In addition, we will also disclose certain key operational metrics that will demonstrate how the program is making the changes which drive savings, including the ratio of roles in higher cost locations to lower cost locations, the ratio of seats per employee, and square footage of floor space per employee.


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Willis Group Holdings plc

Business Strategy

Today we operate in attractive growth markets with a diversified platform across geographies, industries, segments and lines of business. We aim to become the risk advisor, insurance and reinsurance broker of choice globally.

We will achieve this by being completely focused on:

where we compete and that means the areas where we can succeed by:

            Geography - we will re-balance our business mix towards faster
             growing geographies, with both developed and developing markets


            Client Segmentation - we will segment our client offering to provide
             distinct offerings to different types of client, focusing on the
             value we provide to our clients


            Sector - we will build business lines around our industry and sector
             strength e.g. Human Capital and Employee Benefits.

How we compete which will be centered on meeting the needs of our client by:

Connection - leading to more cross-selling

Innovation - competing on analytics and innovation

Investment - focusing on earnings accretion, competitive position and fit

Through these strategies we aim to grow revenue with positive operating leverage, grow cash flows and generate compelling returns for investors.


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Business discussion

Changes to Segmental and Income Statement Presentation

During the first quarter 2014 the Company announced a number of changes to the structure of its operations that are effective from January 1, 2014.

The principal changes to the components of the North America, Global and International reporting segments are:

the UK retail business, previously reported within the International reporting segment, has been combined with our Specialty businesses and is now reported within the Global reporting segment;

the Mexican retail business, previously reported within the North America reporting segment, is now reported within the International reporting segment; and

the US captive consulting business and facultative reinsurance businesses, both previously reported within the North America reporting segment, are now reported within the Global reporting segment.

The Company has made additional changes to the segmental financial information that are now used and reported to evaluate performance and to support decision making. We will continue to use organic growth in commissions and fees and operating income to evaluate segment performance however, operating income has been changed to reflect the following:

amortization of intangibles, previously reported in Corporate and other, is now reported in operating expenses for each of the reporting segments; and

certain leadership, project and other costs relating to group functions and the non-servicing or financing elements of the defined benefit pension scheme cost (income), previously allocated to each of the reporting segments are now reported in Corporate and other.

Finally, the Company has made changes to the presentation of certain items in the Consolidated Statement of Operations. Certain foreign exchange gains and losses, primarily from balance sheet revaluation, and gains and losses from the disposal of operations, previously reported within total operating expenses, are now reported in a new income statement line item, 'Other income (expense)', which is now reported below Operating income (loss).
The impact of the changes to the selected financial data described above, has been retrospectively applied to the first quarter 2013 results.


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Willis Group Holdings plc


REVIEW OF CONSOLIDATED RESULTS
The following table is a summary of our revenues, operating income, operating
margin, net income and diluted earnings per share (in millions, except per share
data and percentages):
                                                                         Three months ended March 31,
                                                                            2014               2013
REVENUES
Commissions and fees                                                  $       1,090       $       1,046
Investment income                                                                 4                   4
Other income                                                                      3                   1
Total revenues                                                                1,097               1,051
EXPENSES
Salaries and benefits                                                          (570 )              (568 )
Other operating expenses                                                       (165 )              (162 )
Depreciation expense                                                            (23 )               (26 )
Amortization of intangible assets                                               (13 )               (14 )
Total expenses                                                                 (771 )              (770 )
OPERATING INCOME                                                                326                 281
Other income (expense)                                                            -                   6
Interest expense                                                                (32 )               (31 )
INCOME BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES               294                 256
Income taxes                                                                    (63 )               (48 )
INCOME BEFORE INTEREST IN EARNINGS OF ASSOCIATES                                231                 208
Interest in earnings of associates, net of tax                                   19                  15
NET INCOME                                                                      250                 223
Less: net income attributable to noncontrolling interests                        (4 )                (4 )
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS                      $         246       $         219

Salaries and benefits as a percentage of total revenues                        52.0 %              54.0 %
Other operating expenses as a percentage of total revenues                     15.0 %              15.4 %
Operating margin (operating income as a percentage of total revenues)          29.7 %              26.7 %
Diluted earnings per share                                            $        1.35       $        1.24
Average diluted number of shares outstanding                                    182                 176


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Business discussion

Revenues
Total revenues for the Group and by segment for the three months ended March 31,
2014 and 2013 are shown below (millions, except percentages):
                                                                                  Attributable to:
                                                                                                         Organic
                                                                    Foreign                            commissions
Three months ended                                                 currency       Acquisitions and      and fees
March 31,                 2014          2013        % Change      translation        disposals         growth (a)
. . .
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