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WILLIS TOWERS WATSON PLC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion includes forward-looking statements. See 'Disclaimer Regarding
Forward-looking Statements' for certain cautionary information regarding
forward-looking statements and Part I, Item 1A Risk Factors for a list of
factors that could cause actual results to differ materially from those
predicted in those statements.
This discussion includes references to non-GAAP financial measures as defined in the rules of theSEC . We present such non-GAAP financial measures, specifically, adjusted, constant currency and organic non-GAAP financial measures, 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 underU.S. GAAP, and these provide a measure against which our businesses may be assessed in the future. 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, the consolidated financial statements for the year endedDecember 31, 2021 .
See 'Non-GAAP Financial Measures' below for further discussion of our adjusted,
constant currency and organic non-GAAP financial measures.
Executive Overview
Market Conditions
Typically, our business benefits from regulatory change, political risk or economic uncertainty. Insurance broking generally tracks the economy, but demand for both insurance broking and consulting services usually remains steady during times of uncertainty. We have some businesses, such as our health and benefits and administration businesses, which can be counter cyclical during the early period of a significant economic change. Within our insurance and brokerage business, due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenue 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 revenue and can have a material adverse impact on our revenue and operating margin. A 'hard' or 'firming' market, during which premium rates rise, generally has a favorable impact on our revenue 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 in the aggregate. Overall, we are currently seeing a modest but definite increase in pricing in the market.
Market conditions in the broking industry in which we operate 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 markets for our consulting, technology and solutions, and marketplace
services are affected by economic, regulatory and legislative changes,
technological developments, and increased competition from established and new
competitors. We believe that the primary factors in selecting a human resources
or risk management consulting firm include reputation, the ability to provide
measurable increases to shareholder value and return on investment, global
scale, quality of service and the ability to tailor services to clients' unique
needs. In that regard, we are focused on developing and implementing technology,
data and analytic solutions for both internal operations and for maintaining
industry standards and meeting client preferences. We have made such investments
from time to time and may decide, based on perceived business needs, to make
investments in the future that may be different from past practice or what we
currently anticipate.
With regard to the market for exchanges, we believe that clients base their
decisions on a variety of factors that include the ability of the provider to
deliver measurable cost savings for clients, a strong reputation for efficient
execution and an innovative service delivery model and platform. Part of the
employer-sponsored insurance market has matured and become more fragmented while
other segments remain in the entry phase. As these market segments continue to
evolve, we may experience growth in intervals, with periods of accelerated
expansion balanced by periods of modest growth. In recent years, growth in the
market for exchanges has slowed, and we expect this trend may continue.
From time to time, including but not limited to the period after the
announcement of the proposed Aon combination through the period that has
followed the termination of the proposed combination, we have lost (and may in
the future continue to lose) colleagues who manage substantial client
relationships or possess substantial experience or expertise; when we lose
colleagues such as those, it often results in such colleagues competing against
us. Further, the full impact of this competition may be delayed due to the
timing of restrictive covenants or client renewals. We believe that this
dynamic, which was most pronounced in our Corporate Risk and Broking
41
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segment in the second and third quarters of 2021, has caused the segment's
near-term growth rates in the fourth quarter and expected into 2022 to be
meaningfully slower than other competitors. This dynamic may be difficult to
predict, given that the adverse impact in future periods is more significant
than in the periods in which employees departed. Growth may also be adversely
affected by the fact that 2021 performance in a number of businesses,
particularly commercial risk broking and health & benefits broking, benefited
from revenue from book sales, which is non-repeatable revenue. It is possible
that growth could be different than expected and our results of operations could
be significantly and adversely impacted.
See Part I, Item 1A Risk Factors in this Annual Report on Form 10-K for
discussions of risks that may affect our ability to compete.
Brexit
Following the occurrence of Brexit and the end of the formal transition period onDecember 31, 2020 , a trade agreement has been established between theU.K. and E.U. As expected, the agreement largely addressed goods and not services, and the Company has therefore completed the establishment of appropriate arrangements for the continued servicing of client business in all relevant E.U. countries. Further negotiations between theU.K. and E.U. resulted in the agreement of a Memorandum of Understanding to address matters related to financial services, though the outcome of future engagement between theU.K. and E.U. in relation to services, including financial services and potential impact on the Company, are not yet fully known. For a further discussion of the risks of Brexit to the Company, see Part I, Item 1A Risk Factors in this Annual Report on Form 10-K. Although approximately 18% of our revenue from continuing operations is generated in theU.K. on an annual basis, about 12% of revenue from continuing operations is denominated in Pounds sterling, as much of the insurance business is transacted inU.S. dollars. Approximately 18% of our expenses from continuing operations is denominated in Pounds sterling, thus we generally benefit from a weakening Pound sterling in our income from continuing operations. However, we have a Company hedging strategy for this aspect of our business, which is designed to mitigate significant fluctuations in currency.
Risks and Uncertainties of the COVID-19 Pandemic and the Related Economic
Environment
The COVID-19 pandemic has had an adverse impact on global commercial activity, particularly on the global supply chain and workforce availability, and has contributed to significant volatility in the global financial markets including, among other effects, occasional declines in the equity markets, changes in interest rates and reduced liquidity on a global basis. With regard to the effects on our own business operations and those of our clients, suppliers and other third parties with whom we interact, the Company has regularly considered the impact of COVID-19 and the wider economic results on our business, taking into account our business resilience and continuity plans, financial modeling and stress testing of liquidity and financial resources. Over the last two years, the COVID-19 pandemic generally did not have a material adverse impact on our overall financial results. Initially, the pandemic had a negative impact on our revenue growth, primarily in our businesses that are discretionary in nature, however we later saw an increased demand for these services, which improved revenue growth beginning in the second quarter of 2021. There continues to be increased demand for our services, particularly those services that address the various challenges in the global labor markets and disruptions to the supply chain. While we believe we have adapted to the unique challenges posed by the pandemic surrounding how and where we do our work, we are also impacted by the negative effect on workforce availability, which could hamper our ability to grow our capacity on pace with increasing demand for our services. We expect the market for talent to remain highly competitive for at least the next several months. We will continue to monitor the situation and assess any implications to our business and our stakeholders. Supply and labor market disruptions caused by COVID-19 as well as other factors, such as accommodative monetary and fiscal policy, have contributed to significant inflation in many of the markets in which we operate. This impacts not only the costs to attract and retain employees but also other costs to run and invest in our business. If our costs grow significantly in excess of our ability to raise revenues, our margins and results of operations may be materially and adversely impacted and we may not be able to achieve our strategic and financial objectives. The extent to which COVID-19 impacts our business and financial position will depend on future developments, which are difficult to predict. These future developments may include the severity and scope of the COVID-19 outbreak and the emergence of new variants, which may unexpectedly change or worsen, and the types and duration of measures imposed by governmental authorities to contain the virus or address its impact. We continue to expect that the COVID-19 pandemic and the related impacts on the wider economic environment may cause volatility to our revenue and operating results in fiscal 2022. We believe that, as a general matter, these trends and uncertainties are similar to those faced by other comparable registrants as a result of the pandemic. See Part I, Item 1A Risk Factors in this Annual Report on Form 10-K for a discussion of actual and potential impacts of COVID-19 on our business, clients and operations.
Daily Operations - We continue to closely monitor the spread and impact of
COVID-19, including the availability and efficacy of vaccines, while adhering to
government health directives. The Company continues to administer its own
restrictions on business
42 -------------------------------------------------------------------------------- travel, office access, and meetings and events, where appropriate, but has developed its return-to-work plans with a focus on safe utilization based on appropriate social-distancing guidelines and a continued hybrid work model. We have had thorough business continuity and incident management processes in place and operating effectively for the past two years and will continue to do so through the end of the pandemic.
Transformation Program
In the fourth quarter of 2021, we initiated a three-year 'Transformation program' designed to enhance operations, optimize technology and align our real estate footprint to our new ways of working. We expect the program to generate annual cost savings of approximately$300 million by the end of 2024. The program is expected to include cumulative costs of approximately$490 million and capital expenditures of approximately$260 million , for a total investment of$750 million . The main categories of charges will be in the following four areas:
•
Real estate rationalization - includes costs to align the real estate footprint
to our new ways of working (hybrid work) and includes breakage fees and the
impairment of right-of-use assets and other related leasehold assets.
•
Technology modernization - these charges are incurred in moving to common
platforms and technologies, including migrating certain platforms and
applications to the cloud. This category will include the impairment of
technology assets that are duplicative or no longer revenue-producing, as well
as costs for technology investments that do not qualify for capitalization.
•
Process optimization - these costs will be incurred in the right-shoring
strategy and automation of our operations, which will include optimizing
resource deployment and appropriate colleague alignment. These costs will
include process and organizational design costs, severance and
separation-related costs and temporary retention costs.
•
Other - other costs not included above including fees for professional services, other contract terminations not related to the above categories and supplier migration costs. For the year endedDecember 31, 2021 , restructuring charges under our Transformation program totaled$26 million . From the actions taken in 2021, we expect to have annualized savings of$20 million primarily from the reduction of real estate costs, the benefits of which will be recognized in 2022. For a discussion of some of the risks associated with the Transformation program, please see Part I, Item 1A Risk Factors - 'We may not be able to fully realize the anticipated benefits of our growth strategy' and other Risk Factors in this Annual Report on Form 10-K. 43 --------------------------------------------------------------------------------
Financial Statement Overview
For all financial information presented herein, the operating results of Willis
Re have been reclassified as discontinued operations (see Note 3 - Acquisitions
and Divestitures within Item 8 of this Annual Report on Form 10-K for further
information).
The tables below set forth our summarized consolidated statements of
comprehensive income and data as a percentage of revenue for the periods
indicated.
Consolidated Statements of Comprehensive Income
($ in millions, except per share data)
Years ended December 31,
2021 2020 2019
Revenue $ 8,998 100 % $ 8,615 100 % $ 8,370 100 %
Costs of providing services
Salaries and benefits 5,253 58 % 5,157 60 % 4,929 59 %
Other operating expenses 1,673 19 % 1,697 20 % 1,647 20 %
Depreciation 281 3 % 307 4 % 239 3 %
Amortization 369 4 % 461 5 % 488 6 %
Restructuring costs 26 - % 24 - % - - %
Transaction and integration, net (806 ) (9 )% 110
1 % 13 - % Total costs of providing services 6,796 7,756 7,316 Income from operations 2,202 24 % 859 10 % 1,054 13 % Interest expense (211 ) (2 )% (244 ) (3 )% (234 ) (3 )% Other income, net 701 8 % 396 5 % 226 3 % INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,692 30 % 1,011 12 % 1,046 12 % Provision for income taxes (536 ) (6 )% (249 ) (3 )% (197 ) (2 )% INCOME FROM CONTINUING OPERATIONS 2,156 24 % 762 9 % 849 10 % INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX 2,080 23 % 258 3 % 224 3 % Income attributable to non-controlling interests (14 ) - % (24 ) - % (29 ) - % NET INCOME ATTRIBUTABLE TO WTW$ 4,222 47 %$ 996 12 %$ 1,044 12 % Diluted earnings per share from continuing operations$ 16.63 $ 5.67
Consolidated Revenue (Continuing Operations)
We derive the majority of our revenue from commissions from our brokerage services and fees for consulting and administration services. No single client represented a significant concentration of our consolidated revenue for any of our three most recent fiscal years.
The following table details our top five markets based on percentage of
consolidated revenue (in
performed for the year ended
the currency of the related revenue, which is presented in the next table.
Geographic Region % of RevenueUnited States 51 %United Kingdom 18 %France 4 %Canada 3 %Germany 3 % 44
-------------------------------------------------------------------------------- The table below details the approximate percentage of our revenue and expenses from continuing operations by transactional currency for the year endedDecember 31, 2021 . Transactional Currency Revenue Expenses (i) U.S. dollars 58 % 53 % Pounds sterling 12 % 18 % Euro 15 % 13 % Other currencies 15 % 16 % (i) These percentages exclude certain expenses for significant items which will not be settled in cash, or which we believe to be items that are not core to our current or future operations. These items include amortization of intangible assets and transaction and integration, net. The following table sets forth the total revenue for the years endedDecember 31, 2021 and 2020 and the components of the change in total revenue for the year endedDecember 31, 2021 , as compared to the prior year:
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2021 2020 Change Impact Change Divestitures Change
($ in millions)
Revenue $ 8,998 $ 8,615 4% 2% 2% (3)% 6%
(i)
Components of revenue change may not add due to rounding.
Revenue for the year endedDecember 31, 2021 was$9.0 billion , compared to$8.6 billion for the year endedDecember 31, 2020 , an increase of$383 million , or 4%, on an as-reported basis. Adjusting for the impact of foreign currency and acquisitions and disposals, our organic revenue growth was 6% for the year endedDecember 31, 2021 . The increase to our as-reported revenue was driven by strong performances in all segments and$134 million from book-of-business settlements, partially offset by disposals in our IRR segment in 2020 and early 2021. Our revenue can be materially impacted by changes in currency conversions, which can fluctuate significantly over the course of a calendar year. For the year endedDecember 31, 2021 , currency translation increased our consolidated revenue by$171 million . The primary currencies driving these changes were the Pound sterling and Euro. The following table sets forth the total revenue for the years endedDecember 31, 2020 and 2019 and the components of the change in total revenue for the year endedDecember 31, 2020 , as compared to the prior year:
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2020 2019 Change Impact Change Divestitures Change
($ in millions)
Revenue $ 8,615 $ 8,370 3% -% 3% 2% 1%
(i)
Components of revenue change may not add due to rounding.
Revenue for the year endedDecember 31, 2020 was$8.6 billion , compared to$8.4 billion for the year endedDecember 31, 2019 , an increase of$245 million , or 3%, on an as-reported basis. Adjusting for the impact of foreign currency and acquisitions and disposals, our organic revenue growth was 1% for the year endedDecember 31, 2020 . The CRB and BDA segments had organic revenue growth during the year, while the HCB and IRR segments were flat, in part due to the impact of the COVID-19 reduction in demand for our discretionary services, mostly for HCB. The revenue from acquisitions related primarily toTRANZACT , which generated revenue of$557 million for the year endedDecember 31, 2020 as compared to$245 million for the year endedDecember 31, 2019 , which represents revenue included from the date of the acquisition ofJuly 30, 2019 . For the year endedDecember 31, 2020 , currency translation decreased our consolidated revenue by$8 million . The primary currencies driving this change were the Canadian dollar, Australian dollar, and Malaysian Ringgit, partially offset by the Pound sterling.
Definitions of Constant Currency Change and Organic Change are included in the
section entitled 'Non-GAAP Financial Measures' elsewhere within this Form 10-K.
45 --------------------------------------------------------------------------------
Segment Revenue
AtDecember 31, 2021 , we managed our business across four reportable operating segments: Human Capital and Benefits; Corporate Risk and Broking; Investment, Risk and Reinsurance; and Benefits Delivery and Administration. OnJanuary 1, 2022 , we began managing across two new reportable operating segments. See Part I, Item 1, 'Business - Segment Reorganization' for a discussion of the new segments. Discussion of segment results in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the segments as ofDecember 31, 2021 . Segment revenue excludes amounts that were directly incurred on behalf of our clients and reimbursed by them (reimbursed expenses); however, these amounts are included in consolidated revenue.
The Company experiences seasonal fluctuations in its revenue. Revenue is
typically higher during the Company's first and fourth quarters due primarily to
the timing of broking-related activities.
Human Capital and Benefits
The HCB segment provided an array of advice, broking, solutions and software for
our clients.
HCB was the largest segment of the Company, generating approximately 39% of our segment revenue for the year endedDecember 31, 2021 . HCB was focused on addressing our clients' people and risk needs to help them take on the challenges of operating in a global marketplace. This segment was further strengthened with teams of international consultants who provided support through each of our business units to the global headquarters of multinational clients and their foreign subsidiaries.
The HCB segment provided services through four business units:
•
Retirement - The Retirement business provides actuarial support, plan design, and administrative services for traditional pension and retirement savings plans. We help our clients assess the costs and risks of retirement plans on cash flow, earnings and the balance sheet, the effects of changing workforce demographics on their retirement plans and retiree benefit adequacy and security.
•
Health and Benefits - The Health & Benefits business provides plan management consulting, broking and administration across the full spectrum of health and group benefit programs, including medical, dental, disability, life and other coverage.
•
Talent & Rewards - Our Talent & Rewards business provides advice, data, software
and products to address clients' total rewards and talent issues.
•
Technology and Administration Solutions - Our Technology and Administration
Solutions business provides benefits outsourcing services to clients outside of
the
The following table sets forth HCB segment revenue for the years ended
31, 2021
ended
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2021 2020 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 3,447 $ 3,278 5% 2% 3% -% 3%
(i)
Components of revenue change may not add due to rounding.
HCB segment revenue for the years endedDecember 31, 2021 and 2020 was$3.4 billion and$3.3 billion , respectively. On an organic basis, Talent and Rewards led the segment's revenue growth, driven by strong market demand for rewards advisory work and talent and compensation products. Health and Benefits revenue grew from increased consulting work and a gain recorded in connection with a book-of-business settlement inNorth America alongside continued expansion of our local portfolios and global benefits management appointments outside ofNorth America . Retirement revenue increased with notable growth inGreat Britain driven by funding advice and Guaranteed Minimum Pension ('GMP') equalization work. Technology and Administration Solutions revenue increased primarily due to new project and client activity inGreat Britain .
The following table sets forth HCB segment revenue for the years ended
31, 2020
ended
46 --------------------------------------------------------------------------------
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2020 2019 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 3,278 $ 3,298 (1)% -% (1)% -% -%
(i)
Components of revenue change may not add due to rounding.
HCB segment revenue for both the years endedDecember 31, 2020 and 2019 was$3.3 billion . On an organic basis, the global impact of COVID-19 negatively impacted demand in our Talent and Rewards business. Health and Benefits delivered moderate revenue growth, driven by increased consulting and brokerage services and continued expansion of our client portfolio for both local and global benefit management appointments. In our Retirement and Technology and Administration Solutions businesses, revenue grew modestly as a result of increased project work in the first half of the year, primarily inGreat Britain andWestern Europe . Corporate Risk and Broking The CRB segment provided a broad range of risk advice, insurance brokerage and consulting services to our clients worldwide, ranging from small businesses to multinational corporations. The segment delivered integrated global solutions tailored to client needs and underpinned by data and analytics.
CRB generated approximately 35% of our segment revenue for the year ended
insurance markets on an annual basis.
CRB had eight global lines of business:
•
Property and Casualty - Property and Casualty provides property and liability insurance brokerage services across a wide range of industries and segments, including real estate, healthcare and retail.
•
Aerospace - Aerospace provides specialist expertise to the aerospace and space
industries.
•
Construction - Our Construction business provides services that include
insurance broking, claims, loss control and specialized risk advice for a wide
range of construction projects and activities.
•
Facultative - Facultative capabilities exist for each of CRB's offerings to
serve as a broker or intermediary for insurance companies seeking to arrange
reinsurance solutions across various classes of risk.
•
Financial, Executive and Professional Risks ('FINEX ') - FINEX encompasses all
financial and executive risks, delivering client solutions that range from
management and professional liability, employment practices liability, crime,
cyber and merger and acquisition-related insurances, to risk consulting and
advisory services.
•
Financial Solutions - Financial Solutions provides insurance broking services and specialized risk advice related to credit, surety, terrorism and political risk.
•
Marine - Marine provides specialist expertise to the maritime and logistics
industries.
•
Natural Resources - Our Natural Resources practice encompasses the oil, gas and
chemicals, mining and metals, power and utilities and renewable energy sectors.
The following table sets forth CRB segment revenue for the years ended
31, 2021
ended
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2021 2020 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 3,177 $ 2,977 7% 2% 5% -% 5%
(i)
Components of revenue change may not add due to rounding.
CRB segment revenue for the years endedDecember 31, 2021 and 2020 was$3.2 billion and$3.0 billion , respectively. On an organic basis,North America led the segment with gains recorded in connection with book-of-business sales and settlements alongside strong 47 -------------------------------------------------------------------------------- renewals, primarily inFINEX , M&A, and Construction. International andGreat Britain revenue increased with new business generation primarily in theFINEX and Construction insurance lines. Revenue inWestern Europe was down due to challenges related to senior staff departures.
The following table sets forth CRB segment revenue for the years ended
31, 2020
ended
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2020 2019 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 2,977 $ 2,946 1% -% 1% -% 1%
(i)
Components of revenue change may not add due to rounding.
CRB segment revenue for the years endedDecember 31, 2020 and 2019 was$3.0 billion and$2.9 billion , respectively. On an organic basis,North America led the segment, followed byWestern Europe , primarily with new business generation along with strong renewals. The revenue increase was partially offset by a decline inGreat Britain and International, due to a change in the remuneration model for certain lines of business. This change, which is neutral to operating income, results in lower revenue and an equal reduction to salaries and benefits expense. Absent this change, International revenue increased, led by growth inLatin America andAsia .Great Britain was additionally impacted by an internal transfer of a book-of-business toNorth America . Apart from these two structural changes, revenue increased modestly due to strong new business and renewals which were partially offset by the impact of COVID-19 on the construction and marine insurance lines.
Investment, Risk and Reinsurance
The IRR segment used a sophisticated approach to risk, which helped clients free up capital and manage investment complexity. The segment worked closely with investors and insurers to manage the equation between risk and return. Blending advanced analytics with deep institutional knowledge, IRR identified new opportunities to maximize performance. This segment provided investment consulting and discretionary management services and insurance-specific services and solutions through reserves opinions, software, ratemaking and risk underwriting. This segment generated approximately 9% of segment revenue for the Company for the year endedDecember 31, 2021 . Approximately 78% of the revenue for this segment was split betweenNorth America and theU.K. AtDecember 31, 2021 , IRR included the following businesses and offerings:
•
Insurance Consulting and Technology -Insurance Consulting and Technology is a global business that provides advice and technology solutions to the insurance industry. We combine our consulting and technology solutions to provide guidance on risk and capital management, pricing and predictive modeling, financial and regulatory reporting, financial and capital modeling, M&A, outsourcing and business management.
•
Investments - Investments provides advice and discretionary management solutions to improve investment outcomes for asset owners using a broad and sophisticated framework for managing risk.
The following IRR businesses were disposed of in 2021 or 2020:
•
Willis Re - Willis Re provided reinsurance industry clients with an
understanding of how risk affects capital and financial performance and advised
on the best ways to manage related outcomes.
•
Wholesale Insurance Broking - Wholesale Insurance Broking provided specialist
broking services primarily to retail and wholesale brokers.
•
Innovisk - Innovisk brought together our set of managing general agent
underwriting activities for the purposes of accelerating their future
development using data and technology.
48 --------------------------------------------------------------------------------
•
and products to companies involved in the insurance and reinsurance industries.
•
insurance, benefits, human resources and savings in the Nordic region. The
business specialized in providing human capital and benefits administration
together with providing market leading savings and insurance solutions.
InDecember 2021 , the Company completed the sale of Willis Re (see Note 3 - Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K for further information). As a result, we have reclassified revenue associated with Willis Re to discontinued operations within our consolidated statements of comprehensive income, and therefore it is not included for each of the periods presented below. Additionally, during 2021, the Company completed divestitures of its Wholesale Insurance Broking and Innovisk businesses. InSeptember 2020 , the Company sold itsMax Matthiessen business. Revenue attributable to these businesses prior to their respective divestitures are included in each of the periods presented below. See Note 3 - Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K for further information.
The following table sets forth IRR segment revenue for the years ended
31, 2021
ended
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2021 2020 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 814 $ 921 (12)% 3%
(15)% (31)% 16% (i)
Components of revenue change may not add due to rounding.
IRR segment revenue for the years endedDecember 31, 2021 and 2020 was$814 million and$921 million , respectively. On an organic basis, advisory-related fees led the revenue growth in both our Investment business andInsurance Consulting and Technology business alongside increased contingent performance fees and software sales. Revenue growth in IRR was further aided by a gain recorded in connection with a book-of-business settlement which relates to Reinsurance assets that were not transferred as part of the sale of Willis Re. The growth was partially offset by a decline in Wholesale's revenue prior to its disposal in the first quarter of 2021, resulting from headwinds across coverage lines coupled with a strategic shift in its operating model.
The following table sets forth IRR segment revenue for the years ended
31, 2020
ended
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2020 2019 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 921 $ 962 (4)% -%
(5)% (5)% -% (i)
Components of revenue change may not add due to rounding.
IRR segment revenue for the years endedDecember 31, 2020 and 2019 was$921 million and$962 million , respectively. On an organic basis, most lines of business contributed to the growth.Insurance Consulting and Technology revenue grew from strong technology sales.Max Matthiessen revenue increased as a result of overall growth in net commissions. Revenue growth in the Investment businesses resulted from client wins.
Benefit Delivery and Administration
The BDA segment provided primary medical and ancillary benefit exchange and outsourcing services to active employees and retirees across both the group and individual markets. A significant portion of the revenue in this segment was recurring in nature, driven by either the commissions from the policies we sell, or from long-term service contracts with our clients that typically range from three to five years. Revenue across this segment may have been seasonal, driven by the magnitude and timing of client enrollment activities, which often occur during the fourth quarter, with increased membership levels typically effectiveJanuary 1 , after calendar year-end benefits elections. OnJuly 30, 2019 , the Company acquiredTRANZACT , which operated as part of the BDA segment.TRANZACT 49 --------------------------------------------------------------------------------
experiences seasonally higher revenue during the fourth quarter due primarily to
the timing of the Federal Medicare Open Enrollment window.
BDA generated approximately 17% of our segment revenue for the year ended
customers primarily in the
•
Benefits Outsourcing - This service line is focused on serving active employee groups for clients across theU.S. We use our proprietary technology to provide a broad suite of health and welfare and pension administration outsourcing services, including tools to enable benefit modeling, decision support, enrollment and benefit choice.
•
Individual Marketplace - This service line offers decision support processes and tools to connect consumers with insurance carriers in private individual and Medicare markets.Individual Marketplace serves both employer-based and direct-to-consumer populations through its end-to-end consumer acquisition and engagement platforms, which tightly integrate call routing technology, an efficient quoting and enrollment engine, a customer relations management system and deep links with insurance carriers.
•
Benefits Accounts - This service line delivers consumer-driven healthcare and reimbursement accounts, including health savings accounts, health reimbursement arrangements and other consumer-directed accounts to our benefits outsourcing, individual marketplace and employer clients.
The following table sets forth BDA segment revenue for the years ended
31, 2021
ended
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2021 2020 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 1,500 $ 1,359 10% -% 10% 1% 10%
(i)
Components of revenue change may not add due to rounding.
BDA segment revenue for the years endedDecember 31, 2021 and 2020 was$1.5 billion and$1.4 billion , respectively. BDA's organic revenue increase was led byIndividual Marketplace , primarily byTRANZACT , which generated year-to-date revenue of$661 million with strong growth in Medicare Advantage sales. Benefits Outsourcing revenue also increased, driven by its expanded client base and project work stemming from temporary federal policy changes affecting group healthcare plans.
The following table sets forth BDA segment revenue for the years ended
31, 2020
ended
Components of Revenue Change (i)
As Constant
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2020 2019 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 1,359 $ 1,035 31% -% 31% 21% 10%
(i)
Components of revenue change may not add due to rounding.
BDA segment revenue for the years endedDecember 31, 2020 and 2019 was$1.4 billion and$1.0 billion , respectively. BDA's organic revenue increase was led byIndividual Marketplace , primarily byTRANZACT , with growth across all products. Benefits Outsourcing revenue also grew, driven by its expanded client base. For the year endedDecember 31, 2020 ,TRANZACT generated revenue of$557 million as compared to$245 million for the year endedDecember 31, 2019 , in which it was partially included from the date of the acquisition ofJuly 30, 2019 . 50 --------------------------------------------------------------------------------
Costs of Providing Services (Continuing Operations)
For all financial information presented herein, the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 - Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K for further information). Total costs of providing services for the year endedDecember 31, 2021 were$6.8 billion , compared to$7.8 billion for the year endedDecember 31, 2020 , a decrease of$960 million , or 12%. This decrease was primarily due to the$1 billion income receipt related to the termination of the proposed Aon combination during the third quarter of 2021. Total costs of providing services for the year endedDecember 31, 2020 were$7.8 billion , compared to$7.3 billion for the year endedDecember 31, 2019 , an increase of$440 million , or 6%. See the following discussion for further details.
Salaries and Benefits
Salaries and benefits for the year endedDecember 31, 2021 were$5.3 billion , compared to$5.2 billion for the year endedDecember 31, 2020 , an increase of$96 million , or 2%. The increase in the current year is primarily due to higher incentive and benefit accruals for the period. Salaries and benefits for the year endedDecember 31, 2020 were$5.2 billion , compared to$4.9 billion for the year endedDecember 31, 2019 , an increase of$228 million , or 5%. The increase was primarily a result of higher salaries and incentive accruals along with the full year inclusion ofTRANZACT's compensation costs.
Salaries and benefits, as a percentage of revenue, represented 58%, 60% and 59%
for the years ended
Other Operating Expenses
Other operating expenses include occupancy, legal, marketing, licenses, royalties, supplies, technology, printing and telephone costs, as well as insurance, including premiums on excess insurance and losses on professional liability claims, travel by colleagues, publications, professional subscriptions and development, recruitment, other professional fees and irrecoverable value added and sales taxes. Additionally, other operating expenses included costs historically allocated to our Willis Re business which will be partially offset by fees under theTSA withGallagher . Other operating expenses for both the years endedDecember 31, 2021 and 2020 were$1.7 billion , a decrease of$24 million , or 1%. This improvement was primarily due to decreases in local office expenses, non-income taxes, travel and entertainment costs and professional insurance expense, partially offset by higher marketing and professional fees for the year endedDecember 31, 2021 as compared to the prior year. Other operating expenses for the year endedDecember 31, 2020 were$1.7 billion , compared to$1.6 billion for the year endedDecember 31, 2019 , an increase of$50 million , or 3%. The increase was primarily due to the full year inclusion ofTRANZACT's operating expenses as well as the prior year settlement of two shareholder litigation suits net of insurance and other recovery receivables. Depreciation Depreciation represents the expense incurred over the useful lives of our tangible fixed assets and internally-developed software. Depreciation for the year endedDecember 31, 2021 was$281 million , compared to$307 million for the year endedDecember 31, 2020 , a decrease of$26 million , or 8%. The year-over-year decrease was primarily due to the prior year acceleration of depreciation of$35 million related to the abandonment of an internally-developed software asset prior to being placed in service. This decrease was partially offset by additional assets placed in service during 2020 and 2021. Depreciation for the year endedDecember 31, 2020 was$307 million , compared to$239 million for the year endedDecember 31, 2019 , an increase of$68 million , or 28%. The increase was due to a higher depreciable base of assets resulting from additional assets placed in service during 2019. Also contributing to the year-over-year increase was the$35 million of accelerated depreciation related to the abandonment of an internally-developed software asset.
Amortization
Amortization represents the amortization of acquired intangible assets, including acquired internally-developed software. Amortization for the year endedDecember 31, 2021 was$369 million , compared to$461 million for the year endedDecember 31, 2020 , a decrease of$92 million , or 20%. Amortization for the year endedDecember 31, 2020 was$461 million , compared to$488 million for the year endedDecember 31, 2019 , a decrease of$27 million , or 6%. Our intangible amortization is more heavily weighted to the initial years of the useful lives of the related intangibles, and therefore amortization related to intangible assets purchased prior to our acquisition ofTRANZACT will continue to decrease over time. This decrease was partially offset by the additional amortization resulting from the intangible assets related to theTRANZACT acquisition. 51 --------------------------------------------------------------------------------
Restructuring Costs
Restructuring costs for the year endedDecember 31, 2021 were$26 million primarily related to the real estate rationalization component of the Transformation program commenced by the Company during the fourth quarter of 2021 (see Transformation Program within this section and Note 6 - Restructuring Costs within Item 8 of this Annual Report on Form 10-K). Restructuring costs for the year endedDecember 31, 2020 were$24 million , all of which related to minor restructuring activities carried out by various business lines throughout the Company. There were no restructuring costs incurred for the year endedDecember 31, 2019 .
Transaction and Integration, Net
Transaction and integration, net for the year endedDecember 31, 2021 was income of$806 million , compared to$110 million of expenses for the year endedDecember 31, 2020 . The income for the current year was primarily due to the$1 billion income receipt related to the termination of the proposed Aon transaction during the current year, partially offset by costs mostly related to the terminated proposed transaction. Transaction and integration expenses for the year endedDecember 31, 2020 were comprised of$110 million of mostly transaction costs, consisting primarily of legal fees related to our then-proposed combination with Aon and integration expenses related to the acquisition ofTRANZACT in 2019. Transaction and integration expenses for the year endedDecember 31, 2019 were comprised of$13 million of transaction costs, primarily related to the acquisition ofTRANZACT .
Income from Operations
Income from operations for the year endedDecember 31, 2021 was$2.2 billion , compared to$859 million for the year endedDecember 31, 2020 , an increase of$1.3 billion . The increase was mostly due to the$1 billion income receipt from the termination of the proposed Aon transaction and higher revenue. Income from operations for the year endedDecember 31, 2020 was$859 million , compared to$1.1 billion for the year endedDecember 31, 2019 , a decrease of$195 million . This decrease resulted mostly from higher salaries and benefits and transaction and integration expenses as well as the additional depreciation related to the asset abandonment noted above, partially offset by higher revenue year over year.
Interest Expense
Interest expense for the years endedDecember 31, 2021 and 2020 was$211 million and$244 million , respectively. Interest expense is comprised primarily of interest associated with our senior notes. Interest expense decreased by$33 million for the year endedDecember 31, 2021 , which was primarily the result of lower levels of indebtedness in the current year. Interest expense for the years endedDecember 31, 2020 and 2019 was$244 million and$234 million , respectively. Interest expense increased by$10 million for the year endedDecember 31, 2020 , primarily due to our additional senior notes offerings during the second half of 2019 and the first half of 2020, and additional indebtedness associated with theTRANZACT acquisition.
Other Income, Net
Other income, net includes gains and losses on disposals of operations, pension credits or expenses that are not attributable to service expense, interest in earnings of associates, foreign exchange gains and losses and other miscellaneous non-operating income and costs. Other income, net for the year endedDecember 31, 2021 was$701 million , compared to$396 million for the year endedDecember 31, 2020 , an increase of$305 million , primarily resulting from the net gain on disposals of operations, mostly due to the disposal of our Miller business (see Note 3 - Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K). Other income, net for the year endedDecember 31, 2020 was$396 million , compared to$226 million for the year endedDecember 31, 2019 , an increase of$170 million . The increase resulted from the net gains on disposals of operations, primarily due to the disposal of ourMax Matthiessen business (see Note 3 - Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K), and higher pension income in 2020.
Provision for Income Taxes
Provision for income taxes on continuing operations for the years endedDecember 31, 2021 , 2020 and 2019 was$536 million ,$249 million and$197 million , respectively. The effective tax rates for the years endedDecember 31, 2021 , 2020 and 2019 were 19.9%, 24.7% and 18.8%, respectively. These effective tax rates are calculated using extended values from our consolidated statements of comprehensive income and are therefore more precise tax rates than can be calculated from rounded values. The current year effective tax rate includes a$250 million estimated tax expense related to the income receipt of the termination payment. TheDecember 31, 2020 effective rate was higher primarily due to additional tax expense of$61 million in connection with the temporary income tax provisions of the CARES Act. During 2020 the Company elected to utilize the higher section 163(j) 50 percent business interest limitation for tax years 2019 and 2020, which allowed the Company to utilize additional interest expense. The utilization of additional interest expense reduced our regular tax liability, however, it created a base erosion minimum tax expense for these tax years. The Base Erosion and Anti-Abuse Tax ('BEAT') effectively applies a 10 percent minimum tax if modified taxable income, as adjusted for base erosion payments, is greater than the regular tax liability for a year. 52 --------------------------------------------------------------------------------
Income from Discontinued Operations, Net of Tax
The following table presents selected financial information as it relates to
income from discontinued operations, net of tax:
Years ended December 31,
2021 2020 2019
Revenue from discontinued operations $ 721 $ 737 $ 669
Costs of providing services
Salaries and benefits 350 350 320
Other operating expenses 59 61 72
Depreciation and amortization 2 2 2
Transaction and integration, net 33 - -
Total costs of providing services 444 413 394
Other income, net 2 3 1
Income from discontinued operations before
income taxes 279 327 276
Gain on disposal of Willis Re 2,300 - -
Provision for income tax expense (500 ) (69 ) (52 )
Net losses receivable from Gallagher on
Deferred Closing 1 - -
Income from discontinued operations, net of
tax $ 2,080 $ 258 $ 224
Income from discontinued operations, net of tax for the years ended December 31,
2021 , 2020 and 2019 was $2.1 billion , $258 million and $224 million ,
respectively. The operations of our Willis Re business have been reclassified to
discontinued operations upon our entering into an agreement to sell the business
during the third quarter of 2021 (see Note 3 - Acquisitions and Divestitures
within Item 8 of this Annual Report on Form 10-K). See the following discussion
for further details.
Revenue from Discontinued Operations
Revenue from discontinued operations for the year endedDecember 31, 2021 was$721 million , compared to$737 million for the year endedDecember 31, 2020 , a decrease of$16 million , which was driven by only eleven months of revenue activity in 2021 for the majority of the Willis Re business prior to its disposal onDecember 1, 2021 . Revenue from discontinued operations for the year endedDecember 31, 2020 was$737 million , compared to$669 million for the year endedDecember 31, 2019 , an increase of$68 million , which was driven by new business wins and favorable renewal factors.
Salaries and Benefits
Salaries and benefits attributable to discontinued operations for both the years endedDecember 31, 2021 and 2020 was$350 million , as increased incentives and share-based compensation in 2021 offset the reduction in salaries and payroll taxes stemming from the inclusion of only eleven months of these costs. Salaries and benefits attributable to discontinued operations for the year endedDecember 31, 2020 was$350 million , compared to$320 million for the year endedDecember 31, 2019 , an increase of$30 million , which related to increased incentive accruals.
Other Operating Expenses
Other operating expenses attributable to discontinued operations for the year endedDecember 31, 2021 was$59 million , compared to$61 million for the year endedDecember 31, 2020 , a decrease of$2 million , which was due to the inclusion of only eleven months of these costs. Other operating expenses attributable to discontinued operations for the year endedDecember 31, 2020 were$61 million , compared to$72 million for the year endedDecember 31, 2019 , a decrease of$11 million , which was due primarily to decreased travel and entertainment expenses.
Depreciation and Amortization
Depreciation and amortization attributable to discontinued operations for the
years ended
presented.
Transaction and Integration, Net
Transaction and integration, net directly attributable to discontinued
operations for the year ended
were incurred as part of the sale of Willis Re.
53 --------------------------------------------------------------------------------
Other Income, Net
Other income, net attributable to discontinued operations for the years endedDecember 31, 2021 , 2020 and 2019 was$2 million ,$3 million and$1 million , respectively, which was entirely attributable to foreign currency transaction gains. Gain on Disposal of Willis Re
The preliminary pre-tax gain on disposal of Willis Re for the year ended
billion
billion
Provision for Income Taxes on Discontinued Operations
Provision for income taxes attributable to discontinued operations for the years endedDecember 31, 2021 , 2020 and 2019 was$500 million ,$69 million and$52 million , respectively. The current year income tax provision was driven primarily by tax expense on the gain on the sale of our Willis Re business, the majority of which was recognized in theU.S. The majority of theU.K. gain satisfied the conditions of theU.K. substantial shareholding exemption and was exempt from taxation. The taxable component of theU.K. gain on disposal of$226 million was partially offset by the utilization of capital loss carryforwards of$98 million . Associated with the use ofU.K. capital losses, a tax benefit of$17 million was recorded for the release of an associated valuation allowance. Additionally, the recognition of income from discontinued operations results in the Company no longer being subject to a BEAT liability in 2021. As the Company has recorded a$22 million BEAT liability within continuing operations, a corresponding$22 million benefit has been included within discontinued operations.
Net Income Attributable to WTW
Net income attributable to WTW for the year endedDecember 31, 2021 was$4.2 billion , compared to$996 million for the year endedDecember 31, 2020 , an increase of$3.2 billion , or 324%. This increase was primarily due to the$2.1 billion net income from the discontinued operations of our Willis Re business, the$1 billion income receipt from the termination of the proposed Aon transaction, the sale of our Miller business in the first quarter of 2021, and higher revenue. Net income attributable to WTW for the year endedDecember 31, 2020 was$996 million , compared to$1.0 billion for the year endedDecember 31, 2019 , a decrease of$48 million , or 5%. This decrease resulted primarily from higher salaries and benefits, tax expense and transaction and integration expenses, partially offset by higher revenue year over year and the net gains on disposals of operations.
Liquidity and Capital Resources
Executive Summary
Our principal sources of liquidity are funds generated by operating activities, available cash and cash equivalents and amounts available under our revolving credit facilities and any new debt offerings. These sources of liquidity will fund our short-term and long-term obligations atDecember 31, 2021 . Our most significant long-term obligations include mandatory debt and related interest, operating leases and pension obligations and contributions to our qualified pension plans. Additionally, during 2021, we divested Willis Re for$3.3 billion of proceeds. The COVID-19 pandemic has contributed to significant volatility in financial markets, including occasional declines in equity markets, inflation and changes in interest rates and reduced liquidity on a global basis. Specific to WTW, over the past two years, the COVID-19 pandemic had an initial negative impact on discretionary work we perform for our clients, but we later saw increased demand for these services begin to return in the second quarter of 2021 which continues into 2022. We continue to have decreased spending on travel and associated expenses and third-party contractors, and we have the ability to contain spending on discretionary projects and certain capital expenditures. Based on our current balance sheet and cash flows, current market conditions and information available to us at this time, we believe that WTW has access to sufficient liquidity, which includes all of the borrowing capacity available to draw against our recently-amended and restated$1.5 billion revolving credit facility (see Note 11 - Debt in Item 8 within this Annual Report on Form 10-K), to meet our cash needs for the next twelve months, including investments in the business for growth, scheduled debt repayments, share repurchases and dividend payments. During the year endedDecember 31, 2021 , we made payments of$185 million (net of reimbursements) for the settlement of obligations related to theStanford and WTW merger-related securities litigations, and we repaid in full the$450 million of 3.500% senior notes which matured in the third quarter of 2021 and the$500 million of 5.750% senior notes which matured in the first quarter of 2021, along with the respective interest, using currently available cash. Additionally, we repaid in full the principal and interest outstanding on our collateralized facility. During the third quarter of 2021 we also restarted our share repurchase programs and during the year endedDecember 31, 2021 , we repurchased$1.6 billion of shares, and have authorization to repurchase an additional$3.9 billion . Further, as ofFebruary 18, 2022 , we have repurchased approximately$1.5 billion of additional shares. 54 -------------------------------------------------------------------------------- From time to time, we will consider whether to repurchase shares based on many factors, including market and economic conditions, applicable legal requirements and other business considerations. The share repurchase program has no termination date and may be suspended or discontinued at any time. Additionally, the operating results and balance sheets of Willis Re were reclassified to discontinued operations during the current year. Willis Re's operating cash flows approximate its pre-tax income and any adjustments for working capital movements (see Note 3 - Acquisitions and Divestitures in Item 8 within this Annual Report on Form 10-K). Certain costs historically allocated to the Willis Re business are included in continuing operations and will be retained following the disposal, but are expected to be partially offset by reimbursements through theTSA . Costs incurred to service theTSA are expected to be reduced as part of the Company's Transformation program as quickly as possible when the services are no longer required byGallagher . Events that could change the historical cash flow dynamics discussed above include significant changes in operating results, potential future acquisitions or divestitures, material changes in geographic sources of cash, unexpected adverse impacts from litigation or regulatory matters including tax laws, or future pension funding during periods of severe downturn in the capital markets. Tax considerations - The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when it expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. We continue to have certain subsidiaries whose earnings have not been deemed permanently reinvested, for which we have been accruing estimates of the tax effects of such repatriation. Excluding these certain subsidiaries, we continue to assert that the historical cumulative earnings for the remainder of our subsidiaries have been reinvested indefinitely and therefore do not provide deferred taxes on these amounts. If future events, including material changes in estimates of cash, working capital, long-term investment requirements or additional legislation, necessitate that these earnings be distributed, an additional provision for income and foreign withholding taxes, net of credits, may be necessary. Other potential sources of cash may be through the settlement of intercompany loans or return of capital distributions in a tax-efficient manner.
Cash and Cash Equivalents
Our cash and cash equivalents atDecember 31, 2021 and 2020 totaled$4.5 billion and$2.0 billion , respectively. The increase in cash fromDecember 31, 2020 toDecember 31, 2021 was driven by our strong operating results, including the$1 billion income receipt related to the termination of the proposed Aon transaction, and the proceeds from the sales of our Willis Re and Miller businesses in the amounts of$3.3 billion and$696 million , respectively. These items were partially offset by$1.6 billion of stock repurchases, the full payments of our$450 million of 3.500% senior notes and$500 million of 5.750% senior notes, net legal settlement payments of$185 million (related to theStanford and WTW merger settlements), tax payments of$383 million primarily related to the disposal of Willis Re and the income receipt of the termination payment, and higher bonus payments and benefit-related items of$250 million made during the year endedDecember 31, 2021 .
Additionally, we had all of the borrowing capacity available to draw against our
new
Included within cash and cash equivalents at
amounts held for regulatory capital adequacy requirements, including
million
55 --------------------------------------------------------------------------------
Summarized Consolidated Cash Flows
The following table presents the summarized consolidated cash flow information
for the years ended:
Years ended December 31,
2021 2020 2019
(in millions)
Net cash from/(used in):
Operating activities $ 2,061 $ 1,774 $ 1,081
Investing activities 2,570 (160 ) (1,614 )
Financing activities (3,114 ) 378 455
INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH 1,517 1,992 (78 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash (127 ) 126 - CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR (i) 6,301 4,183
4,261
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR (i)$ 7,691 $ 6,301 $ 4,183 (i) The amounts of the cash, cash equivalents and restricted cash, and their respective classification on the balance sheet, have been included in Note 21 - Supplemental Disclosures of Cash Flow Information within Item 8 of this Annual Report on Form 10-K, as well as their respective portion of the change in the increase or decrease of cash, cash equivalents and restricted cash for each of the periods presented.
Cash Flows From Operating Activities
Cash flows from operating activities were$2.1 billion for 2021, compared to cash flows from operating activities of$1.8 billion for 2020. The$2.1 billion net cash from operating activities for 2021 included net income of$4.2 billion , partially offset by$1.7 billion of unfavorable non-cash adjustments and by unfavorable changes in operating assets and liabilities of$449 million . The$1.7 billion of unfavorable non-cash adjustments primarily includes the net gains on sales of operations, depreciation, amortization and non-cash lease expense. This increase in cash flows from operating activities as compared to the prior year was primarily due the$1 billion of income receipt related to the termination of the proposed Aon transaction, partially offset by$383 million in tax payments primarily related to the disposal of Willis Re and the income receipt of the termination payment, net legal settlement payments of$185 million and$250 million of increased bonus and benefit-related payments made during the year endedDecember 31, 2021 . Cash flows from operating activities were$1.8 billion for 2020, compared to cash flows from operating activities of$1.1 billion for 2019. The$1.8 billion net cash from operating activities for 2020 included net income of$1.0 billion and$810 million of non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of$56 million . The$810 million of non-cash adjustments primarily includes depreciation, amortization and non-cash lease expense. This increase in cash flows from operations as compared to the prior year was primarily due to positive cash flows from our improved working capital position driven by effective management of discretionary spending for the year endedDecember 31, 2020 as compared toDecember 31, 2019 .
The
of
offset by unfavorable changes in operating assets and liabilities of
million
depreciation, amortization and non-cash lease expense.
Cash Flows From/(Used In) Investing Activities
Cash flows from investing activities for the year endedDecember 31, 2021 were$2.6 billion compared to cash flows used in investing activities of$160 million for the year endedDecember 31, 2020 . The cash flows from investing activities for the year endedDecember 31, 2021 primarily include the proceeds from the sale of Willis Re of$3.3 billion and Miller of$696 million and other smaller disposals, partially offset by cash and fiduciary funds transferred on disposal of$1.0 billion , purchases of investments of$200 million , capital expenditures and capitalized software additions of$201 million and net cash paid for acquisitions of$47 million . Cash flows used in investing activities for 2020 and 2019 were$160 million and$1.6 billion , respectively, with 2020 primarily driven by capital expenditures and capitalized software additions and an acquisition during the first quarter of 2020. These outflows were partially offset by proceeds from the sale of operations, primarily resulting from the disposal of ourMax Matthiessen business. Cash flows in 2019 were primarily driven by the acquisition ofTRANZACT during the third quarter of 2019, coupled with capital expenditures and capitalized software additions.
Cash Flows (Used In)/From Financing Activities
Cash flows used in financing activities for the year ended
were
repurchases of
payments of
56 -------------------------------------------------------------------------------- Cash flows from financing activities for 2020 were$378 million . The significant financing activities included$812 million of net proceeds from fiduciary funds held for clients, partially offset by dividend payments of$346 million and net debt-related payments of$47 million .
Cash flows from financing activities for 2019 were
significant financing activities included net debt-related proceeds of
million
share repurchases of
Indebtedness
Total debt, total equity, and the capitalization ratio at
December 31,
2021 2020
(in millions)
Long-term debt $ 3,974 $ 4,664
Current debt 613 971
Total debt $ 4,587 $ 5,635
Total WTW shareholders' equity
Capitalization ratio 25.7 % 34.2 % The capitalization ratio decreased fromDecember 31, 2020 due to debt repayments and strong earnings, partially offset by share repurchases. Our debt repayments included the$450 million of our 3.500% senior notes inAugust 2021 , theMarch 2021 repayment of our$500 million 5.750% senior notes, and theNovember 2021 repayment of$32 million of principal and interest outstanding on our collateralized facility (see Note 11 - Debt within Item 8 of this Annual Report on Form 10-K for further information). The increase in shareholders' equity was driven by strong earnings during the current full year, which included the gains on the Willis Re business and Miller wholesale business sales, and the income receipt related to the termination of the proposed Aon transaction, partially offset by$1.6 billion of share repurchases. AtDecember 31, 2021 , our mandatory debt repayment over the next twelve months consists of$614 million outstanding on our Euro-denominated 2.125% senior notes due 2022.
At
covenants.
Fiduciary Funds
As an intermediary, we hold funds, generally in a fiduciary capacity, for the account of third parties, typically as the result of premiums received from clients that are in transit to insurers and claims due to clients that are in transit from insurers. We also hold funds for clients of our benefits account businesses. These fiduciary funds are included in fiduciary assets on our consolidated balance sheets. We present the equal and corresponding fiduciary liabilities related to these fiduciary funds representing amounts or claims due to our clients or premiums due on their behalf to insurers on our consolidated balance sheets. Fiduciary funds are generally required to be kept in regulated bank accounts subject to guidelines which emphasize capital preservation and liquidity; such funds are not available to service the Company's debt or for other corporate purposes. Notwithstanding the legal relationships with clients and insurers, the Company is entitled to retain investment income earned on certain of these fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds. AtDecember 31, 2021 and 2020, we had fiduciary funds of$3.4 billion and$4.3 billion , respectively, of which$719 million and$2.5 billion , respectively, are attributable to our Willis Re business.
Share Repurchase Program
The Company is authorized to repurchase shares, by way of redemption or
otherwise, and will consider whether to do so from time to time, based on many
factors, including market conditions. There are no expiration dates for our
repurchase plans or programs.
OnFebruary 26, 2020 , the board of directors approved a$251 million increase to the existing share repurchase program. OnJuly 26, 2021 , the board of directors approved a$1.0 billion increase to the existing share repurchase program, and onSeptember 16, 2021 , approved a$4.0 billion increase to the existing share repurchase program. These three increases brought the total approved authorization to$5.5 billion . See Part II, Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer 57 --------------------------------------------------------------------------------
Purchases of
information regarding the Company's share repurchase program.
At
repurchase authority. The maximum number of shares that could be repurchased
based on the closing price of our ordinary shares on
The following table presents specified information about the Company's
repurchases of ordinary shares for the year ended
Year ended
December 31, 2021
Shares repurchased 7,155,396
Average price per share $227.43
Aggregate repurchase cost (excluding broker costs)
During the first half of 2021, the Company had no share repurchase activity. A share repurchase prohibition existed under the transaction agreement for the proposed Aon combination. Following the Termination, there are no longer any contractual prohibitions on share repurchases.
Capital Commitments
The Company's capital expenditures for fixed assets and software for internal use were$148 million for the year endedDecember 31, 2021 . Expected capital expenditures for fixed assets and software for internal use, which include expenditures under our Transformation program, are$250 million for the year endedDecember 31, 2022 . We expect cash from operations to adequately provide for these cash needs. Dividends Total cash dividends of$374 million were paid during the year endedDecember 31, 2021 . InFebruary 2022 , the board of directors approved a quarterly cash dividend of$0.82 per share ($3.28 per share annualized rate), which will be paid on or aroundApril 15, 2022 to shareholders of record as ofMarch 31, 2022 .
Supplemental Guarantor Financial Information
As of
'notes'):
a)
Willis North America Inc. ('Willis North America ') has approximately$2.9 billion senior notes outstanding, of which$650 million were issued onMay 16, 2017 ,$1.0 billion were issued onSeptember 10, 2018 ,$1.0 billion were issued onSeptember 10, 2019 , and$275 million were issued onMay 29, 2020 ; and
b)
Trinity Acquisition plc has approximately$1.7 billion senior notes outstanding, of which$525 million were issued onAugust 15, 2013 ,$550 million were issued onMarch 22, 2016 and €540 million ($609 million ) were issued onMay 26, 2016 , and a$1.5 billion revolving credit facility established onOctober 6, 2021 , on which no balance was outstanding atDecember 31, 2021 . The following table presents a summary of the entities that issue each note and those wholly-owned subsidiaries of the Company that guarantee each respective note on a joint and several basis as ofDecember 31, 2021 . These subsidiaries are all consolidated byWillis Towers Watson plc (the 'parent company') and together with the parent company comprise the 'Obligor group'. Trinity Willis North Acquisition America Inc. Entity plc Notes Notes Willis Towers Watson plc Guarantor Guarantor Trinity Acquisition plc Issuer Guarantor Willis North America Inc. Guarantor Issuer Willis Netherlands Holdings B.V. Guarantor
Guarantor
Willis Investment UK Holdings Limited Guarantor Guarantor TA I Limited Guarantor Guarantor Willis Group Limited Guarantor Guarantor
Willis Towers Watson UK Holdings Limited
Guarantor Guarantor
58
--------------------------------------------------------------------------------
The notes issued by
•
rank equally with all of the issuer's existing and future unsubordinated and
unsecured debt;
•
rank equally with the issuer's guarantee of all of the existing senior debt of the Company and the other guarantors, including any debt under the Revolving Credit Facility;
•
are senior in right of payment to all of the issuer's future subordinated debt;
and
•
are effectively subordinated to all of the issuer's secured debt to the extent
of the value of the assets securing such debt.
All other subsidiaries of the parent company are non-guarantor subsidiaries
('the non-guarantor subsidiaries').
Each member of the Obligor group has only a stockholder's claim on the assets of the non-guarantor subsidiaries. This stockholder's claim is junior to the claims that creditors have against those non-guarantor subsidiaries. Holders of the notes will only be creditors of the Obligor group and not creditors of the non-guarantor subsidiaries. As a result, all of the existing and future liabilities of the non-guarantor subsidiaries, including any claims of trade creditors and preferred stockholders, will be structurally senior to the notes. As of and for the periods endedDecember 31, 2021 and 2020, the non-guarantor subsidiaries represented substantially all of the total assets and accounted for substantially all of the total revenue of the Company prior to consolidating adjustments. The non-guarantor subsidiaries have other liabilities, including contingent liabilities that may be significant. Each indenture does not contain any limitations on the amount of additional debt that the Obligor group and the non-guarantor subsidiaries may incur. The amounts of this debt could be substantial, and this debt may be debt of the non-guarantor subsidiaries, in which case this debt would be effectively senior in right of payment to the notes. The notes are obligations exclusively of the Obligor group. Substantially all of the Obligor group's operations are conducted through its non-guarantor subsidiaries. Therefore, the Obligor group's ability to service its debt, including the notes, is dependent upon the net cash flows of its non-guarantor subsidiaries and their ability to distribute those net cash flows as dividends, loans or other payments to the Obligor group. Certain laws restrict the ability of these non-guarantor subsidiaries to pay dividends and make loans and advances to the Obligor group. In addition, such non-guarantor subsidiaries may enter into contractual arrangements that limit their ability to pay dividends and make loans and advances to the Obligor group. Intercompany balances and transactions between members of the Obligor group have been eliminated. All intercompany balances and transactions between the Obligor group and the non-guarantor subsidiaries have been presented in the disclosures below on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. The intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries, presented below, relate to a number of items including loan funding for acquisitions and other purposes, transfers of surplus cash between subsidiary companies, funding provided for working capital purposes, settlement of expense accounts, transactions related to share-based payment arrangements and share issuances, intercompany royalty arrangements, intercompany dividends and intercompany interest. AtDecember 31, 2021 and 2020, the intercompany balances of the Obligor group with non-guarantor subsidiaries were net receivables of$700 million and$500 million , respectively, and net payables of$8.1 billion and$7.6 billion , respectively.
No balances or transactions of non-guarantor subsidiaries are presented in the
disclosures other than the intercompany items noted above.
59
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Presented below is certain summarized financial information for the Obligor
group.
As of As of
December 31, 2021 December 31, 2020
(in millions)
Total current assets $ 243 $ 161
Total non-current assets 862 671
Total current liabilities 7,747 5,116
Total non-current liabilities 5,298 8,434
Year ended
December 31, 2021
(in millions)
Revenue $ 2,026
Income from operations 2,382
Income from operations before income taxes (i) 2,121
Net income (ii) 2,127
Net income attributable to Willis Towers Watson 2,127
(i)
Includes intercompany expense, net of the Obligor group from non-guarantor subsidiaries of$20 million for the year endedDecember 31, 2021 . (ii) Included in net income is tax-exempt income, including a gain from the sale of Miller and other intercompany dividends, and tax benefits related to the payment of our litigation settlements and transactions costs, partially offset by tax expense related to the$1 billion termination receipt.
Non-GAAP Financial Measures
In order to assist readers of our consolidated financial statements in
understanding the core operating results that WTW's management uses to evaluate
the business and for financial planning purposes, we present the following
non-GAAP measures and their most directly comparable
Most Directly Comparable
Measure
As reported change
Constant currency change As reported change Organic change Income from operations/margin Adjusted operating income/margin Net income/margin Adjusted EBITDA/margin Net income attributable to WTW Adjusted net income Diluted earnings per share Adjusted diluted earnings per
share
Income from continuing operations Adjusted income before taxes before income taxes Provision for income taxes/U.S. GAAP Adjusted income taxes/tax rate tax rate Net cash from operating activities Free cash flow The Company believes that these measures are relevant and provide useful information widely used by analysts, investors and other interested parties in our industry to provide a baseline for evaluating and comparing our operating performance, and in the case of free cash flow, our liquidity results. Within the measures referred to as 'adjusted', we adjust for significant items which will not be settled in cash, or which we believe to be items that are not core to our current or future operations. These items include the following:
•
Income from discontinued operations, net of tax - Adjustment to remove the
after-tax income from discontinued operations and the after-tax gain
attributable to the divestiture of our Willis Re business.
•
Restructuring costs and transaction and integration, net - Management believes it is appropriate to adjust for restructuring costs and transaction and integration, net when they relate to a specific significant program with a defined set of activities and costs that are not expected to continue beyond a defined period of time, or significant acquisition-related transaction expenses. We believe the adjustment is necessary to present how the Company is performing, both now and in the future when the incurrence of these costs will have concluded. Transaction and integration, net in 2021 includes the income receipt related to the termination of the proposed Aon transaction.
•
Gains and losses on disposals of operations - Adjustment to remove the gain or
loss resulting from disposed operations that have not been classified as
discontinued operations.
60 --------------------------------------------------------------------------------
•
Pension settlement and curtailment gains and losses - Adjustment to remove
significant pension settlement and curtailment gains and losses to better
present how the Company is performing.
•
Abandonment of long-lived asset - Adjustment to remove the depreciation expense resulting from internally-developed software that was abandoned prior to being placed into service.
•
Provisions for significant litigation - We will include provisions for
litigation matters which we believe are not representative of our core business
operations. These amounts are presented net of insurance and other recovery
receivables.
•
Tax effect of statutory rate changes - Relates to the incremental tax expense or benefit from significant statutory income tax rate changes enacted in material jurisdictions in which we operate.
•
Tax effect of the Coronavirus Aid, Relief, and Economic Security ('CARES') Act -
Relates to the incremental tax expense impact, primarily from the BEAT,
generated from electing certain income tax provisions of the CARES Act.
•
Tax effects of internal reorganizations - Relates to theU.S. income tax expense resulting from the completion of internal reorganizations of the ownership of certain businesses that reduced the investments held by ourU.S. -controlled subsidiaries. These non-GAAP measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP measures should be considered in addition to, and not as a substitute for, the information contained within our consolidated financial statements. For all financial information presented herein (with the exception of Free Cash Flow), the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 - Acquisitions and Divestitures within Item 8 in this Annual Report on Form 10-K for additional information).
Constant Currency Change and Organic Change
We evaluate our revenue on an as reported (U.S. GAAP), constant currency and organic basis. We believe presenting constant currency and organic information provides valuable supplemental information regarding our comparable results, consistent with how we evaluate our performance internally.
•
Constant Currency Change - Represents the year-over-year change in revenue excluding the impact of foreign currency fluctuations. To calculate this impact, the prior year local currency results are first translated using the current year monthly average exchange rates. The change is calculated by comparing the prior year revenue, translated at the current year monthly average exchange rates, to the current year as reported revenue, for the same period. We believe constant currency measures provide useful information to investors because they provide transparency to performance by excluding the effects that foreign currency exchange rate fluctuations have on period-over-period comparability given volatility in foreign currency exchange markets.
•
Organic Change - Excludes the impact of fluctuations in foreign currency exchange rates as described above and the period-over-period impact of acquisitions and divestitures on current-year revenue. We believe that excluding transaction-related items from ourU.S. GAAP financial measures provides useful supplemental information to our investors, and it is important in illustrating what our core operating results would have been had we not included these transaction-related items, since the nature, size and number of these transaction-related items can vary from period to period. The constant currency and organic change results, and a reconciliation from the reported results for consolidated revenue, are included in the 'Consolidated Revenue (Continuing Operations)' section within this Form 10-K. These measures are also reported by segment in the 'Segment Revenue' section within this Form 10-K. A reconciliation of the reported change to the constant currency and organic change for the year endedDecember 31, 2021 from the year endedDecember 31, 2020 is as follows:
Components of Revenue Change (i)
As
Constant
Years ended December 31, Reported Currency
Currency Acquisitions/ Organic
2021 2020 Change Impact Change Divestitures Change
($ in millions)
Revenue $ 8,998 $ 8,615 4% 2% 2% (3)% 6%
(i)
Components of revenue change may not add due to rounding.
61 -------------------------------------------------------------------------------- Adjusting for the impacts of foreign currency and acquisitions and disposals in the calculation of our organic activity, our revenue grew by 6% for the year endedDecember 31, 2021 . The increase to our as-reported revenue was driven by strong performances in all segments and$134 million from book-of-business settlements, partially offset by disposals in our IRR segment in 2020 and early 2021. A reconciliation of the reported change to the constant currency and organic change for the year endedDecember 31, 2020 from the year endedDecember 31, 2019 is as follows: Components of Change (i) As Constant Years ended December 31, Reported Currency Currency Acquisitions/ Organic 2020 2019 Change Impact Change Divestitures Change (in millions) Revenue$ 8,615 $ 8,370 3% -% 3% 2% 1% (i)
Components of revenue change may not add due to rounding.
Adjusting for the impacts of foreign currency and acquisitions and disposals in the calculation of our organic activity, our revenue grew by 1% for the year endedDecember 31, 2020 . The CRB and BDA segments had organic revenue growth during the year, while the HCB and IRR segments were flat, in part due to the impact of the COVID-19 reduction in demand for our discretionary services, mostly for HCB.
Adjusted Operating Income/Margin
We consider adjusted operating income/margin to be important financial measures,
which are used to internally evaluate and assess our core operations and to
benchmark our operating results against our competitors.
Adjusted operating income is defined as income from operations adjusted for amortization, transaction and integration, net and non-recurring items that, in management's judgment, significantly affect the period-over-period assessment of operating results. Adjusted operating income margin is calculated by dividing adjusted operating income by revenue.
Reconciliations of income from operations to adjusted operating income for the
years ended
Years Ended December 31,
2021 2020 2019
(in millions)
Income from operations $ 2,202 $ 859 $ 1,054
Adjusted for certain items:
Abandonment of long-lived asset - 35 -
Amortization 369 461 488
Restructuring costs 26 24 -
Transaction and integration, net (806 ) 110
13
Provision for significant litigation (i) - 65 - Adjusted operating income$ 1,791 $ 1,554 $ 1,555 Income from operations margin 24.5 % 10.0 % 12.6 % Adjusted operating income margin 19.9 % 18.0 % 18.6 % (i)
For additional information, see the disclosure under WTW Merger-Related
Securities Litigation in Note 15 - Commitments and Contingencies in Item 8 in
this Annual Report on Form 10-K.
Adjusted operating income increased for the year endedDecember 31, 2021 to$1.8 billion , from$1.6 billion for the year endedDecember 31, 2020 . This increase resulted primarily from higher revenue.
Adjusted operating income for the years ended
Adjusted EBITDA/Margin
We consider adjusted EBITDA/margin to be important financial measures, which are
used to internally evaluate and assess our core operations, to benchmark our
operating results against our competitors and to evaluate and measure our
performance-based compensation plans.
62
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Adjusted EBITDA is defined as net income adjusted for income from discontinued
operations, net of tax, provision for income taxes, interest expense,
depreciation and amortization, transaction and integration, net, gains and
losses on disposals of operations and non-recurring items that, in management's
judgment, significantly affect the period-over-period assessment of operating
results. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by
revenue.
Reconciliations of net income to adjusted EBITDA for the years ended
31, 2021
Years Ended December 31,
2021 2020 2019
(in millions)
NET INCOME $ 4,236 $ 1,020 $ 1,073
Income from discontinued operations, net of tax (2,080 ) (258 ) (224 )
Provision for income taxes 536 249 197
Interest expense 211 244 234
Depreciation (i) 281 307 239
Amortization 369 461 488
Restructuring costs 26 24 -
Transaction and integration, net (806 ) 110
13
Provision for significant litigation (ii) - 65
-
(Gain)/loss on disposal of operations (379 ) (81 ) 2 Adjusted EBITDA$ 2,394 $ 2,141 $ 2,022 Net income margin 47.1 % 11.8 % 12.8 % Adjusted EBITDA margin 26.6 % 24.9 % 24.2 % (i)
Includes abandonment of long-lived asset of
(ii)
For additional information, see the disclosure under WTW Merger-Related
Securities Litigation in Note 15 - Commitments and Contingencies in Item 8 in
this Annual Report on Form 10-K.
Adjusted EBITDA for the year ended
to
primarily due to higher revenue.
Adjusted EBITDA for the year endedDecember 31, 2020 was$2.1 billion , compared to$2.0 billion for the year endedDecember 31, 2019 . This increase resulted primarily from higher revenue and pension income, partially offset by higher salaries and benefits expense.
Adjusted Net Income and Adjusted Diluted Earnings Per Share
Adjusted net income is defined as net income attributable to WTW adjusted for
income from discontinued operations, net of tax, amortization, transaction and
integration, net, gains and losses on disposals of operations and non-recurring
items that, in management's judgment, significantly affect the
period-over-period assessment of operating results and the related tax effect of
those adjustments and the tax effects of internal reorganizations. This measure
is used solely for the purpose of calculating adjusted diluted earnings per
share.
Adjusted diluted earnings per share is defined as adjusted net income divided by
the weighted-average number of shares of common stock, diluted. Adjusted diluted
earnings per share is used to internally evaluate and assess our core operations
and to benchmark our operating results against our competitors.
63
--------------------------------------------------------------------------------
Reconciliations of net income attributable to WTW to adjusted diluted earnings
per share for the years ended December 31, 2021 , 2020 and 2019 are as follows:
Years Ended December 31,
2021 2020 2019
($ and weighted-average shares in millions)
NET INCOME ATTRIBUTABLE TO WTW $ 4,222 $ 996 $ 1,044
Adjusted for certain items:
Income from discontinued operations, net
of tax (2,080 ) (258 ) (224 )
Abandonment of long-lived asset - 35 -
Amortization 369 461 488
Restructuring costs 26 24 -
Transaction and integration, net (806 ) 110 13
Provision for significant litigation (i) - 65 -
(Gain)/loss on disposal of operations (379 ) (81 ) 2
Tax effect on certain items listed above
(ii) 103 (149 ) (121 )
Tax effect of statutory rate change 40 - -
Tax effect of the CARES Act - 61 -
Adjusted net income $ 1,495 $ 1,264 $ 1,202
Weighted-average shares of common stock
- diluted 129 130 130
Diluted earnings per share $ 32.78 $ 7.65 $ 8.02
Adjusted for certain items (iii):
Income from discontinued operations, net
of tax (16.15 ) (1.98 ) (1.72 )
Abandonment of long-lived asset - 0.27 -
Amortization 2.86 3.54 3.75
Restructuring costs 0.20 0.18 -
Transaction and integration, net (6.26 ) 0.84 0.10
Provision for significant litigation (i) - 0.50 -
(Gain)/loss on disposal of operations (2.94 ) (0.62 ) 0.02
Tax effect on certain items listed above
(ii) 0.79 (1.14 ) (0.93 )
Tax effect of statutory rate change 0.31 - -
Tax effect of the CARES Act - 0.47 -
Adjusted diluted earnings per share $ 11.60
(i)
For additional information, see the disclosure under WTW Merger-Related Securities Litigation in Note 15 - Commitments and Contingencies in Item 8 in this Annual Report on Form 10-K. (ii) The tax effect was calculated using an effective tax rate for each item. (iii) Per share values and totals may differ due to rounding. Our adjusted diluted earnings per share increased for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 primarily due to higher revenue. Our adjusted diluted earnings per share increased for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 primarily due to higher revenue and pension income, partially offset by higher salaries and benefits expense.
Adjusted Income Before Taxes and Adjusted Income Taxes/Tax Rate
Adjusted income before taxes is defined as income from operations before income
taxes adjusted for amortization, transaction and integration, net, gains and
losses on disposals of operations and non-recurring items that, in management's
judgment, significantly affect the period-over-period assessment of operating
results. Adjusted income before taxes is used solely for the purpose of
calculating the adjusted income tax rate.
Adjusted income taxes/tax rate is defined as the provision for income taxes
adjusted for taxes on certain items of amortization, transaction and
integration, net, gains and losses on disposals of operations, the tax effects
of internal reorganizations and non-recurring items that, in management's
judgment, significantly affect the period-over-period assessment of operating
results, divided by adjusted income before taxes. Adjusted income taxes is used
solely for the purpose of calculating the adjusted income tax rate.
Management believes that the adjusted income tax rate presents a rate that is
more closely aligned to the rate that we would incur if not for the reduction of
pre-tax income for the adjusted items and the tax effects of internal
reorganizations, which are not core to our current and future operations.
64
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Reconciliations of income from continuing operations before income taxes to
adjusted income before taxes and provision for income taxes to adjusted income
taxes for the years ended
Years Ended December 31,
2021 2020 2019
($ in millions)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES$ 2,692 $ 1,011 $
1,046
Adjusted for certain items: Abandonment of long-lived asset - 35 - Amortization 369 461 488 Restructuring costs 26 24 - Transaction and integration, net (806 ) 110
13
Provision for significant litigation (i) - 65
-
(Gain)/loss on disposal of operations (379 ) (81 ) 2 Adjusted income before taxes$ 1,902 $ 1,625 $ 1,549 Provision for income taxes$ 536 $ 249 $ 197
Tax effect on certain items listed above (ii) (103 ) 149
121
Tax effect of statutory rate change (40 ) - - Tax effect of the CARES Act - (61 ) - Adjusted income taxes$ 393 $ 337 $ 318 U.S. GAAP tax rate 19.9 % 24.7 % 18.8 % Adjusted income tax rate 20.7 % 20.8 % 20.5 % (i) For additional information, see the disclosure under WTW Merger-Related Securities Litigation in Note 15 - Commitments and Contingencies in Item 8 in this Annual Report on Form 10-K. (ii) The tax effect was calculated using an effective tax rate for each item. OurU.S. GAAP tax rates were 19.9%, 24.7% and 18.8% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The effective tax rate for the year endedDecember 31, 2021 includes a$250 million estimated tax expense related to the income receipt of the termination payment. The effective tax rate for the year endedDecember 31, 2020 was higher primarily due to tax expense of$61 million recognized in connection with the temporary income tax provisions of the CARES Act. During 2020 the Company elected to utilize the higher section 163(j) 50 percent business interest limitation for tax years 2019 and 2020, which allowed the Company to utilize additional interest expense. The utilization of additional interest expense reduced our regular tax liability, however, it created a base erosion minimum tax expense for these tax years. The BEAT effectively applies a 10 percent minimum tax if modified taxable income, as adjusted for base erosion payments, is greater than the regular tax liability for a year.
Our adjusted income tax rates were 20.7%, 20.8% and 20.5% for the years ended
Free Cash Flow
Free cash flow is defined as cash flows from operating activities less cash used to purchase fixed assets and software for internal use. Free cash flow is a liquidity measure and is not meant to represent residual cash flow available for discretionary expenditures.
Management believes that free cash flow presents the core operating performance
and cash generating capabilities of our business operations.
Reconciliations of cash flows from operating activities to free cash flow for
the years ended
Years ended December 31,
2021 2020 2019
(in millions)
Cash flows from operating activities $ 2,061 $ 1,774 $ 1,081
Less: Additions to fixed assets and software
for internal use (148 ) (223 ) (246 )
Free cash flow $ 1,913 $ 1,551 $ 835
The favorable movement in free cash flows in 2021 was primarily due to the $1
billion of income receipt related to the termination of the proposed Aon
transaction, partially offset by $383 million in tax payments primarily related
to the disposal of Willis Re and the
65
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income receipt of the termination payment, net legal settlement payments of $185
million and $250 million of increased bonus and benefit-related payments made
during the year ended December 31, 2021 .
Additionally, the free cash flow for both the current and prior years presented
include the operating cash flows of Willis Re through December 1, 2021 . Willis
Re's operating cash flows approximate its pre-tax income and any adjustments for
working capital movements (see Note 3 - Acquisitions and Divestitures within
Item 8 of this Annual Report on Form 10-K for further information), the absence
of which is expected to be partially made up by reimbursements through the TSA .
The favorable movement in free cash flows in 2020 was primarily due to positive
cash flows from our improved working capital position driven by effective
management of discretionary spending for the year ended December 31, 2020 . Our
free cash flows in 2020 were partially offset by transaction and integration
expenses, primarily related to the proposed combination with Aon.
Critical Accounting Estimates
These consolidated financial statements conform toU.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. The areas that we believe include critical accounting estimates are revenue recognition, costs to fulfill under our broking contracts, valuation of billed and unbilled receivables from clients, income taxes, commitments, contingencies and accrued liabilities, pension assumptions, and goodwill and intangible assets. The critical accounting estimates discussed below involve making difficult, subjective or complex accounting estimates that could have a material effect on our financial condition and results of operations. These critical accounting estimates require us to make assumptions about matters that are highly uncertain at the time of the estimate or assumption. Different estimates that we could have used, or changes in estimates that are reasonably likely to occur, may have a material effect on our results of operations and financial condition.
Revenue Recognition
We use significant estimates related to revenue recognition most commonly during our estimation of the transaction prices or where we recognize revenue over time on a proportional performance basis. A brief description of these policies and estimates is included below: Estimation of transaction prices - This process occurs most frequently in certain broking transactions. In situations in which our fees are not fixed but are variable, we must estimate the likely commission per policy, taking into account the likelihood of cancellation before the end of the policy. For Medicare broking, Affinity arrangements and proportional treaty reinsurance broking, the commissions to which we will be entitled can vary based on the underlying individual insurance policies that are placed. For Medicare broking and proportional treaty reinsurance in particular, we base the estimates of transaction prices on supportable evidence from an analysis of past transactions, and only include amounts that are probable of being received or not refunded (referred to as applying 'constraint' under ASC 606, Revenue From Contracts With Customers). In our direct-to-consumer Medicare broking arrangements, the estimate of the total renewal commissions that will be received over the lifetime of the policy requires significant judgment, and will vary based on product type, estimated commission rates, the expected lives of the respective policies and other factors. The Company has applied an actuarial model to account for these uncertainties, which is updated periodically based on actual experience. Each of these processes result in us estimating a transaction price that may be significantly lower than the ultimate amount of commissions we may collect. The transaction price is then adjusted over time as we receive confirmation of our remuneration through receipt of commissions, or as other information becomes available. Proportional performance basis over time recognition - Where we recognize revenue on a proportional performance basis, primarily in our consulting and outsourced administration arrangements, the amount we recognize is affected by a number of factors that can change the estimated amount of work required to complete the project, such as the staffing on the engagement and/or the level of client participation. Our periodic engagement evaluations require us to make judgments and estimates regarding the overall profitability and stages of project completion that, in turn, affect how we recognize revenue. We recognize a loss on an engagement when estimated revenue to be received for that engagement is less than the total estimated costs associated with the engagement. Losses are recognized in the period in which the loss becomes probable and the amount of the loss is reasonably estimable.
Costs to Fulfill -Broking Contracts
For our broking business, the Company must estimate the fulfillment costs
incurred during the pre-placement of the broking contracts. These judgments
include the following:
•
which activities in the pre-placement process should be eligible for
capitalization;
•
the amount of time and effort expended on those pre-placement activities;
66 --------------------------------------------------------------------------------
•
the amount of payroll and related costs eligible for capitalization; and,
•
the monthly or quarterly timing of underlying insurance and reinsurance policy
inception dates.
Valuation of Billed and Unbilled Receivables from Clients
We maintain allowances for doubtful accounts to reflect estimated losses resulting from a client's failure to pay for the services after the services have been rendered, which are recorded in other operating expenses. We also maintain allowances related to our unbilled receivables for such items as expected realization or client disputes, the related provision for which is recorded as a reduction to revenue. Our allowance policy is based in part on the aging of the billed and unbilled client receivables and has been developed based on our write-off history. However, facts and circumstances, such as the average length of time the receivables are past due, general market conditions at the time we perform the work, current economic trends and our clients' ability to pay, may cause fluctuations in our valuation of billed and unbilled receivables.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized for continuing operations in the consolidated statement of comprehensive income in the period in which the change is enacted. Deferred tax assets are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company adjusts valuation allowances to measure deferred tax assets at the amounts considered realizable in future periods, which is assessed at each balance sheet date. In making such determinations, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operating results. We place more reliance on evidence that is objectively verifiable.
Commitments, Contingencies and Accrued Liabilities
We have established provisions against 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 and the provision of consulting services in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also claims that have been incurred but not reported. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in the light of current information and legal advice. In certain cases, where a range of loss exists, we accrue the minimum amount in the range if no amount within the range is a better estimate than any other amount.
See Note 15 - Commitments and Contingencies in Item 8 within this Annual Report
on Form 10-K.
Pension Assumptions We maintain defined benefit pension plans for employees in several countries, with the most significant defined benefit plans offered in theU.S. andU.K. Our disclosures in Note 13 - Retirement Benefits contain additional information about our other less significant but material retirement plans. Within our critical accounting policy discussion, we have excluded analysis for plans outside of those noted in the description below, as any variance of recorded information based on management's estimates would be immaterial.
Descriptions of our
benefit obligations and 93% of our plan assets, are below:
Legacy Willis - This plan was frozen in 2009. Approximately one-quarter of the Legacy Willis employees inthe United States have a frozen accrued benefit under this plan. WTW Plan - Substantially allU.S. employees are eligible to participate in this plan. Benefits are provided under a stable value pension plan design. The original stable value design came into effect onJanuary 1, 2012 . Plan participants prior toJuly 1, 2017 earn benefits without having to make employee contributions, and all newly-eligible employees after that date are required to contribute 2% of pay on an after-tax basis to participate in the plan. 67 --------------------------------------------------------------------------------
Legacy Willis - This plan covers approximately one-fifth of the Legacy Willis employees in theUnited Kingdom . The plan is now closed to new entrants. New employees in theUnited Kingdom are offered the opportunity to join a defined contribution plan. Legacy Towers Watson - Benefit accruals earned under the LegacyWatson Wyatt defined benefit plan (predominantly pension benefits) ceased onFebruary 28, 2015 , although benefits earned prior toJanuary 1, 2008 retain a link to salary until the employee leaves the Company. Benefit accruals earned under the legacy Towers Perrin defined benefit plan (predominantly lump sum benefits) were frozen onMarch 31, 2008 . All participants now accrue defined contribution benefits. The determination of the Company's obligations and annual expense under the plans is based on a number of assumptions that, given the longevity of the plans, are long-term in focus. A change in one or a combination of these assumptions could have a material impact on our projected benefit obligation. However, certain of these changes, such as changes in the discount rates and other actuarial assumptions, are not recognized immediately in net income, but are instead recorded in other comprehensive income. The accumulated gains and losses not yet recognized in net income are amortized into net income as a component of the net periodic benefit cost/(income) over the average remaining service period or average remaining life expectancy, as appropriate, of the plan's participants to the extent that the net gains or losses as of the beginning of the year exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation. WTW considers several factors prior to the start of each fiscal year when determining the appropriate annual assumptions, including economic forecasts, relevant benchmarks, historical trends, portfolio composition and peer company comparisons. These assumptions, used to determine our pension liabilities and pension expense, are reviewed annually by senior management and changed when appropriate. A discount rate will be changed annually if underlying rates have moved, whereas an expected long-term return on assets will be changed less frequently as longer-term trends in asset returns emerge or long-term target asset allocations are revised. To calculate the discount rate, we use the granular approach to determining service cost and interest cost. The expected rate of return assumptions for all plans are supported by an analysis of the weighted-average yield expected to be achieved with the anticipated makeup of investments. Other material assumptions include rates of participant mortality, and the expected long-term rates of compensation and pension increases.
Funding is based on actuarially determined contributions and is limited to
amounts that are currently deductible for tax purposes, or as agreed to with the
plan trustees for the
different measurements than those used for accounting purposes, pension
contributions are not equal to net periodic benefit cost.
We recorded a combined$186 million net periodic benefit income for ourU.S. andU.K. plans for the year endedDecember 31, 2021 . For theU.S. andU.K. plans, the following table presents our estimated net periodic benefit income for 2022 and the impact to both plans of a 0.25% increase and decrease to both the expected return on assets ('EROA') and the discount rate assumptions; and the projected benefit obligations as ofDecember 31, 2021 and the impact of a 0.25% increase and decrease to the discount rates: Totals - current Impact of 0.25% change to Impact of 0.25% change to estimates EROA discount rate Increase Decrease Increase Decrease Estimated 2022 (income): U.S. Plans$ (122 ) $ (12 ) $ 12 $ 3 $ 5 U.K. Plans$ (50 ) $ (13 ) $ 13 $ (1 ) $ 1 Projected benefit obligation atDecember 31, 2021 : U.S. Plans$ 5,096 N/A N/A $ (152 ) $ 160 U.K. Plans$ 4,369 N/A N/A $ (189 ) $ 203
Economic factors and conditions often affect multiple assumptions
simultaneously, and the effects of changes in key assumptions are not
necessarily linear.
In applying the acquisition method of accounting for business combinations, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment annually as ofOctober 1 , and whenever indicators of impairment arise. The fair value of the intangible assets is compared with their carrying value and an impairment loss would be recognized for the 68 -------------------------------------------------------------------------------- amount by which the carrying amount exceeds the fair value.Goodwill is tested for impairment annually as ofOctober 1 , and whenever indicators of impairment arise.
reporting units as of
During fiscal year 2021, the Company performed the impairment test for all
reporting units. Each of the reporting unit's estimated fair values were in
excess of their carrying values, and we did not record any impairment losses of
goodwill. To perform the test, we used valuation techniques to estimate the fair
value of a reporting unit that are under the income and/or market approaches of
valuation methods. Under the discounted cash flow method, an income approach,
the business enterprise value is determined by discounting to present value the
terminal value which is calculated using debt-free after-tax cash flows for a
finite period of years. Key estimates in this approach were internal financial
projection estimates prepared by management, assessment of business risk, and
expected rates of return on capital. The guideline company method, a market
approach, develops valuation multiples by comparing our reporting units to
similar publicly traded companies. Key estimates and determination of valuation
multiples rely on the selection of similar companies, obtaining forecast revenue
and EBITDA estimates for the similar companies and selection of valuation
multiples as they apply to the reporting unit characteristics. Under the similar
transactions method, a market approach, actual transaction prices and operating
data from companies deemed reasonably similar to the reporting units are used to
develop valuation multiples as an indication of how much a knowledgeable
investor in the marketplace would be willing to pay for the business units.
69
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