UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

Commission file number: 001-16503

 

 

 

WILLIS GROUP HOLDINGS PUBLIC

LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

 

c/o Willis Group Limited
51 Lime Street, London, EC3M 7DQ, England

(Address of principal executive offices)

 

(011) 44-20-3124-6000

(Registrant’s telephone number, including area code)

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ‘large accelerated filer’, ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of November 4, 2011, there were outstanding 173,552,702 ordinary shares, nominal value $0.000115 per share, of the Registrant.

 

 

 

Table Of Contents

 

 

 

Certain Definitions

 

The following definitions apply throughout this quarterly report unless the context requires otherwise:

 

 

Willis Group Holdings plc

 

FORWARD-LOOKING STATEMENTS

•	the impact of any regional, national or global political, economic, business, competitive, market, environmental and regulatory conditions on our global business operations;
•	the impact of current financial market conditions on our results of operations and financial condition, including as a result of the impact of the volume of foreclosures, any insolvencies of or other difficulties experienced by our clients, insurance companies or financial institutions;
•	our ability to continue to manage our significant indebtedness;
•	our ability to compete effectively in our industry;
•	the impact of the 2011 Operational Review and our ability to implement and realize anticipated benefits of such review and the Willis Cause, or any other initiative we pursue;
•	material changes in commercial property and casualty markets generally or the availability of insurance products or changes in premiums resulting from a catastrophic event, such as a hurricane, or otherwise;
•	the volatility or declines in other insurance markets and premiums on which our commissions are based, but which we do not control;
•	our ability to retain key employees and clients and attract new business;

•	the timing or ability to carry out share repurchases, refinancings or take other steps to manage our capital and the limitations in our long-term debt agreements that may restrict our ability to take these actions;
•	any fluctuations in exchange and interest rates that could affect expenses and revenue;
•	rating agency actions that could inhibit our ability to borrow funds or the pricing thereof;
•	a significant decline in the value of investments that fund our pension plans or changes in our pension plan funding obligations;
•	our ability to achieve the expected strategic benefits of transactions;
•	our ability to receive dividends or other distributions in needed amounts from our subsidiaries;
•	changes in the tax or accounting treatment of our operations;
•	any potential impact from the US healthcare reform legislation;
•	the potential costs and difficulties in complying with a wide variety of foreign laws and regulations and any related changes, given the global scope of our operations;
•	our involvements in and the results of any regulatory investigations, legal proceedings and other contingencies;
•	risks associated with non-core operations including underwriting, advisory or reputational;
•	our exposure to potential liabilities arising from errors and omissions and other potential claims against us; and
•	the interruption or loss of our information processing systems or failure to maintain secure information systems.

 

About Willis

 

 

Willis Group Holdings plc

 

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Financial statements

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

(Continued on next page)

 

Willis Group Holdings plc

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Financial statements

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

(Continued on next page)

 

Willis Group Holdings plc

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Notes to the financial statements
(Unaudited)

 

 

Willis Group Holdings and its subsidiaries provide a broad range of insurance and reinsurance broking and risk management consulting services to its clients worldwide, both directly and indirectly through its associates. The Company provides both specialized risk management advisory and consulting services on a global basis to clients engaged in specific industrial and commercial activities, and services to small, medium and major corporates through its retail operations.

 

In its capacity as an advisor and insurance broker, the Company acts as an intermediary between clients and insurance carriers by advising clients on risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance risk with insurance carriers through the Company’s global distribution network.

 

2.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements (‘Interim Financial Statements’) have been prepared in accordance with accounting principles generally accepted in the United States of America (‘US GAAP’).

 

The Interim Financial Statements are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company’s management considers necessary for a fair presentation of the financial position as of such dates and the operating results and cash flows for those periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the nine month period ended September 30, 2011 may not necessarily be indicative of the operating results for the entire fiscal year.

 

These Interim Financial Statements should be read in conjunction with the Company’s consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of operations, cash flows and changes in equity for each of the three years in the period ended December 31, 2010 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2011 (‘2010 10-K’) and as amended by Current Report on Form 8-K subsequently filed on August 10, 2011.

 

Balance Sheet Presentation

 

As disclosed in the Company’s 2010 10-K, the Company now provides additional disclosure within the unaudited condensed consolidated balance sheet of:

 

 

The Company believes this amended presentation better reflects the Company’s liquidity position and exposures to credit risk. Accordingly, the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2010 has been recast to conform with the new balance sheet presentation.

 

Devaluation of Venezuelan Currency

 

With effect from January 1, 2010, the Venezuelan economy was designated as hyper-inflationary. The Venezuelan government also devalued the Bolivar Fuerte in January 2010. As a result of these actions, the Company recorded a $12 million charge in other operating expenses in the three month period ended March 31, 2010 to reflect the re-measurement of its net monetary assets denominated in Venezuelan Bolivar Fuerte at January 1, 2010.

 

Willis Group Holdings plc

 

 

Recent Accounting Pronouncements

 

Fair Value Measurement and Disclosure

 

In May 2011, the Financial Accounting Standards Board (‘FASB’) issued Accounting Standards Update (‘ASU’) No. 2011 - 04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new guidance was issued to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between US GAAP and International Financial Reporting Standards (‘IFRS’). The guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements.

 

This guidance is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively.

 

The Company is currently evaluating the impact that adoption of this guidance will have on the consolidated financial statements.

 

Other Comprehensive Income

 

In June 2011, the FASB issued ASU No. 2011 - 05, Presentation of Comprehensive Income to revise the manner in which entities present comprehensive income in their financial statements. These changes require that components of comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

 

This guidance is effective for interim and annual periods beginning after December 15, 2011 and is applied retrospectively, although early adoption is permitted.

 

ASU 2011-05 also requires entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. On November 8, 2011 the FASB exposed a proposal to defer this requirement. The proposed amendments would be effective at the same time as the amendments in Update 2011-05.

 

The Company is currently evaluating the impact that adoption of this guidance will have on the consolidated financial statements.

 

Goodwill impairment testing

 

In September 2011, the FASB issued ASU No. 2011 - 08, Intangibles — Goodwill and other: testing goodwill for impairment. The new guidance was issued to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit.

 

This guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted.

 

Notes to the financial statements
(Unaudited)

 

3.  SALARIES AND BENEFITS EXPENSE

Severance Costs

 

As part of the Company’s 2011 Operational Review, the Company incurred severance costs of $61 million in the nine months ended September 30, 2011 (three months ended September 30, 2011: $6 million). These costs relate to approximately 800 positions that have been or are in the process of being eliminated.

 

$55 million of these severance costs for these employees were recognized pursuant to a one-time benefit arrangement, with the remaining $6 million recognized pursuant to the terms of employees’ existing benefit arrangements or employee arrangements. All of these costs have been recognized within salaries and benefits.

 

In addition to the severance incurred as part of the 2011 Operational Review, an additional charge of $3 million in the nine months ended September 30, 2011 (three months ended September 30, 2011: $1 million) was recognised within salaries and benefits relating to the write-off of retention awards held on the balance sheet for the approximately 800 positions that have been eliminated.

 

The Company’s severance liability under the 2011 Operational Review was:

 

 

It is estimated that a total of $80 million will be incurred under the 2011 Operational Review for severance throughout 2011 across the Group.

 

The Company evaluates the performance of its operating segments based on organic revenue growth and operating income. For internal reporting and segmental reporting, segmental management are not held accountable for certain items deemed to be centrally-controlled costs and initiatives, which includes the 2011 Operational Review. See Note 18 — Segment Information for an analysis of centrally-controlled costs and initiatives, including the 2011 Operational Review costs, disclosed within ‘Corporate and Other’.

 

Severance costs also arise in the normal course of business and these charges amounted to a nominal amount in the nine months ended September 30, 2011 (2010: $14 million). These costs relate to approximately 70 positions (2010: 450 positions) that have been or are in the process of being eliminated. Of these costs, $nil was incurred in the three months ended September 30, 2011 (2010: $3 million).

 

Other Salaries and Benefits Expense

 

The Company also incurred other salaries and benefits costs as part of the 2011 Operational Review of $35 million in the nine months ended September 30, 2011 (three months ended September 30, 2011: $nil) relating primarily to the buy out of previously existing incentive schemes and other contractual arrangements.

 

Willis Group Holdings plc

 

 

Cash Retention Awards

 

As part of the Company’s incentive compensation, the Company makes annual cash retention awards to its employees. Employees must repay a proportionate amount of these awards if they voluntarily leave the Company’s employ (other than in the event of retirement or permanent disability) within a certain time period, currently up to three years. The Company makes cash payments to its employees in the year it grants these retention awards and recognizes these payments ratably over the period they are subject to repayment, beginning in the quarter in which the award is made. The unamortized portion of cash retention awards is recorded within Other Assets.

 

The following table sets out the amount of cash retention awards made and the related amortization of those awards for the three and nine months ended September 30, 2011 and 2010:

 

 

Unamortized cash retention awards totaled $243 million as of September 30, 2011 (December 31, 2010: $173 million; September 30, 2010: $193 million).

 

4.  INCOME TAXES

The tables below reflect the components of the tax charge for the three and nine months ended September 30, 2011:

 

 

 

Notes to the financial statements
(Unaudited)

 

 

 

For interim income tax reporting purposes, the Company generally determines its best estimate of an annual effective tax rate and applies that rate on a year-to-date basis applicable to its ordinary income. The Company’s estimated annual effective tax rate excludes significant, unusual or infrequently occurring items and certain other items excluded pursuant to the US GAAP authoritative guidance where applicable. The income tax expense (or benefit) related to all other items is individually computed and recognized when the items occur.

 

The estimated annual effective tax rate applicable to ordinary income of 22 percent includes the tax benefit of expenses relating to the 2011 Operational Review, which are generally relieved at a higher rate than the Company’s annual effective tax rate calculated excluding these expenses, and the impact of the UK Financial Services Authority (‘FSA’) regulatory fine for which no tax relief is available. After adjusting for the impact of these items, the estimated annual effective tax rate would have been approximately 24 percent.

 

5.  EARNINGS PER SHARE

Basic and diluted earnings per share are calculated by dividing net income attributable to Willis Group Holdings by the weighted average number of shares outstanding during each period. The computation of diluted earnings per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue shares were exercised or converted into shares or resulted in the issuance of shares that then shared in the net income of the Company.

 

At September 30, 2011, time-based and performance-based options to purchase 9.6 million and 7.5 million (September 30, 2010: 12.0 million and 8.5 million) shares, respectively, and 1.3 million restricted stock units (September 30, 2010: 1.6 million), respectively, were outstanding.

 

Basic and diluted earnings per share are as follows:

 

 

Options to purchase 4.7 million and 3.3 million shares for the three and nine months ended September 30, 2011 respectively were not included in the computation of the dilutive effect of stock options because the effect was antidilutive (three and nine months ended September 30, 2010: 13.4 million and 13.6 million shares respectively).

 

Willis Group Holdings plc

 

6.  PENSION PLANS

The components of the net periodic benefit cost of the UK, US and international defined benefit plans are as follows:

 

 

 

As of September 30, 2011, the Company had made contributions of $69 million, $30 million and $6 million to the UK, US and international defined benefit pension plans (2010: $67 million, $30 million and $5 million), respectively. The Company expects to contribute a total of approximately $92 million to the UK defined benefit pension plan and $10 million to the international plans for the full year 2011 (inclusive of amounts contributed in the first nine months). No further contributions are expected to be made to the US plan in 2011.

 

7.  COMMITMENTS AND CONTINGENCIES

Debt Obligations and Facilities

 

Changes in the Company’s debt obligations are set out in Note 14 — ‘Debt’ to the Condensed Consolidated Financial Statements.

 

Guarantees

 

Guarantees issued by Willis Group Holdings and certain of its subsidiaries with respect to the senior notes are discussed in Note 19 — ‘Financial information for parent guarantor, other guarantor subsidiaries and non-guarantor subsidiaries’ and Note 20 — ‘Financial information for parent issuer, guarantor subsidiaries and non-guarantor subsidiaries’.

 

Notes to the financial statements
(Unaudited)

 

 

The revolving credit facilities are fully and unconditionally guaranteed on a joint and several basis by Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA1 Limited, Trinity Acquisition plc, Willis Group Limited and Willis Group Holdings plc.

 

Other Contractual Obligations

 

In July 2010, the Company made a capital commitment of $25 million to Trident V Parallel Fund, LP. As at September 30, 2011 there had been approximately $6 million of capital contributions.

 

In May 2011, the Company made a capital commitment of $10 million to Dowling Capital Partners I, LP. As at September 30, 2011 there had been no capital contributions.

 

Claims, Lawsuits and Other Proceedings

 

In the ordinary course of business, the Company is subject to various actual and potential claims, lawsuits, and other proceedings relating principally to alleged errors and omissions in connection with the placement of insurance and reinsurance. Similar to other corporations, the Company is also subject to a variety of other claims, including those relating to the Company’s employment practices. Some of the claims, lawsuits and other proceedings seek damages in amounts which could, if assessed, be significant.

 

Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance. The terms of this insurance vary by policy year and self-insured risks have increased significantly in recent years. Regarding self-insured risks, the Company has established provisions which are believed to be adequate in the light of current information and legal advice, and the Company adjusts such provisions from time to time according to developments.

 

On the basis of current information, the Company does not expect that the actual claims, lawsuits and other proceedings, to which the Company is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will ultimately have a material adverse effect on the Company’s financial condition, results of operations or liquidity. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and disputes with insurance companies, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.

 

The material actual or potential claims, lawsuits and other proceedings, of which the Company is currently aware, are:

 

Assurance of Discontinuance

 

In connection with the investigation launched by the New York State Attorney General in April 2004 concerning, among other things, contingent commissions paid by insurers to insurance brokers, in April 2005, the Company entered into an Assurance of Discontinuance (‘Original AOD’) with the New York State Attorney General and the Superintendent of the New York Insurance Department and paid $50 million to eligible clients. As part of the Original AOD, the Company also agreed not to accept contingent compensation and to disclose to customers any compensation the Company will receive in connection with providing policy placement services to the customer. The Company also resolved similar investigations launched by the Minnesota Attorney General, the Florida Attorney General, the Florida Department of Financial Services, and the Florida Office of Insurance Regulation for amounts that were not material to the Company.

 

Similarly, in August 2005, HRH entered into an agreement with the Attorney General of the State of Connecticut and the Insurance Commissioner of the State of Connecticut to resolve all issues related to their investigations into certain insurance brokerage and insurance agency practices and to settle a lawsuit brought in August 2005 by the Connecticut Attorney General alleging violations of the Connecticut Unfair Trade Practices Act and the Connecticut Unfair Insurance

 

Willis Group Holdings plc

 

 

Practices Act. As part of this settlement, HRH agreed to take certain actions including establishing a $30 million national fund for distribution to certain clients; enhancing disclosure practices for agency and broker clients; and declining to accept contingent compensation on brokerage business.

 

On February 16, 2010, the Company entered into the Amended and Restated Assurance of Discontinuance with the Attorney General of the State of New York and the Amended and Restated Stipulation with the Superintendent of Insurance of the State of New York (the ‘Amended and Restated AOD’) on behalf of itself and its named subsidiaries. The Amended and Restated AOD was effective February 11, 2010 and supersedes and replaces the Original AOD.

 

The Amended and Restated AOD specifically recognizes that the Company has substantially met its obligations under the Original AOD and ends many of the requirements previously imposed. It relieves the Company of a number of technical compliance obligations that have imposed significant administrative and financial burdens on its operations. The Amended and Restated AOD no longer limits the types of compensation the Company can receive and has lowered the compensation disclosure requirements. The Amended and Restated AOD requires the Company, among other things to: (i) in New York, and each of the other 49 states of the United States, the District of Columbia and U.S. territories, provide compensation disclosure that will, at a minimum, comply with the terms of the applicable regulations, as may be amended from time to time, or the provisions of the AOD that existed prior to the adoption of the Amended and Restated AOD; and (ii) maintain its compliance programs and continue to provide appropriate training to relevant employees in business ethics, professional obligations, conflicts of interest, and antitrust and trade practices compliance.

 

European Commission Sector Inquiry

 

In 2006, the European Commission issued questionnaires pursuant to its Sector Inquiry or, in respect of Norway, the European Free Trade Association Surveillance Authority, related to insurance business practices, including compensation arrangements for brokers, to at least 150 European brokers including our operations in nine European countries. The Company filed responses to the European Commission and the European Free Trade Association Surveillance Authority questionnaires. The European Commission reported on September 25, 2007, expressing concerns over potential conflicts of interest in the industry relating to remuneration and binding authorities and also over the nature of the coinsurance market.

 

The Company cooperated with both the European Free Trade Association Surveillance Authority and the European Commission to resolve issues raised in its final report regarding coinsurance as required of the industry by the European Commission. The Company has recently learned that the European Commission has renewed its interest in the coinsurance market and we anticipate that, like our competitors and insurers, our European subsidiaries will receive further questionnaires on this matter later this year or early 2012.

 

Contingent Compensation Class Action

 

Since August 2004, the Company and HRH (along with various other brokers and insurers) have been named as defendants in purported class actions in various courts across the United States. All of these actions have been consolidated into a single action in the US District Court for the District of New Jersey (‘MDL’). These actions allege that the brokers breached their duties to their clients by entering into contingent compensation agreements with either no disclosure or limited disclosure to clients and participated in other improper activities. Plaintiffs seek monetary damages, including punitive damages, and certain equitable relief. In May 2011, the majority of defendants, including the Company and HRH, entered into a written settlement agreement with plaintiffs. On June 28, 2011, the Judge entered an Order granting preliminary approval to the settlement agreement. Notice of the settlement will be sent to all members of the class and each member will have the opportunity to opt out of the settlement and pursue its own individual claim against any defendant. A Fairness Hearing to decide if the settlement should be given final approval took place on September 14, 2011, but the Judge has not yet issued his decision on approval of the settlement. A total of 84 members of the class have opted out of the settlement. The amount of the proposed settlement to be paid by the Company and HRH is immaterial and was previously reserved.

 

Notes to the financial statements
(Unaudited)

 

 

Additional actions could be brought in the future by individual policyholders. The Company disputes the allegations in all of these suits and has been and intends to continue to defend itself vigorously against these actions. The outcomes of these lawsuits, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.

 

Reinsurance Market Dispute

 

Various legal proceedings are pending, have concluded, or may commence between reinsurers, reinsureds and in some cases their intermediaries, including reinsurance brokers, relating to personal accident excess of loss reinsurance for the years 1993 to 1998. The proceedings principally concern allegations by reinsurers that they have sustained substantial losses due to an alleged abnormal ‘spiral’ in the market in which the reinsurance contracts were placed, the existence and nature of which, as well as other information, was not disclosed to them by the reinsureds or their reinsurance broker.

 

A ‘spiral’ is a market term for a situation in which reinsureds and reinsurers reinsure each other with the effect that the same loss or portion of that loss moves through the market multiple times.

 

The reinsurers concerned have taken the position that, despite their decisions to underwrite risks or a group of risks, they are no longer bound by their reinsurance contracts. As a result, they have stopped settling claims and are seeking to recover claims already paid. The Company also understands that there have been arbitration awards in relation to a ‘spiral’, among other things, in which the reinsurer successfully argued that it was no longer bound by parts of its reinsurance program. Willis Limited, the Company’s principal insurance brokerage subsidiary in the United Kingdom, acted as the reinsurance broker or otherwise as intermediary, but not as an underwriter, for numerous personal accident reinsurance contracts. Due to the small number of reinsurance brokers generally, Willis Limited also utilized other brokers active in this market as sub-agents, including brokers who are parties to the legal proceedings described above, for certain contracts and may be responsible for any errors and omissions they may have made. In July 2003, one of the reinsurers received a judgment in the English High Court against certain parties, including a sub-broker Willis Limited used to place two of the contracts involved in this trial. Although neither the Company nor any of its subsidiaries were a party to this proceeding or any arbitration, Willis Limited entered into tolling agreements with certain of the principals to the reinsurance contracts tolling the statute of limitations pending the outcome of proceedings between the reinsureds and reinsurers.

 

Two former clients of Willis Limited, American Reliable Insurance Company and one of its associated companies (‘ARIC’), and CNA Insurance Company Limited and two of its associated companies (‘CNA’) terminated their respective tolling agreements with Willis Limited and commenced litigation in September 2007 and January 2008, respectively, in the English Commercial Court against Willis Limited. ARIC alleged conspiracy between a former Willis Limited employee and the ARIC underwriter as well as negligence and CNA alleged deceit and negligence by the same Willis Limited employee both in connection with placements of personal accident reinsurance in the excess of loss market in London and elsewhere. On June 9, 2009, Willis Limited entered into a settlement agreement under which Willis Limited paid a total of $139 million to ARIC, which was covered by errors and omissions insurance.

 

On September 11, 2009, Willis Limited entered into a settlement agreement under which Willis Limited paid a total of $130 million to CNA. The Company has collected in full from errors and omissions insurers. The settlements include no admission of wrongdoing by any party. Each party also realized and waived all claims it may have against any of the other parties arising out of or in connection with the subject matter of the litigation.

 

From time to time, former clients or their reinsurers request co-operation from the Company and suggest that claims may be asserted against the Company. Such claims may be made against the Company if reinsurers do not pay claims on policies issued by them. A number of mutual releases have been entered by the Company or its subsidiaries with former clients and/or reinsurers for no financial consideration. The Company cannot predict at this time whether any further claims will be made or the damages that may be alleged.

 

Willis Group Holdings plc

 

 

Gender Discrimination Class Action

 

In December 2006, a purported class action was filed against the Company in the United States District Court, Southern District of New York, alleging that the Company discriminated against female officers and officer equivalent employees on the basis of their gender and seeking injunctive relief, monetary damages and attorneys’ fees and costs. In January 2011, the Company reached a monetary settlement with plaintiffs that resolves all individual and class claims. The amount of this settlement is not material. However, this matter cannot be formally and finally settled until the Court approves the settlement and until members of the class are given an opportunity to object to the terms of the settlement. The Court has given preliminary approval to the settlement. Notice of the settlement has been provided to the class members and the Court will hold a Fairness Hearing on December 12, 2011 to decide if final approval should be given to the settlement.

 

World Trade Center

 

The Company acted as the insurance broker, but not as an underwriter, for the placement of both property and casualty insurance for a number of entities which were directly impacted by the September 11, 2001 destruction of the World Trade Center complex, including Silverstein Properties LLC, which acquired a 99-year leasehold interest in the twin towers and related facilities from the Port Authority of New York and New Jersey in July 2001. Although the World Trade Center complex insurance was bound at or before the July 2001 closing of the leasehold acquisition, consistent with standard industry practice, the final policy wording for the placements was still in the process of being finalized when the twin towers and other buildings in the complex were destroyed on September 11, 2001. There have been a number of lawsuits in the United States between the insured parties and the insurers for several placements. Other disputes may arise in respect of insurance placed by us which could affect the Company including claims by one or more of the insureds that the Company made culpable errors or omissions in connection with our brokerage activities. However, the Company does not believe that our role as broker will lead to liabilities which in the aggregate would have a material adverse effect on our results of operations, financial condition or liquidity.

 

Stanford Financial Group Litigation

 

The Company has been named as a defendant in six similar lawsuits relating to the collapse of The Stanford Financial Group (‘Stanford’), for which Willis of Colorado, Inc. acted as broker of record on certain lines of insurance. The complaints in these actions generally allege that the defendants actively and materially aided Stanford’s alleged fraud by providing Stanford with certain letters regarding coverage that they knew would be used to help retain or attract actual or prospective Stanford client investors. The complaints further allege that these letters, which contain statements about Stanford and the insurance policies that the defendants placed for Stanford, contained untruths and omitted material facts and were drafted in this manner to help Stanford promote and sell its allegedly fraudulent certificates of deposit.

 

The six actions are as follows:

 

 

Notes to the financial statements
(Unaudited)

 

 

 

 

On May 10, 2011, the court presiding over the Stanford-related actions in the Northern District of Texas entered an order providing that it would consider the applicability of SLUSA to the Stanford-related actions based on the decision in a separate Stanford action not involving a Willis entity, Roland v. Green, Civil Action No. 3:10-CV-0224-N. On August 31, 2011, the court issued its decision in Roland, dismissing that action with prejudice under SLUSA. On September 23, 2011, the plaintiffs in Roland filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit, and, on October 6, 2011, they filed a motion in the Court of Appeals to expedite the appeal. On October 14, 2011, the Fifth Circuit granted the motion to expedite the appeal.

 

On October 26, 2011, the plaintiffs in Troice filed a notice of voluntary dismissal without prejudice with respect to those claims asserted in their Third Amended Class Action Complaint on an individual (i.e., non-class) basis.

 

On October 27, 2011, the court in Troice entered an order (i) dismissing with prejudice those claims asserted in the Third Amended Class Action Complaint on a class basis on the grounds set forth in the Roland decision discussed above and

 

Willis Group Holdings plc

 

 

(ii) dismissing without prejudice those claims asserted in the Third Amended Class Action Complaint on an individual basis. Also on October 27, 2011, the court entered a final judgment in the action.

 

Additional actions could be brought in the future by other investors in certificates of deposit issued by Stanford and its affiliates. The Company disputes these allegations and intends to defend itself vigorously against these actions. The outcomes of these actions, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.

 

Regulatory Investigation

 

Given the increased interest expressed by US and UK regulators in the effectiveness of compliance controls relating to financial crime in our market sector in particular, we began a voluntary internal review of our policies and controls four years ago. This review includes analysis and advice from external experts on best practices, review of public regulatory decisions, and discussions with government regulators in the US and UK. In addition, during 2010 and 2011 the UK Financial Services Authority (the ‘FSA’) conducted an investigation of Willis Limited’s, our UK brokerage subsidiary, compliance systems and controls between 2005 and 2009. On July 21, 2011, we and the FSA announced a settlement under which the FSA concluded its investigation by assessing a £7 million ($11 million) fine on Willis Limited for lapses in its implementation and documentation of its controls to counter the risks of improper payments being made to non-FSA authorized overseas third parties engaged to help win business, particularly in high risk jurisdictions.

 

As a result of the FSA settlement, we are conducting a further internal review of all payments made between 2005 and 2009. We also continue to fully cooperate with our US regulators, however we are unable to predict at this time when our discussions with them will be concluded. We do not believe that this further internal review or our discussions with the US regulators will result in any material fines or sanctions, but there can be no assurance that any resolution will not have an adverse impact on our ability to conduct our business in certain jurisdictions. While we believe that our current systems and controls are adequate and in accordance with all applicable laws and regulations, we cannot assure that such systems and controls will prevent any violations of applicable laws and regulations.

 

 

Fair value of derivative financial instruments

 

In addition to the note below, see Note 9 for information about the fair value hierarchy of derivatives.

 

Primary risks managed by derivative financial instruments

 

The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and credit risk. The Company’s board of directors reviews and agrees to policies for managing each of these risks as summarized below.

 

The Company enters into derivative transactions (principally interest rate swaps and forward foreign currency contracts) in order to manage interest rate and currency risks arising from the Company’s operations and its sources of finance. The Company does not hold financial or derivative instruments for trading purposes.

 

Interest Rate Risk

 

As a result of the Company’s operating activities, the Company receives cash for premiums and claims which it deposits in short-term investments denominated in US dollars and other currencies. The Company earns interest on these funds, which is included in the Company’s financial statements as investment income. These funds are regulated in terms of

 

Notes to the financial statements
(Unaudited)

 

 

access and the instruments in which they may be invested, most of which are short-term in maturity. In order to manage interest rate risk arising from these financial assets, the Company enters into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest denominated in the various currencies related to the short-term investments. The use of interest rate contracts essentially converts groups of short-term variable rate investments to fixed rates.

 

The fair value of these contracts is recorded in other assets and other liabilities. For contracts that qualify as cash flow hedges for accounting purposes, the effective portions of changes in fair value are recorded as a component of other comprehensive income.

 

At September 30, 2011, the Company had the following derivative financial instruments that were designated as cash flow hedges of interest rate risk:

 

 

 

 

The Company’s operations are financed principally by $2,050 million fixed rate senior notes and $328 million under a 5-year term loan facility. Of the fixed rate senior notes, $350 million are due 2015, $300 million are due 2016, $600 million are due 2017, $300 million are due 2019 and $500 million are due 2021. At September 30, 2011, we had $nil outstanding under our $300 million revolving credit facility and $nil outstanding under both our $200 million facility and our $20 million UK facility which is solely for use by our main regulated UK entity in certain exceptional circumstances.

 

The 5-year term loan facility bears interest at LIBOR plus 2.250%. Drawings under the revolving $300 million credit facility bear interest at LIBOR plus 2.250%. Drawings under the revolving $200 million credit facility bear interest at LIBOR plus a margin of either 1.750% or 2.750% depending upon the currency of the loan. This margin applies while the Company’s debt rating remains BBB-/Baa3. Should the Company’s debt rating change, then the margin will change in accordance with the credit facilities agreements.

 

During the nine months ended September 30, 2010, the Company entered into a series of interest rate swaps for a total notional amount of $350 million to receive a fixed rate and pay a variable rate on a semi-annual basis, with a maturity date of July 15, 2015. The Company has designated and accounts for these instruments as fair value hedges against its $350 million 5.625% senior notes due 2015. The fair values of the interest rate swaps are included within other assets or other liabilities and the fair value of the hedged element of the senior notes is included within long-term debt.

 

At September 30, 2011 and December 31, 2010, the Company’s interest rate swaps were all designated as hedging instruments.

 

Liquidity Risk

 

The Company’s objective is to ensure that it has the ability to generate sufficient cash either from internal or external sources, in a timely and cost-effective manner, to meet its commitments as they fall due. The Company’s management of liquidity risk is embedded within its overall risk management framework. Scenario analysis is continually undertaken to ensure that the Company’s resources can meet its liquidity requirements. These resources are supplemented by access to a total $520 million under three revolving credit facilities.

 

Willis Group Holdings plc

 

 

Foreign Currency Risk

 

The Company’s primary foreign exchange risks arise:

 

 

The foreign exchange risks in its London market operations are hedged as follows:

 

 

The Company does not hedge net income earned within foreign subsidiaries outside of the UK.

 

The fair value of foreign currency contracts is recorded in other assets and other liabilities. For contracts that qualify as accounting hedges, changes in fair value resulting from movements in the spot exchange rate are recorded as a component of other comprehensive income whilst changes resulting from a movement in the time value are recorded in interest expense. For contracts that do not qualify for hedge accounting, the total change in fair value is recorded in interest expense. Amounts held in comprehensive income are reclassified into earnings when the hedged exposure affects earnings.

 

At September 30, 2011 and December 31, 2010, the Company’s foreign currency contracts were all designated as hedging instruments except for those relating to short-term cash flows in its London market operations.

 

The table below summarizes by major currency the contractual amounts of the Company’s forward contracts to exchange foreign currencies for pounds sterling in the case of US dollars and US dollars for Euro and Japanese yen at September 30, 2011.

 

 

 

 

Credit Risk and Concentrations of Credit Risk

 

Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform as contracted and from movements in interest rates and foreign exchange rates. The Company currently does not anticipate non-performance by its counterparties. The Company generally does not require collateral or other security to support

 

Notes to the financial statements
(Unaudited)

 

 

financial instruments with credit risk; however, it is the Company’s policy to enter into master netting arrangements with counterparties as practical.

 

Concentrations of credit risk that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments on the balance sheet that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and derivatives which are recorded at fair value.

 

The Company maintains a policy providing for the diversification of cash and cash equivalent investments and places such investments in an extensive number of financial institutions to limit the amount of credit risk exposure. These financial institutions are monitored on an ongoing basis for credit quality predominantly using information provided by credit agencies.

 

Concentrations of credit risk with respect to receivables are limited due to the large number of clients and markets in which the Company does business, as well as the dispersion across many geographic areas. Management does not believe significant risk exists in connection with the Company’s concentrations of credit as of September 30, 2011.

 

Derivative Financial Instruments

 

The table below presents the fair value of the Company’s derivative financial instruments and their balance sheet classification at September 30, 2011 and December 31, 2010:

 

 

Willis Group Holdings plc

 

 

Cash Flow Hedges

 

The table below presents the effects of derivative financial instruments in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity for the three and nine months ended September 30, 2011 and 2010:

 

 

 

Amounts above shown gross of tax.

 

 

For interest rate swaps all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For foreign exchange contracts, only the changes in fair value resulting from movements in the spot exchange rates are included in this assessment. In instances where the timing of expected cashflows can be matched exactly to the maturity of the foreign exchange contract, then changes in fair value attributable to movement in the forward points are also included.

 

At September 30, 2011 the Company estimates there will be $5 million of net derivative gains reclassified from accumulated comprehensive income into earnings within the next twelve months.

 

Notes to the financial statements
(Unaudited)

 

 

Fair Value Hedges

 

The table below presents the effects of derivative financial instruments in fair value hedging relationships on the consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010.

 

 

All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

 

 

The following table presents, for each of the fair-value hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis: