ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion includes forward-looking statements. See ‘Disclaimer Regarding Forward-looking Statements’ for certain cautionary information regarding forward-looking statements and Part I, Item 1A Risk Factors for a list of factors that could cause actual results to differ materially from those predicted in those statements.
This discussion includes references to non-GAAP financial measures as defined in the rules of the SEC. We present such non-GAAP financial measures, specifically, adjusted, constant currency and organic non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent under U.S. GAAP, and these provide a measure against which our businesses may be assessed in the future.
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measuresshould be viewed in addition to, not in lieu of, the consolidated financialstatements for the year ended December 31, 2023.
See ‘Non-GAAP Financial Measures’ below for further discussion of our adjusted, constant currency and organic non-GAAP financial measures.
Executive Overview
Market Conditions
Typically, our business benefits from regulatory change, political risk or economic uncertainty. Insurance broking generally tracks the economy, but demand for both insurance broking and consulting services usually remains steady during times of uncertainty. We have some businesses, such as our health and benefits and administration businesses, which can be counter cyclical during the early period of a significant economic change.
Within our insurance and brokerage business, due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenue may vary widely between accounting periods. A period of low or declining premium rates, generally known as a ‘soft’ or ‘softening’ market, generally leads to downward pressure on commission revenue and can have a material adverse impact on our revenue and operating margin. A ‘hard’ or ‘firming’ market, during which premium rates rise, generally has a favorable impact on our revenue and operating margin. Rates, however, vary by geography, industry and client segment. As a result, and due to the global and diverse nature of our business, we view rates in the aggregate. Overall, we are currently seeing a stabilizing market.
Market conditions in the broking industry in which we operate are generally defined by factors such as the strength of the economies in the various geographic regions in which we serve around the world, insurance rate movements, and insurance and reinsurance buying patterns of our clients.
The markets for our consulting, technology and solutions, and marketplace services are affected by economic, regulatory and legislative changes, technological developments, and increased competition from established and new competitors. We believe that the primary factors in selecting a human resources or risk management consulting company include reputation, the ability to provide measurable increases to shareholder value and return on investment, global scale, quality of service and the ability to tailor services to clients’ unique needs. In that regard, we are focused on developing and implementing technology, data and analytic solutions for both internal operations and for maintaining industry standards and meeting client preferences. We have made such investments from time to time and may decide, based on perceived business needs, to make investments in the future that may be different from past practice or what we currently anticipate.
With regard to the market for exchanges, we believe that clients base their decisions on a variety of factors that include the ability of the provider to deliver measurable cost savings for clients, a strong reputation for efficient execution and an innovative service delivery model and platform. Part of the employer-sponsored insurance market has matured and become more fragmented while other segments remain in the entry phase. As these market segments continue to evolve, we may experience growth in intervals, with periods of accelerated expansion balanced by periods of modest growth. In recent years, growth in the market for exchanges has slowed, and this trend may continue.
Risks and Uncertainties of the Economic Environment
U.S. and global markets are continuing to experience volatility and disruption as a result of the ongoing Russia-Ukraine and Israel-Hamas wars. Although the length and impact of these ongoing situations are highly unpredictable, they have caused disruption in the global markets and could continue to lead to further market disruptions. The conflicts have contributed to negative impacts on and
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volatility of the global economy and capital markets, resulting in significant inflation and fluctuating interest rates in many of the markets in which we operate. This impacts not only the cost of and access to liquidity, but also other costs to run and invest in our business.
Other global economic events, such as accommodative monetary and fiscal policy and geopolitical tensions beyond the ongoing wars, have also contributed to significant inflation across the globe. In particular, inflation in the United States, Europe, and other geographies has risen to levels not experienced in recent decades and we are seeing its impact on various aspects of our business. Moreover, U.S. and global economic conditions have created market uncertainty and volatility. Such general economic conditions, including inflation, stagflation, political volatility, costs of labor, cost of capital, interest rates, bank stability, credit availability, and tax rates, affect our operating and general and administrative expenses, and we have no control or limited ability to control such factors. These general economic conditions can also impact revenue, including revenue from customers as well as income from funds we hold on behalf of customers and pension-related income.
From time to time, our financial results have been (such as in 2021 and 2022), and may in the future be, negatively impacted by adverse workforce factors in a number of businesses, particularly commercial risk broking and health and benefits broking. Additionally, our performance has benefited (such as in 2021 and 2022), and may benefit in the future, from revenue from book sales, which is non-recurring revenue. The net impact of these factors, which caused our growth in 2021 and 2022 to be meaningfully slower than other competitors, has affected the comparability of our 2022 results against those in 2023 and could affect comparability of other future periods. See Part I, Item 1A Risk Factors in this Annual Report on Form 10-K for a discussion of risks that may affect our growth relative to expectations and our ability to compete.
Transformation Program
In the fourth quarter of 2021, the Company initiated a three-year ‘Transformation program’ designed to enhance operations, optimize technology and align its real estate footprint to its new ways of working. During the fourth quarter of 2023, we revised the expected costs and savings under the program and we now expect the program to generate annual cost savings in excess of $425 million by the end of 2024. The program is expected to incur cumulative costs of approximately $995 million and capital expenditures of approximately $130 million, for a total investment of $1.125 billion. The main categories of charges have been in the following four areas:
•
Real estate rationalization — includes costs to align the real estate footprint to our new ways of working (hybrid work) and includes breakage fees and the impairment of right-of-use assets and other related leasehold assets.
•
Technology modernization — these charges are incurred in moving to common platforms and technologies, including migrating certain platforms and applications to the cloud. This category includes the impairment of technology assets that are duplicative or no longer revenue-producing, as well as costs for technology investments that do not qualify for capitalization.
•
Process optimization — these costs are incurred in the right-shoring strategy and automation of our operations, which includes optimizing resource deployment and appropriate colleague alignment. These costs include process and organizational design costs, severance and separation-related costs and temporary retention costs.
•
Other — other costs not included above including fees for professional services, other contract terminations not related to the above categories and supplier migration costs.
Certain costs under the Transformation program are accounted for under ASC 420, Exit or Disposal Cost Obligation, and are included as restructuring costs in the consolidated statements of comprehensive income. For the years ended December 31, 2023, 2022 and 2021, restructuring charges under our Transformation program totaled $68 million, $99 million and $26 million, respectively. Other costs incurred under the Transformation program are included in transaction and transformation, net and were $347 million and $136 million for the years ended December 31, 2023 and 2022, respectively.
From the actions taken during 2023, we have identified an additional $188 million of annualized run-rate savings during the year due to newly-realized opportunities and incremental sources of value. Since the inception of the program, we have identified $337 million of cumulative annualized run-rate savings, which overall are primarily attributable to process optimization. We began to recognize the benefits from the program during 2022.
For a discussion of material risks associated with the Transformation program, please see Part I, Item 1A Risk Factors - ‘We may not be able to fully realize the anticipated benefits of our growth strategy or our expected product, service and transaction pipelines’ and other Risk Factors in this Annual Report on Form 10-K.
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For management’s discussion of our results of operations for the year ended December 31, 2022 in comparison with the year ended December 31, 2021, please see our Annual Report on Form 10-K filed with the SEC on February 24, 2023.
Financial Statement Overview
The tables below set forth our summarized consolidated statements of comprehensive income and data as a percentage of revenue for the periods indicated.
Consolidated Statements of Comprehensive Income
($ in millions, except per share data)
Years ended December 31,
Costs of providing services
Restructuring costs 68 1 % 99 1 %
Transaction and transformation 386 4 % 181 2 %
Total costs of providing services 8,118 7,688
Interest expense (235 ) (2 )% (208 ) (2 )%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,279 13 % 1,258 14 %
Provision for income taxes (215 ) (2 )% (194 ) (2 )%
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX — — % (40 ) — %
Income attributable to non-controlling interests (9 ) — % (15 ) — %
Diluted earnings per share from continuing operations $ 9.95 $ 9.34
Consolidated Revenue (Continuing Operations)
We derive the majority of our revenue from commissions from our brokerage services and fees for consulting and administration services. No single client represented a significant concentration of our consolidated revenue for any of our three most recent fiscal years.
The following table details our top five markets based on percentage of consolidated revenue (in U.S. dollars) from the countries where work was performed for the year ended December 31, 2023. These figures do not represent the currency of the related revenue, which is presented in the next table.
Geographic Region % of Revenue
United States 53 %
United Kingdom 18 %
France 4 %
Canada 3 %
Germany 3 %
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The table below details the approximate percentage of our revenue and expenses from continuing operations by transactional currency for the year ended December 31, 2023.
Transactional Currency Revenue Expenses (i)
U.S. dollars 60 % 54 %
Pounds sterling 11 % 17 %
Other currencies 15 % 17 %
(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 transformation, net.
The following table sets forth the total revenue for the years ended December 31, 2023 and 2022 and the components of the change in total revenue for the year ended December 31, 2023, as compared to the prior year. The components of the revenue change may not add due to rounding.
Components of Revenue Change
As Less: Constant Less:
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2023 2022 Change Impact Change Divestitures Change
($ in millions)
Revenue for the year ended December 31, 2023 was $9.5 billion, compared to $8.9 billion for the year ended December 31, 2022, an increase of $617 million, or 7%, on an as-reported basis. Adjusting for the impact of foreign currency and acquisitions and disposals, our organic revenue growth was 8% for the year ended December 31, 2023. The increases in both as-reported and organic revenue were driven by strong performances in both segments as well as the recognition of higher interest income that is not allocated to the segments.
Our revenue can be materially impacted by changes in currency conversions, which can fluctuate significantly over the course of a calendar year. For the year ended December 31, 2023, currency translation decreased our consolidated revenue by $10 million. The primary currencies driving this change were the Argentine Peso and Canadian Dollar.
Definitions of Constant Currency Change and Organic Change are included in the section entitled ‘Non-GAAP Financial Measures’ elsewhere within this Form 10-K.
Segment Revenue
Segment revenue excludes amounts that were directly incurred on behalf of our clients and reimbursed by them (reimbursed expenses); however, these amounts are included in consolidated revenue, as required by applicable accounting standards and SEC rules. See Note 5 – Segment Information within Item 8 of this Annual Report on Form 10-K for more information about how our segment revenue is calculated and a reconciliation to our GAAP results.
The Company experiences seasonal fluctuations in its revenue. Revenue is typically higher during the Company’s first and fourth quarters due primarily to the timing of broking-related activities.
For all tables presented below, the components of the revenue change may not add due to rounding.
Health, Wealth & Career(‘HWC’)
The HWC segment provides an array of advice, broking, solutions and technology for employee benefit plans, institutional investors, compensation and career programs, and the employee experience overall.
HWC is the larger of the two segments of the Company, generating approximately 60% of our segment revenue for the year ended December 31, 2023. Addressing four key areas, Health, Wealth, Career and Benefits Delivery & Outsourcing, the segment is focused on addressing our clients’ people and risk needs to help them succeed in a global marketplace.
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The following table sets forth HWC segment revenue for the years ended December 31, 2023 and 2022, and the components of the change in revenue for the year ended December 31, 2023 from the year ended December 31, 2022.
Components of Revenue Change
As Less: Constant Less:
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2023 2022 Change Impact Change Divestitures Change
($ in millions)
HWC segment revenue for the years ended December 31, 2023 and 2022 was $5.6 billion and $5.3 billion, respectively. Organic growth was led by Benefits Delivery & Outsourcing, driven by higher volumes and placements of Medicare Advantage and life policies in Individual Marketplace and increased project activity in Outsourcing. Our Wealth businesses generated organic revenue growth from higher levels of Retirement work in North America and Europe, along with new client acquisitions and higher fees in Investments. Health had organic revenue growth driven by the continued expansion of our Global Benefits Management client portfolio, expanded consulting work and increased brokerage income. Career had organic revenue growth from increased compensation survey sales and executive compensation and other reward-based advisory services.
Risk & Broking (‘R&B’)
The R&B segment provides a broad range of risk advice, insurance brokerage and consulting services to clients worldwide ranging from small businesses to multinational corporations.
R&B generated approximately 40% of our segment revenue for the year ended December 31, 2023. The segment comprises two primary businesses - Corporate Risk & Broking and Insurance Consulting and Technology.
The following table sets forth R&B segment revenue for the years ended December 31, 2023 and 2022, and the components of the change in revenue for the year ended December 31, 2023 from the year ended December 31, 2022.
Components of Revenue Change
As Less: Constant Less:
Years Ended December 31, Reported Currency Currency Acquisitions/ Organic
2023 2022 Change Impact Change Divestitures Change
($ in millions)
R&B segment revenue for the years ended December 31, 2023 and 2022 was $3.7 billion and $3.5 billion, respectively. Despite significant pressure from headwinds from book-of-business settlement revenue in the comparable period, Corporate Risk & Broking generated solid organic revenue growth driven by strong new business and improved client retention. Insurance Consulting and Technology had organic revenue growth from software sales and increased project revenue.
Costs of Providing Services (Continuing Operations)
Total costs of providing services for the year ended December 31, 2023 were $8.1 billion, compared to $7.7 billion for the year ended December 31, 2022, an increase of $430 million, or 6%. See the following discussion for further details.
Salaries and Benefits
Salaries and benefits for the year ended December 31, 2023 were $5.3 billion, compared to $5.1 billion for the year ended December 31, 2022, an increase of $279 million, or 6%. The increase in the current year is primarily due to higher salary expense, driven by increased colleague headcount and cost-of-living compensation adjustments, and increased incentive and benefit costs for the year.
Salaries and benefits, as a percentage of revenue, represented 56% and 57% for the years ended December 31, 2023 and 2022, respectively.
Other Operating Expenses
Other operating expenses include occupancy, legal, marketing, licenses, royalties, supplies, technology, printing and telephone costs, as well as insurance, including premiums on excess insurance and losses on professional liability claims, travel by colleagues, publications, professional subscriptions and development, recruitment, other professional fees and irrecoverable value-added and sales taxes. Additionally, other operating expenses included costs historically allocated to our Willis Re business which are partially offset by fees under a cost reimbursement Transition Services Agreement (‘TSA’; see Note 3 — Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K) with Gallagher.
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Other operating expenses for both years ended December 31, 2023 and 2022 were $1.8 billion, an increase of $39 million, or 2%. The increase was primarily due to higher professional service and marketing-related expenses for the current year as compared to the prior-year, and higher travel and entertainment costs due to the continued increase of post-pandemic activity. These increases were partially offset by the absence of the prior-year asset impairments incurred, mostly accounts receivables, related to Russian insurance contracts placed by U.K. brokers in the London market (see Note 3 — Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K) and lower external labor fees in the current year.
Depreciation
Depreciation represents the expense incurred over the useful lives of our tangible fixed assets and internally-developed software. Depreciation for the year ended December 31, 2023 was $242 million, compared to $255 million for the year ended December 31, 2022, a decrease of $13 million, or 5%. The year-over-year decrease was primarily due to a lower depreciable base of assets resulting from business disposals and a lower dollar value of assets placed in service during the past few years.
Amortization
Amortization represents the amortization of acquired intangible assets, including acquired internally-developed software. Amortization for the year ended December 31, 2023 was $263 million, compared to $312 million for the year ended December 31, 2022, a decrease of $49 million, or 16%. Our intangible amortization is generally more heavily weighted to the initial years of the useful lives of the related intangibles, and therefore amortization related to intangible assets will continue to decrease over time.
Restructuring Costs
Restructuring costs for the years ended December 31, 2023 and 2022 were $68 million and $99 million, respectively. Restructuring costs in both the current year and prior year primarily related to the real estate rationalization component of the Transformation program commenced by the Company during the fourth quarter of 2021 (see Transformation Program within this section and Note 6 — Restructuring Costs within Item 8 of this Annual Report on Form 10-K).
Transaction and Transformation, Net
Transaction and transformation, net for the years ended December 31, 2023 was $386 million, compared to $181 million for the year ended December 31, 2022, an increase of $205 million. Transaction and transformation costs for the current year were higher primarily due to increased consulting and compensation costs related to our Transformation program (see ‘Transformation Program’ elsewhere within this Item 7) incurred in the current year as compared to the prior year.
Income from Operations
Income from operations for the year ended December 31, 2023 was $1.4 billion, compared to $1.2 billion for the year ended December 31, 2022, an increase of $187 million. This increase resulted primarily from higher revenue, the absence of the prior-year’s asset impairment expense discussed above and lower restructuring costs in the current year, partially offset by higher salary expense and incentive and benefit costs, increased transaction and transformation costs, higher professional service and marketing-related expenses and increased travel and entertainment costs in the current year as compared to the prior year.
Interest Expense
Interest expense for the years ended December 31, 2023 and 2022 was $235 million and $208 million, respectively. Interest expense, which is attributable primarily to our senior notes, increased by $27 million for the year ended December 31, 2023, which was primarily the result of higher levels of indebtedness in the current year.
Other Income, Net
Other income, net includes gains and losses on disposals of operations, pension credits or expenses that are not attributable to service expense, interest in earnings of associates, foreign exchange gains and losses and other miscellaneous non-operating income and costs.
Other income, net for the year ended December 31, 2023 was $149 million, compared to $288 million for the year ended December 31, 2022, a decrease of $139 million. Other income, net decreased due to lower pension income, which was primarily attributable to higher interest costs resulting from higher assumed discount rates in the current year, partially offset by greater gains on disposals in the current year.
Provision for Income Taxes
Provision for income taxes on continuing operations for the year ended December 31, 2023 was $215 million, compared to $194 million for the year ended December 31, 2022. The effective tax rates for the years ended December 31, 2023 and 2022 were 16.8%
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and 15.4%, respectively. These effective tax rates are calculated using extended values from our consolidated statements of comprehensive income and are therefore more precise tax rates than can be calculated from rounded values. The current year effective tax rate includes a $20 million deferred tax benefit related to changes in state apportionment and a $10 million deferred tax benefit related to the remeasurement of deferred tax assets and liabilities associated with the enactment of the Bermuda corporate income tax law. The prior-year effective tax rate includes a $34 million tax benefit associated with amending the Company’s U.S. federal income tax returns for tax years 2019 and 2020, primarily related to the reduction of Base Erosion and Anti Abuse Tax (‘BEAT’), and a $22 million income tax benefit associated with foreign exchange remeasurement on income tax account balances.
In December 2022, E.U. member states formally adopted the E.U.’s Pillar Two Directive, which introduces a global corporate minimum tax of 15% for certain large multinational companies. For the rules to take effect, E.U. member states were required to enact domestic legislation by the end of 2023 to be effective January 1, 2024. While we do not anticipate that this will have a material impact on our tax provision or effective tax rate, we continue to monitor evolving tax legislation in the jurisdictions in which we operate.
Loss from Discontinued Operations, Net of Tax
The following table presents selected financial information as it relates to loss from discontinued operations, net of tax:
Year ended December 31,
Revenue from discontinued operations $ 48
Costs of providing services
Salaries and benefits 14
Other operating expenses 10
Total costs of providing services 24
Other income, net 5
Income from discontinued operations before income taxes 29
Loss on disposal of Willis Re (65 )
Benefit from income tax expense 1
Net income payable to Gallagher on Deferred Closing (5 )
Loss from discontinued operations, net of tax $ (40 )
Loss from discontinued operations, net of tax for the year ended December 31, 2022 was $40 million. The operations of our Willis Re business were reclassified to discontinued operations upon our entering into an agreement to sell the business during the third quarter of 2021 (see Note 3 - Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K). Loss from discontinued operations in the prior year are primarily attributable to the adjustments to the gain on disposal resulting from finalizing the value of the net assets transferred and the operations of the deferred closing entities and run-off activity associated with the divestiture.
Net Income Attributable to WTW
Net income attributable to WTW for the year ended December 31, 2023 was $1.1 billion, compared to $1.0 billion for the year ended December 31, 2022, an increase of $46 million. This increase resulted primarily from higher revenue, the absence of the prior-year’s asset impairment expense discussed above, higher gains on disposals and lower restructuring costs in the current year, partially offset by higher salary expense and incentive and benefit costs, increased transaction and transformation costs, lower pension income, higher professional service and marketing-related expenses and higher travel and entertainment costs in the current year.
Liquidity and Capital Resources
Executive Summary
Our principal sources of liquidity are funds generated by operating activities, available cash and cash equivalents and amounts available under our revolving credit facility and any new debt offerings. These sources of liquidity will fund our short-term and long-term obligations at December 31, 2023. Our most significant long-term obligations include mandatory debt and related interest, operating leases and pension obligations and contributions to our qualified pension plans.
There has been significant volatility in financial markets, including occasional declines in equity markets, inflation and changes in interest rates and reduced liquidity on a global basis. Specific to WTW, following the reduced spending driven by the COVID-19 pandemic, spending on travel and associated expenses began to increase in 2022, and this trend continued during 2023 following the return to office for many companies increasing in-person interactions.
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Based on our current balance sheet and cash flows, current market conditions and information available to us at this time, we believe that WTW has access to sufficient liquidity, which includes all of the borrowing capacity available to draw against our $1.5 billion revolving credit facility, to meet our cash needs for the next twelve months, including investments in the business for growth and those related to our Transformation program, scheduled debt repayments, share repurchases and dividend payments. During the year ended December 31, 2023, we completed an offering of $750 million aggregate principal amount of 5.350% senior notes due 2033 and used the net proceeds to repay in full the $250 million aggregate principal amount and related accrued interest of 4.625% senior notes. The Company will use the remaining net proceeds for general corporate purposes. Additionally, during the year ended December 31, 2023 we repurchased $1.0 billion of shares, with remaining authorization to repurchase an additional $1.3 billion as of December 31, 2023.
We consider many factors, including market and economic conditions, applicable legal requirements and other business considerations, when considering whether to repurchase shares. The share repurchase program has no termination date and may be suspended or discontinued at any time.
Before its disposal in 2021, Willis Re’s operating cash flows approximated its pre-tax income and any adjustments for working capital movements (see Note 3 — Acquisitions and Divestitures in Item 8 within this Annual Report on Form 10-K). Certain costs historically allocated to the Willis Re business are included in continuing operations and were retained following the disposal, but are being partially offset by reimbursements through the TSA. Costs incurred to service the TSA are expected to be reduced as part of the Company’s Transformation program as quickly as possible when the services are no longer required by Gallagher.
Events that could change the historical cash flow dynamics discussed above include significant changes in operating results, potential future acquisitions or divestitures, material changes in geographic sources of cash, unexpected adverse impacts from litigation or regulatory matters, or future pension funding during periods of severe downturn in the capital markets.
Distributable Profits - We are required under Irish law to have available ‘distributable profits’ to make share repurchases or pay dividends to shareholders. Distributable profits are created through the earnings of the Irish parent company and, among other methods, through intercompany dividends or a reduction in share capital approved by the High Court of Ireland. Distributable profits are not linked to a U.S. GAAP reported amount (e.g. retained earnings). At WTW's Annual General Meeting on June 8, 2022, its shareholders voted in favor of a proposed capital reduction. In accordance with Part 3 of the Irish Companies Act 2014 the Parent Company submitted an application to the High Court of Ireland to reduce its share premium account. On July 19, 2022, the High Court of Ireland approved a reduction of the share premium account of the Parent Company of approximately $9.5 billion, with the resulting balance being treated as realized profits of the Parent Company. The High Court of Ireland's order was registered with the Irish Companies Registration Office and became effective on July 21, 2022.
Tax considerations - The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when it expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. We continue to have certain subsidiaries whose earnings have not been deemed permanently reinvested, for which we have been accruing estimates of the tax effects of such repatriation. Excluding these certain subsidiaries, we continue to assert that the historical cumulative earnings for the remainder of our subsidiaries have been reinvested indefinitely and therefore do not provide deferred taxes on these amounts. If future events, including material changes in estimates of cash, working capital, long-term investment requirements or additional legislation, necessitate that these earnings be distributed, an additional provision for income and foreign withholding taxes, net of credits, may be necessary. Other potential sources of cash may be through the settlement of intercompany loans or return of capital distributions in a tax-efficient manner.
Cash and Cash Equivalents
Our cash and cash equivalents at December 31, 2023 and 2022 totaled $1.4 billion and $1.3 billion, respectively. The increase in cash from December 31, 2022 to December 31, 2023 was due primarily to increased cash flow from operations, driven by operating margin improvement and the non-recurrence of certain prior-year headwinds related to foreign currency, tax and discretionary compensation, partially offset byincreased Transformation program costs and $1.0 billion of share repurchases.
Additionally, we had all of the borrowing capacity available to draw against our $1.5 billion revolving credit facility at December 31, 2023.
Included within cash and cash equivalents at December 31, 2023 and 2022 are amounts held for regulatory capital adequacy requirements, including $105 million and $99 million, respectively, held within our regulated U.K. entities.
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Summarized Consolidated Cash Flows
The following table presents the summarized consolidated cash flow information for the years ended:
Years ended December 31,
(in millions)
Net cash from/(used in):
Investing activities (1,085 ) (173 )
DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (940 ) (2,806 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR (i) 4,721 7,691
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR (i) $ 3,792 $ 4,721
(i)
The amounts of the cash, cash equivalents and restricted cash, their respective classification on the consolidated balance sheets, as well as their respective portions of the increase or decrease in cash, cash equivalents and restricted cash for each of the periods presented, have been included in Note 21 — Supplemental Disclosures of Cash Flow Information within Item 8 of this Annual Report on Form 10-K.
Cash Flows From Operating Activities
Cash flows from operating activities were $1.3 billion for 2023, compared to $812 million for 2022. The $1.3 billion net cash from operating activities for 2023 included net income of $1.1 billion and $652 million of favorable non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of $371 million. The $652 million of favorable non-cash adjustments primarily includes depreciation, amortization and non-cash lease expense. The increase in cash flows from operating activities as compared to the prior year was due primarily to operating margin improvement and the non-recurrence of prior-year headwinds, including realized losses on foreign currency hedges, payments made in the prior year for certain discretionary compensation and taxes for one-time gains recognized in connection with the Willis Re divestiture and the 2021 income receipt related to the Aon plc (‘Aon’) transaction termination. These tailwinds were partially offset by increased Transformation program-related costs.
Cash flows from operating activities of $812 million for 2022 included net income of $1.0 billion, and $676 million of favorable non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of $888 million. The $676 million of favorable non-cash adjustments primarily includes depreciation, amortization and non-cash lease expense.
Cash Flows Used In Investing Activities
Cash flows used in investing activities for the year ended December 31, 2023 were $1.1 billion compared to $173 million for the year ended December 31, 2022. The cash flows used in investing activities for the year ended December 31, 2023 consisted primarily of cash and fiduciary funds of $922 million associated with the transfer to Gallagher under a new side letter to the Willis Re sale agreement (see Note 3 — Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K for more information) and $242 million of capital expenditures and capitalized software additions.
Cash flows used in investing activities of $173 million for the year ended December 31, 2022 consisted of capital expenditures and capitalized software additions of $204 million and net cash outflows for acquisitions and divestitures of $169 million, partially offset by sales of investments of $200 million.
Cash Flows Used In Financing Activities
Cash flows used in financing activities for the year ended December 31, 2023 were $1.2 billion. The significant financing activities included share repurchases of $1.0 billion, dividend payments of $352 million and net payments from fiduciary funds held for clients of $234 million, partially offset by $487 million of net proceeds from the issuance of debt.
Cash flows used in financing activities for the year ended December 31, 2022 were $3.4 billion. The significant financing activities included share repurchases of $3.5 billion, debt repayments of $585 million and dividend payments of $369 million, partially offset by $750 million of net proceeds from the issuance of debt and $354 million of net proceeds from fiduciary funds held for clients.
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Indebtedness
Total debt, total equity, and the capitalization ratio at December 31, 2023 and December 31, 2022 were as follows:
December 31,
(in millions)
Total WTW shareholders’ equity $ 9,520 $ 10,016
Capitalization ratio 35.4 % 32.0 %
At December 31, 2023, our mandatory debt repayments over the next twelve months include $650 million outstanding on our 3.600% senior notes due 2024. For more information regarding our current and long-term debt, please see ‘Supplemental Guarantor Financial Information’ elsewhere within this Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.
At December 31, 2023 and 2022, we were in compliance with all financial covenants.
Fiduciary Funds
As an intermediary, we hold funds, generally in a fiduciary capacity, for the account of third parties, typically as the result of premiums received from clients that are in transit to insurers and claims due to clients that are in transit from insurers. We also hold funds for clients of our benefits account businesses, some of which are invested in open-ended mutual funds as directed by the participant. These fiduciary funds are included in fiduciary assets on our consolidated balance sheets. We present the equal and corresponding fiduciary liabilities related to these fiduciary funds representing amounts or claims due to our clients or premiums due on their behalf to insurers on our consolidated balance sheets.
Fiduciary funds are generally required to be kept in regulated bank accounts subject to guidelines which emphasize capital preservation and liquidity; such funds are not available to service the Company’s debt or for other corporate purposes. Notwithstanding the legal relationships with clients and insurers, the Company is entitled to retain investment income earned on certain of these fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds.
At December 31, 2023 and 2022, we had fiduciary funds of $2.6 billion and $3.6 billion, respectively. At December 31, 2022, $945 million of these funds were attributable to the divested Willis Re business. All amounts have since been settled or transferred to Gallagher due to the termination of the co-broking agreement (see Note 3 — Acquisitions and Divestitures within Item 8 of this Annual Report on Form 10-K for further information).
Share Repurchase Program
The Company is authorized to repurchase shares, by way of redemption or otherwise, and will consider whether to do so from time to time, based on many factors, including market conditions. There are no expiration dates for our repurchase plans or programs.
On July 26, 2021, the board of directors approved a $1.0 billion increase to the existing share repurchase program, which was previously at $500 million. Additionally, on September 16, 2021, the board of directors approved a $4.0 billion increase to the existing share repurchase program, on May 25, 2022, approved a $1.0 billion increase to the existing share repurchase program, and on September 20, 2023, approved a $1.0 billion increase to the existing share repurchase program. These increases brought the total approved authorization, since April 20, 2016, to $9.2 billion. See Part II, Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in this Annual Report on Form 10-K for further information regarding the Company’s share repurchase program.
At December 31, 2023, approximately $1.3 billion remained on the current repurchase authority. The maximum number of shares that could be repurchased based on the closing price of our ordinary shares on December 31, 2023 of $241.20 was 5,565,955.
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The following table presents specified information about the Company’s repurchases of ordinary shares for the year ended December 31, 2023:
Average price per share $223.10
Aggregate repurchase cost (excluding broker costs) $1.0 billion
Dividends
Total cash dividends of $352 million were paid during the year ended December 31, 2023. In February 2024, the board of directors is expected to approve a quarterly cash dividend to shareholders of record as of March 31, 2024.
Capital Commitments
The Company’s capital expenditures for fixed assets and software for internal use were $153 million for the year ended December 31, 2023. Capital expenditures for fixed assets and software for internal use, which include expenditures under our Transformation program, are expected to be in the range of $175 million to $200 million for the year ended December 31, 2024. We expect cash from operations to adequately provide for these cash needs.
Supplemental Guarantor Financial Information
As of December 31, 2023, WTW has issued the following debt securities (the ‘notes’):
a)
Willis North America Inc. (‘Willis North America’) has approximately $4.4 billion senior notes outstanding, of which $650 million were issued on May 16, 2017, $1.0 billion were issued on September 10, 2018, $1.0 billion were issued on September 10, 2019, $275 million were issued on May 29, 2020, $750 million were issued on May 19, 2022, and $750 million were issued on May 17, 2023; and
b)
Trinity Acquisition plc has $825 million senior notes outstanding, of which $275 million were issued on August 15, 2013 and $550 million were issued on March 22, 2016, and a $1.5 billion revolving credit facility, on which no balance was outstanding at December 31, 2023.
The following table presents a summary of the entities that issue each note and those wholly-owned subsidiaries of the Company that guarantee each respective note on a joint and several basis as of December 31, 2023. These subsidiaries are all consolidated by Willis Towers Watson plc (the ‘parent company’) and together with the parent company comprise the ‘Obligor group’.
Entity Trinity Acquisition plc Notes Willis North America Inc. Notes
Willis Towers Watson plc Guarantor Guarantor
Trinity Acquisition plc Issuer Guarantor
Willis North America Inc. Guarantor Issuer
Willis Netherlands Holdings B.V. Guarantor Guarantor
Willis Investment UK Holdings Limited Guarantor Guarantor
TA I Limited Guarantor Guarantor
Willis Group Limited Guarantor Guarantor
Willis Towers Watson Sub Holdings Unlimited Company Guarantor Guarantor
Willis Towers Watson UK Holdings Limited Guarantor Guarantor
The notes issued by Willis North America and Trinity Acquisition plc:
•
rank equally with all of the issuer’s existing and future unsubordinated and unsecured debt;
•
rank equally with the issuer’s guarantee of all of the existing senior debt of the Company and the other guarantors, including any debt under the Revolving Credit Facility;
•
are senior in right of payment to all of the issuer’s future subordinated debt; and
•
are effectively subordinated to all of the issuer’s secured debt to the extent of the value of the assets securing such debt.
All other subsidiaries of the parent company are non-guarantor subsidiaries (‘the non-guarantor subsidiaries’).
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Each member of the Obligor group has only a stockholder’s claim on the assets of the non-guarantor subsidiaries. This stockholder’s claim is junior to the claims that creditors have against those non-guarantor subsidiaries. Holders of the notes will only be creditors of the Obligor group and not creditors of the non-guarantor subsidiaries. As a result, all of the existing and future liabilities of the non-guarantor subsidiaries, including any claims of trade creditors and preferred stockholders, will be structurally senior to the notes. As of and for the periods ended December 31, 2023 and 2022, the non-guarantor subsidiaries represented substantially all of the total assets and accounted for substantially all of the total revenue of the Company prior to consolidating adjustments. The non-guarantor subsidiaries have other liabilities, including contingent liabilities that may be significant. Each indenture does not contain any limitations on the amount of additional debt that the Obligor group and the non-guarantor subsidiaries may incur. The amounts of this debt could be substantial, and this debt may be debt of the non-guarantor subsidiaries, in which case this debt would be effectively senior in right of payment to the notes.
The notes are obligations exclusively of the Obligor group. Substantially all of the Obligor group’s operations are conducted through its non-guarantor subsidiaries. Therefore, the Obligor group’s ability to service its debt, including the notes, is dependent upon the net cash flows of its non-guarantor subsidiaries and their ability to distribute those net cash flows as dividends, loans or other payments to the Obligor group. Certain laws restrict the ability of these non-guarantor subsidiaries to pay dividends and make loans and advances to the Obligor group. In addition, such non-guarantor subsidiaries may enter into contractual arrangements that limit their ability to pay dividends and make loans and advances to the Obligor group.
Intercompany balances and transactions between members of the Obligor group have been eliminated. All intercompany balances and transactions between the Obligor group and the non-guarantor subsidiaries have been presented in the disclosures below on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. The intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries, presented below, relate to a number of items including loan funding for acquisitions and other purposes, transfers of surplus cash between subsidiary companies, funding provided for working capital purposes, settlement of expense accounts, transactions related to share-based payment arrangements and share issuances, intercompany royalty arrangements, intercompany dividends and intercompany interest. At December 31, 2023 and 2022, the intercompany balances of the Obligor group with non-guarantor subsidiaries were net receivables of $3.4 billion and $600 million, respectively, and net payables of $14.0 billion and $10.2 billion, respectively.
No balances or transactions of non-guarantor subsidiaries are presented in the disclosures other than the intercompany items noted above.
Presented below is certain summarized financial information for the Obligor group.
(in millions)
Total current assets $ 299 $ 216
(in millions)
Income from operations 1,643
Income from operations before income taxes (i) 849
Net income attributable to Willis Towers Watson 1,022
(i)
Includes intercompany expense, net of the Obligor group from non-guarantor subsidiaries of $262 million for the year ended December 31, 2023.
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Non-GAAP Financial Measures
In order to assist readers of our consolidated financial statements in understanding the core operating results that WTW’s management uses to evaluate the business and for financial planning purposes, we present the following non-GAAP measures and their most directly comparable U.S. GAAP measure:
Most Directly Comparable U.S. GAAP Measure Non-GAAP Measure
As reported change Constant currency change
As reported change Organic change
Income from operations/margin Adjusted operating income/margin
Net income/margin Adjusted EBITDA/margin
Net income attributable to WTW Adjusted net income
Diluted earnings per share Adjusted diluted earnings per share
Provision for income taxes/U.S. GAAP tax rate Adjusted income taxes/tax rate
Net cash from operating activities Free cash flow/margin
The Company believes that these measures are relevant and provide pertinent information widely used by analysts, investors and other interested parties in our industry to provide a baseline for evaluating and comparing our operating performance, and in the case of free cash flow, our liquidity results.
Within the measures referred to as ‘adjusted’, we adjust for significant items which will not be settled in cash, or which we believe to be items that are not core to our current or future operations. These items include the following:
•
Income and loss from discontinued operations, net of tax – Adjustment to remove the after-tax income or loss from discontinued operations and the after-tax gain attributable to the divestiture of our Willis Re business.
•
Restructuring costs and transaction and transformation – Management believes it is appropriate to adjust for restructuring costs and transaction and transformation when they relate to a specific significant program with a defined set of activities and costs that are not expected to continue beyond a defined period of time, or significant acquisition-related transaction expenses. We believe the adjustment is necessary to present how the Company is performing, both now and in the future when the incurrence of these costs will have concluded.
•
Impairment – Adjustment to remove the impairment related to the net assets of our Russian business that are held outside of our Russian entities.
•
Gains and losses on disposals of operations – Adjustment to remove the gains or losses resulting from disposed operations that have not been classified as discontinued operations.
•
Pension settlement and curtailment gains and losses – Adjustment to remove significant pension settlement and curtailment gains and losses to better present how the Company is performing.
•
Provisions for significant litigation – We will include provisions for litigation matters which we believe are not representative of our core business operations. These amounts are presented net of insurance and other recovery receivables.
•
Tax effect of statutory rate changes – Relates to the incremental tax expense or benefit from significant statutory income tax rate changes enacted in material jurisdictions in which we operate.
•
Tax effect of the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act – Relates to the incremental tax expense or benefit, primarily from the BEAT, generated from electing or changing elections of certain income tax provisions available under the CARES Act.
•
Tax effect of internal reorganizations – Relates to the U.S. income tax expense resulting from the completion of internal reorganizations of the ownership of certain businesses that reduced the investments held by our U.S.-controlled subsidiaries.
These non-GAAP measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP measures should be considered in addition to, and not as a substitute for, the information contained within our consolidated financial statements.
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Constant Currency Change and Organic Change
We evaluate our revenue on an as reported (U.S. GAAP), constant currency and organic basis. We believe presenting constant currency and organic information provides valuable supplemental information regarding our comparable results, consistent with how we evaluate our performance internally.
•
Constant Currency Change - Represents the year-over-year change in revenue excluding the impact of foreign currency fluctuations. To calculate this impact, the prior year local currency results are first translated using the current year monthly average exchange rates. The change is calculated by comparing the prior year revenue, translated at the current year monthly average exchange rates, to the current year as reported revenue, for the same period. We believe constant currency measures provide useful information to investors because they provide transparency to performance by excluding the effects that foreign currency exchange rate fluctuations have on period-over-period comparability given volatility in foreign currency exchange markets.
•
Organic Change - Excludes the impact of fluctuations in foreign currency exchange rates as described above and the period-over-period impact of acquisitions and divestitures on current-year revenue. We believe that excluding transaction-related items from our U.S. GAAP financial measures provides useful supplemental information to our investors, and it is important in illustrating what our core operating results would have been had we not included these transaction-related items, since the nature, size and number of these transaction-related items can vary from period to period.
The constant currency and organic change results, and a reconciliation from the reported results for consolidated revenue, are included in the ‘Consolidated Revenue (Continuing Operations)’ section within this Form 10-K. These measures are also reported by segment in the ‘Segment Revenue’ section within this Form 10-K.
A reconciliation of the reported change to the constant currency and organic change for the year ended December 31, 2023 from the year ended December 31, 2022 is as follows. The components of revenue change may not add due to rounding.
Components of Revenue Change
As Less: Constant Less:
Years ended December 31, Reported Currency Currency Acquisitions/ Organic
2023 2022 Change Impact Change Divestitures Change
($ in millions)
For the year ended December 31, 2023, our as-reported revenue increased by 7%, and our organic revenue increased by 8%. The increases in both as-reported and organic revenue were driven by strong performances in both segments as well as the recognition of higher interest income that is not allocated to the segments.
Adjusted Operating Income/Margin
We consider adjusted operating income/margin to be important financial measures, which are used internally to evaluate and assess our core operations and to benchmark our operating results against our competitors.
Adjusted operating income is defined as income from operations adjusted for impairment, amortization, restructuring costs, transaction and transformation and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted operating income margin is calculated by dividing adjusted operating income by revenue.
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Reconciliations of income from operations to adjusted operating income for the years ended December 31, 2023 and 2022 are as follows:
Years Ended December 31,
($ in millions)
Adjusted for certain items:
Impairment — 81
Restructuring costs 68 99
Transaction and transformation 386 181
Adjusted operating income $ 2,082 $ 1,851
Income from operations margin 14.4 % 13.3 %
Adjusted operating income margin 22.0 % 20.9 %
Adjusted operating income increased for the year ended December 31, 2023 to $2.1 billion, from $1.9 billion for the year ended December 31, 2022. This increase resulted primarily from higher revenue, partially offset by higher salary expense and incentive and benefit costs, higher professional service and marketing-related expenses and increased travel and entertainment costs in the current year as compared to the prior year.
Adjusted EBITDA/Margin
We consider adjusted EBITDA/margin to be important financial measures, which are used internally to evaluate and assess our core operations, to benchmark our operating results against our competitors and to evaluate and measure our performance-based compensation plans.
Adjusted EBITDA is defined as net income adjusted for income or loss from discontinued operations, net of tax, provision for income taxes, interest expense, impairment, depreciation and amortization, restructuring costs, transaction and transformation, gains and losses on disposals of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenue.
Reconciliations of net income to adjusted EBITDA for the years ended December 31, 2023 and 2022 are as follows:
Years Ended December 31,
($ in millions)
Loss from discontinued operations, net of tax — 40
Provision for income taxes 215 194
Impairment — 81
Restructuring costs 68 99
Transaction and transformation 386 181
Gain on disposal of operations (43 ) (7 )
Net income margin 11.2 % 11.5 %
Adjusted EBITDA margin 25.6 % 26.9 %
Adjusted EBITDA for both the years ended December 31, 2023 and 2022 was $2.4 billion, an increase of $43 million. This increase was due primarily to higher revenue, partially offset by higher salary expense and incentive and benefit costs, lower pension income, higher professional service and marketing-related expenses and increased travel and entertainment costs in the current year as compared to the prior year.
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Adjusted Net Income and Adjusted Diluted Earnings Per Share
Adjusted net income is defined as net income attributable to WTW adjusted for income or loss from discontinued operations, net of tax, impairment, amortization, restructuring costs, transaction and transformation, gains and losses on disposals of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results and the related tax effect of those adjustments and the tax effects of internal reorganizations. This measure is used solely for the purpose of calculating adjusted diluted earnings per share.
Adjusted diluted earnings per share is defined as adjusted net income divided by the weighted-average number of ordinary shares, diluted. Adjusted diluted earnings per share is used to internally evaluate and assess our core operations and to benchmark our operating results against our competitors.
Reconciliations of net income attributable to WTW to adjusted diluted earnings per share for the years ended December 31, 2023 and 2022 are as follows:
Years Ended December 31,
($ and weighted-average shares in millions)
NET INCOME ATTRIBUTABLE TO WTW $ 1,055 $ 1,009
Adjusted for certain items:
Loss from discontinued operations, net of tax — 40
Impairment — 81
Restructuring costs 68 99
Transaction and transformation 386 181
Gain on disposal of operations (43 ) (7 )
Tax effect on certain items listed above (i) (195 ) (188 )
Tax effect of the CARES Act — (24 )
Tax effect of internal reorganizations 2 4
Weighted-average ordinary shares — diluted 106 112
Diluted earnings per share $ 9.95 $ 8.98
Adjusted for certain items (ii):
Loss from discontinued operations, net of tax — 0.36
Impairment — 0.72
Transaction and transformation 3.64 1.61
Gain on disposal of operations (0.41 ) (0.06 )
Tax effect on certain items listed above (i) (1.84 ) (1.67 )
Tax effect of the CARES Act — (0.21 )
Tax effect of internal reorganizations 0.02 0.04
Adjusted diluted earnings per share $ 14.49 $ 13.41
(i)
The tax effect was calculated using an effective tax rate for each item.
(ii)
Per share values and totals may differ due to rounding.
Our adjusted diluted earnings per share increased for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to a lower weighted-average outstanding share count attributable to our share repurchase activity in the current year and higher revenue, partially offset by higher salary expense and incentive and benefit costs, lower pension income, higher professional service and marketing-related expenses and increased travel and entertainment costs in the current year as compared to the prior year.
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 impairment, amortization, restructuring costs, transaction and transformation, 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.
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Adjusted income taxes/tax rate is defined as the provision for income taxes adjusted for taxes on certain items of impairment, amortization, restructuring costs, transaction and transformation, gains and losses on disposals of operations, the tax effects of internal reorganizations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results, divided by adjusted income before taxes. Adjusted income taxes is used solely for the purpose of calculating the adjusted income tax rate.
Management believes that the adjusted income tax rate presents a rate that is more closely aligned to the rate that we would incur if not for the reduction of pre-tax income for the adjusted items and the tax effects of internal reorganizations, which are not core to our current and future operations.
Reconciliations of income from continuing operations before income taxes to adjusted income before taxes and provision for income taxes to adjusted income taxes for the years ended December 31, 2023 and 2022 are as follows:
Years Ended December 31,
($ in millions)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 1,279 $ 1,258
Adjusted for certain items:
Impairment — 81
Restructuring costs 68 99
Transaction and transformation 386 181
Gain on disposal of operations (43 ) (7 )
Adjusted income before taxes $ 1,953 $ 1,924
Provision for income taxes $ 215 $ 194
Tax effect on certain items listed above (i) 195 188
Tax effect of the CARES Act — 24
Tax effect of internal reorganizations (2 ) (4 )
Adjusted income taxes $ 408 $ 402
U.S. GAAP tax rate 16.8 % 15.4 %
Adjusted income tax rate 20.9 % 20.9 %
(i)
The tax effect was calculated using an effective tax rate for each item.
Our U.S. GAAP tax rates were 16.8% and 15.4% for the years ended December 31, 2023 and 2022, respectively. The current year U.S. GAAP tax rate includes a $20 million deferred tax benefit related to changes in state apportionment and a $10 million deferred tax benefit related to the remeasurement of deferred tax assets and liabilities associated with the enactment of the Bermuda corporate income tax law. The prior year U.S. GAAP tax rate includes a $34 million tax benefit associated with amending the Company’s U.S. federal income tax returns for tax years 2019 and 2020, primarily related to the reduction of the BEAT, and a $22 million income tax benefit associated with foreign exchange remeasurement on income tax account balances.
Our adjusted income tax rates were 20.9% for both years ended December 31, 2023 and 2022.
Free Cash Flow/Margin
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. Free cash flow margin, which we include on an annual basis as seasonal fluctuations in our revenue render it not meaningful during interim periods, is calculated by dividing free cash flow by revenue.
Management believes that free cash flow and free cash flow margin present the core operating performance and cash generating capabilities of our business operations.
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Reconciliations of cash flows from operating activities to free cash flow for the years ended December 31, 2023 and 2022 are as follows:
Years ended December 31,
(in millions)
Cash flows from operating activities $ 1,345 $ 812
Less: Additions to fixed assets and software for internal use (153 ) (138 )
Free cash flow margin 12.6 % 7.6 %
The favorable movement in free cash flow and free cash flow margin during the current-year period was primarily due to operating margin improvement and the non-recurrence of prior-year headwinds, including realized losses on foreign currency hedges, payments made in the prior year for certain discretionary compensation and taxes for one-time gains recognized in connection with the Willis Re divestiture and the 2021 income receipt related to the Aon transaction termination. These tailwinds were partially offset by increased Transformation program-related costs.
Critical Accounting 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 include critical accounting estimates are revenue recognition, costs to fulfill under our broking contracts, valuation of billed and unbilled receivables from clients, income taxes, commitments, contingencies and accrued liabilities, pension assumptions, and goodwill and intangible assets. The critical accounting estimates discussed below involve making difficult, subjective or complex accounting estimates that could have a material effect on our financial condition and results of operations. These critical accounting estimates require us to make assumptions about matters that are highly uncertain at the time of the estimate or assumption. Different estimates that we could have used, or changes in estimates that are reasonably likely to occur, may have a material effect on our results of operations and financial condition.
Revenue Recognition
We use significant estimates related to revenue recognition most commonly during our estimation of the transaction prices or where we recognize revenue over time on a proportional performance basis. A brief description of these policies and estimates is included below:
Estimation of transaction prices — This process occurs most frequently in certain broking transactions. In situations in which our fees are not fixed but are variable, we must estimate the likely commission per policy, taking into account the likelihood of cancellation before the end of the policy. For Medicare broking and Affinity arrangements, the commissions to which we will be entitled can vary based on the underlying individual insurance policies that are placed. For Medicare 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, Revenue From Contracts With Customers). In our direct-to-consumer Medicare broking arrangements, the estimate of the total renewal commissions that will be received over the lifetime of the policy requires significant judgment, and will vary based on product type, estimated commission rates, the expected lives of the respective policies and other factors. The Company has applied an actuarial model to account for these uncertainties, which is updated periodically based on actual experience. Each of these processes result in us estimating a transaction price that may be significantly lower than the ultimate amount of commissions we may collect. The transaction price is then adjusted over time as we receive confirmation of our remuneration through receipt of commissions, or as other information becomes available.
Proportional performance basis over time recognition — Where we recognize revenue on a proportional performance basis, primarily in our consulting and outsourced administration arrangements, the amount we recognize is affected by a number of factors that can change the estimated amount of work required to complete the project, such as the staffing on the engagement and/or the level of client participation. Our periodic engagement evaluations require us to make judgments and estimates regarding the overall profitability and stages of project completion that, in turn, affect how we recognize revenue. We recognize a loss on an engagement when estimated revenue to be received for that engagement is less than the total estimated costs associated with the engagement. Losses are recognized in the period in which the loss becomes probable and the amount of the loss is reasonably estimable.
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Costs to Fulfill —Broking Contracts
For our broking business, the Company must estimate the fulfillment costs incurred during the pre-placement of the broking contracts. These judgments include the following:
•
which activities in the pre-placement process should be eligible for capitalization;
•
the amount of time and effort expended on those pre-placement activities;
•
the amount of payroll and related costs eligible for capitalization; and,
•
the monthly or quarterly timing of underlying insurance and reinsurance policy inception dates.
Valuation of Billed and Unbilled Receivables from Clients
We maintain allowances for doubtful accounts to reflect estimated losses resulting from a client’s failure to pay for the services after the services have been rendered, which are recorded in other operating expenses. We also maintain allowances related to our unbilled receivables for such items as expected realization or client disputes, the related provision for which is recorded as a reduction to revenue. Our allowance policy is based in part on the aging of the billed and unbilled client receivables and has been developed based on our write-off history. However, facts and circumstances, such as the average length of time the receivables are past due, general market conditions at the time we perform the work, current economic trends and our clients’ ability to pay, may cause fluctuations in our valuation of billed and unbilled receivables.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized for continuing operations in the consolidated statement of comprehensive income in the period in which the change is enacted. Deferred tax assets are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company adjusts valuation allowances to measure deferred tax assets at the amounts considered realizable in future periods, which is assessed at each balance sheet date. In making such determinations, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operating results. We place more reliance on evidence that is objectively verifiable.
Commitments, Contingencies and Accrued Liabilities
We have established provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in connection with the placement of insurance and reinsurance and the provision of consulting services in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also claims that have been incurred but not reported. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in the light of current information and legal advice. In certain cases, where a range of loss exists, we accrue the minimum amount in the range if no amount within the range is a better estimate than any other amount.
See Note 15 — Commitments and Contingencies in Item 8 within this Annual Report on Form 10-K.
Pension Assumptions
We maintain defined benefit pension plans for employees in several countries, with the most significant defined benefit plans offered in the U.S. and U.K. Our disclosures in Note 13 — Retirement Benefits contain additional information about our other less significant but material retirement plans. Within our critical accounting policy discussion, we have excluded analysis for plans outside of those noted in the description below, as any variance of recorded information based on management’s estimates would be immaterial.
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Descriptions of our U.S. and U.K. plans, which comprise 88% of our projected benefit obligations and 91% of our plan assets, are below:
United States
Legacy Willis – This plan was frozen in 2009. Approximately 600 WTW employees in the United States have a frozen accrued benefit under this plan.
WTW 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. Plan participants prior 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. Effective January 1, 2024, stable value benefits are earned under the same contributory formula for all eligible colleagues. To participate, participants are required to contribute 2% of eligible earnings (base salary only) on an after-tax basis.
United Kingdom
Legacy Willis – This plan covers approximately 400 WTW employees in the U.K. The plan is now closed to new entrants. New employees in the U.K. 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.
The determination of the Company’s obligations and annual expense under the plans is based on a number of assumptions that, given the longevity of the plans, are long-term in focus. A change in one or a combination of these assumptions could have a material impact on our projected benefit obligation. However, certain of these changes, such as changes in the discount rates and other actuarial assumptions, are not recognized immediately in net income, but are instead recorded in other comprehensive income. The accumulated gains and losses not yet recognized in net income are amortized into net income as a component of the net periodic benefit cost/(income) over the average remaining service period or average remaining life expectancy, as appropriate, of the plan’s participants to the extent that the net gains or losses as of the beginning of the year exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation.
WTW considers several factors prior to the start of each fiscal year when determining the appropriate annual assumptions, including economic forecasts, relevant benchmarks, historical trends, portfolio composition and peer company comparisons. These assumptions, used to determine our pension liabilities and pension expense, are reviewed annually by senior management and changed when appropriate. A discount rate will be changed annually if underlying rates have moved, whereas an expected long-term return on assets will be changed less frequently as longer-term trends in asset returns emerge or long-term target asset allocations are revised. To calculate the discount rate, we use the granular approach to determining service cost and interest cost. The expected rate of return assumptions for all plans are supported by an analysis of the weighted-average yield expected to be achieved with the anticipated makeup of investments. We have allowed for actual and known inflation in preparing our estimates. Other material assumptions include rates of participant mortality, and the expected long-term rates of compensation and pension increases.
Funding is based on actuarially determined contributions and is limited to amounts that are currently deductible for tax purposes, or as agreed to with the plan trustees for the 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.
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We recorded a combined $39 million net periodic benefit income for our U.S. and U.K. plans for the year ended December 31, 2023. For the U.S. and U.K. plans, the following table presents our estimated net periodic benefit income for 2024 and the impact to both plans of a 0.25% increase and decrease to both the expected return on assets (‘EROA’) and the discount rate assumptions; and the projected benefit obligations as of December 31, 2023 and the impact of a 0.25% increase and decrease to the discount rates:
Increase Decrease Increase Decrease
Estimated 2024 (income)/expense:
U.S. Plans $ (28 ) $ (9 ) $ 9 $ (7 ) $ 7
U.K. Plans $ 3 $ (8 ) $ 8 $ (1 ) $ 1
Projected benefit obligation at December 31, 2023:
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 seven reporting units as of October 1, 2023. During fiscal year 2023, the Company performed the impairment test for all reporting units which resulted in no impairments being identified. Six out of seven of our reporting units had estimated fair values that were significantly in excess of their carrying values. However, through this analysis, we determined that the reporting unit comprising our BDA business had a narrowed margin of excess fair value in 2023, driven primarily by reductions in market multiples for industry-specific competitors and an increase in the discount rate. This business had an excess fair value margin of 6.4% and holds $2.3 billion of goodwill at December 31, 2023. The Company continuously monitors and evaluates relevant events and circumstances that could unfavorably impact the significant assumptions noted above, including changes to the regulatory environment, general industry, market and macro-economic conditions and recent market valuations from transactions of comparable companies. It is possible that future changes in such circumstances, or in the inputs or assumptions used in estimating the fair value of the reporting unit, could require the Company to record a non-cash impairment charge.
To perform the test, we used valuation techniques to estimate the fair value of a reporting unit that are under the income and/or market approaches of valuation methods:
•
Discounted cash flow method — 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.
•
Guideline public company method — The guideline public company method, a market approach, develops valuation multiples by comparing our reporting units to similar publicly traded companies. Key estimates and determination of valuation multiples rely on the selection of similar companies, obtaining forecast revenue and EBITDA estimates for the similar companies and selection of valuation multiples as they apply to the reporting unit characteristics.
•
Guideline transaction method — Under the guideline 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.
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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. 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 10 — 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 from continuing operations by currency in 2023.
U.S.dollars Poundssterling Euro Othercurrencies
(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 transformation, net.
Our principal exposures to foreign exchange risk arise from:
•
our London market operations;
•
intercompany lending between subsidiaries; and
•
translation.
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 and option 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; and
•
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.
Intercompany lending between subsidiaries
The Company engages in intercompany borrowing and lending between subsidiaries, primarily through its 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, 2023, we had notional amounts of $1.2 billion (denominated primarily in U.S. dollars, Pounds sterling and Euros), with a net asset fair value of $3 million. Such derivatives typically mature within three months.
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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 and option contracts which are designated as hedging instruments and 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,
(millions) (millions)
Foreign currency sold
U.S. dollars sold for Pounds sterling $ 63 $1.23 = £1 $ 26 $1.24 = £1
Fair value (i) $ 1 $ 1
(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, 2023 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 $1.5 billion under a revolving credit facility (see Note 11 — Debt within Item 8 of this Annual Report on Form 10-K for further information). As of December 31, 2023, no amount was drawn on this facility. We are also subject to market risk from exposure to changes in interest rates based on our investing activities where our primary interest rate risk arises from changes in short-term interest rates in U.S. dollars, Pounds sterling and Euros.
The table below provides information about our financial instruments that are sensitive to changes in interest rates. The Company had no outstanding floating rate-based debt at December 31, 2023.
Expected to mature before December 31,
($ in millions)
Fixed rate debt
(i)
Represents the net present value of the expected cash flows discounted at current market rates of interest or quoted market rates as appropriate.
Interest Income on Fiduciary Funds
We are exposed to interest rate risk. Specifically, as a result of our operating activities, we receive cash for premiums and claims which we deposit in high-quality bank term deposit and money market funds, on which we earn interest, where permitted. We also hold funds for clients of our benefits accounts businesses. For the benefit funds not invested, cash and cash equivalents are held, on which we earn interest, until the funds are directed by plan participants to either be invested in mutual funds or paid out on their behalf. This interest earned 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. As a result of measures taken by central banks around the world, rates offered on these investments have increased, in some cases significantly, over the course of the last year. This has resulted in the Company recognizing higher interest income over the same period in the prior year. Interest income in the future will be a function of the short-term rates we are able to obtain by currency and the cash balances available to
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invest in these instruments. Interest income was $145 million, $55 million and $12 million for the years ended December 31, 2023, 2022 and 2021, respectively. At December 31, 2023, 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.
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, 2023.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
INDEX TO FORM 10-K
For the year ended December 31, 2023
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 34) 71
Consolidated Balance Sheets as of December 31, 2023 and 2022 74
Notes to the Consolidated Financial Statements 77
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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, 2023 and 2022, the related consolidated statements of comprehensive income, changes in equity and cash flows, for each of the three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 22, 2024, 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 Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Provisions for Liabilities - Errors & Omissions Reserve — Refer to Notes 2, 15 and 16 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
Our audit procedures related to the determination of E&O provisions included the following, among others:
•
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.
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•
For the IBNR provisions, we evaluated the appropriateness of the IBNR models, 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.
Goodwill – Benefits Delivery & Administration Reporting Unit— Refer to Notes 2 and 9 to the financial statements
Critical Audit Matter Description
The Company's evaluation of goodwill for impairment is performed annually as of October 1, and whenever indicators of impairment exist. Goodwill is tested at the reporting unit level, and the Company had seven reporting units as of October 1, 2023. 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. Through this analysis, the Company determined that the reporting unit comprising its Benefits Delivery & Administration (‘BDA’) business had a narrowed margin of excess fair value in 2023. The Company estimated the fair value of the reporting unit using the discounted cash flow method and guideline public company method. Significant management judgement is required to make assumptions and estimates that are subject to risk and uncertainty related to discount rate, and forecasts of future revenue and operating margin. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both.
Auditing management’s judgments related to its goodwill impairment analysis on the BDA reporting unit, and in particular the discount rate, and forecasts of future revenue and operating margin, involved especially complex and subjective auditor judgment and an increased extent of effort. This included the need to involve our fair value specialists when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate, specifically due to the sensitivity of the BDA reporting unit’s fair value to a change in the discount rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discount rate and forecasts of future revenue and operating margin used by management to estimate the fair value of the BDA reporting unit included the following, among others:
•
We tested the effectiveness of controls over the Company’s goodwill impairment evaluation, including those over the determination of the fair value of the BDA reporting unit, including controls related to management’s assumptions of discount rates, and forecasts of future revenues and operating margins.
•
We evaluated management’s ability to accurately forecast BDA reporting unit revenues and operating margins, by comparing actual results to management’s historical forecasts.
•
We evaluated the reasonableness of management’s BDA reporting unit forecasted revenues and operating margins by comparing the forecasts to:
o
Historical revenues and operating margins;
o
Internal communications to management and the Board of Directors; and,
o
Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.
•
With the assistance of our fair value specialists, we evaluated (1) the valuation methodology and (2) the discount rate. We developed a range of independent estimates and compared those to the discount rate selected by management.
/s/Deloitte & Touche LLP
Philadelphia, PA
February 22, 2024
We have served as the Company’s auditor since 2017.
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WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Consolidated Statements of Comprehensive Income
(In millions of U.S. dollars, except per share data)
Years ended December 31,
Costs of providing services
Transaction and transformation, net 386 181 (806 )
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,279 1,258 2,692
Provision for income taxes (215 ) (194 ) (536 )
(LOSS)/INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX — (40 ) 2,080
Income attributable to non-controlling interests (9 ) (15 ) (14 )
EARNINGS PER SHARE
Basic earnings per share:
Income from continuing operations per share $ 10.01 $ 9.36 $ 16.68
(Loss)/income from discontinued operations per share — (0.36 ) 16.20
Diluted earnings per share:
Income from continuing operations per share $ 9.95 $ 9.34 $ 16.63
(Loss)/income from discontinued operations per share — (0.36 ) 16.15
Other comprehensive (loss)/income, net of tax:
Foreign currency translation $ 173 $ (499 ) $ (87 )
Defined pension and post-retirement benefits (408 ) 65 260
Derivative instruments 2 (2 ) 2
Comprehensive income before non-controlling interests 831 588 4,411
Comprehensive income attributable to non-controlling interests (11 ) (14 ) (16 )
Comprehensive income attributable to WTW $ 820 $ 574 $ 4,395
See accompanying notes to the consolidated financial statements
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WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
ASSETS
Cash and cash equivalents $ 1,424 $ 1,262
Prepaid and other current assets 364 414
Pension benefits assets 588 827
LIABILITIES AND EQUITY
Deferred revenue and accrued expenses 2,104 1,915