(i) | For additional information, see the disclosure under Willis Towers Watson to adjusted diluted earnings per share for the years ended December 31, 2018, 2017Merger-Related Securities Litigation inNote 14 — Commitments and 2016 are as follows: | | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | As reported | | | Without adoption of ASC 606 | | | As reported | | | As reported | | | | ($ and weighted-average shares in millions) | | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 695 | | | $ | 775 | | | $ | 568 | | | $ | 420 | | Adjusted for certain items: | | | | | | | | | | | | | | | | | Amortization | | | 534 | | | | 534 | | | | 581 | | | | 591 | | Restructuring costs | | | — | | | | — | | | | 132 | | | | 193 | | Transaction and integration expenses | | | 202 | | | | 202 | | | | 269 | | | | 177 | | Provisions for significant litigation | | | — | | | | — | | | | 11 | | | | 50 | | Fair value adjustment for deferred revenue | | | — | | | | — | | | | — | | | | 58 | | Pension settlement and curtailment gains and losses | | | 24 | | | | 24 | | | | 36 | | | | — | | Loss/(gain) on disposal of operations | | | 9 | | | | 9 | | | | (13 | ) | | | (2 | ) | Venezuela currency devaluation | | | — | | | | — | | | | 2 | | | | — | | Tax effect on certain items listed above (i) | | | (184 | ) | | | (184 | ) | | | (275 | ) | | | (320 | ) | Tax effects of internal reorganizations | | | 4 | | | | 4 | | | | 48 | | | | — | | Tax effect of U.S. Tax Reform | | | — | | | | — | | | | (204 | ) | | | — | | Deferred tax valuation allowance | | | — | | | | — | | | | — | | | | (69 | ) | Adjusted net income | | $ | 1,284 | | | $ | 1,364 | | | $ | 1,155 | | | $ | 1,098 | | Weighted-average shares of common stock — diluted | | | 132 | | | | 132 | | | | 136 | | | | 138 | | Diluted earnings per share, as reported from operations | | $ | 5.27 | | | $ | 5.87 | | | $ | 4.18 | | | $ | 3.04 | | Adjusted for certain items (ii): | | | | | | | | | | | | | | | | | Amortization | | | 4.04 | | | | 4.04 | | | | 4.28 | | | | 4.28 | | Restructuring costs | | | — | | | | — | | | | 0.97 | | | | 1.40 | | Transaction and integration expenses | | | 1.53 | | | | 1.53 | | | | 1.98 | | | | 1.28 | | Provisions for significant litigation | | | — | | | | — | | | | 0.08 | | | | 0.36 | | Fair value adjustment for deferred revenue | | | — | | | | — | | | | — | | | | 0.42 | | Pension settlement and curtailment gains and losses | | | 0.18 | | | | 0.18 | | | | 0.27 | | | | — | | Loss/(gain) on disposal of operations | | | 0.07 | | | | 0.07 | | | | (0.09 | ) | | | (0.01 | ) | Venezuela currency devaluation | | | — | | | | — | | | | 0.01 | | | | — | | Tax effect on certain items listed above (i) | | | (1.39 | ) | | | (1.39 | ) | | | (2.02 | ) | | | (2.31 | ) | Tax effects of internal reorganizations | | | 0.03 | | | | 0.03 | | | | 0.35 | | | | — | | Tax effect of U.S. Tax Reform | | | — | | | | — | | | | (1.50 | ) | | | — | | Deferred tax valuation allowance | | | — | | | | — | | | | — | | | | (0.50 | ) | Adjusted diluted earnings per share | | $ | 9.73 | | | $ | 10.33 | | | $ | 8.51 | | | $ | 7.96 | |
(i)
| The tax effect was calculated using an effective tax rate for each item.
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(ii)
| Per share values and totals may differ due to rounding.
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Our adjusted diluted earnings per share without the adoption of ASC 606 increased for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due to organic revenue growth across all segments, increased pension credits and lower foreign exchange lossesContingencies in Item 8 in this Annual Report on a year-to-date basis.
Our adjusted diluted earnings per share increased for the year ended December 31, 2017 as compared to the prior year primarily due to revenue growth across all segments partially offset by higher salary and benefits costs. The prior year also included settlement income of £28 million ($41 million) related to the Fine Arts, Jewellery and Specie team.
Adjusted Income Before Taxes and Adjusted Income Taxes/Tax Rate
Adjusted income before taxes is defined as income from operations before income taxes adjusted for amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted income before taxes is used solely for the purpose of calculating the adjusted income tax rate.
Adjusted income taxes/tax rate is defined as the provision for income taxes adjusted for taxes on certain items of amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations, the tax effects of internal reorganizations and U.S. Tax Reform and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results, divided by adjusted income before taxes. Adjusted income taxes is used solely for the purpose of calculating the adjusted income tax rate.
Management believes that the adjusted income tax rate presents a rate that is more closely aligned to the rate that we would incur if not for the reduction of pre-tax income for the adjusted items, the tax effects of our internal reorganizations, and the tax effect of U.S. Tax Reform, which are not core to our current and future operations.
Reconciliations of income from operations before income taxes to adjusted income before taxes and provision for/(benefit from) income taxes to adjusted income taxes for the years ended December 31, 2018, 2017 and 2016 are as follows:
| | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | | As reported | | | Without adoption of ASC 606 | | | As reported | | | As reported | | | | ($ in millions) | | INCOME FROM OPERATIONS BEFORE INCOME TAXES | | $ | 851 | | | $ | 949 | | | $ | 492 | | | $ | 342 | | Adjusted for certain items: | | | | | | | | | | | | | | | | | Amortization | | | 534 | | | | 534 | | | | 581 | | | | 591 | | Restructuring costs | | | — | | | | — | | | | 132 | | | | 193 | | Transaction and integration expenses | | | 202 | | | | 202 | | | | 269 | | | | 177 | | Provisions for significant litigation | | | — | | | | — | | | | 11 | | | | 50 | | Fair value adjustment for deferred revenue | | | — | | | | — | | | | — | | | | 58 | | Pension settlement and curtailment gains and losses | | | 24 | | | | 24 | | | | 36 | | | | — | | Loss/(gain) on disposal of operations | | | 9 | | | | 9 | | | | (13 | ) | | | (2 | ) | Venezuela currency devaluation | | | — | | | | — | | | | 2 | | | | — | | Adjusted income before taxes | | $ | 1,620 | | | $ | 1,718 | | | $ | 1,510 | | | $ | 1,409 | | | | | | | | | | | | | | | | | | | Provision for/(benefit from) income taxes | | $ | 136 | | | $ | 154 | | | $ | (100 | ) | | $ | (96 | ) | Tax effect on certain items listed above (i) | | | 184 | | | | 184 | | | | 275 | | | | 320 | | Tax effects of internal reorganizations | | | (4 | ) | | | (4 | ) | | | (48 | ) | | | — | | Tax effect of U.S. Tax Reform | | | — | | | | — | | | | 204 | | | | — | | Deferred tax valuation allowance | | | — | | | | — | | | | — | | | | 69 | | Adjusted income taxes | | $ | 316 | | | $ | 334 | | | $ | 331 | | | $ | 293 | | | | | | | | | | | | | | | | | | | U.S. GAAP tax rate | | | 16.0 | % | | | 16.2 | % | | | (20.5 | )% | | | (28.1 | )% | Adjusted income tax rate | | | 19.5 | % | | | 19.4 | % | | | 21.9 | % | | | 20.8 | % |
(i)
| The tax effect was calculated using an effective tax rate for each item.Form 10-K.
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Our U.S. GAAP(ii)
| The tax effect was calculated using an effective tax rate is lower thanfor each item. |
(iii) | Per share values and totals may differ due to rounding. |
Our adjusted diluted earnings per share increased for the year ended December 31, 2020 as compared to the year ended December 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, restructuring costs, transaction and integration expenses, 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, restructuring costs, transaction and integration expenses, gains and losses on disposals of operations, the tax effect of the CARES Act, 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 our internal reorganizations, which are not core to our current and future operations.
Reconciliations of income from operations before income taxes to adjusted income before taxes and provision for/(benefit from) income taxes to adjusted income taxes for the years ended December 31, 2020 and 2019 are as follows: | | Years Ended December 31, | | | | 2020 | | | 2019 | | | | ($ in millions) | | INCOME FROM OPERATIONS BEFORE INCOME TAXES | | $ | 1,338 | | | $ | 1,322 | | Adjusted for certain items: | | | | | | | | | Abandonment of long-lived asset | | | 35 | | | | — | | Amortization | | | 462 | | | | 489 | | Restructuring costs | | | 24 | | | | — | | Transaction and integration expenses | | | 110 | | | | 13 | | Provision for significant litigation (i) | | | 65 | | | | — | | (Gain)/loss on disposal of operations | | | (81 | ) | | | 2 | | Adjusted income before taxes | | $ | 1,953 | | | $ | 1,826 | | | | | | | | | | | Provision for income taxes | | $ | 318 | | | $ | 249 | | Tax effect on certain items listed above (ii) | | | 149 | | | | 121 | | Tax effect of the CARES Act | | | (61 | ) | | | — | | Adjusted income taxes | | $ | 406 | | | $ | 370 | | | | | | | | | | | U.S. GAAP tax rate | | | 23.8 | % | | | 18.8 | % | Adjusted income tax rate | | | 20.8 | % | | | 20.3 | % |
(i) | For additional information, see the U.S. statutorydisclosure under Willis Towers Watson Merger-Related Securities Litigation inNote 14 — 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 of 21%. Prior to U.S. Tax Reform, this was primarily due to our global mix of income and deductions in jurisdictions with high statutory income tax rates. For 2018, while the U.S. federal corporate income tax rate has decreased as a result of U.S. Tax Reform, certain deferred tax benefits realized as a result of both the Merger and deductions in jurisdictions with high statutory income tax rates have now been reduced as well. This offsets, in part, the benefit of U.S. Tax Reform, thus increasing our income tax rate. Our U.S. GAAP tax rates without the adoption of ASC 606 were 16.2%, (20.5)% and (28.1)% for the years ended December 31, 2018, 2017 and 2016, respectively.each item.
Our adjusted income tax rates without the adoption of ASC 606 were 19.4%, 21.9% and 20.8% for the years ended December 31, 2018, 2017 and 2016,
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Our U.S. GAAP tax rates were 23.8% and 18.8% for the years ended December 31, 2020 and 2019, respectively. The current year effective tax rate is 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 allows the Company to utilize additional interest expense. The utilization of additional interest expense reduces our regular tax liability and reduces our ability to utilize foreign tax credits, however, it creates 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 20.8% and 20.3% for the years ended December 31, 2020 and 2019, respectively. The current year adjusted income tax rate is higher than the prior year due to an enacted statutory tax rate change in the U.K., requiring us to remeasure our U.K. deferred tax liabilities and recognize a deferred tax expense of $11 million. 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 December 31, 2018, 20172020 and 20162019 are as follows: | | Years ended December 31, | | | | | 2018 | | | 2017 | | | 2016 | | | Years ended December 31, | | | | As reported | | | Without adoption of ASC 606 | | | As reported | | | As reported | | | 2020 | | | 2019 | | | | (in millions) | | | (in millions) | | Cash flows from operating activities | | $ | 1,288 | | | $ | 1,338 | | | $ | 862 | | | $ | 933 | | | $ | 1,774 | | | $ | 1,081 | | Less: Additions to fixed assets and software for internal use | | | (268 | ) | | | (268 | ) | | | (300 | ) | | | (218 | ) | | | (223 | ) | | | (246 | ) | Free cash flow | | $ | 1,020 | | | $ | 1,070 | | | $ | 562 | | | $ | 715 | | | $ | 1,551 | | | $ | 835 | |
The increasefavorable movement in free cash flows in 2018 as compared2020 was primarily due to 2017 primarily resulted from increasedpositive cash from operations and cash collectionsflows from our customers as compared toimproved working capital position driven by effective management of discretionary spending for the prior year. The decrease inyear ended December 31, 2020. Our free cash flows in 2017 as compared to 20162020 were partially offset by transaction and integration expenses, primarily resulted from higher capital expenditures and higher discretionary compensation payments made in 2017 for the 2016 compensation cycle. These discretionary compensation payments were lower in 2016 because they included only a partial payment to Legacy Towers Watson colleagues duerelated to the timing of the Merger.combination with Aon.
Critical Accounting Policies and Estimates These consolidated financial statements conform to U.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 areinclude critical accounting policies includeare revenue recognition, costs to fulfill broking contracts, valuation of billed and unbilled receivables from clients, discretionary compensation, income taxes, commitments, contingencies and accrued liabilities, pension assumptions, and goodwill and intangible assets. The critical accounting policies 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 policies 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 financial condition and results of operations.operations and financial condition. Revenue Recognition (effective January 1, 2018) 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)606, Revenue From Contracts With Customers). This resultsIn 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 treaty statements,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 (effective January 1, 2018) For our broking business, the Company must estimate the fulfillment costs incurred during the pre-placement of the broking contracts. These judgments include:include the following: which activities in the pre-placement process should be eligible for capitalization;
| • | which activities in the pre-placement process should be eligible for capitalization; |
the amount of time and effort expended on those pre-placement activities;
| • | the amount of time and effort expended on those pre-placement activities; |
the amount of payroll and related costs eligible for capitalization; and,
| • | the amount of payroll and related costs eligible for capitalization; and, |
| • | the monthly or quarterly timing of underlying insurance and reinsurance policy inception dates. |
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. FactsHowever, 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. Discretionary Compensation Our compensation program includes a discretionary bonus that is determined by management and has historically been paid once per fiscal year in the form of cash and/or deferred stock units after our annual operating results are finalized. An estimated annual bonus amount is initially developed at the beginning of each fiscal year in conjunction with our budgeting process. Estimated annual operating performance is reviewed quarterly and the discretionary annual bonus amount is then adjusted, if necessary, by management to reflect changes in the forecast of pre-bonus profitability for the year. Our estimated annual profitability, coupled with the projected seasonality inherent in our business, represent significant estimates during our interim quarterly close process. 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 carry forwards.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 in the 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 allowancesto measure deferred tax assets at the amountamounts considered realizable in future periods ifwhen the Company’s facts and assumptions change. 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 the results of recent financial operations.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 14 — 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 the U.S. and U.K. Our disclosures in Note 1312 — 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 U.S. and U.K. plans, which comprise 90% of our projected benefit obligations and 94%93% of our plan assets, are below: United States Legacy Willis – This plan was frozen in 2009. Approximately one-quarter of the Legacy Willis employees in the United States have a frozen accrued benefit under this plan.
Willis Towers Watson Plan – Substantially all U.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 on January 1, 2012. Existing plan participants as ofprior to July 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. United Kingdom Legacy Willis – This plan covers approximately one-thirdone-quarter of the Legacy Willis employees in the United Kingdom. The plan is now closed to new entrants. New employees in the United Kingdom are offered the opportunity to join a defined contribution plan. Legacy Towers Watson – Benefit accruals earned under the Legacy Watson Wyatt defined benefit plan (predominantly pension benefits) ceased on February 28, 2015, although benefits earned prior to January 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 on March 31, 2008. All participants now accrue defined contribution benefits. Legacy Miller – The plan provides retirement benefits based on members’ salaries at the point at which they ceased to accrue benefits under the scheme.
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) generally based onover the average workingremaining service period or average remaining life expectancy, of eachas appropriate, of the plan’s active 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. Willis Towers Watson 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 termlonger-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 raterates 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 U.K. plans. Since funding calculations are based on different measurements than those used for accounting purposes, pension contributions are not equal to net periodic benefit cost. We recorded a combined $173$201 million net periodic benefit income for our U.S. and U.K. plans for the year ended December 31, 2018.2020. For the U.S. and U.K. plans, the following table presents our estimated net periodic benefit income for 20192021 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,assumptions; and the projected benefit obligations as of December 31, 20182020 and the impact of a 0.25% increase and decrease to the discount rates: | | Totals - current estimates | | | Impact of 0.25% change to EROA | | | Impact of 0.25% change to discount rate | | | Totals - current estimates | | | Impact of 0.25% change to EROA | | | Impact of 0.25% change to discount rate | | | | | | | | Increase | | | Decrease | | | Increase | | | Decrease | | | | | | | Increase | | | Decrease | | | Increase | | | Decrease | | Estimated 2019 (income): | | | | | | | | | | | | | | | | | | | | | | Estimated 2021 (income): | | | | | | | | | | | | | | | | | | | | | | U.S. Plans | | $ | (12 | ) | | $ | (9 | ) | | $ | 8 | | | $ | (4 | ) | | $ | 7 | | | $ | (91 | ) | | $ | (11 | ) | | $ | 11 | | | $ | (9 | ) | | $ | 9 | | U.K. Plans | | $ | (135 | ) | | $ | (11 | ) | | $ | 11 | | | $ | (1 | ) | | $ | 1 | | | $ | (95 | ) | | $ | (14 | ) | | $ | 14 | | | $ | — | | | $ | — | | Projected benefit obligation at December 31, 2018: | | | | | | | | | | | | | | | Projected benefit obligation at December 31, 2020: | | Projected benefit obligation at December 31, 2020: | | | | | | | | | | | | | | U.S. Plans | | $ | 4,187 | | | N/A | | | N/A | | | $ | (118 | ) | | $ | 124 | | | $ | 5,291 | | | N/A | | | N/A | | | $ | (163 | ) | | $ | 171 | | U.K. Plans | | $ | 3,666 | | | N/A | | | N/A | | | $ | (169 | ) | | $ | 155 | | | $ | 4,843 | | | N/A | | | N/A | | | $ | (215 | ) | | $ | 230 | |
Economic factors and conditions often affect multiple assumptions simultaneously, and the effects of changes in key assumptions are not necessarily linear. Goodwill and Intangible Assets — Impairment Review 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 of October 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 amount by which the carrying amount exceeds the fair value. Goodwill is tested for impairment annually as of October 1, and whenever indicators of impairment arise. Goodwill is tested at the reporting unit level, and the Company had nineeight reporting units as of October 1, 2018.2020. During fiscal year 2018,2020, the Company performed Step 1 of the two-step impairment test for all reporting units. Each of the reporting units'unit’s estimated fair values were in excess of their carrying values.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 fallare under the income and/or market approaches.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-tradedpublicly 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.
IfITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management We are exposed to market risk from changes in foreign currency exchange rates. In order to manage the risk arising from these exposures, we enter into a variety of foreign currency derivatives. We do not hold financial or derivative instruments for trading purposes. A discussion of our accounting policies for financial and derivative instruments is included in Note 2 — Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements and Note 9 — Derivative Financial Instruments within Item 8 of this Annual Report on Form 10-K. Foreign Exchange Risk Because of the large number of countries and currencies we operate in, movements in currency exchange rates may affect our results. We report our operating results and financial condition in U.S. dollars. Our U.S. operations earn revenue and incur expenses primarily in U.S. dollars. Outside the U.S., we predominantly generate revenue and expenses in the local currency with the exception of our London market operations which earn revenue in several currencies but incur expenses predominantly in Pounds sterling. The table below gives an approximate analysis of revenue and expenses by currency in 2020. | | U.S. dollars | | | Pounds sterling | | | Euro | | | Other currencies | | Revenue | | 58% | | | 12% | | | 15% | | | 15% | | Expenses (i) | | 52% | | | 20% | | | 12% | | | 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 expenses. |
Our principal exposures to foreign exchange risk arise from: | • | our London market operations; |
| • | intercompany lending between subsidiaries; and |
London market operations The Company’s primary foreign exchange risks in its London market operations arise from changes in the exchange rate between the U.S. dollar and Pound sterling as its London market operations earn the majority of its revenue in U.S. dollars but incur expenses predominantly in Pounds sterling, and may also hold significant foreign currency asset or liability positions on its consolidated balance sheet. In addition, the London market operations earn significant revenue in Euro and Japanese yen. The foreign exchange risks in our London market operations are hedged to the extent that: | • | forecasted Pounds sterling expenses exceed Pounds sterling revenue, in which case the Company limits its exposure to this exchange rate risk by the use of forward contracts matched to a portion of the forecasted Pounds sterling outflows arising in the ordinary course of business. In addition, we are also exposed to foreign exchange risk on any net Pounds sterling asset or liability position in our London market operations; |
| • | the U.K. operations also earn significant revenue in Euro and Japanese yen. The Company limits its exposure to changes in the exchange rates between the U.S. dollar and these currencies by the use of foreign exchange contracts matched to a proportion of forecast cash inflows in these specific currencies and periods; and |
| • | Miller Insurance Services LLP, which is a Pound sterling functional entity, earns significant non-functional currency revenue, in which case the Company limits its exposure to exchange rate changes by the use of foreign exchange contracts matched to a proportion of forecast cash inflows in specific currencies and periods. The sale of our Miller business is expected to close during the first quarter of 2021, and as such, the foreign exchange contracts entered into by Miller will be part of the transaction. |
Intercompany lending between subsidiaries The Company engages in intercompany borrowing and lending between subsidiaries, primarily through our in-house banking operations which give rise to foreign exchange exposures. The Company mitigates these risks through the use of short-term foreign currency forward and swap transactions that offset the underlying exposure created when the borrower and lender have different functional currencies. These derivatives are not generally designated as hedging instruments and at December 31, 2020 we had notional amounts of $1.5 billion (denominated primarily in U.S. dollars, Pound sterling, Euro and Australian dollars), with net fair value assets of $15 million. Such derivatives typically mature within three months. Translation risk Outside our U.S. and London market operations, we predominantly earn revenue and incur expenses in the local currency. When we translate the results and net assets of these operations into U.S. dollars for reporting purposes, movements in exchange rates will affect reported results and net assets. For example, if the U.S. dollar strengthens against the Euro, the reported results of our Eurozone operations in U.S. dollar terms will be lower. The table below provides information about our foreign currency forward exchange contracts, which are sensitive to exchange rate risk. The table summarizes the U.S. dollar equivalent amounts of each currency bought and sold forward and the weighted-average contractual exchange rates. All forward exchange contracts mature within two years. | | Settlement date before December 31, | | | 2021 | | 2022 | December 31, 2020 | | Contract amount | | | Average contractual exchange rate | | Contract amount | | | Average contractual exchange rate | | | (millions) | | | | | (millions) | | | | Foreign currency sold | | | | | | | | | | | | | U.S. dollars sold for Pounds sterling | | $ | 158 | | | $1.29 = £1 | | $ | 55 | | | $1.30 = £1 | Euros sold for U.S. dollars | | | 70 | | | €1 = $1.15 | | | 26 | | | €1 = $1.16 | Japanese yen sold for U.S. dollars | | | 17 | | | ¥104.80 = $1 | | | 7 | | | ¥104.05 = $1 | Euros sold for Pounds sterling | | | 7 | | | €1 = £1.13 | | | — | | | | Total | | $ | 252 | | | | | $ | 88 | | | | Fair value (i) | | $ | 5 | | | | | $ | - | | | |
(i) | Represents the difference between the contract amount and the cash flow in U.S. dollars which would have been receivable had the foreign currency forward exchange contracts been entered into on December 31, 2020 at the forward exchange rates prevailing at that date. |
Income earned within foreign subsidiaries outside of the U.K. is generally offset by expenses in the same local currency, however the Company does have exposure to foreign exchange movements on the net income of these entities. Interest Rate Risk The Company has access to $1.25 billion under a revolving credit facility expiring March 7, 2022. As of December 31, 2020, no amount was requireddrawn on this facility. We are also subject to market risk from exposure to changes in interest rates based on our investing activities where our primary interest rate risk arises from changes in short-term interest rates in U.S. dollars, Pounds sterling and Euros.
The table below provides information about our financial instruments that are sensitive to changes in interest rates. | | Expected to mature before December 31, | | | | | | | | | | | | | | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | Thereafter | | | Total | | | Fair Value (i) | | | | ($ in millions) | | Fixed rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | $ | 950 | | | | 660 | | | $ | 250 | | | $ | 650 | | | $ | — | | | $ | 3,100 | | | $ | 5,610 | | | $ | 6,418 | | Fixed rate payable | | | 4.684 | % | | | 2.125 | % | | | 4.625 | % | | | 3.600 | % | | | — | | | | 4.224 | % | | | 4.000 | % | | | | | Floating rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | $ | 22 | | | $ | 17 | | | $ | 13 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 55 | | | $ | 55 | | Variable rate payable (ii) | | | 5.448 | % | | | 5.448 | % | | | 5.530 | % | | | 5.595 | % | | | — | | | | — | | | | 5.475 | % | | | | |
(i) | Represents the net present value of the expected cash flows discounted at current market rates of interest or quoted market rates as appropriate. |
(ii) | Represents the estimated interest rate payable. |
Interest Income on Fiduciary Funds As a result of our operating activities, we receive cash for premiums and claims which we deposit in short-term investments denominated in U.S. dollars and other currencies. We earn interest on these funds, which is included in our consolidated financial statements as interest income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity. At December 31, 2020, we held $2.2 billion of fiduciary funds invested in interest-bearing accounts. If short-term interest rates increased or decreased by 25 basis points, interest earned on these invested fiduciary funds, and therefore our interest income recognized, would increase or decrease by approximately $6 million on an annualized basis. LIBOR-Related Debt Instruments In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced its intention to phase out LIBOR as a benchmark rate by the end of 2021. The Alternative Reference Rates Committee (‘ARRC’), a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from U.S. dollar LIBOR (‘USD-LIBOR’) to a more robust reference rate, has proposed that the Secured Overnight Financing Rate (‘SOFR’) represents the best alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a transition plan with specific steps and timelines designed to encourage the adoption of SOFR and guide the transition to SOFR from USD-LIBOR. Organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to USD-LIBOR. Similar efforts are underway to identify suitable replacement reference rates for LIBOR in other major currencies. As of December 31, 2020, the Company’s primary exposure is its $1.25 billion revolving credit facility maturing in 2022 and its collateralized facility assumed as part of its acquisition of TRANZACT, which are both priced using rates tied to LIBOR. We anticipate renegotiating the revolving credit facility prior to the potential LIBOR quotation termination date and will renegotiate, or repay, the collateralized facility prior to the end of 2021. In addition, the Company and its subsidiaries have entered into various intercompany notes indexed to LIBOR. The Company, in preparation for a December 31, 2021 deadline, expects to amend or replace the LIBOR-based intercompany notes as necessary to reflect new market benchmarks for the relevant loan currencies. We are currently evaluating the LIBOR-related risks that may be inherent in our Treasury workstation software and elsewhere in our business and are monitoring for further proposals and guidance from the ARRC and other alternative-rate initiatives. While it is currently uncertain whether SOFR or another reference rate will be selected as the alternative to LIBOR, or whether other reforms will be enacted in response to the planned transition, we will make the appropriate changes when necessary. Credit Risk and Concentrations of Credit Risk Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform Step 2, weas contracted. The Company currently does not anticipate non-performance by its counterparties. The Company generally does not require collateral or other security to support financial instruments with credit risk. Concentrations of credit risk that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would determinecause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments on the impliedbalance sheet that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, fiduciary funds, accounts receivable and derivatives which are recorded at fair valuevalue.
The Company maintains a policy of providing for the reporting unit useddiversification of cash and cash equivalent investments and places such investments in Step 1an extensive number of financial institutions to alllimit the amount of the assets and liabilitiescredit risk exposure. These financial institutions are monitored on an ongoing basis for credit quality predominantly using information provided by credit agencies. Concentrations of that reporting unit (including any recognized or unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. Then the implied fair value of goodwill would be comparedcredit risk with respect to receivables are limited due to the carrying amountlarge number of goodwill to determine if goodwill is impaired. clients and markets in which the Company does business, as well as the dispersion across many geographic areas. Management does not believe that significant risk exists in connection with the Company’s concentrations of credit as of December 31, 2020.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WILLIS TOWERS WATSON INDEX TO FORM 10-K For the year ended December 31, 2018,2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors ofWillis Towers Watson Public Limited Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Willis Towers Watson Public Limited Company and subsidiaries (the ‘Company’) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, changes in equity and cash flows, for the three years then ended, and the related notes (collectively referred to as the ‘financial statements’). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the three years then ended, in conformity with accounting principles generally accepted in the United States of America (‘US GAAP’). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (‘PCAOB’), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Errors and Omissions Reserve — Refer to Notes 2, 14 and 15 to the financial statements Critical Audit Matter Description The Company has established provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions (‘E&O’) which arise in connection with the placement of insurance and reinsurance and provision of broking, consulting and outsourcing 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 (‘IBNR’). These provisions are established based on actuarial estimates together with individual case reviews. Significant management judgment is required to estimate the amounts of such claims. Auditing management’s judgments related to its E&O provision, and in particular the broking, consulting and outsourcing business provisions related to the IBNR, and the provisions related to significant claims reported but not paid, involved especially complex and subjective judgment and an increased extent of effort, including the need to involve our actuarial specialists. How the Critical Audit Matter Was Addressed in the Audit We tested the effectiveness of controls over the Company’s estimation of the E&O provisions, including controls over the underlying historical claims data, the actuarial methodology used, the assumptions selected by management that are used to calculate the broking,
consulting and outsourcing business IBNR provisions, and the establishment and quarterly evaluation of provisions for reported claims, including significant claims. For the IBNR provisions, we evaluated the appropriateness of the IBNR models, including evaluating changes needed or warranted given changes in the business and trends emerging from the COVID-19 pandemic, and evaluated the consistency of the model with prior years in order to challenge the methodology used to estimate the provisions. With the assistance of our actuarial specialists, we assessed the methodology and models used, including key inputs and assumptions used in, and arithmetical accuracy of, the models used. We also performed retrospective reviews of management’s estimated claims emergence in comparison to actual results and evaluated the provisions set by management in comparison to a range of independent estimates that we developed. We evaluated the E&O matters and the appropriateness of their projected settlement values through inquiries of, and confirmations from, in-house counsel and external lawyers handling those matters for the Company. /s/Deloitte & Touche LLP Philadelphia, PA February 23, 2021 We have served as the Company’s auditor since 2017.
WILLIS TOWERS WATSON Consolidated Statements of Comprehensive Income (In millions of U.S. dollars, except per share data) | | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Revenue | | $ | 9,352 | | | $ | 9,039 | | | $ | 8,513 | | Costs of providing services | | | | | | | | | | | | | Salaries and benefits | | | 5,507 | | | | 5,249 | | | | 5,123 | | Other operating expenses | | | 1,758 | | | | 1,719 | | | | 1,637 | | Depreciation | | | 308 | | | | 240 | | | | 208 | | Amortization | | | 462 | | | | 489 | | | | 534 | | Restructuring costs | | | 24 | | | | 0 | | | | 0 | | Transaction and integration expenses | | | 110 | | | | 13 | | | | 202 | | Total costs of providing services | | | 8,169 | | | | 7,710 | | | | 7,704 | | Income from operations | | | 1,183 | | | | 1,329 | | | | 809 | | Interest expense | | | (244 | ) | | | (234 | ) | | | (208 | ) | Other income, net | | | 399 | | | | 227 | | | | 250 | | INCOME FROM OPERATIONS BEFORE INCOME TAXES | | | 1,338 | | | | 1,322 | | | | 851 | | Provision for income taxes | | | (318 | ) | | | (249 | ) | | | (136 | ) | NET INCOME | | | 1,020 | | | | 1,073 | | | | 715 | | Income attributable to non-controlling interests | | | (24 | ) | | | (29 | ) | | | (20 | ) | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 996 | | | $ | 1,044 | | | $ | 695 | | | | | | | | | | | | | | | EARNINGS PER SHARE | | | | | | | | | | | | | Basic earnings per share | | $ | 7.68 | | | $ | 8.05 | | | $ | 5.29 | | Diluted earnings per share | | $ | 7.65 | | | $ | 8.02 | | | $ | 5.27 | | | | | | | | | | | | | | | NET INCOME | | $ | 1,020 | | | $ | 1,073 | | | $ | 715 | | Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | | Foreign currency translation | | $ | 139 | | | $ | 78 | | | $ | (251 | ) | Defined pension and post-retirement benefits | | | (266 | ) | | | (329 | ) | | | (199 | ) | Derivative instruments | | | (4 | ) | | | 21 | | | | 2 | | Other comprehensive income/(loss), net of tax, before non-controlling interests | | | (131 | ) | | | (230 | ) | | | (448 | ) | Comprehensive income before non-controlling interests | | | 889 | | | | 843 | | | | 267 | | Comprehensive income attributable to non-controlling interests | | | (25 | ) | | | (29 | ) | | | (20 | ) | Comprehensive income attributable to Willis Towers Watson | | $ | 864 | | | $ | 814 | | | $ | 247 | |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Balance Sheets (In millions of U.S. dollars, except share data) | | December 31, 2020 | | | December 31, 2019 | | ASSETS | | | | | | | | | Cash and cash equivalents | | $ | 2,089 | | | $ | 887 | | Fiduciary assets | | | 15,160 | | | | 13,004 | | Accounts receivable, net | | | 2,555 | | | | 2,621 | | Prepaid and other current assets | | | 497 | | | | 525 | | Total current assets | | | 20,301 | | | | 17,037 | | Fixed assets, net | | | 1,014 | | | | 1,046 | | Goodwill | | | 11,204 | | | | 11,194 | | Other intangible assets, net | | | 3,043 | | | | 3,478 | | Right-of-use assets | | | 902 | | | | 968 | | Pension benefits assets | | | 971 | | | | 868 | | Other non-current assets | | | 1,096 | | | | 835 | | Total non-current assets | | | 18,230 | | | | 18,389 | | TOTAL ASSETS | | $ | 38,531 | | | $ | 35,426 | | LIABILITIES AND EQUITY | | | | | | | | | Fiduciary liabilities | | $ | 15,160 | | | $ | 13,004 | | Deferred revenue and accrued expenses | | | 2,161 | | | | 1,784 | | Current debt | | | 971 | | | | 316 | | Current lease liabilities | | | 152 | | | | 164 | | Other current liabilities | | | 888 | | | | 802 | | Total current liabilities | | | 19,332 | | | | 16,070 | | Long-term debt | | | 4,664 | | | | 5,301 | | Liability for pension benefits | | | 1,405 | | | | 1,324 | | Deferred tax liabilities | | | 561 | | | | 526 | | Provision for liabilities | | | 407 | | | | 537 | | Long-term lease liabilities | | | 918 | | | | 964 | | Other non-current liabilities | | | 312 | | | | 335 | | Total non-current liabilities | | | 8,267 | | | | 8,987 | | TOTAL LIABILITIES | | | 27,599 | | | | 25,057 | | COMMITMENTS AND CONTINGENCIES | | | | | | | | | EQUITY (i) | | | | | | | | | Additional paid-in capital | | | 10,748 | | | | 10,687 | | Retained earnings | | | 2,434 | | | | 1,792 | | Accumulated other comprehensive loss, net of tax | | | (2,359 | ) | | | (2,227 | ) | Treasury shares, at cost, 17,519 in 2020 and 2019 and 40,000 shares, €1 nominal value, in 2019 | | | (3 | ) | | | (3 | ) | Total Willis Towers Watson shareholders’ equity | | | 10,820 | | | | 10,249 | | Non-controlling interests | | | 112 | | | | 120 | | Total equity | | | 10,932 | | | | 10,369 | | TOTAL LIABILITIES AND EQUITY | | $ | 38,531 | | | $ | 35,426 | |
_________ (i) | Equity includes (a) Ordinary shares $0.000304635 nominal value; Authorized 1,510,003,775; Issued 128,964,579 (2020) and 128,689,930 (2019); Outstanding 128,964,579 (2020) and 128,689,930 (2019); (b) Ordinary shares, €1 nominal value; Authorized and Issued 40,000 shares in 2019; and (c) Preference shares, $0.000115 nominal value; Authorized 1,000,000,000 and Issued NaN in 2020 and 2019. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Statements of Cash Flows (In millions of U.S. dollars) | | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | NET INCOME | | $ | 1,020 | | | $ | 1,073 | | | $ | 715 | | Adjustments to reconcile net income to total net cash from operating activities: | | | | | | | | | | | | | Depreciation | | | 308 | | | | 240 | | | | 213 | | Amortization | | | 462 | | | | 489 | | | | 534 | | Non-cash lease expense | | | 146 | | | | 148 | | | | 0 | | Net periodic benefit of defined benefit pension plans | | | (196 | ) | | | (135 | ) | | | (163 | ) | Provision for doubtful receivables from clients | | | 29 | | | | 9 | | | | 8 | | Provision for/(benefit from) deferred income taxes | | | 99 | | | | (72 | ) | | | (115 | ) | Share-based compensation | | | 90 | | | | 74 | | | | 50 | | Net (gain)/loss on disposal of operations | | | (81 | ) | | | 2 | | | | 9 | | Non-cash foreign exchange (gain)/loss | | | (6 | ) | | | 26 | | | | 26 | | Other, net | | | (41 | ) | | | 17 | | | | 8 | | Changes in operating assets and liabilities, net of effects from purchase of subsidiaries: | | | | | | | | | | | | | Accounts receivable | | | 72 | | | | (261 | ) | | | 68 | | Fiduciary assets | | | (1,774 | ) | | | (365 | ) | | | (839 | ) | Fiduciary liabilities | | | 1,774 | | | | 365 | | | | 839 | | Other assets | | | (205 | ) | | | (269 | ) | | | (22 | ) | Other liabilities | | | 215 | | | | (264 | ) | | | (20 | ) | Provisions | | | (138 | ) | | | 4 | | | | (23 | ) | Net cash from operating activities | | | 1,774 | | | | 1,081 | | | | 1,288 | | CASH FLOWS USED IN INVESTING ACTIVITIES | | | | | | | | | | | | | Additions to fixed assets and software for internal use | | | (223 | ) | | | (246 | ) | | | (268 | ) | Capitalized software costs | | | (63 | ) | | | (59 | ) | | | (54 | ) | Acquisitions of operations, net of cash acquired | | | (69 | ) | | | (1,329 | ) | | | (36 | ) | Net proceeds from sale of operations | | | 212 | | | | 17 | | | | 4 | | Other, net | | | (17 | ) | | | 3 | | | | 13 | | Net cash used in investing activities | | | (160 | ) | | | (1,614 | ) | | | (341 | ) | CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES | | | | | | | | | | | | | Net payments on revolving credit facility | | | 0 | | | | (131 | ) | | | (754 | ) | Senior notes issued | | | 282 | | | | 997 | | | | 998 | | Proceeds from issuance of other debt | | | 0 | | | | 1,100 | | | | 0 | | Debt issuance costs | | | (2 | ) | | | (13 | ) | | | (8 | ) | Repayments of debt | | | (327 | ) | | | (995 | ) | | | (170 | ) | Repurchase of shares | | | 0 | | | | (150 | ) | | | (602 | ) | Proceeds from issuance of shares | | | 16 | | | | 45 | | | | 45 | | Payments of deferred and contingent consideration related to acquisitions | | | (12 | ) | | | (57 | ) | | | (50 | ) | Cash paid for employee taxes on withholding shares | | | (14 | ) | | | (15 | ) | | | (30 | ) | Dividends paid | | | (346 | ) | | | (329 | ) | | | (306 | ) | Acquisitions of and dividends paid to non-controlling interests | | | (28 | ) | | | (55 | ) | | | (26 | ) | Other, net | | | (3 | ) | | | 0 | | | | 0 | | Net cash (used in)/from financing activities | | | (434 | ) | | | 397 | | | | (903 | ) | INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 1,180 | | | | (136 | ) | | | 44 | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 21 | | | | (2 | ) | | | (41 | ) | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR (i) | | | 895 | | | | 1,033 | | | | 1,030 | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR (i) | | $ | 2,096 | | | $ | 895 | | | $ | 1,033 | |
(i) | As a result of the acquired TRANZACT collateralized facility (see Note 10 — Debt), cash, cash equivalents and restricted cash included $7 million and $8 million of restricted cash at December 31, 2020 and 2019, respectively, which is included within prepaid and other current assets on our consolidated balance sheets. There were 0 restricted cash amounts held at December 31, 2018 and 2017. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Statements of Changes in Equity (In millions of U.S. dollars and number of shares in thousands) | | Shares outstanding | | | Additional paid-in capital | | | Retained earnings | | | Treasury shares | | | AOCL (i) | | | Total WTW shareholders’ equity | | | Non-controlling interests | | | Total equity | | | | | Redeemable Non-controlling interest (ii) | | | Total | | Balance as of January 1, 2018 | | | 132,140 | | | $ | 10,538 | | | $ | 1,104 | | | $ | (3 | ) | | $ | (1,513 | ) | | $ | 10,126 | | | $ | 123 | | | $ | 10,249 | | | | | $ | 28 | | | | | | Adoption of ASC 606 | | | — | | | | — | | | | 317 | | | | — | | | | — | | | | 317 | | | | — | | | | 317 | | | | | | — | | | | | | Shares repurchased | | | (3,919 | ) | | | — | | | | (602 | ) | | | — | | | | — | | | | (602 | ) | | | — | | | | (602 | ) | | | | | — | | | | | | Net income | | | — | | | | — | | | | 695 | | | | — | | | | — | | | | 695 | | | | 18 | | | | 713 | | | | | | 2 | | | $ | 715 | | Dividends declared ($2.40 per share) | | | — | | | | — | | | | (313 | ) | | | — | | | | — | | | | (313 | ) | | | — | | | | (313 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24 | ) | | | (24 | ) | | | | | (2 | ) | | | | | Other comprehensive (loss)/income | | | — | | | | — | | | | — | | | | — | | | | (448 | ) | | | (448 | ) | | | 2 | | | | (446 | ) | | | | | (2 | ) | | $ | (448 | ) | Issuance of shares under employee stock compensation plans | | | 701 | | | | 45 | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 45 | | | | | | — | | | | | | Share-based compensation and net settlements | | | — | | | | 27 | | | | — | | | | — | | | | — | | | | 27 | | | | — | | | | 27 | | | | | | — | | | | | | Foreign currency translation | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | | — | | | | | | Balance as of December 31, 2018 | | | 128,922 | | | $ | 10,615 | | | $ | 1,201 | | | $ | (3 | ) | | $ | (1,961 | ) | | $ | 9,852 | | | $ | 119 | | | $ | 9,971 | | | | | $ | 26 | | | | | | Adoption of ASU 2018-02 | | | — | | | | — | | | | 36 | | | | — | | | | (36 | ) | | | — | | | | — | | | | — | | | | | | — | | | | | | Shares repurchased | | | (788 | ) | | | — | | | | (150 | ) | | | — | | | | — | | | | (150 | ) | | | — | | | | (150 | ) | | | | | — | | | | | | Net income | | | — | | | | — | | | | 1,044 | | | | — | | | | — | | | | 1,044 | | | | 23 | | | | 1,067 | | | | | | 6 | | | $ | 1,073 | | Dividends declared ($2.60 per share) | | | — | | | | — | | | | (339 | ) | | | — | | | | — | | | | (339 | ) | | | — | | | | (339 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (21 | ) | | | (21 | ) | | | | | (2 | ) | | | | | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (230 | ) | | | (230 | ) | | | — | | | | (230 | ) | | | | | — | | | $ | (230 | ) | Issuance of shares under employee stock compensation plans | | | 556 | | | | 45 | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 45 | | | | | | — | | | | | | Share-based compensation and net settlements | | | — | | | | 32 | | | | — | | | | — | | | | — | | | | 32 | | | | — | | | | 32 | | | | | | — | | | | | | Acquisition of non-controlling interests | | | — | | | | (6 | ) | | | — | | | | — | | | | — | | | | (6 | ) | | | (1 | ) | | | (7 | ) | | | | | (30 | ) | | | | | Foreign currency translation | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | | | | | — | | | | | | Balance as of December 31, 2019 | | | 128,690 | | | $ | 10,687 | | | $ | 1,792 | | | $ | (3 | ) | | $ | (2,227 | ) | | $ | 10,249 | | | $ | 120 | | | $ | 10,369 | | | | | $ | — | | | | | | Net income | | | — | | | | — | | | | 996 | | | | — | | | | — | | | | 996 | | | | 24 | | | | 1,020 | | | | | | — | | | $ | 1,020 | | Dividends declared ($2.75 per share) | | | — | | | | — | | | | (354 | ) | | | — | | | | — | | | | (354 | ) | | | — | | | | (354 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (22 | ) | | | (22 | ) | | | | | — | | | | | | Other comprehensive (loss)/income | | | — | | | | — | | | | — | | | | — | | | | (132 | ) | | | (132 | ) | | | 1 | | | | (131 | ) | | | | | — | | | $ | (131 | ) | Issuance of shares under employee stock compensation plans | | | 275 | | | | 16 | | | | — | | | | — | | | | — | | | | 16 | | | | — | | | | 16 | | | | | | — | | | | | | Share-based compensation and net settlements | | | — | | | | 46 | | | | — | | | | — | | | | — | | | | 46 | | | | — | | | | 46 | | | | | | — | | | | | | Reduction of non-controlling interests (iii) | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | 9 | | | | (11 | ) | | | (2 | ) | | | | | — | | | | | | Other | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) | | | | | — | | | | | | Foreign currency translation | | | — | | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) | | | — | | | | (7 | ) | | | | | — | | | | | | Balance as of December 31, 2020 | | | 128,965 | | | $ | 10,748 | | | $ | 2,434 | | | $ | (3 | ) | | $ | (2,359 | ) | | $ | 10,820 | | | $ | 112 | | | $ | 10,932 | | | | | $ | — | | | | | |
_________ (i) | Accumulated other comprehensive loss, net of tax (‘AOCL’). |
(ii) | The redeemable non-controlling interest was related to Max Matthiessen Holding AB. The Company purchased the remaining non-controlling interest of Max Matthiessen Holding AB during the year ended December 31, 2019. |
(iii) | Attributable to the divestiture of businesses that are less than wholly-owned or the acquisition of shares previously owned by minority interest holders. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Notes to the Consolidated Financial Statements (Tabular amounts are in millions of U.S. dollars, except per share data) Note 1 — Nature of Operations Willis Towers Watson plc is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. The Company has more than 46,000 employees and services clients in more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our risk management services include strategic risk consulting (including providing actuarial analysis), a variety of due diligence services, the provision of practical on-site risk control services (such as health and safety and property loss control consulting), and analytical and advisory services (such as hazard modeling and reinsurance optimization studies). We also assist our clients with planning for addressing incidents or crises when they occur. These services include contingency planning, security audits and product tampering plans. We help our clients enhance business performance by delivering consulting services, technology and solutions that optimize benefits and cultivate talent. Our services and solutions encompass such areas as employee benefits, total rewards, talent and benefits outsourcing. In addition, we provide investment advice to help our clients develop disciplined and efficient strategies to meet their investment goals and expand the power of capital. As an insurance broker, we act as an intermediary between our clients and insurance carriers by advising on their risk management requirements, helping them to determine the best means of managing risk and negotiating and placing insurance with insurance carriers through our global distribution network. We operate a private Medicare marketplace in the U.S. through which, along with our active employee marketplace, we help our clients move to a more sustainable economic model by capping and controlling the costs associated with healthcare benefits. Additionally, with the acquisition of TRANZACT in July 2019 (see Note 3 – Acquisitions and Divestitures), we also provide direct-to-consumer sales of Medicare coverage. We are not an insurance company, and therefore we do not underwrite insurable risks for our own account. We believe our broad perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance. Proposed Combination with Aon plc On March 9, 2020, WTW and Aon plc (‘Aon’) issued an announcement disclosing that the respective boards of directors of WTW and Aon had reached agreement on the terms of a recommended acquisition of WTW by Aon. Under the terms of the agreement each WTW shareholder will receive 1.08 Aon ordinary shares for each WTW ordinary share. At the time of the announcement, it was estimated that upon completion of the combination, existing Aon shareholders will own approximately 63% and existing WTW shareholders will own approximately 37% of the combined company on a fully diluted basis. The transaction was approved by the shareholders of both WTW and Aon during meetings of the respective shareholders held on August 26, 2020 and remains subject to other customary closing conditions, including required regulatory approvals. The antitrust regulatory review of the transaction remains ongoing. In addition, there are numerous other regulatory approvals and other closing conditions that need to be met. The parties expect the transaction to close in the first half of 2021, subject to satisfaction of these conditions. Note 2—Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements Basis of Presentation The accompanying audited consolidated financial statements of Willis Towers Watson and our subsidiaries are presented in accordance with the rules and regulations of the SEC for annual reports on Form 10-K and are prepared in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Risks and Uncertainties Related to the COVID-19 Pandemic The COVID-19 pandemic has had an adverse impact on global commercial activity, including the global supply chain, 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. In light of 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 on our business, taking into account our business resilience and continuity plans, financial modeling and stress testing of liquidity and financial resources. Generally, the COVID-19 pandemic did not recordhave a material adverse impact on our overall financial results during 2020; however, during 2020, the COVID-19 pandemic negatively impacted our revenue growth, primarily in our businesses that are discretionary in nature. We believe such level of impact will continue through much of 2021, at least until a sufficient portion of the populations in jurisdictions where we do business have been vaccinated and social-distancing orders are lessened or lifted. As part of the significant estimates and assumptions that are inherent in our financial statements, we have considered the impact COVID-19 will have on our client behavior and the economic environment looking forward to 2021 and throughout the geographies in which we operate. These estimates and assumptions include the collectability of billed and unbilled receivables, the estimation of revenue, and the fair value of our reporting units, tangible and intangible assets and contingent consideration. With regard to collectability of receivables, we believe we may continue to face atypical delays in client payments going forward. The demand for certain discretionary lines of business has decreased, and we believe that decrease may continue to impact our financial results in succeeding periods. Non-discretionary lines of business have also been, to some extent, adversely affected and may be adversely affected in the future. Further, reduced economic activity or disruption in insurance markets could reduce the demand for or the extent of insurance coverage. For example, we have seen instances where the reduced demand for air travel has reduced the extent of insurance coverage needed. Also, the increased frequency and severity of coverage disputes between our clients and (re)insurers arising out of the pandemic could increase our professional liability risk. We will continue to monitor the situation and assess any implications to our business and our stakeholders. 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, 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 will negatively impact our revenue and operating results in fiscal 2021. We believe that these trends and uncertainties are similar to those faced by other comparable registrants as a result of the pandemic. CARES Act On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act was enacted in the U.S. to provide relief to companies in the midst of the COVID-19 pandemic and to stimulate the economy. The assistance includes temporary tax relief and government loans, grants and investments for entities in affected industries. With regard to the income tax provisions of the CARES Act, the Company has reviewed its eligibility requirements, including if and how they apply and how they will affect the Company, particularly provisions that (i) eliminate the taxable income limit for certain net operating losses (‘NOLs’) and allow businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years; (ii) generally relaxed the business interest limitation under section 163(j) from 30 percent to 50 percent; and (iii) fix the ‘retail glitch’ for qualified improvement property. During the three months ended June 30, 2020, the Company elected to use the section 163(j) 50 percent business interest limitation for tax years 2019 and 2020. Utilizing this temporary provision, the Company realized a cash tax benefit in 2020 of approximately $38 million for tax years 2019 and 2020. The Company recognized tax expense of approximately $29 million and $32 million for the 2019 and 2020 tax years, respectively, primarily related to an incremental Base Erosion and Anti-Abuse Tax (‘BEAT’). Additionally, the CARES Act offers an employee retention credit to encourage employers to maintain headcounts even if employees cannot report to work because of issues related to COVID-19 as well as a temporary provision allowing companies to defer remitting the employer share of some payroll taxes to the government. The payroll tax provisions of the CARES Act were not material for 2020. Significant Accounting Policies Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Willis Towers Watson and those of our majority-owned and controlled subsidiaries. Intercompany accounts and transactions have been eliminated.
We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (‘VIE’). Variable interest entities are entities that lack one or more of the characteristics of a voting interest entity and therefore require a different approach in determining which party involved with the VIE should consolidate the entity. With a VIE, either the entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, or the equity holders, as a group, do not have the power to direct the activities that most significantly impact its financial performance, the obligation to absorb expected losses of the entity, or the right to receive the expected residual returns of the entity. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. Voting interest entities are entities that have sufficient equity and provide equity investors voting rights that give them the power to make significant decisions related to the entity’s operations. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. Accordingly, we consolidate our voting interest entity investments in which we hold, directly or indirectly, more than 50% of the voting rights. Use of Estimates — These consolidated financial statements conform to U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. 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. Estimates are used when accounting for revenue recognition and related costs, the selection of useful lives of fixed and intangible assets, impairment testing, valuation of billed and unbilled receivables from clients, discretionary compensation, income taxes, pension assumptions, incurred but not reported claims, legal reserves and goodwill and intangible assets. Going Concern — Management evaluates at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Management’s evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the consolidated financial statements are issued. Management has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date of these financial statements. Fair Value of Financial Instruments — The carrying values of our cash, cash equivalents and restricted cash, accounts receivable, accrued expenses, revolving lines of credit and term loans approximate their fair values because of the short maturity and liquidity of those instruments. We consider the difference between carrying value and fair value to be immaterial for our senior notes. The fair value of our senior notes and note receivable are considered Level 2 financial instruments as they are corroborated by observable market data. See Note 11 — Fair Value Measurements for additional information about our measurements of fair value. Investments in Associates— Investments are accounted for using the equity method of accounting, included within other non-current assets in the consolidated balance sheets, if the Company has the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an equity ownership in the voting stock of the investee between 20 and 50 percent, although other factors, such as representation on the board of directors, the existence of substantive participation rights, and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is carried at the cost of acquisition, plus the Company’s equity in undistributed net income since acquisition, less any dividends received since acquisition. The Company periodically reviews its investments in associates for which fair value is less than cost to determine if the decline in value is other than temporary. If the decline in value is judged to be other than temporary, the cost basis of the investment is written down to fair value. The amount of any write-down is included in the consolidated statements of comprehensive income. Cash and Cash Equivalents — Cash and cash equivalents primarily consist of time deposits with original maturities of 90 days or less. In certain of the countries in which we conduct business, we are subject to capital adequacy requirements. Most significantly, Willis Limited, our U.K. brokerage subsidiary regulated by the Financial Conduct Authority, is currently required to maintain $140 million in unencumbered and available financial resources, of which at least $51 million must be in cash, for regulatory purposes. Term deposits and certificates of deposits with original maturities greater than 90 days are considered to be short-term investments. As a result of the acquired TRANZACT collateralized facility (see Note 10 — Debt), we had $7 million and $8 million of restricted cash at December 31, 2020 and 2019, respectively, which is included within prepaid and other current assets on our consolidated balance sheet. Fiduciary Assets and Liabilities — The Company collects premiums from insureds and, after deducting commissions, remits the premiums to the respective insurers. The Company also collects claims or refunds from insurers on behalf of insureds. Certain of our health and welfare benefits administration outsourcing agreements require us to hold funds on behalf of clients to pay obligations on
their behalf. Each of these transactions is reported on our consolidated balance sheet as assets and corresponding liabilities unless such balances are due to or from the same party and a right of offset exists, in which case the balances are recorded net. Fiduciary assetson the consolidated balance sheets are comprised of both fiduciary funds and fiduciary receivables: Fiduciary Funds – Unremitted insurance premiums and claims are recorded within fiduciary assets on the consolidated balance sheets. Fiduciary funds are generally required to be kept in certain 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 insureds and insurers, the Company is entitled to retain investment income earned on fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds. The period for which the Company holds such funds is dependent upon the date the insured remits the payment of the premium to the Company, or the date the Company receives refunds from the insurers, and the date the Company is required to forward such payments to the insurer or insured, respectively. Fiduciary receivables – Uncollected premiums from insureds and uncollected claims or refunds from insurers are recorded as fiduciary assets on the consolidated balance sheets. In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. Such advances are made from fiduciary funds and are reflected in the consolidated balance sheets as fiduciary assets. Fiduciary liabilities on the consolidated balance sheets represent the obligations to remit all fiduciary funds and fiduciary receivables to insurers or insureds. Accounts Receivable — Accounts receivable includes both billed and unbilled receivables and is stated at estimated net realizable values. Provision for billed receivables is recorded, when necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncollectible accounts. Accrued and unbilled receivables are stated at net realizable value which includes an allowance for accrued and unbillable amounts. See Note 4 — Revenue for additional information about our accounts receivable. Acquired Accounts Receivable — As part of the acquisition accounting for the TRANZACT business (see Note 3 – Acquisitions and Divestitures), the acquired accounts receivable arising from direct-to-consumer Medicare broking sales were present-valued at the acquisition date in accordance with ASC 805, Business Combinations (‘ASC 805’). Cash collections for these receivables are expected to occur over a period of several years. Due to the provisions of ASC 606, Revenue From Contracts With Customers (‘ASC 606’), these receivables are not discounted for a significant financing component when initially recognized. The acquired renewal commissions receivables will be accounted for prospectively using the cost-recovery method in which future cash receipts will initially be applied against the acquisition date fair value until the value reaches zero. Any cash received in excess of the fair value determined at acquisition will be recorded to earnings when it is received at a future date. The adjusted values of these acquired renewal commissions receivables will be included in prepaid and other current assets or other non-current assets, as appropriate, on the consolidated balance sheets. 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 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 when the Company’s facts and assumptions change. 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. Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. The Company recognizes the benefits of uncertain tax positions in the financial statements when it is more likely than not that a position will be sustained on the basis of the technical merits of the position assuming the tax authorities have full knowledge of the position and all relevant facts. Recognition also occurs upon either the lapse of the relevant statute of limitations or when positions are effectively settled. The benefit recognized is the largest amount of tax benefit that is greater than 50 percent likely to be realized on settlement with the tax authority. The Company adjusts its recognition of uncertain tax benefits in the period in which new information is available impacting either the recognition or measurement of its uncertain tax positions. Such adjustments are reflected as increases or decreases to income taxes in the period in which they are determined.
The Company recognizes interest and penalties relating to unrecognized tax benefits within income taxes. See Note 6 — Income Taxes for additional information regarding the Company’s income taxes. Foreign Currency — Transactions in currencies other than the functional currency of the entity are recorded at the rates of exchange prevailing at the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are translated at the rates of exchange prevailing at the balance sheet date and the related transaction gains and losses are reported as income or expense in the consolidated statements of comprehensive income. Certain intercompany loans are determined to be of a long-term investment nature. The Company records transaction gains and losses from re-measuring such loans as other comprehensive income in the consolidated statements of comprehensive income. Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates, and assets and liabilities are translated at year-end exchange rates. Translation adjustments are presented as a separate component of other comprehensive income in the financial statements and are included in net income only upon sale or liquidation of the underlying foreign subsidiary or associated company. Derivatives — The Company uses derivative financial instruments to alter the risk profile of an existing underlying exposure. Forward foreign currency exchange contracts are used to manage currency exposures arising from future income and expenses and to offset balance sheet exposures in currencies other than the functional currency of an entity. We do not hold any derivatives for trading purposes. The fair values of derivative contracts are recorded in other assets and other liabilities in the consolidated balance sheets. The effective portions of changes in the fair value of derivatives that qualify for hedge accounting as cash flow hedges are recorded in other comprehensive income. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings. If the derivative is designated and qualifies as an effective fair value hedge, the changes in the fair value of the derivative and of the hedged item associated with the hedged risk are both recognized in earnings. The amount of hedge ineffectiveness recognized in earnings is based on the extent to which an offset between the fair value of the derivative and hedged item is not achieved. Changes in the fair value of derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness on those that do qualify, are recorded in other income, net or interest expense as appropriate. The Company evaluates whether its contracts include clauses or conditions which would be required to be separately accounted for at fair value as embedded derivatives. See Note 9 — Derivative Financial Instruments for additional information about the Company’s derivatives. Commitments, Contingencies and Provisions for Liabilities — The Company establishes provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also unasserted claims and related legal fees. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in 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. To the extent such losses can be recovered under the Company’s insurance programs, estimated recoveries are recorded when losses for insured events are recognized and the recoveries are likely to be realized. Significant management judgment is required to estimate the amounts of such unasserted claims and the related insurance recoveries. The Company analyzes its litigation exposure based on available information, including consultation with outside counsel handling the defense of these matters, to assess its potential liability. These contingent liabilities are not discounted. See Note 14 — Commitments and Contingencies and Note 15 — Supplementary Information for Certain Balance Sheet Accounts for additional information about our commitments, contingencies and provisions for liabilities. Share-Based Compensation — The Company has equity-based compensation plans that provide for grants of restricted stock units and stock options to employees and non-employee directors of the Company. Additionally, the Company has cash-settled share-based compensation plans that provide for grants to employees. The Company expenses equity-based compensation, which is included in Salaries and benefits in the consolidated statements of comprehensive income, primarily on a straight-line basis over the requisite service period. The significant assumptions underlying our expense calculations include the fair value of the award on the date of grant, the estimated achievement of any performance targets and estimated forfeiture rates. The awards under equity-based compensation are classified as equity and are included as a component of equity on the Company’s consolidated balance sheets, as the ultimate payment of such awards will not be achieved through use of the Company’s cash or other assets. For the cash-settled share-based compensation, the Company recognizes a liability for the fair-value of the awards as of each reporting date. The liability for these awards is included within other current liabilities or other non-current liabilities in the consolidated balance sheets depending when the amounts are payable. Expense is recognized over the service period, and as the liability is remeasured at the end of each reporting period, changes in fair value are recognized as compensation cost within Salaries and benefits
in the consolidated statements of comprehensive income. The significant assumptions underlying our expense calculations include the estimated achievement of any performance targets and estimated forfeiture rates. See Note 18 — Share-based Compensation for additional information about the Company’s share-based compensation. Fixed Assets — Fixed assets are stated at cost less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of assets. Depreciation on internally-developed software is amortized over the estimated useful life of the asset ranging from 3 to 10 years. Buildings include assets held under finance leases and are depreciated over the lesser of 50 years, the asset lives or the lease terms. Depreciation on leasehold improvements is calculated over the lesser of the useful lives of the assets or the remaining lease terms. Depreciation on furniture and equipment is calculated based on a range of 3 to 10 years. Land is not depreciated. Long-lived assets are tested for recoverability whenever events or changes in circumstance indicate that their carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. Recoverability is determined based on the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. See Note 7 — Fixed Assets for additional information about our fixed assets. Leases (effective from January 1, 2019) — The following policies were effective beginning with the 2019 fiscal year as a result of the adoption, on January 1, 2019, of ASC 842, Leases (‘ASC 842’). The lease policies in effect prior to 2019 are reflected in the next section. As an advisory, broking and solutions company providing services to clients in more than 140 countries, we enter into lease agreements from time to time, primarily for the use of real estate for our office space. We determine if an arrangement is a lease at the inception of the contract, and the nature of our operations is such that it is generally clear whether an arrangement contains a lease and what underlying asset is being leased. The majority of the leases into which we enter are operating leases. Upon entering into leases, we obtain the right to control the use of an identified space for a lease term and recognize these right-of-use (‘ROU’) assets on our consolidated balance sheets with corresponding lease liabilities reflecting our obligation to make the related lease payments. ROU assets are amortized over the term of the lease. Our real estate leases are generally long-term in nature, with terms that typically range from 5 to 15 years. Our most significant lease supports our London market operations with a lease term through 2032. Our real estate leases often contain options to renew the lease, either through exercise of the option or through automatic renewal. Additionally, certain leases have options to cancel the lease with appropriate notice to the landlord prior to the end of the stated lease term. As we enter into new leases after the adoption of ASC 842, we consider these options as we assess lease terms in our recognized ROU assets and lease liabilities. If we are reasonably certain to exercise an option to renew a lease, we include this period in our lease term. To the extent that we have the option to cancel a lease, we recognize our ROU assets and lease liabilities using the term that would result from using this earlier date. If a significant penalty is required to cancel the lease at an earlier date, we assess our lease term as ending at the point when no significant penalty would be due. In addition to payments for previously-agreed base rent, many of our lease agreements are subject to variable and unknown future payments, typically in the form of common area maintenance charges (a non-lease component as defined by ASC 842) or real estate taxes. These variable payments are excluded from our lease liabilities and ROU assets, and instead are recognized as lease expense within other operating expenses on the consolidated statement of comprehensive income as the amounts are incurred. To the extent that we have agreed to fixed charges for common area maintenance or other non-lease components, or our base rent increases by an index or rate (most commonly an inflation rate), these amounts are included in the measurement of our lease liabilities and ROU assets. We have elected the practical expedient under ASC 842 which allows the lease and non-lease components to be combined in our measurement of lease liabilities and ROU assets. From time to time we may enter into subleases if we are unable to cancel or fully occupy a space and are able to find an appropriate subtenant. However, entering subleases is not a primary objective of our business operations and these arrangements represent an immaterial amount of cash flows. We are required to use judgment in the determination of the incremental borrowing rates to calculate the present values of our future lease payments. Since the majority of our debt is publicly traded, our real estate function is centralized, and our treasury function is centralized and generally prohibits our subsidiaries from borrowing externally, we have determined it appropriate to use the Company’s consolidated unsecured borrowing rate, and we adjust for collateralization in accordance with ASC 842. Using the resulting interest rate curves from publicly traded debt at this collateralized borrowing rate, we select the interest rate at lease
inception by reference to the lease term and lease currency. Over 90% of our leases are denominated in U.S. dollars, Pounds sterling or Euros. Our leases generally do not subject us to restrictive covenants and contain no residual value guarantees. See Note 13 — Leases for additional information about our operating leases. Operating Leases (effective before January 1, 2019) — Rentals payable on operating leases were charged on a straight-line basis to other operating expenses in the consolidated statements of comprehensive income over the lease terms prior to the implementation of ASC 842. Goodwill and Other Intangible Assets — 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 of October 1, and whenever indicators of impairment exist. The fair values of intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value. Acquired intangible assets are amortized over the following periods: | | | | | | Amortization basis | | Expected life (years) | Client relationships | In line with underlying cash flows | | 5 to 20 | Software | In line with underlying cash flows or straight-line basis | | 4 to 7 | Trademark and trade name | Straight-line basis | | 14 to 25 | Other | In line with underlying cash flows or straight-line basis | | 3 to 20 |
Prior to the adoption of ASC 842, favorable and unfavorable acquired lease agreement intangible assets and liabilities were amortized straight-line over the remaining terms of the leases. These amounts have been subsumed into the ROU assets upon adoption of ASC 842. Goodwill is tested for impairment annually as of October 1, and whenever indicators of impairment exist. Goodwill is tested at the reporting unit level, and the Company had 8 reporting units as of October 1, 2020. In the impairment test, the fair value of each reporting unit is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the difference is recognized as an impairment loss. The Company’s goodwill impairment tests for the years ended December 31, 2020 and 2019 have not resulted in any impairment charges. See Note 8 — Goodwill and Other Intangible Assets for additional information about our goodwill and other intangible assets. Pensions — The Company has multiple defined benefit pension and defined contribution plans. The net periodic cost of the Company’s defined benefit plans is measured on an actuarial basis using various methods and actuarial assumptions. The most significant assumptions are the discount rates (calculated using the granular approach to calculating service and interest cost) and the expected long-term rates of return on plan assets. Other material assumptions include rates of participant mortality, the expected long-term rates of compensation and pension increases and rates of employee termination. Gains and losses occur when actual experience differs from actuarial assumptions. If such gains or losses exceed ten percent of goodwillthe greater of the market-related value of plan assets or intangibles.the projected benefit obligation, the Company amortizes those gains or losses over the average remaining service period or average remaining life expectancy, as appropriate, of the plan participants. In accordance with U.S. GAAP, the Company records the funded status of its pension plans based on the projected benefit obligation on its consolidated balance sheets. Contributions to the Company’s defined contribution plans are recognized as incurred. Differences between contributions payable in the year and contributions actually paid are shown as either other assets or other liabilities in the consolidated balance sheets. See Note 12 — Retirement Benefits for additional information about our pensions. Revenue Recognition — We recognize revenue from a variety of services, with broking, consulting and outsourced administration representing our most significant offerings. All other revenue streams, which can be recognized at either a point in time or over time, are individually less significant and are grouped in Other in our revenue disaggregation disclosures in Note 4 — Revenue. These Other revenue streams represent approximately 5%of customer contract revenue for the years ended December 31, 2020, 2019 and 2018. Broking — Representing approximately 52%, 50% and 48% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018, respectively, in our broking arrangements, we earn revenue by acting as an intermediary in the placement of effective
insurance policies. Generally, we act as an agent and view our client to be the party looking to obtain insurance coverage for various risks, or an employer or sponsoring organization looking to obtain insurance coverage for its employees or members. Also, we act as an agent in reinsurance broking arrangements where our client is the party looking to cede risks to the reinsurance markets. Our primary performance obligation under the majority of these arrangements is to place an effective insurance or reinsurance policy, but there can also be significant post-placement obligations in certain contracts to which we need to allocate revenue. The most common of these is for claims handling or call center support. The revenue recognition method for these, after the relative fair value allocation, is described further as part of the ‘Outsourced Administration’ description below. Due to the nature of the majority of our broking arrangements, no single document constitutes the contract for ASC 606 purposes. Our services may be governed by a mixture of different types of contractual arrangements depending on the jurisdiction or type of coverage, including terms of business agreements, broker-of-record letters, statements of work or local custom and practice. This is then confirmed by the client’s acceptance of the underlying insurance contract. Prior to the policy inception date, the client has not accepted nor formally committed to perform under the arrangement (i.e. pay for the insurance coverage in place). Therefore in the majority of broking arrangements, the contract date is the date the insurance policy incepts. However, in certain instances such as employer-sponsored Medicare broking or Affinity arrangements, where the employer or sponsoring organization is our customer, client acceptance of underlying individual policy placements is not required, and therefore the date at which we have a contract with a customer is not dependent upon placement. As noted, our primary performance obligations typically consist of only the placement of an effective insurance policy which precedes the inception date of the policy. Therefore, most of our fulfillment costs are incurred before we can recognize revenue, and are thus deferred during the pre-placement process. Where we have material post-placement services obligations, we estimate the relative fair value of the post-placement services using either the expected cost-plus-margin or the market assessment approach. Revenue from our broking services consists of commissions or fees negotiated in lieu of commissions. At times, we may receive additional income for performing these services from the insurance and reinsurance carriers’ markets, which is collectively referred to as ‘market derived income’. 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 term. For employer-sponsored 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 employer-sponsored Medicare broking and proportional treaty reinsurance broking 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). This is an area requiring significant judgment and results 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 treaty statements, or as other information becomes available. We recognize revenue for most broking arrangements as of a point in time at the later of the policy inception date or when the policy placement is complete, because this is viewed as the date when control is transferred to the client. For employer-sponsored Medicare broking, we recognize revenue over time, as we stand ready under our agreements to place retiree Medicare coverage. For this type of broking arrangement, we recognize the majority of our placement revenue in the fourth quarter of the calendar year when most of the placement or renewal activity occurs. Beginning on July 30, 2019 with the acquisition of TRANZACT (see Note 3 — Acquisitions and Divestitures), we have a direct-to-consumer Medicare broking offering. The contractual arrangements in this offering differ from our previously existing employer-sponsored Medicare broking offering described above. The governing contracts in our direct-to-consumer Medicare broking offering are the contractual arrangements with insurance carriers, for whom we act as an agent, that provide compensation in return for issued policies. Once an application is submitted to a carrier, our obligation is complete, and we have no ongoing fulfilment obligations. We receive compensation from carriers in the form of commissions, administrative fees and marketing fees in the first year, and depending on the type of policy issued, we may receive renewal commissions for up to 25 years, provided the policies are renewed for such periods of time. Because our obligation is complete upon application submission to the carrier, we recognize revenue at that date, which includes both compensation due to us in the first year as well as an estimate of the total renewal commissions that will be received over the lifetime of the policy. This variable consideration estimate 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, and includes an element of ‘constraint’ as defined by ASC 606 such that no significant reversal is expected to occur in the future. Actual results will differ from these estimates. The timing of renewal payments in our direct-to-consumer Medicare broking offering is reflective of regulatory restrictions and insurance carriers’ protection for cancellations and varies based on policy holder decisions that are outside of the control of both the
Company and the insurance carriers. As such, the estimate of these renewal commissions receivables has not been discounted to reflect a significant financing component. Consulting — We earn revenue for advisory and consulting work that may be structured as different types of service offerings, including annual recurring projects, projects of a short duration or stand-ready obligations. Collectively, our consulting arrangements represent approximately 30%, 32% and 34% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018, respectively. We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. In assessing our performance obligations, our consulting work is typically highly integrated, with the various promised services representing inputs of the combined overall output. We view these arrangements as representing a single performance obligation. To the extent we do not integrate our services, as is the case with unrelated services that may be sourced from different areas of our business, we consider these separate performance obligations. Fee terms can be in the form of fixed-fees (including fixed-fees offset by commissions), time-and-expense fees, commissions, per-participant fees, or fees based on assets under management. Payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination. The majority of our revenue from these consulting engagements is recognized over time, either because our clients are simultaneously receiving and consuming the benefits of our services, or because we have an enforceable right to payment for performance rendered to date. Additionally, from time to time, we may be entitled to an additional fee based on achieving certain performance criteria. To the extent that we cannot estimate with reasonable assurance the likelihood that we will achieve the performance target, we will ‘constrain’ this portion of the transaction price and recognize it when or as the uncertainty is resolved. We use different progress measures to determine our revenue depending on the nature of the engagement: | • | Annual recurring projects and projects of short duration. These projects are typically straightforward and highly predictable in nature with either time-and-expense or fixed fee terms. Time-and-expense fees are recognized as hours or expenses are incurred using the ‘right to invoice’ practical expedient allowed under ASC 606. For fixed-fee arrangements, to the extent estimates can be made of the remaining work required under the arrangement, revenue is based upon the proportional performance method, using the value of labor hours spent to date compared to the estimated total value of labor hours for the entire engagement. We believe that cost represents a faithful depiction of the transfer of value because the completion of these performance obligations is based upon the professional services of employees of differing experience levels and thereby costs. It is appropriate that satisfaction of these performance obligations considers both the number of hours incurred by each employee and the value of each labor hour worked (as opposed to simply the hours worked). |
| • | Stand-ready obligations. These projects consist of repetitive monthly or quarterly services performed consistently each period. As none of the activities provided under these services are performed at specified times and quantities, but at the discretion of each customer, our obligation is to stand ready to perform these services on an as-needed basis. These arrangements represent a ‘series’ performance obligation in accordance with ASC 606. Each time increment (i.e., each month or quarter) of standing ready to provide the overall services is distinct and the customer obtains value from each period of service independent of the other periods of service. |
Where we recognize revenue on a proportional performance basis, 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 stage 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. Outsourced Administration — We provide customized benefits outsourcing and co-sourcing solutions services in relation to the administration of defined benefit, defined contribution, and health and welfare plans. These plans are sponsored by our clients to provide benefits to their active or retired employees. Additionally, these services include operating call centers and may include providing access to, and managing, a variety of consumer-directed savings accounts. The operation of call centers and consumer-directed accounts can be provisioned as part of an ongoing administration or solutions service, or separately as part of a broking arrangement. The products and services available to all clients are the same, but the selections by a client can vary and portray customized products and services based on the customer’s specific needs. Our services often include the use of proprietary systems
that are configured for each of our clients’ needs. In total, our outsourced administration services represent approximately 12% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018. These contracts typically consist of an implementation phase and an ongoing administration phase: | • | Implementation phase. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer, and therefore costs are deferred during this phase of the arrangement. Since these arrangements are longer term in nature and subject to more changes in scope as the project progresses, our contracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of implementation. |
| • | Ongoing administration phase. The ongoing administration phase includes a variety of plan administration services, system hosting and support services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our health and welfare arrangements, annual onboarding and enrollment support. While there are a variety of activities performed, the overall nature of the obligation is to provide an integrated outsourcing solution to the customer. The arrangement represents a stand-ready obligation to perform these activities on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or each benefits cycle in our health and welfare arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services represent a ‘series’ in accordance with ASC 606 and are deemed one performance obligation. |
We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. Fees for these arrangements can be fixed, per-participant-per-month, or in the case of call center services, provided in conjunction with our broking services, with an allocation based on commissions. Our fees are not typically payable until the commencement of the ongoing administration phase. However, in our health and welfare arrangements, we begin transferring services to our customers approximately four months prior to payments being due as part of our annual onboarding and enrollment work. Although our per-participant-per-month and commission-based fees are considered variable, they are typically predictable in nature, and therefore we generally do not ‘constrain’ any portion of our transaction price estimates. Once fees become payable, payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination. Revenue is recognized over time as the services are performed because our clients are simultaneously receiving and consuming the benefits of our services. For our health and welfare arrangements where each benefits cycle represents a time increment under the series guidance, revenue is recognized based on proportional performance. We use an input measure (value of labor hours worked) as the measure of progress. Given that the service is stand-ready in nature, it can be difficult to predict the remaining obligation under the benefits cycle. Therefore, the input measure is based on the historical effort expended each month, which is measured as labor cost. This results in slightly more revenue being recognized during periods of annual onboarding since we are performing both our normal monthly services and our annual services during this portion of the benefits cycle. For all other outsourced administration arrangements where a month represents our time increment under the series guidance, we allocate transaction price to the month we are performing our services. Therefore, the amount recognized each month is the variable consideration related to that month plus the fixed monthly or annual fee. The fixed monthly or annual fee is recognized on a straight-line basis. Revenue recognition for these types of arrangements is therefore more consistent throughout the year. Reimbursed expenses — Client reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included in revenue, and an equivalent amount of reimbursable expenses is included in other operating expenses as a cost of revenue as incurred. Reimbursed expenses represented approximately 1% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018. Taxes collected from customers and remitted to government authorities are recorded net and are excluded from revenue. Interest income — Interest income is recognized as earned. Other income — Other income includes gains on disposal of intangible assets, which primarily arise from settlements through enforcing non-compete agreements in the event of losing accounts through producer defection or the disposal of books of business. Cost to obtain or fulfill contracts— Costs to obtain customers include commissions for brokers under specific agreements that would not be incurred without a contract being signed and executed. The Company has elected to apply the ASC 606 ‘practical expedient’ which allows us to expense these costs as incurred if the amortization period related to the resulting asset would be one year or less. The Company has no significant instances of contracts that would be amortized for a period greater than a year, and therefore has no contract costs capitalized for these arrangements.
Costs to fulfill include costs incurred by the Company that are expected to be recovered within the expected contract period. The costs associated with our system implementation activities and consulting contracts are recorded through time entry. For our broking business, the Company must estimate the fulfillment costs incurred during the pre-placement of the broking contracts. These judgments include: | • | which activities in the pre-placement process should be eligible for capitalization; |
| • | the amount of time and effort expended on those pre-placement activities; |
| • | the amount of payroll and related costs eligible for capitalization; and, |
| • | the monthly or quarterly timing of underlying insurance and reinsurance policy inception dates. |
We amortize costs to fulfill over the period we receive the related benefits. For broking pre-placement costs, this is typically less than a year. In our system implementation and consulting arrangements, we include the likelihood of contract renewals in our estimate of the amortization period, resulting in most costs being amortized for a greater length of time than the initial contract term. Recent Accounting PronouncementsInterest Rate Risk
The Company has access to $1.25 billion under a revolving credit facility expiring March 7, 2022. As of December 31, 2020, no amount was drawn on this facility. We are also subject to market risk from exposure to changes in interest rates based on our investing activities where our primary interest rate risk arises from changes in short-term interest rates in U.S. dollars, Pounds sterling and Euros.
The table below provides information about our financial instruments that are sensitive to changes in interest rates. | | Expected to mature before December 31, | | | | | | | | | | | | | | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | Thereafter | | | Total | | | Fair Value (i) | | | | ($ in millions) | | Fixed rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | $ | 950 | | | | 660 | | | $ | 250 | | | $ | 650 | | | $ | — | | | $ | 3,100 | | | $ | 5,610 | | | $ | 6,418 | | Fixed rate payable | | | 4.684 | % | | | 2.125 | % | | | 4.625 | % | | | 3.600 | % | | | — | | | | 4.224 | % | | | 4.000 | % | | | | | Floating rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | $ | 22 | | | $ | 17 | | | $ | 13 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 55 | | | $ | 55 | | Variable rate payable (ii) | | | 5.448 | % | | | 5.448 | % | | | 5.530 | % | | | 5.595 | % | | | — | | | | — | | | | 5.475 | % | | | | |
(i) | Represents the net present value of the expected cash flows discounted at current market rates of interest or quoted market rates as appropriate. |
(ii) | Represents the estimated interest rate payable. |
Interest Income on Fiduciary Funds As a result of our operating activities, we receive cash for premiums and claims which we deposit in short-term investments denominated in U.S. dollars and other currencies. We earn interest on these funds, which is included in our consolidated financial statements as interest income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity. At December 31, 2020, we held $2.2 billion of fiduciary funds invested in interest-bearing accounts. If short-term interest rates increased or decreased by 25 basis points, interest earned on these invested fiduciary funds, and therefore our interest income recognized, would increase or decrease by approximately $6 million on an annualized basis. LIBOR-Related Debt Instruments In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced its intention to phase out LIBOR as a benchmark rate by the end of 2021. The Alternative Reference Rates Committee (‘ARRC’), a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from U.S. dollar LIBOR (‘USD-LIBOR’) to a more robust reference rate, has proposed that the Secured Overnight Financing Rate (‘SOFR’) represents the best alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a transition plan with specific steps and timelines designed to encourage the adoption of SOFR and guide the transition to SOFR from USD-LIBOR. Organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to USD-LIBOR. Similar efforts are underway to identify suitable replacement reference rates for LIBOR in other major currencies. As of December 31, 2020, the Company’s primary exposure is its $1.25 billion revolving credit facility maturing in 2022 and its collateralized facility assumed as part of its acquisition of TRANZACT, which are both priced using rates tied to LIBOR. We anticipate renegotiating the revolving credit facility prior to the potential LIBOR quotation termination date and will renegotiate, or repay, the collateralized facility prior to the end of 2021. In addition, the Company and its subsidiaries have entered into various intercompany notes indexed to LIBOR. The Company, in preparation for a December 31, 2021 deadline, expects to amend or replace the LIBOR-based intercompany notes as necessary to reflect new market benchmarks for the relevant loan currencies. We are currently evaluating the LIBOR-related risks that may be inherent in our Treasury workstation software and elsewhere in our business and are monitoring for further proposals and guidance from the ARRC and other alternative-rate initiatives. While it is currently uncertain whether SOFR or another reference rate will be selected as the alternative to LIBOR, or whether other reforms will be enacted in response to the planned transition, we will make the appropriate changes when necessary. Credit Risk and Concentrations of Credit Risk Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform as contracted. The Company currently does not anticipate non-performance by its counterparties. The Company generally does not require collateral or other security to support financial instruments with credit risk. Concentrations of credit risk that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments on the balance sheet that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, fiduciary funds, accounts receivable and derivatives which are stillrecorded at fair value.
The Company maintains a policy of providing for the diversification of cash and cash equivalent investments and places such investments in an extensive number of financial institutions to limit the amount of credit risk exposure. These financial institutions are monitored on an ongoing basis for credit quality predominantly using information provided by credit agencies. Concentrations of credit risk with respect to receivables are limited due to the large number of clients and markets in which the Company does business, as well as the dispersion across many geographic areas. Management does not believe that significant risk exists in connection with the Company’s concentrations of credit as of December 31, 2020.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WILLIS TOWERS WATSON INDEX TO FORM 10-K For the year ended December 31, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors ofWillis Towers Watson Public Limited Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Willis Towers Watson Public Limited Company and subsidiaries (the ‘Company’) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, changes in equity and cash flows, for the three years then ended, and the related notes (collectively referred to as the ‘financial statements’). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the three years then ended, in conformity with accounting principles generally accepted in the processUnited States of analyzingAmerica (‘US GAAP’). We have also audited, in accordance with the various ASUsstandards of the Public Company Accounting Oversight Board (United States) (‘PCAOB’), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the FASB, those which we believe will have a material impact toCommittee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are listed below. the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Errors and Omissions Reserve — Refer to Notes 2, 14 and 15 to the financial statements Critical Audit Matter Description The Company has established provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions (‘E&O’) which arise in connection with the placement of insurance and reinsurance and provision of broking, consulting and outsourcing 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 (‘IBNR’). These provisions are established based on actuarial estimates together with individual case reviews. Significant management judgment is required to estimate the amounts of such claims. Auditing management’s judgments related to its E&O provision, and in particular the broking, consulting and outsourcing business provisions related to the IBNR, and the provisions related to significant claims reported but not paid, involved especially complex and subjective judgment and an increased extent of effort, including the need to involve our actuarial specialists. How the Critical Audit Matter Was Addressed in the Audit We tested the effectiveness of controls over the Company’s estimation of the E&O provisions, including controls over the underlying historical claims data, the actuarial methodology used, the assumptions selected by management that are used to calculate the broking,
consulting and outsourcing business IBNR provisions, and the establishment and quarterly evaluation of provisions for reported claims, including significant claims. For the IBNR provisions, we evaluated the appropriateness of the IBNR models, including evaluating changes needed or warranted given changes in the business and trends emerging from the COVID-19 pandemic, and evaluated the consistency of the model with prior years in order to challenge the methodology used to estimate the provisions. With the assistance of our actuarial specialists, we assessed the methodology and models used, including key inputs and assumptions used in, and arithmetical accuracy of, the models used. We also performed retrospective reviews of management’s estimated claims emergence in comparison to actual results and evaluated the provisions set by management in comparison to a range of independent estimates that we developed. We evaluated the E&O matters and the appropriateness of their projected settlement values through inquiries of, and confirmations from, in-house counsel and external lawyers handling those matters for the Company. /s/Deloitte & Touche LLP Philadelphia, PA February 23, 2021 We have served as the Company’s auditor since 2017.
WILLIS TOWERS WATSON Consolidated Statements of Comprehensive Income (In millions of U.S. dollars, except per share data) | | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Revenue | | $ | 9,352 | | | $ | 9,039 | | | $ | 8,513 | | Costs of providing services | | | | | | | | | | | | | Salaries and benefits | | | 5,507 | | | | 5,249 | | | | 5,123 | | Other operating expenses | | | 1,758 | | | | 1,719 | | | | 1,637 | | Depreciation | | | 308 | | | | 240 | | | | 208 | | Amortization | | | 462 | | | | 489 | | | | 534 | | Restructuring costs | | | 24 | | | | 0 | | | | 0 | | Transaction and integration expenses | | | 110 | | | | 13 | | | | 202 | | Total costs of providing services | | | 8,169 | | | | 7,710 | | | | 7,704 | | Income from operations | | | 1,183 | | | | 1,329 | | | | 809 | | Interest expense | | | (244 | ) | | | (234 | ) | | | (208 | ) | Other income, net | | | 399 | | | | 227 | | | | 250 | | INCOME FROM OPERATIONS BEFORE INCOME TAXES | | | 1,338 | | | | 1,322 | | | | 851 | | Provision for income taxes | | | (318 | ) | | | (249 | ) | | | (136 | ) | NET INCOME | | | 1,020 | | | | 1,073 | | | | 715 | | Income attributable to non-controlling interests | | | (24 | ) | | | (29 | ) | | | (20 | ) | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 996 | | | $ | 1,044 | | | $ | 695 | | | | | | | | | | | | | | | EARNINGS PER SHARE | | | | | | | | | | | | | Basic earnings per share | | $ | 7.68 | | | $ | 8.05 | | | $ | 5.29 | | Diluted earnings per share | | $ | 7.65 | | | $ | 8.02 | | | $ | 5.27 | | | | | | | | | | | | | | | NET INCOME | | $ | 1,020 | | | $ | 1,073 | | | $ | 715 | | Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | | Foreign currency translation | | $ | 139 | | | $ | 78 | | | $ | (251 | ) | Defined pension and post-retirement benefits | | | (266 | ) | | | (329 | ) | | | (199 | ) | Derivative instruments | | | (4 | ) | | | 21 | | | | 2 | | Other comprehensive income/(loss), net of tax, before non-controlling interests | | | (131 | ) | | | (230 | ) | | | (448 | ) | Comprehensive income before non-controlling interests | | | 889 | | | | 843 | | | | 267 | | Comprehensive income attributable to non-controlling interests | | | (25 | ) | | | (29 | ) | | | (20 | ) | Comprehensive income attributable to Willis Towers Watson | | $ | 864 | | | $ | 814 | | | $ | 247 | |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Balance Sheets (In millions of U.S. dollars, except share data) | | December 31, 2020 | | | December 31, 2019 | | ASSETS | | | | | | | | | Cash and cash equivalents | | $ | 2,089 | | | $ | 887 | | Fiduciary assets | | | 15,160 | | | | 13,004 | | Accounts receivable, net | | | 2,555 | | | | 2,621 | | Prepaid and other current assets | | | 497 | | | | 525 | | Total current assets | | | 20,301 | | | | 17,037 | | Fixed assets, net | | | 1,014 | | | | 1,046 | | Goodwill | | | 11,204 | | | | 11,194 | | Other intangible assets, net | | | 3,043 | | | | 3,478 | | Right-of-use assets | | | 902 | | | | 968 | | Pension benefits assets | | | 971 | | | | 868 | | Other non-current assets | | | 1,096 | | | | 835 | | Total non-current assets | | | 18,230 | | | | 18,389 | | TOTAL ASSETS | | $ | 38,531 | | | $ | 35,426 | | LIABILITIES AND EQUITY | | | | | | | | | Fiduciary liabilities | | $ | 15,160 | | | $ | 13,004 | | Deferred revenue and accrued expenses | | | 2,161 | | | | 1,784 | | Current debt | | | 971 | | | | 316 | | Current lease liabilities | | | 152 | | | | 164 | | Other current liabilities | | | 888 | | | | 802 | | Total current liabilities | | | 19,332 | | | | 16,070 | | Long-term debt | | | 4,664 | | | | 5,301 | | Liability for pension benefits | | | 1,405 | | | | 1,324 | | Deferred tax liabilities | | | 561 | | | | 526 | | Provision for liabilities | | | 407 | | | | 537 | | Long-term lease liabilities | | | 918 | | | | 964 | | Other non-current liabilities | | | 312 | | | | 335 | | Total non-current liabilities | | | 8,267 | | | | 8,987 | | TOTAL LIABILITIES | | | 27,599 | | | | 25,057 | | COMMITMENTS AND CONTINGENCIES | | | | | | | | | EQUITY (i) | | | | | | | | | Additional paid-in capital | | | 10,748 | | | | 10,687 | | Retained earnings | | | 2,434 | | | | 1,792 | | Accumulated other comprehensive loss, net of tax | | | (2,359 | ) | | | (2,227 | ) | Treasury shares, at cost, 17,519 in 2020 and 2019 and 40,000 shares, €1 nominal value, in 2019 | | | (3 | ) | | | (3 | ) | Total Willis Towers Watson shareholders’ equity | | | 10,820 | | | | 10,249 | | Non-controlling interests | | | 112 | | | | 120 | | Total equity | | | 10,932 | | | | 10,369 | | TOTAL LIABILITIES AND EQUITY | | $ | 38,531 | | | $ | 35,426 | |
_________ (i) | Equity includes (a) Ordinary shares $0.000304635 nominal value; Authorized 1,510,003,775; Issued 128,964,579 (2020) and 128,689,930 (2019); Outstanding 128,964,579 (2020) and 128,689,930 (2019); (b) Ordinary shares, €1 nominal value; Authorized and Issued 40,000 shares in 2019; and (c) Preference shares, $0.000115 nominal value; Authorized 1,000,000,000 and Issued NaN in 2020 and 2019. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Statements of Cash Flows (In millions of U.S. dollars) | | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | NET INCOME | | $ | 1,020 | | | $ | 1,073 | | | $ | 715 | | Adjustments to reconcile net income to total net cash from operating activities: | | | | | | | | | | | | | Depreciation | | | 308 | | | | 240 | | | | 213 | | Amortization | | | 462 | | | | 489 | | | | 534 | | Non-cash lease expense | | | 146 | | | | 148 | | | | 0 | | Net periodic benefit of defined benefit pension plans | | | (196 | ) | | | (135 | ) | | | (163 | ) | Provision for doubtful receivables from clients | | | 29 | | | | 9 | | | | 8 | | Provision for/(benefit from) deferred income taxes | | | 99 | | | | (72 | ) | | | (115 | ) | Share-based compensation | | | 90 | | | | 74 | | | | 50 | | Net (gain)/loss on disposal of operations | | | (81 | ) | | | 2 | | | | 9 | | Non-cash foreign exchange (gain)/loss | | | (6 | ) | | | 26 | | | | 26 | | Other, net | | | (41 | ) | | | 17 | | | | 8 | | Changes in operating assets and liabilities, net of effects from purchase of subsidiaries: | | | | | | | | | | | | | Accounts receivable | | | 72 | | | | (261 | ) | | | 68 | | Fiduciary assets | | | (1,774 | ) | | | (365 | ) | | | (839 | ) | Fiduciary liabilities | | | 1,774 | | | | 365 | | | | 839 | | Other assets | | | (205 | ) | | | (269 | ) | | | (22 | ) | Other liabilities | | | 215 | | | | (264 | ) | | | (20 | ) | Provisions | | | (138 | ) | | | 4 | | | | (23 | ) | Net cash from operating activities | | | 1,774 | | | | 1,081 | | | | 1,288 | | CASH FLOWS USED IN INVESTING ACTIVITIES | | | | | | | | | | | | | Additions to fixed assets and software for internal use | | | (223 | ) | | | (246 | ) | | | (268 | ) | Capitalized software costs | | | (63 | ) | | | (59 | ) | | | (54 | ) | Acquisitions of operations, net of cash acquired | | | (69 | ) | | | (1,329 | ) | | | (36 | ) | Net proceeds from sale of operations | | | 212 | | | | 17 | | | | 4 | | Other, net | | | (17 | ) | | | 3 | | | | 13 | | Net cash used in investing activities | | | (160 | ) | | | (1,614 | ) | | | (341 | ) | CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES | | | | | | | | | | | | | Net payments on revolving credit facility | | | 0 | | | | (131 | ) | | | (754 | ) | Senior notes issued | | | 282 | | | | 997 | | | | 998 | | Proceeds from issuance of other debt | | | 0 | | | | 1,100 | | | | 0 | | Debt issuance costs | | | (2 | ) | | | (13 | ) | | | (8 | ) | Repayments of debt | | | (327 | ) | | | (995 | ) | | | (170 | ) | Repurchase of shares | | | 0 | | | | (150 | ) | | | (602 | ) | Proceeds from issuance of shares | | | 16 | | | | 45 | | | | 45 | | Payments of deferred and contingent consideration related to acquisitions | | | (12 | ) | | | (57 | ) | | | (50 | ) | Cash paid for employee taxes on withholding shares | | | (14 | ) | | | (15 | ) | | | (30 | ) | Dividends paid | | | (346 | ) | | | (329 | ) | | | (306 | ) | Acquisitions of and dividends paid to non-controlling interests | | | (28 | ) | | | (55 | ) | | | (26 | ) | Other, net | | | (3 | ) | | | 0 | | | | 0 | | Net cash (used in)/from financing activities | | | (434 | ) | | | 397 | | | | (903 | ) | INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 1,180 | | | | (136 | ) | | | 44 | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 21 | | | | (2 | ) | | | (41 | ) | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR (i) | | | 895 | | | | 1,033 | | | | 1,030 | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR (i) | | $ | 2,096 | | | $ | 895 | | | $ | 1,033 | |
(i) | As a result of the acquired TRANZACT collateralized facility (see Note 10 — Debt), cash, cash equivalents and restricted cash included $7 million and $8 million of restricted cash at December 31, 2020 and 2019, respectively, which is included within prepaid and other current assets on our consolidated balance sheets. There were 0 restricted cash amounts held at December 31, 2018 and 2017. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Statements of Changes in Equity (In millions of U.S. dollars and number of shares in thousands) | | Shares outstanding | | | Additional paid-in capital | | | Retained earnings | | | Treasury shares | | | AOCL (i) | | | Total WTW shareholders’ equity | | | Non-controlling interests | | | Total equity | | | | | Redeemable Non-controlling interest (ii) | | | Total | | Balance as of January 1, 2018 | | | 132,140 | | | $ | 10,538 | | | $ | 1,104 | | | $ | (3 | ) | | $ | (1,513 | ) | | $ | 10,126 | | | $ | 123 | | | $ | 10,249 | | | | | $ | 28 | | | | | | Adoption of ASC 606 | | | — | | | | — | | | | 317 | | | | — | | | | — | | | | 317 | | | | — | | | | 317 | | | | | | — | | | | | | Shares repurchased | | | (3,919 | ) | | | — | | | | (602 | ) | | | — | | | | — | | | | (602 | ) | | | — | | | | (602 | ) | | | | | — | | | | | | Net income | | | — | | | | — | | | | 695 | | | | — | | | | — | | | | 695 | | | | 18 | | | | 713 | | | | | | 2 | | | $ | 715 | | Dividends declared ($2.40 per share) | | | — | | | | — | | | | (313 | ) | | | — | | | | — | | | | (313 | ) | | | — | | | | (313 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24 | ) | | | (24 | ) | | | | | (2 | ) | | | | | Other comprehensive (loss)/income | | | — | | | | — | | | | — | | | | — | | | | (448 | ) | | | (448 | ) | | | 2 | | | | (446 | ) | | | | | (2 | ) | | $ | (448 | ) | Issuance of shares under employee stock compensation plans | | | 701 | | | | 45 | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 45 | | | | | | — | | | | | | Share-based compensation and net settlements | | | — | | | | 27 | | | | — | | | | — | | | | — | | | | 27 | | | | — | | | | 27 | | | | | | — | | | | | | Foreign currency translation | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | | — | | | | | | Balance as of December 31, 2018 | | | 128,922 | | | $ | 10,615 | | | $ | 1,201 | | | $ | (3 | ) | | $ | (1,961 | ) | | $ | 9,852 | | | $ | 119 | | | $ | 9,971 | | | | | $ | 26 | | | | | | Adoption of ASU 2018-02 | | | — | | | | — | | | | 36 | | | | — | | | | (36 | ) | | | — | | | | — | | | | — | | | | | | — | | | | | | Shares repurchased | | | (788 | ) | | | — | | | | (150 | ) | | | — | | | | — | | | | (150 | ) | | | — | | | | (150 | ) | | | | | — | | | | | | Net income | | | — | | | | — | | | | 1,044 | | | | — | | | | — | | | | 1,044 | | | | 23 | | | | 1,067 | | | | | | 6 | | | $ | 1,073 | | Dividends declared ($2.60 per share) | | | — | | | | — | | | | (339 | ) | | | — | | | | — | | | | (339 | ) | | | — | | | | (339 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (21 | ) | | | (21 | ) | | | | | (2 | ) | | | | | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (230 | ) | | | (230 | ) | | | — | | | | (230 | ) | | | | | — | | | $ | (230 | ) | Issuance of shares under employee stock compensation plans | | | 556 | | | | 45 | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 45 | | | | | | — | | | | | | Share-based compensation and net settlements | | | — | | | | 32 | | | | — | | | | — | | | | — | | | | 32 | | | | — | | | | 32 | | | | | | — | | | | | | Acquisition of non-controlling interests | | | — | | | | (6 | ) | | | — | | | | — | | | | — | | | | (6 | ) | | | (1 | ) | | | (7 | ) | | | | | (30 | ) | | | | | Foreign currency translation | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | | | | | — | | | | | | Balance as of December 31, 2019 | | | 128,690 | | | $ | 10,687 | | | $ | 1,792 | | | $ | (3 | ) | | $ | (2,227 | ) | | $ | 10,249 | | | $ | 120 | | | $ | 10,369 | | | | | $ | — | | | | | | Net income | | | — | | | | — | | | | 996 | | | | — | | | | — | | | | 996 | | | | 24 | | | | 1,020 | | | | | | — | | | $ | 1,020 | | Dividends declared ($2.75 per share) | | | — | | | | — | | | | (354 | ) | | | — | | | | — | | | | (354 | ) | | | — | | | | (354 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (22 | ) | | | (22 | ) | | | | | — | | | | | | Other comprehensive (loss)/income | | | — | | | | — | | | | — | | | | — | | | | (132 | ) | | | (132 | ) | | | 1 | | | | (131 | ) | | | | | — | | | $ | (131 | ) | Issuance of shares under employee stock compensation plans | | | 275 | | | | 16 | | | | — | | | | — | | | | — | | | | 16 | | | | — | | | | 16 | | | | | | — | | | | | | Share-based compensation and net settlements | | | — | | | | 46 | | | | — | | | | — | | | | — | | | | 46 | | | | — | | | | 46 | | | | | | — | | | | | | Reduction of non-controlling interests (iii) | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | 9 | | | | (11 | ) | | | (2 | ) | | | | | — | | | | | | Other | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) | | | | | — | | | | | | Foreign currency translation | | | — | | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) | | | — | | | | (7 | ) | | | | | — | | | | | | Balance as of December 31, 2020 | | | 128,965 | | | $ | 10,748 | | | $ | 2,434 | | | $ | (3 | ) | | $ | (2,359 | ) | | $ | 10,820 | | | $ | 112 | | | $ | 10,932 | | | | | $ | — | | | | | |
_________ (i) | Accumulated other comprehensive loss, net of tax (‘AOCL’). |
(ii) | The redeemable non-controlling interest was related to Max Matthiessen Holding AB. The Company purchased the remaining non-controlling interest of Max Matthiessen Holding AB during the year ended December 31, 2019. |
(iii) | Attributable to the divestiture of businesses that are less than wholly-owned or the acquisition of shares previously owned by minority interest holders. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Notes to the Consolidated Financial Statements (Tabular amounts are in millions of U.S. dollars, except per share data) Note 1 — Nature of Operations Willis Towers Watson plc is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. The Company has more than 46,000 employees and services clients in more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our risk management services include strategic risk consulting (including providing actuarial analysis), a variety of due diligence services, the provision of practical on-site risk control services (such as health and safety and property loss control consulting), and analytical and advisory services (such as hazard modeling and reinsurance optimization studies). We also assist our clients with planning for addressing incidents or crises when they occur. These services include contingency planning, security audits and product tampering plans. We help our clients enhance business performance by delivering consulting services, technology and solutions that optimize benefits and cultivate talent. Our services and solutions encompass such areas as employee benefits, total rewards, talent and benefits outsourcing. In addition, we provide investment advice to help our clients develop disciplined and efficient strategies to meet their investment goals and expand the power of capital. As an insurance broker, we act as an intermediary between our clients and insurance carriers by advising on their risk management requirements, helping them to determine the best means of managing risk and negotiating and placing insurance with insurance carriers through our global distribution network. We operate a private Medicare marketplace in the U.S. through which, along with our active employee marketplace, we help our clients move to a more sustainable economic model by capping and controlling the costs associated with healthcare benefits. Additionally, with the acquisition of TRANZACT in July 2019 (see Note 3 – Acquisitions and Divestitures), we also provide direct-to-consumer sales of Medicare coverage. We are not an insurance company, and therefore we do not underwrite insurable risks for our own account. We believe our broad perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance. Proposed Combination with Aon plc On March 9, 2020, WTW and Aon plc (‘Aon’) issued an announcement disclosing that the respective boards of directors of WTW and Aon had reached agreement on the terms of a recommended acquisition of WTW by Aon. Under the terms of the agreement each WTW shareholder will receive 1.08 Aon ordinary shares for each WTW ordinary share. At the time of the announcement, it was estimated that upon completion of the combination, existing Aon shareholders will own approximately 63% and existing WTW shareholders will own approximately 37% of the combined company on a fully diluted basis. The transaction was approved by the shareholders of both WTW and Aon during meetings of the respective shareholders held on August 26, 2020 and remains subject to other customary closing conditions, including required regulatory approvals. The antitrust regulatory review of the transaction remains ongoing. In addition, there are numerous other regulatory approvals and other closing conditions that need to be met. The parties expect the transaction to close in the first half of 2021, subject to satisfaction of these conditions. Note 2—Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements within Item 8 Basis of thisPresentation The accompanying audited consolidated financial statements of Willis Towers Watson and our subsidiaries are presented in accordance with the rules and regulations of the SEC for annual reports on Form 10-K for additional information.and are prepared in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Risks and Uncertainties Related to the COVID-19 Pandemic ASU No. 2016-02 ‘Leases’
In February 2016,The COVID-19 pandemic has had an adverse impact on global commercial activity, including the FASB issued ASU No. 2016-02, Leases, which requires a lesseeglobal supply chain, and has contributed to recognizesignificant volatility in the statementglobal financial markets including, among other effects, occasional declines in the equity markets, changes in interest rates and reduced liquidity on a global basis. In light of 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 on our business, taking into account our business resilience and continuity plans, financial modeling and stress testing of liquidity and financial resources.
Generally, the COVID-19 pandemic did not have a material adverse impact on our overall financial results during 2020; however, during 2020, the COVID-19 pandemic negatively impacted our revenue growth, primarily in our businesses that are discretionary in nature. We believe such level of impact will continue through much of 2021, at least until a sufficient portion of the populations in jurisdictions where we do business have been vaccinated and social-distancing orders are lessened or lifted. As part of the significant estimates and assumptions that are inherent in our financial statements, we have considered the impact COVID-19 will have on our client behavior and the economic environment looking forward to 2021 and throughout the geographies in which we operate. These estimates and assumptions include the collectability of billed and unbilled receivables, the estimation of revenue, and the fair value of our reporting units, tangible and intangible assets and contingent consideration. With regard to collectability of receivables, we believe we may continue to face atypical delays in client payments going forward. The demand for certain discretionary lines of business has decreased, and we believe that decrease may continue to impact our financial results in succeeding periods. Non-discretionary lines of business have also been, to some extent, adversely affected and may be adversely affected in the future. Further, reduced economic activity or disruption in insurance markets could reduce the demand for or the extent of insurance coverage. For example, we have seen instances where the reduced demand for air travel has reduced the extent of insurance coverage needed. Also, the increased frequency and severity of coverage disputes between our clients and (re)insurers arising out of the pandemic could increase our professional liability risk. We will continue to monitor the situation and assess any implications to our business and our stakeholders. 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, 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 will negatively impact our revenue and operating results in fiscal 2021. We believe that these trends and uncertainties are similar to those faced by other comparable registrants as a liabilityresult of the pandemic. CARES Act On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act was enacted in the U.S. to make lease payments (the lease liability)provide relief to companies in the midst of the COVID-19 pandemic and a right-of-use asset representingto stimulate the economy. The assistance includes temporary tax relief and government loans, grants and investments for entities in affected industries. With regard to the income tax provisions of the CARES Act, the Company has reviewed its righteligibility requirements, including if and how they apply and how they will affect the Company, particularly provisions that (i) eliminate the taxable income limit for certain net operating losses (‘NOLs’) and allow businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years; (ii) generally relaxed the business interest limitation under section 163(j) from 30 percent to 50 percent; and (iii) fix the ‘retail glitch’ for qualified improvement property. During the three months ended June 30, 2020, the Company elected to use the underlying assetsection 163(j) 50 percent business interest limitation for tax years 2019 and 2020. Utilizing this temporary provision, the Company realized a cash tax benefit in 2020 of approximately $38 million for tax years 2019 and 2020. The Company recognized tax expense of approximately $29 million and $32 million for the lease term. Additional ASUs2019 and 2020 tax years, respectively, primarily related to an incremental Base Erosion and Anti-Abuse Tax (‘BEAT’). Additionally, the CARES Act offers an employee retention credit to encourage employers to maintain headcounts even if employees cannot report to work because of issues related to COVID-19 as well as a temporary provision allowing companies to defer remitting the employer share of some payroll taxes to the government. The payroll tax provisions of the CARES Act were not material for 2020. Significant Accounting Policies Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Willis Towers Watson and those of our majority-owned and controlled subsidiaries. Intercompany accounts and transactions have since been issuedeliminated.
We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (‘VIE’). Variable interest entities are entities that lack one or more of the characteristics of a voting interest entity and therefore require a different approach in determining which provide amended andparty involved with the VIE should consolidate the entity. With a VIE, either the entity does not have sufficient equity at risk to finance its activities without additional guidance forsubordinated financial support from other parties, or the implementationequity holders, as a group, do not have the power to direct the activities that most significantly impact its financial performance, the obligation to absorb expected losses of ASU No. 2016-02. All related guidancethe entity, or the right to receive the expected residual returns of the entity. The entity that has been codified into,a controlling financial interest in a VIE is referred to as the primary beneficiary and is nowrequired to consolidate the VIE. Voting interest entities are entities that have sufficient equity and provide equity investors voting rights that give them the power to make significant decisions related to the entity’s operations. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. Accordingly, we consolidate our voting interest entity investments in which we hold, directly or indirectly, more than 50% of the voting rights. Use of Estimates — These consolidated financial statements conform to U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. 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. Estimates are used when accounting for revenue recognition and related costs, the selection of useful lives of fixed and intangible assets, impairment testing, valuation of billed and unbilled receivables from clients, discretionary compensation, income taxes, pension assumptions, incurred but not reported claims, legal reserves and goodwill and intangible assets. Going Concern — Management evaluates at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Management’s evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the consolidated financial statements are issued. Management has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as ASC 842, Leases (‘ASC 842’). ASC 842 became effectivea going concern within one year after the date of these financial statements. Fair Value of Financial Instruments — The carrying values of our cash, cash equivalents and restricted cash, accounts receivable, accrued expenses, revolving lines of credit and term loans approximate their fair values because of the short maturity and liquidity of those instruments. We consider the difference between carrying value and fair value to be immaterial for our senior notes. The fair value of our senior notes and note receivable are considered Level 2 financial instruments as they are corroborated by observable market data. See Note 11 — Fair Value Measurements for additional information about our measurements of fair value. Investments in Associates— Investments are accounted for using the equity method of accounting, included within other non-current assets in the consolidated balance sheets, if the Company has the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an equity ownership in the voting stock of the investee between 20 and 50 percent, although other factors, such as representation on the board of directors, the existence of substantive participation rights, and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is carried at the beginningcost of acquisition, plus the Company’s equity in undistributed net income since acquisition, less any dividends received since acquisition. The Company periodically reviews its 2019 calendar year,investments in associates for which fair value is less than cost to determine if the decline in value is other than temporary. If the decline in value is judged to be other than temporary, the cost basis of the investment is written down to fair value. The amount of any write-down is included in the consolidated statements of comprehensive income. Cash and Cash Equivalents — Cash and cash equivalents primarily consist of time deposits with original maturities of 90 days or less. In certain of the countries in which we conduct business, we are subject to capital adequacy requirements. Most significantly, Willis Limited, our U.K. brokerage subsidiary regulated by the Financial Conduct Authority, is currently required to maintain $140 million in unencumbered and available financial resources, of which at which time the Company adopted it. least $51 million must be in cash, for regulatory purposes. Term deposits and certificates of deposits with original maturities greater than 90 days are considered to be short-term investments. As a result of finalizingthe acquired TRANZACT collateralized facility (see Note 10 — Debt), we had $7 million and analyzing our inventory$8 million of lease agreements to determine the full impact this standard will haverestricted cash at December 31, 2020 and 2019, respectively, which is included within prepaid and other current assets on our consolidated balance sheet. Fiduciary Assets and Liabilities — The Company collects premiums from insureds and, after deducting commissions, remits the premiums to the respective insurers. The Company also collects claims or refunds from insurers on behalf of insureds. Certain of our health and welfare benefits administration outsourcing agreements require us to hold funds on behalf of clients to pay obligations on
their behalf. Each of these transactions is reported on our consolidated balance sheet as assets and corresponding liabilities unless such balances are due to or from the same party and a right of offset exists, in which case the balances are recorded net. Fiduciary assetson the consolidated balance sheets are comprised of both fiduciary funds and fiduciary receivables: Fiduciary Funds – Unremitted insurance premiums and claims are recorded within fiduciary assets on the consolidated balance sheets. Fiduciary funds are generally required to be kept in certain 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 insureds and insurers, the Company is entitled to retain investment income earned on fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds. The period for which the Company holds such funds is dependent upon the date the insured remits the payment of the premium to the Company, or the date the Company receives refunds from the insurers, and the date the Company is required to forward such payments to the insurer or insured, respectively. Fiduciary receivables – Uncollected premiums from insureds and uncollected claims or refunds from insurers are recorded as fiduciary assets on the consolidated balance sheets. In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. Such advances are made from fiduciary funds and are reflected in the consolidated balance sheets as fiduciary assets. Fiduciary liabilities on the consolidated balance sheets represent the obligations to remit all fiduciary funds and fiduciary receivables to insurers or insureds. Accounts Receivable — Accounts receivable includes both billed and unbilled receivables and is stated at estimated net realizable values. Provision for billed receivables is recorded, when necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncollectible accounts. Accrued and unbilled receivables are stated at net realizable value which includes an allowance for accrued and unbillable amounts. See Note 4 — Revenue for additional information about our accounts receivable. Acquired Accounts Receivable — As part of the acquisition accounting for the TRANZACT business (see Note 3 – Acquisitions and Divestitures), the acquired accounts receivable arising from direct-to-consumer Medicare broking sales were present-valued at the acquisition date in accordance with ASC 805, Business Combinations (‘ASC 805’). Cash collections for these receivables are expected to occur over a period of several years. Due to the provisions of ASC 606, Revenue From Contracts With Customers (‘ASC 606’), these receivables are not discounted for a significant financing component when initially recognized. The acquired renewal commissions receivables will be accounted for prospectively using the cost-recovery method in which future cash receipts will initially be applied against the acquisition date fair value until the value reaches zero. Any cash received in excess of the fair value determined at acquisition will be recorded to earnings when it is received at a future date. The adjusted values of these acquired renewal commissions receivables will be included in prepaid and other current assets or other non-current assets, as appropriate, on the consolidated balance sheets. 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 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 when the Company’s facts and assumptions change. 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. Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. The Company recognizes the benefits of uncertain tax positions in the financial statements processeswhen it is more likely than not that a position will be sustained on the basis of the technical merits of the position assuming the tax authorities have full knowledge of the position and systems,all relevant facts. Recognition also occurs upon either the lapse of the relevant statute of limitations or when positions are effectively settled. The benefit recognized is the largest amount of tax benefit that is greater than 50 percent likely to be realized on settlement with the tax authority. The Company adjusts its recognition of uncertain tax benefits in the period in which new information is available impacting either the recognition or measurement of its uncertain tax positions. Such adjustments are reflected as increases or decreases to income taxes in the period in which they are determined.
The Company recognizes interest and penalties relating to unrecognized tax benefits within income taxes. See Note 6 — Income Taxes for additional information regarding the Company’s income taxes. Foreign Currency — Transactions in currencies other than the functional currency of the entity are recorded at the rates of exchange prevailing at the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are translated at the rates of exchange prevailing at the balance sheet date and the related transaction gains and losses are reported as income or expense in the consolidated statements of comprehensive income. Certain intercompany loans are determined to be of a long-term investment nature. The Company records transaction gains and losses from re-measuring such loans as other comprehensive income in the consolidated statements of comprehensive income. Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates, and assets and liabilities are translated at year-end exchange rates. Translation adjustments are presented as a separate component of other comprehensive income in the financial statements and are included in net income only upon sale or liquidation of the underlying foreign subsidiary or associated company. Derivatives — The Company uses derivative financial instruments to alter the risk profile of an existing underlying exposure. Forward foreign currency exchange contracts are used to manage currency exposures arising from future income and expenses and to offset balance sheet exposures in currencies other than the functional currency of an entity. We do not hold any derivatives for trading purposes. The fair values of derivative contracts are recorded in other assets and other liabilities in the consolidated balance sheets. The effective portions of changes in the fair value of derivatives that qualify for hedge accounting as cash flow hedges are recorded in other comprehensive income. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings. If the derivative is designated and qualifies as an effective fair value hedge, the changes in the fair value of the derivative and of the hedged item associated with the hedged risk are both recognized in earnings. The amount of hedge ineffectiveness recognized in earnings is based on the extent to which an offset between the fair value of the derivative and hedged item is not achieved. Changes in the fair value of derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness on those that do qualify, are recorded in other income, net or interest expense as appropriate. The Company evaluates whether its contracts include clauses or conditions which would be required to be separately accounted for at fair value as embedded derivatives. See Note 9 — Derivative Financial Instruments for additional information about the Company’s derivatives. Commitments, Contingencies and Provisions for Liabilities — The Company establishes provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also unasserted claims and related legal fees. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in 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. To the extent such losses can be recovered under the Company’s insurance programs, estimated recoveries are recorded when losses for insured events are recognized and the recoveries are likely to be realized. Significant management judgment is required to estimate the amounts of such unasserted claims and the related insurance recoveries. The Company analyzes its litigation exposure based on available information, including consultation with outside counsel handling the defense of these matters, to assess its potential liability. These contingent liabilities are not discounted. See Note 14 — Commitments and Contingencies and Note 15 — Supplementary Information for Certain Balance Sheet Accounts for additional information about our commitments, contingencies and provisions for liabilities. Share-Based Compensation — The Company has equity-based compensation plans that provide for grants of restricted stock units and stock options to employees and non-employee directors of the Company. Additionally, the Company has determined the following:cash-settled share-based compensation plans that provide for grants to employees. The Company expenses equity-based compensation, which is included in Salaries and benefits in the consolidated statements of comprehensive income, primarily on a straight-line basis over the requisite service period. The significant assumptions underlying our expense calculations include the fair value of the award on the date of grant, the estimated achievement of any performance targets and estimated forfeiture rates. The awards under equity-based compensation are classified as equity and are included as a component of equity on the Company’s consolidated balance sheets, as the ultimate payment of such awards will adoptnot be achieved through use of the standardCompany’s cash or other assets. For the cash-settled share-based compensation, the Company recognizes a liability for the fair-value of the awards as of each reporting date. The liability for these awards is included within other current liabilities or other non-current liabilities in the consolidated balance sheets depending when the amounts are payable. Expense is recognized over the service period, and as the liability is remeasured at the end of each reporting period, changes in fair value are recognized as compensation cost within Salaries and benefits
in the consolidated statements of comprehensive income. The significant assumptions underlying our expense calculations include the estimated achievement of any performance targets and estimated forfeiture rates. See Note 18 — Share-based Compensation for additional information about the Company’s share-based compensation. Fixed Assets — Fixed assets are stated at cost less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Depreciation is computed primarily using the modified retrospective approach whereby it will recognizestraight-line method based on the estimated useful lives of assets. Depreciation on internally-developed software is amortized over the estimated useful life of the asset ranging from 3 to 10 years. Buildings include assets held under finance leases and are depreciated over the lesser of 50 years, the asset lives or the lease terms. Depreciation on leasehold improvements is calculated over the lesser of the useful lives of the assets or the remaining lease terms. Depreciation on furniture and equipment is calculated based on a transition adjustmentrange of 3 to 10 years. Land is not depreciated. Long-lived assets are tested for recoverability whenever events or changes in circumstance indicate that their carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. Recoverability is determined based on the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. See Note 7 — Fixed Assets for additional information about our fixed assets. Leases (effective from January 1, 2019) — The following policies were effective datebeginning with the 2019 fiscal year as a result of the adoption, on January 1, 2019, of ASC 842, Leases (‘ASC 842’). The lease policies in effect prior to 2019 are reflected in the next section. As an advisory, broking and solutions company providing services to clients in more than 140 countries, we enter into lease agreements from time to time, primarily for the use of real estate for our office space. We determine if an arrangement is a lease at the inception of the contract, and the nature of our operations is such that it is generally clear whether an arrangement contains a lease and what underlying asset is being leased. The majority of the leases into which we enter are operating leases. Upon entering into leases, we obtain the right to control the use of an identified space for a lease term and recognize these right-of-use (‘ROU’) assets on our consolidated balance sheets with corresponding lease liabilities reflecting our obligation to make the related lease payments. ROU assets are amortized over the term of the lease. Our real estate leases are generally long-term in nature, with terms that typically range from 5 to 15 years. Our most significant lease supports our London market operations with a lease term through 2032. Our real estate leases often contain options to renew the lease, either through exercise of the option or through automatic renewal. Additionally, certain leases have options to cancel the lease with appropriate notice to the landlord prior to the end of the stated lease term. As we enter into new leases after the adoption of ASC 842, we consider these options as we assess lease terms in our recognized ROU assets and lease liabilities. If we are reasonably certain to exercise an option to renew a lease, we include this period in our lease term. To the extent that we have the option to cancel a lease, we recognize our ROU assets and lease liabilities using the term that would result from using this earlier date. If a significant penalty is required to cancel the lease at an earlier date, we assess our lease term as ending at the point when no significant penalty would be due. In addition to payments for previously-agreed base rent, many of our lease agreements are subject to variable and unknown future payments, typically in the form of common area maintenance charges (a non-lease component as defined by ASC 842) or real estate taxes. These variable payments are excluded from our lease liabilities and ROU assets, and instead are recognized as lease expense within other operating expenses on the consolidated statement of comprehensive income as the amounts are incurred. To the extent that we have agreed to fixed charges for common area maintenance or other non-lease components, or our base rent increases by an index or rate (most commonly an inflation rate), these amounts are included in the measurement of our lease liabilities and ROU assets. We have elected the practical expedient under ASC 842 which allows the lease and non-lease components to be combined in our measurement of lease liabilities and ROU assets. From time to time we may enter into subleases if we are unable to cancel or fully occupy a space and are able to find an appropriate subtenant. However, entering subleases is not a primary objective of our business operations and these arrangements represent an immaterial amount of cash flows. We are required to use judgment in the determination of the incremental borrowing rates to calculate the present values of our future lease payments. Since the majority of our debt is publicly traded, our real estate function is centralized, and our treasury function is centralized and generally prohibits our subsidiaries from borrowing externally, we have determined it appropriate to use the Company’s consolidated unsecured borrowing rate, and we adjust for collateralization in accordance with ASC 842. Using the resulting interest rate curves from publicly traded debt at this collateralized borrowing rate, we select the interest rate at lease
inception by reference to the lease term and lease currency. Over 90% of our leases are denominated in U.S. dollars, Pounds sterling or Euros. Our leases generally do not subject us to restrictive covenants and contain no residual value guarantees. See Note 13 — Leases for additional information about our operating leases. Operating Leases (effective before January 1, 2019, rather than2019) — Rentals payable on operating leases were charged on a straight-line basis to other operating expenses in the consolidated statements of comprehensive income over the lease terms prior to the implementation of ASC 842. Goodwill and Other Intangible Assets — 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 of October 1, and whenever indicators of impairment exist. The fair values of intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value. Acquired intangible assets are amortized over the following periods: | | | | | | Amortization basis | | Expected life (years) | Client relationships | In line with underlying cash flows | | 5 to 20 | Software | In line with underlying cash flows or straight-line basis | | 4 to 7 | Trademark and trade name | Straight-line basis | | 14 to 25 | Other | In line with underlying cash flows or straight-line basis | | 3 to 20 |
Prior to the adoption of ASC 842, favorable and unfavorable acquired lease agreement intangible assets and liabilities were amortized straight-line over the remaining terms of the leases. These amounts have been subsumed into the ROU assets upon adoption of ASC 842. Goodwill is tested for impairment annually as of October 1, and whenever indicators of impairment exist. Goodwill is tested at the beginningreporting unit level, and the Company had 8 reporting units as of October 1, 2020. In the impairment test, the fair value of each reporting unit is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the difference is recognized as an impairment loss. The Company’s goodwill impairment tests for the years ended December 31, 2020 and 2019 have not resulted in any impairment charges. See Note 8 — Goodwill and Other Intangible Assets for additional information about our goodwill and other intangible assets. Pensions — The Company has multiple defined benefit pension and defined contribution plans. The net periodic cost of the earliest comparativeCompany’s defined benefit plans is measured on an actuarial basis using various methods and actuarial assumptions. The most significant assumptions are the discount rates (calculated using the granular approach to calculating service and interest cost) and the expected long-term rates of return on plan assets. Other material assumptions include rates of participant mortality, the expected long-term rates of compensation and pension increases and rates of employee termination. Gains and losses occur when actual experience differs from actuarial assumptions. If such gains or losses exceed ten percent of the greater of the market-related value of plan assets or the projected benefit obligation, the Company amortizes those gains or losses over the average remaining service period presented.or average remaining life expectancy, as appropriate, of the plan participants. In accordance with U.S. GAAP, the Company records the funded status of its pension plans based on the projected benefit obligation on its consolidated balance sheets. Contributions to the Company’s defined contribution plans are recognized as incurred. Differences between contributions payable in the year and contributions actually paid are shown as either other assets or other liabilities in the consolidated balance sheets. See Note 12 — Retirement Benefits for additional information about our pensions. Revenue Recognition — We recognize revenue from a variety of services, with broking, consulting and outsourced administration representing our most significant offerings. All other revenue streams, which can be recognized at either a point in time or over time, are individually less significant and are grouped in Other in our revenue disaggregation disclosures in Note 4 — Revenue. These Other revenue streams represent approximately 5%of customer contract revenue for the years ended December 31, 2020, 2019 and 2018. Broking — Representing approximately 52%, 50% and 48% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018, respectively, in our broking arrangements, we earn revenue by acting as an intermediary in the placement of effective
insurance policies. Generally, we act as an agent and view our client to be the party looking to obtain insurance coverage for various risks, or an employer or sponsoring organization looking to obtain insurance coverage for its employees or members. Also, we act as an agent in reinsurance broking arrangements where our client is the party looking to cede risks to the reinsurance markets. Our primary performance obligation under the majority of these arrangements is to place an effective insurance or reinsurance policy, but there can also be significant post-placement obligations in certain contracts to which we need to allocate revenue. The most common of these is for claims handling or call center support. The revenue recognition method for these, after the relative fair value allocation, is described further as part of the ‘Outsourced Administration’ description below. Due to the nature of the majority of our broking arrangements, no single document constitutes the contract for ASC 606 purposes. Our services may be governed by a mixture of different types of contractual arrangements depending on the jurisdiction or type of coverage, including terms of business agreements, broker-of-record letters, statements of work or local custom and practice. This is then confirmed by the client’s acceptance of the underlying insurance contract. Prior to the policy inception date, the client has not accepted nor formally committed to perform under the arrangement (i.e. pay for the insurance coverage in place). Therefore in the majority of broking arrangements, the contract date is the date the insurance policy incepts. However, in certain instances such as employer-sponsored Medicare broking or Affinity arrangements, where the employer or sponsoring organization is our customer, client acceptance of underlying individual policy placements is not required, and therefore the date at which we have a contract with a customer is not dependent upon placement. As noted, our primary performance obligations typically consist of only the placement of an effective insurance policy which precedes the inception date of the policy. Therefore, most of our fulfillment costs are incurred before we can recognize revenue, and are thus deferred during the pre-placement process. Where we have material post-placement services obligations, we estimate the relative fair value of the post-placement services using either the expected cost-plus-margin or the market assessment approach. Revenue from our broking services consists of commissions or fees negotiated in lieu of commissions. At times, we may receive additional income for performing these services from the insurance and reinsurance carriers’ markets, which is collectively referred to as ‘market derived income’. 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 term. For employer-sponsored 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 employer-sponsored Medicare broking and proportional treaty reinsurance broking 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). This is an area requiring significant judgment and results 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 treaty statements, or as other information becomes available. We will reflect additional operating lease liabilitiesrecognize revenue for most broking arrangements as of a point in time at the transitionlater of the policy inception date or when the policy placement is complete, because this is viewed as the date when control is transferred to the client. For employer-sponsored Medicare broking, we recognize revenue over time, as we stand ready under our agreements to place retiree Medicare coverage. For this type of approximately $1.2 billion,broking arrangement, we recognize the majority of our placement revenue in the fourth quarter of the calendar year when most of the placement or renewal activity occurs. Beginning on July 30, 2019 with the acquisition of TRANZACT (see Note 3 — Acquisitions and Divestitures), we have a direct-to-consumer Medicare broking offering. The contractual arrangements in this offering differ from our previously existing employer-sponsored Medicare broking offering described above. The governing contracts in our direct-to-consumer Medicare broking offering are the contractual arrangements with insurance carriers, for whom we act as an agent, that provide compensation in return for issued policies. Once an application is submitted to a carrier, our obligation is complete, and we have no ongoing fulfilment obligations. We receive compensation from carriers in the form of commissions, administrative fees and marketing fees in the first year, and depending on the type of policy issued, we may receive renewal commissions for up to 25 years, provided the policies are renewed for such periods of time. Because our obligation is complete upon application submission to the carrier, we recognize revenue at that date, which includes both compensation due to us in the first year as well as right-of-use assetsan estimate of the total renewal commissions that will be received over the lifetime of the policy. This variable consideration estimate 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, and includes an element of ‘constraint’ as defined by ASC 606 such that no significant reversal is expected to occur in the future. Actual results will differ from these estimates. The timing of renewal payments in our direct-to-consumer Medicare broking offering is reflective of regulatory restrictions and insurance carriers’ protection for cancellations and varies based on policy holder decisions that are outside of the control of both the
Company and the insurance carriers. As such, the estimate of these renewal commissions receivables has not been discounted to reflect a significant financing component. Consulting — We earn revenue for advisory and consulting work that may be structured as different types of service offerings, including annual recurring projects, projects of a short duration or stand-ready obligations. Collectively, our consulting arrangements represent approximately $1.0 billion,30%, 32% and an immaterial adjustment to retained earnings.34% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018, respectively. We have assessedengagement letters with our clients that specify the transition practical expedients availableterms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. In assessing our performance obligations, our consulting work is typically highly integrated, with the various promised services representing inputs of the combined overall output. We view these arrangements as representing a single performance obligation. To the extent we do not integrate our services, as is the case with unrelated services that may be sourced from different areas of our business, we consider these separate performance obligations. Fee terms can be in the form of fixed-fees (including fixed-fees offset by commissions), time-and-expense fees, commissions, per-participant fees, or fees based on assets under management. Payment is typically due on a monthly basis as we perform under the guidancecontract, and we are entitled to be reimbursed for work performed to date in addition to selecting the modified retrospective transition approach as noted above,event of termination. The majority of our revenue from these consulting engagements is recognized over time, either because our clients are simultaneously receiving and consuming the benefits of our services, or because we have madean enforceable right to payment for performance rendered to date. Additionally, from time to time, we may be entitled to an additional fee based on achieving certain performance criteria. To the following elections:extent that we cannot estimate with reasonable assurance the likelihood that we will achieve the performance target, we will ‘constrain’ this portion of the transaction price and recognize it when or as the uncertainty is resolved. We use different progress measures to determine our revenue depending on the nature of the engagement: | o•
| PracticalAnnual recurring projects and projects of short duration. These projects are typically straightforward and highly predictable in nature with either time-and-expense or fixed fee terms. Time-and-expense fees are recognized as hours or expenses are incurred using the ‘right to invoice’ practical expedient package -allowed under ASC 606. For fixed-fee arrangements, to the extent estimates can be made of the remaining work required under the arrangement, revenue is based upon the proportional performance method, using the value of labor hours spent to date compared to the estimated total value of labor hours for the entire engagement. We have elected this package,believe that cost represents a faithful depiction of the transfer of value because the completion of these performance obligations is based upon the professional services of employees of differing experience levels and therefore we will not reassess lease classification for our existing or expired leases, whether any existing or expired contracts contain a lease, or our treatmentthereby costs. It is appropriate that satisfaction of any initial direct costs.these performance obligations considers both the number of hours incurred by each employee and the value of each labor hour worked (as opposed to simply the hours worked).
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| Hindsight practical expedient – We have elected this practical expedient,Stand-ready obligations. These projects consist of repetitive monthly or quarterly services performed consistently each period. As none of the activities provided under these services are performed at specified times and quantities, but at the discretion of each customer, our obligation is to stand ready to perform these services on an as-needed basis. These arrangements represent a ‘series’ performance obligation in accordance with ASC 606. Each time increment (i.e., each month or quarter) of standing ready to provide the overall services is distinct and the customer obtains value from each period of service independent of the other periods of service.
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Where we recognize revenue on a proportional performance basis, 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 stage 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. Outsourced Administration — We provide customized benefits outsourcing and co-sourcing solutions services in relation to the administration of defined benefit, defined contribution, and health and welfare plans. These plans are sponsored by our clients to provide benefits to their active or retired employees. Additionally, these services include operating call centers and may include providing access to, and managing, a variety of consumer-directed savings accounts. The operation of call centers and consumer-directed accounts can be provisioned as part of an ongoing administration or solutions service, or separately as part of a broking arrangement. The products and services available to all clients are the same, but the selections by a client can vary and portray customized products and services based on the customer’s specific needs. Our services often include the use of proprietary systems
that are configured for each of our clients’ needs. In total, our outsourced administration services represent approximately 12% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018. These contracts typically consist of an implementation phase and an ongoing administration phase: | • | Implementation phase. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer, and therefore will not revisitcosts are deferred during this phase of the arrangement. Since these arrangements are longer term in nature and subject to more changes in scope as the project progresses, our estimatecontracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of lease terms upon transition to ASC 842.implementation. |
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| Short-term lease exemption – We have elected this exemption,Ongoing administration phase. The ongoing administration phase includes a variety of plan administration services, system hosting and will therefore not recognize any right-of-use assetssupport services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our health and welfare arrangements, annual onboarding and enrollment support. While there are a variety of activities performed, the overall nature of the obligation is to provide an integrated outsourcing solution to the customer. The arrangement represents a stand-ready obligation to perform these activities on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or liabilities for short-term leases (generally defined as havingeach benefits cycle in our health and welfare arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services represent a term of 12 months or less) on our consolidated balance sheet.‘series’ in accordance with ASC 606 and are deemed one performance obligation.
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We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. Fees for these arrangements can be fixed, per-participant-per-month, or in the case of call center services, provided in conjunction with our broking services, with an allocation based on commissions. Our fees are not typically payable until the commencement of the ongoing administration phase. However, in our health and welfare arrangements, we begin transferring services to our customers approximately four months prior to payments being due as part of our annual onboarding and enrollment work. Although our per-participant-per-month and commission-based fees are considered variable, they are typically predictable in nature, and therefore we generally do not ‘constrain’ any portion of our transaction price estimates. Once fees become payable, payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination. Revenue is recognized over time as the services are performed because our clients are simultaneously receiving and consuming the benefits of our services. For our health and welfare arrangements where each benefits cycle represents a time increment under the series guidance, revenue is recognized based on proportional performance. We use an input measure (value of labor hours worked) as the measure of progress. Given that the service is stand-ready in nature, it can be difficult to predict the remaining obligation under the benefits cycle. Therefore, the input measure is based on the historical effort expended each month, which is measured as labor cost. This results in slightly more revenue being recognized during periods of annual onboarding since we are performing both our normal monthly services and our annual services during this portion of the benefits cycle. For all other outsourced administration arrangements where a month represents our time increment under the series guidance, we allocate transaction price to the month we are performing our services. Therefore, the amount recognized each month is the variable consideration related to that month plus the fixed monthly or annual fee. The fixed monthly or annual fee is recognized on a straight-line basis. Revenue recognition for these types of arrangements is therefore more consistent throughout the year. Reimbursed expenses — Client reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included in revenue, and an equivalent amount of reimbursable expenses is included in other operating expenses as a cost of revenue as incurred. Reimbursed expenses represented approximately 1% of customer contract revenue for the years ended December 31, 2020, 2019 and 2018. Taxes collected from customers and remitted to government authorities are recorded net and are excluded from revenue. Interest income — Interest income is recognized as earned. Other income — Other income includes gains on disposal of intangible assets, which primarily arise from settlements through enforcing non-compete agreements in the event of losing accounts through producer defection or the disposal of books of business. Cost to obtain or fulfill contracts— Costs to obtain customers include commissions for brokers under specific agreements that would not be incurred without a contract being signed and executed. The Company has elected to apply the ASC 606 ‘practical expedient’ which allows us to expense these costs as incurred if the amortization period related to the resulting asset would be one year or less. The Company has no significant instances of contracts that would be amortized for a period greater than a year, and therefore has no contract costs capitalized for these arrangements.
Costs to fulfill include costs incurred by the Company that are expected to be recovered within the expected contract period. The costs associated with our system implementation activities and consulting contracts are recorded through time entry. For our broking business, the Company must estimate the fulfillment costs incurred during the pre-placement of the broking contracts. These judgments include: | • | which activities in the pre-placement process should be eligible for capitalization; |
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| Separationthe amount of leasetime and non-lease components – We have elected the practical expedient to not separate the cash flows associated with lease and non-lease components in our lease accounting and resulting amounts recorded in our consolidated financial statements. effort expended on those pre-placement activities;
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Additionally, to prepare for the other required disclosures and new accounting treatment, the Company has implemented additional tools for its lease accounting and data collection processes, which were in place and effective on January 1, 2019.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
We are exposed to market risk from changes in foreign currency exchange rates and interest rates. In order to manage the risk arising from these exposures, we enter into a variety of interest rate and foreign currency derivatives. We do not hold financial or derivative instruments for trading purposes.
A discussion of our accounting policies for financial and derivative instruments is included in Note 2 — Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements and Note 10 — Derivative Financial Instruments within Item 8 of this Form 10-K.
Foreign Exchange Risk
Because of the large number of countries and currencies we operate in, movements in currency exchange rates may affect our results.
We report our operating results and financial condition in U.S. dollars. Our U.S. operations earn revenue and incur expenses primarily in U.S. dollars. Outside the United States, we predominantly generate revenue and expenses in the local currency with the exception of our London market operations which earn revenue in several currencies but incur expenses predominantly in Pounds sterling.
The table below gives an approximate analysis of revenue and expenses by currency in 2018.
| | U.S. dollars | | | Pounds sterling | | | Euro | | | Other currencies | | Revenue | | 54% | | | 13% | | | 16% | | | 17% | | Expenses (i) | | 48% | | | 21% | | | 13% | | | 18% | |
| • | the amount of payroll and related costs eligible for capitalization; and, |
(i)
| These percentages exclude certain expenses for significant items which will not be settled in cash,•
| the monthly or which we believe to be items that are not core to our current or future operations. These items include Merger-related amortizationquarterly timing of intangible assets, restructuring costsunderlying insurance and transaction and integration expenses.reinsurance policy inception dates. |
Our principal exposuresWe amortize costs to foreign exchange risk arise from:
fulfill over the period we receive the related benefits. For broking pre-placement costs, this is typically less than a year. In our London market operations; intercompany lending between subsidiaries;system implementation and
London market operations
The Company’s primary foreign exchange risks in its London market operations arise from changes in consulting arrangements, we include the exchange rate between the U.S. dollar and Pound sterling as its London market operations earn the majoritylikelihood of its revenue in U.S. dollars but incur expenses predominantly in Pounds sterling, and may also hold significant foreign currency asset or liability positions on its balance sheet. In addition, the London market operations earn significant revenue in Euro and Japanese yen.
The foreign exchange riskscontract renewals in our London market operations are hedged to the extent that:
forecast Pounds sterling expenses exceed Pounds sterling revenue, in which case the Company limits its exposure to this exchange rate risk by the use of forward contracts matched to forecast Pounds sterling outflows arising in the ordinary course of business. In addition, we are also exposed to foreign exchange risk on any net Pounds sterling asset or liability position in our London market operations;
the U.K. operations also earn significant revenue in Euro and Japanese yen. The Company limits its exposure to changes in the exchange rates between the U.S. dollar and these currencies by the use of foreign exchange contracts matched to a proportion of forecast cash inflows in these specific currencies and periods; and
Miller Insurance Services LLP, which is a Pound sterling functional entity, earns significant non-functional currency revenue, in which case the Company limits its exposure to exchange rate changes by the use of foreign exchange contracts matched to a proportion of forecast cash inflows in specific currencies and periods.
Intercompany lending between subsidiaries
The Company engages in intercompany borrowing and lending between subsidiaries, primarily through our in-house banking operations which give rise to foreign exchange exposure. The Company mitigates these risks though the use of short-term foreign currency forward and swap transactions that offset the underlying exposure created when the borrower and lender have different functional currencies.
Translation risk
Outside our U.S. and London market operations, we predominantly earn revenue and incur expenses in the local currency. When we translate the results and net assets of these operations into U.S. dollars for reporting purposes, movements in exchange rates will affect reported results and net assets. For example, if the U.S. dollar strengthens against the Euro, the reported results of our Eurozone operations in U.S. dollar terms will be lower.
The table below provides information about our foreign currency forward exchange contracts (expiring in 2020), which are sensitive to exchange rate risk. The table summarizes the U.S. dollar equivalent amounts of each currency bought and sold forward and the weighted-average contractual exchange rates. All forward exchange contracts mature within three years.
| | Settlement date before December 31, | | | 2019 | | 2020 | December 31, 2018 | | Contract amount | | | Average contractual exchange rate | | Contract amount | | | Average contractual exchange rate | | | (millions) | | | | | (millions) | | | | Foreign currency sold | | | | | | | | | | | | | U.S. dollars sold for Pounds sterling | | $ | 243 | | | $1.36 = £1 | | $ | 98 | | | $1.37 = £1 | Euros sold for U.S. dollars | | | 48 | | | €1 = $1.20 | | | 15 | | | €1 = $1.23 | Japanese yen sold for U.S. dollars | | | 17 | | | ¥105.13 = $1 | | | 4 | | | ¥104.11 = $1 | Euros sold for Pounds sterling | | | 9 | | | €1 = £1.13 | | | 4 | | | €1 = £1.10 | Total | | $ | 317 | | | | | $ | 121 | | | | Fair value (i) | | $ | (11 | ) | | | | $ | (4 | ) | | |
(i)
| Represents the difference between the contract amount and the cash flow in U.S. dollars which would have been receivable had the foreign currency forward exchange contracts been entered into on December 31, 2018 at the forward exchange rates prevailing at that date.
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Income earned within foreign subsidiaries outsideestimate of the United Kingdom is generally offset by expensesamortization period, resulting in most costs being amortized for a greater length of time than the same local currency but the Company does have exposure to foreign exchange movements on the net income of these entities.initial contract term.
Interest Rate Risk The Company has access to $1.25 billion under a revolving credit facility expiring March 7, 2022. As of December 31, 2018, $130 million2020, no amount was drawn on this facility. We are also subject to market risk from exposure to changes in interest rates based on our investing activities where our primary interest rate risk arises from changes in short-term interest rates in U.S. dollars, Pounds sterling and Euros.
The table below provides information about our financial instruments that are sensitive to changes in interest rates. | | Expected to mature before December 31, | | | | | | | | | | | | | | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | Thereafter | | | Total | | | Fair Value (i) | | | | ($ in millions) | | Fixed rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | $ | 950 | | | | 660 | | | $ | 250 | | | $ | 650 | | | $ | — | | | $ | 3,100 | | | $ | 5,610 | | | $ | 6,418 | | Fixed rate payable | | | 4.684 | % | | | 2.125 | % | | | 4.625 | % | | | 3.600 | % | | | — | | | | 4.224 | % | | | 4.000 | % | | | | | Floating rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | $ | 22 | | | $ | 17 | | | $ | 13 | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 55 | | | $ | 55 | | Variable rate payable (ii) | | | 5.448 | % | | | 5.448 | % | | | 5.530 | % | | | 5.595 | % | | | — | | | | — | | | | 5.475 | % | | | | |
(i) | Represents the net present value of the expected cash flows discounted at current market rates of interest or quoted market rates as appropriate. |
(ii) | Represents the estimated interest rate payable. |
Interest Income on Fiduciary Funds As a result of our operating activities, we receive cash for premiums and claims which we deposit in short-term investments denominated in U.S. dollars and other currencies. We earn interest on these funds, which is included in our consolidated financial statements as interest income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity. At December 31, 2018,2020, we held $1.4$2.2 billion of fiduciary funds invested in interest-bearing accounts. If short-term interest rates increased or decreased by 25 basis points, interest earned on these invested fiduciary funds, and therefore our interest income recognized, would increase or decrease by approximately $4$6 million on an annualized basis.
LIBOR-Related Debt Instruments In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced its intention to phase out LIBOR as a benchmark rate by the end of 2021. The table below provides information about ourAlternative Reference Rates Committee (‘ARRC’), a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from U.S. dollar LIBOR (‘USD-LIBOR’) to a more robust reference rate, has proposed that the Secured Overnight Financing Rate (‘SOFR’) represents the best alternative to USD-LIBOR for use in derivatives and other financial instrumentscontracts that are sensitivecurrently indexed to changesUSD-LIBOR. ARRC has proposed a transition plan with specific steps and timelines designed to encourage the adoption of SOFR and guide the transition to SOFR from USD-LIBOR. Organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to USD-LIBOR. Similar efforts are underway to identify suitable replacement reference rates for LIBOR in interest rates. The Company’s previously-held interest rate swap derivatives matured during 2018, and it has not entered into additional interest rate hedging contracts asother major currencies. As of December 31, 2018.2020, the Company’s primary exposure is its $1.25 billion revolving credit facility maturing in 2022 and its collateralized facility assumed as part of its acquisition of TRANZACT, which are both priced using rates tied to LIBOR. We anticipate renegotiating the revolving credit facility prior to the potential LIBOR quotation termination date and will renegotiate, or repay, the collateralized facility prior to the end of 2021. In addition, the Company and its subsidiaries have entered into various intercompany notes indexed to LIBOR. The Company, in preparation for a December 31, 2021 deadline, expects to amend or replace the LIBOR-based intercompany notes as necessary to reflect new market benchmarks for the relevant loan currencies. We are currently evaluating the LIBOR-related risks that may be inherent in our Treasury workstation software and elsewhere in our business and are monitoring for further proposals and guidance from the ARRC and other alternative-rate initiatives. While it is currently uncertain whether SOFR or another reference rate will be selected as the alternative to LIBOR, or whether other reforms will be enacted in response to the planned transition, we will make the appropriate changes when necessary. | | Expected to mature before December 31, | | | | | | | | | | | | | | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | | | Fair Value (i) | | | | ($ in millions) | | Fixed rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | $ | 187 | | | | — | | | $ | 950 | | | $ | 617 | | | $ | 250 | | | $ | 2,475 | | | $ | 4,479 | | | $ | 4,519 | | Fixed rate payable | | | 7.000 | % | | | — | | | | 4.684 | % | | | 2.125 | % | | | 4.625 | % | | | 4.511 | % | | | 4.329 | % | | | | | Floating rate debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal | | | — | | | | — | | | | — | | | $ | 130 | | | | — | | | | — | | | $ | 130 | | | $ | 130 | | Variable rate payable (ii) | | | — | | | | — | | | | — | | | | 3.971 | % | | | — | | | | — | | | | 3.971 | % | | | | |
(i)
| Represents the net present value of the expected cash flows discounted at current market rates of interest or quoted market rates as appropriate.
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(ii)
| Represents the estimated interest rate payable.
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Credit Risk and Concentrations of Credit Risk Credit risk represents the loss that would be recognized at the reporting date if counterparties failed to perform as contracted. The Company currently does not anticipate non-performance by its counterparties. The Company generally does not require collateral or other security to support financial instruments with credit risk. Concentrations of credit risk that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments on the balance sheet that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, fiduciary funds, accounts receivable and derivatives which are recorded at fair value.
The Company maintains a policy of providing for the diversification of cash and cash equivalent investments and places such investments in an extensive number of financial institutions to limit the amount of credit risk exposure. These financial institutions are monitored on an ongoing basis for credit quality predominantly using information provided by credit agencies. Concentrations of credit risk with respect to receivables are limited due to the large number of clients and markets in which the Company does business, as well as the dispersion across many geographic areas. Management does not believe that significant risk exists in connection with the Company’s concentrations of credit as of December 31, 2018.2020.
ITEM 8. FINANCIAL STATEMENTSSTATEMENTS AND SUPPLEMENTARY DATA WILLIS TOWERS WATSON INDEX TO FORM 10-K For the year ended December 31, 20182020
REPORT OF INDEPENDENT REGISTEREDREGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors ofWillis Towers Watson Public Limited Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Willis Towers Watson Public Limited Company and subsidiaries (the "Company"‘Company’) as of December 31, 20182020 and 2017,2019, the related consolidated statements of comprehensive income, changes in equity and cash flows, for the twothree years then ended, and the related notes (collectively referred to as the "financial statements"‘financial statements’). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for the twothree years then ended, in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements of the Company for the year ended December 31, 2016 (the “2016 financial statements”America (‘US GAAP’), before the effects of the adjustments to retrospectively apply the changes in accounting discussed in Note 2, before the effects of the retrospective adjustments to the disclosures for changes in the composition of reportable segments discussed in Note 5, and before the effects of the retrospective adjustments to the presentation of financial information for issuers and other guarantor subsidiaries as discussed in Note 22 to the financial statements, were audited by other auditors whose report, dated March 1, 2017, expressed an unqualified opinion on those statements. We have also audited the adjustments to the 2016 financial statements to retrospectively apply the changes in accounting related to net periodic pension and postretirement benefit cost and stock compensation as discussed in Note 2, the retrospective adjustments to the disclosures for changes in the composition of reportable segments as discussed in Note 5, and the retrospective adjustments to the presentation of financial information for issuers and other guarantor subsidiaries as discussed in Note 22 to the financial statements. In our opinion, such retrospective adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2016 financial statements of the Company other than with respect to the retrospective adjustments, and accordingly, we do not express an opinion or any other form of assurance on the 2016 financial statements taken as a whole..
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(‘PCAOB’), the Company's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2019,23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in the year ended December 31, 2018 due to adoption of Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.
Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Errors and Omissions Reserve — Refer to Notes 2, 14 and 15 to the financial statements Critical Audit Matter Description The Company has established provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions (‘E&O’) which arise in connection with the placement of insurance and reinsurance and provision of broking, consulting and outsourcing 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 (‘IBNR’). These provisions are established based on actuarial estimates together with individual case reviews. Significant management judgment is required to estimate the amounts of such claims. Auditing management’s judgments related to its E&O provision, and in particular the broking, consulting and outsourcing business provisions related to the IBNR, and the provisions related to significant claims reported but not paid, involved especially complex and subjective judgment and an increased extent of effort, including the need to involve our actuarial specialists. How the Critical Audit Matter Was Addressed in the Audit We tested the effectiveness of controls over the Company’s estimation of the E&O provisions, including controls over the underlying historical claims data, the actuarial methodology used, the assumptions selected by management that are used to calculate the broking,
consulting and outsourcing business IBNR provisions, and the establishment and quarterly evaluation of provisions for reported claims, including significant claims. For the IBNR provisions, we evaluated the appropriateness of the IBNR models, including evaluating changes needed or warranted given changes in the business and trends emerging from the COVID-19 pandemic, and evaluated the consistency of the model with prior years in order to challenge the methodology used to estimate the provisions. With the assistance of our actuarial specialists, we assessed the methodology and models used, including key inputs and assumptions used in, and arithmetical accuracy of, the models used. We also performed retrospective reviews of management’s estimated claims emergence in comparison to actual results and evaluated the provisions set by management in comparison to a range of independent estimates that we developed. We evaluated the E&O matters and the appropriateness of their projected settlement values through inquiries of, and confirmations from, in-house counsel and external lawyers handling those matters for the Company. /s/Deloitte & Touche LLP Philadelphia, PA February 27, 201923, 2021 We have served as the Company’s auditor since 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Willis Towers Watson Public Limited Company
Dublin, Ireland
We have audited, before the effects of the adjustments to retrospectively apply the changes in accounting discussed in Note 2, the adjustment to the disclosures for changes in the composition of reportable segments discussed in Note 5 and the change in presentation of the financial information for issuers and other guarantor subsidiaries discussed in Note 22 to the consolidated financial statements, the consolidated statement of income, comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2016 of Willis Towers Watson Public Limited Company and subsidiaries (the "Company") (the 2016 consolidated financial statements before the effects of the retrospective adjustments discussed in Notes 2, 5 and 22 to the consolidated financial statements are not presented herein). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such 2016 consolidated financial statements, before the effects of the adjustments to retrospectively apply the changes in accounting discussed in Note 2, the adjustment to the disclosures for changes in the composition of reportable segments discussed in Note 5 and the change in presentation of the financial information for issuers and other guarantor subsidiaries discussed in Note 22 to the consolidated financial statements, present fairly, in all material respects, the results of operations and cash flows of Willis Towers Watson Public Limited Company and subsidiaries for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the changes in accounting discussed in Note 2, the adjustment to the disclosures for changes in the composition of reportable segments discussed in Note 5 and the change in presentation of the financial information for issuers and other guarantor subsidiaries discussed in Note 22 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.
/s/ Deloitte LLP
London, United Kingdom
March 1, 2017
WILLIS TOWERS WATSON Consolidated Statements of Comprehensive Income (In millions of U.S. dollars, except per share data) | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Revenue | | $ | 8,513 | | | $ | 8,202 | | | $ | 7,887 | | | $ | 9,352 | | | $ | 9,039 | | | $ | 8,513 | | Costs of providing services | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and benefits | | | 5,123 | | | | 4,967 | | | | 4,849 | | | | 5,507 | | | | 5,249 | | | | 5,123 | | Other operating expenses | | | 1,637 | | | | 1,534 | | | | 1,551 | | | | 1,758 | | | | 1,719 | | | | 1,637 | | Depreciation | | | 208 | | | | 203 | | | | 178 | | | | 308 | | | | 240 | | | | 208 | | Amortization | | | 534 | | | | 581 | | | | 591 | | | | 462 | | | | 489 | | | | 534 | | Restructuring costs | | | — | | | | 132 | | | | 193 | | | | 24 | | | | 0 | | | | 0 | | Transaction and integration expenses | | | 202 | | | | 269 | | | | 177 | | | | 110 | | | | 13 | | | | 202 | | Total costs of providing services | | | 7,704 | | | | 7,686 | | | | 7,539 | | | | 8,169 | | | | 7,710 | | | | 7,704 | | Income from operations | | | 809 | | | | 516 | | | | 348 | | | | 1,183 | | | | 1,329 | | | | 809 | | Interest expense | | | (208 | ) | | | (188 | ) | | | (184 | ) | | | (244 | ) | | | (234 | ) | | | (208 | ) | Other income, net | | | 250 | | | | 164 | | | | 178 | | | | 399 | | | | 227 | | | | 250 | | INCOME FROM OPERATIONS BEFORE INCOME TAXES | | | 851 | | | | 492 | | | | 342 | | | | 1,338 | | | | 1,322 | | | | 851 | | (Provision for)/benefit from income taxes | | | (136 | ) | | | 100 | | | | 96 | | | Provision for income taxes | | | | (318 | ) | | | (249 | ) | | | (136 | ) | NET INCOME | | | 715 | | | | 592 | | | | 438 | | | | 1,020 | | | | 1,073 | | | | 715 | | Income attributable to non-controlling interests | | | (20 | ) | | | (24 | ) | | | (18 | ) | | | (24 | ) | | | (29 | ) | | | (20 | ) | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 695 | | | $ | 568 | | | $ | 420 | | | $ | 996 | | | $ | 1,044 | | | $ | 695 | | | | | | | | | | | | | | | | | | | | | | | | | | | EARNINGS PER SHARE | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 5.29 | | | $ | 4.21 | | | $ | 3.07 | | | $ | 7.68 | | | $ | 8.05 | | | $ | 5.29 | | Diluted earnings per share | | $ | 5.27 | | | $ | 4.18 | | | $ | 3.04 | | | $ | 7.65 | | | $ | 8.02 | | | $ | 5.27 | | | | | | | | | | | | | | | | | | | | | | | | | | | NET INCOME | | $ | 715 | | | $ | 592 | | | $ | 438 | | | $ | 1,020 | | | $ | 1,073 | | | $ | 715 | | Other comprehensive (loss)/income, net of tax: | | | | | | | | | | | | | | Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | | | Foreign currency translation | | $ | (251 | ) | | $ | 295 | | | $ | (353 | ) | | $ | 139 | | | $ | 78 | | | $ | (251 | ) | Defined pension and post-retirement benefits | | | (199 | ) | | | 14 | | | | (439 | ) | | | (266 | ) | | | (329 | ) | | | (199 | ) | Derivative instruments | | | 2 | | | | 75 | | | | (75 | ) | | | (4 | ) | | | 21 | | | | 2 | | Other comprehensive (loss)/income, net of tax, before non-controlling interests | | | (448 | ) | | | 384 | | | | (867 | ) | | Comprehensive income/(loss) before non-controlling interests | | | 267 | | | | 976 | | | | (429 | ) | | Comprehensive (income)/loss attributable to non-controlling interests | | | (20 | ) | | | (37 | ) | | | 2 | | | Comprehensive income/(loss) attributable to Willis Towers Watson | | $ | 247 | | | $ | 939 | | | $ | (427 | ) | | Other comprehensive income/(loss), net of tax, before non-controlling interests | | | | (131 | ) | | | (230 | ) | | | (448 | ) | Comprehensive income before non-controlling interests | | | | 889 | | | | 843 | | | | 267 | | Comprehensive income attributable to non-controlling interests | | | | (25 | ) | | | (29 | ) | | | (20 | ) | Comprehensive income attributable to Willis Towers Watson | | | $ | 864 | | | $ | 814 | | | $ | 247 | |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Balance Sheets (In millions of U.S. dollars, except share data) | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | ASSETS | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 1,033 | | | $ | 1,030 | | | $ | 2,089 | | | $ | 887 | | Fiduciary assets | | | 12,604 | | | | 12,155 | | | | 15,160 | | | | 13,004 | | Accounts receivable, net | | | 2,379 | | | | 2,246 | | | | 2,555 | | | | 2,621 | | Prepaid and other current assets | | | 404 | | | | 430 | | | | 497 | | | | 525 | | Total current assets | | | 16,420 | | | | 15,861 | | | | 20,301 | | | | 17,037 | | Fixed assets, net | | | 942 | | | | 985 | | | | 1,014 | | | | 1,046 | | Goodwill | | | 10,465 | | | | 10,519 | | | | 11,204 | | | | 11,194 | | Other intangible assets, net | | | 3,318 | | | | 3,882 | | | | 3,043 | | | | 3,478 | | Right-of-use assets | | | | 902 | | | | 968 | | Pension benefits assets | | | 773 | | | | 764 | | | | 971 | | | | 868 | | Other non-current assets | | | 467 | | | | 447 | | | | 1,096 | | | | 835 | | Total non-current assets | | | 15,965 | | | | 16,597 | | | | 18,230 | | | | 18,389 | | TOTAL ASSETS | | $ | 32,385 | | | $ | 32,458 | | | $ | 38,531 | | | $ | 35,426 | | LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | Fiduciary liabilities | | $ | 12,604 | | | $ | 12,155 | | | $ | 15,160 | | | $ | 13,004 | | Deferred revenue and accrued expenses | | | 1,647 | | | | 1,711 | | | | 2,161 | | | | 1,784 | | Short-term debt and current portion of long-term debt | | | 186 | | | | 85 | | | Current debt | | | | 971 | | | | 316 | | Current lease liabilities | | | | 152 | | | | 164 | | Other current liabilities | | | 864 | | | | 804 | | | | 888 | | | | 802 | | Total current liabilities | | | 15,301 | | | | 14,755 | | | | 19,332 | | | | 16,070 | | Long-term debt | | | 4,389 | | | | 4,450 | | | | 4,664 | | | | 5,301 | | Liability for pension benefits | | | 1,170 | | | | 1,259 | | | | 1,405 | | | | 1,324 | | Deferred tax liabilities | | | 559 | | | | 615 | | | | 561 | | | | 526 | | Provision for liabilities | | | 540 | | | | 558 | | | | 407 | | | | 537 | | Long-term lease liabilities | | | | 918 | | | | 964 | | Other non-current liabilities | | | 429 | | | | 544 | | | | 312 | | | | 335 | | Total non-current liabilities | | | 7,087 | | | | 7,426 | | | | 8,267 | | | | 8,987 | | TOTAL LIABILITIES | | | 22,388 | | | | 22,181 | | | | 27,599 | | | | 25,057 | | COMMITMENTS AND CONTINGENCIES | | | | | | | | | | | | | | | | | REDEEMABLE NON-CONTROLLING INTEREST | | | 26 | | | | 28 | | | EQUITY (i) | | | | | | | | | | | | | | | | | Additional paid-in capital | | | 10,615 | | | | 10,538 | | | | 10,748 | | | | 10,687 | | Retained earnings | | | 1,201 | | | | 1,104 | | | | 2,434 | | | | 1,792 | | Accumulated other comprehensive loss, net of tax | | | (1,961 | ) | | | (1,513 | ) | | | (2,359 | ) | | | (2,227 | ) | Treasury shares, at cost, 17,519 in 2018 and 2017 and 40,000 shares, €1 nominal value, in 2018 and 2017 | | | (3 | ) | | | (3 | ) | | Treasury shares, at cost, 17,519 in 2020 and 2019 and 40,000 shares, €1 nominal value, in 2019 | | | | (3 | ) | | | (3 | ) | Total Willis Towers Watson shareholders’ equity | | | 9,852 | | | | 10,126 | | | | 10,820 | | | | 10,249 | | Non-controlling interests | | | 119 | | | | 123 | | | | 112 | | | | 120 | | Total equity | | | 9,971 | | | | 10,249 | | | | 10,932 | | | | 10,369 | | TOTAL LIABILITIES AND EQUITY | | $ | 32,385 | | | $ | 32,458 | | | $ | 38,531 | | | $ | 35,426 | |
_________ (i) | Equity includes (a) Ordinary shares $0.000304635 nominal value; Authorized 1,510,003,775; Issued 128,921,530 (2018)128,964,579 (2020) and 132,139,581 (2017)128,689,930 (2019); Outstanding 128,921,530 (2018)128,964,579 (2020) and 132,139,581 (2017)128,689,930 (2019); (b) Ordinary shares, €1 nominal value; Authorized and Issued 40,000 shares in 2018 and 2017;2019; and (c) Preference shares, $0.000115 nominal value; Authorized 1,000,000,000 and Issued noneNaN in 2020 and 2019. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Statements of Cash Flows (In millions of U.S. dollars) | | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | NET INCOME | | $ | 1,020 | | | $ | 1,073 | | | $ | 715 | | Adjustments to reconcile net income to total net cash from operating activities: | | | | | | | | | | | | | Depreciation | | | 308 | | | | 240 | | | | 213 | | Amortization | | | 462 | | | | 489 | | | | 534 | | Non-cash lease expense | | | 146 | | | | 148 | | | | 0 | | Net periodic benefit of defined benefit pension plans | | | (196 | ) | | | (135 | ) | | | (163 | ) | Provision for doubtful receivables from clients | | | 29 | | | | 9 | | | | 8 | | Provision for/(benefit from) deferred income taxes | | | 99 | | | | (72 | ) | | | (115 | ) | Share-based compensation | | | 90 | | | | 74 | | | | 50 | | Net (gain)/loss on disposal of operations | | | (81 | ) | | | 2 | | | | 9 | | Non-cash foreign exchange (gain)/loss | | | (6 | ) | | | 26 | | | | 26 | | Other, net | | | (41 | ) | | | 17 | | | | 8 | | Changes in operating assets and liabilities, net of effects from purchase of subsidiaries: | | | | | | | | | | | | | Accounts receivable | | | 72 | | | | (261 | ) | | | 68 | | Fiduciary assets | | | (1,774 | ) | | | (365 | ) | | | (839 | ) | Fiduciary liabilities | | | 1,774 | | | | 365 | | | | 839 | | Other assets | | | (205 | ) | | | (269 | ) | | | (22 | ) | Other liabilities | | | 215 | | | | (264 | ) | | | (20 | ) | Provisions | | | (138 | ) | | | 4 | | | | (23 | ) | Net cash from operating activities | | | 1,774 | | | | 1,081 | | | | 1,288 | | CASH FLOWS USED IN INVESTING ACTIVITIES | | | | | | | | | | | | | Additions to fixed assets and software for internal use | | | (223 | ) | | | (246 | ) | | | (268 | ) | Capitalized software costs | | | (63 | ) | | | (59 | ) | | | (54 | ) | Acquisitions of operations, net of cash acquired | | | (69 | ) | | | (1,329 | ) | | | (36 | ) | Net proceeds from sale of operations | | | 212 | | | | 17 | | | | 4 | | Other, net | | | (17 | ) | | | 3 | | | | 13 | | Net cash used in investing activities | | | (160 | ) | | | (1,614 | ) | | | (341 | ) | CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES | | | | | | | | | | | | | Net payments on revolving credit facility | | | 0 | | | | (131 | ) | | | (754 | ) | Senior notes issued | | | 282 | | | | 997 | | | | 998 | | Proceeds from issuance of other debt | | | 0 | | | | 1,100 | | | | 0 | | Debt issuance costs | | | (2 | ) | | | (13 | ) | | | (8 | ) | Repayments of debt | | | (327 | ) | | | (995 | ) | | | (170 | ) | Repurchase of shares | | | 0 | | | | (150 | ) | | | (602 | ) | Proceeds from issuance of shares | | | 16 | | | | 45 | | | | 45 | | Payments of deferred and contingent consideration related to acquisitions | | | (12 | ) | | | (57 | ) | | | (50 | ) | Cash paid for employee taxes on withholding shares | | | (14 | ) | | | (15 | ) | | | (30 | ) | Dividends paid | | | (346 | ) | | | (329 | ) | | | (306 | ) | Acquisitions of and dividends paid to non-controlling interests | | | (28 | ) | | | (55 | ) | | | (26 | ) | Other, net | | | (3 | ) | | | 0 | | | | 0 | | Net cash (used in)/from financing activities | | | (434 | ) | | | 397 | | | | (903 | ) | INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 1,180 | | | | (136 | ) | | | 44 | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 21 | | | | (2 | ) | | | (41 | ) | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR (i) | | | 895 | | | | 1,033 | | | | 1,030 | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR (i) | | $ | 2,096 | | | $ | 895 | | | $ | 1,033 | |
(i) | As a result of the acquired TRANZACT collateralized facility (see Note 10 — Debt), cash, cash equivalents and restricted cash included $7 million and $8 million of restricted cash at December 31, 2020 and 2019, respectively, which is included within prepaid and other current assets on our consolidated balance sheets. There were 0 restricted cash amounts held at December 31, 2018 and 2017. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON
Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
| | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | NET INCOME | | $ | 715 | | | $ | 592 | | | $ | 438 | | Adjustments to reconcile net income to total net cash from operating activities: | | | | | | | | | | | | | Depreciation | | | 213 | | | | 252 | | | | 178 | | Amortization | | | 534 | | | | 581 | | | | 591 | | Net periodic benefit of defined benefit pension plans | | | (163 | ) | | | (91 | ) | | | (93 | ) | Provision for doubtful receivables from clients | | | 8 | | | | 17 | | | | 36 | | Benefit from deferred income taxes | | | (115 | ) | | | (285 | ) | | | (244 | ) | Share-based compensation | | | 50 | | | | 67 | | | | 123 | | Non-cash foreign exchange loss/(gain) | | | 26 | | | | 77 | | | | (28 | ) | Net loss/(gain) on disposal of operations | | | 9 | | | | (13 | ) | | | — | | Other, net | | | 8 | | | | (57 | ) | | | 27 | | Changes in operating assets and liabilities, net of effects from purchase of subsidiaries: | | | | | | | | | | | | | Accounts receivable | | | 68 | | | | (64 | ) | | | (101 | ) | Fiduciary assets | | | (839 | ) | | | (1,167 | ) | | | (249 | ) | Fiduciary liabilities | | | 839 | | | | 1,167 | | | | 249 | | Other assets | | | (22 | ) | | | (128 | ) | | | (233 | ) | Other liabilities | | | (20 | ) | | | (51 | ) | | | 174 | | Provisions | | | (23 | ) | | | (35 | ) | | | 65 | | Net cash from operating activities | | | 1,288 | | | | 862 | | | | 933 | | CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES | | | | | | | | | | | | | Additions to fixed assets and software for internal use | | | (268 | ) | | | (300 | ) | | | (218 | ) | Capitalized software costs | | | (54 | ) | | | (75 | ) | | | (85 | ) | Acquisitions of operations, net of cash acquired | | | (36 | ) | | | (13 | ) | | | 476 | | Net proceeds from sale of operations | | | 4 | | | | 57 | | | | (1 | ) | Other, net | | | 13 | | | | (4 | ) | | | 23 | | Net cash (used in)/from investing activities | | | (341 | ) | | | (335 | ) | | | 195 | | CASH FLOWS USED IN FINANCING ACTIVITIES | | | | | | | | | | | | | Net (payments)/borrowings on revolving credit facility | | | (754 | ) | | | 642 | | | | (237 | ) | Senior notes issued | | | 998 | | | | 649 | | | | 1,606 | | Proceeds from issuance of other debt | | | — | | | | 32 | | | | 404 | | Debt issuance costs | | | (8 | ) | | | (9 | ) | | | (14 | ) | Repayments of debt | | | (170 | ) | | | (734 | ) | | | (1,901 | ) | Repurchase of shares | | | (602 | ) | | | (532 | ) | | | (396 | ) | Proceeds from issuance of shares | | | 45 | | | | 61 | | | | 63 | | Payments related to share cancellation | | | — | | | | (177 | ) | | | — | | Payments of deferred and contingent consideration related to acquisitions | | | (50 | ) | | | (65 | ) | | | (67 | ) | Cash paid for employee taxes on withholding shares | | | (30 | ) | | | (18 | ) | | | (13 | ) | Dividends paid | | | (306 | ) | | | (277 | ) | | | (199 | ) | Acquisitions of and dividends paid to non-controlling interests | | | (26 | ) | | | (51 | ) | | | (21 | ) | Net cash used in financing activities | | | (903 | ) | | | (479 | ) | | | (775 | ) | INCREASE IN CASH AND CASH EQUIVALENTS | | | 44 | | | | 48 | | | | 353 | | Effect of exchange rate changes on cash and cash equivalents | | | (41 | ) | | | 112 | | | | (15 | ) | CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 1,030 | | | | 870 | | | | 532 | | CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 1,033 | | | $ | 1,030 | | | $ | 870 | |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Consolidated Statements of Changes in Equity (In millions of U.S. dollars and number of shares in thousands) | | Shares outstanding | | | Additional paid-in capital | | | Retained earnings | | | Treasury shares | | | AOCL (i) | | | Total WTW shareholders’ equity | | | Non-controlling interests | | | Total equity | | | | | Redeemable Non-controlling interest (ii) | | | Total | | | Shares outstanding | | | Additional paid-in capital | | | Retained earnings | | | Treasury shares | | | AOCL (i) | | | Total WTW shareholders’ equity | | | Non-controlling interests | | | Total equity | | | | | Redeemable Non-controlling interest (ii) | | | Total | | Balance as of January 1, 2016 | | | 68,625 | | | $ | 1,672 | | | $ | 1,597 | | | $ | (3 | ) | | $ | (1,037 | ) | | $ | 2,229 | | | $ | 131 | | | $ | 2,360 | | | | | $ | 53 | | | | | | | Balance as of January 1, 2018 | | | | 132,140 | | | $ | 10,538 | | | $ | 1,104 | | | $ | (3 | ) | | $ | (1,513 | ) | | $ | 10,126 | | | $ | 123 | | | $ | 10,249 | | | | | $ | 28 | | | | | | Adoption of ASC 606 | | | | — | | | | — | | | | 317 | | | | — | | | | — | | | | 317 | | | | — | | | | 317 | | | | | | — | | | | | | Shares repurchased | | | (3,170 | ) | | | — | | | | (300 | ) | | | (96 | ) | | | — | | | | (396 | ) | | | — | | | | (396 | ) | | | | | — | | | | | | | | (3,919 | ) | | | — | | | | (602 | ) | | | — | | | | — | | | | (602 | ) | | | — | | | | (602 | ) | | | | | — | | | | | | Net income | | | — | | | | — | | | | 420 | | | | — | | | | — | | | | 420 | | | | 11 | | | | 431 | | | | | | 7 | | | $ | 438 | | | | — | | | | — | | | | 695 | | | | — | | | | — | | | | 695 | | | | 18 | | | | 713 | | | | | | 2 | | | $ | 715 | | Dividends ($1.92 per share) | | | — | | | | — | | | | (265 | ) | | | — | | | | — | | | | (265 | ) | | | (9 | ) | | | (274 | ) | | | | | (5 | ) | | | | | | Dividends declared ($2.40 per share) | | | | — | | | | — | | | | (313 | ) | | | — | | | | — | | | | (313 | ) | | | — | | | | (313 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24 | ) | | | (24 | ) | | | | | (2 | ) | | | | | Other comprehensive (loss)/income | | | | — | | | | — | | | | — | | | | — | | | | (448 | ) | | | (448 | ) | | | 2 | | | | (446 | ) | | | | | (2 | ) | | $ | (448 | ) | Issuance of shares under employee stock compensation plans | | | | 701 | | | | 45 | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 45 | | | | | | — | | | | | | Share-based compensation and net settlements | | | | — | | | | 27 | | | | — | | | | — | | | | — | | | | 27 | | | | — | | | | 27 | | | | | | — | | | | | | Foreign currency translation | | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | | — | | | | | | Balance as of December 31, 2018 | | | | 128,922 | | | $ | 10,615 | | | $ | 1,201 | | | $ | (3 | ) | | $ | (1,961 | ) | | $ | 9,852 | | | $ | 119 | | | $ | 9,971 | | | | | $ | 26 | | | | | | Adoption of ASU 2018-02 | | | | — | | | | — | | | | 36 | | | | — | | | | (36 | ) | | | — | | | | — | | | | — | | | | | | — | | | | | | Shares repurchased | | | | (788 | ) | | | — | | | | (150 | ) | | | — | | | | — | | | | (150 | ) | | | — | | | | (150 | ) | | | | | — | | | | | | Net income | | | | — | | | | — | | | | 1,044 | | | | — | | | | — | | | | 1,044 | | | | 23 | | | | 1,067 | | | | | | 6 | | | $ | 1,073 | | Dividends declared ($2.60 per share) | | | | — | | | | — | | | | (339 | ) | | | — | | | | — | | | | (339 | ) | | | — | | | | (339 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (21 | ) | | | (21 | ) | | | | | (2 | ) | | | | | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (847 | ) | | | (847 | ) | | | (16 | ) | | | (863 | ) | | | | | (4 | ) | | $ | (867 | ) | | | — | | | | — | | | | — | | | | — | | | | (230 | ) | | | (230 | ) | | | — | | | | (230 | ) | | | | | — | | | $ | (230 | ) | Issuance of shares under employee stock compensation plans | | | 1,342 | | | | 66 | | | | — | | | | — | | | | — | | | | 66 | | | | — | | | | 66 | | | | | | — | | | | | | | | 556 | | | | 45 | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 45 | | | | | | — | | | | | | Issuance of shares for acquisitions | | | 69,500 | | | | 8,686 | | | | — | | | | — | | | | — | | | | 8,686 | | | | — | | | | 8,686 | | | | | | — | | | | | | | Replacement share-based compensation awards issued on acquisition | | | — | | | | 37 | | | | — | | | | — | | | | — | | | | 37 | | | | — | | | | 37 | | | | | | — | | | | | | | Share-based compensation | | | — | | | | 123 | | | | — | | | | — | | | | — | | | | 123 | | | | — | | | | 123 | | | | | | — | | | | | | | Additional non-controlling interests | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | 7 | | | | 1 | | | | 8 | | | | | | — | | | | | | | Foreign currency translation | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | | — | | | | | | | Balance as of December 31, 2016 | | | 136,297 | | | $ | 10,596 | | | $ | 1,452 | | | $ | (99 | ) | | $ | (1,884 | ) | | $ | 10,065 | | | $ | 118 | | | $ | 10,183 | | | | | $ | 51 | | | | | | | Adoption of ASU 2016-16 | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) | | | | | — | | | | | | | Shares repurchased | | | (3,797 | ) | | | — | | | | (532 | ) | | | — | | | | — | | | | (532 | ) | | | — | | | | (532 | ) | | | | | — | | | | | | | Shares canceled | | | (1,415 | ) | | | (177 | ) | | | (96 | ) | | | 96 | | | | — | | | | (177 | ) | | | — | | | | (177 | ) | | | | | — | | | | | | | Net income | | | — | | | | — | | | | 568 | | | | — | | | | — | | | | 568 | | | | 16 | | | | 584 | | | | | | 8 | | | $ | 592 | | | Dividends ($2.12 per share) | | | — | | | | — | | | | (285 | ) | | | — | | | | — | | | | (285 | ) | | | (15 | ) | | | (300 | ) | | | | | (3 | ) | | | | | | Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 371 | | | | 371 | | | | 7 | | | | 378 | | | | | | 6 | | | $ | 384 | | | Issuance of shares under employee stock compensation plans | | | 1,055 | | | | 62 | | | | — | | | | — | | | | — | | | | 62 | | | | — | | | | 62 | | | | | | — | | | | | | | Share-based compensation | | | — | | | | 67 | | | | — | | | | — | | | | — | | | | 67 | | | | — | | | | 67 | | | | | | — | | | | | | | Share-based compensation and net settlements | | | | — | | | | 32 | | | | — | | | | — | | | | — | | | | 32 | | | | — | | | | 32 | | | | | | — | | | | | | Acquisition of non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | | | | | (34 | ) | | | | | | | — | | | | (6 | ) | | | — | | | | — | | | | — | | | | (6 | ) | | | (1 | ) | | | (7 | ) | | | | | (30 | ) | | | | | Foreign currency translation | | | — | | | | (10 | ) | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | (10 | ) | | | | | — | | | | | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | | | | | — | | | | | | Balance as of December 31, 2017 | | | 132,140 | | | $ | 10,538 | | | $ | 1,104 | | | $ | (3 | ) | | $ | (1,513 | ) | | $ | 10,126 | | | $ | 123 | | | $ | 10,249 | | | | | $ | 28 | | | | | | | Adoption of ASC 606 (See Note 2) | | | — | | | | — | | | | 317 | | | | — | | | | — | | | | 317 | | | | — | | | | 317 | | | | | | — | | | | | | | Shares repurchased | | | (3,919 | ) | | | — | | | | (602 | ) | | | — | | | | — | | | | (602 | ) | | | — | | | | (602 | ) | | | | | — | | | | | | | Balance as of December 31, 2019 | | | | 128,690 | | | $ | 10,687 | | | $ | 1,792 | | | $ | (3 | ) | | $ | (2,227 | ) | | $ | 10,249 | | | $ | 120 | | | $ | 10,369 | | | | | $ | — | | | | | | Net income | | | — | | | | — | | | | 695 | | | | — | | | | — | | | | 695 | | | | 18 | | | | 713 | | | | | | 2 | | | $ | 715 | | | | — | | | | — | | | | 996 | | | | — | | | | — | | | | 996 | | | | 24 | | | | 1,020 | | | | | | — | | | $ | 1,020 | | Dividends ($2.40 per share) | | | — | | | | — | | | | (313 | ) | | | — | | | | — | | | | (313 | ) | | | (24 | ) | | | (337 | ) | | | | | (2 | ) | | | | | | Dividends declared ($2.75 per share) | | | | — | | | | — | | | | (354 | ) | | | — | | | | — | | | | (354 | ) | | | — | | | | (354 | ) | | | | | — | | | | | | Dividends attributable to non-controlling interests | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (22 | ) | | | (22 | ) | | | | | — | | | | | | Other comprehensive (loss)/income | | | — | | | | — | | | | — | | | | — | | | | (448 | ) | | | (448 | ) | | | 2 | | | | (446 | ) | | | | | (2 | ) | | $ | (448 | ) | | | — | | | | — | | | | — | | | | — | | | | (132 | ) | | | (132 | ) | | | 1 | | | | (131 | ) | | | | | — | | | $ | (131 | ) | Issuance of shares under employee stock compensation plans | | | 701 | | | | 45 | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 45 | | | | | | — | | | | | | | | 275 | | | | 16 | | | | — | | | | — | | | | — | | | | 16 | | | | — | | | | 16 | | | | | | — | | | | | | Share-based compensation | | | — | | | | 27 | | | | — | | | | — | | | | — | | | | 27 | | | | — | | | | 27 | | | | | | — | | | | | | | Share-based compensation and net settlements | | | | — | | | | 46 | | | | — | | | | — | | | | — | | | | 46 | | | | — | | | | 46 | | | | | | — | | | | | | Reduction of non-controlling interests (iii) | | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | 9 | | | | (11 | ) | | | (2 | ) | | | | | — | | | | | | Other | | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) | | | | | — | | | | | | Foreign currency translation | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | | — | | | | | | | | — | | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) | | | — | | | | (7 | ) | | | | | — | | | | | | Balance as of December 31, 2018 | | | 128,922 | | | $ | 10,615 | | | $ | 1,201 | | | $ | (3 | ) | | $ | (1,961 | ) | | $ | 9,852 | | | $ | 119 | | | $ | 9,971 | | | | | $ | 26 | | | | | | | Balance as of December 31, 2020 | | | | 128,965 | | | $ | 10,748 | | | $ | 2,434 | | | $ | (3 | ) | | $ | (2,359 | ) | | $ | 10,820 | | | $ | 112 | | | $ | 10,932 | | | | | $ | — | | | | | |
_________ (i) | Accumulated other comprehensive loss, net of tax (‘AOCL’). |
(ii) | The redeemable non-controlling interest iswas related to Max Matthiessen Holding AB. The Company purchased the remaining non-controlling interest of Max Matthiessen Holding AB during the year ended December 31, 2019. |
(iii) | Attributable to the divestiture of businesses that are less than wholly-owned or the acquisition of shares previously owned by minority interest holders. |
See accompanying notes to the consolidated financial statements
WILLIS TOWERS WATSON Notes to the Consolidated Financial Statements (Tabular amounts are in millions of U.S. dollars, except per share data) Note 1 — Nature of Operations Willis Towers Watson plc is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. The Company has more than 43,00046,000 employees and services clients in more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. We believe our broad perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance. We offer our clients a broad range of services to help them identify and control their risks, and to enhance business performance by improving their ability to attract, retain and engage a talented workforce. Our risk controlmanagement services range frominclude strategic risk consulting (including providing actuarial analysis), to a variety of due diligence services, to the provision of practical on-site risk control services (such as health and safety orand property loss control consulting), as well asand analytical and advisory services (such as hazard modeling and reinsurance optimization studies). We also assist our clients inwith planning how to managefor addressing incidents or crises when they occur. These services include contingency planning, security audits and product tampering plans.
We help our clients enhance their business performance by delivering consulting services, technology and solutions that help them anticipate, identifyoptimize benefits and capitalize on emerging opportunities in human capital managementcultivate talent. Our services and solutions encompass such areas as well as offeremployee benefits, total rewards, talent and benefits outsourcing. In addition, we provide investment advice to help themour clients develop disciplined and efficient strategies to meet their investment goals.goals and expand the power of capital. As an insurance broker, we act as an intermediary between our clients and insurance carriers by advising our clients on their risk management requirements, helping them to determine the best means of managing risk and negotiating and placing insurance with insurance carriers through our global distribution network. We operate a private Medicare exchangemarketplace in the U.S. Through this exchange and those forthrough which, along with our active employees,employee marketplace, we help our clients move to a more sustainable economic model by capping and controlling the costs associated with healthcare benefits. Additionally, with the acquisition of TRANZACT in July 2019 (see Note 3 – Acquisitions and Divestitures), we also provide direct-to-consumer sales of Medicare coverage. We are not an insurance company, and therefore we do not underwrite insurable risks for our own account. We believe our broad perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance. Proposed Combination with Aon plc On March 9, 2020, WTW and Aon plc (‘Aon’) issued an announcement disclosing that the respective boards of directors of WTW and Aon had reached agreement on the terms of a recommended acquisition of WTW by Aon. Under the terms of the agreement each WTW shareholder will receive 1.08 Aon ordinary shares for each WTW ordinary share. At the time of the announcement, it was estimated that upon completion of the combination, existing Aon shareholders will own approximately 63% and existing WTW shareholders will own approximately 37% of the combined company on a fully diluted basis. The transaction was approved by the shareholders of both WTW and Aon during meetings of the respective shareholders held on August 26, 2020 and remains subject to other customary closing conditions, including required regulatory approvals. The antitrust regulatory review of the transaction remains ongoing. In addition, there are numerous other regulatory approvals and other closing conditions that need to be met. The parties expect the transaction to close in the first half of 2021, subject to satisfaction of these conditions. Note 2—Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements Basis of Presentation The accompanying audited consolidated financial statements of Willis Towers Watson and our subsidiaries are presented in accordance with the rules and regulations of the SEC for annual reports on Form 10-K and are prepared in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation. We have reclassified certain prior year amounts to conform
Risks and Uncertainties Related to the current year presentation.COVID-19 Pandemic The COVID-19 pandemic has had an adverse impact on global commercial activity, including the global supply chain, 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. In light of 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 on our business, taking into account our business resilience and continuity plans, financial modeling and stress testing of liquidity and financial resources. Generally, the COVID-19 pandemic did not have a material adverse impact on our overall financial results during 2020; however, during 2020, the COVID-19 pandemic negatively impacted our revenue growth, primarily in our businesses that are discretionary in nature. We believe such level of impact will continue through much of 2021, at least until a sufficient portion of the populations in jurisdictions where we do business have been vaccinated and social-distancing orders are lessened or lifted. As part of the significant estimates and assumptions that are inherent in our financial statements, we have considered the impact COVID-19 will have on our client behavior and the economic environment looking forward to 2021 and throughout the geographies in which we operate. These estimates and assumptions include the collectability of billed and unbilled receivables, the estimation of revenue, and the fair value of our reporting units, tangible and intangible assets and contingent consideration. With regard to collectability of receivables, we believe we may continue to face atypical delays in client payments going forward. The demand for certain discretionary lines of business has decreased, and we believe that decrease may continue to impact our financial results in succeeding periods. Non-discretionary lines of business have also been, to some extent, adversely affected and may be adversely affected in the future. Further, reduced economic activity or disruption in insurance markets could reduce the demand for or the extent of insurance coverage. For example, we have seen instances where the reduced demand for air travel has reduced the extent of insurance coverage needed. Also, the increased frequency and severity of coverage disputes between our clients and (re)insurers arising out of the pandemic could increase our professional liability risk. We will continue to monitor the situation and assess any implications to our business and our stakeholders. 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, 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 will negatively impact our revenue and operating results in fiscal 2021. We believe that these trends and uncertainties are similar to those faced by other comparable registrants as a result of the pandemic. CARES Act On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act was enacted in the U.S. to provide relief to companies in the midst of the COVID-19 pandemic and to stimulate the economy. The assistance includes temporary tax relief and government loans, grants and investments for entities in affected industries. With regard to the income tax provisions of the CARES Act, the Company has reviewed its eligibility requirements, including if and how they apply and how they will affect the Company, particularly provisions that (i) eliminate the taxable income limit for certain net operating losses (‘NOLs’) and allow businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years; (ii) generally relaxed the business interest limitation under section 163(j) from 30 percent to 50 percent; and (iii) fix the ‘retail glitch’ for qualified improvement property. During the three months ended June 30, 2020, the Company elected to use the section 163(j) 50 percent business interest limitation for tax years 2019 and 2020. Utilizing this temporary provision, the Company realized a cash tax benefit in 2020 of approximately $38 million for tax years 2019 and 2020. The Company recognized tax expense of approximately $29 million and $32 million for the 2019 and 2020 tax years, respectively, primarily related to an incremental Base Erosion and Anti-Abuse Tax (‘BEAT’). Additionally, the CARES Act offers an employee retention credit to encourage employers to maintain headcounts even if employees cannot report to work because of issues related to COVID-19 as well as a temporary provision allowing companies to defer remitting the employer share of some payroll taxes to the government. The payroll tax provisions of the CARES Act were not material for 2020. Significant Accounting Policies Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Willis Towers Watson and those of our majority-owned and controlled subsidiaries. Intercompany accounts and transactions have been eliminated.
We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (‘VIE’). Variable interest entities are entities that lack one or more of the characteristics of a voting interest entity and therefore require a different approach in determining which party involved with the VIE should consolidate the entity. With a VIE, either the entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, or the equity holders, as a group, do not have the power to direct the activities that most significantly impact its financial performance, the obligation to absorb expected losses of the entity, or the right to receive the expected residual returns of the entity. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. Voting interest entities are entities that have sufficient equity and provide equity investors voting rights that give them the power to make significant decisions related to the entity’s operations. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. Accordingly, we consolidate our voting interest entity investments in which we hold, directly or indirectly, more than 50% of the voting rights.
Use of Estimates — These consolidated financial statements conform to U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. 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. Estimates are used when accounting for revenue recognition and related costs, the selection of useful lives of fixed and intangible assets, impairment testing, valuation of billed and unbilled receivables from clients, discretionary compensation, income taxes, pension assumptions, incurred but not reported claims, legal reserves and goodwill and intangible assets. Going Concern — Management evaluates at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Management’s evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the consolidated financial statements are issued. Management has concluded that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date of these financial statements. Fair Value of Financial Instruments — The carrying values of our cash, and cash equivalents and restricted cash, accounts receivable, accrued expenses, revolving lines of credit and term loans approximate their fair values because of the short maturity and liquidity of those instruments. We consider the difference between carrying value and fair value to be immaterial for our senior notes. The fair value of our senior notes and note receivable are considered Level 2 financial instruments as they are corroborated by observable market data. See Note 1211 — Fair Value Measurements for additional information about our measurements of fair value. Investments in Associates— Investments are accounted for using the equity method of accounting, included within other non-current assets in the consolidated balance sheets, if the Company has the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an equity ownership in the voting stock of the investee between 20 and 50 percent, although other factors, such as representation on the board of directors, the existence of substantive participation rights, and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is carried at the cost of acquisition, plus the Company’s equity in undistributed net income since acquisition, less any dividends received since acquisition. The Company periodically reviews its investments in associates for which fair value is less than cost to determine if the decline in value is other than temporary. If the decline in value is judged to be other than temporary, the cost basis of the investment is written down to fair value. The amount of any write-down is included in the consolidated statements of comprehensive income. Common Shares Split — On January 4, 2016, the Company effected a 1 to 2.6490 reverse share split to shareholders of record as of January 4, 2016. All share and per share information has been retroactively adjusted to reflect the reverse share split and show the new number of shares. See Note 3 — Merger, Acquisitions and Divestitures for additional information about our Merger and reverse share split.
Cash and Cash Equivalents — Cash and cash equivalents primarily consist of time deposits with original maturities of 90 days or less. In certain of the countries in which we conduct business, we are subject to capital adequacy requirements. Most significantly, Willis Limited, our U.K. brokerage subsidiary regulated by the Financial Conduct Authority, is currently required to maintain $140 million in unencumbered and available financial resources, of which at least $79$51 million must be in cash, for regulatory purposes. Term deposits and certificates of deposits with original maturities greater than 90 days are considered to be short-term investments. There is noAs a result of the acquired TRANZACT collateralized facility (see Note 10 — Debt), we had $7 million and $8 million of restricted cash at December 31, 2020 and 2019, respectively, which is included inwithin prepaid and other current assets on our cash and cash equivalentsconsolidated balance as these amounts are included in fiduciary assets.sheet. Fiduciary Assets and Liabilities — The Company collects premiums from insureds and, after deducting commissions, remits the premiums to the respective insurers. The Company also collects claims or refunds from insurers on behalf of insureds. Certain of our health and welfare benefits administration outsourcing agreements require us to hold funds on behalf of clients to pay obligations on
their behalf. Each of these transactions is reported on our consolidated balance sheet as assets and corresponding liabilities unless such balances are due to or from the same party and a right of offset exists, in which case the balances are recorded net. Fiduciary assetson the consolidated balance sheets are comprised of both fiduciary funds and fiduciary receivables: Fiduciary Funds – Unremitted insurance premiums and claims are recorded within fiduciary assets on the consolidated balance sheets. Fiduciary funds are generally required to be kept in certain 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 insureds and insurers, the Company is entitled to retain investment income earned on fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds. The period for which the Company holds such funds is dependent upon the date the insured remits the payment of the premium to the Company, or the date the Company receives refunds from the insurers, and the date the Company is required to forward such payments to the insurer or insured, respectively. Fiduciary receivables – Uncollected premiums from insureds and uncollected claims or refunds from insurers are recorded as fiduciary assets on the consolidated balance sheets. In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. Such advances are made from fiduciary funds and are reflected in the consolidated balance sheets as fiduciary assets. Fiduciary liabilities on the consolidated balance sheets represent the obligations to remit all fiduciary funds and fiduciary receivables to insurers or insureds. Accounts Receivable — Accounts receivable includes both billed and unbilled receivables and is stated at estimated net realizable values. Provision for billed receivables is recorded, when necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncollectible accounts. Accrued and unbilled receivables are stated at net realizable value which includes an allowance for accrued and unbillable amounts. See Note 4 — Revenue for additional information about our accounts receivable. Acquired Accounts Receivable — As part of the acquisition accounting for the TRANZACT business (see Note 3 – Acquisitions and Divestitures), the acquired accounts receivable arising from direct-to-consumer Medicare broking sales were present-valued at the acquisition date in accordance with ASC 805, Business Combinations (‘ASC 805’). Cash collections for these receivables are expected to occur over a period of several years. Due to the provisions of ASC 606, Revenue From Contracts With Customers (‘ASC 606’), these receivables are not discounted for a significant financing component when initially recognized. The acquired renewal commissions receivables will be accounted for prospectively using the cost-recovery method in which future cash receipts will initially be applied against the acquisition date fair value until the value reaches zero. Any cash received in excess of the fair value determined at acquisition will be recorded to earnings when it is received at a future date. The adjusted values of these acquired renewal commissions receivables will be included in prepaid and other current assets or other non-current assets, as appropriate, on the consolidated balance sheets. 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 carry forwards.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 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 ifwhen the Company’s facts and assumptions change. 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 the results of recent financial operations.operating results. We place more reliance on evidence that is objectively verifiable. Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. The Company recognizes the benefitbenefits of uncertain tax positions in the financial statements when it is more likely than not that thea position will be sustained on the basis of the technical merits of the position assuming the tax authorities have full knowledge of the position and all relevant facts. Recognition also occurs upon either the lapse of the relevant statute of limitations or when positions are effectively settled. The benefit recognized is the largest amount of tax benefit that is greater than 50 percent likely to be realized on settlement with the tax authority. The Company adjusts its recognition of uncertain tax benefits in the period in which new information is available impacting either the recognition or measurement of its uncertain tax positions. Such adjustments are reflected as increases or decreases to income taxes in the period in which they are determined.
The Company recognizes interest and penalties relating to unrecognized tax benefits within income taxes. See Note 76 — Income Taxes for additional information regarding the Company’s income taxes. Foreign Currency — Transactions in currencies other than the functional currency of the entity are recorded at the rates of exchange prevailing at the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are translated at the rates of exchange prevailing at the balance sheet date and the related transaction gains and losses are reported as income or expense in the consolidated statements of comprehensive income. Certain intercompany loans are determined to be of a long-term investment nature. The Company records transaction gains and losses from re-measuring such loans as other comprehensive income in the consolidated statements of comprehensive income. Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates, and assets and liabilities are translated at year-end exchange rates. Translation adjustments are presented as a separate component of other comprehensive income in the
financial statements and are included in net income only upon sale or liquidation of the underlying foreign subsidiary or associated company. Derivatives — The Company uses derivative financial instruments for other than trading purposes to alter the risk profile of an existing underlying exposure. Interest rate swaps have been used to manage interest risk exposures. Forward foreign currency exchange contracts are used to manage currency exposures arising from future income and expenses.expenses and to offset balance sheet exposures in currencies other than the functional currency of an entity. We do not hold any derivatives for trading purposes. The fair values of derivative contracts are recorded in other assets and other liabilities in the consolidated balance sheets. The effective portions of changes in the fair value of derivatives that qualify for hedge accounting as cash flow hedges are recorded in other comprehensive income. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings. If the derivative is designated and qualifies as an effective fair value hedge, the changes in the fair value of the derivative and of the hedged item associated with the hedged risk are both recognized in earnings. The amount of hedge ineffectiveness recognized in earnings is based on the extent to which an offset between the fair value of the derivative and hedged item is not achieved. Changes in the fair value of derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness on those that do qualify, are recorded in other income, net or interest expense as appropriate. The Company evaluates whether its contracts include clauses or conditions which would be required to be separately accounted for at fair value as embedded derivatives. See Note 109 — Derivative Financial Instruments for additional information about the Company’s derivatives. Commitments, Contingencies and Provisions for Liabilities — The Company establishes provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also unasserted claims and related legal fees. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in 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. To the extent such losses can be recovered under the Company’s insurance programs, estimated recoveries are recorded when losses for insured events are recognized and the recoveries are likely to be realized. Significant management judgment is required to estimate the amounts of such unasserted claims and the related insurance recoveries. The Company analyzes its litigation exposure based on available information, including consultation with outside counsel handling the defense of these matters, to assess its potential liability. These contingent liabilities are not discounted. See Note 14 — Commitments and Contingencies and Note 15 — Supplementary Information for Certain Balance Sheet Accounts for additional information about our commitments, contingencies and provisions for liabilities. Share-Based Compensation — The Company has equity-based compensation plans that provide for grants of restricted stock units and stock options to employees and non-employee directors of the Company. Additionally, the Company has cash-settled share-based compensation plans that provide for grants to employees. The Company expenses equity-based compensation, which is included in Salaries and benefits in the consolidated statements of comprehensive income, primarily on a straight-line basis over the requisite service period. The significant assumptions underlying our expense calculations include the fair value of the award on the date of grant, the estimated achievement of any performance targets and estimated forfeiture rates. The awards under equity-based compensation are classified as equity and are included as a component of equity on the Company’s consolidated balance sheets, as the ultimate payment of such awards will not be achieved through use of the Company’s cash or other assets. For the cash-settled share-based compensation, the Company recognizes a liability for the fair-value of the awards as of each reporting datedate. The liability for these awards is included within other current liabilities or other non-current liabilities in the consolidated balance sheets.sheets depending when the amounts are payable. Expense is recognized over the service period, and as the liability is remeasured at the end of each reporting period, changes in fair value are recognized as compensation cost within Salaries and benefits
in the consolidated statements of comprehensive income. The significant assumptions underlying our expense calculations include the estimated achievement of any performance targets and estimated forfeiture rates. See Note 18 — Share-based Compensation for additional information about the Company’s share-based compensation. Fixed Assets — Fixed assets are stated at cost less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of assets.
Depreciation on internally-developed software is amortized over the estimated useful life of the asset ranging from 3 to 10 years. Buildings include assets held under capitalfinance leases and are depreciated over the lesser of 50 years, the asset lives or the lease terms. Depreciation on leasehold improvements is calculated over the lesser of the useful lives of the assets or the remaining lease terms. Depreciation on furniture and equipment is calculated based on a range of 3 to 10 years.years. Land is not depreciated. Long-lived assets are tested for recoverability whenever events or changes in circumstance indicate that their carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. Recoverability is determined based on the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. See Note 87 — Fixed Assets for additional information about our fixed assets. Leases (effective from January 1, 2019) — The following policies were effective beginning with the 2019 fiscal year as a result of the adoption, on January 1, 2019, of ASC 842, Leases (‘ASC 842’). The lease policies in effect prior to 2019 are reflected in the next section. As an advisory, broking and solutions company providing services to clients in more than 140 countries, we enter into lease agreements from time to time, primarily for the use of real estate for our office space. We determine if an arrangement is a lease at the inception of the contract, and the nature of our operations is such that it is generally clear whether an arrangement contains a lease and what underlying asset is being leased. The majority of the leases into which we enter are operating leases. Upon entering into leases, we obtain the right to control the use of an identified space for a lease term and recognize these right-of-use (‘ROU’) assets on our consolidated balance sheets with corresponding lease liabilities reflecting our obligation to make the related lease payments. ROU assets are amortized over the term of the lease. Our real estate leases are generally long-term in nature, with terms that typically range from 5 to 15 years. Our most significant lease supports our London market operations with a lease term through 2032. Our real estate leases often contain options to renew the lease, either through exercise of the option or through automatic renewal. Additionally, certain leases have options to cancel the lease with appropriate notice to the landlord prior to the end of the stated lease term. As we enter into new leases after the adoption of ASC 842, we consider these options as we assess lease terms in our recognized ROU assets and lease liabilities. If we are reasonably certain to exercise an option to renew a lease, we include this period in our lease term. To the extent that we have the option to cancel a lease, we recognize our ROU assets and lease liabilities using the term that would result from using this earlier date. If a significant penalty is required to cancel the lease at an earlier date, we assess our lease term as ending at the point when no significant penalty would be due. In addition to payments for previously-agreed base rent, many of our lease agreements are subject to variable and unknown future payments, typically in the form of common area maintenance charges (a non-lease component as defined by ASC 842) or real estate taxes. These variable payments are excluded from our lease liabilities and ROU assets, and instead are recognized as lease expense within other operating expenses on the consolidated statement of comprehensive income as the amounts are incurred. To the extent that we have agreed to fixed charges for common area maintenance or other non-lease components, or our base rent increases by an index or rate (most commonly an inflation rate), these amounts are included in the measurement of our lease liabilities and ROU assets. We have elected the practical expedient under ASC 842 which allows the lease and non-lease components to be combined in our measurement of lease liabilities and ROU assets. From time to time we may enter into subleases if we are unable to cancel or fully occupy a space and are able to find an appropriate subtenant. However, entering subleases is not a primary objective of our business operations and these arrangements represent an immaterial amount of cash flows. We are required to use judgment in the determination of the incremental borrowing rates to calculate the present values of our future lease payments. Since the majority of our debt is publicly traded, our real estate function is centralized, and our treasury function is centralized and generally prohibits our subsidiaries from borrowing externally, we have determined it appropriate to use the Company’s consolidated unsecured borrowing rate, and we adjust for collateralization in accordance with ASC 842. Using the resulting interest rate curves from publicly traded debt at this collateralized borrowing rate, we select the interest rate at lease
inception by reference to the lease term and lease currency. Over 90% of our leases are denominated in U.S. dollars, Pounds sterling or Euros. Our leases generally do not subject us to restrictive covenants and contain no residual value guarantees. See Note 13 — Leases for additional information about our operating leases. Operating Leases (effective before January 1, 2019) — Rentals payable on operating leases arewere charged on a straight-line basis to Otherother operating expenses in the consolidated statements of comprehensive income over the lease terms. See Note 14 — Commitments and Contingencies for additional information about our operating leases.terms prior to the implementation of ASC 842. Goodwill and Other Intangible Assets — 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 of October 1, and whenever indicators of impairment exist. The fair values of intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value. Acquired intangible assets are amortized over the following periods: | | | | | | Amortization basis | | Expected life (years) | Client relationships | In line with underlying cash flows | | 5 to 20 | Software | In line with underlying cash flows or straight-line basis | | 4 to 7 | Product
| In line with underlying cash flows
| | 17.5
| Trademark and trade name | Straight-line basis | | 14 to 25 | Favorable agreementsOther
| Straight-lineIn line with underlying cash flows or straight-line basis
| | 7
| Management contracts
| Straight-line basis
| | 18 3 to 20
|
Prior to the adoption of ASC 842, favorable and unfavorable acquired lease agreement intangible assets and liabilities were amortized straight-line over the remaining terms of the leases. These amounts have been subsumed into the ROU assets upon adoption of ASC 842. Goodwill is tested for impairment annually as of October 1, and whenever indicators of impairment exist. Goodwill is tested at the reporting unit level, and the Company had nine8 reporting units as of October 1, 2018.2020. In the first step of the impairment test, the fair value of each reporting unit is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the amount ofdifference is recognized as an impairment loss, if any, is calculated in the second step of the impairment test by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.loss. The Company’s goodwill impairment tests for the years ended December 31, 20182020 and 20172019 have not resulted in any impairment charges. See Note 98 — Goodwill and Other Intangible Assets for additional information about our goodwill and other intangible assets. Pensions — The Company has multiple defined benefit pension and defined contribution plans. The net periodic cost of the Company’s defined benefit plans is measured on an actuarial basis using various methods and actuarial assumptions. The most significant assumptions are the discount rates (calculated using the granular approach to calculating service and interest cost) and the expected long-term rates of return on plan assets. Other material assumptions include rates of participant mortality, the expected long-term rates of compensation and pension increases and rates of employee termination. Gains and losses occur when actual experience differs from actuarial assumptions. If such gains or losses exceed ten percent of the greater of the market-related value of plan assets or the projected benefit obligation, the Company amortizes those gains or losses over the average remaining service period or average remaining life expectancy, as appropriate, of the plan participants. In accordance with U.S. GAAP, the Company records on its consolidated balance sheets the funded status of its pension plans based on the projected benefit obligation.obligation on its consolidated balance sheets.
Contributions to the Company’s defined contribution plans are recognized as incurred. Differences between contributions payable in the year and contributions actually paid are shown as either other assets or other liabilities in the consolidated balance sheets. See Note 1312 — Retirement Benefits for additional information about our pensions. Revenue Recognition (effective from January 1, 2018) — The following policies were effective for the 2018 fiscal year as a result of the adoption, on January 1, 2018, of ASC 606, Revenue From Contracts With Customers (‘ASC 606’). The revenue recognition policies in effect prior to 2018 are reflected in the next section. We recognize revenue from a variety of services, with broking, consulting and outsourced administration representing our most significant offerings. All other revenue streams, which can be recognized at either a point in time or over time, are individually less significant and are grouped in Other in our revenue disaggregation disclosures in Note 4 — Revenue. These Other revenue streams represent approximately 5%of customer contract revenue for the yearyears ended December 31, 2020, 2019 and 2018. Broking — Representing approximately 52%, 50% and 48% of customer contract revenue for the yearyears ended December 31, 2020, 2019 and 2018, respectively, in our broking arrangements, we earn revenue by acting as an intermediary in the placement of effective
insurance policies. Generally, we act as an agent and view our client to be the party looking to obtain insurance coverage for various risks, or an employer or sponsoring organization looking to obtain insurance coverage for its employees or members. Also, we act as an agent in reinsurance broking arrangements where our client is the party looking to cede risks to the reinsurance markets. Our primary performance obligation under the majority of these arrangements is to place an effective insurance or reinsurance policy, but there can also be significant post-placement obligations in certain contracts to which we need to allocate revenue. The most common of these is for claims handling or call center support. The revenue recognition method for these, after the relative fair value allocation, is described further as part of the ‘Outsourced Administration’ description below. Due to the nature of the majority of our broking arrangements, no single document constitutes the contract for ASC 606 purposes. Our services may be governed by a mixture of different types of contractual arrangements depending on the jurisdiction or type of coverage, including terms of business agreements, broker-of-record letters, statements of work or local custom and practice. This is then confirmed by the client’s acceptance of the underlying insurance contract. Prior to the policy inception date, the client has not accepted nor formally committed to perform under the arrangement (i.e. pay for the insurance coverage in place). Therefore in the majority of broking arrangements, the contract date is the date the insurance policy incepts. However, in certain instances such as employer-sponsored Medicare broking or Affinity arrangements, where the employer or sponsoring organization is our customer, client acceptance of underlying individual policy placements is not required, and therefore the date at which we have a contract with a customer is not dependent upon placement. As noted, our primary performance obligations typically consist of only the placement of an effective insurance policy which precedes the inception date of the policy. Therefore, most of our fulfillment costs are incurred before we can recognize revenue, and are thus deferred during the pre-placement process. Where we have material post-placement services obligations, we estimate the relative fair value of the post-placement services using either the expected cost-plus-margin or the market assessment approach. Fees forRevenue from our broking services consistconsists of commissions or fees negotiated in lieu of commissions. At times, we may receive additional income for performing these services from the insurance and reinsurance carriers’ markets, which is collectively referred to as ‘market derived income’. 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.policy term. For employer-sponsored 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 employer-sponsored Medicare broking and proportional treaty reinsurance broking 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). This is an area requiring significant judgment and results 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 treaty statements, or as other information becomes available.
We recognize revenue for most broking arrangements as of a point in time at the later of the policy inception date or when the policy placement is complete, because this is viewed as the date when control is transferred to the client. For employer-sponsored Medicare broking, we recognize revenue over time, as we stand ready under our agreements to place retiree Medicare coverage. For this type of broking arrangement, we recognize the majority of our placement revenue in the fourth quarter of the calendar year when the majoritymost of the placement or renewal activity occurs. Beginning on July 30, 2019 with the acquisition of TRANZACT (see Note 3 — Acquisitions and Divestitures), we have a direct-to-consumer Medicare broking offering. The contractual arrangements in this offering differ from our previously existing employer-sponsored Medicare broking offering described above. The governing contracts in our direct-to-consumer Medicare broking offering are the contractual arrangements with insurance carriers, for whom we act as an agent, that provide compensation in return for issued policies. Once an application is submitted to a carrier, our obligation is complete, and we have no ongoing fulfilment obligations. We receive compensation from carriers in the form of commissions, administrative fees and marketing fees in the first year, and depending on the type of policy issued, we may receive renewal commissions for up to 25 years, provided the policies are renewed for such periods of time. Because our obligation is complete upon application submission to the carrier, we recognize revenue at that date, which includes both compensation due to us in the first year as well as an estimate of the total renewal commissions that will be received over the lifetime of the policy. This variable consideration estimate 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, and includes an element of ‘constraint’ as defined by ASC 606 such that no significant reversal is expected to occur in the future. Actual results will differ from these estimates. The timing of renewal payments in our direct-to-consumer Medicare broking offering is reflective of regulatory restrictions and insurance carriers’ protection for cancellations and varies based on policy holder decisions that are outside of the control of both the
Company and the insurance carriers. As such, the estimate of these renewal commissions receivables has not been discounted to reflect a significant financing component. Consulting — We earn revenue for advisory and consulting work that may be structured as different types of service offerings, including annual recurring projects, projects of a short duration or stand-ready obligations. Collectively, our consulting arrangements represent approximately 30%, 32% and 34% of customer contract revenue for the yearyears ended December 31, 2018.2020, 2019 and 2018, respectively. We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. In assessing our performance obligations, our consulting work is typically highly integrated, with the various promised services representing inputs of the combined overall output. We view these arrangements to representas representing a single performance obligation. To the extent we do not integrate our services, as is the case with unrelated services that may be sourced from different areas of our business, we consider these separate performance obligations. Fee terms can be in the form of fixed-fees (including fixed-fees offset by commissions), time-and-expense fees, commissions, per-participant fees, or fees based on assets under management. Payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination. The majority of our revenue from these consulting engagements is recognized over time, either because our clients are simultaneously receiving and consuming the benefits of our services, or because we have an enforceable right to payment for performance rendered to date. Additionally, from time to time, we may be entitled to an additional fee based on achieving certain performance criteria. To the extent that we cannot estimate with reasonable assurance the likelihood that we will achieve the performance target, we will ‘constrain’ this portion of the transaction price and recognize it when or as the uncertainty is resolved. We use different progress measures to determine our revenue depending on the nature of the engagement: Annual recurring projects and projects of short duration. These projects are typically straightforward and highly predictable in nature with either time-and-expense or fixed fee terms. Time-and-expense fees are recognized as hours or expenses are incurred using the ‘right to invoice’ practical expedient allowed under ASC 606. For fixed-fee arrangements, to the extent estimates can be made of the remaining work required under the arrangement, revenue is based upon the proportional performance method, using the value of labor hours compared to the estimated total value of labor hours. We believe that cost represents a faithful depiction of transfer of value because the completion of these performance obligations is based upon the professional services of employees of differing experience levels and thereby costs. It is appropriate that satisfaction of these performance obligations considers both the number of hours incurred by each employee and the value of each labor hour worked (as opposed to simply the hours worked).
| • | Annual recurring projects and projects of short duration. These projects are typically straightforward and highly predictable in nature with either time-and-expense or fixed fee terms. Time-and-expense fees are recognized as hours or expenses are incurred using the ‘right to invoice’ practical expedient allowed under ASC 606. For fixed-fee arrangements, to the extent estimates can be made of the remaining work required under the arrangement, revenue is based upon the proportional performance method, using the value of labor hours spent to date compared to the estimated total value of labor hours for the entire engagement. We believe that cost represents a faithful depiction of the transfer of value because the completion of these performance obligations is based upon the professional services of employees of differing experience levels and thereby costs. It is appropriate that satisfaction of these performance obligations considers both the number of hours incurred by each employee and the value of each labor hour worked (as opposed to simply the hours worked). |
Stand-ready obligations. These projects consist of repetitive monthly or quarterly services performed consistently each period. As none of the activities provided under these services are performed at specified times and quantities, but at the discretion of each customer, our obligation is to stand ready to perform these services on an as-needed basis. These arrangements represent a ‘series’ performance obligation in accordance with ASC 606. Each time increment (i.e. each month or quarter) of standing ready to provide the overall services is distinct and the customer obtains value from each period of service independent of the other periods of service.
| • | Stand-ready obligations. These projects consist of repetitive monthly or quarterly services performed consistently each period. As none of the activities provided under these services are performed at specified times and quantities, but at the discretion of each customer, our obligation is to stand ready to perform these services on an as-needed basis. These arrangements represent a ‘series’ performance obligation in accordance with ASC 606. Each time increment (i.e., each month or quarter) of standing ready to provide the overall services is distinct and the customer obtains value from each period of service independent of the other periods of service. |
Where we recognize revenue on a proportional performance basis, 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 stage 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. Outsourced Administration — We provide customized benefits outsourcing and co-sourcing solutions services in relation to the administration of defined benefit, defined contribution, and health and welfare plans. These plans are sponsored by our clients to provide benefits to their active or retired employees. Additionally, these services include operating call centers and may include providing access to, and managing, a variety of consumer-directed savings accounts. The operation of call centers and consumer-directed accounts can be provisioned as part of an ongoing administration or solutions service, or separately as part of a broking arrangement. The products and services available to all clients are the same, but the selections by thea client can vary and portray customized products and services based on the customer’s specific needs. Our services
often include the use of proprietary systems
that are configured for each of our clients’ needs. In total, our outsourced administration services represent approximately 12% of customer contract revenue for the yearyears ended December 31, 2020, 2019 and 2018. These contracts typically consist of an implementation phase and an ongoing administration phase: Implementation phase. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer, and therefore costs are deferred during this phase of the arrangement. Since these arrangements are longer term in nature and subject to more changes in scope as the project progresses, our contracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of implementation.
| • | Implementation phase. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer, and therefore costs are deferred during this phase of the arrangement. Since these arrangements are longer term in nature and subject to more changes in scope as the project progresses, our contracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of implementation. |
Ongoing administration phase. The ongoing administration phase includes a variety of plan administration services, system hosting and support services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our health and welfare arrangements, annual onboarding and enrollment support. While there are a variety of activities performed, the overall nature of the obligation is to provide an integrated outsourcing solution to the customer. The arrangement represents a stand-ready obligation to perform these activities on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or each benefits cycle in our health and welfare arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services represent a ‘series’ in accordance with ASC 606 and are deemed one performance obligation.
| • | Ongoing administration phase. The ongoing administration phase includes a variety of plan administration services, system hosting and support services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our health and welfare arrangements, annual onboarding and enrollment support. While there are a variety of activities performed, the overall nature of the obligation is to provide an integrated outsourcing solution to the customer. The arrangement represents a stand-ready obligation to perform these activities on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or each benefits cycle in our health and welfare arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services represent a ‘series’ in accordance with ASC 606 and are deemed one performance obligation. |
We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. Fees for these arrangements can be fixed, per-participant-per-month, or in the case of call center services, provided in conjunction with our broking services, with an allocation based on commissions. Our fees are not typically payable until the commencement of the ongoing administration phase. However, in our health and welfare arrangements, we begin transferring services to our customers approximately four months prior to payments being due as part of our annual onboarding and enrollment work. Although our per-participant-per-month and commission-based fees are considered variable, they are typically predictable in nature, and therefore we generally do not ‘constrain’ any portion of our transaction price estimates. Once fees become payable, payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination. Revenue is recognized over time as the services are performed because our clients are simultaneously receiving and consuming the benefits of our services. For our health and welfare arrangements where each benefits cycle represents a time increment under the series guidance, revenue is recognized based on proportional performance. We use an input measure (value of labor hours worked) as the measure of progress. Given that the service is stand-ready in nature, it can be difficult to predict the remaining obligation under the benefits cycle. Therefore, the input measure is based on the historical effort expended each month, which is measured as labor cost. This results in slightly more revenue being recognized during periods of annual onboarding since we are performing both our normal monthly services and our annual services during this portion of the benefits cycle. For all other outsourced administration arrangements where a month represents our time increment under the series guidance, we allocate transaction price to the month we are performing our services. Therefore, the amount recognized each month is the variable consideration related to that month plus the fixed monthly or annual fee. The fixed monthly or annual fee is recognized on a straight-line basis. Revenue recognition for these types of arrangements is therefore more consistent throughout the year. Reimbursed expenses — Client reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included in revenue, and an equivalent amount of reimbursable expenses is included in other operating expenses as a cost of revenue as incurred. Reimbursed expenses represented approximately 1% of customer contract revenue for the yearyears ended December 31, 2020, 2019 and 2018. Taxes collected from customers and remitted to government authorities are recorded net and are excluded from revenue. Revenue Recognition(effective before January 1, 2018) — Revenue included insurance commissions, fees in lieu of commission, fees for consulting services rendered, hosted and delivered software, survey sales, interest and other income.
Revenue recognized in excess of billings was recorded as unbilled accounts receivable. Cash collections in excess of revenue recognized were recorded as deferred revenue until the revenue recognition criteria were met. Client reimbursable expenses,
including those relating to travel, other out-of-pocket expenses and any third-party costs, were included in revenue, and an equivalent amount of reimbursable expenses was included in other operating expenses as a cost of revenue. Taxes collected from customers and remitted to government authorities were recorded net and were excluded from revenue.
Commissions revenue. Brokerage commissions and fees negotiated in lieu of commissions were recognized at the later of the policy inception date or when the policy placement was complete. In situations in which our fees were not fixed and determinable due to the uncertainty of the commission fee per policy, we recognized revenue as the fees were determined. Commissions on additional premiums and adjustments were recognized when approved by or agreed between the parties and collectability was reasonably assured.
Consulting revenue. The majority of our consulting revenue consisted of fees earned from providing consulting services. We recognized revenue from these consulting engagements when hours were worked, either on a time-and-expense basis or on a fixed-fee basis, depending on the terms and conditions defined at the inception of an engagement with a client. We had engagement letters with our clients that specified the terms and conditions upon which the engagements were based. These terms and conditions could only be changed upon agreement by both parties. Individual billing rates were principally based on a multiple of salary and compensation costs.
Revenue for fixed-fee arrangements was based upon the proportional performance method to the extent estimates could be made of the remaining work required under the arrangement. If we did not have sufficient information to estimate proportional performance, we recognized the fees straight-line over the contract period. We typically had four types of fixed-fee arrangements: annual recurring projects, projects of a short duration, stand-ready obligations and non-recurring system projects.
Annual recurring projects and projects of short duration. These projects were typically straightforward and highly predictable in nature. As a result, the project manager and financial staff were able to identify, as the project status was reviewed and bills were prepared monthly, the occasions when cost overruns could lead to the recording of a loss accrual.
Stand-ready obligations. Where we were entitled to fees (whether fixed or variable based on assets under management or a per-participant per-month basis) regardless of the hours, we generally recognized this revenue on either a straight-line basis or as the variable fees were calculated.
Non-recurring system projects. These projects were longer in duration and subject to more changes in scope as the project progressed. Certain software or outsourced administration contracts generally provided that if the client terminated a contract, we were entitled to an additional payment for services performed through termination designed to recover our up-front cost of implementation.
Revenue recognition for fixed-fee engagements was affected by a number of factors that changed the estimated amount of work required to complete the project such as changes in scope, the staffing on the engagement and/or the level of client participation. The periodic engagement evaluations required us to make judgments and estimates regarding the overall profitability and stage of project completion that, in turn, affected how we recognized revenue. We recognized a loss on an engagement when estimated revenue to be received for that engagement was less than the total estimated costs associated with the engagement. Losses were recognized in the period in which the loss became probable and the amount of the loss was reasonably estimable.
Hosted software. We develop various software programs and technologies that we provide to clients in connection with consulting services. In most instances, such software is hosted and maintained by us and ownership of the technology and rights to the related code remain with us. We deferred costs for software developed to be utilized in providing services to a client, but for which the client did not have the contractual right to take possession, during the implementation stage. We recognized these deferred costs from the go-live date, signaling the end of the implementation stage, until the end of the initial term of the contract with the client. We determined that the system implementation and customized ongoing administrative services were one combined service. Revenue was recognized over the service period, after the go-live date, on a straight-line basis. As a result, we did not recognize revenue during the implementation phase of an engagement.
Delivered software. We deliver software under arrangements with clients who take possession of our software. The maintenance associated with the initial software fees is a fixed percentage which enabled us to determine the stand-alone value of the delivered software separate from the maintenance. We recognized the initial software fees as software was delivered to the client, and we recognized the maintenance fees ratably over the contract period based on each element’s
relative fair value. For software arrangements in which initial fees were received in connection with mandatory maintenance for the initial software license to remain active, we determined that the initial maintenance period was substantive. Therefore, we recognized the fees for the initial license and maintenance bundle ratably over the initial contract term, which was generally one year. Each subsequent renewal fee was recognized ratably over the contractually-stated renewal period.
Surveys. We collect, analyze and compile data in the form of surveys for our clients who have the option of participating in the survey. The surveys are published online via a web tool that provides simplistic functionality. We determined that the web tool was inconsequential to the overall arrangement. We recorded the survey revenue when the results were delivered online and made available to our clients who had a contractual right to the data. If the data was updated more frequently than annually, we recognized the survey revenue ratably over the contractually-stated period.
Interest income— Interest income is recognized as earned. Other income — Other income includes gains on disposal of intangible assets, which primarily arise from settlements through enforcing non-compete agreements in the event of losing accounts through producer defection or the disposal of books of business. Cost to obtain or fulfill contracts (effective from January 1, 2018)— Costs to obtain customers include commissions for brokers under specific agreements that would not be incurred without a contract being signed and executed. The Company has elected to apply the ASC 606 ‘practical expedient’ which allows us to expense these costs as incurred if the amortization period related to the resulting asset would be one year or less. The Company has no significant instances of contracts that would be amortized for a period greater than a year, and therefore has no contract costs capitalized for these arrangements.
Costs to fulfill include costs incurred by the Company that are expected to be recovered within the expected contract period. The costs associated with our system implementation activities and consulting contracts are recorded through time entry. For our broking business, the Company must estimate the fulfillment costs incurred during the pre-placement of the broking contracts. These judgments include: which activities in the pre-placement process should be eligible for capitalization;
| • | which activities in the pre-placement process should be eligible for capitalization; |
the amount of time and effort expended on those pre-placement activities;
| • | the amount of time and effort expended on those pre-placement activities; |
the amount of payroll and related costs eligible for capitalization; and,
| • | the amount of payroll and related costs eligible for capitalization; and, |
the monthly timing of underlying insurance and reinsurance policy inception dates.
| • | the monthly or quarterly timing of underlying insurance and reinsurance policy inception dates. |
We amortize costs to fulfill over the period we receive the related benefits. For broking pre-placement costs, this is typically less than a year. In our system implementation and consulting arrangements, we include the likelihood of contract renewals in our estimate of the amortization period, resulting in most costs being amortized for a greater length of time than the initial contract term. Recent Accounting Pronouncements Not yet adopted for 2020 In FebruaryDecember 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which clarifies and amends existing guidance, including removing certain exceptions to the general principles of accounting for income taxes. This ASU becomes effective for the Company on January 1, 2021. Some of the changes must be applied on a retrospective or modified retrospective basis while others must be applied on a prospective basis. Early adoption is permitted. The Company does not plan to adopt this ASU early and does not expect it to have a material impact on our consolidated financial statements. Adopted for 2020 In June 2016, the FASB issued ASU No. 2016-02, Leases, 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires a lessee to recognize inamended the statementguidance on the impairment of financial position a liabilityinstruments. The ASU added an impairment model (known as the current expected credit loss (‘CECL’) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses on assets measured at amortized cost, which is intended to make lease payments (the lease liability) and a right-of-use asset representing its rightresult in more timely recognition of such losses. The ASU was also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the underlying assetASU made targeted changes to the impairment model for the lease term.available-for-sale debt securities. Additional ASUs have since beenwere subsequently issued which provideprovided amended and additional guidance for the implementation of ASU No. 2016-02.2016-13. All related guidance has been codified into, and is now known as, ASC 842, Leases (‘326, Financial Instruments—Credit Losses (‘ASC 842’326’). ASC 842326 became effective for the Company at the beginning of its 2019 calendar year,on January 1, 2020, at which time the Companywe adopted it.
As This ASU did not have a result of finalizing and analyzingmaterial impact on our inventory of lease agreements to determine the full impact this standard will have on the consolidated financial statements, processes and systems, the Company has determined the following:statements.
The Company will adopt the standard using the modified retrospective approach whereby it will recognize a transition adjustment at the effective date of ASC 842, January 1, 2019, rather than at the beginning of the earliest comparative period presented.
We will reflect additional operating lease liabilities at the transition date of approximately $1.2 billion, as well as right-of-use assets of approximately $1.0 billion and an immaterial adjustment to retained earnings.
We have assessed the transition practical expedients available under the guidance and, in addition to selecting the modified retrospective transition approach as noted above, we have made the following elections:
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| Practical expedient package - We have elected this package, and therefore we will not reassess lease classification for our existing or expired leases, whether any existing or expired contracts contain a lease, or our treatment of any initial direct costs.
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| Hindsight practical expedient – We have elected this practical expedient, and therefore will not revisit our estimate of lease terms upon transition to ASC 842.
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| Short-term lease exemption – We have elected this exemption, and will therefore not recognize any right-of-use assets or liabilities for short-term leases (generally defined as having a term of 12 months or less) on our consolidated balance sheet.
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| Separation of lease and non-lease components – We have elected the practical expedient to not separate the cash flows associated with lease and non-lease components in our lease accounting and resulting amounts recorded in our consolidated financial statements.
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Additionally, to prepare for the other required disclosures and new accounting treatment, the Company has implemented additional tools for its lease accounting and data collection processes, which were in place and effective on January 1, 2019.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, currentprevious U.S. GAAP requiresrequired the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would beis required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomesbecame effective for the Company on January 1, 2020.2020, at which time we adopted it. The amendments in this ASU should beare applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017, and the Company is still evaluating when to adopt this ASU. The Company does not expect anThere was no immediate impact to itsour consolidated financial statements upon adopting this ASU, sinceand the most recent Step 1 goodwill impairment test resulted in fair values in excess of carrying values for all reporting units at October 1, 2018. In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which provides amendments under six specific objectives to better align risk management activities and financial reporting, and to simplify disclosure, presentation, hedging and the testing and measurement of ineffectiveness. The ASU became effective for the Company on January 1, 2019, at which time we adopted it. The Company does not believe adopting this ASU will have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for a reclassification from accumulated other comprehensive income to retained earnings for ‘stranded’ tax effects (those tax effects of items within accumulated other comprehensive income resulting from the historical corporate income tax rate reduction) resulting from U.S. Tax Reform. The amendments within this ASU also require certain disclosures about stranded tax effects. The
ASU became effective for the Company on January 1, 2019, at which time we adopted it. This ASU did not have a material impact on our consolidated financial statements.2020.
In August 2018, the FASB issued two ASU’sASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement as part of its disclosure framework project. The focus of this project is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of an entity’s financial statements. Both of these ASU’s removeThis ASU removes certain disclosure requirements and addadds or modifymodifies other requirements. The two ASU’s are as follows: This ASU No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement – was effective for the Company on January 1, 2020, although early adoption is permitted immediately. Additionally, companies are permitted to immediately adopt the removal or modifications of disclosures as provided in this ASU, and adopt the additional disclosures on the effective date of the ASU.at which time we adopted it. Certain provisions of the ASU mustwere required to be adopted retrospectively, while others must be adopted prospectively. The Company is still assessing when and how it will adopt this ASU, but does not expect there to be a material impact to the notes to the consolidated financial statements. ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans – this ASU will impact certain 10-K disclosures and will be effective for the Company for its 2020 Annual Report on Form 10-K. Early adoption is permitted and must be applied on a retrospective basis. The Company is still assessing when it will adopt this ASU, but does not expect there to be a material impact to the notes to the consolidated financial statements.
Adopted
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires implementation costs, in a hosting arrangement that is a service contract, to be capitalized consistent with the rules in ASC 350-40, Intangibles—Goodwill and Other—Internal-Use Software. Costs incurred during the application development stage are to be capitalized and expensed according to their nature, while costs incurred during the preliminary project and post-implementation stages are to be expensed. This ASU also contains guidance with regard to the amortization period, impairment and presentation within the financial statements. The ASU iswere required to be adopted by the Company during 2020, however early adoption is allowed in an interim period before then, and may be applied retrospectively or prospectively to applicable costsprospectively. This ASU did not have a material impact on the Company’snotes to our consolidated financial statements. The Company adopted this ASU prospectively during the fourth quarter of 2018, which began on October 1. The impact of this ASU is not material.
In August 2018,March 2020, the SEC issued a final rule that amended certain of itsamends the disclosure requirements related to certain registered securities under SEC Regulation S-X, Rules 3-10 and 3-16 which currently require separate financial statements for subsidiary issuers and guarantors of registered debt securities unless certain exceptions are met, and affiliates that have become redundant, duplicative or superseded in light of other SEC disclosure requirements, changes in U.S. GAAP, or other information that has become widely available. As partcollateralize registered securities offerings if the affiliates’ securities are a substantial portion of the SEC’s overall effort to improve the effectivenesscollateral. The final rule is generally effective for filings on or after January 4, 2021, however early application is permitted. The most pertinent portions of financial reporting requirements, the amendments contained in the final rule were intendedthat are currently applicable to facilitate the disclosureCompany include: (i) replacing the previous requirement under Rule 3-10 to provide condensed consolidating financial information in the registrant’s financial statements with a requirement to provide alternative financial disclosures (which include summarized financial information of the parent and any issuers and guarantors, as well as other qualitative disclosures) in either the registrant’s Management’s Discussion & Analysis section or its financial statements; and, (ii) reducing the periods for which summarized financial information is required to investorsthe most recent annual period and simplify compliance without significantly alteringyear-to-date interim period. The Company elected to early-adopt the total mixprovisions of information provided to investors. Certain amendments affect this Annual Report on Form 10-K, while others were reflected initially in our Quarterly Report on Form 10-Q filed on November 2, 2018. Specifically, the final rule changes to annual requirements which have been reflected induring the three months ended March 31, 2020. Further, the new reduced quantitative disclosures and accompanying qualitative disclosures as required by this final rule are included within Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operationson this Form 10-K include the elimination of the ratio of earnings to fixed charges schedule, as well as changes to the market price information and geographic data contained in Parts I and II of this Form 10-K. None of these changes have a significant impact to our Form 10-K. In May 2014,March 2020, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers.2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for accounting for contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The new standard supersedes most current revenue recognition guidanceamendments apply only to contracts, hedging relationships and eliminates most industry-specific guidance. The ASU is based on the principleother transactions that an entity should recognize revenue to depict the transfer of goodsreference LIBOR or services to customers in an amount that reflects the consideration to which the entity expectsanother reference rate expected to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertaintydiscontinued because of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities had the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. Additional ASUs have since been issued which provide further guidance, examples and technical corrections for the implementation of ASU No. 2014-09. All related guidance has been codified into, and is now known as, ASC 606. The guidance was effective for, and was adopted by, the Company as of January 1, 2018 using the modified retrospective method, and has a material impact on the consolidated financial statements and their accompanying
notes containing our 2018 information. A full description of each impact, as well as the new disclosures required by ASC 606, is discussed in Note 4 — Revenue.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities to (1) disaggregate the current service-cost component from the other components of net benefit cost (the ‘other components’) and present it in the income statement with other current compensation costs for related employees and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented or included in appropriately-described separate lines. Thereference rate reform. This ASU became effective for the Company on March 12, 2020. The Company may apply the changes relating to contracts from January 1, 2018,2020 or from a later date. The Company has made no contract modifications thus far to transition to a different reference rate, however, it will consider this guidance as future modifications are made.
In August 2020, the SEC issued amendments to its disclosure rules to modernize the requirements in Regulation S-K, Item 101 ‘Business’, Item 103 ‘Legal Proceedings’, and itItem 105 ‘Risk Factors’. These amendments are intended to improve the readability of disclosures, reduce repetition, and eliminate immaterial information, thereby simplifying compliance for registrants and making disclosures more meaningful for investors. The amendments to the disclosure requirements related to a registrant’s description of its business and risk factors are intended to expand the use of a principles-based approach that gives registrants more flexibility to tailor disclosures. The amendments to the disclosure requirements related to legal proceedings continue to reflect the current, more prescriptive approach because those requirements depend less on a registrant’s specific characteristics. Further, additional human capital disclosures are required as part of the amendments to the description of the business. The final rule became effective on November 9, 2020, and the Company has incorporated these changes as part of this Form 10-K. In November 2020, the SEC issued amendments to its disclosure rules to modernize the requirements in Regulation S-K, Item 301 ‘Selected Financial Data’, Item 302 ‘Supplementary Financial Information’ and Item 303 ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’. Like the previous modernization amendments to Regulation S-K, the amendments are intended to eliminate duplicative disclosures and enhance management’s discussion and analysis for the benefit of investors, while simplifying compliance efforts for registrants. Certain amendments codified interpretive guidance released by the SEC historically, and as such, these amendments were already reflected in the Company’s Form 10-K. The most impactful of these amendments to the disclosure requirements include the following: registrants are no longer required to provide selected financial data for each of the last five fiscal years; registrants are generally not required to disclose selected quarterly financial data for each of the most recent two fiscal years, unless there is a material retrospective change to any of these quarters; and the removal of the requirement for separate sections and certain tabular disclosures of future obligations, off-balance sheet obligations and material commitments for capital expenditures, and instead emphasizes that these obligations should be discussed as part of the results of operations and liquidity discussions of cash requirements in the next fiscal year and beyond. The final rule became effective on February 10, 2021 and must be applied the standard retrospectively in thisa registrant’s Annual Report on Form 10-K for its first fiscal year ending on or after August 9, 2021, however early adoption is allowed on an item-by-item basis. The Company has incorporated these changes as part of this Form 10-K. As Note 3— Acquisitions and Divestitures The following disclosures discuss significant transactions during the three-year period ended December 31, 2020. Acquisitions TRANZACT Acquisition On July 30, 2019, the Company acquired TRANZACT, a U.S.-based provider of comprehensive, direct-to-consumer sales and marketing solutions for leading insurance carriers in the U.S. TRANZACT leverages digital, data and direct marketing solutions to deliver qualified leads, fully-provisioned sales and robust customer management systems to brands seeking to acquire and manage large numbers of consumers. Pursuant to the terms of the acquisition agreement, subject to certain adjustments, the consideration
consisted of $1.3 billion paid in cash at closing. Additional contingent consideration in the form of a potential earn-out of up to $17 million is to be paid in cash in 2021 based on the achievement of certain financial targets. The acquisition was initially funded in part with a $1.1 billion one-year term loan (see Note 10 — Debt for a description of the term loan and its repayment), with the remainder being funded from the Company’s existing revolving credit facility. TRANZACT operates as part of our Benefits Delivery and Administration segment and enhances the Company’s existing Medicare broking offering, while also adding significant direct-to-consumer marketing experience. A summary of the fair values of the identifiable assets acquired, and liabilities assumed, of TRANZACT at July 30, 2019 are summarized in the following table. Cash and cash equivalents | | $ | 7 | | Restricted cash | | | 2 | | Accounts receivable, net | | | 3 | | Renewal commissions receivable, current (i) | | | 36 | | Prepaid and other current assets | | | 22 | | Renewal commissions receivable, non-current (i) | | | 130 | | Fixed assets | | | 9 | | Intangible assets | | | 646 | | Goodwill | | | 718 | | Right-of-use assets | | | 19 | | Other non-current assets | | | 2 | | Collateralized facility (ii) | | | (91 | ) | Other current liabilities | | | (55 | ) | Deferred tax liabilities, net | | | (100 | ) | Lease liabilities | | | (19 | ) | Net assets acquired | | $ | 1,329 | |
______________ (i) | Renewal commissions receivables arise from direct-to-consumer Medicare broking sales. Cash collections for these receivables are expected to occur over a period of several years. Due to the provisions of ASC 606, these receivables are not discounted for a significant financing component when initially recognized (see Note 2 – Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements). However, as a result of recognizing the fair value of these receivables in accordance with ASC 805, these receivables have now been present-valued at the acquisition date. Prior to this fair value adjustment, the carrying value of these receivables was $231 million. The adjusted values of these acquired renewal commissions receivables will be included in prepaid and other current assets or other non-current assets, as appropriate, on the consolidated balance sheets. The acquired renewal commissions receivables will be accounted for prospectively using the cost-recovery method in which future cash receipts will initially be applied against the acquisition date fair value until the value reaches zero. Any cash received in excess of the fair value determined at acquisition will be recorded to earnings when it is received at a future date. |
(ii) | See Note 10— Debt for a description of the acquired collateralized facility debt. |
Intangible assets consist primarily of $612 million of customer relationships, with an expected life of 15.4 years. Additional intangibles acquired consist of domain names. Goodwill is calculated as the difference between the aggregate consideration and the acquisition date fair value of the net assets acquired, including the intangible assets acquired, and represents the value of TRANZACT’s assembled workforce and the future economic benefits that we expect to achieve as a result of adopting this ASU, the Company classified or reclassified net periodic pension and postretirement benefit credits totaling $280 million, $222 million and $203 million for the years ended December 31, 2018, 2017 and 2016, respectively, from salaries and benefits expense to other income, net, in the consolidated statements of comprehensive income. In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU requires that an entity should account for the effects of a modification unless the fair value (or calculated value or intrinsic value, if used), vesting conditions and classification (as equity or liability)acquisition. None of the modified award are allgoodwill recognized on the same as for the original award immediately before the modification. The ASU became effective for the Company on January 1, 2018 andtransaction is tax deductible, however there is tax deductible goodwill that will be applied prospectively to any award modified on or after this date. There is no immediate impact to the accompanying consolidated financial statements, until such time as an award may be modified in 2019 or beyond.carried forward from previous acquisitions by TRANZACT.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which amends guidance on presentation and classification of eight specific cash flow issues with the objective of reducing diversity in practice. The ASU became effective for the Company on January 1, 2018 on a prospective basis. While there was no impact to the consolidated statement of cash flows forDuring the year ended December 31, 2018,2020, purchase price allocation adjustments were made primarily to adjust the Company will reflect the new guidance prospectivelydeferred tax liabilities. The purchase price allocation as applicable transactions occur.
Note 3—Merger,Acquisitions and Divestitures
The following paragraphs describe significant transactions during the three year period ending December 31, 2018. There have been other less significant transactions during this time period which have not been discussed.
Merger
On January 4, 2016, pursuant to the Agreement and Plan of Merger, dated June 29, 2015, as amended on November 19, 2015, between Willis, Towers Watson, and Citadel Merger Sub, Inc., a wholly-owned subsidiary of Willis formed for the purpose of facilitating this transaction (‘Merger Sub’), Merger Sub merged with and into Towers Watson, with Towers Watson continuing as the surviving corporation and as a wholly-owned subsidiary of Willis.
Towers Watson was a leading global professional services firm operating throughout the world, dating back more than 100 years. The Merger allows the combined firm to go to market with complementary strategic product and services offerings.
At the effective time of the Merger (the ‘Effective Time’), each issued and outstanding share of Towers Watson common stock (the ‘Towers Watson shares’), was converted into the right to receive 2.6490 validly issued, fully paid and nonassessable ordinary shares of Willis (the ‘Willis ordinary shares’), $0.000115 nominal value per share, other than any Towers Watson shares owned by Towers Watson, Willis or Merger Sub at the Effective Time and the Towers Watson shares held by stockholders who are entitled to and who properly exercised dissenter’s rights under Delaware law.
The Merger was accounted for using the acquisition method of accounting, with Willis considered the accounting acquirer of Towers Watson.
The table below presents the final calculation of aggregate Merger consideration.
| | January 4, 2016 | | Number of shares of Towers Watson common stock outstanding as of January 4, 2016 | | 69 million | | Exchange ratio | | | 2.6490 | | Number of Willis Group Holdings shares issued (prior to reverse stock split) | | 184 million | | Willis Group Holdings price per share on January 4, 2016 | | $ | 47.18 | | Fair value of 184 million Willis ordinary shares | | $ | 8,686 | | Value of equity awards assumed | | | 37 | | Aggregate Merger consideration | | $ | 8,723 | |
The Company acquired cash and cash equivalents of $476 million as a result of the Merger.
Acquisitionsdate is now complete.
Alston Gayler Acquisition On December 21, 2018, the Company, through its majority-owned subsidiary, Miller, completed the transaction to acquire Alston Gayler, a U.K.-based insurance and reinsurance broker, for total consideration of $67 million. Cash consideration of $35 million was paid upon completion of the acquisition, with the remaining $32 million deferred consideration to be paid in equal installments on the first, second and third anniversaries of the date of acquisition. As part of our forthcoming Miller divestiture (see discussion below), the Alston Gayler business is expected to be divested during the first quarter of 2021. The Company has preliminarily recognized $36 million of intangible assets, primarily arising from client relationships, and $24 million of goodwill. The purchase price allocation as of the acquisition date and our accounting for the related tax assets and liabilitiesthis transaction is not yet complete. Divestitures
Related Party Transaction - In the third quarter of 2017, the Company divested its Global Wealth Solutions business through a sale to an employee of the business. As part of that transaction, we financed a $50 million note payable from the employee to purchase the business. The note amortizes over 10 years, bears interest at a weighted-average rate of 3% and is guaranteed by $3 million in assets. Following the sale, employees of this business are no longer employees of the Company, and the purchasing employee is no longer considered a related party. The current and non-current portions of the note receivable are
included in the tables found in Note 15 — Supplementary Information for Certain Balance Sheet Accounts to these consolidated financial statements as Other current assets and Acquisitions
Other non-current assets. 2017 Cumulative Divestiture Impact - Including the divestiture of Global Wealth Solutions, we sold five businessesacquisitions were completed during the second half of 2017. For the year ended December 31, 2017,2020 for combined cash payments of $79 million and contingent consideration fair valued at $9 million.
Max Matthiessen Divestiture In September 2020, the Company completed the transaction to sell its Swedish majority-owned subsidiary MM Holding AB (‘Max Matthiessen’) for total consideration of SEK 2.3 billion ($262 million) plus certain other adjustments, resulting in a tax-exempt gain recognized related to business disposals was $13on the sale of $86 million, which was recordedis included in Other income, net on the accompanying consolidated statements of comprehensive income. Results from these disposals prior to the sales represented $54 million of revenue and $13 million of operating income for the year ended December 31, 2017. Note 4 — Revenue
As of January 1, 2018, the Company adopted ASC 606. The adoption of this new guidance had a material impact to the amounts and classification of certain balances within our consolidated financial statements and disclosures in the accompanying notes.
We adopted ASC 606 using the modified retrospective approach, and elected to apply the following ‘practical expedients’ during adoption:
We elected to apply the new standard only to contracts that were not completed as of the transition date. This had the net effect of reducing revenue recognized under ASC 606 due to the change in method in our Health and Benefits broking business. See a further discussion and quantification for the annual results below.
We elected to reflect the aggregate effect of all modifications made to contracts prior to the transition date, January 1, 2018, rather than retrospectively restating the contracts for each of these modifications.
We recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative periods included within this Annual Report on Form 10-K have not been restated and continue to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 were as follows:
Balance Sheet | | Balance at December 31, 2017 | | | Adjustments due to ASC 606 | | Balance at January 1, 2018 | | ASSETS | | | | | | | | | | | | | | Accounts receivable, net | | $ | 2,246 | | | $ | 309 | | a | | $ | 2,555 | | Prepaid and other current assets | | | 430 | | | | 89 | | b | | | 519 | | Fixed assets, net | | | 985 | | | | (83 | ) | c | | | 902 | | Other non-current assets | | | 447 | | | | 39 | | c | | | 486 | | LIABILITIES | | | | | | | | | | | | | | Deferred revenue and accrued expenses | | | 1,711 | | | | (74 | ) | d | | | 1,637 | | Deferred tax liabilities | | | 615 | | | | 99 | | e | | | 714 | | Provision for liabilities | | | 558 | | | | 12 | | f | | | 570 | | EQUITY | | | | | | | | | | | | | | Retained earnings | | | 1,104 | | | | 317 | | g | | | 1,421 | |
In accordance with the modified retrospective adoption requirements of ASC 606, the following disclosures represent the impact of adoption on our consolidated statement of comprehensive income, balance sheet and statement of cash flows:
| | Year Ended December 31, 2018 | Statement of Comprehensive Income | | As Reported | | | Balances Without Adoption of ASC 606 | | | Effect of Change | Revenue | | $ | 8,513 | | | $ | 8,613 | | | $ | (100 | ) | h | Costs of providing services | | | | | | | | | | | | | | Salaries and benefits | | | 5,123 | | | | 5,098 | | | | 25 | | i | Depreciation | | | 208 | | | | 235 | | | | (27 | ) | i | Income from operations | | | 809 | | | | 907 | | | | (98 | ) | | INCOME FROM OPERATIONS BEFORE INCOME TAXES | | | 851 | | | | 949 | | | | (98 | ) | | Provision for income taxes | | | (136 | ) | | | (154 | ) | | | 18 | | j | NET INCOME | | | 715 | | | | 795 | | | | (80 | ) | | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | | 695 | | | | 775 | | | | (80 | ) | | | | | | | | | | | | | | | | EARNINGS PER SHARE | | | | | | | | | | | | | | Basic earnings per share | | $ | 5.29 | | | $ | 5.90 | | | $ | (0.61 | ) | | Diluted earnings per share | | $ | 5.27 | | | $ | 5.87 | | | $ | (0.60 | ) | |
| | As of December 31, 2018 | Balance Sheet | | As Reported | | | Balances Without Adoption of ASC 606 | | | Effect of Change | ASSETS | | | | | | | | | | | | | | Accounts receivable, net | | $ | 2,379 | | | $ | 2,198 | | | $ | 181 | | a | Prepaid and other current assets | | | 404 | | | | 302 | | | | 102 | | b | Fixed assets, net | | | 942 | | | | 1,051 | | | | (109 | ) | c | Other non-current assets | | | 467 | | | | 419 | | | | 48 | | c | LIABILITIES | | | | | | | | | | | | | | Deferred revenue and accrued expenses | | | 1,647 | | | | 1,754 | | | | (107 | ) | d | Other current liabilities | | | 864 | | | | 863 | | | | 1 | | e | Deferred tax liabilities | | | 559 | | | | 479 | | | | 80 | | e | Provision for liabilities | | | 540 | | | | 529 | | | | 11 | | f | EQUITY | | | | | | | | | | | | | | Retained earnings | | | 1,201 | | | | 964 | | | | 237 | | g |
| | Year Ended December 31, 2018 | | | Statement of Cash Flows | | As Reported | | | Balances Without Adoption of ASC 606 | | | Effect of Change | Net cash from operating activities | | $ | 1,288 | | | $ | 1,338 | | | $ | (50 | ) | k | Capitalized software costs | | | (54 | ) | | | (104 | ) | | | 50 | | k |
Explanation of Changes
The adoption of ASC 606 hadoperations. Of the following impacts to our balance sheets at January 1, 2018 and December 31, 2018:
| a.
| Accounts receivable, net, now includes receivables that have been billed, not yet billed and short-term contract assets. This adjustment is the result of the cumulative adjustments to revenue that have not yet been collected from our customers, but are expected to be collected within the next twelve months. The most significant increases to this balance result from revenue acceleration under ASC 606 for Medicare and proportional treaty broking commissions.
|
| b.
| Prepaid and other current assets include the impact of costs deferred in connection with our broking pre-placement activities. These costs are being deferred while the related pre-placement work is performed, and amortized as the related revenue is recognized, typically upon policy inception. Since the amortization period associated with these fulfillment costs is less than one year, these deferred costs have been classified as a current asset.
|
| c.
| Prior to the adoption of ASC 606, costs that we deferred related to certain system implementation activities had been included in fixed assets, net. These costs, adjusted based on the guidance in ASC 606, have now been included in other non-current assets. Additionally we have included less significant impacts of adjustments to deferred tax assets and have classified non-current contract assets within non-current assets.
|
| d.
| Deferred revenue has been adjusted primarily to reflect revenue acceleration in our Medicare broking business. Additional adjustments were included to accelerate the license component of certain software arrangements and to net deferred revenue with contract assets.
|
| e.
| Other current liabilities, which include current taxes payable, and deferred tax liabilities, have been adjusted for the tax effects of the individual changes resulting from the adoption of ASC 606. The income tax expense was calculated based on the U.S. and foreign statutory rates applicable to adjustments made. Where applicable, a U.S. statutory rate of 21% was used.
|
| f.
| Provision for liabilities has been adjusted for additional reserves for long-term post-placement obligations in our broking business.
|
| g.
| Retained earnings has been adjusted for the net impact of the adoption of ASC 606. See the discussion of the significant pre-tax changes by revenue in the following section.
|
The following changes are now reflected in our consolidated statements of comprehensive income for the year ended December 31, 2018. Each description also includes a discussion of the impact to retained earnings as of the adoption date.
| | Retained Earnings Increase/(Decrease) at January 1, 2018 | | | Increase/(Decrease) for the Year Ended December 31, 2018 | | Revenue adjustments | | | | | | | | | Medicare broking | | $ | 311 | | | $ | (38 | ) | Proportional treaty reinsurance broking | | | 50 | | | | 2 | | Health and benefits broking | | | — | | | | (57 | ) | Other adjustments | | | 28 | | | | (7 | ) | Total adjustments related to revenue | | | 389 | | | | (100 | ) | | | | | | | | | | Cost adjustments | | | | | | | | | System implementation activities | | | (46 | ) | | | 6 | | Other cost adjustments | | | 75 | | | | (8 | ) | Total adjustments related to costs | | | 29 | | | | (2 | ) | | | | | | | | | | Tax effect | | | (101 | ) | | | (18 | ) | Total net adjustments | | $ | 317 | | | $ | (80 | ) |
| h.
| Revenue was adjusted for the following significant changes:
|
Medicare broking — The majority of revenue recognition for this offering, within our Individual Marketplace business, has moved from monthly ratable recognition over the policy period, to recognition upon placement of the policy. Consequently,total consideration, the Company will now recognize approximately two-thirds of one calendar year of expected commissions during its fourth quarter offinanced a SEK 600 million ($68 million) note repayable by the preceding calendar year.purchaser. The remainder ofnote has no fixed term but is repayable subject to certain terms and conditions and bears an interest rate that could range from 5% to 10%, increasing the revenuelonger the note remains outstanding. This note receivable is recognized consistently with methods used priorincluded in Other non-current assets in the consolidated balance sheet. The Company entered into certain foreign currency transactions to hedge the adoption of ASC 606. Therefore, atconsideration to be received against fluctuations in foreign exchange rates (see Note 9 — Derivative Financial Instruments). Prior to disposal, Max Matthiessen was included within the adoption date, we have reflected a $271 million pre-tax increase to retained earnings for the portion of the revenue that would otherwise have been recognized during our 2018 calendar year since our earnings process was largely completed during the fourth quarter of 2017. Additionally, we have reflected a $40 million pretax adjustment to increase retained earnings related to previously deferred contingent revenue from placements made prior to 2018 because the earnings process was complete under ASC 606. During the year ended December 31, 2018, the accounting for this revenue stream under ASC 606 represented a reduction of revenue from ASC 605, Revenue Recognition (‘ASC 605’) accounting methods of $38 million.
Proportional treaty reinsurance broking — The revenue recognition for proportional treaty reinsurance broking commissions, within our Investment, Risk and Reinsurance segment, has moved from recognition uponsegment.
Miller Divestiture In November 2020, the receiptCompany entered into an agreement to sell its majority-owned subsidiary Miller for total consideration of GBP 591 million ($808 million at December 31, 2020) plus certain other adjustments. The divestiture is expected to close during the monthly or quarterly treaty statements fromfirst quarter of 2021. Miller provides wholesale insurance services to its clients and is included in the ceding insurance carriers, toInvestment, Risk and Reinsurance segment. As of December 31, 2020, the recognitionnet assets of an estimateMiller are approximately $350 million notwithstanding intercompany debt. The actual amounts disposed of expected commissions upon the policy effective date. Since the majority of revenue recognized historically based on these monthly or quarterly statements was received over a two-year period, we reflected a $50 million pretax increase to retained earningswill be determined at the adoption date forof closing and will depend upon foreign exchange rates and intercompany transactions in effect at the portion of revenue that would otherwise have been recognized during our 2018 calendar year related to policies effective in 2017 or prior years. For the year ended December 31, 2018, this accounting change resulted in a revenue increase of $2 million related to this adjustment. Health and benefits broking — Revenue for certain Health and Benefits broking arrangements, in our Human Capital and Benefits segment, will now be recognized evenly over the year to reflect the nature of the ongoing obligations to our customers as well as receipt of the monthly commissions. These contracts are monthly or annual in nature, and are considered complete as of the transition date. Therefore, no retained earnings adjustment is required. The total effect to revenue as a result of this accounting change for the year ended December 31, 2018 was a decrease of $57 million.
Other adjustments — Certaintime, among other revenue changes with individually less significant adjustments were made to retained earnings as of the adoption date totaling a net $28 million. The cumulative change to revenue for the year ended December 31, 2018 for other revenue streams not discussed above resulting from the ASC 606 adoption was a decrease of $7 million.factors.
Note 4—Revenue | i.
| Salaries and benefits and depreciation expense have been impacted by the guidance for deferred costs. Our accounting for these deferred costs has changed for certain revenue streams with system implementation activities, and other types of arrangements with associated costs, that now meet the criteria for cost deferral under ASC 606:
|
System implementation activities — For those portions of the business that previously deferred costs, the length of time over which we amortize those costs will extend to a longer estimated contract term. For 2017 and prior years, these costs were amortized over a typical period of 3-5 years in accordance with the initial stated terms of the customer agreements. Additionally, the composition of deferred costs has been adjusted to reflect the guidance in ASC 606. A reduction adjustment to retained earnings of $46 million was recorded on the adoption date to reflect these changes. Further, the amortization of the costs are no longer classified as depreciation expense, but rather included in salaries and benefits. These adjustments resulted in an increase in expense of $6 million for the year ended December 31, 2018.
Other cost adjustments — This guidance now applies to our broking arrangements and certain consulting engagements. While the costs deferred for our broking arrangements will typically be amortized within one year, costs now deferred related to certain consulting arrangements will be amortized over a longer term. We have increased pre-tax retained earnings by $75 million, primarily to reflect the total changes to contract costs as of the adoption date. For the year ended December 31, 2018, these changes resulted in a decrease in expense of $8 million.
| j.
| The provision for income taxes for the year ended December 31, 2018 was $18 million lower than our provision on an ASC 605 basis. The income tax expense was calculated based on the U.S. and foreign statutory rates applicable to adjustments made. Where applicable, a U.S. statutory rate of 21% was used. There was a $101 million net tax reduction to retained earnings upon adoption of ASC 606.
|
The following changes are now reflected in our consolidated statement of cash flows for the year ended December 31, 2018.
| k.
| As part of the changes in accounting for deferred costs, amounts capitalized relating to system implementation activities are now classified as operating cash flows. Prior to 2018, those costs capitalized under previous guidance were included in Capitalized software costs as an investing cash outflow.
|
Disaggregation of Revenue The Company reports revenue by segment in Note 5 — Segment Information. The following table presents revenue by service offering and segment, as well as a reconciliation to total revenue for the yearyears ended December 31, 2020, 2019 and 2018. Along with reimbursable expenses and other, total revenue by service offering represents our revenue from customer contracts. See Note 5 — Segment Information for further information. | | Year ended December 31, 2018 | | | | HCB | | | CRB | | | IRR | | | BDA | | | Corporate (i) | | | Total | | Broking | | $ | 266 | | | $ | 2,578 | | | $ | 905 | | | $ | 272 | | | $ | — | | | $ | 4,021 | | Consulting | | | 2,224 | | | | 163 | | | | 430 | | | | — | | | | 13 | | | | 2,830 | | Outsourced administration | | | 484 | | | | 65 | | | | — | | | | 486 | | | | — | | | | 1,035 | | Other | | | 235 | | | | 9 | | | | 185 | | | | — | | | | 4 | | | | 433 | | Total revenue by service offering | | | 3,209 | | | | 2,815 | | | | 1,520 | | | | 758 | | | | 17 | | | | 8,319 | | Reimbursable expenses and other (i) | | | 62 | | | | — | | | | 8 | | | | 7 | | | | 17 | | | | 94 | | Total revenue from customer contracts | | $ | 3,271 | | | $ | 2,815 | | | $ | 1,528 | | | $ | 765 | | | $ | 34 | | | $ | 8,413 | | Interest and other income (ii) | | | 24 | | | | 37 | | | | 36 | | | | — | | | | 3 | | | | 100 | | Total revenue | | $ | 3,295 | | | $ | 2,852 | | | $ | 1,564 | | | $ | 765 | | | $ | 37 | | | $ | 8,513 | |
Year Ended December 31, | | Broking | | | Consulting | | | Outsourced Administration | | | Other | | | Total revenue by service offering | | | Reimbursable expenses and other (i) | | | Total revenue from customer contracts | | | Interest and other income (ii) | | | Total revenue | | HCB | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | $ | 302 | | | $ | 2,215 | | | $ | 503 | | | $ | 241 | | | $ | 3,261 | | | $ | 50 | | | $ | 3,311 | | | $ | 17 | | | $ | 3,328 | | 2019 | | | 278 | | | | 2,269 | | | | 466 | | | | 262 | | | | 3,275 | | | | 61 | | | | 3,336 | | | | 23 | | | | 3,359 | | 2018 | | | 266 | | | | 2,224 | | | | 484 | | | | 235 | | | | 3,209 | | | | 62 | | | | 3,271 | | | | 24 | | | | 3,295 | | CRB | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 2,707 | | | | 154 | | | | 66 | | | | 11 | | | | 2,938 | | | | 2 | | | | 2,940 | | | | 39 | | | | 2,979 | | 2019 | | | 2,692 | | | | 132 | | | | 71 | | | | 5 | | | | 2,900 | | | | 1 | | | | 2,901 | | | | 46 | | | | 2,947 | | 2018 | | | 2,578 | | | | 163 | | | | 65 | | | | 9 | | | | 2,815 | | | | — | | | | 2,815 | | | | 37 | | | | 2,852 | | IRR | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 1,006 | | | | 393 | | | | 15 | | | | 231 | | | | 1,645 | | | | 8 | | | | 1,653 | | | | 6 | | | | 1,659 | | 2019 | | | 975 | | | | 421 | | | | 10 | | | | 205 | | | | 1,611 | | | | 9 | | | | 1,620 | | | | 26 | | | | 1,646 | | 2018 | | | 905 | | | | 430 | | | | — | | | | 185 | | | | 1,520 | | | | 8 | | | | 1,528 | | | | 36 | | | | 1,564 | | BDA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 834 | | | | — | | | | 525 | | | | — | | | | 1,359 | | | | 12 | | | | 1,371 | | | | — | | | | 1,371 | | 2019 | | | 514 | | | | — | | | | 521 | | | | — | | | | 1,035 | | | | 12 | | | | 1,047 | | | | — | | | | 1,047 | | 2018 | | | 272 | | | | — | | | | 486 | | | | — | | | | 758 | | | | 7 | | | | 765 | | | | — | | | | 765 | | Corporate (i) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 1 | | | | 5 | | | | — | | | | 3 | | | | 9 | | | | 2 | | | | 11 | | | | 4 | | | | 15 | | 2019 | | | — | | | | 11 | | | | — | | | | 4 | | | | 15 | | | | 22 | | | | 37 | | | | 3 | | | | 40 | | 2018 | | | — | | | | 13 | | | | — | | | | 4 | | | | 17 | | | | 17 | | | | 34 | | | | 3 | | | | 37 | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | $ | 4,850 | | | $ | 2,767 | | | $ | 1,109 | | | $ | 486 | | | $ | 9,212 | | | $ | 74 | | | $ | 9,286 | | | $ | 66 | | | $ | 9,352 | | 2019 | | $ | 4,459 | | | $ | 2,833 | | | $ | 1,068 | | | $ | 476 | | | $ | 8,836 | | | $ | 105 | | | $ | 8,941 | | | $ | 98 | | | $ | 9,039 | | 2018 | | $ | 4,021 | | | $ | 2,830 | | | $ | 1,035 | | | $ | 433 | | | $ | 8,319 | | | $ | 94 | | | $ | 8,413 | | | $ | 100 | | | $ | 8,513 | |
________________
(i) | Reimbursable expenses and other, as well as Corporate revenue, are excluded from segment revenue, but included in total revenue on the consolidated statements of comprehensive income. |
(ii) | Interest and other income is included in segment revenue and total revenue, however it has been presented separately in the above tables because it does not arise directly from contracts with customers. |
Individual revenue streams aggregating to 5% of total revenue for the yearyears ended December 31, 2020, 2019 and 2018 have been included within the Other linecolumn in the table above.
The following table presents revenue by the geography where our work was performed for the yearyears ended December 31, 2020, 2019 and 2018. The reconciliation to total revenue on our consolidated statements of comprehensive income and to segment revenue is shown in the table above. | | Year ended December 31, 2018 | | | | HCB | | | CRB | | | IRR | | | BDA | | | Corporate | | | Total | | North America | | $ | 1,849 | | | $ | 1,044 | | | $ | 416 | | | $ | 758 | | | $ | 16 | | | $ | 4,083 | | Great Britain | | | 481 | | | | 648 | | | | 732 | | | | — | | | | — | | | | 1,861 | | Western Europe | | | 562 | | | | 631 | | | | 218 | | | | — | | | | 1 | | | | 1,412 | | International | | | 317 | | | | 492 | | | | 154 | | | | — | | | | — | | | | 963 | | Total revenue by geography | | $ | 3,209 | | | $ | 2,815 | | | $ | 1,520 | | | $ | 758 | | | $ | 17 | | | $ | 8,319 | |
Year Ended December 31, | | North America | | | Great Britain | | | Western Europe | | | International | | | Total revenue by geography | | HCB | | | | | | | | | | | | | | | | | | | | | 2020 | | $ | 1,859 | | | $ | 491 | | | $ | 584 | | | $ | 327 | | | $ | 3,261 | | 2019 | | | 1,901 | | | | 475 | | | | 566 | | | | 333 | | | | 3,275 | | 2018 | | | 1,849 | | | | 481 | | | | 562 | | | | 317 | | | | 3,209 | | CRB | | | | | | | | | | | | | | | | | | | | | 2020 | | | 1,176 | | | | 630 | | | | 679 | | | | 453 | | | | 2,938 | | 2019 | | | 1,112 | | | | 656 | | | | 661 | | | | 471 | | | | 2,900 | | 2018 | | | 1,044 | | | | 648 | | | | 631 | | | | 492 | | | | 2,815 | | IRR | | | | | | | | | | | | | | | | | | | | | 2020 | | | 474 | | | | 824 | | | | 193 | | | | 154 | | | | 1,645 | | 2019 | | | 449 | | | | 788 | | | | 216 | | | | 158 | | | | 1,611 | | 2018 | | | 416 | | | | 732 | | | | 218 | | | | 154 | | | | 1,520 | | BDA | | | | | | | | | | | | | | | | | | | | | 2020 | | | 1,351 | | | | — | | | | — | | | | 8 | | | | 1,359 | | 2019 | | | 1,033 | | | | — | | | | — | | | | 2 | | | | 1,035 | | 2018 | | | 758 | | | | — | | | | — | | | | — | | | | 758 | | Corporate | | | | | | | | | | | | | | | | | | | | | 2020 | | | 7 | | | | — | | | | 2 | | | | — | | | | 9 | | 2019 | | | 13 | | | | — | | | | 1 | | | | 1 | | | | 15 | | 2018 | | | 16 | | | | — | | | | 1 | | | | — | | | | 17 | | Total | | | | | | | | | | | | | | | | | | | | | 2020 | | $ | 4,867 | | | $ | 1,945 | | | $ | 1,458 | | | $ | 942 | | | $ | 9,212 | | 2019 | | $ | 4,508 | | | $ | 1,919 | | | $ | 1,444 | | | $ | 965 | | | $ | 8,836 | | 2018 | | $ | 4,083 | | | $ | 1,861 | | | $ | 1,412 | | | $ | 963 | | | $ | 8,319 | |
Contract Balances The Company reports accounts receivable, net on the consolidated balance sheet, which includes billed and unbilled receivables and current contract assets. In addition to accounts receivable, net, the Company had the following non-current contract assets and deferred revenue balances at December 31, 20182020 and January 1, 2018:2019: | | December 31, 2018 | | | January 1, 2018 | | | December 31, 2020 | | | December 31, 2019 | | Billed receivables, net of allowance for doubtful accounts of $40 million and $45 million | | $ | 1,702 | | | $ | 1,933 | | | Billed receivables, net of allowance for doubtful accounts of $41 million and $37 million | | | $ | 1,697 | | | $ | 1,831 | | Unbilled receivables | | | 356 | | | | 276 | | | | 445 | | | | 434 | | Current contract assets | | | 321 | | | | 346 | | | | 413 | | | | 356 | | Accounts receivable, net | | $ | 2,379 | | | $ | 2,555 | | | $ | 2,555 | | | $ | 2,621 | | Non-current accounts receivable, net | | $ | 20 | | | $ | 33 | | | $ | 34 | | | $ | 30 | | Non-current contract assets | | $ | 3 | | | $ | 5 | | | $ | 329 | | | $ | 105 | | Deferred revenue | | $ | 448 | | | $ | 463 | | | $ | 549 | | | $ | 538 | |
The Company receives payments from customers based on billing schedules or terms as written in our contracts. Those balances denoted as contract assets relate to situations where we have completed some or all performance under the contract, however our right to consideration is conditional. Contract assets result most materially in our Medicare broking and proportional treaty broking businesses. The significant increases in both current and non-current contract assets for the year ended December 31, 2020 relate to our direct-to-consumer Medicare broking business. Billed and unbilled receivables are recorded when the right to consideration becomes unconditional. Deferred revenue relates to payments received in advance of performance under the contract and is recognized as revenue as (or when) we perform under the contract.
Accounts receivable are stated at estimated net realizable values. The following table presents the changes in our allowance for doubtful accounts for the years ended December 31, 2018, 20172020, 2019 and 2016.2018. | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2020 | | | December 31, 2019 | | | December 31, 2018 | | Balance at beginning of year | | $ | 45 | | | $ | 40 | | | $ | 22 | | | $ | 37 | | | $ | 40 | | | $ | 45 | | Additions charged to costs and expenses | | | 9 | | | | 17 | | | | 36 | | | | 29 | | | | 9 | | | | 9 | | Charges to other accounts - acquisitions | | | — | | | | — | | | | 8 | | | Deductions/other movements | | | (15 | ) | | | (9 | ) | | | (27 | ) | | | (29 | ) | | | (10 | ) | | | (15 | ) | Foreign exchange | | | 1 | | | | (3 | ) | | | 1 | | | | 4 | | | | (2 | ) | | | 1 | | Balance at end of year | | $ | 40 | | | $ | 45 | | | $ | 40 | | | $ | 41 | | | $ | 37 | | | $ | 40 | |
During the year ended December 31, 2018,2020, revenue of approximately $389$497 million was recognized that was reflected as deferred revenue at January 1, 2018. There were no other primary drivers for the changes in contract assets and liabilities from January 1, 2018 to December 31, 2018 besides the recognition of revenue and receipts of cash.2019. During the year ended December 31, 2018,2020, the Company recognized no material revenue of approximately $37 million related to performance obligations satisfied in a prior period.
Performance Obligations The Company has contracts for which performance obligations have not been satisfied as of December 31, 20182020 or have been partially satisfied as of December 31, 2018.this date. The following table shows the expected timing for the satisfaction of the remaining performance obligations. This table does not include contract renewals noror variable consideration, which was excluded from the transaction prices in accordance with the guidance on constraining estimates of variable consideration. In addition, in accordance with ASC 606, the Company has elected not to disclose the remaining performance obligations when one or both of the following circumstances apply: Performance obligations which are part of a contract that has an original expected duration of less than one year, and
| • | Performance obligations which are part of a contract that has an original expected duration of less than one year, and |
Performance obligations satisfied in accordance with ASC 606-10-55-18 (‘right to invoice’).
| • | Performance obligations satisfied in accordance with ASC 606-10-55-18 (‘right to invoice’). |
| | 2019 | | | 2020 | | | 2021 onward | | | Total | | Revenue expected to be recognized on contracts as of December 31, 2018 | | $ | 441 | | | $ | 357 | | | $ | 466 | | | $ | 1,264 | |
| | 2021 | | | 2022 | | | 2023 onward | | | Total | | Revenue expected to be recognized on contracts as of December 31, 2020 | | $ | 540 | | | $ | 392 | | | $ | 497 | | | $ | 1,429 | |
Since most of the Company’s contracts are cancellable with less than one year’s notice and have no substantive penalty for cancellation, the majority of the Company’s remaining performance obligations as of December 31, 2018 has2020 have been excluded from the table above. Costs to obtain or fulfill a contract The Company incurs costs to obtain or fulfill contracts which it would not incur if a contract with a customer was not executed. The following table shows the categories of costs that are capitalized and deferred over the expected life of a contract. | | Costs to fulfill | | | Costs to fulfill | | Balance at January 1, 2018 | | $ | 126 | | | | | | December 31, 2020 | | | December 31, 2019 | | | December 31, 2018 | | Balance at beginning of the year | | | $ | 177 | | | $ | 148 | | | $ | 126 | | New capitalized costs | | | 465 | | | | 493 | | | | 488 | | | | 465 | | Amortization | | | (442 | ) | | | (465 | ) | | | (460 | ) | | | (442 | ) | Impairments | | | — | | | | (1 | ) | | | 0 | | | | 0 | | Foreign currency translation | | | (1 | ) | | | 2 | | | | 1 | | | | (1 | ) | Balance at December 31, 2018 | | $ | 148 | | | Balance at end of the year | | | $ | 206 | | | $ | 177 | | | $ | 148 | |
Note 5—Segment Information Willis Towers Watson has four4 reportable operating segments or business areas: Human Capital and Benefits (‘HCB’)
| • | Human Capital and Benefits (‘HCB’) |
Corporate Risk and Broking (‘CRB’)
| • | Corporate Risk and Broking (‘CRB’) |
Investment, Risk and Reinsurance (‘IRR’)
| • | Investment, Risk and Reinsurance (‘IRR’) |
Benefits Delivery and Administration (‘BDA’)
| • | Benefits Delivery and Administration (‘BDA’) |
Willis Towers Watson’s chief operating decision maker is its chief executive officer.Chief Executive Officer. We determined that the operational data used by the chief operating decision maker is at the segment level. Management bases strategic goals and decisions on these segments and the data presented below is used to assess the adequacy of strategic decisions and the method of achieving these strategies and related financial results. Management evaluates the performance of its segments and allocates resources to them based on net operating income on a pre-bonus, pre-tax basis. The Company experiences seasonal fluctuations of its revenue. Revenue is typically higher during the Company’s first and fourth quarters due primarily to the timing of broking-related activities, and although the mix of quarterly income changed as a result of the adoption of ASC 606, we expect our revenue to remain highest in our first and fourth quarters.
Beginning in 2018, we made certain changes that affect our segment results that are not material. These changes include the following:
To better align our business within our segments, we (1) moved portions of our Insurance, Consulting and Technology business from IRR to CRB; (2) moved certain resources that support our outsourced administration offerings from HCB to BDA; and (3) moved our CEEMEA-based strategy study business from our Health and Benefits business in HCB to CRB.
As part of the continued integration of our businesses, we have applied our 2018 corporate expense allocation methodology to our 2017 and 2016 segment results in order to standardize our methodologies and allocate those expenses for period over period comparatives. Such methodology updates include (1) an increased allocation for Gras Savoye as it no longer benefits as a new acquisition; (2) adjustments relating to changes in segment and total headcount; and (3) the addition of certain allocable direct expenses, which lowers the corporate expense allocation.
In connection with our segment realignment, we reassigned a proportional amount of the carrying value of goodwill between the CRB and IRR segments. See Note 9 — Goodwill and Other Intangible Assets for further information.
Previously during the year ended December 31, 2017, the Company made changes to our segment results which standardized the allocation of corporate expenses directly attributable to business segments, reassigned Max Matthiessen to IRR and Fine Art, Jewellery & Specie to CRB to better align with their specializations, and revised the presentation of certain costs impacting fixed assets and internally-developed software which arose from the purchase accounting for the Merger.
The prior period comparatives reflected in the tables below have been retroactively adjusted to reflect our current segment presentation.activities.
Under the segment structure and for internal and segment reporting, Willis Towers Watson segment revenue includes commissions and fees, interest and other income. U.S. GAAP revenue also includes amounts that were directly incurred on behalf of our clients and reimbursed by them (reimbursable expenses), which are removed from segment revenue. Segment operating income excludes certain costs, including (i) amortization of intangibles; (ii) restructuring costs; (iii) certain transaction and integration expenses; (iv) certain litigation provisions; (v) significant pension settlement and curtailment gains or losses; and (vi)(v) to the extent that the actual expense based upon which allocations are made differs from the forecast/budget amount, a reconciling item will be created between internally-allocated expenses and the actual expenses that we report for U.S. GAAP purposes. During 2016, segment revenue and operating income both include revenue that was deferred by Towers Watson at the time of the Merger, and eliminated due to purchase accounting. The impact of the elimination from purchase accounting (which is the reduction to 2016 consolidated revenue and operating income) has been included in the reconciliation to our consolidated results in order to provide the actual revenue that the segments would have recognized on an unadjusted basis.
The following table presents segment revenue and segment operating income for our reportable segments for the years ended December 31, 2018, 20172020, 2019 and 2016.2018. | | Segment revenue | | | Segment operating income | | | Segment revenue | | | Segment operating income | | | | Years ended December 31 | | | Years ended December 31 | | | Years ended December 31 | | | Years ended December 31 | | | | 2018 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2018 | | HCB | | $ | 3,233 | | | $ | 3,176 | | | $ | 3,100 | | | $ | 789 | | | $ | 774 | | | $ | 722 | | | $ | 3,278 | | | $ | 3,298 | | | $ | 3,233 | | | $ | 853 | | | $ | 848 | | | $ | 789 | | CRB | | | 2,852 | | | | 2,709 | | | | 2,608 | | | | 528 | | | | 483 | | | | 458 | | | | 2,977 | | | | 2,946 | | | | 2,852 | | | | 630 | | | | 578 | | | | 528 | | IRR | | | 1,556 | | | | 1,474 | | | | 1,473 | | | | 384 | | | | 329 | | | | 346 | | | | 1,651 | | | | 1,637 | | | | 1,556 | | | | 457 | | | | 420 | | | | 384 | | BDA | | | 758 | | | | 734 | | | | 660 | | | | 144 | | | | 153 | | | | 120 | | | | 1,359 | | | | 1,035 | | | | 758 | | | | 320 | | | | 244 | | | | 144 | | Total | | $ | 8,399 | | | $ | 8,093 | | | $ | 7,841 | | | $ | 1,845 | | | $ | 1,739 | | | $ | 1,646 | | | $ | 9,265 | | | $ | 8,916 | | | $ | 8,399 | | | $ | 2,260 | | | $ | 2,090 | | | $ | 1,845 | |
The following table presents reconciliations of the information reported by segment to the Company’s consolidated amounts reported for the years ended December 31, 2018, 20172020, 2019 and 2016.2018. | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | Total segment revenue | | $ | 8,399 | | | $ | 8,093 | | | $ | 7,841 | | | $ | 9,265 | | | $ | 8,916 | | | $ | 8,399 | | Fair value adjustment to deferred revenue | | | — | | | | — | | | | (58 | ) | | Reimbursable expenses and other | | | 114 | | | | 109 | | | | 104 | | | | 87 | | | | 123 | | | | 114 | | Revenue | | $ | 8,513 | | | $ | 8,202 | | | $ | 7,887 | | | $ | 9,352 | | | $ | 9,039 | | | $ | 8,513 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total segment operating income | | $ | 1,845 | | | $ | 1,739 | | | $ | 1,646 | | | $ | 2,260 | | | $ | 2,090 | | | $ | 1,845 | | Fair value adjustment for deferred revenue | | | — | | | | — | | | | (58 | ) | | Amortization | | | (534 | ) | | | (581 | ) | | | (591 | ) | | | (462 | ) | | | (489 | ) | | | (534 | ) | Restructuring costs | | | — | | | | (132 | ) | | | (193 | ) | | Transaction and integration expenses (i) | | | (202 | ) | | | (269 | ) | | | (177 | ) | | Provisions for significant litigation | | | — | | | | (11 | ) | | | (50 | ) | | Unallocated, net (ii) | | | (300 | ) | | | (230 | ) | | | (229 | ) | | Restructuring costs (i) | | | | (24 | ) | | | — | | | | — | | Transaction and integration expenses (ii) | | | | (110 | ) | | | (13 | ) | | | (202 | ) | Provision for significant litigation (iii) | | | | (65 | ) | | | — | | | | — | | Unallocated, net (iv) | | | | (416 | ) | | | (259 | ) | | | (300 | ) | Income from operations | | | 809 | | | | 516 | | | | 348 | | | | 1,183 | | | | 1,329 | | | | 809 | | Interest expense | | | (208 | ) | | | (188 | ) | | | (184 | ) | | | (244 | ) | | | (234 | ) | | | (208 | ) | Other income, net | | | 250 | | | | 164 | | | | 178 | | | | 399 | | | | 227 | | | | 250 | | Income from operations before income taxes | | $ | 851 | | | $ | 492 | | | $ | 342 | | | $ | 1,338 | | | $ | 1,322 | | | $ | 851 | |
(i) | Restructuring costs relate to minor restructuring activities carried out by various business lines throughout the Company. |
(ii) | Includes transaction costs related to the proposed Aon combination in 2020, the TRANZACT acquisition in 2019, and transaction and integration expenses related to the Merger and the acquisition of Gras Savoye.Savoye in 2018. |
(ii)(iii)
| For additional information, see the disclosure under Willis Towers Watson Merger-Related Securities Litigation inNote 14 — Commitments and Contingencies. |
(iv) | Includes certain costs, primarily related to corporate functions which are not directly related to the segments, and certain differences between budgeted expenses determined at the beginning of the year and actual expenses that we report for U.S. GAAP purposes. |
The Company does not currently provide asset information by reportable segment as it does not routinely evaluate the total asset position by segment. None of the Company’s customers represented a significant amount of the Company’sits consolidated revenue for the years ended December 31, 2018, 20172020, 2019 and 2016.2018. Below are our revenue and long-lived assets for Ireland, our country of domicile, countries with significant concentrations, and all other foreign countries for each of the years ended December 31, 2018, 20172020, 2019 and 2016:2018: | | Revenue | | | Long-Lived Assets (i) | | | Revenue | | | Long-Lived Assets (i) | | | | 2018 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2018 | | Ireland | | $ | 138 | | | $ | 107 | | | $ | 92 | | | $ | 78 | | | $ | 127 | | | $ | 114 | | | $ | 157 | | | $ | 144 | | | $ | 138 | | | $ | 110 | | | $ | 103 | | | $ | 78 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | United States | | | 3,970 | | | | 3,821 | | | | 3,395 | | | | 11,068 | | | | 9,988 | | | | 11,400 | | | | 4,650 | | | | 4,370 | | | | 3,970 | | | | 12,652 | | | | 12,786 | | | | 11,068 | | United Kingdom | | | 1,926 | | | | 1,815 | | | | 2,236 | | | | 2,349 | | | | 3,173 | | | | 2,431 | | | | 1,920 | | | | 1,934 | | | | 1,926 | | | | 2,840 | | | | 2,901 | | | | 2,349 | | Rest of World | | | 2,479 | | | | 2,459 | | | | 2,164 | | | | 2,411 | | | | 3,263 | | | | 2,466 | | | | 2,625 | | | | 2,591 | | | | 2,479 | | | | 2,533 | | | | 2,527 | | | | 2,411 | | Total Foreign Countries | | | 8,375 | | | | 8,095 | | | | 7,795 | | | | 15,828 | | | | 16,424 | | | | 16,297 | | | | 9,195 | | | | 8,895 | | | | 8,375 | | | | 18,025 | | | | 18,214 | | | | 15,828 | | | | $ | 8,513 | | | $ | 8,202 | | | $ | 7,887 | | | $ | 15,906 | | | $ | 16,551 | | | $ | 16,411 | | | $ | 9,352 | | | $ | 9,039 | | | $ | 8,513 | | | $ | 18,135 | | | $ | 18,317 | | | $ | 15,906 | |
(i) | Long-lived assets do not include deferred tax assets. |
Note 6 — Restructuring Costs
The Company had two major elements of the restructuring costs included in its consolidated financial statements, which were the Operational Improvement Program and the Business Restructure Program. Costs for each program were fully accrued and completed by the end of 2017 and 2016, respectively. No additional costs for either program were incurred during 2018.
Operational Improvement Program- In April 2014, Legacy Willis announced a multi-year operational improvement program designed to strengthen its client service capabilities and to deliver future cost savings. The main elements of the program included: moving more than 3,500 support roles from higher cost locations to facilities in lower cost locations; net workforce reductions in support positions; lease consolidation in real estate; and information technology systems simplification and rationalization.
The Company recognized restructuring costs of $134 million and $145 million for the years ended December 31, 2017 and 2016, respectively, related to the Operational Improvement Program. The Company spent a cumulative amount of $441 million on restructuring costs for this program.
Business Restructure Program - In the second quarter of 2016, we began planning targeted staffing reductions in certain portions of the business due to a reduction in business demand or change in business focus (hereinafter referred to as the Business Restructure Program). The main element of the program included workforce reductions, and was completed in 2016, however, cash payments pertaining to the program were made primarily in 2017. During the year ended December 31, 2017, the Company recognized a $2 million reversal of expense related to an estimate of previously incurred termination benefits. The Company recognized restructuring costs of $48 million for the year ended December 31, 2016.
An analysis of total restructuring costs recognized in the consolidated statements of comprehensive income, with costs by segment, and costs attributable to corporate functions, for the years ended December 31, 2017 and 2016 is as follows:
| | HCB | | | CRB | | | IRR | | | BDA | | | Corporate | | | Total | | Year ended December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | — | | | $ | 25 | | | $ | 4 | | | $ | — | | | $ | 17 | | | $ | 46 | | Professional services and other (i) | | | 3 | | | | 63 | | | | 6 | | | | — | | | | 14 | | | | 86 | | Total | | $ | 3 | | | $ | 88 | | | $ | 10 | | | $ | — | | | $ | 31 | | | $ | 132 | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | 33 | | | $ | 26 | | | $ | 6 | | | $ | 1 | | | $ | 2 | | | $ | 68 | | Professional services and other (i) | | | 4 | | | | 81 | | | | 4 | | | | — | | | | 36 | | | | 125 | | Total | | $ | 37 | | | $ | 107 | | | $ | 10 | | | $ | 1 | | | $ | 38 | | | $ | 193 | |
(i)
| Other includes salary and benefits, premises, and other expenses incurred to support the ongoing management and facilitation of the programs.
|
An analysis of the total cumulative restructuring costs recognized for the Operational Improvement Program from its commencement to December 31, 2017 by segment is as follows:
| | HCB | | | CRB | | | IRR | | | BDA | | | Corporate | | | Total | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | — | | | $ | 15 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 16 | | Professional services and other (i) | | | — | | | | 3 | | | | — | | | | — | | | | 17 | | | | 20 | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | 2 | | | $ | 24 | | | $ | 7 | | | $ | — | | | $ | 3 | | | $ | 36 | | Professional services and other (i) | | | 1 | | | | 57 | | | | 2 | | | | — | | | | 30 | | | | 90 | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | 1 | | | $ | 18 | | | $ | 3 | | | $ | — | | | $ | 1 | | | $ | 23 | | Professional services and other (i) | | | 1 | | | | 81 | | | | 4 | | | | — | | | | 36 | | | | 122 | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | — | | | $ | 25 | | | $ | 4 | | | $ | — | | | $ | 19 | | | $ | 48 | | Professional services and other (i) | | | 3 | | | | 63 | | | | 6 | | | | — | | | | 14 | | | | 86 | | Total | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | 3 | | | $ | 82 | | | $ | 15 | | | $ | — | | | $ | 23 | | | $ | 123 | | Professional services and other (i) | | | 5 | | | | 204 | | | | 12 | | | | — | | | | 97 | | | | 318 | | Total | | $ | 8 | | | $ | 286 | | | $ | 27 | | | $ | — | | | $ | 120 | | | $ | 441 | |
(i)
| Other includes salary and benefits, premises, and other expenses incurred to support the ongoing management and facilitation of the program.
|
The changes in the Company’s liability under the Operational Improvement Program from its commencement to December 31, 2018, are as follows:
| | Termination Benefits | | | Professional Services and Other | | | Total | | Balance at January 1, 2014 | | $ | — | | | $ | — | | | $ | — | | Charges incurred | | | 16 | | | | 20 | | | | 36 | | Cash payments | | | (11 | ) | | | (14 | ) | | | (25 | ) | Balance at December 31, 2014 | | | 5 | | | | 6 | | | | 11 | | Charges incurred | | | 36 | | | | 90 | | | | 126 | | Cash payments | | | (26 | ) | | | (85 | ) | | | (111 | ) | Balance at December 31, 2015 | | | 15 | | | | 11 | | | | 26 | | Charges incurred | | | 23 | | | | 122 | | | | 145 | | Cash payments | | | (31 | ) | | | (115 | ) | | | (146 | ) | Balance at December 31, 2016 | | | 7 | | | | 18 | | | | 25 | | Charges incurred | | | 48 | | | | 86 | | | | 134 | | Cash payments | | | (41 | ) | | | (97 | ) | | | (138 | ) | Balance at December 31, 2017 | | | 14 | | | | 7 | | | | 21 | | Cash payments | | | (12 | ) | | | (6 | ) | | | (18 | ) | Balance at December 31, 2018 | | $ | 2 | | | $ | 1 | | | $ | 3 | |
Restructuring costs related to the Business Restructuring Program for the year ended December 31, 2016 by segment are as follows:
| | HCB | | | CRB | | | IRR | | | BDA | | | Corporate | | | Total | | | | (in millions) | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | Termination benefits | | $ | 32 | | | $ | 8 | | | $ | 3 | | | $ | 1 | | | $ | 1 | | | $ | 45 | | Professional services and other (i) | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | 3 | | Total | | $ | 35 | | | $ | 8 | | | $ | 3 | | | $ | 1 | | | $ | 1 | | | $ | 48 | |
(i)
| Other includes salary and benefits, premises, and other expenses incurred to support the ongoing management and facilitation of the program.
|
The changes in the Company’s liability under the Business Restructure Program from its commencement to December 31, 2018, are as follows:
| | Termination Benefits | | | Professional Services and Other | | | Total | | Balance at January 1, 2016 | | $ | — | | | $ | — | | | $ | — | | Charges incurred | | | 45 | | | | 3 | | | | 48 | | Cash payments | | | (19 | ) | | | (3 | ) | | | (22 | ) | Balance at December 31, 2016 | | | 26 | | | | — | | | | 26 | | Adjustment to prior charges incurred | | | (2 | ) | | | — | | | | (2 | ) | Cash payments | | | (23 | ) | | | — | | | | (23 | ) | Balance at December 31, 2017 | | | 1 | | | | — | | | | 1 | | Cash payments | | | (1 | ) | | | — | | | | (1 | ) | Balance at December 31, 2018 | | $ | — | | | $ | — | | | $ | — | |
Note 7 6—Income Taxes Impact of U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as ‘U.S. Tax Reform’. U.S. Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) requiring a one-time transition tax on certain unremitted earnings of foreign subsidiaries that may be payable over eight years; (2) bonus depreciation that will allow for full expensing of qualified property; (3) reduction of the federal corporate tax rate from 35% to 21%; (4) a new provision designed to tax global intangible low-taxed income (‘GILTI’), which allows for the possibility of using foreign tax credits (‘FTCs’) and a deduction of up to 50% to offset the income tax liability (subject to some limitations); (5) a new limitation on deductible interest expense; (6) limitations on the deductibility of certain executive compensation; (7) limitations on the use of FTCs to reduce the U.S. income tax liability; (8) the creation of the base erosion anti-abuse tax (‘BEAT’), a new minimum tax; and (9) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries.
Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (‘SAB 118’), which provided guidance on accounting for the tax effects of the U.S. Tax Reform. SAB 118 provided a measurement period that should not extend beyond one year from the U.S. Tax Reform enactment date for companies to complete the accounting under ASC 740, Income Taxes (‘ASC 740’). In accordance with SAB 118, a company was required to reflect the income tax effects of those aspects of U.S. Tax Reform for which the accounting under ASC 740 was complete. Adjustments to incomplete and unknown amounts were required to be recorded and disclosed during the measurement period. To the extent that a company’s accounting for certain income tax effects of U.S. Tax Reform was incomplete but it was able to determine a reasonable estimate, a provisional estimate in the financial statements was required to be recorded. If a company was unable to determine a provisional estimate, it was required to continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of U.S. Tax Reform.
While the measurement period under SAB 118 is now closed, the Company may in future periods need to further refine its U.S. federal and state calculations related to U.S. Tax Reform as the taxing authorities provide additional guidance and
clarification. However, as of December 31, 2018, the Company's accounting for U.S. Tax Reform is complete based on its interpretation of the guidance issued as of the balance sheet date.
As such, the Company has revised and finalized the provisional adjustments for the following items:
Reduction of the federal corporate tax rate – Beginning January 1, 2018, the Company’s U.S. income is taxed at a 21% federal corporate tax rate. Under ASC 740, deferred tax assets or liabilities must be recalculated as of the enactment date using current tax laws and rates expected to be in effect when the deferred tax items reverse in future periods, which is 21%. Consequently, the Company recorded a provisional decrease in its net deferred tax liabilities of $208 million, with a corresponding deferred income tax benefit of $208 million during the year ended December 31, 2017. On October 12, 2018, the Company filed its 2017 U.S. federal corporate income tax return. After refining our analysis of those items directly related to U.S. Tax Reform, the Company recorded additional deferred tax benefit of approximately $8 million related to deferred tax items that are now subject to tax at 21%. The effect of the measurement period adjustment on the 2018 effective tax rate is approximately 1%.
One-time transition tax – The one-time transition tax is based on the Company’s total post-1986 earnings and profits (‘E&P’) that it previously deferred from U.S. income taxes. At December 31, 2017, the Company recorded a provisional amount for the one-time transition tax liability for our foreign subsidiaries owned by U.S. corporate shareholders, resulting in an increase in U.S. Federal income tax expense of $70 million and state income tax expense of $2 million. This transition tax liability was recorded as a long-term liability in the 2017 financial statements. Subsequent to the December 31, 2017 reporting period, the Internal Revenue Service (‘IRS’) clarified the application of the ‘with’ and ‘without’ approach for calculating the transition tax liability in determining the amount payable over eight years. Based on this guidance the Company revised its provisional estimate for the U.S. federal transition tax liability in the first quarter of 2018, which was reduced by $64 million due to the utilization of interest loss carryforwards resulting from the transition tax income inclusion. This reduction has no impact on the 2018 effective tax rate. Additionally, on the basis of revised E&P computations that were completed during the year ended December 31, 2018, we recognized an additional increase to income tax expense of $8 million, which was recorded in current income tax payable. This has an approximate 1% impact on the Company’s 2018 effective tax rate. The tax expense recorded includes the final measurement period adjustment related to the Company’s November 30, 2018 foreign subsidiaries. While the measurement period under SAB 118 is now closed, we may in future periods need to further refine the U.S. federal and state transition tax calculations of the November 30, 2018 foreign subsidiaries as the taxing authorities provide additional guidance and clarification.
Indefinite reinvestment assertion – Beginning in 2018, U.S. Tax Reform provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax for U.S. corporate shareholders, companies must still account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. At December 31, 2017, we analyzed our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation and determined we might repatriate up to $219 million which was previously deemed indefinitely reinvested. For those investments from which we were able to make a reasonable estimate of the tax effects of such repatriation, we recorded a provisional estimate for foreign withholding and state income taxes of $1 million. In addition, we re-measured the existing deferred tax liability accrued on certain acquired Towers Watson subsidiaries and released the associated deferred tax liability. This resulted in an income tax benefit of $76 million as these foreign earnings were subject to the one-time transition tax. These estimates are now considered final and no further adjustments have been made in the year ended December 31, 2018 as a result of U.S. Tax Reform.
Bonus Depreciation – The Company completed its determination of all capital expenditures that qualify for immediate expensing. For the year ended December 31, 2017, the Company recorded a provisional deduction of $40 million based on its current intent to fully expense all qualifying expenditures. This resulted in an increase of approximately $14 million to the Company's U.S. federal current income taxes receivable and a corresponding increase in its net deferred tax liabilities of approximately $14 million. However, as a result of further analysis on assets placed in service after September 27, 2017, the Company concluded its tax deduction to be $8 million. The tax benefit was reflected on the Company’s 2017 U.S. federal corporate income tax return filed on October 12, 2018. The effect of the measurement-period adjustment on the 2018 effective tax rate is included in the reduction of the federal corporate tax rate above.
Executive compensation – Starting with compensation paid in 2018, Section 162(m) will limit the Company from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who,
starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million deduction limit if paid to a covered executive. The Company recorded a provisional income tax expense of $8 million relating to our compensation plans not qualifying as a binding contract exception. During the fourth quarter the Company finalized its analysis and review of the executive compensation plans and IRS guidance released throughout the year. The Company has concluded that the reviewed plans are not subject to future limitation under the binding contract exception and grandfathering rules. This resulted in the re-establishment of the deferred tax asset through the recording of an income tax benefit of $8 million. The effect of the measurement period adjustment on the 2018 effective tax rate is approximately 1%.
GILTI – U.S. Tax Reform creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (‘CFCs’) must be included currently in the gross income of the CFCs’ U.S. shareholders. GILTI is the excess of the shareholder’s ‘net CFC tested income’ over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the ‘period cost method’) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the ‘deferred method’). The Company has concluded it is treating the taxes due on U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the ‘period cost method’). The estimated tax impact of GILTI, net of available foreign tax credits, is approximately $15 million at December 31, 2018.
Valuation allowances – The Company has concluded there have been no changes to valuation allowances as a result of U.S. Tax Reform.
Provision for income taxes An analysis of income from operations before income taxes by taxing jurisdiction is shown below: | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Ireland | | $ | (16 | ) | | $ | (23 | ) | | $ | (27 | ) | | $ | (5 | ) | | $ | (11 | ) | | $ | (16 | ) | U.S. | | | (101 | ) | | | (198 | ) | | | (311 | ) | | | 25 | | | | 178 | | | | (101 | ) | U.K. | | | 182 | | | | 31 | | | | 123 | | | | 332 | | | | 337 | | | | 182 | | Other jurisdictions | | | 786 | | | | 682 | | | | 557 | | | Rest of World | | | | 986 | | | | 818 | | | | 786 | | Total | | $ | 851 | | | $ | 492 | | | $ | 342 | | | $ | 1,338 | | | $ | 1,322 | | | $ | 851 | |
The components of the provision for income taxes include: | | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Current tax expense: | | | | | | | | | | | | | U.S. federal taxes | | $ | (27 | ) | | $ | (108 | ) | | $ | (98 | ) | U.S. state and local taxes | | | (5 | ) | | | (43 | ) | | | (25 | ) | U.K. corporation tax | | | (45 | ) | | | (43 | ) | | | (16 | ) | Other jurisdictions | | | (142 | ) | | | (127 | ) | | | (112 | ) | Total current tax expense | | | (219 | ) | | | (321 | ) | | | (251 | ) | Deferred tax (expense)/benefit: | | | | | | | | | | | | | U.S. federal taxes | | | (78 | ) | | | 56 | | | | 79 | | U.S. state and local taxes | | | 1 | | | | 14 | | | | 12 | | U.K. corporation tax | | | (48 | ) | | | (15 | ) | | | (6 | ) | Other jurisdictions | | | 26 | | | | 17 | | | | 30 | | Total deferred tax (expense)/benefit | | | (99 | ) | | | 72 | | | | 115 | | Total provision for income taxes | | $ | (318 | ) | | $ | (249 | ) | | $ | (136 | ) |
The components of the (provision for)/benefit from income taxes include:
| | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | Current tax expense: | | | | | | | | | | | | | U.S. federal taxes | | $ | (98 | ) | | $ | (65 | ) | | $ | (35 | ) | U.S. state and local taxes | | | (25 | ) | | | (7 | ) | | | (14 | ) | U.K. corporation tax | | | (16 | ) | | | (14 | ) | | | (28 | ) | Other jurisdictions | | | (112 | ) | | | (99 | ) | | | (71 | ) | Total current tax expense | | | (251 | ) | | | (185 | ) | | | (148 | ) | Deferred tax benefit: | | | | | | | | | | | | | U.S. federal taxes | | | 79 | | | | 268 | | | | 214 | | U.S. state and local taxes | | | 12 | | | | (6 | ) | | | 5 | | U.K. corporation tax | | | (6 | ) | | | 9 | | | | (10 | ) | Other jurisdictions | | | 30 | | | | 14 | | | | 35 | | Total deferred tax benefit | | | 115 | | | | 285 | | | | 244 | | Total (provision for)/benefit from income taxes | | $ | (136 | ) | | $ | 100 | | | $ | 96 | |
Included in the 2018 U.S. state and local tax expense is an approximate $25 million deferred tax benefit related to a valuation allowance release on certain state deferred tax assets offset with the write-off of certain state net operating losses that are no longer realizable.
Effective tax rate reconciliation The reported (provision for)/benefit fromprovision for income taxes differs from the amounts that would have resulted had the reported income before income taxes been taxed at the U.S. federal statutory rate. The principal reasons for the differences between the amounts provided and those that would have resulted from the application of the U.S. federal statutory tax rate are as follows: | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | INCOME FROM OPERATIONS BEFORE INCOME TAXES | | $ | 851 | | | $ | 492 | | | $ | 342 | | | $ | 1,338 | | | $ | 1,322 | | | $ | 851 | | U.S. federal statutory income tax rate | | | 21 | % | | | 35 | % | | | 35 | % | | | 21 | % | | | 21 | % | | | 21 | % | Income tax expense at U.S. federal tax rate | | | (179 | ) | | | (172 | ) | | | (120 | ) | | | (281 | ) | | | (278 | ) | | | (179 | ) | Adjustments to derive effective tax rate: | | | | | | | | | | | | | | | | | | | | | | | | | Non-deductible expenses and dividends | | | (44 | ) | | | (68 | ) | | | (15 | ) | | | (20 | ) | | | (34 | ) | | | (44 | ) | Non-deductible acquisition costs | | | (2 | ) | | | (11 | ) | | | (1 | ) | | | (15 | ) | | | (2 | ) | | | (2 | ) | Disposal of non-deductible goodwill | | | 1 | | | | (11 | ) | | | (2 | ) | | | 0 | | | | 0 | | | | 1 | | Impact of change in rate on deferred tax balances | | | 7 | | | | — | | | | 15 | | | | (7 | ) | | | 0 | | | | 7 | | Effect of foreign exchange and other differences | | | 1 | | | | (3 | ) | | | (6 | ) | | | (3 | ) | | | 1 | | | | 1 | | Non-deductible Venezuelan foreign exchange loss | | | — | | | | (2 | ) | | | (4 | ) | | Changes in valuation allowances | | | 80 | | | | (13 | ) | | | 74 | | | | (8 | ) | | | 6 | | | | 80 | | Net tax effect of intra-group items | | | 99 | | | | 97 | | | | 98 | | | | 90 | | | | 93 | | | | 99 | | Tax on disposal of operations | | | | 16 | | | | 0 | | | | 0 | | Tax differentials of non-U.S. jurisdictions | | | (2 | ) | | | 69 | | | | 80 | | | | 3 | | | | (2 | ) | | | (2 | ) | Tax differentials of U.S. state taxes and local taxes | | | (77 | ) | | | 6 | | | | (14 | ) | | | (3 | ) | | | (21 | ) | | | (77 | ) | Global Intangible Low-Taxed Income (GILTI) | | | (15 | ) | | | — | | | | — | | | | (3 | ) | | | (7 | ) | | | (15 | ) | Impact of U.S. Tax Reform | | | — | | | | 204 | | | | — | | | Base Erosion Anti-Abuse Tax (BEAT) | | | | (81 | ) | | | 0 | | | | 0 | | Other items, net | | | (5 | ) | | | 4 | | | | (9 | ) | | | (6 | ) | | | (5 | ) | | | (5 | ) | (Provision for)/benefit from income taxes | | $ | (136 | ) | | $ | 100 | | | $ | 96 | | | Provision for income taxes | | | $ | (318 | ) | | $ | (249 | ) | | $ | (136 | ) |
Included in the BEAT expense for 2020 is an approximate $29 million true-up related to the 2019 tax year as a result of certain elections of the CARES Act. 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. Included in the changes in valuation allowance for 2018, the Company recorded a deferred income tax benefit for approximately $71 million related to the valuation allowance release of certain state deferred tax assets.
In 2017, in connection with our initial analysis of U.S. Tax Reform, the Company recorded a provisional net tax benefit of $204 million, which consisted of a net benefit of $208 million due to the reduction of the federal corporate tax rate and re-measurement of our net U.S. deferred tax liabilities primarily related to acquisition-based intangibles, and a $76 million benefit related to the release of a deferred tax liability we had previously recorded on the accumulated earnings of certain Towers Watson subsidiaries. These net benefit items were offset by provisional expenses of $8 million recognized as a write-off of a deferred tax asset the Company had previously recorded on executive compensation as well as the U.S. federal and state income tax expense of $72 million associated with the one-time transition tax on foreign earnings of our subsidiaries.
Willis Towers Watson plc is a non-trading holding company tax resident in Ireland where it is taxed at the statutory rate of 25%. In 2018, the provisionThe provisions for income tax on operations hashave been reconciled above to the U.S. federal statutory tax rate of 21% due to significant operations in the U.S. The prior year effective tax rates have not been restated to reflect a U.S. federal statutory tax rate of 21%. Deferred income taxes Deferred income tax assets and liabilities reflect the effect of temporary differences between the assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We recognize deferred tax assets if it is more likely than not that a benefit will be realized.
Deferred income tax assets and liabilities included in the consolidated balance sheets at December 31, 20182020 and 20172019 are comprised of the following: | | December 31, | | | December 31, | | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | Deferred tax assets: | | | | | | | | | | | | | | | | | Accrued expenses not currently deductible | | $ | 177 | | | $ | 131 | | | $ | 212 | | | $ | 201 | | Net operating losses | | | 91 | | | | 145 | | | | 92 | | | | 116 | | Capital loss carryforwards | | | 30 | | | | 28 | | | | 40 | | | | 33 | | Accrued retirement benefits | | | 285 | | | | 339 | | | | 334 | | | | 326 | | Operating lease liabilities | | | | 165 | | | | 181 | | Deferred compensation | | | 82 | | | | 69 | | | | 90 | | | | 86 | | Stock options | | | 22 | | | | 24 | | | | 25 | | | | 18 | | Financial derivative transactions | | | 1 | | | | 18 | | | | 1 | | | | 0 | | Gross deferred tax assets | | | 688 | | | | 754 | | | | 959 | | | | 961 | | Less: valuation allowance | | | (81 | ) | | | (162 | ) | | | (84 | ) | | | (76 | ) | Net deferred tax assets | | $ | 607 | | | $ | 592 | | | $ | 875 | | | $ | 885 | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | Cost of intangible assets, net of related amortization | | $ | 825 | | | $ | 929 | | | $ | 788 | | | $ | 865 | | Operating lease right-of-use assets | | | | 159 | | | | 177 | | Cost of tangible assets, net of related depreciation | | | 37 | | | | 56 | | | | 78 | | | | 53 | | Prepaid retirement benefits | | | 101 | | | | 114 | | | | 152 | | | | 121 | | Financial derivative transactions | | | | 1 | | | | 3 | | Accrued revenue not currently taxable | | | 144 | | | | 62 | | | | 163 | | | | 120 | | Deferred tax liabilities | | $ | 1,107 | | | $ | 1,161 | | | $ | 1,341 | | | $ | 1,339 | | Net deferred tax liabilities | | $ | 500 | | | $ | 569 | | | $ | 466 | | | $ | 454 | |
During December 2017, the Company re-measured its U.S. deferred tax assets and liabilities as a result of U.S. Tax Reform to the newly enacted federal tax rate, which is 21%. The net deferred income tax assets are included in other non-current assets and the net deferred tax liabilities are included in deferred tax liabilities in our consolidated balance sheets.
| | December 31, | | | December 31, | | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | Balance sheet classifications: | | | | | | | | | | | | | | | | | Other non-current assets | | $ | 59 | | | $ | 46 | | | $ | 95 | | | $ | 72 | | Deferred tax liabilities | | | 559 | | | | 615 | | | | 561 | | | | 526 | | Net deferred tax liability | | $ | 500 | | | $ | 569 | | | $ | 466 | | | $ | 454 | |
At December 31, 2018,2020, we had U.S. federal and non-U.S. net operating loss carryforwards amounting to $288$258 million of which $239$209 million can be indefinitely carried forward under local statutes. The remaining $49 million of net operating loss carryforwards will expire, if unused, in varying amounts from 20192021 through 2038.2040. In addition, we had U.S. state net operating loss carryforwards of $515$621 million, of which $97 million can be indefinitely carried forward, while the remaining $524 million will expire in varying amounts from 20192021 to 2038.2040. Management believes, based on the evaluation of positive and negative evidence, including the future reversal of existing taxable temporary differences, it is more likely than not that the Company will realize the benefits of net deferred tax assets of $607$875 million, net of the valuation allowance. During 2020, the Company increased its valuation allowance by $8 million, primarily related to non-U.S. deferred tax assets. During 2019, the Company decreased its valuation allowance by $5 million, primarily related to non-U.S. deferred tax assets now considered realizable. During 2018, the Company decreased its valuation allowance by $81 million primarily related to the completion of an internal U.S. restructuring. The U.S. restructuring provided a source of positive evidence and enabled the Company to release its valuation allowance on certain state deferred tax assets now considered realizable. In addition, the Company reassessed certain state net operating losses and determined thesecertain losses and the related valuation allowance would never be realized. During 2017, the Company increased its valuation allowance by $28 million primarily due to state net operating losses. At December 31, 20182020 and 2017,2019, the Company had valuation allowances of $81$84 million and $162$76 million, respectively, to reduce its deferred tax assets to their estimated realizable value.values. The valuation allowance at December 31, 20182020 primarily relates to deferred tax
assets for U.K. capital loss carryforwards of $30$39 million, which have an unlimited carryforward period but can only be utilized against U.K. capital gains and U.S. state and non-U.S. net operating losses of $27$26 million and $20$19 million, respectively. The valuation allowance at December 31, 2017 related to deferred tax assets for U.K. capital loss carryforwards of $28 million, which have an unlimited carryforward period and U.S. and non-U.S. net operating losses of $80 million and $34 million, respectively. An analysis of our valuation allowance is shown below. | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Balance at beginning of year | | $ | 162 | | | $ | 134 | | | $ | 187 | | | $ | 76 | | | $ | 81 | | | $ | 162 | | Additions charged to costs and expenses | | | 18 | | | | 35 | | | | — | | | | 17 | | | | 7 | | | | 18 | | Additions charged against other accounts | | | — | | | | — | | | | 21 | | | Deductions | | | (99 | ) | | | (7 | ) | | | (74 | ) | | | (9 | ) | | | (12 | ) | | | (99 | ) | Balance at end of year | | $ | 81 | | | $ | 162 | | | $ | 134 | | | $ | 84 | | | $ | 76 | | | $ | 81 | |
In 2020, the net change in valuation allowance was an $8 million increase, primarily related to non-U.S. deferred tax assets. In 2019, the net change in valuation allowance was a $5 million decrease, primarily related to non-U.S. deferred tax assets now considered realizable. This amount differs from the 2019 rate reconciliation due to changes in foreign currency translation. In 2018, the net change in valuation allowance was an $81 million decrease, of which $80 million was a reduction to tax expense primarily related to an internal U.S. restructuring. In 2017, the amount charged to tax expense in the table above differs from the 2017 rate reconciliation of $13 million because a portion of the valuation allowance increase is related to the U.S. federal corporate tax rate reduction impact on the U.S. state valuation allowance and is included in the impact of U.S. Tax Reform. The amount charged to tax expense in the table above for 2016 differs from the effect of $74 million disclosed in the 2016 rate reconciliation primarily because the movement in this table includes the effects of acquisition accounting, which does not impact tax expense. The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when the Company expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. In 2016 we began accruing deferred taxes on the cumulative earnings of certain acquired Towers Watson subsidiaries. The historical cumulative earnings of our other subsidiaries have been reinvested indefinitely. As a result of U.S. Tax Reform we analyzed our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation and determined we might repatriate up to $219 million, the majority of which was previously deemed indefinitely reinvested. For those investments from which we were able to make a reasonable estimate of the tax effects of such repatriation, we recorded a provisional estimate for foreign withholding taxes and state income taxes of $1 million. In addition, we re-measured the existing deferred tax liability accrued on certain acquired Towers Watson subsidiaries and released the associated deferred tax liability for this item. This resulted in an income tax benefit of $76 million as these foreign earnings were subject to the one-time transition tax. These estimates are now considered final and no further adjustments have been made in the period ended December 31, 2018 as a result of U.S. Tax Reform.
At December 31, 2018, as a result of an international restructuring, we have determined that we may repatriate an additional $2.1 billion, which was previously deemed indefinitely reinvested. As a result we recorded an estimate for foreign withholding and state income tax expense of approximately $11 million.
Of the original $2.1 billion under consideration, $1.4 billion remains permanently reinvested at December 31, 2020. The cumulative earnings related to amounts reinvested indefinitely as of December 31, 20182020 were approximately $7.2$8.9 billion, the majority of which are non-U.S. earnings not subject to U.S. tax. As a result, itIt is not practicable to calculate the tax cost of repatriating these unremitted earnings. If future events, including material changes in estimates of cash, working capital, long-term investment requirements or additional guidance relating to U.S. Tax Reform necessitate that these earnings be distributed, an additional provision for income and foreign withholding taxes, net of credits, may be necessary. Uncertain tax positions At December 31, 2018,2020, the amount of unrecognized tax benefits associated with uncertain tax positions, determined in accordance with ASC 740-10, excluding interest and penalties, was $49$50 million. A reconciliation of the beginning and ending balances of the liability for unrecognized tax benefits is as follows: | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Balance at beginning of year | | $ | 59 | | | $ | 56 | | | $ | 22 | | | $ | 49 | | | $ | 49 | | | $ | 59 | | Increases related to acquisitions | | | — | | | | — | | | | 33 | | | | 4 | | | | 0 | | | | 0 | | Increases related to tax positions in prior years | | | 2 | | | | 2 | | | | 1 | | | | 1 | | | | 2 | | | | 2 | | Decreases related to tax positions in prior years | | | (4 | ) | | | (5 | ) | | | (9 | ) | | | 0 | | | | (1 | ) | | | (4 | ) | Decreases related to settlements | | | (4 | ) | | | — | | | | (1 | ) | | | (3 | ) | | | 0 | | | | (4 | ) | Decreases related to lapse in statute of limitations | | | (5 | ) | | | (2 | ) | | | (1 | ) | | | (2 | ) | | | (1 | ) | | | (5 | ) | Increases related to current year tax positions | | | 3 | | | | 9 | | | | 11 | | | | 0 | | | | 0 | | | | 3 | | Cumulative translation adjustment and other adjustments | | | (2 | ) | | | (1 | ) | | | — | | | | 1 | | | | 0 | | | | (2 | ) | Balance at end of year | | $ | 49 | | | $ | 59 | | | $ | 56 | | | $ | 50 | | | $ | 49 | | | $ | 49 | |
The liability for unrecognized tax benefits for the years ended December 31, 2018, 20172020, 2019 and 20162018 can be reduced by $2$3 million, $3 million and $4$2 million, respectively, of offsetting deferred tax benefits associated with timing differences, foreign tax credits and the federal tax benefit of state income taxes. If these offsetting deferred tax benefits were recognized, there would have beenbe a favorable impact on our effective tax rate. There are no material balances that would result in adjustments to other tax accounts. Interest and penalties related to unrecognized tax benefits are included as a component of income tax expense. At December 31, 2018,2020, we had cumulative accrued interest of $3$5 million. At December 31, 2017,2019, the cumulative accrued interest was $5$4 million. Penalties accrued in 2018Accrued penalties were immaterial in both 2020 and $2 million in 2017.2019. Tax expense for both the years ended December 31, 20182020 and 2017 included immaterial2019 includes $1 million of interest benefits.expense.
The Company believes that the outcomes which are reasonably possible within the next 12 months may result in a reduction in the liability for unrecognized tax benefits in the range of $1$4 million to $3$8 million, excluding interest and penalties. The Company and its subsidiaries file income tax returns in various tax jurisdictions in which it operates. Willis North America Inc. is notand subsidiaries’ federal income tax filings for the tax years ended December 31, 2017 and December 31, 2018 are currently under examination by the IRS. Internal Revenue Service (‘IRS’). As of December 31, 2020, the IRS has not advised the Company of any proposed changes. We have ongoing state income tax examinations in certain states for tax years ranging from calendar years ended December 31, 20132014 through December 31, 2016.2018. The statute of limitations in certain states extendsremains open back to the fiscalcalendar year ended June 30, 2014. All U.K. tax returns have been filed timely and are in the normal process of being reviewed by HMHer Majesty’s Revenue & Customs. The Company is not currently subject to any material examinations in other jurisdictions. A summary of the tax years that remain open to tax examination in our major tax jurisdictions are as follows: | | | | | Open Tax Years (fiscal year ending in) | U.S. — federal | 20152017 and forward
| U.S. — various states | 20132014 and forward
| U.K. | 2010 and forward | Ireland | 20142016 and forward
| France | 2010 and forward | Germany | 2010 and forward | Canada - federal | 20112013 and forward
|
Note 87 — Fixed Assets The following table reflects changes in the net carrying amount of the components of fixed assets for the yearyears ended December 31, 20182020 and 2017:2019: | | Furniture, equipment and software | | | Leasehold improvements | | | Land and buildings | | | Total | | | Furniture, equipment and software | | | Leasehold improvements | | | Land and buildings | | | Total | | Cost: at January 1, 2017 | | $ | 1,009 | | | $ | 382 | | | $ | 90 | | | $ | 1,481 | | | Cost: at January 1, 2019 | | | $ | 1,130 | | | $ | 488 | | | $ | 92 | | | $ | 1,710 | | Additions | | | 303 | | | | 91 | | | | — | | | | 394 | | | | 268 | | | | 68 | | | | — | | | | 336 | | Acquisitions | | | | 7 | | | | 3 | | | | — | | | | 10 | | Disposals | | | | (117 | ) | | | (15 | ) | | | — | | | | (132 | ) | Reclassification due to ASC 842 (i) | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | Foreign exchange | | | | 14 | | | | 6 | | | | 1 | | | | 21 | | Cost: at December 31, 2019 | | | | 1,302 | | | | 550 | | | | 90 | | | | 1,942 | | Additions | | | | 238 | | | | 31 | | | | — | | | | 269 | | Acquisitions | | | | 1 | | | | — | | | | — | | | | 1 | | Disposals | | | | (64 | ) | | | (12 | ) | | | (1 | ) | | | (77 | ) | Abandonment of long-lived asset (ii) | | | | (35 | ) | | | — | | | | — | | | | (35 | ) | Foreign exchange | | | | 31 | | | | 9 | | | | 1 | | | | 41 | | Cost: at December 31, 2020 | | | $ | 1,473 | | | $ | 578 | | | $ | 90 | | | $ | 2,141 | | | | | | | | | | | | | | | | | | | | Depreciation: at January 1, 2019 | | | $ | (519 | ) | | $ | (197 | ) | | $ | (52 | ) | | $ | (768 | ) | Depreciation expense | | | | (179 | ) | | | (57 | ) | | | (4 | ) | | | (240 | ) | Disposals | | | (61 | ) | | | (21 | ) | | | — | | | | (82 | ) | | | 109 | | | | 11 | | | | — | | | | 120 | | Foreign exchange | | | 49 | | | | 16 | | | | 4 | | | | 69 | | | | (5 | ) | | | (2 | ) | | | (1 | ) | | | (8 | ) | Cost: at December 31, 2017 | | | 1,300 | | | | 468 | | | | 94 | | | | 1,862 | | | Additions | | | 249 | | | | 70 | | | | — | | | | 319 | | | Disposals | | | (278 | ) | | | (35 | ) | | | — | | | | (313 | ) | | Reclassification due to ASC 606 (i) | | | (102 | ) | | | — | | | | — | | | | (102 | ) | | Foreign exchange | | | (39 | ) | | | (15 | ) | | | (2 | ) | | | (56 | ) | | Cost: at December 31, 2018 | | $ | 1,130 | | | $ | 488 | | | $ | 92 | | | $ | 1,710 | | | | | | | | | | | | | | | | | | | | | Depreciation: at January 1, 2017 | | $ | (464 | ) | | $ | (137 | ) | | $ | (41 | ) | | $ | (642 | ) | | Depreciation: at December 31, 2019 | | | | (594 | ) | | | (245 | ) | | | (57 | ) | | | (896 | ) | Depreciation expense (ii) | | | (199 | ) | | | (47 | ) | | | (6 | ) | | | (252 | ) | | | (214 | ) | | | (55 | ) | | | (4 | ) | | | (273 | ) | Disposals | | | 37 | | | | 14 | | | | — | | | | 51 | | | | 56 | | | | 10 | | | | — | | | | 66 | | Foreign exchange | | | (26 | ) | | | (6 | ) | | | (2 | ) | | | (34 | ) | | | (17 | ) | | | (6 | ) | | | (1 | ) | | | (24 | ) | Depreciation: at December 31, 2017 | | | (652 | ) | | | (176 | ) | | | (49 | ) | | | (877 | ) | | Depreciation expense (ii) | | | (155 | ) | | | (54 | ) | | | (4 | ) | | | (213 | ) | | Disposals | | | 250 | | | | 27 | | | | — | | | | 277 | | | Reclassification due to ASC 606 (i) | | | 19 | | | | — | | | | — | | | | 19 | | | Foreign exchange | | | 19 | | | | 6 | | | | 1 | | | | 26 | | | Depreciation: at December 31, 2018 | | $ | (519 | ) | | $ | (197 | ) | | $ | (52 | ) | | $ | (768 | ) | | Depreciation: at December 31, 2020 | | | $ | (769 | ) | | $ | (296 | ) | | $ | (62 | ) | | $ | (1,127 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net book value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2017 | | $ | 648 | | | $ | 292 | | | $ | 45 | | | $ | 985 | | | At December 31, 2019 | | | $ | 708 | | | $ | 305 | | | $ | 33 | | | $ | 1,046 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2018 | | $ | 611 | | | $ | 291 | | | $ | 40 | | | $ | 942 | | | At December 31, 2020 | | | $ | 704 | | | $ | 282 | | | $ | 28 | | | $ | 1,014 | |
(i) | Pertains to costs related to certain system implementation activities thatlease incentives which have now been included in other non-currentwithin right-of-use assets based onupon the guidance inadoption of ASC 606.842. See Note 42 — RevenueBasis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements for further information. |
(ii) | Depreciation expense included here does not equal the depreciation expense on the statementsstatement of comprehensive income for the yearsyear ended December 31, 2018 and 2017 due2020 includes both the depreciation expense presented here as well as the abandonment of an internally-developed software asset of $35 million prior to the inclusion of $5 million and $49 million, respectively, which have been classified as transaction and integration expenses.being placed in service. |
Included within land and buildings are the following assets held under capitalfinance leases: | | December 31, | | | December 31, | | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | Capital leases | | $ | 31 | | | $ | 31 | | | Finance leases | | | $ | 28 | | | $ | 29 | | Accumulated depreciation | | | (16 | ) | | | (14 | ) | | | (20 | ) | | | (19 | ) | | | $ | 15 | | | $ | 17 | | | $ | 8 | | | $ | 10 | |
Depreciation related to capital leases was $2 million for each of the years ended December 31, 2018, 2017 and 2016.
Note 98—Goodwill and Other Intangible Assets Goodwill The components of goodwill are outlined below for the years ended December 31, 20182020 and 2017:2019: | | HCB | | | CRB | | | IRR | | | BDA | | | Total | | | HCB | | | CRB | | | IRR | | | BDA | | | Total | | Balance at December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | Goodwill, gross | | $ | 4,412 | | | $ | 2,178 | | | $ | 1,758 | | | $ | 2,557 | | | $ | 10,905 | | | Accumulated impairment losses | | | (130 | ) | | | (362 | ) | | | — | | | | — | | | | (492 | ) | | Goodwill, net - December 31, 2016 | | | 4,282 | | | | 1,816 | | | | 1,758 | | | | 2,557 | | | | 10,413 | | | Goodwill reassigned in segment realignment | | | (113 | ) | | | 13 | | | | 100 | | | | — | | | | — | | | Goodwill acquired during the period | | | — | | | | 8 | | | | — | | | | — | | | | 8 | | | Goodwill disposed of during the period | | | (31 | ) | | | (5 | ) | | | (27 | ) | | | — | | | | (63 | ) | | Foreign exchange | | | 74 | | | | 67 | | | | 20 | | | | — | | | | 161 | | | Balance at December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | Goodwill, gross | | | 4,342 | | | | 2,261 | | | | 1,851 | | | | 2,557 | | | | 11,011 | | | Accumulated impairment losses | | | (130 | ) | | | (362 | ) | | | — | | | | — | | | | (492 | ) | | Goodwill, net - December 31, 2017 | | | 4,212 | | | | 1,899 | | | | 1,851 | | | | 2,557 | | | | 10,519 | | | Goodwill reassigned in segment realignment (i) | | | — | | | | 72 | | | | (72 | ) | | | — | | | | — | | | Goodwill acquired during the period | | | — | | | | 9 | | | | 29 | | | | — | | | | 38 | | | Goodwill disposed of during the period | | | — | | | | — | | | | (5 | ) | | | — | | | | (5 | ) | | Foreign exchange | | | (42 | ) | | | (34 | ) | | | (11 | ) | | | — | | | | (87 | ) | | Balance at December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Goodwill, gross | | | 4,300 | | | | 2,308 | | | | 1,792 | | | | 2,557 | | | | 10,957 | | | $ | 4,300 | | | $ | 2,308 | | | $ | 1,792 | | | $ | 2,557 | | | $ | 10,957 | | Accumulated impairment losses | | | (130 | ) | | | (362 | ) | | | — | | | | — | | | | (492 | ) | | | (130 | ) | | | (362 | ) | | | 0 | | | | 0 | | | | (492 | ) | Goodwill, net - December 31, 2018 | | $ | 4,170 | | | $ | 1,946 | | | $ | 1,792 | | | $ | 2,557 | | | $ | 10,465 | | | | 4,170 | | | | 1,946 | | | | 1,792 | | | | 2,557 | | | | 10,465 | | Goodwill acquired | | | | 0 | | | | 10 | | | | 0 | | | | 727 | | | | 737 | | Goodwill disposals | | | | 0 | | | | (6 | ) | | | 0 | | | | 0 | | | | (6 | ) | Foreign exchange | | | | (2 | ) | | | (3 | ) | | | 3 | | | | 0 | | | | (2 | ) | Balance at December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | Goodwill, gross | | | | 4,298 | | | | 2,309 | | | | 1,795 | | | | 3,284 | | | | 11,686 | | Accumulated impairment losses | | | | (130 | ) | | | (362 | ) | | | 0 | | | | 0 | | | | (492 | ) | Goodwill, net - December 31, 2019 | | | | 4,168 | | | | 1,947 | | | | 1,795 | | | | 3,284 | | | | 11,194 | | Goodwill acquired | | | | 15 | | | | 30 | | | | 2 | | | | 3 | | | | 50 | | Goodwill disposals | | | | (12 | ) | | | (1 | ) | | | (117 | ) | | | 0 | | | | (130 | ) | Acquisition accounting adjustment | | | | 0 | | | | 0 | | | | 0 | | | | (9 | ) | | | (9 | ) | Foreign exchange | | | | 45 | | | | 40 | | | | 14 | | | | 0 | | | | 99 | | Balance at December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | Goodwill, gross | | | | 4,346 | | | | 2,378 | | | | 1,694 | | | | 3,278 | | | | 11,696 | | Accumulated impairment losses | | | | (130 | ) | | | (362 | ) | | | 0 | | | | 0 | | | | (492 | ) | Goodwill, net - December 31, 2020 | | | $ | 4,216 | | | $ | 2,016 | | | $ | 1,694 | | | $ | 3,278 | | | $ | 11,204 | |
(i)
| Represents the reallocation of goodwill related to certain businesses which were realigned among the segments as of January 1, 2018. See Note 5 — Segment Information for further information.
|
Other Intangible Assets The following table reflects changes in the net carrying amounts of the components of finite-lived intangible assets for the year ended December 31, 2018:2020 and 2019: | | Balance at December 31, 2017 | | | Intangible assets acquired | | | Intangible assets disposed | | | Amortization (i) | | | Foreign exchange | | | Balance at December 31, 2018 | | Client relationships | | $ | 2,342 | | | $ | 39 | | | $ | (7 | ) | | $ | (341 | ) | | $ | (47 | ) | | $ | 1,986 | | Management contracts | | | 56 | | | | — | | | | — | | | | (4 | ) | | | (4 | ) | | | 48 | | Software | | | 473 | | | | — | | | | — | | | | (140 | ) | | | (5 | ) | | | 328 | | Trademark and trade name | | | 966 | | | | — | | | | — | | | | (44 | ) | | | (2 | ) | | | 920 | | Product | | | 33 | | | | — | | | | — | | | | (4 | ) | | | (2 | ) | | | 27 | | Favorable agreements | | | 10 | | | | — | | | | — | | | | (2 | ) | | | 1 | | | | 9 | | Other | | | 2 | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | | Total amortizable intangible assets | | $ | 3,882 | | | $ | 39 | | | $ | (7 | ) | | $ | (536 | ) | | $ | (60 | ) | | $ | 3,318 | |
| Client relationships | | | Software | | | Trademark and trade name | | | Favorable agreements (i) | | | Other | | | Total | | Balance at December 31, 2018: | | | | | | | | | | | | | | | | | | | | | | | | Intangible assets, gross | $ | 3,401 | | | $ | 749 | | | $ | 1,052 | | | $ | 14 | | | $ | 102 | | | $ | 5,318 | | Accumulated amortization | | (1,415 | ) | | | (421 | ) | | | (132 | ) | | | (5 | ) | | | (27 | ) | | | (2,000 | ) | Intangible assets, net - December 31, 2018 | | 1,986 | | | | 328 | | | | 920 | | | | 9 | | | | 75 | | | | 3,318 | | ASC 842 reclassification (i) | | — | | | | — | | | | — | | | | (9 | ) | | | — | | | | (9 | ) | Intangible assets acquired (ii) | | 626 | | | | — | | | | — | | | | — | | | | 34 | | | | 660 | | Intangible asset disposals | | (9 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | | (10 | ) | Amortization | | (313 | ) | | | (125 | ) | | | (45 | ) | | | — | | | | (6 | ) | | | (489 | ) | Foreign exchange | | 8 | | | | — | | | | — | | | | — | | | | — | | | | 8 | | Balance at December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | Intangible assets, gross | | 4,029 | | | | 753 | | | | 1,051 | | | | — | | | | 134 | | | | 5,967 | | Accumulated amortization | | (1,731 | ) | | | (551 | ) | | | (176 | ) | | | — | | | | (31 | ) | | | (2,489 | ) | Intangible assets, net - December 31, 2019 | | 2,298 | | | | 202 | | | | 875 | | | | — | | | | 103 | | | | 3,478 | | Intangible assets acquired | | 30 | | | | — | | | | — | | | | — | | | | 32 | | | | 62 | | Intangible asset disposals | | (19 | ) | | | — | | | | — | | | | — | | | | (48 | ) | | | (67 | ) | Amortization | | (301 | ) | | | (103 | ) | | | (43 | ) | | | — | | | | (15 | ) | | | (462 | ) | Foreign exchange | | 26 | | | | 3 | | | | 2 | | | | — | | | | 1 | | | | 32 | | Balance at December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | Intangible assets, gross | | 4,065 | | | | 761 | | | | 1,054 | | | | — | | | | 108 | | | | 5,988 | | Accumulated amortization | | (2,031 | ) | | | (659 | ) | | | (220 | ) | | | — | | | | (35 | ) | | | (2,945 | ) | Intangible assets, net - December 31, 2020 | $ | 2,034 | | | $ | 102 | | | $ | 834 | | | $ | — | | | $ | 73 | | | $ | 3,043 | |
(i) | Amortization associatedOn January 1, 2019, in accordance with ASC 842, we reclassified our favorable lease agreements is recorded in Other operating expenses in theagreement assets to right-of-use assets within our consolidated statements of comprehensive income.balance sheet.
|
(ii) | Includes $612 million and $34 million of client relationship and domain name intangible assets, respectively, associated with our acquisition of TRANZACT. |
The following table reflects changes in the net carrying amounts of the components of finite-lived intangible assets forFor the year ended December 31, 2017:
| | Balance at December 31, 2016 | | | Intangible assets acquired | | | Intangible assets disposed | | | Amortization (ii) | | | Foreign exchange | | | Balance at December 31, 2017 | | Client relationships | | $ | 2,655 | | | $ | 13 | | | $ | (44 | ) | | $ | (379 | ) | | $ | 97 | | | $ | 2,342 | | Management contracts | | | 54 | | | | — | | | | — | | | | (4 | ) | | | 6 | | | | 56 | | Software (i) | | | 570 | | | | 36 | | | | — | | | | (150 | ) | | | 17 | | | | 473 | | Trademark and trade name | | | 1,006 | | | | — | | | | (1 | ) | | | (44 | ) | | | 5 | | | | 966 | | Product | | | 33 | | | | — | | | | — | | | | (3 | ) | | | 3 | | | | 33 | | Favorable agreements | | | 11 | | | | 1 | | | | — | | | | (2 | ) | | | — | | | | 10 | | Other | | | 3 | | | | — | | | | — | | | | (1 | ) | | | — | | | | 2 | | Total amortizable intangible assets | | $ | 4,332 | | | $ | 50 | | | $ | (45 | ) | | $ | (583 | ) | | $ | 128 | | | $ | 3,882 | |
(i)
| In-process research and development intangible assets acquired as part of the Merger on January 4, 2016 of $39 million ($36 million at the date placed into service due to changes in foreign currency exchange rates) had been placed in service during the year ended December 31, 2017 and are included as intangible assets acquired in this presentation.
|
(ii)
| Amortization associated with favorable lease agreements is recorded in Other operating expenses in the consolidated statements of comprehensive income.
|
We2018, we recorded amortization related to our finite-lived intangible assets, exclusive of the amortization of our favorable lease agreements, of $534 million, $581 million and $591 million for the years ended December 31, 2018, 2017 and 2016, respectively.million.
Our acquired unfavorable lease agreement liabilities were $21 million and $26 million as ofat December 31, 2018 and December 31, 2017, respectively, and arewere recorded in other non-current liabilities in the consolidated balance sheet. The following table reflects the carrying values of finite-lived intangible On January 1, 2019, in accordance with ASC 842, we reclassified our unfavorable lease liabilities as a reduction to our right-of-use assets and liabilities at December 31, 2018 and December 31, 2017:within our consolidated balance sheet.
| | December 31, 2018 | | | December 31, 2017 | | | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | | Client relationships | | $ | 3,401 | | | $ | (1,415 | ) | | $ | 3,462 | | | $ | (1,120 | ) | Management contracts | | | 63 | | | | (15 | ) | | | 68 | | | | (12 | ) | Software | | | 749 | | | | (421 | ) | | | 764 | | | | (291 | ) | Trademark and trade name | | | 1,052 | | | | (132 | ) | | | 1,055 | | | | (89 | ) | Product | | | 36 | | | | (9 | ) | | | 39 | | | | (6 | ) | Favorable agreements | | | 14 | | | | (5 | ) | | | 14 | | | | (4 | ) | Other | | | 3 | | | | (3 | ) | | | 6 | | | | (4 | ) | Total finite-lived assets | | $ | 5,318 | | | $ | (2,000 | ) | | $ | 5,408 | | | $ | (1,526 | ) | | | | | | | | | | | | | | | | | | Unfavorable agreements | | $ | 34 | | | $ | (13 | ) | | $ | 34 | | | $ | (8 | ) | Total finite-lived intangible liabilities | | $ | 34 | | | $ | (13 | ) | | $ | 34 | | | $ | (8 | ) |
The weighted-average remaining life of amortizable intangible assets and liabilities at December 31, 20182020 was 13.913.3 years.
The table below reflects the future estimated amortization expense for amortizable intangible assets and the rent offset resulting from amortization of the net lease intangible assets and liabilities for the next five years and thereafter: Years ended December 31, | | | Amortization | | | Rent offset | | | | Amortization | | 2019 | | | $ | 472 | | | $ | (2 | ) | | 2020 | | | | 420 | | | | (2 | ) | | 2021 | | | | 344 | | | | (2 | ) | | | $ | 389 | | 2022 | | | | 287 | | | | (3 | ) | | | | 328 | | 2023 | | | | 239 | | | | (2 | ) | | | | 274 | | 2024 | | | | | 239 | | 2025 | | | | | 217 | | Thereafter | | | | 1,547 | | | | (1 | ) | | | | 1,596 | | Total | | | $ | 3,309 | | | $ | (12 | ) | | | $ | 3,043 | |
Note 10 9—Derivative Financial Instruments We are exposed to certain interest rate and foreign currency risks. Where possible, we identify exposures in our business that can be offset internally. Where no natural offset is identified, we may choose to enter into various derivative transactions. These instruments have the effect of reducing our exposure to unfavorable changes in interest and foreign currency rates. The Company’s board of directors reviews and approves policies for managing each of these risksthis risk as summarized below. Additional information regarding our derivative financial instruments can be found in Note 2 — Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements, Note 1211 — Fair Value Measurements and Note 17 — Accumulated Other Comprehensive Loss. Interest Rate Risk - Investment Income
As a result of its operating activities, the Company holds fiduciary funds. The Company earns interest on these funds, which is included in its consolidated financial statements in revenue. These funds are regulated in terms of access as are the instruments in which they may be invested, most of which are short-term in nature.
During 2015, in order to manage interest rate risk arising from these financial assets, the Company entered into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest. These derivatives, with total notional amounts of $300 million, were designated as hedging instruments at December 31, 2017 and had a net fair value liability of $1 million. These derivatives matured during 2018.
Foreign Currency Risk Certain non-U.S. subsidiaries receive revenue and incur expenses in currencies other than their functional currency, and as a result, the foreign subsidiary’s functional currency revenue and/or expenses will fluctuate as the currency rates change. Additionally, the forecastforecasted Pounds sterling expenses of our London brokerage market operations may exceed their Pounds sterling revenue, and theythe entity with such operations may also hold significant foreign currency asset or liability positions in the consolidated balance sheet. To reduce such variability, we use foreign exchange contracts to hedge against this currency risk. These derivatives were designated as hedging instruments and at December 31, 20182020 and December 31, 20172019 had total notional amounts of $438$340 million and $937$499 million, respectively, and hadrepresented net fair value liabilitiesassets of $15$5 million and $21$8 million, respectively. At December 31, 2018,2020, the Company estimates, based on current interest and exchange rates, there will be $12$3 million of net derivative lossesgains on forward exchange rates reclassified from accumulated other comprehensive loss into earnings within the next twelve months as the forecastforecasted transactions affect earnings. These amounts include gains for contracts held by Miller, which is expected to be sold in the first quarter of 2021 (see Note 3 — Acquisitions and Divestitures). At December 31, 2018,2020, our longest outstanding maturity was 21.7 years.
The effects of the material derivative instruments that are designated as hedging instruments on the consolidated statements of comprehensive income for the years ended December 31, 2020, 2019 and 2018 2017are below. Amounts pertaining to the ineffective portion of hedging instruments and 2016 are as follows:those excluded from effectiveness testing were immaterial for the years ended December 31, 2020, 2019 and 2018. | | (Loss)/gain recognized in OCI (effective element) | | | Location of loss reclassified from Accumulated OCL into income (effective element) | | Loss reclassified from Accumulated OCL into income (effective element) | | | Location of loss recognized in income (ineffective portion and amount excluded from effectiveness testing) | | Loss recognized in income (ineffective portion and amount excluded from effectiveness testing) | | | | 2018 | | | 2017 | | | 2016 | | | | | 2018 | | | 2017 | | | 2016 | | | | | 2018 | | | 2017 | | | 2016 | | Foreign exchange contracts | | $ | (22 | ) | | $ | 39 | | | $ | (127 | ) | | Other income, net | | $ | (28 | ) | | $ | (53 | ) | | $ | (42 | ) | | Interest expense | | $ | (1 | ) | | $ | (1 | ) | | $ | (1 | ) |
| | Loss/(gain) recognized in OCI (effective element) | | | | 2020 | | | 2019 | | | 2018 | | Foreign exchange contracts | | $ | (13 | ) | | $ | 15 | | | $ | (22 | ) |
Location of loss reclassified from Accumulated OCL into income (effective element) | | Loss reclassified from Accumulated OCL into income (effective element) | | | | 2020 | | | 2019 | | | 2018 | | Revenue | | $ | (5 | ) | | $ | (5 | ) | | $ | 0 | | Salaries and benefits | | | (4 | ) | | | (4 | ) | | | 0 | | Other income, net | | | 0 | | | | 0 | | | | (28 | ) | | | $ | (9 | ) | | $ | (9 | ) | | $ | (28 | ) |
We also enter into foreign currency transactions, primarily to hedge certain intercompany loans.loans and other balance sheet exposures in currencies other than the functional currency of a given entity. These derivatives are not generally designated as hedging instruments, and at December 31, 20182020 and December 31, 2017, we2019, had notional amounts of $909 million$1.5 billion and $971$931 million, respectively, and had arepresented net fair value assetassets of $3$15 million at both December 31, 2018 and 2017.$21 million, respectively. The effects of derivatives that have not been designated as hedging instruments on the consolidated statements of comprehensive income for the years ended December 31, 2018, 20172020, 2019 and 20162018 are as follows: | | Location of gain/(loss) | | Gain/(loss) recognized in income | | | Location of (loss)/gain | | (Loss)/gain recognized in income | | Derivatives not designated as hedging instruments: | | recognized in income | | 2018 | | | 2017 | | | 2016 | | | recognized in income | | 2020 | | | 2019 | | | 2018 | | Foreign exchange contracts | | Other income, net | | $ | — | | | $ | 11 | | | $ | (3 | ) | | Other income, net | | $ | (3 | ) | | $ | 18 | | | $ | 0 | |
On June 10, 2020, we entered into certain foreign currency transactions to hedge the consideration to be received from the then-pending divestiture of our Max Matthiessen business (see Note 113 — Acquisitions and Divestitures) against fluctuations in foreign exchange rates. The notional value of these contracts was approximately $273 million, of which approximately $181 million had been
designated as a hedge of net investment, on an after-tax basis, against the carrying value of the net assets of Max Matthiessen. The settlement of the hedging instruments resulted in a $1 million loss during the year ended December 31, 2020, which was included in the net gain on disposal. Note 10—Debt Short-term debt and current portion of long-termCurrent debt consists of the following:
| | December 31, | | | | 2018 | | | 2017 | | 7.000% senior notes due 2019 | | $ | 186 | | | $ | — | | Current portion of term loan due 2019 | | | — | | | | 85 | | | | $ | 186 | | | $ | 85 | |
| | December 31, | | | | 2020 | | | 2019 | | 5.750% senior notes due 2021 | | $ | 500 | | | $ | — | | 3.500% senior notes due 2021 | | | 449 | | | | — | | Current portion of collateralized facility | | | 22 | | | | 24 | | Term loan due 2020 | | | — | | | | 292 | | | | $ | 971 | | | $ | 316 | |
Long-term debt consists of the following: | | December 31, | | | December 31, | | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | Revolving $1.25 billion credit facility | | $ | 130 | | | $ | 884 | | | $ | — | | | $ | — | | Term loan due 2019 | | | — | | | | 84 | | | 7.000% senior notes due 2019 | | | — | | | | 186 | | | Collateralized facility (i) | | | | 33 | | | | 60 | | 5.750% senior notes due 2021 | | | 498 | | | | 497 | | | | — | | | | 499 | | 3.500% senior notes due 2021 | | | 448 | | | | 447 | | | | — | | | | 448 | | 2.125% senior notes due 2022 (i) | | | 615 | | | | 644 | | | 2.125% senior notes due 2022 (ii) | | | | 659 | | | | 604 | | 4.625% senior notes due 2023 | | | 248 | | | | 248 | | | | 249 | | | | 249 | | 3.600% senior notes due 2024 | | | 645 | | | | 645 | | | | 647 | | | | 646 | | 4.400% senior notes due 2026 | | | 544 | | | | 544 | | | | 546 | | | | 546 | | 4.500% senior notes due 2028 | | | 595 | | | | — | | | | 596 | | | | 595 | | 2.950% senior notes due 2029 | | | | 726 | | | | 446 | | 6.125% senior notes due 2043 | | | 271 | | | | 271 | | | | 271 | | | | 271 | | 5.050% senior notes due 2048 | | | 395 | | | | — | | | | 395 | | | | 395 | | 3.875% senior notes due 2049 | | | | 542 | | | | 542 | | | | $ | 4,389 | | | $ | 4,450 | | | $ | 4,664 | | | $ | 5,301 | |
(i) | At December 31, 2020 and 2019, the Company had $98 million and $127 million, respectively, of renewal commissions receivables pledged as collateral for this facility (see below for additional information). |
(ii) | Notes issued in Euro (€540 million). |
Guarantees All direct obligations under the 5.750% senior notes are issued by Willis Towers Watson and guaranteed by Willis Netherlands Holdings B.V., Willis Investment U.K.UK Holdings Limited, TA I Limited, Trinity Acquisition plc, Willis Group Limited, Willis North America Inc., Willis Towers Watson Sub Holdings Unlimited Company and Willis Towers Watson U.K. Holdings Limited. All direct obligations under the 7.000%, 3.600%, 4.500%, 2.950%, 5.050% and 5.050%3.875% senior notes are issued by Willis North America Inc. and guaranteed by Willis Towers Watson and each of the subsidiaries that guarantees the Company notes, except for Willis North America Inc. itself. All direct obligations under the 4.625%, 6.125%, 3.500%, 4.400%, and 2.125% senior notes are issued by Trinity Acquisition plc and guaranteed by Willis Towers Watson and each of the subsidiaries that guarantees the Company notes, except for Trinity Acquisition plc itself. See Note 22 — Financial Information for Issuers and Other Guarantor Subsidiaries. Revolving Credit Facility $1.25 billion revolving credit facility On March 7, 2017, Trinity Acquisition plc (see Note 22 for further information) entered into a $1.25 billion amended and restated revolving credit facility (the ‘RCF’), that will mature on March 7, 2022. The RCF replaced the previous $800 million revolving credit facility (see below for further information).facility. Amounts outstanding under the RCF shall bear
interest at LIBOR plus a margin of 1.00% to 1.75%, or alternatively, the base rate plus a margin of 0.00% to 0.75%, based upon the Company’s guaranteed senior unsecured long-term debt rating. BorrowingsSenior Notes
2.950% senior notes due 2029 and 3.875% senior notes due 2049 On September 10, 2019, the Company, together with its wholly-owned subsidiary, Willis North America Inc., as issuer, completed an offering of $409$450 million aggregate principal amount of 2.950% senior notes due 2029 (the ‘initial 2029 senior notes’) and $550 million aggregate principal amount of 3.875% senior notes due 2049 (‘2049 senior notes’; collectively, the ‘2019 senior notes offering’). On May 29, 2020, the Company, together with its wholly-owned subsidiary, Willis North America Inc., as issuer, completed an offering of an additional $275 million aggregate principal amount of 2.950% senior notes due 2029 (the ‘additional 2029 senior notes’). The additional 2029 senior notes will be treated as a single class with, and otherwise identical to, the initial 2029 senior notes other than with respect to the date of issuance, the issue price and the amounts paid to holders for each class of note on the first interest payment date. The effective interest rates of the initial 2029 senior notes and 2049 senior notes are 2.971% and 3.898%, respectively, which include the impact of the discount upon issuance. The effective interest rate of the additional 2029 senior notes is 2.697%, which includes the impact of the premium upon issuance. Both 2029 senior notes offerings will mature on September 15, 2029, and the 2049 senior notes will mature on September 15, 2049. Interest on the 2019 senior notes offering has accrued from September 10, 2019 and is paid in cash on March 15 and September 15 of each year. Interest on the additional 2029 senior notes has accrued from March 15, 2020 and is paid in cash on March 15 and September 15 of each year. The net proceeds from the 2019 senior notes offering, after deducting underwriter discounts and commissions and estimated offering expenses, were approximately $988 million and €45 million againstwere used to prepay a portion of the RCFamount outstanding under the Company’s one-year term loan commitment (described below) and to repay borrowings under the Company’s $1.25 billion revolving credit facility. The net proceeds from the additional 2029 senior notes offering were used to repay all$175 million of the full principal amount and related accrued interest under the term loan facility, which was set to expire in July 2020, as well as repay $105 million of borrowings outstanding borrowings againstunder the previous $800 millionCompany’s $1.25 billion revolving credit facility and the 7-year term loan due July 23, 2018. Additionally, on March 28, 2017, $407 million was used to repay the 6.200% senior notes due 2017, includingrelated accrued interest.
Senior Notes
4.500% senior notes due 2028 and 5.050% senior notes due 2048 On September 10, 2018, the Company, together with its wholly-owned subsidiary, Willis North America Inc. as issuer, (see Note 22 for further information), completed an offering of $600 million of 4.500% senior notes due 2028 (‘2028 senior notes’) and $400 million of 5.050% senior notes due 2048 (‘2048 senior notes’). The effective interest rates of the 2028 senior notes and 2048 senior notes are 4.504% and 5.073%, respectively, which include the impact of the discount upon issuance. The 2028 senior notes will mature on September 15, 2028 and the 2048 senior notes will mature on September 15, 2048. Interest has accrued on both the 2028 senior notes and 2048 senior notes from September 10, 2018 and will beis paid in cash on March 15 and September 15 of each year, commencing on March 15, 2019.year. The net proceeds from this offering, after deducting underwriter discounts and commissions and estimated offering expenses, were $989 million and were used to prepay in full $127 million outstanding under the Company’s term loan due December 2019 and to repay a portion of the amount outstanding under the Company’s RCF. 3.600% senior notes due 2024 On May 16, 2017, Willis North America Inc. (see Note 22 for further information) issued $650 million of 3.600% senior notes due 2024 (‘2024 senior notes’). The effective interest rate of the 2024 senior notes is 3.614%, which includes the impact of the discount upon issuance. The 2024 senior notes will mature on May 15, 2024, and interest has accrued on the 2024 senior notes from May 16, 2017 and will beis paid in cash on May 15 and November 15 of each year. The net proceeds from this offering, after deducting underwriter discounts and commissions and estimated offering expenses, were $644 million and were used to pay down amounts outstanding under the RCF and for general corporate purposes.
2.125% senior notes due 2022 On May 26, 2016, Trinity Acquisition plc issued €540 million ($609 million) of 2.125% senior notes due 2022 (‘2022 senior notes’). The effective interest rate of these senior notes is 2.154%, which includes the impact of the discount upon issuance. The 2022 senior notes will mature on May 26, 2022. Interest has accrued on the notes from May 26, 2016 and will be paid in cash on May 26 of each year. The net proceeds from this offering, after deducting underwriter discounts and commissions and estimated offering expenses, were €535 million ($600 million). We used the net proceeds of this offering to repay Tranche Aa portion of the previous 1-year term loan facility, which matured in 2016, and related accrued interest.
3.500% senior notes due 2021 and 4.400% senior notes due 2026 On March 22, 2016, Trinity Acquisition plc issued $450 million of 3.500% senior notes due 2021 (‘2021 senior notes’) and $550 million of 4.400% senior notes due 2026 (‘2026 senior notes’). The effective interest rates of these senior notes are 3.707% and 4.572%, respectively, which include the impact of the discount upon issuance. The 2021 senior notes and the 2026 senior notes will mature on September 15, 2021 and March 15, 2026, respectively. Interest has accrued on the notes from March 22, 2016 and will be paid in cash on March 15 and September 15 of each year. The net proceeds from these offerings, after deducting underwriter discounts and commissions and estimated offering expenses, were $988 million. We used the net proceeds of these offerings to: (i) repay $300 million principal under the prior $800 million revolving credit facility and related accrued interest, which was drawn to repay our previously issuedpreviously-issued 4.125% senior notes on March 15, 2016; (ii) repay $400 million principal on Tranche Banother portion of the previous 1-year term loan facility and related accrued interest; and (iii) pay down a portion of the remaining principal amount outstanding under the previous $800 million revolving credit facility (see below for further information) and related accrued interest. 4.625% senior notes due 2023 and 6.125% senior notes due 2043 On August 15, 2013, the CompanyTrinity Acquisition plc issued $250 million of 4.625% senior notes due 2023 (‘2023 senior notes’) and $275 million of 6.125% senior notes due 2043.2043 (‘2043 senior notes’). The effective interest rates of these senior notes are 4.696% and 6.154%, respectively, which include the impact of the discount upon issuance. The proceeds were used to repurchase other previously issued senior notes. The 2023 senior notes will mature on August 15, 2023 and the 2043 senior notes will mature on August 15, 2043. 5.750% senior notes due 2021 In March 2011, the Company issued $500 million of 5.750% senior notes due 2021. The effective interest rate of thisthese senior notenotes is 5.871%, which includes the impact of the discount upon issuance. The proceeds were used to repurchase and redeem other previouslypreviously- issued senior notes. The notes will mature on March 15, 2021. Collateralized Facility As part of the acquisition of TRANZACT, the Company assumed debt of $91 million related to borrowings by TRANZACT whereby certain renewal commissions receivables were pledged as collateral. The Company is required to remit cash received from these pledged renewal commissions receivables on a quarterly basis to the lenders until the borrowings and related interest are repaid, after the payment of certain fees and other permitted distributions. NaN borrowings have been made against this collateralized facility since the acquisition. The maturity date of the borrowing is in January 2033, at which time all remaining outstanding principal and unpaid accrued interest will be payable. The collateralization facility may be prepaid in November 2021 or earlier if approval is obtained from at least half of the lenders. Loans under the agreement bear interest at LIBOR plus an applicable margin of 3.95%. The collateralization facility contains financial covenants, including requirements to separately and securely maintain the collateral. As cash is received for these pledged assets, it is classified as restricted cash within prepaid and other current assets on our accompanying consolidated balance sheet. Accumulated cash receipts are applied against the principal and interest on a quarterly basis. Additional Information Regarding Fully Repaid Senior Notes and Term Loan Facilities 7.000% senior notes due 2019 In September 2009, Willis North America Inc. issued $300 million of 7.000% senior notes due 2019. The effective interest rate of these senior notes iswas 7.081%, which includesincluded the impact of the discount upon issuance. A portion of the proceeds werewas used to repurchase and redeem other previously-issuedpreviously issued senior notes. In August 2013, $113 million of the 7.000% senior notes due 2019 were repurchased. Term Loan Facilities In September 2019, the Company repaid in full the remaining $187 million outstanding on the 7.000% senior notes due 2019 with borrowings against its revolving credit facility.
Term loan due December 2019 On January 4, 2016, we acquired a $340 million term loan in connection with the Merger. On November 20, 2015, Towers Watson Delaware Inc. entered into a 4-year amortizing term loan agreement for up to $340 million with a consortium of banks to help fund the pre-Merger special dividend. On December 28, 2015, Towers Watson Delaware Inc. borrowed the full $340 million. During 2018, we prepaid the remaining $127 million outstanding under the term loan with proceeds from the issuance of the 2028 senior notes and 2048 senior notes discussed above.
Additional Information Regarding Fully Repaid Revolving Credit Facility,One-year Term Loan Facilities and Senior NotesCommitment
$800 million revolving credit facilityAs part of the acquisition of TRANZACT, the Company secured financing of up to $1.1 billion in the form of a one-year unsecured term loan. Borrowing occurred in conjunction with the closing of the acquisition on July 30, 2019.
DrawingsAmounts outstanding under the previous $800 million revolving credit facilityterm loan bore interest, at the option of the borrowers, at a rate equal to (a) LIBOR plus a margin0.75% to 1.375% for Eurocurrency Rate Loans or (b) the highest of 1.25%(i) the Federal Funds Rate plus 0.5%, (ii) the ‘prime rate’ quoted by Bank of America, N.A., and (iii) LIBOR plus 1.00%, plus 0.00% to 2.00%0.375%, or alternatively the base rate plus a margin of 0.25% to 1.00%in each case, based upon the Company’s guaranteed senior unsecuredsenior-unsecured long-term debt rating;rating. In addition, the Company paid a 1.375% margin applied whilecommitment fee in an amount equal to 0.15% per annum on the undrawn portion of the commitments in respect of the term loan, which we had accrued from May 29, 2019 until the closing date of the acquisition.
The term loan was pre-payable in part or in full prior to the maturity date at the Company’s debt rating remained BBB/Baa3.
7-yeardiscretion. Covenants and events of default were substantively the same as in our existing revolving credit facility. The remaining outstanding balance on the term loan facility
The 7-year term loan facility expiring 2018 bore interest at the same rate applicable to the previous $800 million revolving credit facility and was repayable in quarterly installments of $6 million with a final repayment of $186 million due in the third quarter of 2018. During 2017, we repaid in full and terminated the 7-year term loan with proceeds from borrowings against our $1.25 billion revolving credit facility.
1-year term loan facility
On November 20, 2015, Legacy Willis entered into a 1-year term loan facility. The 1-year term loan had two tranches: Tranche A was for €550 million, of which €544 million ($592 million) was drawn on December 19, 2015 and used to finance the acquisition of Gras Savoye. Tranche B was for $400 million and was drawn on January 4, 2016 and used to re-finance debt held by Legacy Towers Watson which became due on acquisition. Tranche A was repaid in its entirety on May 26, 2016 from the proceeds from theupon issuance of our 2022the additional 2029 senior notes discussed above. Tranche B was repaid in its entirety on March 22, 2016 from a portion of the proceeds from the issuance of our senior notes discussed above.
4.125% senior notes due 2016
In March 2011, the Company issued $300 million of 4.125% senior notes due 2016. The effective interest rate of the senior notes was 4.240%, which included the impact of the discount upon issuance. The proceeds were used to repurchase and redeem other previously issued senior notes. The 4.125% senior notes were repaid in March 2016.
6.200% senior notes due 2017
On March 28, 2007, we issued $600 million of 10-year senior notes at 6.200%. The effective interest rate of these senior notes was 6.253%. In August 2013, $206 million of the 6.200% senior notes was repurchased. The final balance was repaid on March 28, 2017 from the RCF as discussed above.
Covenants The terms of our current financings also include certain limitations. For example, the agreements relating to the debt arrangements and credit facilities generally contain numerous operating and financial covenants, including requirements to maintain minimum ratios of consolidated EBITDA to consolidated cash interest expense and maximum levels of consolidated funded indebtedness in relation to consolidated EBITDA, in each case subject to certain adjustments. The operating restrictions and financial covenants in our current credit facilities do, and any future financing agreements may, limit our ability to finance future operations or capital needs or to engage in other business activities. At December 31, 20182020 and 2017,2019, we were in compliance with all financial covenants. Debt Maturity The following table summarizes the maturity of our debt and interest on senior notes and excludes any reduction for debt issuance costs: | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | Thereafter | | | Total | | Senior notes | | $ | 187 | | | $ | — | | | $ | 950 | | | $ | 617 | | | $ | 250 | | | $ | 2,475 | | | $ | 4,479 | | | $ | 950 | | | $ | 660 | | | $ | 250 | | | $ | 650 | | | $ | — | | | $ | 3,100 | | | $ | 5,610 | | Interest on senior notes | | | 191 | | | | 181 | | | | 153 | | | | 128 | | | | 119 | | | | 1,019 | | | | 1,791 | | | | 197 | | | | 171 | | | | 162 | | | | 140 | | | | 131 | | | | 1,418 | | | | 2,219 | | RCF | | | — | | | | — | | | | — | | | | 130 | | | | — | | | | — | | | | 130 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Collateralized facility | | | | 22 | | | | 17 | | | | 13 | | | | 3 | | | | — | | | | — | | | | 55 | | Total | | $ | 378 | | | $ | 181 | | | $ | 1,103 | | | $ | 875 | | | $ | 369 | | | $ | 3,494 | | | $ | 6,400 | | | $ | 1,169 | | | $ | 848 | | | $ | 425 | | | $ | 793 | | | $ | 131 | | | $ | 4,518 | | | $ | 7,884 | |
Interest Expense The following table shows an analysis of the interest expense for the years ended December 31:31, 2020, 2019 and 2018: | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Senior notes | | $ | 166 | | | $ | 148 | | | $ | 139 | | | $ | 227 | | | $ | 206 | | | $ | 166 | | Term loans | | | 4 | | | | 8 | | | | 17 | | | | 6 | | | | 9 | | | | 4 | | RCF | | | 26 | | | | 17 | | | | 10 | | | | 4 | | | | 8 | | | | 26 | | WSI revolving credit facility | | | — | | | | 1 | | | | 2 | | | Collateralized facility | | | | 3 | | | | 1 | | | | — | | Other (i) | | | 12 | | | | 14 | | | | 16 | | | | 4 | | | | 10 | | | | 12 | | Total interest expense | | $ | 208 | | | $ | 188 | | | $ | 184 | | | $ | 244 | | | $ | 234 | | | $ | 208 | |
(i) | Other primarily includes debt issuance costs, interest expense on capitalizedfinancing leases and accretion on deferred and contingent consideration. |
Note 12 11—Fair Value Measurements The Company has categorized its assets and liabilities that are measured at fair value on a recurring and non-recurring basis into a three-level fair value hierarchy, based on the reliability of the inputs used to determine fair value as follows: Level 1: refers to fair values determined based on quoted market prices in active markets for identical assets;
| • | Level 1: refers to fair values determined based on quoted market prices in active markets for identical assets; |
Level 2: refers to fair values estimated using observable market-based inputs or unobservable inputs that are corroborated by market data; and
| • | Level 2: refers to fair values estimated using observable market-based inputs or unobservable inputs that are corroborated by market data; and |
Level 3: includes fair values estimated using unobservable inputs that are not corroborated by market data.
| • | Level 3: includes fair values estimated using unobservable inputs that are not corroborated by market data. |
The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments: Available-for-sale securities are classified as Level 1 because we use quoted market prices in determining the fair value of these securities.
| • | Available-for-sale securities are classified as Level 1 because we use quoted market prices in determining the fair value of these securities. |
Market values for our derivative instruments have been used to determine the fair values of interest rate swaps and forward foreign exchange contracts based on estimated amounts the Company would receive or have to pay to terminate the agreements, taking into account observable information about the current interest rate environment or current foreign currency forward rates. Such financial instruments are classified as Level 2 in the fair value hierarchy.
| • | Market values for our derivative instruments have been used to determine the fair values of forward foreign exchange contracts based on estimated amounts the Company would receive or have to pay to terminate the agreements, taking into account observable information about the current foreign currency forward rates. Such financial instruments are classified as Level 2 in the fair value hierarchy. |
Contingent consideration payable is classified as Level 3, and we estimate fair value based on the likelihood and timing of achieving the relevant milestones of each arrangement, applying a probability assessment to each of the potential outcomes, and discounting the probability-weighted payout. Typically, milestones are based on revenue or EBITDA growth for the acquired business.
| • | Contingent consideration payable is classified as Level 3, and we estimate fair value based on the likelihood and timing of achieving the relevant milestones of each arrangement, applying a probability assessment to each of the potential outcomes, which at times includes the use of a Monte Carlo simulation and discounting the probability-weighted payout. Typically, milestones are based on revenue or earnings growth for the acquired business. |
The following tables present our assets and liabilities measured at fair value on a recurring basis at December 31, 20182020 and December 31, 2017:2019: | | | | Fair Value Measurements on a Recurring Basis at December 31, 2018 | | | | | Fair Value Measurements on a Recurring Basis at December 31, 2020 | | | | Balance Sheet Location | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Balance Sheet Location | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mutual funds / exchange traded funds | | Prepaid and other current assets and other non-current assets | | $ | 18 | | | $ | — | | | $ | — | | | $ | 18 | | | Prepaid and other current assets and other non-current assets | | $ | 8 | | | $ | 0 | | | $ | 0 | | | $ | 8 | | Derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments (i) | | Prepaid and other current assets and other non-current assets | | $ | — | | | $ | 5 | | | $ | — | | | $ | 5 | | | Prepaid and other current assets and other non-current assets | | $ | 0 | | | $ | 27 | | | $ | 0 | | | $ | 27 | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Contingent consideration: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Contingent consideration (ii) | | Other current liabilities and other non-current liabilities | | $ | — | | | $ | — | | | $ | 51 | | | $ | 51 | | | Other current liabilities and other non-current liabilities | | $ | 0 | | | $ | 0 | | | $ | 45 | | | $ | 45 | | Derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments (i) | | Other current liabilities and other non-current liabilities | | $ | — | | | $ | 17 | | | $ | — | | | $ | 17 | | | Other current liabilities and other non-current liabilities | | $ | 0 | | | $ | 7 | | | $ | 0 | | | $ | 7 | |
| | | | Fair Value Measurements on a Recurring Basis at December 31, 2017 | | | | | Fair Value Measurements on a Recurring Basis at December 31, 2019 | | | | Balance Sheet Location | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Balance Sheet Location | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mutual funds / exchange traded funds | | Prepaid and other current assets and other non-current assets | | $ | 40 | | | $ | — | | | $ | — | | | $ | 40 | | | Prepaid and other current assets and other non-current assets | | $ | 20 | | | $ | 0 | | | $ | 0 | | | $ | 20 | | Derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments (i) | | Prepaid and other current assets and other non-current assets | | $ | — | | | $ | 18 | | | $ | — | | | $ | 18 | | | Prepaid and other current assets and other non-current assets | | $ | 0 | | | $ | 32 | | | $ | 0 | | | $ | 32 | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Contingent consideration: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Contingent consideration (ii) | | Other current liabilities and other non-current liabilities | | $ | — | | | $ | — | | | $ | 51 | | | $ | 51 | | | Other current liabilities and other non-current liabilities | | $ | 0 | | | $ | 0 | | | $ | 17 | | | $ | 17 | | Derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments (i) | | Other current liabilities and other non-current liabilities | | $ | — | | | $ | 37 | | | $ | — | | | $ | 37 | | | Other current liabilities and other non-current liabilities | | $ | 0 | | | $ | 3 | | | $ | 0 | | | $ | 3 | |
(i) | See Note 109 — Derivative Financial Instruments for further information on our derivative instruments. |
(ii) | Probability weightings are based on our knowledge of the past and planned performance of the acquired entity to which the contingent consideration applies. The weighted-average discount rates used on our material contingent consideration calculations were 9.92%9.46% and 9.64%10.16% at December 31, 20182020 and December 31, 2017,2019, respectively. The range of these discount rates was 3.53% - 13.00% at December 31, 2020. Using different probability weightings and discount rates could result in an increase or decrease of the contingent consideration payable. |
The following table summarizes the change in fair value of the Level 3 liabilities: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | December 31, 2018 | | | December 31, 2020 | | Balance at December 31, 2017 | | $ | 51 | | | Balance at December 31, 2019 | | | $ | 17 | | Obligations assumed | | | 2 | | | | 9 | | Payments | | | (3 | ) | | | 0 | | Realized and unrealized gains | | | 3 | | | | 18 | | Foreign exchange | | | (2 | ) | | | 1 | | Balance at December 31, 2018 | | $ | 51 | | | Balance at December 31, 2020 | | | $ | 45 | |
There were no0 significant transfers between Levels 1, 2 or 3 during the years ended December 31, 20182020 and 2017.2019.
Fair value information about financial instruments not measured at fair value The following tables present our assets and liabilities not measured at fair value on a recurring basis at December 31, 20182020 and 2017:2019: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | Assets: | | | | | | | | | | | | | | | | | | Long-term note receivable | | | $ | 71 | | | $ | 73 | | | $ | 0 | | | $ | 0 | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Short-term debt and current portion of long-term debt | | $ | 186 | | | $ | 191 | | | $ | 85 | | | $ | 85 | | | Current debt | | | $ | 971 | | | $ | 985 | | | $ | 316 | | | $ | 319 | | Long-term debt | | $ | 4,389 | | | $ | 4,458 | | | $ | 4,450 | | | $ | 4,706 | | | $ | 4,664 | | | $ | 5,488 | | | $ | 5,301 | | | $ | 5,694 | |
The carrying values of our revolving lines of credit facility and term loanscollateralized facility approximate their fair values. The fair values above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.instruments. The fair valuevalues of our respective senior notes and long-term note receivable are considered levelLevel 2 financial instruments as they are corroborated by observable market data.
Note 13 12—Retirement Benefits Defined Benefit Plans and Post-retirement Welfare Plans Willis Towers Watson sponsors both qualified and non-qualified defined benefit pension plans and other post-retirement welfare (‘PRW’) plans throughout the world. The majority of our plan assets and obligations are in the United StatesU.S. and the United Kingdom.U.K. We have also included disclosures related to defined benefit plans in certain other countries, including Canada, France, Germany Ireland and the Netherlands.Ireland. Together, these disclosed funded and unfunded plans represent 99% of Willis Towers Watson’s pension and PRW obligations and are disclosedpresented herein. As part of these obligations, in the United States,U.S., the United KingdomU.K. and Canada, we have non-qualified plans that provide for the additional pension benefits that would be covered under the qualified plan in the respective country were it not for statutory maximums. The non-qualified plans are unfunded. The significant plans within each grouping are described below: United States Legacy Willis – This plan was frozen in 2009. Approximately one-quarter of the Legacy Willis employees in the United States have a frozen accrued benefit under this plan. Willis Towers Watson Plan – Substantially all U.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 on January 1, 2012. Existing planPlan participants as ofprior to July 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. United Kingdom Legacy Willis – This plan covers approximately one-thirdone-quarter of the Legacy Willis employees in the United Kingdom. The plan is now closed to new entrants. New employees in the United Kingdom are offered the opportunity to join a defined contribution plan. Legacy Towers Watson – Benefit accruals earned under the Legacy Watson Wyatt defined benefit plan (predominantly pension benefits) ceased on February 28, 2015, although benefits earned prior to January 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 on March 31, 2008. All participants now accrue defined contribution benefits.
Legacy Miller – The plan provides retirement benefits based on members’ salaries at the point at which they ceased to accrue benefits under the scheme. Other Canada (Legacy Willis and Legacy Towers Watson) – Participants accrue qualified and non-qualified benefits based on a career averagecareer-average benefit formula. Additionally, participants can choose to make voluntary contributions to purchase enhancements to their pension. France (Legacy Gras Savoye) – The mandatory retirement indemnity plan is a termination benefit which provides lump sum benefits at retirement. There is no vesting before the retirement date, and the benefit formula is determined through the collective bargaining agreement and the labor code. All employees with permanent employment contracts are eligible. Germany (Legacy Willis and Legacy Towers Watson) – BothThe defined benefit plans are closed to new entrants and include certain legacy employee populations hired before 2011. These benefits are primarily account-based, with some long-service participants continuing to accrue benefits according to grandfathered final-average–payfinal-average-pay formulas. Other employees, including new entrants, participate in defined contribution arrangements. Ireland (Legacy Willis) – The defined benefit plans provideprovided pension benefits for approximately one-third of legacy Willis employees in Ireland. The defined benefit plans are nowIreland and were closed to new entrants. Benefit accruals ceased effective from December 31, 2019; however accrued benefits for active employees are indexed to salary increases (to a maximum annual salary of €150,000) until the member leaves the Company. A future service retirement provision is being provided on a defined contribution basis. Ireland (Legacy Towers Watson) – Benefit accruals earned under the scheme’s defined benefit plan ceased on May 1, 2015. Benefits earned prior to this date retain a link to salary until the employee leaves the Company.
Netherlands (Legacy Towers Watson) – This plan was terminated during the year ended December 31, 2018. Benefits under the plan accrued on a final pay basis on earnings up to a maximum amount each year, however this accrual stopped at December 31, 2010. The accrued benefits received conditional indexation each year prior to the plan termination.
Post-retirement Welfare Plan We provide certain healthcare and life insurance benefits for retired participants. The principal plans coverplan disclosed herein covers participants in the U.S. who have met certain eligibility requirements. Our principalThis post-retirement benefit plans areplan was primarily unfunded.unfunded, with the remaining assets being paid out during the year ended December 31, 2019. Retiree medical benefits provided under our U.S. post-retirement benefit plansplan were closed to new hires effective January 1, 2011. Life insurance benefits under the plansplan were frozen with respect to service, eligibility and amounts as of January 1, 2012 for active participants.
Amounts Recognized in our Consolidated Financial Statements The following schedules provide information concerning the defined benefit pension plans and PRW plan as of and for the years ended December 31, 20182020 and 2017:2019: | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | Change in Benefit Obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefit obligation, beginning of year | | $ | 4,476 | | | $ | 4,165 | | | $ | 822 | | | $ | 123 | | | $ | 4,169 | | | $ | 3,899 | | | $ | 732 | | | $ | 113 | | | $ | 4,768 | | | $ | 4,259 | | | $ | 842 | | | $ | 90 | | | $ | 4,187 | | | $ | 3,666 | | | $ | 728 | | | $ | 87 | | Service cost | | | 66 | | | | 18 | | | | 21 | | | | 1 | | | | 66 | | | | 32 | | | | 20 | | | | — | | | | 72 | | | | 15 | | | | 21 | | | | 1 | | | | 65 | | | | 14 | | | | 20 | | | | 1 | | Interest cost | | | 140 | | | | 95 | | | | 18 | | | | 4 | | | | 139 | | | | 93 | | | | 17 | | | | 4 | | | | 131 | | | | 73 | | | | 15 | | | | 2 | | | | 157 | | | | 93 | | | | 18 | | | | 3 | | Employee contributions | | | 14 | | | | 1 | | | | — | | | | 7 | | | | 6 | | | | 1 | | | | — | | | | 6 | | | | 15 | | | | 0 | | | | 0 | | | | 3 | | | | 15 | | | | 0 | | | | 0 | | | | 6 | | Actuarial (gains)/losses | | | (313 | ) | | | (176 | ) | | | (7 | ) | | | (3 | ) | | | 293 | | | | 2 | | | | 5 | | | | 14 | | | Actuarial losses | | | | 509 | | | | 494 | | | | 65 | | | | 5 | | | | 535 | | | | 472 | | | | 88 | | | | 5 | | Settlements | | | (11 | ) | | | (152 | ) | | | (26 | ) | | | — | | | | (16 | ) | | | (138 | ) | | | (1 | ) | | | — | | | | (10 | ) | | | (27 | ) | | | (4 | ) | | | 0 | | | | (6 | ) | | | (8 | ) | | | (3 | ) | | | 0 | | Curtailments | | | — | | | | — | | | | (20 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | Benefits paid | | | (185 | ) | | | (96 | ) | | | (28 | ) | | | (14 | ) | | | (181 | ) | | | (93 | ) | | | (29 | ) | | | (14 | ) | | | (194 | ) | | | (146 | ) | | | (32 | ) | | | (10 | ) | | | (185 | ) | | | (140 | ) | | | (26 | ) | | | (12 | ) | Plan amendments | | | — | | | | 40 | | | | — | | | | (31 | ) | | | — | | | | — | | | | — | | | | — | | | | 0 | | | | 9 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Business disposal | | | | 0 | | | | 0 | | | | (1 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Transfers in | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 2 | | | | 0 | | Other | | | | 0 | | | | 0 | | | | 1 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Foreign currency changes | | | — | | | | (229 | ) | | | (53 | ) | | | — | | | | — | | | | 369 | | | | 77 | | | | — | | | | 0 | | | | 166 | | | | 48 | | | | 0 | | | | 0 | | | | 162 | | | | 15 | | | | 0 | | Benefit obligation, end of year | | $ | 4,187 | | | $ | 3,666 | | | $ | 728 | | | $ | 87 | | | $ | 4,476 | | | $ | 4,165 | | | $ | 822 | | | $ | 123 | | | $ | 5,291 | | | $ | 4,843 | | | $ | 955 | | | $ | 91 | | | $ | 4,768 | | | $ | 4,259 | | | $ | 842 | | | $ | 90 | | Change in Plan Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets, beginning of year | | $ | 3,654 | | | $ | 4,910 | | | $ | 562 | | | $ | 2 | | | $ | 3,280 | | | $ | 4,360 | | | $ | 467 | | | $ | 4 | | | $ | 3,873 | | | $ | 5,086 | | | $ | 588 | | | $ | 0 | | | $ | 3,403 | | | $ | 4,402 | | | $ | 486 | | | $ | 1 | | Actual return on plan assets | | | (157 | ) | | | (69 | ) | | | (9 | ) | | | — | | | | 464 | | | | 290 | | | | 42 | | | | — | | | | 602 | | | | 590 | | | | 64 | | | | 0 | | | | 557 | | | | 561 | | | | 85 | | | | 0 | | Employer contributions | | | 88 | | | | 85 | | | | 22 | | | | 6 | | | | 101 | | | | 66 | | | | 34 | | | | 6 | | | | 71 | | | | 66 | | | | 35 | | | | 7 | | | | 89 | | | | 77 | | | | 31 | | | | 5 | | Employee contributions | | | 14 | | | | 1 | | | | — | | | | 7 | | | | 6 | | | | 1 | | | | — | | | | 6 | | | | 15 | | | | 0 | | | | 0 | | | | 3 | | | | 15 | | | | 0 | | | | 0 | | | | 6 | | Settlements | | | (11 | ) | | | (152 | ) | | | (26 | ) | | | — | | | | (16 | ) | | | (138 | ) | | | (1 | ) | | | — | | | | (10 | ) | | | (27 | ) | | | (4 | ) | | | 0 | | | | (6 | ) | | | (8 | ) | | | (3 | ) | | | 0 | | Benefits paid | | | (185 | ) | | | (96 | ) | | | (28 | ) | | | (14 | ) | | | (181 | ) | | | (93 | ) | | | (29 | ) | | | (14 | ) | | | (194 | ) | | | (146 | ) | | | (32 | ) | | | (10 | ) | | | (185 | ) | | | (140 | ) | | | (26 | ) | | | (12 | ) | Transfers in | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 2 | | | | 0 | | Other | | | | 0 | | | | 0 | | | | 1 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Foreign currency adjustment | | | — | | | | (277 | ) | | | (36 | ) | | | — | | | | — | | | | 424 | | | | 48 | | | | — | | | | 0 | | | | 198 | | | | 32 | | | | 0 | | | | 0 | | | | 194 | | | | 13 | | | | 0 | | Fair value of plan assets, end of year | | $ | 3,403 | | | $ | 4,402 | | | $ | 486 | | | $ | 1 | | | $ | 3,654 | | | $ | 4,910 | | | $ | 562 | | | $ | 2 | | | $ | 4,357 | | | $ | 5,767 | | | $ | 684 | | | $ | 0 | | | $ | 3,873 | | | $ | 5,086 | | | $ | 588 | | | $ | 0 | | Funded status at end of year | | $ | (784 | ) | | $ | 736 | | | $ | (242 | ) | | $ | (86 | ) | | $ | (822 | ) | | $ | 745 | | | $ | (260 | ) | | $ | (121 | ) | | $ | (934 | ) | | $ | 924 | | | $ | (271 | ) | | $ | (91 | ) | | $ | (895 | ) | | $ | 827 | | | $ | (254 | ) | | $ | (90 | ) | Accumulated Benefit Obligation | | $ | 4,187 | | | $ | 3,666 | | | $ | 698 | | | $ | 87 | | | $ | 4,476 | | | $ | 4,165 | | | $ | 790 | | | $ | 123 | | | $ | 5,291 | | | $ | 4,841 | | | $ | 918 | | | $ | 91 | | | $ | 4,768 | | | $ | 4,259 | | | $ | 810 | | | $ | 90 | | Components on the Consolidated Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension benefits assets | | $ | — | | | $ | 745 | | | $ | 17 | | | $ | — | | | $ | — | | | $ | 754 | | | $ | 17 | | | $ | — | | | $ | 0 | | | $ | 932 | | | $ | 28 | | | $ | 0 | | | $ | 0 | | | $ | 835 | | | $ | 22 | | | $ | 0 | | Current liability for pension benefits | | $ | (49 | ) | | $ | (1 | ) | | $ | (6 | ) | | $ | (5 | ) | | $ | (40 | ) | | $ | — | | | $ | (6 | ) | | $ | (5 | ) | | $ | (31 | ) | | $ | (1 | ) | | $ | (5 | ) | | $ | (6 | ) | | $ | (33 | ) | | $ | (1 | ) | | $ | (6 | ) | | $ | (6 | ) | Non-current liability for pension benefits | | $ | (735 | ) | | $ | (8 | ) | | $ | (253 | ) | | $ | (81 | ) | | $ | (782 | ) | | $ | (9 | ) | | $ | (271 | ) | | $ | (116 | ) | | $ | (903 | ) | | $ | (7 | ) | | $ | (294 | ) | | $ | (85 | ) | | $ | (862 | ) | | $ | (7 | ) | | $ | (270 | ) | | $ | (84 | ) | | | $ | (784 | ) | | $ | 736 | | | $ | (242 | ) | | $ | (86 | ) | | $ | (822 | ) | | $ | 745 | | | $ | (260 | ) | | $ | (121 | ) | | $ | (934 | ) | | $ | 924 | | | $ | (271 | ) | | $ | (91 | ) | | $ | (895 | ) | | $ | 827 | | | $ | (254 | ) | | $ | (90 | ) |
For both the years ended December 31, 2020 and 2019, bond yields continued to decline, which drove a decrease in the discount rates. This reduction, coupled with unfavorable foreign exchange effects for the U.K. and Other plans, was the most significant driver of the increase in benefit obligations for the plans. Additionally in 2019, the actuarial loss in the PRW plan driven by the discount rate reduction was partially offset by gains due to fewer retirees enrolling in medical coverage than had been assumed.
Amounts recognized in accumulated other comprehensive loss as of December 31, 20182020 and 20172019 consist of: | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | Net actuarial loss | | $ | 769 | | | $ | 955 | | | $ | 98 | | | $ | 16 | | | $ | 663 | | | $ | 909 | | | $ | 79 | | | $ | 19 | | | $ | 1,143 | | | $ | 1,304 | | | $ | 169 | | | $ | 24 | | | $ | 982 | | | $ | 1,133 | | | $ | 128 | | | $ | 20 | | Net prior service gain | | | — | | | | (76 | ) | | | — | | | | (31 | ) | | | — | | | | (142 | ) | | | — | | | | — | | | | 0 | | | | (37 | ) | | | 0 | | | | (23 | ) | | | 0 | | | | (61 | ) | | | 0 | | | | (27 | ) | Accumulated other comprehensive loss/(income) | | $ | 769 | | | $ | 879 | | | $ | 98 | | | $ | (15 | ) | | $ | 663 | | | $ | 767 | | | $ | 79 | | | $ | 19 | | | $ | 1,143 | | | $ | 1,267 | | | $ | 169 | | | $ | 1 | | | $ | 982 | | | $ | 1,072 | | | $ | 128 | | | $ | (7 | ) |
The following table presents the projected benefit obligation and fair value of plan assets for our plans that have a projected benefit obligation in excess of plan assets as of December 31, 20182020 and 2017:2019: | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | | U.S. | | | U.K. | | | Other | | | U.S. | | | U.K. | | | Other | | | U.S. | | | U.K. | | | Other | | | U.S. | | | U.K. | | | Other | | Projected benefit obligation at end of year | | $ | 4,187 | | | $ | 9 | | | $ | 672 | | | $ | 4,476 | | | $ | 10 | | | $ | 758 | | | $ | 5,291 | | | $ | 8 | | | $ | 891 | | | $ | 4,768 | | | $ | 7 | | | $ | 784 | | Fair value of plan assets at end of year | | $ | 3,403 | | | $ | — | | | $ | 413 | | | $ | 3,654 | | | $ | — | | | $ | 481 | | | $ | 4,357 | | | $ | 0 | | | $ | 593 | | | $ | 3,873 | | | $ | 0 | | | $ | 509 | |
The following table presents the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for our plans that have an accumulated benefit obligation in excess of plan assets as of December 31, 20182020 and 2017.2019. | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | | U.S. | | | U.K. | | | Other | | | U.S. | | | U.K. | | | Other | | | U.S. | | | U.K. | | | Other | | | U.S. | | | U.K. | | | Other | | Projected benefit obligation at end of year | | $ | 4,187 | | | $ | 9 | | | $ | 672 | | | $ | 4,476 | | | $ | 10 | | | $ | 758 | | | $ | 5,291 | | | $ | 8 | | | $ | 477 | | | $ | 4,768 | | | $ | 7 | | | $ | 784 | | Accumulated benefit obligation at end of year | | $ | 4,187 | | | $ | 9 | | | $ | 642 | | | $ | 4,476 | | | $ | 10 | | | $ | 726 | | | $ | 5,291 | | | $ | 8 | | | $ | 457 | | | $ | 4,768 | | | $ | 7 | | | $ | 752 | | Fair value of plan assets at end of year | | $ | 3,403 | | | $ | — | | | $ | 413 | | | $ | 3,654 | | | $ | — | | | $ | 481 | | | $ | 4,357 | | | $ | 0 | | | $ | 193 | | | $ | 3,873 | | | $ | 0 | | | $ | 509 | |
The components of the net periodic benefit income and other amounts recognized in other comprehensive (income)/loss for the years ended December 31, 2018, 20172020, 2019 and 20162018 for the defined benefit pension and PRW plans are as follows: | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | Components of net periodic benefit (income)/cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Service cost | | $ | 66 | | | $ | 18 | | | $ | 21 | | | $ | 1 | | | $ | 66 | | | $ | 32 | | | $ | 20 | | | $ | — | | | $ | 59 | | | $ | 24 | | | $ | 19 | | | $ | 1 | | | $ | 72 | | | $ | 15 | | | $ | 21 | | | $ | 1 | | | $ | 65 | | | $ | 14 | | | $ | 20 | | | $ | 1 | | | $ | 66 | | | $ | 18 | | | $ | 21 | | | $ | 1 | | Interest cost | | | 140 | | | | 95 | | | | 18 | | | | 4 | | | | 139 | | | | 93 | | | | 17 | | | | 4 | | | | 137 | | | | 114 | | | | 18 | | | | 3 | | | | 131 | | | | 73 | | | | 15 | | | | 2 | | | | 157 | | | | 93 | | | | 18 | | | | 3 | | | | 140 | | | | 95 | | | | 18 | | | | 4 | | Expected return on plan assets | | | (273 | ) | | | (298 | ) | | | (31 | ) | | | — | | | | (245 | ) | | | (284 | ) | | | (30 | ) | | | — | | | | (240 | ) | | | (253 | ) | | | (27 | ) | | | — | | | | (291 | ) | | | (247 | ) | | | (34 | ) | | | 0 | | | | (254 | ) | | | (246 | ) | | | (29 | ) | | | 0 | | | | (273 | ) | | | (298 | ) | | | (31 | ) | | | 0 | | Amortization of unrecognized prior service credit | | | — | | | | (19 | ) | | | — | | | | — | | | | — | | | | (18 | ) | | | — | | | | — | | | | — | | | | (19 | ) | | | — | | | | — | | | | 0 | | | | (17 | ) | | | 0 | | | | (4 | ) | | | 0 | | | | (16 | ) | | | 0 | | | | (4 | ) | | | 0 | | | | (19 | ) | | | 0 | | | | 0 | | Amortization of unrecognized actuarial loss | | | 11 | | | | 45 | | | | 2 | | | | — | | | | 13 | | | | 53 | | | | 2 | | | | — | | | | 12 | | | | 42 | | | | — | | | | — | | | | 35 | | | | 23 | | | | 3 | | | | 1 | | | | 19 | | | | 21 | | | | 2 | | | | 1 | | | | 11 | | | | 45 | | | | 2 | | | | 0 | | Settlement | | | 1 | | | | 41 | | | | 2 | | | | — | | | | 1 | | | | 37 | | | | 1 | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 2 | | | | 3 | | | | 1 | | | | 0 | | | | 0 | | | | 0 | | | | 1 | | | | 0 | | | | 1 | | | | 41 | | | | 2 | | | | 0 | | Curtailment gain | | | — | | | | — | | | | (16 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (16 | ) | | | 0 | | Net periodic benefit (income)/cost | | $ | (55 | ) | | $ | (118 | ) | | $ | (4 | ) | | $ | 5 | | | $ | (26 | ) | | $ | (87 | ) | | $ | 10 | | | $ | 4 | | | $ | (32 | ) | | $ | (92 | ) | | $ | 15 | | | $ | 4 | | | $ | (51 | ) | | $ | (150 | ) | | $ | 6 | | | $ | 0 | | | $ | (13 | ) | | $ | (134 | ) | | $ | 12 | | | $ | 1 | | | $ | (55 | ) | | $ | (118 | ) | | $ | (4 | ) | | $ | 5 | | Other changes in plan assets and benefit obligations recognized in other comprehensive loss/(income): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net actuarial loss/(gain) | | $ | 117 | | | $ | 191 | | | $ | 13 | | | $ | (3 | ) | | $ | 74 | | | $ | (4 | ) | | $ | (7 | ) | | $ | 14 | | | $ | 238 | | | $ | 323 | | | $ | 62 | | | $ | 4 | | | $ | 198 | | | $ | 151 | | | $ | 35 | | | $ | 5 | | | $ | 232 | | | $ | 157 | | | $ | 32 | | | $ | 5 | | | $ | 117 | | | $ | 191 | | | $ | 13 | | | $ | (3 | ) | Amortization of unrecognized actuarial loss | | | (11 | ) | | | (45 | ) | | | (2 | ) | | | — | | | | (13 | ) | | | (53 | ) | | | (2 | ) | | | — | | | | (12 | ) | | | (42 | ) | | | — | | | | — | | | | (35 | ) | | | (23 | ) | | | (3 | ) | | | (1 | ) | | | (19 | ) | | | (21 | ) | | | (2 | ) | | | (1 | ) | | | (11 | ) | | | (45 | ) | | | (2 | ) | | | 0 | | Prior service cost/(credit) | | | — | | | | 40 | | | | — | | | | (31 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0 | | | | 9 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 40 | | | | 0 | | | | (31 | ) | Amortization of unrecognized prior service credit | | | — | | | | 19 | | | | — | | | | — | | | | — | | | | 18 | | | | — | | | | — | | | | — | | | | 19 | | | | — | | | | — | | | | 0 | | | | 17 | | | | 0 | | | | 4 | | | | 0 | | | | 16 | | | | 0 | | | | 4 | | | | 0 | | | | 19 | | | | 0 | | | | 0 | | Settlement | | | (1 | ) | | | (41 | ) | | | (2 | ) | | | — | | | | (1 | ) | | | (37 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | | (8 | ) | | | — | | | | (2 | ) | | | (3 | ) | | | (1 | ) | | | 0 | | | | 0 | | | | 0 | | | | (1 | ) | | | 0 | | | | (1 | ) | | | (41 | ) | | | (2 | ) | | | 0 | | Curtailment gain | | | — | | | | — | | | | 16 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 16 | | | | 0 | | Total recognized in other comprehensive loss/(income) | | | 105 | | | | 164 | | | | 25 | | | | (34 | ) | | | 60 | | | | (76 | ) | | | (10 | ) | | | 14 | | | | 226 | | | | 300 | | | | 54 | | | | 4 | | | | 161 | | | | 151 | | | | 31 | | | | 8 | | | | 213 | | | | 152 | | | | 29 | | | | 8 | | | | 105 | | | | 164 | | | | 25 | | | | (34 | ) | Total recognized in net periodic benefit (income)/cost and other comprehensive loss/(income) | | $ | 50 | | | $ | 46 | | | $ | 21 | | | $ | (29 | ) | | $ | 34 | | | $ | (163 | ) | | $ | — | | | $ | 18 | | | $ | 194 | | | $ | 208 | | | $ | 69 | | | $ | 8 | | | $ | 110 | | | $ | 1 | | | $ | 37 | | | $ | 8 | | | $ | 200 | | | $ | 18 | | | $ | 41 | | | $ | 9 | | | $ | 50 | | | $ | 46 | | | $ | 21 | | | $ | (29 | ) |
As a result of adopting ASU 2017-07, within the consolidated statements of comprehensive income, service cost is included within salaries and benefits expense. The remainder of the components of net periodic benefit income of $280 million, $222 million and $203 million for the years ended December 31, 2018, 2017 and 2016, respectively, are included within other income, net. These reclassifications include amounts for those plans which are immaterial for disclosure.
During the year ended December 31, 2018, the Company terminated its Netherlands-based defined benefit plan, resulting in the recognition of a non-cash curtailment gain of $16 million.
During the yearsyear ended December 31, 2018, and 2017, as a result of past changes in UKU.K. legislation and the low interest rate environment, the amount of transfer payments from the Legacy Willis UKU.K. pension plan exceeded the plan’s service and interest cost.costs. This triggerstriggered settlement accounting which requiresrequired immediate recognition of a portion of the obligations associated with the plan transfers. Consequently, the Company recognized a non-cash expense of $40 million and $36 million for the years ended December 31, 2018 and 2017, respectively. During the year ended December 31, 2016, we adopted the granular approach to calculating service and interest costs. This was treated as a change in accounting estimate, and resulted in a credit of $51 million included in our total net periodic benefit income reflected above.2018.
The estimated net actuarial loss and prior service credit for the defined benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are:
| | For the Year Ended December 31, 2019 | | | | U.S. | | | U.K | | | Other | | | PRW | | Estimated net actuarial loss | | $ | 19 | | | $ | 21 | | | $ | 2 | | | $ | 1 | | Prior service credit | | $ | — | | | $ | (16 | ) | | $ | — | | | $ | (4 | ) |
Assumptions Used in the Valuations of the Defined Benefit Pension Plans and PRW Plan 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 rate and 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) generally based on the average working life expectancy of each of the plan’s active 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. The average remaining service period of participants for the PRW plan is approximately 10.68.7 years. The Company 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 termlonger-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 and interest costs. The expected rate of return assumptions for all plans are supported by an analysis of the weighted-average yield expected to be achieved based upon the anticipated makeup of the plans’ investments. Other material assumptions include rates of participant mortality, and the expected long-term rate of compensation and pension increases. The following assumptions were used in the valuations of Willis Towers Watson’s defined benefit pension plans and PRW plan. The assumptions presented for the U.S. plans represent the weighted-average of rates for all U.S. plans. The assumptions presented for the U.K. plans represent the weighted-average of rates for the U.K. plans. The assumptions presented for the Other plans represent the weighted-average of rates for the Canada, France, Germany and Ireland and Netherlands plans. The Netherlands plan is excluded from the 2018 disclosures due to the plan termination during the year. The assumptions used to determine net periodic benefit cost for the fiscal years ended December 31, 2018, 2017,2020, 2019 and 20162018 were as follows: | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | Discount rate - PBO | | | 3.6 | % | | | 2.6 | % | | | 2.6 | % | | | 3.5 | % | | | 4.0 | % | | | 2.6 | % | | | 2.7 | % | | | 4.0 | % | | | 4.2 | % | | | 3.8 | % | | | 3.2 | % | | | 4.2 | % | | | 3.3 | % | | | 2.0 | % | | | 2.1 | % | | | 3.2 | % | | | 4.2 | % | | | 2.8 | % | | | 2.8 | % | | | 4.2 | % | | | 3.6 | % | | | 2.6 | % | | | 2.6 | % | | | 3.5 | % | Discount rate - service cost | | | 3.5 | % | | | 2.7 | % | | | 2.9 | % | | | 3.5 | % | | | 3.9 | % | | | 2.6 | % | | | 3.0 | % | | | 3.9 | % | | | 3.9 | % | | | 3.8 | % | | | 3.4 | % | | | 4.1 | % | | | 3.4 | % | | | 2.1 | % | | | 2.5 | % | | | 3.3 | % | | | 4.3 | % | | | 2.9 | % | | | 3.0 | % | | | 4.2 | % | | | 3.5 | % | | | 2.7 | % | | | 2.9 | % | | | 3.5 | % | Discount rate - interest cost on service cost | | | 3.1 | % | | | 2.5 | % | | | 2.7 | % | | | 3.2 | % | | | 3.2 | % | | | 2.4 | % | | | 2.8 | % | | | 3.5 | % | | | 3.2 | % | | | 3.8 | % | | | 3.1 | % | | | 3.5 | % | | | 2.8 | % | | | 1.9 | % | | | 2.4 | % | | | 2.8 | % | | | 3.8 | % | | | 2.8 | % | | | 2.9 | % | | | 3.9 | % | | | 3.1 | % | | | 2.5 | % | | | 2.7 | % | | | 3.2 | % | Discount rate - interest cost on PBO | | | 3.2 | % | | | 2.3 | % | | | 2.3 | % | | | 3.1 | % | | | 3.4 | % | | | 2.3 | % | | | 2.3 | % | | | 3.3 | % | | | 3.4 | % | | | 3.4 | % | | | 2.8 | % | | | 3.3 | % | | | 2.8 | % | | | 1.8 | % | | | 1.9 | % | | | 2.8 | % | | | 3.9 | % | | | 2.6 | % | | | 2.5 | % | | | 3.9 | % | | | 3.2 | % | | | 2.3 | % | | | 2.3 | % | | | 3.1 | % | Expected long-term rate of return on assets | | | 7.6 | % | | | 6.2 | % | | | 5.7 | % | | | 2.0 | % | | | 7.6 | % | | | 6.3 | % | | | 6.1 | % | | | 2.0 | % | | | 7.6 | % | | | 6.2 | % | | | 6.1 | % | | | 2.0 | % | | | 7.7 | % | | | 5.0 | % | | | 5.9 | % | | N/A | | | | 7.6 | % | | | 5.6 | % | | | 6.0 | % | | | 2.0 | % | | | 7.6 | % | | | 6.2 | % | | | 5.7 | % | | | 2.0 | % | Rate of increase in compensation levels | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.2 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.2 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | | Healthcare cost trend | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Initial rate | | | | | | | | | | | | | | | 6.5 | % | | | | | | | | | | | | | | | 7.0 | % | | | | | | | | | | | | | | | 7.0 | % | | | | | | | | | | | | | | | 6.5 | % | | | | | | | | | | | | | | | 6.0 | % | | | | | | | | | | | | | | | 6.5 | % | Ultimate rate | | | | | | | | | | | | | | | 5.0 | % | | | | | | | | | | | | | | | 5.0 | % | | | | | | | | | | | | | | | 5.0 | % | | | | | | | | | | | | | | | 5.0 | % | | | | | | | | | | | | | | | 5.0 | % | | | | | | | | | | | | | | | 5.0 | % | Year reaching ultimate rate | | | | | | | | | | | | | | 2022 | | | | | | | | | | | | | | | 2022 | | | | | | | | | | | | | | | 2022 | | | | | | | | | | | | | | | 2027 | | | | | | | | | | | | | | | 2022 | | | | | | | | | | | | | | | 2022 | |
The following tables present the assumptions used in the valuation to determine the projected benefit obligation for the fiscal years ended December 31, 20182020 and 2017:2019: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | | U.S. | | | U.K. | | | Other | | | PRW | | Discount rate | | | 4.2 | % | | | 2.8 | % | | | 2.8 | % | | | 4.2 | % | | | 3.6 | % | | | 2.6 | % | | | 2.6 | % | | | 3.5 | % | | | 2.5 | % | | | 1.5 | % | | | 1.7 | % | | | 2.4 | % | | | 3.3 | % | | | 2.0 | % | | | 2.1 | % | | | 3.2 | % | Rate of increase in compensation levels | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | | | | 4.3 | % | | | 3.0 | % | | | 2.3 | % | | N/A | |
A one percentage point change in the assumed healthcare cost trend rates would have an immaterial effect on the post-retirement benefit cost and obligation as of December 31, 2018.
The expected return on plan assets was determined on the basis of the weighted-average of the expected future returns of the various asset classes, using the target allocations shown below. The Company’s pension plan asset target allocations as of December 31, 20182020 were as follows: | | U.S. | | | U.K. | | | Canada | | | Germany | | | Ireland | | | U.S. | | | U.K. | | | Canada | | | Germany | | | Ireland | | Asset Category | | Willis | | | Willis Towers Watson | | | Willis | | | Towers Watson | | | Miller | | | Towers Watson | | | Towers Watson | | | Willis | | | Towers Watson | | | Willis | | | Willis Towers Watson | | | Willis | | | Towers Watson | | | Miller | | | Towers Watson | | | Towers Watson | | | Willis | | | Towers Watson | | Equity securities | | | 30 | % | | | 23 | % | | | 23 | % | | | 7 | % | | | 19 | % | | | 40 | % | | | 34 | % | | | 30 | % | | | 40 | % | | | 30 | % | | | 23 | % | | | 0 | % | | | 1 | % | | | 19 | % | | | 40 | % | | | 36 | % | | | 29 | % | | | 40 | % | Debt securities | | | 44 | % | | | 43 | % | | | 58 | % | | | 25 | % | | | 21 | % | | | 50 | % | | | 59 | % | | | 29 | % | | | 30 | % | | | 33 | % | | | 33 | % | | | 30 | % | | | 24 | % | | | 21 | % | | | 50 | % | | | 57 | % | | | 29 | % | | | 30 | % | Real estate | | | 11 | % | | | 6 | % | | | 2 | % | | | 1 | % | | | — | % | | | 5 | % | | | — | % | | | 3 | % | | | — | % | | | 11 | % | | | 6 | % | | | 0 | % | | | 2 | % | | | 0 | % | | | 5 | % | | | 0 | % | | | 3 | % | | | 0 | % | Other | | | 15 | % | | | 28 | % | | | 17 | % | | | 67 | % | | | 60 | % | | | 5 | % | | | 7 | % | | | 38 | % | | | 30 | % | | | 26 | % | | | 38 | % | | | 70 | % | | | 73 | % | | | 60 | % | | | 5 | % | | | 7 | % | | | 39 | % | | | 30 | % | Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
The Legacy Willis plan in Germany is invested in insurance contracts. Consequently, the asset allocations of the plans are managed by the respective insurer. The Legacy Gras Savoye plan in France is unfunded. Our investment strategy is designed to generate returns that will reduce the interest rate risk inherent in each of the plan’s benefit obligations and enable the plans to meet their future obligations. The precise amount for which these obligations will be settled depends on future events, including the life expectancy of the plan participants and salary inflation. The obligations are estimated using actuarial assumptions based on the current economic environment. Each pension plan seeks to achieve total returns sufficient to meet expected future obligations when considered in conjunction with expected future contributions and prudent levels of investment risk and diversification. Each plan’s targeted asset allocation is generally determined through a plan-specific asset-liability modeling study. These comprehensive studies provide an evaluation of the projected status of asset and benefit obligation measures for each plan under a range of both positive and negative factors. The studies include a number of different asset mixes, spanning a range of diversification and potential equity exposures. In evaluating the strategic asset allocation choices, an emphasis is placed on the long-term characteristics of each individual asset class, such as expected return, volatility of returns and correlations with other asset classes within the portfolios. Consideration is also given to the proper long-term level of risk for each plan, the impact of the volatility and magnitude of plan contributions and costs, and the impact that certain actuarial techniques may have on the plan’s recognition of investment experience. We monitor investment performance and portfolio characteristics on a quarterly basis to ensure that managers are meeting expectations with respect to their investment approach. There are also various restrictions and controls placed on managers, including prohibition from investing in our stock. Fair Value of Plan Assets The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value: Level 1: refers to fair values determined based on quoted market prices in active markets for identical assets;
Level 2: refers to fair values estimated using observable market-based inputs or unobservable inputs that are corroborated by market data; and
| • | Level 1: refers to fair values determined based on quoted market prices in active markets for identical assets; |
| • | Level 2: refers to fair values estimated using observable market-based inputs or unobservable inputs that are corroborated by market data; and |
| • | Level 3: includes fair values estimated using unobservable inputs that are not corroborated by market data. |
The fair values of our U.S. plan assets by asset category at December 31, 20182020 and 20172019 are as follows: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Asset category: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash(i) | | $ | 6 | | | $ | — | | | $ | — | | | $ | 6 | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | | | $ | 3 | | | $ | 0 | | | $ | 0 | | | $ | 3 | | | $ | 172 | | | $ | 0 | | | $ | 0 | | | $ | 172 | | Short-term securities | | | — | | | | 78 | | | | — | | | | 78 | | | | — | | | | 283 | | | | — | | | | 283 | | | | 0 | | | | 106 | | | | 0 | | | | 106 | | | | 0 | | | | 99 | | | | 0 | | | | 99 | | Equity securities | | | 156 | | | | — | | | | — | | | | 156 | | | | 202 | | | | — | | | | — | | | | 202 | | | Government bonds | | | 2 | | | | — | | | | — | | | | 2 | | | | 10 | | | | — | | | | — | | | | 10 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4 | | | | 0 | | | | 0 | | | | 4 | | Corporate bonds | | | — | | | | 354 | | | | — | | | | 354 | | | | — | | | | 193 | | | | — | | | | 193 | | | Other fixed income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 20 | | | | — | | | | 20 | | | Pooled / commingled funds | | | — | | | | — | | | | — | | | | 1,467 | | | | — | | | | — | | | | — | | | | 1,922 | | | | 0 | | | | 0 | | | | 0 | | | | 2,599 | | | | 0 | | | | 0 | | | | 0 | | | | 2,033 | | Mutual funds | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | | Private equity | | | — | | | | — | | | | — | | | | 357 | | | | — | | | | — | | | | — | | | | 287 | | | | 0 | | | | 0 | | | | 0 | | | | 415 | | | | 0 | | | | 0 | | | | 0 | | | | 487 | | Hedge funds | | | — | | | | — | | | | — | | | | 984 | | | | — | | | | — | | | | — | | | | 724 | | | | 0 | | | | 0 | | | | 0 | | | | 1,234 | | | | 0 | | | | 0 | | | | 0 | | | | 1,084 | | Total assets | | $ | 164 | | | $ | 432 | | | $ | — | | | $ | 3,404 | | | $ | 223 | | | $ | 496 | | | $ | — | | | $ | 3,652 | | | $ | 3 | | | $ | 106 | | | $ | 0 | | | $ | 4,357 | | | $ | 176 | | | $ | 99 | | | $ | 0 | | | $ | 3,879 | |
(i) | At December 31, 2019, consists primarily of cash on deposit with the managers of the hedge funds due to the timing of purchases of units in the funds. |
The fair values of our U.K. plan assets by asset category at December 31, 20182020 and 20172019 are as follows: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Asset category: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | $ | 229 | | | $ | — | | | $ | — | | | $ | 229 | | | $ | 92 | | | $ | — | | | $ | — | | | $ | 92 | | | $ | 366 | | | $ | 0 | | | $ | 0 | | | $ | 366 | | | $ | 253 | | | $ | 0 | | | $ | 0 | | | $ | 253 | | Equity securities | | | — | | | | — | | | | — | | | | — | | | | 24 | | | | — | | | | — | | | | 24 | | | Government bonds | | | 1,804 | | | | — | | | | — | | | | 1,804 | | | | 1,841 | | | | — | | | | — | | | | 1,841 | | | | 2,684 | | | | 0 | | | | 0 | | | | 2,684 | | | | 1,865 | | | | 0 | | | | 0 | | | | 1,865 | | Corporate bonds | | | — | | | | 297 | | | | — | | | | 297 | | | | — | | | | 224 | | | | — | | | | 224 | | | | 0 | | | | 898 | | | | 0 | | | | 898 | | | | 0 | | | | 741 | | | | 0 | | | | 741 | | Other fixed income | | | — | | | | 248 | | | | — | | | | 248 | | | | — | | | | 246 | | | | — | | | | 246 | | | | 0 | | | | 458 | | | | 0 | | | | 458 | | | | 0 | | | | 350 | | | | 0 | | | | 350 | | Pooled / commingled funds | | | — | | | | — | | | | — | | | | 934 | | | | — | | | | — | | | | — | | | | 2,294 | | | | 0 | | | | 0 | | | | 0 | | | | 1,237 | | | | 0 | | | | 0 | | | | 0 | | | | 1,828 | | Mutual funds | | | — | | | | — | | | | — | | | | 16 | | | | — | | | | — | | | | — | | | | 8 | | | | 0 | | | | 0 | | | | 0 | | | | 59 | | | | 0 | | | | 0 | | | | 0 | | | | 34 | | Private equity | | | — | | | | — | | | | — | | | | 33 | | | | — | | | | — | | | | — | | | | 32 | | | | 0 | | | | 0 | | | | 0 | | | | 31 | | | | 0 | | | | 0 | | | | 0 | | | | 34 | | Derivatives | | | — | | | | 96 | | | | — | | | | 96 | | | | — | | | | 102 | | | | — | | | | 102 | | | | 0 | | | | 376 | | | | 0 | | | | 376 | | | | 0 | | | | 246 | | | | 0 | | | | 246 | | Real estate | | | — | | | | — | | | | — | | | | 184 | | | | — | | | | — | | | | — | | | | 218 | | | | 0 | | | | 0 | | | | 0 | | | | 159 | | | | 0 | | | | 0 | | | | 0 | | | | 161 | | Hedge funds | | | — | | | | — | | | | — | | | | 1,232 | | | | — | | | | — | | | | — | | | | 393 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 54 | | Insurance contracts | | | | 0 | | | | 0 | | | | 71 | | | | 71 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Total assets | | $ | 2,033 | | | $ | 641 | | | $ | — | | | $ | 5,073 | | | $ | 1,957 | | | $ | 572 | | | $ | — | | | $ | 5,474 | | | $ | 3,050 | | | $ | 1,732 | | | $ | 71 | | | $ | 6,339 | | | $ | 2,118 | | | $ | 1,337 | | | $ | 0 | | | $ | 5,566 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liability category: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | | — | | | | 684 | | | | — | | | | 684 | | | | — | | | | 549 | | | | — | | | | 549 | | | | 0 | | | | 572 | | | | 0 | | | | 572 | | | | 0 | | | | 480 | | | | 0 | | | | 480 | | Derivatives | | | — | | | | — | | | | — | | | | — | | | | — | | | | 16 | | | | — | | | | 16 | | | Net assets/(liabilities) | | $ | 2,033 | | | $ | (43 | ) | | $ | — | | | $ | 4,389 | | | $ | 1,957 | | | $ | 7 | | | $ | — | | | $ | 4,909 | | | $ | 3,050 | | | $ | 1,160 | | | $ | 71 | | | $ | 5,767 | | | $ | 2,118 | | | $ | 857 | | | $ | 0 | | | $ | 5,086 | |
The fair values of our Other plan assets by asset category at December 31, 20182020 and 20172019 are as follows: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Asset category: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 5 | | | $ | — | | | $ | — | | | $ | 5 | | | $ | 2 | | | $ | 0 | | | $ | 0 | | | $ | 2 | | | $ | 2 | | | $ | 0 | | | $ | 0 | | | $ | 2 | | Pooled / commingled funds | | | — | | | | — | | | | — | | | | 294 | | | | — | | | | — | | | | — | | | | 327 | | | | 0 | | | | 0 | | | | 0 | | | | 635 | | | | 0 | | | | 0 | | | | 0 | | | | 444 | | Mutual funds | | | — | | | | — | | | | — | | | | 185 | | | | — | | | | — | | | | — | | | | 209 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 106 | | Hedge funds | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | 0 | | | | 0 | | | | 0 | | | | 39 | | | | 0 | | | | 0 | | | | 0 | | | | 34 | | Insurance contracts | | | — | | | | — | | | | 2 | | | | 2 | | | | — | | | | — | | | | 19 | | | | 19 | | | | 0 | | | | 0 | | | | 8 | | | | 8 | | | | 0 | | | | 0 | | | | 2 | | | | 2 | | Total assets | | $ | 1 | | | $ | — | | | $ | 2 | | | $ | 486 | | | $ | 5 | | | $ | — | | | $ | 19 | | | $ | 560 | | | $ | 2 | | | $ | 0 | | | $ | 8 | | | $ | 684 | | | $ | 2 | | | $ | 0 | | | $ | 2 | | | $ | 588 | |
Our PRW plan invests only in short-term investments and mutual funds and is not included within this fair value hierarchy table.
We evaluate the need to transfer between levels based upon the nature of the financial instrument and size of the transfer relative to the total net assets of the plans. There were no significant transfers between Levels 1, 2 or 3 in the fiscal years ended December 31, 20182020 and 2017.2019.
In accordance with Subtopic 820-10, Fair Value Measurement and Disclosures, certain investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statements of net assets. Following is a description of the valuation methodologies used for investments at fair value: Short-term securities: Valued at the net value of shares held by the Company at year end as reported by the sponsor of the funds. Equity securities and mutual funds: Valued at the closing price reported on the active market on which the individual securities are traded. Exchange-traded mutual funds are included as Level 1 above. Government bonds: Valued at the closing price reported in the active market in which the bond is traded. Corporate bonds: Valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing values on yields currently available on comparable securities of issuers with similar credit ratings. Other fixed income: Foreign and municipal bonds are valued atusing pricing models maximizing the closing price reported in the active market in which the bond is traded.use of observable inputs for similar securities. Pooled / commingled funds and mutual funds: Valued at the net value of shares held by the Company at year end as reported by the manager of the funds. These funds are not exchange-traded and are not reported by level in the tables above. Derivative investments: Valued at the closing level of the relevant index or security and interest accrual through the valuation date. Private equity funds, real estate funds, hedge funds: The fair values for these investments are estimated based on the net asset values derived from the latest audited financial statements or most recent capital account statements provided by the private equity fund’s investment manager or third-party administrator. Insurance contracts: The fair values are determined using model-based techniques that include option-pricing models, discounted cash flow models and similar techniques. Repurchase agreements: Valued as the repurchase obligation which includes an interest rate linked to the underlying fixed interest government bond portfolio. These agreements are short-term in nature (less than one year) and were entered into for the purpose of purchasing additional government bonds.
The following table reconciles the net plan investments to the total fair value of the plan assets: | | December 31, | | | December 31, | | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | Net assets held in investments | | $ | 8,279 | | | $ | 9,121 | | | $ | 10,808 | | | $ | 9,553 | | PRW plan assets | | | 1 | | | | 2 | | | Net (payable)/receivable for investments purchased | | | (1 | ) | | | 2 | | | Net receivable/(payable) for investments purchased | | | | 0 | | | | (7 | ) | Dividend and interest receivable | | | 1 | | | | 3 | | | | 0 | | | | 1 | | Other adjustments | | | 12 | | | | — | | | Fair value of plan assets | | $ | 8,292 | | | $ | 9,128 | | | $ | 10,808 | | | $ | 9,547 | |
Level 3 investments As a result of the inherent limitations related to the valuations of the Level 3 investments, due to the unobservable inputs of the underlying funds, the estimated fair valuevalues may differ significantly from the values that would have been used had a market for those investments existed.
The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the fiscal year ended December 31, 2018:2020: | | Level 3 Roll Forward | | Beginning balance at December 31, 2017 | | $ | 19 | | Plan termination | | $ | (17 | ) | Foreign exchange | | | — | | Ending balance at December 31, 2018 | | $ | 2 | |
| | Level 3 Roll Forward | | Beginning balance at December 31, 2019 | | $ | 2 | | Purchases | | | 64 | | Unrealized gains | | | 7 | | Foreign exchange | | | 6 | | Ending balance at December 31, 2020 | | $ | 79 | |
Contributions and Benefit Payments Funding is based on actuarially-determined contributions and is limited to amounts that are currently deductible for tax purposes. Since funding calculations are based on different measurements than those used for accounting purposes, pension contributions are not equal to net periodic pension costs. The following table sets forth our projected pension contributions to our qualified plans for fiscal year 2019,2020, as well as the pension contributions to our qualified plans in fiscal years 20182020 and 2017:2019: | | 2019 (Projected) | | | 2018 (Actual) | | | 2017 (Actual) | | | 2021 (Projected) | | | 2020 (Actual) | | | 2019 (Actual) | | U.S. | | $ | 60 | | | $ | 50 | | | $ | 50 | | | $ | 60 | | | $ | 40 | | | $ | 60 | | U.K. | | $ | 75 | | | $ | 84 | | | $ | 65 | | | $ | 47 | | | $ | 65 | | | $ | 76 | | Other | | $ | 23 | | | $ | 14 | | | $ | 13 | | | $ | 25 | | | $ | 24 | | | $ | 22 | |
Expected benefit payments from our defined benefit pension plans to current plan participants, including the effects of their expected future service, as appropriate, are as follows: | | Benefit Payments | | | Benefit Payments | | Fiscal Year | | U.S. | | | U.K. | | | Other | | | PRW | | | Total | | | U.S. | | | U.K. | | | Other | | | PRW | | | Total | | 2019 | | $ | 263 | | | $ | 109 | | | $ | 28 | | | $ | 13 | | | $ | 413 | | | 2020 | | | 250 | | | | 107 | | | | 25 | | | | 10 | | | | 392 | | | 2021 | | | 263 | | | | 116 | | | | 25 | | | | 11 | | | | 415 | | | $ | 248 | | | $ | 128 | | | $ | 32 | | | $ | 10 | | | $ | 418 | | 2022 | | | 272 | | | | 119 | | | | 26 | | | | 11 | | | | 428 | | | | 275 | | | | 122 | | | | 28 | | | | 10 | | | | 435 | | 2023 | | | 280 | | | | 127 | | | | 27 | | | | 11 | | | | 445 | | | | 265 | | | | 131 | | | | 29 | | | | 10 | | | | 435 | | Years 2024 – 2028 | | | 1,435 | | | | 735 | | | | 160 | | | | 60 | | | | 2,390 | | | 2024 | | | | 274 | | | | 139 | | | | 31 | | | | 11 | | | | 455 | | 2025 | | | | 277 | | | | 143 | | | | 32 | | | | 11 | | | | 463 | | Years 2026 – 2029 | | | | 1,421 | | | | 808 | | | | 187 | | | | 58 | | | | 2,474 | | | | $ | 2,763 | | | $ | 1,313 | | | $ | 291 | | | $ | 116 | | | $ | 4,483 | | | $ | 2,760 | | | $ | 1,471 | | | $ | 339 | | | $ | 110 | | | $ | 4,680 | |
Defined Contribution PlanPlans We have defined contribution plans covering eligible employees in many countries. The most significant plans are in the U.S. and U.K. and are described here. We have a U.S. defined contribution plan (the ‘Plan’) covering all eligible employees of Willis Towers Watson. The Plan allows participants to make pre-tax and Roth after-tax contributions, and the Company provides a 100% match on the first 1% of employee contributions and a 50% match on the next 5% of employee contributions. Employees vest in the Company match upon 2 years of service. All investment assets of the plan are held in a trust account administered by independent trustees. TheOur Legacy Towers Watson U.K. and Legacy Willis U.K. pension plans provide for a defined contribution component as part of a master trust. We make contributions to the plan, has a money purchase component toportion of which we make corerepresents matching contributions plus additional contributions matching those ofmade by the participants up to a maximum rate. Contribution rates depend on the age of the participant and whether or not they arise from salary sacrifice arrangements through which the participant has elected to receive a pension contribution in lieu of additional salary.
The Legacy Willis U.K. pension plan has a money purchase component to which we make core contributions plus additional contributions matching those of the participants up to a maximum rate. Contribution rates may arise from salary sacrifice arrangements through which the participant has elected to receive a pension contribution in lieu of additional salary.
We had defined contribution plan expense for the years ended December 31, 2018, 2017,2020, 2019 and 20162018 amounting to $160 million, $150 million $154 million and $152$150 million, respectively.
Note 1413 — Commitments and Contingencies Leases The Company leases certain land, buildingsfollowing tables present amounts recorded on our consolidated balance sheets at December 31, 2020 and equipment under various2019, classified as either operating lease commitments. The total amount of the minimum rent is expensed on a straight-line basis over the term of the lease. Rental expenses and sub-lease rental income for operatingor finance leases. Operating leases are presented separately on our consolidated balance sheets. For the finance leases, the right-of-use (‘ROU’) assets are included in fixed assets, net, and the liabilities are classified within other current liabilities or other non-current liabilities. | | December 31, 2020 | | | December 31, 2019 | | | | Operating Leases | | | Finance Leases | | | Total Leases | | | Operating Leases | | | Finance Leases | | | Total Leases | | Right-of-use assets | | $ | 902 | | | $ | 8 | | | $ | 910 | | | $ | 968 | | | $ | 10 | | | $ | 978 | | Current lease liabilities | | | 152 | | | | 3 | | | | 155 | | | | 164 | | | | 3 | | | | 167 | | Long-term lease liabilities | | | 918 | | | | 19 | | | | 937 | | | | 964 | | | | 22 | | | | 986 | |
The following tables present amounts recorded as part of other operating expenses in theon our consolidated statements of comprehensive income. Rental expense, exclusive of sublease income was $295 million, $302 million, and $302 million for the years ended December 31, 2020 and 2019: | | Years ended December 31, | | | | 2020 | | | 2019 | | Finance lease cost: | | | | | | | | | Amortization of right-of-use assets | | $ | 2 | | | $ | 2 | | Interest on lease liabilities | | | 3 | | | | 3 | | Operating lease cost | | | 181 | | | | 191 | | Short-term lease cost | | | 1 | | | | 2 | | Variable lease cost | | | 53 | | | | 51 | | Sublease income | | | (21 | ) | | | (16 | ) | Total lease cost, net | | $ | 219 | | | $ | 233 | |
The total lease cost is recognized in different locations in our consolidated statements of comprehensive income. Amortization of the finance lease ROU assets is included in depreciation, while the interest cost component of these finance leases is included in interest expense. All other costs are included in other operating expenses. The Company had rent expense for the year ended December 31, 2018 2017 and 2016, respectively. We have entered intoof $243 million, net of sublease agreementsincome, related to operating leases classified within other operating expenses on our consolidated statement of comprehensive income. Cash paid for someamounts included in the measurement of our excess leased space. Sublease income was $15 million, $21 million and $17 millionlease liabilities for the years ended December 31, 2018, 20172020 and 2016,2019, as well as its location in the consolidated statements of cash flows, is as follows: | | Years ended December 31, | | | | 2020 | | | 2019 | | Cash flows from operating activities: | | | | | | | | | Operating leases | | $ | 190 | | | $ | 205 | | Finance leases | | | 3 | | | | 3 | | Cash flows used in financing activities: | | | | | | | | | Finance leases | | | 3 | | | | 2 | | Total lease payments | | $ | 196 | | | $ | 210 | |
Non-cash additions to our operating lease ROU assets were $70 million and $124 million during the years ended December 31, 2020 and 2019, respectively.
AsOur operating and finance leases have the following weighted-average terms and discount rates as of December 31, 2018,2020 and 2019:
| | December 31, 2020 | | | December 31, 2019 | | | | Operating Leases | | | Finance Leases | | | Operating Leases | | | Finance Leases | | Weighted-average term (in years) | | | 8.3 | | | | 5.2 | | | | 8.8 | | | | 6.0 | | Weighted-average discount rate | | | 3.4 | % | | | 12.9 | % | | | 3.6 | % | | | 12.9 | % |
The maturity of our lease liabilities on an undiscounted basis, including a reconciliation to the aggregate future minimum rental commitments under all non-cancellable operatingtotal lease agreements areliabilities reported on the consolidated balance sheet as of December 31, 2020, is as follows: | | Operating Leases | | | Finance Leases | | | Total Leases | | 2021 | | $ | 185 | | | $ | 6 | | | $ | 191 | | 2022 | | | 172 | | | | 6 | | | | 178 | | 2023 | | | 157 | | | | 6 | | | | 163 | | 2024 | | | 138 | | | | 6 | | | | 144 | | 2025 | | | 123 | | | | 6 | | | | 129 | | Thereafter | | | 458 | | | | 1 | | | | 459 | | Total future lease payments | | | 1,233 | | | | 31 | | | | 1,264 | | Interest | | | (163 | ) | | | (9 | ) | | | (172 | ) | Total lease liabilities | | $ | 1,070 | | | $ | 22 | | | $ | 1,092 | |
| | Gross rental commitments | | | Rentals from subleases | | | Net rental commitments | | 2019 | | $ | 197 | | | $ | (11 | ) | | $ | 186 | | 2020 | | | 180 | | | | (11 | ) | | | 169 | | 2021 | | | 159 | | | | (8 | ) | | | 151 | | 2022 | | | 142 | | | | (2 | ) | | | 140 | | 2023 | | | 131 | | | | (2 | ) | | | 129 | | Thereafter | | | 542 | | | | (8 | ) | | | 534 | | Total | | $ | 1,351 | | | $ | (42 | ) | | $ | 1,309 | |
At December 31, 2018Note 14—Commitments and 2017, the Company had certain capital lease obligations totaling $43 million and $48 million, respectively, primarily in respect of the Company’s Nashville property.Contingencies
Guarantees Guarantees issued by certain of Willis Towers Watson’s subsidiaries with respect to the senior notes and revolving credit facilities are discussed in Note 1110 — Debt and Note 22 — Financial Information for Issuers and Other Guarantor Subsidiaries.Debt. Certain of Willis Towers Watson’s subsidiaries in the U.S. and the U.K. have given the landlords of some leaseholdleased properties occupied by the Company in the U.K. and the U.S. guarantees with respect to the performancerepayment of the lease obligations of the subsidiary
holding the lease.obligations. The operating lease obligations subject to such guarantees amounted to $570$566 million and $669$536 million at December 31, 20182020 and 2017,2019, respectively. The capital lease obligations subject to such guarantees amounted to $7$5 million and $8$6 million at December 31, 20182020 and 2017,2019, respectively.
Acquisition liabilities The Company has deferred and contingent consideration related to acquisition due to be paid on existing acquisitions until 20212024 totaling $83$55 million at December 31, 2018. Most notably, our liabilities for the acquisitions of Alston Gayler and Miller Insurance Services LLP in December 2018 and May 2015, respectively, for which deferred and contingent consideration, including interest, was $73 million at December 31, 2018.2020. Total deferred and contingent consideration paid during the year ended December 31, 20182020 was $50$12 million. Other contractual obligations For certain subsidiaries and associates, the Company has the right to purchase shares (a call option) from co-shareholders at various dates in the future. In addition, the co-shareholders of certain subsidiaries and associates have the right to sell their shares (a put option) to the Company at various dates in the future. Generally, the exercise price of such put options and call options is formula-based (using revenue and earnings) and is designed to reflect fair value. Based on current projections of profitability and exchange rates, and assuming the put options are exercised, the potential amount payable from these options is not expected to exceed $33$38 million. Additionally, the Company has capital commitments with Trident V Parallel Fund, LP, an investment fund managed by Stone Point Capital, and Dowling Capital Partners I, LP. At December 31, 2018,2020, the Company is obligated to make capital contributions of approximately $2 million, collectively, to these funds. Indemnification Agreements Willis Towers Watson has various agreements which provide that it may be obligated to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business and in connection with the purchase and sale of certain businesses. Although itIt is not possible to predict the maximum potential amount of future payments that may become due under these indemnification agreements because of the conditional nature of the Company’s obligations and the unique facts of each particular agreement,agreement. However, we do not believe that any potential liability that may arise from such indemnity provisions is probable or material. There are no provisions for recourse to third parties, nor are any assets held by any third parties that any guarantor can liquidate to recover amounts paid under such indemnities.
Legal Proceedings In the ordinary course of business, the Company is subject to various actual and potential claims, lawsuits and other proceedings. Some of the claims, lawsuits and other proceedings seek damages in amounts which could, if assessed, be significant. We do not expect the impact of claims or demands not described below to be materialimmaterial to the Company’s consolidated financial statements. The Company also receives subpoenas in the ordinary course of business and, from time to time, receives requests for information in connection with governmental investigations. Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance. See Note 15 — Supplementary Information for Certain Balance Sheet Accounts for the amounts accrued at December 31, 2018 and December 31, 2017 in the consolidated balance sheets. The terms of this insurance vary by policy year. Regarding self-insured risks, the Company has established provisions which are believed to be adequate in light of current information and legal advice, or, in certain cases, where a range of loss exists, the Company accrues the minimum amount in the range if no amount within the range is a better estimate than any other amount. The Company adjusts such provisions from time to time according to developments. See Note 15 — Supplementary Information for Certain Balance Sheet Accounts for the amounts accrued at December 31, 2020 and 2019 in the consolidated balance sheets. On the basis of current information, the Company does not expect that the actual claims, lawsuits and other proceedings to which the Companyit is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will ultimately have a material adverse effect on the Company’sits financial condition, results of operations or liquidity. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and disputes with insurance companies, it is possible that an adverse outcome or settlement in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods. In addition, given the early stages of some litigation or regulatory proceedings
described below, it ismay not be possible to predict their outcomeoutcomes or resolution,resolutions, and it is possible that any one or more of these events may have a material adverse effect on the Company. The Company provides for contingent liabilities based on ASC 450, Contingencies, when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. The contingent liabilities recorded are primarily developed actuarially. Litigation is subject to many factors which are difficult to predict so there can be no assurance that in the event of a material unfavorable result in one or more claims, we will not incur material costs. Litigation Relating to the Proposed Combination with Aon plc On May 11, 2020, a purported stockholder of the Company filed a complaint in the United States District Court for the Southern District of New York against the Company and the members of the Company’s board of directors, captioned Stein v. Willis Towers Watson Public Limited Company, et al., Case No. 1:20-cv-03656 (S.D.N.Y.), referred to as the ‘Stein Complaint.’ On May 14, 2020, a purported stockholder of the Company filed a putative class action in the United States District Court for the District of Delaware against the Company, the members of the Company’s board of directors, and Aon plc (‘Aon’), captioned Kent v. Willis Towers Watson Public Limited Company, et al., Case No. 1:20-cv-00641 (D. Del.), referred to as the ‘Kent Complaint.’ On May 19, 2020, a purported stockholder of the Company filed a putative class action in the United States District Court for the Southern District of New York against the Company and the members of the Company’s board of directors, captioned Carter v. Willis Towers Watson Public Limited Company, et al., Case No. 1:20-cv-03865 (S.D.N.Y.), referred to as the ‘Carter Complaint.’ On May 28, 2020, a purported stockholder of the Company filed a complaint in the United States District Court for the Southern District of California against the Company and the members of the Company’s board of directors, captioned Tang v. Willis Towers Watson Public Limited Company, et al., Case No. 3:20-cv-00986 (S.D. Cal.), referred to as the ‘Tang Complaint.’ On June 17, 2020, a purported stockholder of the Company filed a complaint in the United States District Court for the Southern District of California against the Company and the members of the Company’s board of directors, captioned Kuznik v. Willis Towers Watson Public Limited Company, et al., Case No. 3:20-cv-01097 (S.D. Cal.), referred to as the ‘Kuznik Complaint,’ and together with the Stein Complaint, the Kent Complaint, the Carter Complaint, and the Tang Complaint, referred to as the ‘Complaints.’ The Complaints assert claims against certain defendants under Section 14(a) of the Securities Exchange Act of 1934 (the ‘Exchange Act’) for allegedly false and misleading statements in the proxy statement; and against certain defendants under Section 20(a) of the Exchange Act for alleged ‘control person’ liability with respect to such allegedly false and misleading statements. The Stein Complaint, the Carter Complaint, and the Tang Complaint each seek, among other relief, an order enjoining the proposed combination with Aon unless and until corrective disclosures are made. The Kuznik Complaint and the Kent Complaint each seek, among other relief, an order enjoining the proposed combination with Aon and an order directing certain defendants to issue corrective disclosures. The Stein Complaint and the Carter Complaint also seek damages in an unspecified amount. The Company believes the allegations in the Complaints are without merit.
On August 4, 2020, certain plaintiffs voluntarily dismissed without prejudice the Kent Complaint, the Carter Complaint, and the Stein Complaint. On September 15, 2020, certain plaintiffs voluntarily dismissed without prejudice the Tang Complaint and the Kuznik Complaint. Willis Towers Watson Merger-Related Securities Litigation On November 21, 2017, a purported former stockholder of Legacy Towers Watson filed a putative class action complaint on behalf of a putative class consisting of all Legacy Towers Watson stockholders as of October 2, 2015 against the Company, Legacy Towers Watson, Legacy Willis, ValueAct Capital Management (‘ValueAct’), and certain current and former directors and officers of Legacy Towers Watson and Legacy Willis (John Haley, Dominic Casserley, and Jeffrey Ubben), in the United States District Court for the Eastern District of Virginia. The complaint asserted claims against certain defendants under Section 14(a) of the Securities Exchange Act of 1934 (the ‘Exchange Act’) for allegedly false and misleading statements in the proxy statement for the Merger; and against other defendants under Section 20(a) of the Exchange Act for alleged ‘control person’ liability with respect to such allegedly false and misleading statements. The complaint further contended that the allegedly false and misleading statements caused stockholders of Legacy Towers Watson to accept inadequate Merger consideration. The complaint sought damages in an unspecified amount. On February 20, 2018, the court appointed the Regents of the University of California (‘Regents’) as Lead Plaintiff and Bernstein Litowitz Berger & Grossman LLP (‘Bernstein’) as Lead Counsel for the putative class, consolidated all subsequently filed, removed, or transferred actions, and captioned the consolidated action ‘In re Willis Towers Watson plc Proxy Litigation,’ Master File No. 1:17-cv-1338-AJT-JFA.17-cv-1338-AJT-JFA (the ‘Federal Action’). On March 9, 2018, Lead Plaintiff filed an Amended Complaint. On April 13, 2018, the defendants filed motions to dismiss the Amended Complaint, and, on July 11, 2018, following briefing and argument, the court granted the motions and dismissed the Amended Complaint in its entirety. On July 30, 2018, Lead Plaintiff filed a notice of appeal from the court’s July 11, 2018 dismissal order to the United States Court of Appeals for the Fourth Circuit (the ‘Fourth Circuit’), and, on December 6, 2018, the parties completed briefing on the appeal. On May 8, 2019, the parties argued the appeal, and on August 30, 2019, the Fourth Circuit vacated the dismissal order and remanded the case to the Eastern District of Virginia for further proceedings consistent with its decision. On September 13, 2019, the defendants filed a petition for rehearing by the Fourth Circuit en banc, which the Fourth Circuit denied on September 27, 2019. On November 8, 2019, the defendants filed renewed motions to dismiss in the Eastern District of Virginia based upon certain arguments that were advanced in their original motions to dismiss, but undecided by both the district court and the Fourth Circuit. On December 18, 2019, the parties completed briefing on the defendants’ renewed motions, and, on December 20, 2019, the court heard argument on the motions. On January 31, 2020, the court denied the motions. On June 12, 2020, Lead Plaintiff filed a motion for class certification, in connection with which it indicated that it is seeking class-wide damages of approximately $456 million. On September 4, 2020, the court granted Lead Plaintiff’s motion for class certification, certified the putative class, and appointed Lead Plaintiff as the Class Representative for the certified class. On October 16, 2020, the defendants filed motions for summary judgment and to exclude Lead Plaintiff’s proposed experts. Also on October 16, 2020, Lead Plaintiff filed a motion to exclude certain of the defendants’ proposed experts. On February 27, 2018 and March 8, 2018, two additional purported former stockholders of Legacy Towers Watson, City of Fort Myers General Employees’ Pension Fund (‘Fort Myers’) and Alaska Laborers-Employers Retirement Trust (‘Alaska’), filed putative class action complaints on behalf of a putative class of Legacy Towers Watson stockholders against the former members of the Legacy Towers Watson board of directors, Legacy Towers Watson, Legacy Willis and ValueAct, in the Delaware Court of Chancery, captioned City of Fort Myers General Employees’ Pension Fund v. Towers Watson & Co., et al., C.A. No. 2018-0132, and Alaska Laborers-Employers Retirement Trust v. Victor F. Ganzi, et al., C.A. No. 2018-0155, respectively. Based on similar allegations as the Eastern District of Virginia action described above, the complaints assert claims against the former directors of Legacy Towers Watson for breach of fiduciary duty and against Legacy Willis and ValueAct for aiding and abetting breach of fiduciary duty. On March 9, 2018, Regents filed a putative class action complaint on behalf of a putative class of Legacy Towers Watson stockholders against the Company, Legacy Willis, ValueAct, and Messrs. Haley, Casserley, and Ubben, in the Delaware Court of Chancery, captioned The Regents of the University of California v. John J. Haley, et al., C.A. No. 2018-0166. Based on similar allegations as the Eastern District of Virginia action described above, the complaint asserts claims against Mr. Haley for breach of fiduciary duty and against all other defendants for aiding and abetting breach of fiduciary duty. Also on March 9, 2018, Regents filed a motion for consolidation of all pending and subsequently filed Delaware Court of Chancery actions, and for appointment as Lead Plaintiff and for the appointment of Bernstein as Lead Counsel for the putative class. On March 29, 2018, Fort Myers and Alaska responded to Regents’ motion and cross-moved for appointment as Co-Lead Plaintiffs and for the appointment of their counsel, Grant & Eisenhofer P.A. and Kessler Topaz Meltzer & Check, LLP as Co-Lead Counsel. On April 2, 2018, the court consolidated the Delaware Court of Chancery actions and all related actions subsequently filed in or transferred to the Delaware Court of Chancery. On June 5, 2018, the court denied Regents’ motion for appointment of Lead Plaintiff and Lead Counsel and granted Fort Myers’ and Alaska’s cross-motion. On June 20, 2018, Fort Myers and Alaska designated the complaint previously filed by Alaska (the ‘Alaska Complaint’) as the operative complaint in the consolidated action.action (the ‘Delaware Action’). On September 14, 2018, the defendants filed motions to dismiss the Alaska Complaint. On October 31, 2018, Fort Myers and Alaska filed an amended complaint, which, based on similar allegations, asserts claims against the former directors of legacy Towers Watson for breach of fiduciary duty and
against ValueAct and Mr. Ubben for aiding and abetting breach of fiduciary duty. On January 11, 2019, the defendants filed motions to dismiss the amended complaint, and on March 29, 2019, the parties completed briefing on the motions. The court heard argument on the motions on April 11, 2019 and, on July 25, 2019, dismissed the amended complaint in its entirety. On August 22, 2019, Fort Myers and Alaska filed a notice of appeal (only with respect to Messrs. Haley and Ubben and ValueAct) from the court’s July 25, 2019 dismissal order to the Supreme Court of the State of Delaware. On November 22, 2019, the parties completed briefing on the appeal, which was submitted on April 22, 2020 for decision in lieu of argument. On June 30, 2020, the Supreme Court of the State of Delaware reversed and remanded the case to the Court of Chancery for further proceedings consistent with its decision. On July 27, 2020, Fort Myers and Alaska filed a motion for class certification, which is currently pending. On September 14, 2020, Mr. Haley answered the amended complaint.
On October 18, 2018, three3 additional purported former stockholders of Legacy Towers Watson, Naya Master Fund LP, Naya 174 Fund Limited and Naya Lincoln Park Master Fund Limited (collectively, ‘Naya’), filed a complaint against the Company, Legacy Towers Watson, Legacy Willis and John Haley, in the Supreme Court of the State of New York, County of New York, captioned Naya Master Fund LP, et al. v. John J. Haley, et al., Index No. 654968/2018. Based on similar allegations as the Eastern District of Virginia and Delaware actions described above, the complaint asserts claims for common law fraud and negligent misrepresentation. On December 18, 2018, the defendants filed a motion to dismiss the complaint. The defendants disputecomplaint, and on March 21, 2019, the allegations in these actionsparties completed briefing on the motion. On April 23, 2019, the parties filed a Stipulation and intend to defendProposed Order Voluntarily Discontinuing Action providing for the lawsuits vigorously. Given the stagedismissal of the proceedings,action with prejudice, which the court entered on April 29, 2019.
On or about November 19, 2020, the parties to the Federal Action and the Delaware Action reached an agreement in principle to resolve the Federal Action and the Delaware Action for $75 million and $15 million, respectively. The Company agreed to the settlement and the payment of the settlement amounts to eliminate the distraction, burden, expense and uncertainty of further litigation. Further, in reaching the settlement, the parties understood and agreed that there is no admission of liability or wrongdoing by the Company is unable to provide an estimateor any of the reasonably possible lossother defendants in either the Federal Action or rangethe Delaware Action. The Company and the other defendants expressly deny any liability or wrongdoing with respect to the matters alleged in the Federal Action and the Delaware Action. On January 15, 2021, the parties to the Federal Action and the Delaware Action signed formal stipulations of loss in respectsettlement, which memorialized the terms of the complaints.agreement in principle, and which the plaintiffs in the Federal Action and the Delaware Action then filed with each of the respective courts. Also on January 15, 2021, the plaintiff in the Federal Action filed a motion to preliminarily approve the settlement. On January 21, 2021, the court in the Federal Action preliminarily approved the settlement, approved the form of notice to be disseminated to class members, and scheduled a final fairness hearing on the settlement for May 21, 2021. On January 25, 2021, the court in the Delaware Action approved the form of notice to be disseminated to class members and scheduled a final fairness hearing on the settlement for May 25, 2021. The settlement remains subject to notice to class members in the two actions. The settlement is contingent upon final approval by the courts in both the Federal Action and the Delaware Action. The Company will make the $90 million aggregate settlement payment in February 2021, but it will not be distributed to class members unless and until the settlement is finally approved by the courts in both the Federal Action and the Delaware Action and not subject to any further appeal. During the three and twelve months ended December 31, 2020, the Company recognized $50 million and $65 million respectively, of expense, net of $25 million of insurance and other recoveries. Additional insurance recoveries are possible. Stanford Financial Group The Company has beenwas named as a defendant in 15 similar lawsuits relating to the collapse of The Stanford Financial Group (‘Stanford’), for which Willis of Colorado, Inc. acted as broker of record on certain lines of insurance. The complaints in these actions generally allegealleged that the defendants actively and materially aided Stanford’s alleged fraud by providing Stanford with certain letters regarding coverage that they knew would be used to help retain or attract actual or prospective Stanford client investors. The complaints further allegealleged that these letters, which containcontained statements about Stanford and the insurance policies that the defendants placed for Stanford, contained untruths and omitted material facts and were drafted in this manner to help Stanford promote and sell its allegedly fraudulent certificates of deposit. The 15 actions are as follows:
Troice, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:9-CV-1274-N, was filed on July 2, 2009 in the U.S. District Court for the Northern District of Texas against Willis Group Holdings plc, Willis of Colorado, Inc. and a Willis associate, among others. On April 1, 2011, plaintiffs filed the operative Third Amended Class Action Complaint individually and on behalf of a putative, worldwide class of Stanford investors, adding Willis Limited as a defendant and alleging claims under Texas statutory and common law and seeking damages in excess of $1 billion, punitive damages and costs. On May 2, 2011, the defendants filed motions to dismiss the Third Amended Class Action Complaint, arguing, inter alia, that the plaintiffs’ claims are precluded by the Securities Litigation Uniform Standards Act of 1998 (‘SLUSA’).
On May 10, 2011, the court presiding over the Stanford-related actions in the Northern District of Texas entered an order providing that it would consider the applicability of SLUSA to the Stanford-related actions based on the decision in a separate Stanford action not involving a Willis entity, Roland v. Green, Civil Action No. 3:10-CV-0224-N (‘Roland’). On August 31, 2011, the court issued its decision in Roland, dismissing that action with prejudice under SLUSA.
On October 27, 2011, the court in Troice entered an order (i) dismissing with prejudice those claims asserted in the Third Amended Class Action Complaint on a class basis on the grounds set forth in the Roland decision discussed above and (ii) dismissing without prejudice those claims asserted in the Third Amended Class Action Complaint on an individual basis. Also on October 27, 2011, the court entered a final judgment in the action.
On October 28, 2011, the plaintiffs in Troice filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. Subsequently, Troice, Roland and a third action captioned Troice, et al. v. Proskauer Rose LLP, Civil Action No. 3:09-CV-01600-N, which also was dismissed on the grounds set forth in the Roland decision discussed above and on appeal to the U.S. Court of Appeals for the Fifth Circuit, were consolidated for purposes of briefing and oral argument. Following the completion of briefing and oral argument, on March 19, 2012, the Fifth Circuit reversed and remanded the actions. On April 2, 2012, the defendants-appellees filed petitions for rehearing en banc. On April 19, 2012, the petitions for rehearing en banc were denied. On July 18, 2012, defendants-appellees filed a petition for writ of certiorari with the United States Supreme Court regarding the Fifth Circuit’s reversal in Troice. On January 18, 2013, the Supreme Court granted our petition. Opening briefs were filed on May 3, 2013 and the Supreme Court heard oral argument on October 7, 2013. On February 26, 2014, the Supreme Court affirmed the Fifth Circuit’s decision.
On March 19, 2014, the plaintiffs in Troice filed a Motion to Defer Resolution of Motions to Dismiss, to Compel Rule 26(f) Conference and For Entry of Scheduling Order.
On March 25, 2014, the parties in Troice and the Janvey, et al. v. Willis of Colorado, Inc., et al. action discussed below stipulated to the consolidation of the two actions for pre-trial purposes under Rule 42(a) of the Federal Rules of Civil Procedure. On March 28, 2014, the Court ‘so ordered’ that stipulation and, thus, consolidated Troice and Janvey for pre-trial purposes under Rule 42(a).
On September 16, 2014, the court (a) denied the plaintiffs’ request to defer resolution of the defendants’ motions to dismiss, but granted the plaintiffs’ request to enter a scheduling order; (b) requested the submission of supplemental briefing by all parties on the defendants’ motions to dismiss, which the parties submitted on September 30, 2014; and (c) entered an order setting a schedule for briefing and discovery regarding plaintiffs’ motion for class certification, which schedule, among other things, provided for the submission of the plaintiffs’ motion for class certification (following the completion of briefing and discovery) on April 20, 2015.
On December 15, 2014, the court granted in part and denied in part the defendants’ motions to dismiss. On January 30, 2015, the defendants except Willis Group Holdings plc answered the Third Amended Class Action Complaint.
On April 20, 2015, the plaintiffs filed their motion for class certification, the defendants filed their opposition to plaintiffs’ motion, and the plaintiffs filed their reply in further support of the motion. Pursuant to an agreed stipulation also filed with the court on April 20, 2015, the defendants on June 4, 2015 filed sur-replies in further opposition to the motion. The Court has not yet scheduled a hearing on the motion.
On June 19, 2015, Willis Group Holdings plc filed a motion to dismiss the complaint for lack of personal jurisdiction. On November 17, 2015, Willis Group Holdings plc withdrew the motion.
On March 31, 2016, the parties in the Troice and Janvey actions entered into a settlement in principle that is described in more detail below.
Ranni v. Willis of Colorado, Inc., et al., C.A. No. 9-22085, was filed on July 17, 2009 against Willis Group Holdings plc and Willis of Colorado, Inc. in the U.S. District Court for the Southern District of Florida. The complaint was filed on behalf of a putative class of Venezuelan and other South American Stanford investors and alleges claims under Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 thereunder) and Florida statutory and common law and seeks damages in an amount to be determined at trial. On October 6, 2009, Ranni was transferred, for consolidation or coordination with other Stanford-related actions (including Troice), to the Northern District of Texas by the U.S. Judicial Panel on Multidistrict Litigation (the ‘JPML’). The defendants have not yet responded to the complaint in Ranni. On August 26, 2014, the plaintiff filed a notice of voluntary dismissal of the action without prejudice.
Canabal, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:9-CV-1474-D, was filed on August 6, 2009 against Willis Group Holdings plc, Willis of Colorado, Inc. and the same Willis associate named as a defendant in Troice, among others, also in the Northern District of Texas. The complaint was filed individually and on behalf of a putative class of Venezuelan Stanford investors, alleged claims under Texas statutory and common law and sought damages in excess of $1 billion, punitive damages, attorneys’ fees and costs. On December 18, 2009, the parties in Troice and Canabal stipulated to the consolidation of those actions (under the Troice civil action number), and, on December 31, 2009, the plaintiffs in Canabal filed a notice of dismissal, dismissing the action without prejudice.
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| Rupert, et al. v. Winter, et al., Case No. 2009C115137, was filed on September 14, 2009 on behalf of 97 Stanford investors against Willis Group Holdings plc, Willis of Colorado, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). The complaint alleges claims under the Securities Act of 1933, Texas and Colorado statutory law and Texas common law and seeks special, consequential and treble damages of more than $300 million, attorneys’ fees and costs. On October 20, 2009, certain defendants, including Willis of Colorado, Inc., (i) removed Rupert to the U.S. District Court for the Western District of Texas, (ii) notified the JPML of the pendency of this related action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. On April 1, 2010, the JPML issued a final transfer order for the transfer of Rupert to the Northern District of Texas. On January 24, 2012, the court remanded Rupert to Texas state court (Bexar County), but stayed the action until further order of the court. On August 13, 2012, the plaintiffs filed a motion to lift the stay, which motion was denied by the court on September 16, 2014. On October 10, 2014, the plaintiffs appealed the court’s denial of their motion to lift the stay to the U.S. Court of Appeals for the Fifth Circuit. On January 5, 2015, the Fifth
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| | Circuit consolidated the appeal with the appeal in the Rishmague, et ano. v. Winter, et al. action discussed below, and the consolidated appeal, was fully briefed as of March 24, 2015. Oral argument on the consolidated appeal was held on September 2, 2015. On September 16, 2015, the Fifth Circuit affirmed. The defendants have not yet responded to the complaint in Rupert.
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Casanova, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:10-CV-1862-O, was filed on September 16, 2010 on behalf of seven Stanford investors against Willis Group Holdings plc, Willis Limited, Willis of Colorado, Inc. and the same Willis associate, among others, also in the Northern District of Texas. The complaint alleges claims under Texas statutory and common law and seeks actual damages in excess of $5 million, punitive damages, attorneys’ fees and costs. On February 13, 2015, the parties filed an Agreed Motion for Partial Dismissal pursuant to which they agreed to the dismissal of certain claims pursuant to the motion to dismiss decisions in the Troice action discussed above and the Janvey action discussed below. Also on February 13, 2015, the defendants except Willis Group Holdings plc answered the complaint in the Casanova action. On June 19, 2015, Willis Group Holdings plc filed a motion to dismiss the complaint for lack of personal jurisdiction. Plaintiffs have not opposed the motion.
Rishmague, et ano. v. Winter, et al., Case No. 2011CI2585, was filed on March 11, 2011 on behalf of two Stanford investors, individually and as representatives of certain trusts, against Willis Group Holdings plc, Willis of Colorado, Inc., Willis of Texas, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). The complaint alleges claims under Texas and Colorado statutory law and Texas common law and seeks special, consequential and treble damages of more than $37 million and attorneys’ fees and costs. On April 11, 2011, certain defendants, including Willis of Colorado, Inc., (i) removed Rishmague to the Western District of Texas, (ii) notified the JPML of the pendency of this related action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. On August 8, 2011, the JPML issued a final transfer order for the transfer of Rishmague to the Northern District of Texas, where it is currently pending. On August 13, 2012, the plaintiffs joined with the plaintiffs in the Rupert action in their motion to lift the court’s stay of the Rupert action. On September 9, 2014, the court remanded Rishmague to Texas state court (Bexar County), but stayed the action until further order of the court and denied the plaintiffs’ motion to lift the stay. On October 10, 2014, the plaintiffs appealed the court’s denial of their motion to lift the stay to the Fifth Circuit. On January 5, 2015, the Fifth Circuit consolidated the appeal with the appeal in the Rupert action, and the consolidated appeal was fully briefed as of March 24, 2015. Oral argument on the consolidated appeal was held on September 2, 2015. On September 16, 2015, the Fifth Circuit affirmed. The defendants have not yet responded to the complaint in Rishmague.
MacArthur v. Winter, et al., Case No. 2013-07840, was filed on February 8, 2013 on behalf of two Stanford investors against Willis Group Holdings plc, Willis of Colorado, Inc., Willis of Texas, Inc. and the same Willis associate, among others, in Texas state court (Harris County). The complaint alleges claims under Texas and Colorado statutory law and Texas common law and seeks actual, special, consequential and treble damages of approximately $4 million and attorneys’ fees and costs. On March 29, 2013, Willis of Colorado, Inc. and Willis of Texas, Inc. (i) removed MacArthur to the U.S. District Court for the Southern District of Texas and (ii) notified the JPML of the pendency of this related action. On April 2, 2013, Willis of Colorado, Inc. and Willis of Texas, Inc. filed a motion in the Southern District of Texas to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. Also on April 2, 2013, the court presiding over MacArthur in the Southern District of Texas transferred the action to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. On September 29, 2014, the parties stipulated to the remand (to Texas state court (Harris County)) and stay of MacArthur until further order of the court (in accordance with the court’s September 9, 2014 decision in Rishmague (discussed above)), which stipulation was ‘so ordered’ by the court on October 14, 2014. The defendants have not yet responded to the complaint in MacArthur.
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| Florida suits: On February 14, 2013, five lawsuits were filed against Willis Group Holdings plc, Willis Limited and Willis of Colorado, Inc. in Florida state court (Miami-Dade County), alleging violations of Florida common law. The five suits are: (1) Barbar, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05666CA27, filed on behalf of 35 Stanford investors seeking compensatory damages in excess of $30 million; (2) de Gadala-Maria, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05669CA30, filed on behalf of 64 Stanford investors seeking compensatory damages in excess of $83.5 million; (3) Ranni, et ano. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05673CA06, filed on behalf of two Stanford
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| | investors seeking compensatory damages in excess of $3 million; (4) Tisminesky, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05676CA09, filed on behalf of 11 Stanford investors seeking compensatory damages in excess of $6.5 million; and (5) Zacarias, et al. v. Willis Group Holdings Public Limited Company, et al., Case No. 13-05678CA11, filed on behalf of 10 Stanford investors seeking compensatory damages in excess of $12.5 million. On June 3, 2013, Willis of Colorado, Inc. removed all five cases to the Southern District of Florida and, on June 4, 2013, notified the JPML of the pendency of these related actions. On June 10, 2013, the court in Tisminesky issued an order sua sponte staying and administratively closing that action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation and coordination with the other Stanford-related actions. On June 11, 2013, Willis of Colorado, Inc. moved to stay the other four actions pending the JPML’s transfer decision. On June 20, 2013, the JPML issued a conditional transfer order for the transfer of the five actions to the Northern District of Texas, the transmittal of which was stayed for seven days to allow for any opposition to be filed. On June 28, 2013, with no opposition having been filed, the JPML lifted the stay, enabling the transfer to go forward.
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On September 30, 2014, the court denied the plaintiffs’ motion to remand in Zacarias, and, on October 3, 2014, the court denied the plaintiffs’ motions to remand in Tisminesky and de Gadala Maria. On December 3, 2014 and March 3, 2015, the court granted the plaintiffs’ motions to remand in Barbar and Ranni, respectively, remanded both actions to Florida state court (Miami-Dade County) and stayed both actions until further order of the court. On January 2, 2015 and April 1, 2015, the plaintiffs in Barbar and Ranni, respectively, appealed the court’s December 3, 2014 and March 3, 2015 decisions to the Fifth Circuit. On April 22, 2015 and July 22, 2015, respectively, the Fifth Circuit dismissed the Barbar and Ranni appeals sua sponte for lack of jurisdiction. The defendants have not yet responded to the complaints in Ranni or Barbar.
On April 1, 2015, the defendants except Willis Group Holdings plc filed motions to dismiss the complaints in Zacarias, Tisminesky and de Gadala-Maria. On June 19, 2015, Willis Group Holdings plc filed motions to dismiss the complaints in Zacarias, Tisminesky and de Gadala-Maria for lack of personal jurisdiction. On July 15, 2015, the court dismissed the complaint in Zacarias in its entirety with leave to replead within 21 days. On July 21, 2015, the court dismissed the complaints in Tisminesky and de Gadala-Maria in their entirety with leave to replead within 21 days. On August 6, 2015, the plaintiffs in Zacarias, Tisminesky and de Gadala-Maria filed amended complaints (in which, among other things, Willis Group Holdings plc was no longer named as a defendant). On September 11, 2015, the defendants filed motions to dismiss the amended complaints. The motions await disposition by the court.
Janvey, et al. v. Willis of Colorado, Inc., et al., Case No. 3:13-CV-03980-D, was filed on October 1, 2013 also in the Northern District of Texas against Willis Group Holdings plc, Willis Limited, Willis North America Inc., Willis of Colorado, Inc. and the same Willis associate. The complaint was filed (i) by Ralph S. Janvey, in his capacity as Court-Appointed Receiver for the Stanford Receivership Estate, and the Official Stanford Investors Committee (the ‘OSIC’) against all defendants and (ii) on behalf of a putative, worldwide class of Stanford investors against Willis North America Inc. Plaintiffs Janvey and the OSIC allege claims under Texas common law and the court’s Amended Order Appointing Receiver, and the putative class plaintiffs allege claims under Texas statutory and common law. Plaintiffs seek actual damages in excess of $1 billion, punitive damages and costs. As alleged by the Stanford Receiver, the total amount of collective losses allegedly sustained by all investors in Stanford certificates of deposit is approximately $4.6 billion.
On November 15, 2013, plaintiffs in Janvey filed the operative First Amended Complaint, which added certain defendants unaffiliated with Willis. On February 28, 2014, the defendants filed motions to dismiss the First Amended Complaint, which motions, other than with respect to Willis Group Holding plc’s motion to dismiss for lack of personal jurisdiction, were granted in part and denied in part by the court on December 5, 2014. On December 22, 2014, Willis filed a motion to amend the court’s December 5 order to certify an interlocutory appeal to the Fifth Circuit, and, on December 23, 2014, Willis filed a motion to amend and, to the extent necessary, reconsider the court’s December 5 order. On January 16, 2015, the defendants answered the First Amended Complaint. On January 28, 2015, the court denied Willis’s motion to amend the court’s December 5 order to certify an interlocutory appeal to the Fifth Circuit. On February 4, 2015, the court granted Willis’s motion to amend and, to the extent necessary, reconsider the December 5 order.
As discussed above, on March 25, 2014, the parties in Troice and Janvey stipulated to the consolidation of the two actions for pre-trial purposes under Rule 42(a) of the Federal Rules of Civil Procedure. On March 28, 2014, the Court ‘so ordered’ that stipulation and, thus, consolidated Troice and Janvey for pre-trial purposes under Rule 42(a).
On January 26, 2015, the court entered an order setting a schedule for briefing and discovery regarding the plaintiffs’ motion for class certification, which schedule, among other things, provided for the submission of the plaintiffs’ motion for class certification (following the completion of briefing and discovery) on July 20, 2015. By letter dated March 4, 2015, the parties requested that the court consolidate the scheduling orders entered in Troice and Janvey to provide for a class certification submission date of April 20, 2015 in both cases. On March 6, 2015, the court entered an order consolidating the scheduling orders in Troice and Janvey, providing for a class certification submission date of April 20, 2015 in both cases, and vacating the July 20, 2015 class certification submission date in the original Janvey scheduling order.
On November 17, 2015, Willis Group Holdings plc withdrew its motion to dismiss for lack of personal jurisdiction.
On March 31, 2016, the parties in the Troice and Janvey actions entered into a settlement in principle that is described in more detail below.
Martin v. Willis of Colorado, Inc., et al., Case No. 201652115, was filed on August 5, 2016, on behalf of one Stanford investor against Willis Group Holdings plc, Willis Limited, Willis of Colorado, Inc. and the same Willis associate in Texas state court (Harris County). The complaint alleges claims under Texas statutory and common law and seeks actual damages of less than $100,000, exemplary damages, attorneys’ fees and costs. On September 12, 2016, the plaintiff filed an amended complaint, which added five more Stanford investors as plaintiffs and seeks damages in excess of $1 million. The defendants have not yet responded to the amended complaint in Martin.
Abel, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:16-cv-2601, was filed on September 12, 2016, on behalf of more than 300 Stanford investors against Willis Group Holdings plc, Willis Limited, Willis of Colorado, Inc. and the same Willis associate, also in the Northern District of Texas. The complaint alleges claims under Texas statutory and common law and seeks actual damages in excess of $135 million, exemplary damages, attorneys’ fees and costs. On November 10, 2016, the plaintiffs filed an amended complaint, which, among other things, added several more Stanford investors as plaintiffs. The defendants have not yet responded to the complaint in Abel.
The plaintiffs in Janvey and Troice and the otherthese actions above seeksought overlapping damages, representing either the entirety or a portion of the approximately $4.6 billion intotal alleged collective losses incurred by investors in Stanford certificates of deposit, notwithstanding the fact that Legacy Willis acted as broker of record for only a portion of time that Stanford issued certificates of deposit. In the fourth quarter of 2015, the Company recognized a $70 million litigation provision for loss contingencies relating to the Stanford matters based on its ongoing review of a variety of factors as required by accounting standards. On March 31, 2016, the Company entered into a settlement in principle for $120 million relating to this litigation, and increased its provisions by $50 million during that quarter. Further details on this settlement in principle are given below.
The settlement is contingent on a number of conditions, including court approval of the settlement and a bar order prohibiting any continued or future litigation against Willis related to Stanford, which may not be given. Therefore, the ultimate resolution of these matters may differ from the amount provided for. The Company continues to dispute the allegations and, to the extent litigation proceeds, to defend the lawsuits vigorously.
Settlement.On March 31, 2016, the Company entered into a settlement in principle, as reflected in a Settlement Term Sheet, relating to the Stanford litigation matter.litigation. The Company agreed to the Settlement Term Sheet to eliminate the distraction, burden, expense and uncertainty of further litigation. In particular, the settlement and the related bar orders described below if upheld through any appeals, would enable the Company (a newly-combined firm) to conduct itself with the bar orders’ protection from the continued overhang of matters alleged to have occurred approximatelyover a decade ago. Further, the
Settlement Term Sheet provided that the parties understood and agreed that there iswas no admission of liability or wrongdoing by the Company. The Company expressly denies any liability or wrongdoing with respect to the matters alleged in the Stanford litigation. On or about August 31, 2016, the parties to the settlement signed a formal Settlement Agreement memorializing the terms of the settlement as originally set forth in the Settlement Term Sheet. The parties to the Settlement Agreement are Ralph S. Janvey (in his capacity as the Court-appointed receiver (the ‘Receiver’) for The Stanford Financial Group and its affiliated entities in receivership (collectively, ‘Stanford’)), the Official Stanford Investors Committee, Samuel Troice, Martha Diaz, Paula Gilly-Flores, Punga Punga Financial, Ltd., Manuel Canabal, Daniel Gomez Ferreiro and Promotora Villa Marina, C.A. (collectively, ‘Plaintiffs’), on the one hand, and Willis Towers Watson Public Limited Company (formerly Willis Group Holdings Public Limited Company), Willis Limited, Willis North America Inc., Willis of Colorado, Inc. and the Willis
associate referenced above (collectively, ‘Defendants’), on the other hand. Under the terms of the Settlement Agreement, the parties agreed to settle and dismiss the Janvey and Troice actions (collectively, the ‘Actions’) and all current or future claims arising from or related to Stanford in exchange for a one-time cash payment to the Receiver by the Company of $120 million to be distributed to all Stanford investors who have claims recognized by the Receiver pursuant to the distribution plan in place at the time the payment iswas made. The Settlement Agreement also providesprovided the parties’ agreement to seek the Court’s entry of bar orders prohibiting any continued or future litigation against the Defendants and their related parties of claims relating to Stanford, whether asserted to date or not. The terms of the bar orders therefore would prohibit all Stanford-related litigation, described above, and not just the Actions,filed actions, but including any pending matters and any actions that may be brought in the future. Final Court approval of these bar orders iswas a condition of the settlement. On September 7, 2016, Plaintiffs filed with the Court a motion to approve the settlement. On October 19, 2016, the Court preliminarily approved the settlement. Several of the plaintiffs in the other actions above objected to the settlement, and a hearing to consider final approval of the settlement was held on January 20, 2017, after which the Court reserved decision. On August 23, 2017, the Court approved the settlement, including the bar orders. Several of the objectors appealed the settlement approval and bar orders to the Fifth Circuit. The briefing related to the appeals is now completed and oralOral argument on the appeals was heard on December 3, 2018. There is no date2018, and, on July 22, 2019, the Fifth Circuit affirmed the approval of the settlement, including the bar orders. On August 5, 2019, certain of the plaintiff-appellants filed a petition for whenrehearing by the appeals will be decided. TheFifth Circuit en banc (the ‘Petition’). On August 19, 2019, the Fifth Circuit requested a response to the Petition. On August 29, 2019, the Receiver filed a response to the Petition. On December 19, 2019, the Fifth Circuit granted the Petition (treating it as a petition for panel rehearing), withdrew its July 22, 2019 opinion, and substituted a new opinion that also affirmed the approval of the settlement, including the bar orders. On January 2, 2020, certain of the plaintiff-appellants filed another petition for rehearing by the Fifth Circuit en banc (the ‘Second Petition’), in which the other plaintiff-appellants joined. On January 21, 2020, the Fifth Circuit denied the Second Petition. On June 19, 2020, the plaintiff-appellants filed petitions for writ of certiorari with the United States Supreme Court. On September 10, 2020, the Supreme Court requested responses to the petitions for writ of certiorari, which were filed on November 6, 2020. On December 14, 2020, the Supreme Court denied the petitions. On January 12, 2021, the Company will not makemade the $120 million settlement payment unless and until the appeals are decided in its favor and the settlement is not subject to any further appeal.
City of Houston
On August 1, 2014, the City of Houston (‘plaintiff’) filed suit against Legacy Towers Watson in the United States District Court for the Southern District of Texas, Houston Division. On March 8, 2016, plaintiff filed its First Amended Complaint.
In the amended complaint, plaintiff alleged various deficiencies in pension actuarial work-product and advice stated to have been provided by Legacy Towers Watson’s predecessor firm, Towers Perrin, in its capacity as principal actuary to the Houston Firefighters’ Relief and Retirement Fund (the ‘Fund’). Towers Perrin is stated to have acted in this capacity between ‘the early 1980s until 2003.’
In particular, the amended complaint alleged ‘misrepresentations and miscalculations’ in valuation reports allegedly issued by Towers Perrin from 2000 through 2002 upon which plaintiff claimed to have relied. Plaintiff asserted that Towers Perrin assigned a new team of actuaries to the Fund in 2002 ‘to correct Towers’ own earlier mistakes’ and that the new team ‘altered’ certain calculations which ‘increased the actuarial accrued liability by $163 million.’ Plaintiff claimed that the reports indicated that the City’s minimum contribution percentages to the Fund would remain in place through at least 2019 and that existing benefits under the Fund could be increased, and new benefits could be added, without increasing plaintiff’s financial burden, and without increasing plaintiff’s rate of annual contributions to the Fund. payment.The amended complaint alleged that plaintiff relied on these reports when supporting a new benefits package for the Fund. These reports, and other advice, were alleged, among other things, to have been negligent, to have misrepresented the present and future financial conditionterms of the Fund and the contributions required to be made by plaintiff to support those benefits. Plaintiff assertedbar orders that but for Towers Perrin’s alleged negligence and misrepresentations, plaintiff would not have supported the benefits increase, and that such increased benefits would not and could not have been approved or enacted. It is further asserted that Towers Perrin’s alleged ‘negligence and misrepresentations damaged the City in the amount of tens of millions of dollars in annual contributions.’ The amended complaint sought the award of punitive damages, actual damages, exemplary damages, special damages, attorney’s fees and expenses, costs of suit, pre- and post- judgment interest at the maximum legal rate, and other unspecified legal and equitable relief.
On October 10, 2014, Legacy Towers Watson filedare a motion to dismiss plaintiff’s entire complaint on the basis that the complaint fails to state a claim upon which relief can be granted. On November 21, 2014, the City filed its response in opposition to Legacy Towers Watson’s motion to dismiss. On September 23, 2015, Legacy Towers Watson’s motion to dismiss was denied by the United States District Court for the Southern District of Texas, Houston Division. The court entered a Scheduling Order setting trial for May 30, 2017. On June 20, 2016, the Court entered a Second Amended Scheduling Order setting trial for October 31, 2017. On March 27, 2017, the Court entered a Third Amended Scheduling Order setting trial for January 16, 2018.
On May 8, 2017, Legacy Towers Watson received the City’s expert’s damages report, which asserted the City had incurred actual damages of approximately $430 million through July 1, 2017, and would incur future damages that have a present value of approximately $400 million as of July 1, 2017 if the Fund pension benefits remained unchanged. On June 30, 2017, Legacy Towers Watson served its expert reports in rebuttal to the City’s expert reports. Legacy Towers Watson’s experts concluded that Legacy Towers Watson’s work was reasonable and conformed with the actuarial standards of practice, and that Legacy Towers Watson did not cause any damages to the City. Legacy Towers Watson’s experts also concluded that the City’s damages model is flawed.
On January 9, 2018, Legacy Towers Watson and the City participated in a mediation and reached a settlement in principle. On April 4, 2018, the City of Houston City Council approved the settlement. On April 13, 2018, the court entered an order dismissing the case with prejudice, and the settlement became effective on that date. The settlement provided that in exchange for a dismissal of the claims of the City related to Legacy Towers Watson’s pension actuarial advice to the Fund, and any potential claims the City may have related to Legacy Towers Watson’s pension actuarial advice to the Houston Municipal Employees Pension System and the Houston Police Officers Pension System, Legacy Towers Watson agreed to pay a total of $40 million, which was paid in full in April 2018. The Company accrued its portionpart of the settlement priorprohibit any claims or litigation related to 2018.
Elma Sanchez, et. al
On August 6, 2013, three individual plaintiffs filed a putative class action suitthis matter from being maintained or brought against the California Public Employees’ Retirement System (‘CalPERS’) in Los Angeles County Superior Court. On January 10, 2014, plaintiffs filed an amended complaint, which added as defendants several members of CalPERS’ Board of Administration and three Legacy Towers Watson entities, Towers Watson & Co., Towers Perrin, and Tillinghast-Towers Perrin (‘Towers Perrin’).Company.
Plaintiffs’ claims all relate to a self-funded, non-profit Long Term Care Program that CalPERS established in 1995 (the ‘LTC Program’). Plaintiffs’ claims seek unspecified damages allegedly resulting from CalPERS’ 2012 decision to implement in 2015 and 2016 an 85 percent increase in the premium rates of certain of the long term care policies it issued between 1995 and 2004 (the ‘85% Increase’).
The amended complaint alleges claims against CalPERS for breach of contract and breach of fiduciary duty. It also includes a single cause of action against Towers Perrin for professional negligence relating to actuarial services Towers Perrin provided to CalPERS relating to the LTC Program between 1995 and 2004.
Plaintiffs principally allege that CalPERS mismanaged the LTC Program and its investment assets in multiple respects and breached its contractual and fiduciary duties to plaintiffs and other class members by impermissibly imposing the 85% Increase to make up for investment losses. Plaintiffs also allege that Towers Perrin recommended inadequate initial premium rates at the outset of the LTC Program and used unspecified inappropriate assumptions in its annual valuations for CalPERS. Plaintiffs claim that Towers Perrin’s allegedly negligent acts and omissions, prior to the end of its retainer in 2004, contributed to the need for the 85% Increase.
In May 2014, the court denied the motions to dismiss filed by CalPERS and Towers Perrin addressed to the sufficiency of the complaint. On January 28, 2016, the court granted plaintiffs’ motion for class certification. The certified class as currently defined includes those long term care policy holders whose policies were ‘subject to’ the 85% Increase. The court thereafter set an October 2, 2017 trial date.
In May 2016, the case was reassigned to a different judge. The court agreed that Towers Perrin may file a motion for summary judgment which was initially scheduled to be heard on February 3, 2017. The motion was then fully briefed, and the hearing date was thereafter moved to March 8, 2017.
On March 1, 2017, Towers Perrin and Plaintiffs participated in a mediation and reached a settlement in principle. Pursuant to the settlement in principle, in exchange for a dismissal of the claims of all class members and a release of Towers Perrin by all class members, Towers Perrin would pay a total of $9.75 million into an interest-bearing settlement fund, to be used to reimburse class counsel's costs, and for later distribution to class members as approved by the Court. This proposed settlement amount was accrued during the three months ended March 31, 2017. At the hearing on final approval held on January 26, 2018, the Court granted final approval of the settlement. Class members who properly objected to the settlement had standing to appeal by April 9, 2018. No class members filed an appeal and, therefore, the judgment is now final.
The settlement amount of $9.75 million was paid on June 5, 2018.
Aviation Broking Competition Investigations In April 2017, the Financial Conduct Authority (‘FCA’) informed Willis Limited, our U.K. broking subsidiary, that it had opened a formal investigation into possible agreements/concerted practices in the aviation broking sector.
In October 2017, the European Commission (‘Commission’) disclosed to us that it has initiated civil investigation proceedings in respect of a suspected infringement of E.U. competition rules involving several broking firms, including our principal U.K. broking subsidiary and one of its parent entities. In particular, the Commission has stated that the civil proceedings concern the exchange of commercially sensitive information between competitors in relation to aviation and aerospace insurance and reinsurance broking products and services in the European Economic Area, as well as possible coordination between competitors. The initiation of proceedings does not mean there has been a finding of infringement, merely thatIn November 2020, the Commission will investigate the case. We are providing information to the Commission as requested. When the Commission initiated these proceedings, the FCA closed its related competition investigation, but still retained jurisdiction over broking regulatory matters arising from this conduct. In early 2018, the FCA advised that it will not be taking enforcement action against Willis Limited in connection with any such broking regulatory matters.
In May 2018, the Korea Fair Trade Commission (‘KFTC’) disclosed to us that it is investigatinghas decided to close the proceedings against us without taking further action.
Since 2017, we have become aware that other countries are conducting their own investigations of the same or similar alleged cartels in the insurance broking industry. The KFTC has since requested information related to, among other topics, the aviation and aerospace insurance brokerage market and exchanges of information between brokers about insurance policies. conduct, including, without limitation, Brazil. In January 2019, the Brazil Conselho Administrativo de Defesa Economica (‘CADE’) launched an administrative proceeding to investigate alleged sharing of competitive and commercially sensitive information in the insurance and reinsurance brokerage industry for aviation and aerospace and related ancillary services. The CADE identified 11 entities under investigation, including Willis Group Limited, one of our U.K. subsidiaries. Given the status of thesethe above-noted investigations, the Company is currently unable to assess the terms on which they will be resolved, or how any other regulatory matter or civil claims emanating from the conduct being investigated will be resolved, and thus is unable to provide an estimate of the reasonably possible loss or range of loss. U.K. Investment Consulting Investigation
In September 2017, the FCA announced that it would make a referral with respect to the investment consulting industry to the U.K. Competition & Markets Authority (the ‘CMA’). The CMA then commenced a market investigation, and the Company is currently cooperating with the investigation.
The CMA released its final report on December 12, 2018, finding that there is an adverse effect on competition. To address these findings, the CMA has proposed certain remedies, including mandatory tendering when trustees first purchase fiduciary management services, the reporting of investment performance to customers using a set of common standards, transparency in reporting of fees in fiduciary management and the expansion of the FCA’s regulatory perimeter to include the main activities of investment consultancy and fiduciary management providers. The Company is generally supportive of these proposed remedies. The CMA will implement the remedies by way of an order on pension scheme trustees and firms providing the relevant services. Before finalizing the order, the CMA will consult with all interested parties until March 13, 2019 on the details of the order. The remedies are expected to be effective later in 2019.
London Wholesale Insurance Broker Market Study
In November 2017, the FCA published its Terms of Reference for its Market Study into insurance broking activities in the London Wholesale Market including market power, conflicts of interest and broker conduct. This was an industry-wide inquiry and not particular to the Company. The FCA used its powers under the UK Financial Services and Markets Act 2000 to collate information and originally aimed to issue an interim report in or about the first quarter of 2019. The Study had been expected to take two years to conclude. Two of the Company’s subsidiaries responded to extensive data requests which had phased response times through May 2018. It was possible that outcomes of the Study could include new rules, changes to market practices, referral to the U.K. Competition & Markets Authority for a market investigation, and/or individual firm investigations on specific issues. On February 20, 2019, the FCA published its report in final form and closed its study, finding amongst other things that it had ‘not found evidence of significant levels of harm to competition that require intrusive remedies’. The FCA also said it planned to continue to monitor the market as part of its normal supervision function, including in relation to broker business models and the effectiveness of competition. It also said it planned to engage with
individual firms on a number of related issues and would continue to assess specific firms’ compliance with regulatory obligations, including conflict of interest, as part of its normal supervisory function.
Note 15—Supplementary Information for Certain Balance Sheet Accounts Additional details of specific balance sheet accounts are detailed below. Prepaid and other current assets consist of the following: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | Prepayments and accrued income | | $ | 136 | | | $ | 132 | | | $ | 124 | | | $ | 145 | | Deferred contract costs | | | 102 | | | | — | | | | 108 | | | | 101 | | Derivatives and investments | | | 25 | | | | 29 | | | | 42 | | | | 49 | | Deferred compensation plan assets | | | 18 | | | | 21 | | | | 14 | | | | 18 | | Retention incentives | | | 5 | | | | 7 | | | | 3 | | | | 11 | | Corporate income and other taxes | | | 61 | | | | 170 | | | | 83 | | | | 56 | | Insurance and other recovery receivables | | | | 25 | | | | — | | Restricted cash | | | | 7 | | | | 8 | | Acquired renewal commissions receivable | | | | 16 | | | | 25 | | Other current assets | | | 57 | | | | 71 | | | | 75 | | | | 112 | | Total prepaid and other current assets | | $ | 404 | | | $ | 430 | | | $ | 497 | | | $ | 525 | |
Other non-current assets consist of the following: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | Prepayments and accrued income | | $ | 14 | | | $ | 18 | | | $ | 13 | | | $ | 12 | | Deferred contract costs | | | 46 | | | | — | | | | 98 | | | | 76 | | Deferred compensation plan assets | | | 125 | | | | 135 | | | | 117 | | | | 150 | | Deferred tax assets | | | 59 | | | | 46 | | | | 95 | | | | 72 | | Accounts receivable, net | | | 20 | | | | 33 | | | | 34 | | | | 30 | | Acquired renewal commissions receivable | | | | 84 | | | | 125 | | Long-term note receivable | | | | 71 | | | | — | | Other investments | | | 7 | | | | 26 | | | | 24 | | | | 23 | | Insurance recovery receivables | | | | 117 | | | | 119 | | Non-current contract assets | | | | 329 | | | | 105 | | Other non-current assets | | | 196 | | | | 189 | | | | 114 | | | | 123 | | Total other non-current assets | | $ | 467 | | | $ | 447 | | | $ | 1,096 | | | $ | 835 | |
Deferred revenue and accrued expenses consist of the following: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | Accounts payable, accrued liabilities and deferred income | | $ | 691 | | | $ | 772 | | | $ | 862 | | | $ | 856 | | Discretionary compensation | | | 321 | | | | 313 | | | Accrued compensation | | | 437 | | | | 439 | | | Accrued discretionary and incentive compensation | | | | 851 | | | | 727 | | Litigation settlement | | | | 210 | | | | — | | Accrued vacation | | | 111 | | | | 93 | | | | 161 | | | | 137 | | Other employee-related liabilities | | | 87 | | | | 94 | | | | 77 | | | | 64 | | Total deferred revenue and accrued expenses | | $ | 1,647 | | | $ | 1,711 | | | $ | 2,161 | | | $ | 1,784 | |
Other current liabilities consist of the following: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | Accounts payable | | $ | 163 | | | $ | 136 | | | Dividends payable | | | $ | 103 | | | $ | 100 | | Income and other taxes payable | | | 129 | | | | 90 | | | | 102 | | | | 138 | | Interest payable | | | | 68 | | | | 65 | | Deferred compensation plan liabilities | | | | 57 | | | | 14 | | Contingent and deferred consideration on acquisitions | | | 61 | | | | 55 | | | | 39 | | | | 12 | | Payroll-related liabilities | | | 210 | | | | 209 | | | | 268 | | | | 216 | | Derivatives | | | 13 | | | | 32 | | | | 5 | | | | 3 | | Third party commissions | | | 169 | | | | 172 | | | Third-party commissions | | | | 173 | | | | 179 | | Other current liabilities | | | 119 | | | | 110 | | | | 73 | | | | 75 | | Total other current liabilities | | $ | 864 | | | $ | 804 | | | $ | 888 | | | $ | 802 | |
Provision for liabilities consists of the following: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | Claims, lawsuits and other proceedings | | $ | 455 | | | $ | 474 | | | $ | 325 | | | $ | 456 | | Other provisions | | | 85 | | | | 84 | | | | 82 | | | | 81 | | Total provision for liabilities | | $ | 540 | | | $ | 558 | | | $ | 407 | | | $ | 537 | |
Other non-current liabilities consist of the following: | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2020 | | | December 31, 2019 | | Incentives from lessors | | $ | 120 | | | $ | 138 | | | Deferred compensation plan liability | | | 125 | | | | 135 | | | $ | 117 | | | $ | 150 | | Contingent and deferred consideration on acquisitions | | | 22 | | | | 41 | | | | 16 | | | | 26 | | Liabilities for uncertain tax positions | | | 46 | | | | 60 | | | | 49 | | | | 48 | | Lease-related liabilities | | | 29 | | | | 28 | | | Derivatives | | | | 2 | | | | — | | Finance leases | | | | 19 | | | | 22 | | Other non-current liabilities | | | 87 | | | | 142 | | | | 109 | | | | 89 | | Total other non-current liabilities | | $ | 429 | | | $ | 544 | | | $ | 312 | | | $ | 335 | |
Note 16 — Other Income, Net Other income, net consists of the following: | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | (Loss)/gain on disposal of operations | | $ | (9 | ) | | $ | 13 | | | $ | 2 | | Net periodic pension and postretirement benefit credits (i) | | | 280 | | | | 222 | | | | 203 | | Interest in earnings of associates (ii) | | | 3 | | | | 3 | | | | 2 | | Impact of Venezuelan currency devaluation | | | — | | | | (2 | ) | | | — | | Foreign exchange loss | | | (24 | ) | | | (72 | ) | | | (29 | ) | Other income, net | | $ | 250 | | | $ | 164 | | | $ | 178 | |
| | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Gain/(loss) on disposal of operations | | $ | 81 | | | $ | (2 | ) | | $ | (9 | ) | Net periodic pension and postretirement benefit credits | | | 304 | | | | 234 | | | | 280 | | Interest in earnings of associates and other investments | | | 6 | | | | 21 | | | | 3 | | Foreign exchange gain/(loss) | | | 6 | | | | (26 | ) | | | (24 | ) | Other | | | 2 | | | | — | | | | — | | Other income, net | | $ | 399 | | | $ | 227 | | | $ | 250 | |
(i)
| As a result of the retrospective adoption of ASU 2017-07 within the consolidated statements of comprehensive income, the service-cost component of net periodic benefit (income)/cost remained within salaries and benefits expense, while the remainder of the components are now included within other income, net. See Note 2 — Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements for further details.
|
(ii)
| Beginning in 2018, the Company retrospectively reclassified the pre-tax effect of its interest in earnings of associates from its own line item to other income, net within its consolidated statements of comprehensive income.
|
Note 17 — Accumulated Other Comprehensive Loss The components of other comprehensive (loss)/income are as follows:
| | December 31, 2018 | | | December 31, 2017 | | | December 31, 2016 | | | | Before tax amount | | | Tax | | | Net of tax amount | | | Before tax amount | | | Tax | | | Net of tax amount | | | Before tax amount | | | Tax | | | Net of tax amount | | Other comprehensive (loss)/income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | $ | (251 | ) | | $ | — | | | $ | (251 | ) | | $ | 295 | | | $ | — | | | $ | 295 | | | $ | (353 | ) | | $ | — | | | $ | (353 | ) | Defined pension and post-retirement benefits | | | (258 | ) | | | 59 | | | | (199 | ) | | | 3 | | | | 11 | | | | 14 | | | | (553 | ) | | | 114 | | | | (439 | ) | Derivative instruments | | | 5 | | | | (3 | ) | | | 2 | | | | 90 | | | | (15 | ) | | | 75 | | | | (87 | ) | | | 12 | | | | (75 | ) | Other comprehensive (loss)/income | | | (504 | ) | | | 56 | | | | (448 | ) | | | 388 | | | | (4 | ) | | | 384 | | | | (993 | ) | | | 126 | | | | (867 | ) | Less: Other comprehensive (income)/loss attributable to non-controlling interests | | | — | | | | — | | | | — | | | | (13 | ) | | | — | | | | (13 | ) | | | 20 | | | | — | | | | 20 | | Other comprehensive (loss)/income attributable to Willis Towers Watson | | $ | (504 | ) | | $ | 56 | | | $ | (448 | ) | | $ | 375 | | | $ | (4 | ) | | $ | 371 | | | $ | (973 | ) | | $ | 126 | | | $ | (847 | ) |
| | December 31, 2020 | | | December 31, 2019 | | | December 31, 2018 | | | | Before tax amount | | | Tax | | | Net of tax amount | | | Before tax amount | | | Tax | | | Net of tax amount | | | Before tax amount | | | Tax | | | Net of tax amount | | Other comprehensive income/(loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | $ | 139 | | | $ | 0 | | | $ | 139 | | | $ | 78 | | | $ | 0 | | | $ | 78 | | | $ | (251 | ) | | $ | 0 | | | $ | (251 | ) | Defined pension and post-retirement benefits | | | (342 | ) | | | 76 | | | | (266 | ) | | | (412 | ) | | | 83 | | | | (329 | ) | | | (258 | ) | | | 59 | | | | (199 | ) | Derivative instruments | | | (5 | ) | | | 1 | | | | (4 | ) | | | 23 | | | | (2 | ) | | | 21 | | | | 5 | | | | (3 | ) | | | 2 | | Other comprehensive loss | | | (208 | ) | | | 77 | | | | (131 | ) | | | (311 | ) | | | 81 | | | | (230 | ) | | | (504 | ) | | | 56 | | | | (448 | ) | Less: Other comprehensive income attributable to non-controlling interests | | | (1 | ) | | | 0 | | | | (1 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Other comprehensive loss attributable to Willis Towers Watson | | $ | (209 | ) | | $ | 77 | | | $ | (132 | ) | | $ | (311 | ) | | $ | 81 | | | $ | (230 | ) | | $ | (504 | ) | | $ | 56 | | | $ | (448 | ) |
Changes in the components of accumulated other comprehensive loss, net of tax, are included in the following table. This table excludes amounts attributable to non-controlling interests, which are not material for further disclosure. | | Foreign currency translation (i) | | | Cash flow hedges (i) | | | Defined pension and post- retirement benefit costs (ii) | | | Total | | Balance, January 1, 2016 | | $ | (314 | ) | | $ | (10 | ) | | $ | (713 | ) | | $ | (1,037 | ) | Other comprehensive loss before reclassifications | | | (336 | ) | | | (110 | ) | | | (483 | ) | | | (929 | ) | Loss reclassified from accumulated other comprehensive loss (net of income tax benefit of $5) | | | — | | | | 38 | | | | 44 | | | | 82 | | Net other comprehensive loss | | | (336 | ) | | | (72 | ) | | | (439 | ) | | | (847 | ) | Balance, December 31, 2016 | | $ | (650 | ) | | $ | (82 | ) | | $ | (1,152 | ) | | $ | (1,884 | ) | Other comprehensive income/(loss) before reclassifications | | | 285 | | | | 28 | | | | (26 | ) | | | 287 | | Loss reclassified from accumulated other comprehensive loss (net of income tax benefit of $18) | | | — | | | | 44 | | | | 40 | | | | 84 | | Net other comprehensive income | | | 285 | | | | 72 | | | | 14 | | | | 371 | | Balance, December 31, 2017 | | $ | (365 | ) | | $ | (10 | ) | | $ | (1,138 | ) | | $ | (1,513 | ) | Other comprehensive income/(loss) before reclassifications | | | (251 | ) | | | (22 | ) | | | (241 | ) | | | (514 | ) | Loss reclassified from accumulated other comprehensive loss (net of income tax benefit of $17) | | | — | | | | 24 | | | | 42 | | | | 66 | | Net other comprehensive loss | | | (251 | ) | | | 2 | | | | (199 | ) | | | (448 | ) | Balance, December 31, 2018 | | $ | (616 | ) | | $ | (8 | ) | | $ | (1,337 | ) | | $ | (1,961 | ) |
| | Foreign currency translation (i) | | | Derivative instruments (i) | | | Defined pension and post- retirement benefit costs (ii) | | | Total | | Balance, January 1, 2018 | | $ | (365 | ) | | $ | (10 | ) | | $ | (1,138 | ) | | $ | (1,513 | ) | Other comprehensive loss before reclassifications | | | (251 | ) | | | (22 | ) | | | (241 | ) | | | (514 | ) | Loss reclassified from accumulated other comprehensive loss (net of income tax benefit of $17) | | | 0 | | | | 24 | | | | 42 | | | | 66 | | Net other comprehensive (loss)/income | | | (251 | ) | | | 2 | | | | (199 | ) | | | (448 | ) | Balance, December 31, 2018 | | $ | (616 | ) | | $ | (8 | ) | | $ | (1,337 | ) | | $ | (1,961 | ) | Other comprehensive income/(loss) before reclassifications | | | 78 | | | | 12 | | | | (343 | ) | | | (253 | ) | Loss reclassified from accumulated other comprehensive loss (net of income tax benefit of $9) | | | 0 | | | | 9 | | | | 14 | | | | 23 | | Net other comprehensive income/(loss) | | | 78 | | | | 21 | | | | (329 | ) | | | (230 | ) | Reclassification of tax effects per ASU 2018-02 (iii) | | | 0 | | | | 0 | | | | (36 | ) | | | (36 | ) | Balance, December 31, 2019 | | $ | (538 | ) | | $ | 13 | | | $ | (1,702 | ) | | $ | (2,227 | ) | Other comprehensive income/(loss) before reclassifications | | | 138 | | | | (12 | ) | | | (298 | ) | | | (172 | ) | Loss reclassified from accumulated other comprehensive loss (net of income tax benefit of $11) | | | 0 | | | | 8 | | | | 32 | | | | 40 | | Net other comprehensive income/(loss) | | | 138 | | | | (4 | ) | | | (266 | ) | | | (132 | ) | Balance, December 31, 2020 | | $ | (400 | ) | | $ | 9 | | | $ | (1,968 | ) | | $ | (2,359 | ) |
(i) | Reclassification adjustments from accumulated other comprehensive loss related to foreign currency translationderivative instruments for the years ended December 31, 2020 and cash flow hedges2019 are included in Revenue and Salaries and benefits, and are included in Other income, net for the year ended December 31, 2018 in the accompanying consolidated statements of comprehensive income. See Note 109 — Derivative Financial Instruments for additional details regarding the reclassification adjustments for the hedgederivative settlements. |
(ii) | Reclassification adjustments from accumulated other comprehensive loss are included in the computation of net periodic pension cost (see Note 1312 — Retirement Benefits). These components are included in Other income, net in the accompanying consolidated statements of comprehensive income. |
(iii) | On January 1, 2019, in accordance with ASU 2018-02, we reclassified to Retained earnings $36 million of defined pension and postretirement costs, representing the ‘stranded’ tax effect of the change in the U.S. federal corporate tax rate resulting from U.S. Tax Reform. |
Note 18—Share-based Compensation Plan Summaries On December 31, 2018,2020, the Company had a number of open share-based compensation plans, which provide for the grantgranting of time-based and performance-based options, time-based and performance-based restricted stock units, and various other share-based grants to employees. All of the Company’s share-based compensation plans under which any options, restricted stock units (‘RSUs’) or other share-based grants are outstanding as of December 31, 20182020 are described below. The compensation cost that has been recognized for
these plans for the years ended December 31, 2020, 2019 and 2018 2017was $90 million, $74 million and 2016 was $50$50 million $67
million and $123 million,, respectively. The total income tax benefits recognized in the consolidated statements of comprehensive income for share-based compensation arrangements for the years ended December 31, 2020, 2019, and 2018 2017,were $15 million, $11 million and 2016 were $10$10 million $22 million and $35 million,, respectively.
2012 Equity Incentive Plan This plan, which was established on April 25, 2012 and amended and restated on June 10, 2016, provides for the granting of incentive stock options, time-based or performance-based non-statutory stock options, share appreciation rights, restricted shares, time-based or performance-based RSUs, performance-based awards and other share-based grants or any combination thereof (collectively referred to as ‘Awards’) to employees, officers, non-employee directors and consultants (‘Eligible Individuals’) of the Company (‘2012 Plan’). The board of directors also adopted a sub-plan under the 2012 planPlan to provide an employee sharesave scheme in the U.K. There were approximately 75 million shares remaining available for grant under this plan as of December 31, 2018.2020. Options are exercisable on a variety of dates, including from the second, third, fourth or fifth anniversary of the grant date. UnlessThe 2012 Plan shall continue in effect until terminated sooner by the board of directors, except that no incentive stock option may be granted under the 2012 Plan will expire 10 years after the date ofApril 21, 2026 or after its adoption. expiration. That termination will not affect the validity of any grants outstanding at that date. Towers Watson Share Plans In January 2016, in connection with the Merger, we assumed the Towers Watson & Co. 2009 Long-Term Incentive Plan (‘2009 LTIP’) and converted the outstanding unvested restricted stock units and options into Willis Towers Watson RSUs and options using a conversion ratio stated in the Merger Agreement. We determined the fair value of the portion of the outstanding RSUs and options related to pre-acquisition employee service using the straight-line methodology from the date of grant to the acquisition date to be $37 million, which was added to the transaction consideration. The fair value of the remaining portion of RSUs and options related to the post-acquisition employee services was $45 million and was recorded over the subsequent vesting periods.periods through 2018. For the yearsyear ended December 31, 2018, 2017 and 2016, we recorded $3 million $11 million and $31 million of non-cash stock basedstock-based compensation expense, respectively.expense. The acquired awards included performance-vested RSUs. Under the RSU agreement, participants becamehave vested in a number of RSUs based onfull, and the achievement of specified levels of financial performance during the performance period set forth in the Merger Agreement, provided that the participant remained in continuous service with us through the end of the performance period. Dividend equivalents accrued on these RSUs and vested to the same extent as the underlying shares. The Compensation Committee of the board of directors did provide for the continuation of the vesting of RSUs upon an employee’s termination under certain circumstances such as qualified retirement. The definition of qualified retirement is age 55 with 15 years of service with the Company and a minimum of one year of service in the performance period. Based on the terms of the RSU agreement, the achievement of the level of financial performance was determined at the higher of 100% or the level attained at the time of the Merger. The Company does not intend to grant future awards under the 2009 LTIP plan.
Employee Stock Purchase PlansOptions
The Company adopted the Willis Group Holdings 2010 North America Employee Stock Purchase Plan, which expires on May 31, 2020. These plans provide certain eligible employees in the United States and Canada with the ability to contribute payroll deductions to the purchase of Willis Towers Watson ordinary shares at the end of each offering period.
Options
Valuation Assumptions
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s shares. The Company uses the simplified method set out in ASC 718 – Compensation – Stock Compensation to derive the expected term of options granted as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions noted in the table below represent the weighted-average of each assumption for each grant during the year.
| | Years ended December 31, | | | | 2017 | | | 2016 | | Expected volatility | | | 19.8 | % | | | 21.0 | % | Expected dividends | | | 1.4 | % | | | 1.5 | % | Expected life (years) | | | 4.2 | | | | 2.7 | | Risk-free interest rate | | | 1.6 | % | | | 0.7 | % |
There were no0 options granted during the yearyears ended December 31, 2020, 2019 and 2018. Award Activity Classification of options as time-based or performance-based is dependent on the original terms of the award. Performance conditions on the majority of options have been met. A summary of option activity under the plans at December 31, 2018,2020, and changes during the year then ended is presented below: | | Options (thousands) | | | Weighted- Average Exercise Price (i) | | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value | | Time-based stock options | | | | | | | | | | | | | | | Balance as of December 31, 2017 | | | 754 | | | $ | 103.85 | | | | | | | | Granted | | | — | | | $ | — | | | | | | | | Exercised | | | 294 | | | $ | 107.96 | | | | | | | | Expired | | | 11 | | | $ | 102.19 | | | | | | | | Balance as of December 31, 2018 | | | 449 | | | $ | 101.21 | | | 3 years | | $ | 23 | | Options vested or expected to vest at December 31, 2018 | | | 445 | | | $ | 100.97 | | | 3 years | | $ | 23 | | Options exercisable at December 31, 2018 | | | 329 | | | $ | 99.48 | | | 3 years | | $ | 17 | | Performance-based stock options | | | | | | | | | | | | | | | Balance as of December 31, 2017 | | | 680 | | | $ | 106.42 | | | | | | | | Granted | | | — | | | $ | — | | | | | | | | Exercised | | | 138 | | | $ | 96.02 | | | | | | | | Forfeited | | | — | | | $ | — | | | | | | | | Balance as of December 31, 2018 | | | 542 | | | $ | 110.55 | | | 3 years | | $ | 22 | | Options vested or expected to vest at December 31, 2018 | | | 542 | | | $ | 110.55 | | | 3 years | | $ | 22 | | Options exercisable at December 31, 2018 | | | 542 | | | $ | 110.55 | | | 3 years | | $ | 22 | |
| | Options (thousands) | | | Weighted- Average Exercise Price (i) | | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value | | Time-based stock options | | | | | | | | | | | | | | | Balance as of December 31, 2019 | | | 260 | | | $ | 105.38 | | | | | | | | Exercised | | | 163 | | | $ | 101.09 | | | | | | | | Cancelled | | | 12 | | | $ | 95.56 | | | | | | | | Balance as of December 31, 2020 | | | 85 | | | $ | 114.92 | | | 1.5 years | | $ | 8 | | Options vested or expected to vest at December 31, 2020 | | | 85 | | | $ | 114.92 | | | 1.5 years | | $ | 8 | | Options exercisable at December 31, 2020 | | | 57 | | | $ | 107.72 | | | 1.4 years | | $ | 6 | | Performance-based stock options | | | | | | | | | | | | | | | Balance as of December 31, 2019 | | | 287 | | | $ | 110.58 | | | | | | | | Exercised | | | 3 | | | $ | 110.58 | | | | | | | | Balance as of December 31, 2020 | | | 284 | | | $ | 110.58 | | | 1.7 years | | $ | 28 | | Options vested or expected to vest at December 31, 2020 | | | 284 | | | $ | 110.58 | | | 1.7 years | | $ | 28 | | Options exercisable at December 31, 2020 | | | 284 | | | $ | 110.58 | | | 1.7 years | | $ | 28 | |
(i) | Certain options are exercisable in Pounds sterling and are converted to dollars using the exchange rate at December 31, 2018.2020. |
The weighted-average grant-date fair values of time-based options granted during the years ended December 31, 2017 and 2016 were $27.69 and $16.88, respectively. The total intrinsic values of time-based options exercised during the years ended December 31, 2020, 2019 and 2018 2017 and 2016 were $12$17 million, $19$16 million and $25$12 million, respectively. At December 31, 2018,2020, there was less than $1 million of total unrecognized compensation cost under the time-based stock option plans; that cost is expected to be recognized over a weighted-average period of less than one year.1.4 years.
The total intrinsic values of performance-based options exercised during the year ended December 31, 2020 was less than $1 million, and was $16 million and $8 million for the years ended December 31, 2018, 20172019 and 2016 were $8 million, $10 million and $9 million,2018, respectively. At December 31, 2018,2020, there is no0 unrecognized compensation cost related to the performance-based stock option plans. Cash received from option exercises under all share-based payment arrangements for the years ended December 31, 2020, 2019 and 2018 2017 and 2016 was $16 million, $45 million $61 million and $63$45 million, respectively. The actual tax benefit recognized for the tax deductions from option exercises of the share-based payment arrangements totaled $4$5 million, $7$6 million and $6$4 million for the years ended December 31, 2020, 2019 and 2018, 2017 and 2016, respectively. Equity-settled RSUs Valuation Assumptions The fair value of each time-based RSU is based on the grant date fair value, or the fair value on the acquisition date in the case of acquired awards. The fair value of each performance-based RSU is estimated on the grant date using a Monte-Carlo simulation that uses the assumptions noted in the following table. The awards also contain a market-based performance target. For the awards granted in 2020, 2019 and 2018, the performance measure is entirely based on this market target. Expected volatility is based on the historical volatility of the Company’s shares. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The assumptions noted in the table below represent the weighted-averageweighted average of each assumption for each grant during the year. | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Expected volatility | | | 17.9 | % | | | 20.2 | % | | | 20.3 | % | | | 24.2 | % | | | 25.6 | % | | | 17.9 | % | Expected dividend yield | | | — | % | | | — | % | | | — | % | | | — | % | | | — | % | | | — | % | Expected life (years) | | | 2.5 | | | | 2.4 | | | | 2.6 | | | | 2.9 | | | | 2.7 | | | | 2.5 | | Risk-free interest rate | | | 2.6 | % | | | 1.4 | % | | | 0.8 | % | | | 0.4 | % | | | 2.1 | % | | | 2.6 | % |
Award Activity A summary of time-based and performance-based RSU activity under the plans at December 31, 2018,2020, and changes during the year then ended, is presented below: | | Shares (thousands) | | | Weighted- Average Grant Date Fair Value | | | Shares (thousands) | | | Weighted- Average Grant Date Fair Value | | Nonvested shares (time-based RSUs) | | | | | | | | | | | | | | | | | Balance as of December 31, 2017 | | | 143 | | | $ | 122.27 | | | Balance as of December 31, 2019 | | | | 11 | | | $ | 172.25 | | Granted | | | 51 | | | $ | 153.58 | | | | 13 | | | $ | 193.25 | | Vested | | | 165 | | | $ | 122.61 | | | | 13 | | | $ | 178.54 | | Forfeited | | | 10 | | | $ | 117.09 | | | | 0 | | | $ | 160.48 | | Balance as of December 31, 2018 | | | 19 | | | $ | 141.19 | | | Balance as of December 31, 2020 | | | | 11 | | | $ | 190.09 | | Nonvested shares (performance-based RSUs) | | | | | | | | | | | | | | | | | Balance as of December 31, 2017 | | | 881 | | | $ | 90.61 | | | Balance as of December 31, 2019 | | | | 507 | | | $ | 150.22 | | Granted | | | 141 | | | $ | 204.13 | | | | 356 | | | $ | 230.24 | | Vested | | | 250 | | | $ | 125.75 | | | | 416 | | | $ | 117.01 | | Forfeited | | | 14 | | | $ | 118.94 | | | | 8 | | | $ | 216.64 | | Balance as of December 31, 2018 | | | 758 | | | $ | 91.02 | | | Balance as of December 31, 2020 | | | | 439 | | | $ | 245.49 | |
The total number of time-basedTime-based RSUs thattotaling 12,586, 21,025 and 164,728 vested during the yearyears ended December 31, 2020, 2019 and 2018, was 164,728 shares at anrespectively, with average share priceprices of $156.14. The total number of time-based RSUs that vested during the year ended December 31, 2017 was 178,574 shares at an average share price of $150.81. The total number of time-based RSUs that vested during the year ended December 31, 2016 was 459,838 shares at an average share price of $120.42.$195.69, $189.42 and $156.14, respectively. At December 31, 20182020 there was $2$1 million of total unrecognized compensation cost related to the time-based RSU plan; that cost is expected to be recognized over a weighted-average period of 1.40.6 years.
The total number of performance-basedPerformance-based RSUs thattotaling 416,349, 178,346 and 249,901 vested during the yearyears ended December 31, 2020, 2019 and 2018, was 249,901 shares at anrespectively, with average share priceprices of $154.99. The total number of performance-based RSUs that vested during the year ended December 31, 2017 was 318,714 shares at an average share price of $140.32. The total number of performance-based RSUs that vested during the year ended December 31, 2016 was 258,536 shares at an average share price of $119.75.$185.30, $175.01 and $154.99, respectively. At December 31, 20182020 there was $12$42 million of total unrecognized compensation cost related to the performance-based RSU plan; that cost is expected to be recognized over a weighted-average period of 1.92.3 years.
The actual tax benefit recognized for the tax deductions from RSUs that vested totaled $12$7 million, $19$7 million and $25$12 million for the years ended December 31, 2020, 2019 and 2018, 2017 and 2016, respectively. Phantom RSUs The Company granted 204,269 and 268,956 units of phantom stock with a market-performance feature induring the yearyears ended December 31, 2018.2019 and 2018, respectively, and did 0t grant phantom stock during 2020. These are cash-settled awards with final payout based on the performance of Companythe Company’s stock. The grant date fair value of the awards was $105.97 and $83.57 per share.share for the 2019 and 2018 awards, respectively. The fair value of each phantom RSU is estimated using a Monte Carlo simulation. The Company’s stock price as of the last day of the period is one of the inputs intoused in the model.simulation. Expected volatility is based on the historical volatility of the Company’s shares. The expected term of theeach plan is three years, based on the vesting terms of the award.awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Since the awards are cash-settled, they are considered a liability. Expense is recognized over the service period. The liability is remeasured at the end of each reporting period, and changes in fair value are recognized as compensation cost. AsFor both plans, as of December 31, 2018,2020, the liability recognized is $5$61 million and the estimated unrecognized compensation cost is $18$17 million. Note 19 — Earnings Per Share Basic and diluted earnings per share are calculated by dividing net income attributable to Willis Towers Watson by the average number of ordinary shares outstanding during each period. The computation of diluted earnings per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue shares were exercised or converted into shares or resulted in the issuance of shares that then shared in the net income of the Company. At December 31, 2018, 20172020, 2019 and 2016,2018, there were 0.40.1 million, 0.80.3 million and 1.20.4 million time-based share options; 0.50.3 million, 0.70.3 million and 0.90.5 million performance-based options; and 0.80.4 million, 0.90.5 million and 1.20.8 million performance-based RSUs outstanding, respectively. The Company’s time-based RSUs were immaterial at December 31, 2018; there were 0.1 million2020, 2019 and 0.4 million time-based RSUs outstanding at December 31, 2017 and 2016, respectively. In addition, the Company had 0.3 million performance-based phantom units outstanding at December 31, 2018; there were no phantom units outstanding at December 31, 2017 and 2016.2018. Basic and diluted earnings per share are as follows: | | Years ended December 31, | | | Years ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | Net income attributable to Willis Towers Watson | | $ | 695 | | | $ | 568 | | | $ | 420 | | | $ | 996 | | | $ | 1,044 | | | $ | 695 | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic weighted-average number of shares outstanding | | | 131 | | | | 135 | | | | 137 | | | | 130 | | | | 130 | | | | 131 | | Dilutive effect of potentially issuable shares | | | 1 | | | | 1 | | | | 1 | | | | 0 | | | | 0 | | | | 1 | | Diluted weighted-average number of shares outstanding | | | 132 | | | | 136 | | | | 138 | | | | 130 | | | | 130 | | | | 132 | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 5.29 | | | $ | 4.21 | | | $ | 3.07 | | | $ | 7.68 | | | $ | 8.05 | | | $ | 5.29 | | Dilutive effect of potentially issuable shares | | | (0.02 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.02 | ) | Diluted earnings per share | | $ | 5.27 | | | $ | 4.18 | | | $ | 3.04 | | | $ | 7.65 | | | $ | 8.02 | | | $ | 5.27 | |
There were no0 anti-dilutive options for the years ended December 31, 20182020, 2019 and 2017. Options to purchase 0.5 million shares for2018. For the yearyears ended December 31, 2016 were not included in the computation of the dilutive effect of stock options because their effect was anti-dilutive. For the year ended December 31,2020 and 2018, 0.1 million and 0.2 million RSUs, respectively, were not included in the computation of the dilutive effect of potentially issuable shares because their effect was anti-dilutive. ThereAnti-dilutive RSUs were no anti-dilutive RSUsimmaterial for the yearsyear ended December 31, 2017 and 2016.2019.
Note 20 — Supplemental Disclosures of Cash Flow Information Supplemental disclosures regarding cash flow information and non-cash investing and financing activities are as follows: | | Years Ended December 31, | | | | 2018 | | | 2017 | | | 2016 | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | Cash payments for income taxes, net | | $ | 178 | | | $ | 203 | | | $ | 158 | | Cash payments for interest | | $ | 176 | | | $ | 169 | | | $ | 143 | | Cash acquired | | $ | 13 | | | $ | — | | | $ | 476 | | Supplemental disclosures of non-cash investing and financing activities: | | | | | | | | | | | | | Issuance of shares and assumed awards in connection with the Merger | | $ | — | | | $ | — | | | $ | 8,723 | | Fair value of deferred and contingent consideration related to acquisitions | | $ | 36 | | | $ | — | | | $ | — | |
Note 21 — Quarterly Financial Data (Unaudited)
Quarterly financial data for 2018 and 2017 were as follows:
| | Three Months Ended | | | | March 31, | | | June 30, | | | September 30, | | | December 31, | | 2018 | | | | | | | | | | | | | | | | | Revenue | | $ | 2,292 | | | $ | 1,990 | | | $ | 1,859 | | | $ | 2,372 | | Total costs of providing services | | $ | 2,033 | | | $ | 1,927 | | | $ | 1,842 | | | $ | 1,902 | | Income from operations | | $ | 259 | | | $ | 63 | | | $ | 17 | | | $ | 470 | | Net income | | $ | 221 | | | $ | 65 | | | $ | 46 | | | $ | 383 | | Net income attributable to Willis Towers Watson | | $ | 215 | | | $ | 58 | | | $ | 44 | | | $ | 378 | | Earnings per share | | | | | | | | | | | | | | | | | — Basic | | $ | 1.62 | | | $ | 0.44 | | | $ | 0.34 | | | $ | 2.91 | | — Diluted | | $ | 1.61 | | | $ | 0.44 | | | $ | 0.33 | | | $ | 2.89 | | 2017 | | | | | | | | | | | | | | | | | Revenue | | $ | 2,319 | | | $ | 1,953 | | | $ | 1,852 | | | $ | 2,078 | | Total costs of providing services | | $ | 1,918 | | | $ | 1,892 | | | $ | 1,878 | | | $ | 1,998 | | Income/(loss) from operations | | $ | 401 | | | $ | 61 | | | $ | (26 | ) | | $ | 80 | | Net income/(loss) | | $ | 352 | | | $ | 41 | | | $ | (54 | ) | | $ | 253 | | Net income/(loss) attributable to Willis Towers Watson | | $ | 344 | | | $ | 33 | | | $ | (54 | ) | | $ | 245 | | Earnings/(loss) per share | | | | | | | | | | | | | | | | | — Basic | | $ | 2.51 | | | $ | 0.24 | | | $ | (0.40 | ) | | $ | 1.85 | | — Diluted | | $ | 2.50 | | | $ | 0.24 | | | $ | (0.40 | ) | | $ | 1.84 | |
Note 22 — Financial Information for Issuers and Other Guarantor Subsidiaries
As of December 31, 2018 Willis Towers Watson has issued the following debt securities (‘WTW Debt Securities’):
| a)
| Willis Towers Watson plc (the parent company) has $500 million senior notes outstanding, which were issued on March 15, 2016;
|
| b)
| Willis North America Inc. (‘Willis North America’) has $1.8 billion senior notes outstanding, of which $187 million were issued on September 29, 2009, $650 million were issued on May 16, 2017, and $1.0 billion were issued on September 10, 2018; and
|
| c)
| Trinity Acquisition plc has $2.1 billion senior notes outstanding, of which $525 million were issued on August 15, 2013, $1.0 billion were issued on March 22, 2016 and €540 million ($609 million) were issued on May 26, 2016, and $130 million currently outstanding on a consolidated basis under the $1.25 billion revolving credit facility issued on March 7, 2017.
|
The notes issued by the Company are guaranteed by the following additional wholly owned subsidiaries on a joint and several basis: Willis Netherlands B.V., Willis Investment U.K. Holdings Limited, TA I Limited, Trinity Acquisition plc,
Willis Group Limited, Willis North America, Willis Towers Watson Sub Holdings Unlimited Company and Willis Towers Watson U.K. Holdings Limited.
The notes issued by Willis North America are guaranteed on a joint and several basis by the Company and each of the subsidiaries that guarantees the Company notes, except for Willis North America itself.
The notes issued by Trinity Acquisition plc are guaranteed on a joint and several basis by the Company and each of the subsidiaries that guarantees the Company notes, except for Trinity Acquisition plc itself.
For the purposes of this footnote, the companies that guarantee the Company notes, the Willis North America notes and the Trinity Acquisition plc notes, other than Willis North America and Trinity Acquisition plc, are referred to as the ‘other guarantors.’
The presentation of the financial information for issuers and other guarantor subsidiaries has been changed from prior filings in that the three previously disclosed separate notes that presented the three different issuer and related guarantor scenarios have been combined into one note. This new presentation still includes all of the financial information of the appropriate issuing and guarantor entities, with some immaterial reclassifications from what had been previously disclosed for each entity. We believe that this presentation will help to reduce the complexity of the information and offer a more meaningful analysis for the reader.
All intercompany receivables/payables have been presented in the condensed consolidating financial statements as non-current 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 due or owed. The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets of Willis Towers Watson plc, Willis North America, Trinity Acquisition plc and the other guarantors.
Presented below is condensed financial information for:
| (i)
| Willis Towers Watson plc, which is both an issuer and guarantor, on a parent company only basis;
|
| (ii)
| Willis North America, which is both an issuer and guarantor, on a company only basis;
|
| (iii)
| Trinity Acquisition plc, which is both an issuer and guarantor, on a company only basis;
|
| (iv)
| Other guarantors, which are all wholly owned direct or indirect subsidiaries of the parent, on a combined basis;
|
| (v)
| Non-guarantors, which are all wholly owned direct or indirect subsidiaries of the parent, on a combined basis;
|
| (vi)
| Eliminations, which are consolidating adjustments on a combined basis; and
|
| (vii)
| The consolidated Company.
|
Condensed Consolidating Statement of Comprehensive Income
| | Year ended December 31, 2018 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non- guarantors | | | Eliminations | | | Consolidated | | Revenue | | $ | — | | | $ | 34 | | | $ | — | | | $ | — | | | $ | 8,479 | | | $ | — | | | $ | 8,513 | | Costs of providing services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and benefits | | | 2 | | | | 68 | | | | — | | | | — | | | | 5,053 | | | | — | | | | 5,123 | | Other operating expenses | | | 3 | | | | 38 | | | | 1 | | | | 165 | | | | 1,430 | | | | — | | | | 1,637 | | Depreciation | | | — | | | | — | | | | — | | | | 4 | | | | 204 | | | | — | | | | 208 | | Amortization | | | — | | | | — | | | | — | | | | 3 | | | | 534 | | | | (3 | ) | | | 534 | | Transaction and integration expenses | | | — | | | | 8 | | | | — | | | | 1 | | | | 193 | | | | — | | | | 202 | | Total costs of providing services | | | 5 | | | | 114 | | | | 1 | | | | 173 | | | | 7,414 | | | | (3 | ) | | | 7,704 | | (Loss)/income from operations | | | (5 | ) | | | (80 | ) | | | (1 | ) | | | (173 | ) | | | 1,065 | | | | 3 | | | | 809 | | Intercompany income/(expense) | | | — | | | | 56 | | | | 124 | | | | 356 | | | | (536 | ) | | | — | | | | — | | Interest expense | | | (30 | ) | | | (58 | ) | | | (104 | ) | | | — | | | | (16 | ) | | | — | | | | (208 | ) | Other income, net | | | — | | | | — | | | | — | | | | 2 | | | | 1,540 | | | | (1,292 | ) | | | 250 | | (LOSS)/INCOME FROM OPERATIONS BEFORE INCOME TAXES | | | (35 | ) | | | (82 | ) | | | 19 | | | | 185 | | | | 2,053 | | | | (1,289 | ) | | | 851 | | (Provision for)/benefit from income taxes | | | — | | | | (1 | ) | | | (3 | ) | | | 41 | | | | (173 | ) | | | — | | | | (136 | ) | Equity account for subsidiaries | | | 730 | | | | 124 | | | | 437 | | | | 498 | | | | — | | | | (1,789 | ) | | | — | | NET INCOME | | | 695 | | | | 41 | | | | 453 | | | | 724 | | | | 1,880 | | | | (3,078 | ) | | | 715 | | Income attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | (20 | ) | | | — | | | | (20 | ) | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 695 | | | $ | 41 | | | $ | 453 | | | $ | 724 | | | $ | 1,860 | | | $ | (3,078 | ) | | $ | 695 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income/(loss) before non- controlling interests | | $ | 247 | | | $ | (88 | ) | | $ | 14 | | | $ | 286 | | | $ | 1,470 | | | $ | (1,662 | ) | | $ | 267 | | Comprehensive income attributable to non- controlling interests | | | — | | | | — | | | | — | | | | — | | | | (20 | ) | | | — | | | | (20 | ) | Comprehensive income/(loss) attributable to Willis Towers Watson | | $ | 247 | | | $ | (88 | ) | | $ | 14 | | | $ | 286 | | | $ | 1,450 | | | $ | (1,662 | ) | | $ | 247 | |
| | Years Ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | Cash payments for income taxes, net | | $ | 310 | | | $ | 299 | | | $ | 178 | | Cash payments for interest | | $ | 229 | | | $ | 210 | | | $ | 176 | | Cash acquired | | $ | 10 | | | $ | 11 | | | $ | 13 | | Supplemental disclosures of non-cash investing and financing activities: | | | | | | | | | | | | | Fair value of deferred and contingent consideration related to acquisitions | | $ | 9 | | | $ | 13 | | | $ | 36 | |
Condensed Consolidating Statement of Comprehensive Income
| | Year ended December 31, 2017 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non- guarantors | | | Eliminations | | | Consolidated | | Revenue | | $ | — | | | $ | 19 | | | $ | — | | | $ | — | | | $ | 8,183 | | | $ | — | | | $ | 8,202 | | Costs of providing services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and benefits | | | 4 | | | | 48 | | | | — | | | | — | | | | 4,915 | | | | — | | | | 4,967 | | Other operating expenses | | | 3 | | | | 20 | | | | 1 | | | | 91 | | | | 1,419 | | | | — | | | | 1,534 | | Depreciation | | | — | | | | — | | | | — | | | | 6 | | | | 197 | | | | — | | | | 203 | | Amortization | | | — | | | | — | | | | — | | | | 3 | | | | 581 | | | | (3 | ) | | | 581 | | Restructuring costs | | | — | | | | 15 | | | | — | | | | 8 | | | | 109 | | | | — | | | | 132 | | Transaction and integration expenses | | | — | | | | 19 | | | | — | | | | 73 | | | | 177 | | | | — | | | | 269 | | Total costs of providing services | | | 7 | | | | 102 | | | | 1 | | | | 181 | | | | 7,398 | | | | (3 | ) | | | 7,686 | | (Loss)/income from operations | | | (7 | ) | | | (83 | ) | | | (1 | ) | | | (181 | ) | | | 785 | | | | 3 | | | | 516 | | Intercompany income/(expense) | | | — | | | | 34 | | | | 123 | | | | 350 | | | | (507 | ) | | | — | | | | — | | Interest expense | | | (30 | ) | | | (35 | ) | | | (103 | ) | | | — | | | | (20 | ) | | | — | | | | (188 | ) | Other income, net | | | 35 | | | | — | | | | — | | | | — | | | | 367 | | | | (238 | ) | | | 164 | | (LOSS)/INCOME FROM OPERATIONS BEFORE INCOME TAXES | | | (2 | ) | | | (84 | ) | | | 19 | | | | 169 | | | | 625 | | | | (235 | ) | | | 492 | | (Provision for)/benefit from income taxes | | | — | | | | (29 | ) | | | (2 | ) | | | 53 | | | | 78 | | | | — | | | | 100 | | Equity account for subsidiaries | | | 570 | | | | 171 | | | | 290 | | | | 370 | | | | — | | | | (1,401 | ) | | | — | | NET INCOME | | | 568 | | | | 58 | | | | 307 | | | | 592 | | | | 703 | | | | (1,636 | ) | | | 592 | | Income attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | (24 | ) | | | — | | | | (24 | ) | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 568 | | | $ | 58 | | | $ | 307 | | | $ | 592 | | | $ | 679 | | | $ | (1,636 | ) | | $ | 568 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income before non- controlling interests | | $ | 939 | | | $ | 197 | | | $ | 663 | | | $ | 952 | | | $ | 1,051 | | | $ | (2,826 | ) | | $ | 976 | | Comprehensive income attributable to non- controlling interests | | | — | | | | — | | | | — | | | | — | | | | (37 | ) | | | — | | | | (37 | ) | Comprehensive income attributable to Willis Towers Watson | | $ | 939 | | | $ | 197 | | | $ | 663 | | | $ | 952 | | | $ | 1,014 | | | $ | (2,826 | ) | | $ | 939 | |
Condensed Consolidating Statement of Comprehensive Income
| | Year ended December 31, 2016 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non- guarantors | | | Eliminations | | | Consolidated | | Revenue | | $ | — | | | $ | 19 | | | $ | — | | | $ | 2 | | | $ | 7,866 | | | $ | — | | | | 7,887 | | Costs of providing services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and benefits | | | 2 | | | | 15 | | | | — | | | | 1 | | | | 4,831 | | | | — | | | | 4,849 | | Other operating expenses | | | 3 | | | | 88 | | | | — | | | | 112 | | | | 1,348 | | | | — | | | | 1,551 | | Depreciation | | | — | | | | 14 | | | | — | | | | 5 | | | | 159 | | | | — | | | | 178 | | Amortization | | | — | | | | — | | | | — | | | | — | | | | 591 | | | | — | | | | 591 | | Restructuring costs | | | — | | | | 39 | | | | — | | | | 29 | | | | 125 | | | | — | | | | 193 | | Transaction and integration expenses | | | 1 | | | | 26 | | | | — | | | | 16 | | | | 134 | | | | — | | | | 177 | | Total costs of providing services | | | 6 | | | | 182 | | | | — | | | | 163 | | | | 7,188 | | | | — | | | | 7,539 | | (Loss)/income from operations | | | (6 | ) | | | (163 | ) | | | - | | | | (161 | ) | | | 678 | | | | — | | | | 348 | | Intercompany income/(expense) | | | — | | | | 109 | | | | 106 | | | | 320 | | | | (535 | ) | | | — | | | | — | | Interest expense | | | (32 | ) | | | (39 | ) | | | (90 | ) | | | — | | | | (23 | ) | | | — | | | | (184 | ) | Other income, net | | | — | | | | — | | | | — | | | | 2 | | | | 176 | | | | — | | | | 178 | | (LOSS)/INCOME FROM OPERATIONS BEFORE INCOME TAXES | | | (38 | ) | | | (93 | ) | | | 16 | | | | 161 | | | | 296 | | | | — | | | | 342 | | Benefit from/(provision for) income taxes | | | — | | | | 86 | | | | (3 | ) | | | 39 | | | | (26 | ) | | | — | | | | 96 | | Equity account for subsidiaries | | | 458 | | | | 157 | | | | 151 | | | | 247 | | | | — | | | | (1,013 | ) | | | — | | NET INCOME | | | 420 | | | | 150 | | | | 164 | | | | 447 | | | | 270 | | | | (1,013 | ) | | | 438 | | Income attributable to non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | (18 | ) | | | — | | | | (18 | ) | NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 420 | | | $ | 150 | | | $ | 164 | | | $ | 447 | | | $ | 252 | | | $ | (1,013 | ) | | $ | 420 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive loss before non- controlling interests | | $ | (427 | ) | | $ | (266 | ) | | $ | (656 | ) | | $ | (381 | ) | | $ | (549 | ) | | $ | 1,850 | | | $ | (429 | ) | Comprehensive loss attributable to non- controlling interests | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | 2 | | Comprehensive loss attributable to Willis Towers Watson | | $ | (427 | ) | | $ | (266 | ) | | $ | (656 | ) | | $ | (381 | ) | | $ | (547 | ) | | $ | 1,850 | | | $ | (427 | ) |
Condensed Consolidating Balance Sheet
| | As of December 31, 2018 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non- guarantors | | | Eliminations | | | Consolidated | | ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,033 | | | $ | — | | | $ | 1,033 | | Fiduciary assets | | | — | | | | — | | | | — | | | | — | | | | 12,604 | | | | — | | | | 12,604 | | Accounts receivable, net | | | — | | | | 24 | | | | — | | | | — | | | | 2,355 | | | | — | | | | 2,379 | | Prepaid and other current assets | | | — | | | | 311 | | | | 1 | | | | 33 | | | | 357 | | | | (298 | ) | | | 404 | | Total current assets | | | — | | | | 335 | | | | 1 | | | | 33 | | | | 16,349 | | | | (298 | ) | | | 16,420 | | Intercompany receivables, net | | | 4,755 | | | | — | | | | 1,355 | | | | — | | | | — | | | | (6,110 | ) | | | — | | Fixed assets, net | | | — | | | | — | | | | — | | | | 16 | | | | 926 | | | | — | | | | 942 | | Goodwill | | | — | | | | — | | | | — | | | | — | | | | 10,465 | | | | — | | | | 10,465 | | Other intangible assets, net | | | — | | | | — | | | | — | | | | 58 | | | | 3,318 | | | | (58 | ) | | | 3,318 | | Pension benefits assets | | | — | | | | — | | | | — | | | | — | | | | 773 | | | | — | | | | 773 | | Other non-current assets | | | — | | | | 92 | | | | 2 | | | | 49 | | | | 452 | | | | (128 | ) | | | 467 | | Total non-current assets | | | 4,755 | | | | 92 | | | | 1,357 | | | | 123 | | | | 15,934 | | | | (6,296 | ) | | | 15,965 | | Investments in subsidiaries | | | 5,691 | | | | 6,649 | | | | 2,677 | | | | 8,108 | | | | — | | | | (23,125 | ) | | | — | | TOTAL ASSETS | | $ | 10,446 | | | $ | 7,076 | | | $ | 4,035 | | | $ | 8,264 | | | $ | 32,283 | | | $ | (29,719 | ) | | $ | 32,385 | | LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiduciary liabilities | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,604 | | | $ | — | | | $ | 12,604 | | Deferred revenue and accrued expenses | | | 1 | | | | 2 | | | | — | | | | 3 | | | | 1,641 | | | | — | | | | 1,647 | | Short-term debt and current portion of long-term debt | | | — | | | | 186 | | | | — | | | | — | | | | — | | | | — | | | | 186 | | Other current liabilities | | | 95 | | | | 38 | | | | 33 | | | | 13 | | | | 935 | | | | (250 | ) | | | 864 | | Total current liabilities | | | 96 | | | | 226 | | | | 33 | | | | 16 | | | | 15,180 | | | | (250 | ) | | | 15,301 | | Intercompany payables, net | | | — | | | | 902 | | | | — | | | | 4,691 | | | | 517 | | | | (6,110 | ) | | | — | | Long-term debt | | | 498 | | | | 1,635 | | | | 2,256 | | | | — | | | | — | | | | — | | | | 4,389 | | Liability for pension benefits | | | — | | | | — | | | | — | | | | — | | | | 1,170 | | | | — | | | | 1,170 | | Deferred tax liabilities | | | — | | | | — | | | | — | | | | — | | | | 688 | | | | (129 | ) | | | 559 | | Provision for liabilities | | | — | | | | 120 | | | | — | | | | — | | | | 420 | | | | — | | | | 540 | | Other non-current liabilities | | | — | | | | 13 | | | | — | | | | 5 | | | | 411 | | | | — | | | | 429 | | Total non-current liabilities | | | 498 | | | | 2,670 | | | | 2,256 | | | | 4,696 | | | | 3,206 | | | | (6,239 | ) | | | 7,087 | | TOTAL LIABILITIES | | | 594 | | | | 2,896 | | | | 2,289 | | | | 4,712 | | | | 18,386 | | | | (6,489 | ) | | | 22,388 | | REDEEMABLE NON-CONTROLLING INTEREST | | | — | | | | — | | | | — | | | | — | | | | 26 | | | | — | | | | 26 | | EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Willis Towers Watson shareholders’ equity | | | 9,852 | | | | 4,180 | | | | 1,746 | | | | 3,552 | | | | 13,752 | | | | (23,230 | ) | | | 9,852 | | Non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | 119 | | | | — | | | | 119 | | Total equity | | | 9,852 | | | | 4,180 | | | | 1,746 | | | | 3,552 | | | | 13,871 | | | | (23,230 | ) | | | 9,971 | | TOTAL LIABILITIES AND EQUITY | | $ | 10,446 | | | $ | 7,076 | | | $ | 4,035 | | | $ | 8,264 | | | $ | 32,283 | | | $ | (29,719 | ) | | $ | 32,385 | |
Condensed Consolidating Balance Sheet
| | As of December 31, 2017 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non guarantors | | | Eliminations | | | Consolidated | | ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 2 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1,027 | | | $ | — | | | $ | 1,030 | | Fiduciary assets | | | — | | | | — | | | | — | | | | — | | | | 12,155 | | | | — | | | | 12,155 | | Accounts receivable, net | | | — | | | | 4 | | | | — | | | | — | | | | 2,242 | | | | — | | | | 2,246 | | Prepaid and other current assets | | | — | | | | 267 | | | | 1 | | | | 44 | | | | 264 | | | | (146 | ) | | | 430 | | Total current assets | | | 2 | | | | 271 | | | | 1 | | | | 45 | | | | 15,688 | | | | (146 | ) | | | 15,861 | | Intercompany receivables, net | | | 6,202 | | | | — | | | | 2,501 | | | | — | | | | — | | | | (8,703 | ) | | | - | | Fixed assets, net | | | — | | | | — | | | | — | | | | 25 | | | | 960 | | | | — | | | | 985 | | Goodwill | | | — | | | | — | | | | — | | | | — | | | | 10,519 | | | | — | | | | 10,519 | | Other intangible assets, net | | | — | | | | — | | | | — | | | | 60 | | | | 3,882 | | | | (60 | ) | | | 3,882 | | Pension benefits assets | | | — | | | | — | | | | — | | | | — | | | | 764 | | | | — | | | | 764 | | Other non-current assets | | | — | | | | 115 | | | | 3 | | | | 31 | | | | 388 | | | | (90 | ) | | | 447 | | Total non-current assets | | | 6,202 | | | | 115 | | | | 2,504 | | | | 116 | | | | 16,513 | | | | (8,853 | ) | | | 16,597 | | Investments in subsidiaries | | | 4,506 | | | | 6,125 | | | | 1,918 | | | | 8,425 | | | | — | | | | (20,974 | ) | | | — | | TOTAL ASSETS | | $ | 10,710 | | | $ | 6,511 | | | $ | 4,423 | | | $ | 8,586 | | | $ | 32,201 | | | $ | (29,973 | ) | | $ | 32,458 | | LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiduciary liabilities | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,155 | | | $ | — | | | $ | 12,155 | | Deferred revenue and accrued expenses | | | — | | | | 19 | | | | — | | | | 7 | | | | 1,685 | | | | — | | | | 1,711 | | Short-term debt and current portion of long-term debt | | | — | | | | — | | | | — | | | | — | | | | 85 | | | | — | | | | 85 | | Other current liabilities | | | 87 | | | | 83 | | | | 33 | | | | 27 | | | | 724 | | | | (150 | ) | | | 804 | | Total current liabilities | | | 87 | | | | 102 | | | | 33 | | | | 34 | | | | 14,649 | | | | (150 | ) | | | 14,755 | | Intercompany payables, net | | | — | | | | 787 | | | | — | | | | 3,895 | | | | 4,021 | | | | (8,703 | ) | | | — | | Long-term debt | | | 497 | | | | 986 | | | | 2,883 | | | | — | | | | 84 | | | | — | | | | 4,450 | | Liability for pension benefits | | | — | | | | — | | | | — | | | | — | | | | 1,259 | | | | — | | | | 1,259 | | Deferred tax liabilities | | | — | | | | — | | | | — | | | | — | | | | 704 | | | | (89 | ) | | | 615 | | Provision for liabilities | | | — | | | | 120 | | | | — | | | | — | | | | 438 | | | | — | | | | 558 | | Other non-current liabilities | | | — | | | | 19 | | | | — | | | | 5 | | | | 520 | | | | — | | | | 544 | | Total non-current liabilities | | | 497 | | | | 1,912 | | | | 2,883 | | | | 3,900 | | | | 7,026 | | | | (8,792 | ) | | | 7,426 | | TOTAL LIABILITIES | | | 584 | | | | 2,014 | | | | 2,916 | | | | 3,934 | | | | 21,675 | | | | (8,942 | ) | | | 22,181 | | REDEEMABLE NON-CONTROLLING INTEREST | | | — | | | | — | | | | — | | | | — | | | | 28 | | | | — | | | | 28 | | EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Willis Towers Watson shareholders’ equity | | | 10,126 | | | | 4,497 | | | | 1,507 | | | | 4,652 | | | | 10,375 | | | | (21,031 | ) | | | 10,126 | | Non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | 123 | | | | — | | | | 123 | | Total equity | | | 10,126 | | | | 4,497 | | | | 1,507 | | | | 4,652 | | | | 10,498 | | | | (21,031 | ) | | | 10,249 | | TOTAL LIABILITIES AND EQUITY | | $ | 10,710 | | | $ | 6,511 | | | $ | 4,423 | | | $ | 8,586 | | | $ | 32,201 | | | $ | (29,973 | ) | | $ | 32,458 | |
Condensed Consolidating Statement of Cash Flows
| | Year ended December 31, 2018 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non- guarantors | | | Eliminations | | | Consolidated | | NET CASH (USED IN)/FROM OPERATING ACTIVITIES | | $ | (537 | ) | | $ | 153 | | | $ | 355 | | | $ | (792 | ) | | $ | 3,196 | | | $ | (1,087 | ) | | $ | 1,288 | | CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additions to fixed assets and software for internal use | | | — | | | | — | | | | — | | | | (4 | ) | | | (264 | ) | | | — | | | | (268 | ) | Capitalized software costs | | | — | | | | — | | | | — | | | | — | | | | (54 | ) | | | — | | | | (54 | ) | Acquisitions of operations, net of cash acquired | | | — | | | | — | | | | — | | | | — | | | | (36 | ) | | | — | | | | (36 | ) | Net proceeds from sale of operations | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | 4 | | Other, net | | | — | | | | — | | | | — | | | | — | | | | 13 | | | | — | | | | 13 | | Proceeds from/(repayments of) intercompany investing activities, net | | | 1,398 | | | | 369 | | | | 92 | | | | 356 | | | | (2,673 | ) | | | 458 | | | | — | | Net cash from/(used in) investing activities | | $ | 1,398 | | | $ | 369 | | | $ | 92 | | | $ | 352 | | | $ | (3,010 | ) | | $ | 458 | | | $ | (341 | ) | CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net payments on revolving credit facility | | | — | | | | (155 | ) | | | (599 | ) | | | — | | | | — | | | | — | | | | (754 | ) | Senior notes issued | | | — | | | | 998 | | | | — | | | | — | | | | — | | | | — | | | | 998 | | Debt issuance costs | | | — | | | | (8 | ) | | | — | | | | — | | | | — | | | | — | | | | (8 | ) | Repayments of debt | | | — | | | | — | | | | — | | | | — | | | | (170 | ) | | | — | | | | (170 | ) | Repurchase of shares | | | (602 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (602 | ) | Proceeds from issuance of shares | | | 45 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45 | | Payments of deferred and contingent consideration related to acquisitions | | | — | | | | — | | | | — | | | | — | | | | (50 | ) | | | — | | | | (50 | ) | Cash paid for employee taxes on withholding shares | | | — | | | | — | | | | — | | | | — | | | | (30 | ) | | | — | | | | (30 | ) | Dividends paid | | | (306 | ) | | | — | | | | (686 | ) | | | (150 | ) | | | (251 | ) | | | 1,087 | | | | (306 | ) | Acquisitions of and dividends paid to non- controlling interests | | | — | | | | — | | | | — | | | | — | | | | (26 | ) | | | — | | | | (26 | ) | (Repayments of)/proceeds from intercompany financing activities, net | | | — | | | | (1,357 | ) | | | 838 | | | | 589 | | | | 388 | | | | (458 | ) | | | — | | Net cash (used in)/from financing activities | | $ | (863 | ) | | $ | (522 | ) | | $ | (447 | ) | | $ | 439 | | | $ | (139 | ) | | $ | 629 | | | $ | (903 | ) | (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS | | | (2 | ) | | | — | | | | — | | | | (1 | ) | | | 47 | | | | — | | | | 44 | | Effect of exchange rate changes on cash and cash equivalents | | | — | | | | — | | | | — | | | | — | | | | (41 | ) | | | — | | | | (41 | ) | CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 2 | | | | — | | | | — | | | | 1 | | | | 1,027 | | | | — | | | | 1,030 | | CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,033 | | | $ | — | | | $ | 1,033 | |
Condensed Consolidating Statement of Cash Flows
| | Year ended December 31, 2017 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non- guarantors | | | Eliminations | | | Consolidated | | NET CASH FROM/(USED IN) OPERATING ACTIVITIES | | $ | 743 | | | $ | 114 | | | $ | 29 | | | $ | (696 | ) | | $ | 939 | | | $ | (267 | ) | | $ | 862 | | CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additions to fixed assets and software for internal use | | | — | | | | — | | | | — | | | | (8 | ) | | | (292 | ) | | | — | | | | (300 | ) | Capitalized software costs | | | — | | | | — | | | | — | | | | — | | | | (75 | ) | | | — | | | | (75 | ) | Acquisitions of operations, net of cash acquired | | | — | | | | — | | | | — | | | | — | | | | (13 | ) | | | — | | | | (13 | ) | Net proceeds from sale of operations | | | — | | | | — | | | | — | | | | — | | | | 57 | | | | — | | | | 57 | | Other, net | | | — | | | | — | | | | — | | | | — | | | | (4 | ) | | | — | | | | (4 | ) | Proceeds from/(repayments of) intercompany investing activities, net | | | 1,042 | | | | (55 | ) | | | (1,600 | ) | | | 277 | | | | (485 | ) | | | 821 | | | | — | | (Increase)/decrease in investment in subsidiaries | | | (1,035 | ) | | | (115 | ) | | | (148 | ) | | | 833 | | | | 465 | | | | — | | | | — | | Net cash from/(used in) investing activities | | $ | 7 | | | $ | (170 | ) | | $ | (1,748 | ) | | $ | 1,102 | | | $ | (347 | ) | | $ | 821 | | | $ | (335 | ) | CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net borrowings on revolving credit facility | | | — | | | | 155 | | | | 487 | | | | — | | | | — | | | | — | | | | 642 | | Senior notes issued | | | — | | | | 649 | | | | — | | | | — | | | | — | | | | — | | | | 649 | | Proceeds from issuance of other debt | | | — | | | | — | | | | — | | | | — | | | | 32 | | | | — | | | | 32 | | Debt issuance costs | | | — | | | | (5 | ) | | | (4 | ) | | | — | | | | — | | | | — | | | | (9 | ) | Repayments of debt | | | — | | | | (394 | ) | | | (220 | ) | | | — | | | | (120 | ) | | | — | | | | (734 | ) | Repurchase of shares | | | (532 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (532 | ) | Proceeds from issuance of shares | | | 61 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 61 | | Payments related to share cancellation | | | — | | | | — | | | | — | | | | — | | | | (177 | ) | | | — | | | | (177 | ) | Payments of deferred and contingent consideration related to acquisitions | | | — | | | | — | | | | — | | | | — | | | | (65 | ) | | | — | | | | (65 | ) | Cash paid for employee taxes on withholding shares | | | — | | | | — | | | | — | | | | — | | | | (18 | ) | | | — | | | | (18 | ) | Dividends paid | | | (277 | ) | | | (58 | ) | | | — | | | | (58 | ) | | | (151 | ) | | | 267 | | | | (277 | ) | Acquisitions of and dividends paid to non- controlling interests | | | — | | | | — | | | | — | | | | — | | | | (51 | ) | | | — | | | | (51 | ) | (Repayments of)/proceeds from intercompany financing activities, net | | | — | | | | (291 | ) | | | 1,456 | | | | (347 | ) | | | 3 | | | | (821 | ) | | | — | | Net cash (used in)/from financing activities | | $ | (748 | ) | | $ | 56 | | | $ | 1,719 | | | $ | (405 | ) | | $ | (547 | ) | | $ | (554 | ) | | $ | (479 | ) | INCREASE IN CASH AND CASH EQUIVALENTS | | | 2 | | | | — | | | | — | | | | 1 | | | | 45 | | | | — | | | | 48 | | Effect of exchange rate changes on cash and cash equivalents | | | — | | | | — | | | | — | | | | — | | | | 112 | | | | — | | | | 112 | | CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | — | | | | — | | | | — | | | | — | | | | 870 | | | | — | | | | 870 | | CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 2 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1,027 | | | $ | — | | | $ | 1,030 | |
Condensed Consolidating Statement of Cash Flows
| | Year ended December 31, 2016 | | | | Willis Towers Watson plc | | | Willis North America | | | Trinity Acquisition plc | | | Other guarantors | | | Non- guarantors | | | Eliminations | | | Consolidated | | NET CASH FROM/(USED IN) OPERATING ACTIVITIES | | $ | (20 | ) | | $ | (83 | ) | | $ | 152 | | | $ | 440 | | | $ | 1,114 | | | $ | (670 | ) | | $ | 933 | | CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additions to fixed assets and software for internal use | | | — | | | | (12 | ) | | | — | | | | (79 | ) | | | (221 | ) | | | 94 | | | | (218 | ) | Capitalized software costs | | | — | | | | — | | | | — | | | | — | | | | (85 | ) | | | — | | | | (85 | ) | Acquisitions of operations, net of cash acquired | | | — | | | | — | | | | — | | | | — | | | | 476 | | | | — | | | | 476 | | Net proceeds from sale of operations | | | — | | | | — | | | | — | | | | — | | | | (4 | ) | | | 3 | | | | (1 | ) | Other, net | | | — | | | | 33 | | | | — | | | | — | | | | 20 | | | | (30 | ) | | | 23 | | Proceeds from/(repayments of) intercompany investing activities, net | | | (3,751 | ) | | | — | | | | (547 | ) | | | (3,405 | ) | | | (739 | ) | | | 8,442 | | | | — | | Decrease/(increase) in investment in subsidiaries | | | 4,600 | | | | — | | | | — | | | | (1,000 | ) | | | (3,600 | ) | | | — | | | | — | | Net cash from/(used in) investing activities | | $ | 849 | | | $ | 21 | | | $ | (547 | ) | | $ | (4,484 | ) | | $ | (4,153 | ) | | $ | 8,509 | | | $ | 195 | | CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net payments on revolving credit facility | | | — | | | | — | | | | (237 | ) | | | — | | | | — | | | | — | | | | (237 | ) | Senior notes issued | | | — | | | | — | | | | 1,606 | | | | — | | | | — | | | | — | | | | 1,606 | | Proceeds from issuance of other debt | | | — | | | | — | | | | 400 | | | | — | | | | 4 | | | | — | | | | 404 | | Debt issuance costs | | | — | | | | — | | | | (14 | ) | | | — | | | | — | | | | — | | | | (14 | ) | Repayments of debt | | | (300 | ) | | | — | | | | (1,037 | ) | | | — | | | | (564 | ) | | | — | | | | (1,901 | ) | Repurchase of shares | | | (396 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (396 | ) | Proceeds from issuance of shares | | | 63 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 63 | | Payments of deferred and contingent consideration related to acquisitions | | | — | | | | — | | | | — | | | | — | | | | (67 | ) | | | — | | | | (67 | ) | Cash paid for employee taxes on withholding shares | | | — | | | | — | | | | — | | | | — | | | | (13 | ) | | | — | | | | (13 | ) | Dividends paid | | | (199 | ) | | | (49 | ) | | | (302 | ) | | | (162 | ) | | | (90 | ) | | | 603 | | | | (199 | ) | Acquisitions of and dividends paid to non- controlling interests | | | — | | | | — | | | | — | | | | — | | | | (21 | ) | | | — | | | | (21 | ) | Proceeds from/(repayments of) intercompany financing activities, net | | | — | | | | 111 | | | | (21 | ) | | | 4,204 | | | | 4,148 | | | | (8,442 | ) | | | — | | Net cash (used in)/from financing activities | | $ | (832 | ) | | $ | 62 | | | $ | 395 | | | $ | 4,042 | | | $ | 3,397 | | | $ | (7,839 | ) | | $ | (775 | ) | (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS | | | (3 | ) | | | — | | | | — | | | | (2 | ) | | | 358 | | | | — | | | | 353 | | Effect of exchange rate changes on cash and cash equivalents | | | — | | | | — | | | | — | | | | — | | | | (15 | ) | | | — | | | | (15 | ) | CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 3 | | | | — | | | | — | | | | 2 | | | | 527 | | | | — | | | | 532 | | CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 870 | | | $ | — | | | $ | 870 | |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures An evaluation was performed under the supervision and with the participation of the chief executive officer (‘CEO’) and chief financial officer (‘CFO’), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 20182020 in providing reasonable assurance that the information required to be disclosed in our periodic reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management to allow for timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting As part of ongoing activities focused on improving efficiencies and optimizing our resources, the Company completed the outsourcing of a portion of our information technology resources to a third party. These arrangements were made in order to gain efficiencies of scale, reduce costs and improve overall operational effectiveness. They were not considered to be material to our internal controls framework and were not made in response to any identified deficiency or weakness in our internal control over financial reporting. There were no changes in our internal control over financial reporting in the quarter ended December 31, 20182020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although most of our employees who are involved in our financial reporting processes and controls are working remotely due to the COVID-19 pandemic, we have not experienced any specific impact to our internal controls over financial reporting. We are regularly monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness. Management’s Report on Internal Control over Financial Reporting Internal control over financial reporting refers to the process designed by, or under the supervision of, our CEO and CFO, and overseen by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: | (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (‘COSO’) in the report entitled Internal Control — Integrated Framework (2013) to evaluate the effectiveness of the Company’s internal control over financial reporting. Based on this evaluation, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018.2020.
The effectiveness of our internal controls over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors ofWillis Towers Watson Public Limited Company Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Willis Towers Watson Public Limited Company and subsidiaries (the “Company”‘Company’) as of December 31, 2018,2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(‘COSO’). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB)(‘PCAOB’), the consolidated financial statements as of and for the year ended December 31, 2018,2020, of the Company and our report dated February 27, 2019,23, 2021, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Philadelphia, PA February 27, 201923, 2021
ITEM 9B. OTHER INFORMATION None.
PART III. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information with respect to the executive officers of the Company is provided in Part I, Item 1 above under the heading ‘Executive‘Information about Executive Officers of the Registrant’. All other information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than 120 days after the end of the Company’s fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than 120 days after the end of the Company’s fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than 120 days after the end of the Company’s fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than 120 days after the end of the Company’s fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than 120 days after the end of the Company’s fiscal year.
PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | a) | The following documents have been included in Part II, Item 8: |
ReportsReport of Independent Registered Public Accounting FirmsFirm
Consolidated Financial Statements of Willis Towers Watson Financial Statements: Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 20182020 Consolidated Balance Sheets at December 31, 20182020 and 20172019 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 20182020 Consolidated Statements of Changes in Equity for each of the three years in the period ended December 31, 20182020 Notes to the Consolidated Financial Statements In reviewing the agreements included or incorporated by reference as exhibits to this Annual Report on Form 10-K, it is important to note that they are included to provide investors with information regarding their terms, and are not intended to provide any other factual or disclosure information about Willis Towers Watson or the other parties to the agreements. The agreements contain representations and warranties made by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement, and: should not be treated as categorical statements of fact, but rather as a way of allocating risk between the parties; have in some cases been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; may apply standards of materiality in a way that is different from what may be material to investors; and were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Willis Towers Watson may be found elsewhere in this Annual Report on Form 10-K and our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. | | | | | 2.1 | | Agreement and Plan of Merger, dated as of June 29, 2015, by and among Willis Group Holdings plc, Citadel Merger Sub, Inc. and Towers Watson & Co (incorporated by reference to Exhibit 2.1 to the Form 8-K filed by the Company on June 30, 2015) | 2.2 | | Amendment No. 1 to Agreement and Plan of Merger, dated November 19, 2015, by and among Willis, Merger Sub and Towers Watson (incorporated by reference to Exhibit 2.1 to the Form 8-K filed by the Company on November 20, 2015) | 2.3 | | Business Combination Agreement, dated as of March 9, 2020, by and between Aon plc, a company incorporated under the laws of England and Wales, with registered company number 07876075 (‘Aon’) and Willis Towers Watson plc (the ‘Business Combination Agreement’) (incorporated by reference to Exhibit 2.1 to the Form 8-K/A filed by the Company on March 10, 2020). | 2.4 | | Appendix 3 to the Rule 2.5 Announcement, dated as of March 9, 2020 (Conditions Appendix) (incorporated by reference to Exhibit 2.2 to the Form 8-K filed by the Company on March 9, 2020). | 2.5 | | Expenses Reimbursement Agreement, dated as of March 9, 2020, by and between Aon and Willis Towers Watson plc (incorporated by reference to Exhibit 2.3 to the Form 8-K filed by the Company on March 9, 2020). | 2.6 | | Amendment to Business Combination Agreement, dated October 30, 2020 (incorporated by reference to Exhibit 2.1 to the Form 8-K filed October 30, 2020). | 3.1 | | Amended and Restated Memorandum and Articles of Association of Willis Towers Watson Public Limited Company (incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Company on June 15, 2017) | 3.2 | | Certificate of Incorporation of Willis Group Holdings Public Limited Company (incorporated by reference to Exhibit 3.2 to the Form 8-K filed by the Company on January 4, 2010) | 4.1
| | Senior Indenture, dated as of July 1, 2005, and First Supplemental Indenture, dated as of July 1, 2005, by and among Willis North America Inc., as the Issuer, Willis Group Holdings Public Limited Company, TA I Limited, TA II Limited, TA III Limited, Trinity Acquisition Limited, TA IV Limited and Willis Group Limited, as the Guarantors, and The Bank of New York (f/k/a JPMorgan Chase Bank, N.A.), as the Trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on July 1, 2005)
| | | | | |
4.24.1
| | Second Supplemental Indenture, dated asDescription of March 28, 2007, supplemental to the Indenture dated as of July 1, 2005Company’s ordinary shares (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on March 30, 2007)
| 4.3
| | Third Supplemental Indenture, dated as of October 1, 2008, supplemental to the Indenture dated as of July 1, 2005 (incorporated by reference to Exhibit 4.1 to the Form 10-Q filed by the Company on November 10, 2008)
| 4.4
| | Fourth Supplemental Indenture, dated as of September 29, 2009, supplemental to the Indenture dated as of July 1, 2005 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on September 29, 2009)
| 4.5
| | Fifth Supplemental Indenture, dated as of December 31, 2009, supplemental to the Indenture dated as of July 1, 2005 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on January 4, 2010)
| 4.6
| | Sixth Supplemental Indenture, dated as of December 22, 2010, supplemental to the Indenture dated as of July 1, 2005 (incorporated by reference to Exhibit 4.6 to the Form 10-K filed by the Company on February 28, 2011)26, 2020)
| 4.74.2
| | Seventh Supplemental Indenture, dated as of March 9, 2016, supplemental to the Indenture, dated as of July 1, 2005 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on March 10, 2016)
| 4.8
| | Eighth Supplemental Indenture, dated as of August 11, 2017, supplemental to the Indenture dated as of July 1, 2005 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on August 16, 2017)
| 4.9
| | Indenture, dated as of March 17, 2011, by and among Willis Group Holdings Public Limited Company, as issuer, Willis Netherlands Holdings B.V., Willis Investment UK Holdings U.K. Limited, TA I Limited, Trinity Acquisition Limited, Willis Group Limited and Willis North America Inc., as Guarantors, and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on March 17, 2011) | 4.104.3
| | First Supplemental Indenture, dated as of March 17, 2011, supplemental to the Indenture dated March 17, 2011 (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by the Company on March 17, 2011) | 4.114.4
| | Second Supplemental Indenture, dated as of March 9, 2016, supplemental to the Indenture, dated as of March 17, 2011 (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by the Company on March 10, 2016) | 4.124.5
| | Third Supplemental Indenture, dated as of August 11, 2017, supplemental to the Indenture dated as of March 17, 2011 (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by the Company on August 16, 2017) | 4.134.6
| | Indenture, dated as of August 15, 2013, by and among Trinity Acquisition Limited, as issuer, Willis Group Holdings Public Limited Company, Willis Netherlands Holdings B.V., Willis North America Inc., Willis Investment UK Holdings U.K. Limited, TA I Limited and Willis Group Limited, as guarantors, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on August 15, 2013) | 4.144.7
| | First Supplemental Indenture, dated as of August 15, 2013, supplemental to the Indenture dated August 15, 2013 (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by the Company on August 15, 2013) | 4.154.8
| | Second Supplemental Indenture, dated as of March 9, 2016, supplemental to the Indenture, dated as of August 15, 2013 (incorporated by reference to Exhibit 4.3 to the Form 8-K filed by the Company on March 10, 2016) | 4.164.9
| | Third Supplemental Indenture, dated as of March 22, 2016, supplemental to the Indenture, dated as of August 15, 2013 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on March 22, 2016) | 4.174.10
| | Fourth Supplemental Indenture, dated as of May 26, 2016, supplemental to the Indenture, dated as of August 15, 2013 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on May 26, 2016) | 4.184.11
| | Fifth Supplemental Indenture, dated as of August 11, 2017, supplemental to the Indenture dated as of August 15, 2013 (incorporated by reference to Exhibit 4.3 to the Form 8-K filed by the Company on August 16, 2017) | 4.194.12
| | Form of Indenture among Willis Towers Watson Public Limited Company, as issuer, Willis Towers Watson Sub Holdings Unlimited Company, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, WTW Bermuda Holdings Ltd., Trinity Acquisition plc, Willis Group Limited and Willis North America Inc., as guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-3 filed by the Company on March 11, 2016)
| | | | | | 4.20
| | Form of Indenture among Willis North America Inc., as issuer, Willis Towers Watson Public Limited Company, Willis Towers Watson Sub Holdings Unlimited Company, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, WTW Bermuda Holdings Ltd., Trinity Acquisition plc and Willis Group Limited, as guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-3 filed by the Company on March 11, 2016)
|
4.21
| | Indenture, dated as of May 16, 2017, among Willis North America Inc., as issuer, Willis Towers Watson Public Limited Company, Willis Towers Watson Sub Holdings Unlimited Company, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, WTW Bermuda Holdings Ltd., Trinity Acquisition plc and Willis Group Limited, as guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on May 16, 2017) | 4.224.13
| | First Supplemental Indenture, dated as of May 16, 2017 among Willis North America Inc., as issuer, Willis Towers Watson Public Limited Company, Willis Towers Watson Sub Holdings Unlimited Company, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, WTW Bermuda Holdings Ltd., Trinity Acquisition plc and Willis Group Limited, as guarantors, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by the Company on May 16, 2017) | 4.234.14
| | Second Supplemental Indenture, dated as of August 11, 2017, supplemental to the Indenture dated as of May 16, 2017 (incorporated by reference to Exhibit 4.4 to the Form 8-K filed by the Company on August 16, 2017) | 4.244.15
| | Third Supplemental Indenture, dated as of September 10, 2018, supplemental to the Indenture dated as of May 16, 2017 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on September 10, 2018) | 4.254.16
| | Fourth Supplemental Indenture, dated as of September 10, 2019, supplemental to the Indenture dated as of May 16, 2017 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on September 10, 2019). | 4.17 | | Form of Willis North America Inc.’s 4.500%2.950% Senior Note due 20282029 and 5.050%3.875% Senior Note due 20482049 (included in Exhibit 4.234.16 and incorporated by reference to Exhibit 4.2 to the Form 8-K filed by the Company on September 10, 2018)2019) | 4.18 | | Form of Indenture among Willis Towers Watson Public Limited Company, as issuer, Willis Towers Watson Sub Holdings Unlimited Company, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, Willis Towers Watson UK Holdings Limited, Trinity Acquisition plc, Willis Group Limited and Willis North America Inc., as guarantors, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-3 filed by the Company on March 11, 2019) | 4.19 | | Officers’ Certificate of the Issuer and the Guarantors, dated as of May 29, 2020 (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Company on May 29, 2020). | 4.20 | | Form of Note (included in Exhibit 4.19 hereto) | 10.1 | | Amended and Restated Credit Agreement, dated as of March 7, 2017, among Trinity Acquisition plc, Willis Towers Watson Public Limited Company, the lenders party thereto and Barclays Bank PLC., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on March 9, 2017) |
10.2 | | Amended and Restated Guaranty Agreement, dated as of March 7, 2017, among Trinity Acquisition plc, Willis Towers Watson Public Limited Company, the other guarantors party thereto and Barclays Bank PLC, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on March 9, 2017) | 10.3 | | Term Loan Credit Agreement, dated as of November 20, 2015, among Towers Watson Delaware Inc., as borrower, each lender from time to time party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by Towers Watson on November 24, 2015)
| 10.4
| | Amendment No. 1, dated as of December 23, 2015, to the Term Loan Credit Agreement (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by Towers Watson on December 29, 2015)
| 10.5
| | Amendment No. 2, dated as of March 31, 2017, to the Term Loan Credit Agreement dated as of November 20, 2015, among Towers Watson Delaware Inc., as borrower, each lender from time to time party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by the Company on May 9, 2017)
| 10.6
| | Amendment No. 3, dated as of April 28, 2017, to the Term Loan Credit Agreement dated as of November 20, 2015, among Towers Watson Delaware Inc., as borrower, each lender from time to time party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by the Company on May 9, 2017)
| 10.7
| | Deed Poll of Assumption, dated as of December 31, 2009, by and between Willis Group Holdings Limited and Willis Group Holdings Public Limited Company (incorporated by reference to Exhibit 10.4 to the Form 8-K filed by the Company on January 4, 2010)† | 10.810.4
| | Willis Group Senior Management Incentive Plan (incorporated by reference to Exhibit 10.7 to the Form 8-K filed by the Company on January 4, 2010)† | 10.910.5
| | Willis Towers Watson Public Limited Company Amended and Restated 2010 North American Employee Stock Purchase Plan (incorporated by reference to Exhibit B to the Definitive Proxy Statement on Schedule 14A filed by the Company on April 27, 2016)† | 10.10
| | Willis Group Holdings 2001 Share Purchase and Option Plan (incorporated by reference to Exhibit 10.9 to the Form 8-K filed by the Company on January 4, 2010)†
| 10.11
| | Form of Performance-Based Option Agreement under the Willis Group Holdings 2001 Share Purchase and Option Plan (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on May 10, 2010)†
|
10.12
| | Form of Time-Based Option Agreement under the Willis Group Holdings 2001 Share Purchase and Option Plan (incorporated by reference to Exhibit 10.16 to the Form 10-K filed by the Company on February 28, 2011)†
| 10.13
| | Form of Performance-Based Option Agreement for the 2011 Long Term Incentive Program under the Willis Group Holdings 2001 Share Purchase and Option Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on May 3, 2011)†
| | | | | | 10.1410.6
| | Rules of the Willis Group Holdings Sharesave Plan 2001 for the United Kingdom (incorporated by reference to Exhibit 10.13 to the Form 8-K filed by the Company on January 4, 2010)† | 10.1510.7
| | The Willis Group Holdings Irish Sharesave Plan (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by the Company on May 10, 2010)† | 10.1610.8
| | Willis Group Holdings 2008 Share Purchase and Option Plan (incorporated by reference to Exhibit 10.16 to the Form 8-K filed by the Company on January 4, 2010)†
| 10.17
| | Hilb Rogal & Hobbs Company 2007 Share Incentive Plan (incorporated by reference to Exhibit 10.19 to the Form 8-K filed by the Company on January 4, 2010)†
| 10.18
| | Form of Time-Based Restricted Share Unit Award Agreement granted under the Hilb Rogal & Hobbs Company 2007 Share Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by the Company on August 6, 2010)†
| 10.19
| | Form of Time-Based Option Agreement granted under the Hilb Rogal & Hobbs Company 2007 Share Incentive Plan (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by the Company on August 6, 2010)†
| 10.20
| | Form of Performance-Based Option Agreement granted under the Hilb Rogal & Hobbs Company 2007 Share Incentive Plan (incorporated by reference to Exhibit 10.5 to the Form 10-Q filed by the Company on August 9, 2011)†
| 10.21
| | Willis Towers Watson Public Limited Company 2012 Equity Incentive Plan (incorporated by reference to Exhibit A to the Definitive Proxy Statement on Schedule 14A filed by the Company on April 27, 2016)† | 10.2210.9
| | Form of Time-Based Share Option Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by the Company on August 9, 2012)† | 10.2310.10
| | Form of Performance-Based Share Option Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on August 9, 2012)† | 10.2410.11
| | Form of Time-Based Restricted Share Unit Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by the Company on August 9, 2012)† | 10.2510.12
| | Form of Performance-Based Restricted Share Unit Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by the Company on August 9, 2012)† | 10.2610.13
| | Form of Time-Based Restricted Share Unit Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan (for Non-Employee Directors) (incorporated by reference to Exhibit 10.5 to the Form 10-Q filed by the Company on August 9, 2012)† | 10.2710.14
| | Form of Performance-Based Restricted Share Unit Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan for the 2013 Long-Term Incentive Program (incorporated by reference to Exhibit 10.33 to the Form 10-K filed by the Company on February 27, 2014)† | 10.2810.15
| | Rules of the Willis Group Holdings Public Limited Company 2012 Sharesave Sub-Plan for the United Kingdom to the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.32 to the Form 10-K filed by the Company on February 28, 2013)† | 10.2910.16
| | Form of 2012 Long Term Incentive Program Agreement of Restrictive Covenants and Other Obligations (for U.S. employees) Plan (incorporated by reference to Exhibit 10.36 to the Form 10-K filed by the Company on February 28, 2013)† | 10.3010.17
| | Form of 2012 Long Term Incentive Program Agreement of Restrictive Covenants and Other Obligations (for U.K. employees) Plan (incorporated by reference to Exhibit 10.37 to the Form 10-K filed by the Company on February 28, 2013) † |
10.3510.22
| | Amendment 2019-1 to the Amended and Restated Willis U.S. 2005 Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on November 1, 2019)† | 10.23 | | Form of Deed of Indemnity of Willis Towers Watson Public Limited Company (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on January 5, 2016)† | 10.3610.24
| | Form of Indemnification Agreement of Willis North America Inc. (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on January 5, 2016)† | 10.3710.25
| | Willis Towers Watson Public Limited Company Compensation Policy and Share Ownership Guidelines for Non-Employee Directors (as amended May 2018)September 2019) (incorporated by reference to Exhibit 10.310.1 to the Form 10-Q filed by the Company on August 6, 2018)November 1, 2019) | 10.3810.26
| | Employment Agreement, dated as of March 1, 2016, by and between Willis Towers Watson Public Limited Company and John J. Haley (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on March 1, 2016)† | 10.3910.27
| | Amendment to Employment Agreement, dated as of July 18, 2018, by and between Willis Towers Watson Public Limited Company and John J. Haley (incorporated by reference to Exhibit 99.2 to the Form 8-K filed by the Company on July 18, 2018)† | 10.4010.28
| | Second Amendment to Employment Agreement, dated as of May 20, 2019, between Willis Towers Watson Public Limited Company and John J. Haley (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on August 1, 2019)† | 10.29 | | Restricted Share Unit Award Agreement, dated as of February 26, 2016, by and between Willis Towers Watson Public Limited Company and John J. Haley (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on March 1, 2016)† | 10.4110.30
| | Supplemental Restricted Share Unit Award Agreement, by and between Willis Towers Watson Public Limited Company and John J. Haley, dated as of June 14, 2016 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on June 16, 2016)† | 10.4210.31
| | Offer Letter, dated August 17, 2017, from John J. Haley to Michael J. Burwell (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on August 21, 2017)† | 10.4310.32
| | Letter Agreement, dated September 18, 2017, by and between the Company and Roger F. Millay (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on November 6, 2017)† | 10.4410.33
| | Offer Letter, dated July 23, 2013, and Contract of Employment, dated as of September 3, 2013, by and between Willis Limited, a subsidiary of Willis Towers Watson Public Limited Company, and David Shalders (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by the Company on May 10, 2016)†
| 10.45
| | Amendment, dated April 30, 2014, to the Contract of Employment, dated as of September 3, 2013, by and between Willis Limited, a subsidiary of Willis Towers Watson Public Limited Company, and David Shalders (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by the Company on May 10, 2016)†
| 10.46
| | Amendment, dated as of June 29, 2015, to Contract of Employment, dated as of September 3, 2013, by and between Willis Limited, a subsidiary of Willis Towers Watson Public Limited Company, and David Shalders (incorporated by reference to Exhibit 10.5 to the Form 10-Q filed by the Company on May 10, 2016)†
| 10.47
| | Offer Letter, dated November 9, 2014, and Contract of Employment, dated as of November 9, 2014, by and between Willis Limited, a subsidiary of Willis Towers Watson Public Limited Company, and Nicolas Aubert (incorporated by reference to Exhibit 10.6 to the Form 10-Q filed by the Company on May 10, 2016)† | 10.4810.34
| | Amendment, dated as of June 29, 2015, to Contract of Employment, dated as of November 9, 2014, by and between Willis Limited, a subsidiary of Willis Towers Watson Public Limited Company, and Nicolas Aubert (incorporated by reference to Exhibit 10.7 to the Form 10-Q filed by the Company on May 10, 2016)† | 10.4910.35
| | Letter Agreement, dated June 7, 2017, by and between the Company and Nicolas Aubert (incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by the Company on August 7, 2017)† |
10.5010.36
| | Employment Agreement, dated as of September 15, 2003, by and between Willis Americas Administration, Inc. and Todd J. Jones (incorporated by reference to Exhibit 10.63 to the Form 10-K filed by the Company on February 27, 2014)†
| 10.51
| | Letter Agreement, dated August 1, 2013, by and between Willis North America Inc. and Todd J. Jones (incorporated by reference to Exhibit 10.64 to the Form 10-K filed by the Company on February 27, 2014)†
| 10.52
| | Amendment, dated April 30, 2014, to the Employment Agreement, dated August 1, 2013, by and between Willis North America Inc. and Todd J. Jones (incorporated by reference to Exhibit 10.6 to the Form 10-Q filed by the Company on May 9, 2014)†
| 10.53
| | Amendment to Employment Agreement, dated as of June 29, 2015, by and between Willis North America Inc. and Todd Jones (incorporated by reference to Exhibit 10.4 to the Form 8-K filed by the Company on June 30, 2015)†
| 10.54
| | Amendment to Employment Agreement, dated as of May 22, 2018, by and between Willis North America Inc. and Todd Jones. (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by the Company on August 6, 2018)†
| 10.55
| | Form of Time-Based Restricted Share Unit Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan, dated as of November 9, 2015, by and between Todd Jones / Nicolas Aubert / David Shalders and Willis Group Holdings Public Limited Company (incorporated by reference to Exhibit 10.74 to the Form 10-K filed by the Company on February 29, 2016)† | | | | | | 10.5610.37
| | Form of Performance-Based Restricted Share Unit Award Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan, dated as of November 9, 2015, by and between Todd Jones / Nicolas Aubert / David Shalders and Willis Group Holdings Public Limited Company (incorporated by reference to Exhibit 10.75 to the Form 10-K filed by the Company on February 29, 2016)† | 10.5710.38
| | Form of Time-Based Share Option Agreement under the Willis Group Holdings Public Limited Company 2012 Equity Incentive Plan, dated as of November 9, 2015, by and between Todd Jones / Nicolas Aubert / David Shalders and Willis Group Holdings Public Limited Company (incorporated by reference to Exhibit 10.76 to the Form 10-K filed by the Company on February 29, 2016)† | 10.5810.39
| | Form of Performance-Based Restricted Share Unit Award Agreement for Operating Committee Members under the Willis Towers Watson Public Limited Company Amended and Restated 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on November 7, 2016)† |
10.5910.40
| | Form of Performance-Based Restricted Share Unit Agreement for Operating Committee Members under the Willis Towers Watson Public Limited Company Amended and Restated 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Form 10-Q filed by the Company on August 6, 2018)† | 10.6010.41
| | Performance-Based Restricted Share Unit Award Agreement, dated February 26, 2019, by and between Willis Towers Watson Public Limited Company and John J. Haley (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by the Company on May 3, 2019)† | 10.42 | | Towers Watson Amended and Restated 2009 Long Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by the Company on January 5, 2016)† | 10.6110.43
| | Trust Deed and Rules of the Towers Watson Limited Share Incentive Plan 2005 (U.K) (incorporated by reference to Exhibit 10.21 to the Form 10-K filed by Watson Wyatt Worldwide Inc. on September 1, 2006)† | 10.6210.44
| | Towers Watson Limited Share Incentive Plan 2005 Deed of Amendment (U.K.) (incorporated by reference to Exhibit 10.22 to the Form 10-K filed by Watson Wyatt Worldwide Inc. on September 1, 2006)† | 10.6310.45
| | Towers Watson Limited Share Incentive Plan 2005 Deed to Change the Trust Deed and Rules (U.K.) (incorporated by reference to Exhibit 10.10 to the Form 10-K filed by Towers Watson on August 29, 2012)† | 10.6410.46
| | Share Purchase Plan 2005 (Spain) (incorporated by reference to Exhibit 10.24 to the Form 10-K filed by Watson Wyatt Worldwide Inc. on September 1, 2006)† | 10.6510.47
| | Trust Deed and Rules of the Watson Wyatt Ireland Share Participation Scheme (incorporated by reference to Exhibit 10.23 to the Form 10-K filed by Watson Wyatt Worldwide Inc. on September 1, 2006)† | 10.6610.48
| | Form of Non-Qualified Stock Option Award Agreement for use under the Towers Watson & Co. 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by Towers Watson on March 8, 2010)† | 10.6710.49
| | Extend Health Amended and Restated 2007 Equity Incentive Plan (incorporated by reference to Exhibit 99.3 to the Registration Statement on Form S-8 filed by the Company on January 5, 2016)† |
10.6810.50
| | Liazon Amended and Restated 2011 Equity Incentive Plan (incorporated by reference to Exhibit 99.4 to the Registration Statement on Form S-8 filed by the Company on January 5, 2016)† | 10.6910.51
| | Willis Towers Watson Non-Qualified Deferred Savings Plan for U.S. Employees (as amended and restated effective January 1, 2017) (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by the Company on November 7, 2016)† | 10.7010.52
| | Amendment 2018-1 to the Willis Towers Watson Non-Qualified Deferred Savings Plan for U.S. Employees (incorporated by reference to Exhibit 99.3 to the Form 8-K filed by the Company on July 18, 2018)† | 10.7110.53
| | Willis Towers Watson Non-Qualified Stable Value Excess Plan for U.S. Employees (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by the Company on August 7, 2017)† | 10.7210.54
| | Amendment 2017-1 to the Willis Towers Watson Non-Qualified Stable Value Excess Plan for U.S. Employees (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on August 6, 2018)† | 10.7310.55
| | Willis Towers Watson Public Limited Company Compensation Recoupment Policy (incorporated by reference to Exhibit 10.68 to the Form 10-K filed by the Company on February 28, 2018)† | 10.56 | | Form of Irrevocable Director Undertaking (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by WTW on March 9, 2020) | 10.57 | | Willis Towers Watson Severance and Change in Control Pay Plan for U.S. Executives, dated as of March 8, 2020 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on March 11, 2020)† | 10.58 | | Willis Towers Watson Severance and Change in Control Pay Plan for Non-U.S. Executives, dated as of March 8, 2020 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on March 11, 2020)† | 10.59 | | Amendment to John Haley Employment Agreement, dated June 12, 2020 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on June 15, 2020)† | 10.60 | | Willis Towers Watson Public Limited Company Severance and Change in Control Pay Plan for US Executives, adopted March 8, 2020 and as amended June 5, 2020 (incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by the Company on July 30, 2020)† | 10.61 | | Willis Towers Watson Public Limited Company Severance and Change in Control Pay Plan for Non-US Executives, adopted March 8, 2020 and as amended June 5, 2020 (incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by the Company on July 30, 2020)† | 10.62 | | Amendment 2020-1 to the Towers Watson Non-Qualified Deferred Savings Plan for U.S. Employees*† | 10.63 | | Amendment 2020-1 to the Willis Towers Watson Non-Qualified Stable Value Excess Plan for U.S. Employees*† | 10.64 | | Performance-Based Restricted Share Unit Award Agreement, dated January 1, 2021, by and between Willis Towers Watson Public Limited Company and John J. Haley*† |
† | Management contract or compensatory plan or arrangement. |
All exhibits that are incorporated by reference herein to a filing with the SEC made more than five years ago are filed under: SEC File No. 001-16503, for any filings that were made by Willis Group Holdings or the Company; SEC File No. 001-34594, for any filings that were made by Towers Watson; and SEC File No. 001-16159, for any filings that were made by Watson Wyatt Worldwide. ITEM 16. FORM 10-K SUMMARY Not applicable.
SIGNATURESSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | WILLIS TOWERS WATSON PLC (REGISTRANT) | | | | | By: | /s/ John J. Haley | | | John J. Haley | | | Chief Executive Officer |
Date: February 27, 201923, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. /s/ John J. Haley | | /s/ Michael J. Burwell | John J. Haley Chief Executive Officer and Director (Principal Executive Officer) | | Michael J. Burwell Chief Financial Officer | | | | /s/ Susan D. Davies | | | Susan D. Davies Principal Accounting Officer and Controller | | | | | | /s/ Anna C. Catalano | | /s/ Victor F. Ganzi | Anna C. Catalano Director | | Victor F. Ganzi Director | | | | /s/ Wendy E. Lane | | /s/ James F. McCannBrendan R. O’Neill | Wendy E. Lane Director | | James F. McCannBrendan R. O’Neill
Director | | | | /s/ Brendan R. O’NeillJaymin B. Patel | | /s/ Jaymin B. PatelLinda D. Rabbitt | Brendan R. O’NeillJaymin B. Patel
Director | | Jaymin B. PatelLinda D. Rabbitt
Director | | | | /s/ LindaPaul D. RabbittThomas | | /s/ Paul D. ThomasWilhelm Zeller | LindaPaul D. RabbittThomas
Director | | Paul D. ThomasWilhelm Zeller
Director | | | | /s/ Wilhelm Zeller
| | | Wilhelm Zeller
Director
| | |
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