Arthur J. Gallagher & Co 8-K/A, filed Feb 14, 2022
Arthur J. Gallagher & Co. (AJG)
About this 8-K/A
Arthur J. Gallagher & Co filed this 8-K/A on February 14, 2022, reporting on events of December 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Amendment No. 1)
CURRENT REPORT
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EXPLANATORY NOTE
| Item 9.01. | Financial Statements and Exhibits. |
| (a) | Financial Statements of Business Acquired. |
The audited combined financial statements of Willis Re DivestCo as of and for the fiscal year ended December 31, 2020, and the unaudited interim combined financial statements of Willis Re DivestCo as of and for the interim period ended September 30, 2021, are filed with this Form 8-K/A as Exhibits 99.1 and 99.2.
| (b) | Pro Forma Financial Information. |
The unaudited pro forma condensed combined financial information and corresponding explanatory notes are filed with this Form 8-K/A as Exhibit 99.3.
| (d) | Exhibits. |
| Exhibit |
Description | |
| 23.1 | Consent of Deloitte & Touche LLP. | |
| 99.1 | Audited combined financial statements of Willis Re DivestCo as of and for the fiscal year ended December 31, 2020. | |
| 99.2 | Unaudited interim combined financial statements of Willis Re DivestCo as of and for the interim period ended September 30, 2021. | |
| 99.3 | Unaudited pro forma condensed combined financial information and corresponding explanatory notes. | |
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Arthur J. Gallagher & Co. | ||||||
| Date: February 14, 2022 | /s/ RICHARD C. CARY | |||||
| Richard C. Cary | ||||||
| Controller | ||||||
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statements No. 333-254015 on Form S-3, Nos. 333-203203 and 333-214617 on Form S-4 and Nos. 333-87320, 333-106535, 333-106539, 333-174497, 333-197898, 333-204976, 333-221274, 333-252830, and 333-258331 on Form S-8 of Arthur J. Gallagher & Co. of our report dated December 15, 2021 (February 11, 2022, as to Note 10), relating to the financial statements of Willis Re DivestCo appearing in this Current Report on Form 8-K/A dated February 14, 2022.
/s/ Deloitte & Touche LLP
Philadelphia, PA
February 14, 2022
Exhibit 99.1
Willis Re DivestCo
Combined Financial Statements
As of and for the Year Ended December 31, 2020
And Independent Auditor’s Report Thereon
Willis Re DivestCo
Combined Financial Statements
December 31, 2020
Table of Contents
| Page | ||||
| Independent Auditor’s Report |
1 | |||
| Combined Financial Statements: |
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| Combined Balance Sheet |
2 | |||
| Combined Statement of Comprehensive Income |
3 | |||
| Combined Statement of Cash Flows |
4 | |||
| Combined Statement of Changes in Equity |
5 | |||
| Notes to Combined Financial Statements |
6 | |||
Independent Auditor’s Report
To the Board of Directors of Willis Towers Watson Public Limited Company.
We have audited the accompanying combined financial statements of the Willis Re DivestCo businesses of Willis Towers Watson Public Limited Company, (the ‘Company’), which comprise the combined balance sheet as of December 31, 2020 and the related combined statements of comprehensive income, changes in equity, and cash flows for the year then ended, and the related notes to the combined financial statements.
Management’s Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of the combined financial statements that are free from material misstatement whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the Company’s combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Willis Re DivestCo as of December 31, 2020 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 2 to the combined financial statements, the accompanying combined financial statements have been derived from the separate accounting records maintained by Willis Towers Watson Public Limited Company. The combined financial statements also include expense allocations for certain corporate functions historically provided by Willis Towers Watson Public Limited Company. These allocations may not be reflective of the actual expense that would have been incurred had the Company operated as a separate entity apart from Willis Towers Watson Public Limited Company. A summary of transactions with related parties is included in Note 6 to the combined financial statements.
/s/ Deloitte & Touche LLP
Philadelphia, PA
December 15, 2021 (February 11, 2022, as to Note 10)
1
Willis Re DivestCo
Combined Balance Sheet
(In millions of U.S. dollars)
| December 31, 2020 |
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| ASSETS |
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| Cash and cash equivalents |
$ | 44 | ||
| Fiduciary assets, including related party assets of $43 |
6,084 | |||
| Accounts receivable, net |
226 | |||
| Due from related parties |
41 | |||
| Prepaid and other current assets |
41 | |||
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| Total current assets |
6,436 | |||
| Fixed assets, net |
1 | |||
| Goodwill |
812 | |||
| Intangible assets, net |
8 | |||
| Deferred tax assets |
3 | |||
| Other non-current assets |
22 | |||
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| Total non-current assets |
846 | |||
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| TOTAL ASSETS |
$ | 7,282 | ||
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| LIABILITIES AND EQUITY |
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| Fiduciary liabilities, including related party liabilities of $63 |
$ | 6,084 | ||
| Salaries and employee-related liabilities |
111 | |||
| Deferred revenue and accrued expenses |
9 | |||
| Due to related parties |
31 | |||
| Other current liabilities |
127 | |||
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| Total current liabilities |
6,362 | |||
| Employee-related liabilities |
14 | |||
| Provision for liabilities |
11 | |||
| Other non-current liabilities |
21 | |||
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| Total non-current liabilities |
46 | |||
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| TOTAL LIABILITIES |
6,408 | |||
| COMMITMENTS AND CONTINGENCIES |
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| EQUITY |
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| Net Parent investment |
873 | |||
| Accumulated other comprehensive income, net of tax |
1 | |||
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| Total equity |
874 | |||
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| TOTAL LIABILITIES AND EQUITY |
$ | 7,282 | ||
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See accompanying notes to the combined financial statements
2
Willis Re DivestCo
Combined Statement of Comprehensive Income
(In millions of U.S. dollars)
| Year ended December 31, 2020 |
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| Revenue |
$ | 726 | ||
| Costs of providing services |
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| Salaries and benefits |
348 | |||
| Other operating expenses |
143 | |||
| Depreciation and amortization |
3 | |||
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| Total costs of providing services |
494 | |||
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| Income from operations |
232 | |||
| Other income, net |
1 | |||
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| INCOME FROM OPERATIONS BEFORE INCOME TAXES |
233 | |||
| Provision for income taxes |
(50 | ) | ||
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| NET INCOME |
$ | 183 | ||
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| Other comprehensive income, net of tax: |
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| Foreign currency translation |
$ | (4 | ) | |
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| Other comprehensive income, net of tax |
(4 | ) | ||
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| COMPREHENSIVE INCOME |
$ | 179 | ||
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See accompanying notes to the combined financial statements
3
Willis Re DivestCo
Combined Statement of Cash Flows
(In millions of U.S. dollars)
| Year ended December 31, 2020 |
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| CASH FLOWS FROM OPERATING ACTIVITIES |
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| NET INCOME |
$ | 183 | ||
| Adjustments to reconcile net income to total net cash from operating activities: |
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| Depreciation and amortization |
3 | |||
| Non-cash lease expense |
1 | |||
| Net periodic benefit cost of defined benefit pension plans |
2 | |||
| Provision for doubtful receivables from clients |
3 | |||
| Benefit for deferred income taxes |
(3 | ) | ||
| Share-based compensation |
1 | |||
| Non-cash foreign exchange gain |
(1 | ) | ||
| Other, net |
(1 | ) | ||
| Changes in operating assets and liabilities: |
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| Accounts receivable |
(32 | ) | ||
| Due from related parties |
43 | |||
| Due to related parties |
(23 | ) | ||
| Other assets |
24 | |||
| Other liabilities |
63 | |||
| Provisions |
(17 | ) | ||
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| Net cash from operating activities |
246 | |||
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| CASH FLOWS USED IN INVESTING ACTIVITIES |
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| Acquisition of intangible asset |
(5 | ) | ||
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| Net cash used in investing activities |
(5 | ) | ||
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| CASH FLOWS USED IN FINANCING ACTIVITIES |
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| Net transfers to Parent |
(253 | ) | ||
| Related party operational loans, net |
(5 | ) | ||
| Net proceeds from fiduciary funds held for clients |
125 | |||
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| Net cash used in financing activities |
(133 | ) | ||
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| INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
108 | |||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash |
25 | |||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR |
1,190 | |||
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| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR |
$ | 1,323 | ||
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| Reconciliation of cash, cash equivalents and restricted cash: |
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| Cash and cash equivalents |
$ | 44 | ||
| Fiduciary funds held on behalf of clients (included in fiduciary assets) |
1,279 | |||
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| Total cash, cash equivalents and restricted cash |
$ | 1,323 | ||
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| Supplemental disclosure: |
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| Cash paid for income taxes, net |
$ | 4 | ||
See accompanying notes to the combined financial statements
4
Willis Re DivestCo
Combined Statement of Change in Equity
(In millions of U.S. dollars)
| Net Parent Investment | Accumulated Other Comprehensive Income |
Total Equity | ||||||||||
| Balance as of January 1, 2020 |
$ | 937 | $ | 5 | $ | 942 | ||||||
| Net transfers to Parent |
(247 | ) | — | (247 | ) | |||||||
| Net income |
183 | — | 183 | |||||||||
| Other comprehensive loss |
— | (4 | ) | (4 | ) | |||||||
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| Balance as of December 31, 2020 |
$ | 873 | $ | 1 | $ | 874 | ||||||
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See accompanying notes to the combined financial statements
5
Willis Re DivestCo
Notes to Combined Financial Statements
(Tabular amounts are in millions of U.S. dollars)
Note 1 — Nature of Operations
The combined financial statements of Willis Re DivestCo (or the ‘divested businesses’) present the combined results of certain businesses under the common control of Willis Towers Watson plc, a company organized under the laws of Ireland. Willis Towers Watson plc, together with its subsidiaries (‘WTW’ or the ‘Parent’), is a leading global advisory, broking and solutions company. On August 12, 2021, WTW agreed to sell its treaty reinsurance broking businesses to Arthur J. Gallagher & Co. (‘AJG’) pursuant to that certain Security and Asset Purchase Agreement (as amended from time to time, the ‘SAPA’), dated as of August 12, 2021. These divested businesses operate globally as Willis Re (‘Willis Re’) and include the operations of both entities that solely provided reinsurance services (‘Dedicated entities’) and the reinsurance portion of entities that provide both reinsurance and non-reinsurance services (‘Commingled entities’).
Notwithstanding the foregoing description, WTW had not agreed to sell the businesses in France or the Netherlands. However, AJG had granted WTW a put option with respect to such businesses, and therefore the foregoing businesses in France and the Netherlands have been included in the Willis Re DivestCo combined financial statements.
The principal closing of the transactions contemplated by the SAPA occurred on December 1, 2021. See Note 9 — Subsequent Events for further details.
Note 2 — Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Throughout the period covered by the combined financial statements, Willis Re DivestCo operated as part of WTW. Consequently, standalone financial statements have not historically been prepared for Willis Re DivestCo. These combined financial statements are presented on a ‘standalone’ basis and as historically managed by WTW, and were derived from the consolidated financial statements and accounting records of WTW. The accompanying audited combined financial statements of Willis Re DivestCo are presented in accordance with accounting principles generally accepted in the United States (‘U.S. GAAP’). The combined financial statements may not be indicative of the divested businesses’ future performance and do not necessarily fully reflect what the financial position, results of operations and cash flows would have been had Willis Re DivestCo operated as a standalone company during the period presented.
As part of their inclusion in the operations of WTW, WTW provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the divested businesses. The cost of these services has been allocated to the combined financial statements of the divested businesses either on a specific and direct basis, or on an allocation basis using an approach based on key metrics related to the nature of the item, including but not limited to revenue and headcount. WTW and the divested businesses consider these allocations to be a reasonable reflection of the utilization of services and benefits received by the divested businesses. However, the allocations may not reflect the expenses the divested businesses would have incurred if they had been a standalone company for the period presented. Actual costs that would have been incurred if the divested businesses had been a standalone company are impracticable to estimate and would depend on multiple factors, including organization structure and strategic decisions made in various areas, such as information technology and infrastructure.
WTW uses a centralized approach to cash management and financing. These intercompany arrangements are not reflective of the manner in which the divested businesses would have financed their operations had they been a standalone business separate from WTW during the period presented. Assets and liabilities included within these combined financial statements were specifically identifiable or otherwise attributable to the divested businesses. Cash, debt and any related interest that are held in Parent accounts have not been allocated since these balances are not directly attributable to the divested businesses.
These combined financial statements combine all majority-owned subsidiaries to the extent that the subsidiary is included within the scope of the divested businesses and their respective classification as Dedicated or Commingled. Amounts related to noncontrolling interests are immaterial. All intercompany accounts and transactions between the divested businesses have been eliminated in combination. Transactions with WTW or other non-divested subsidiaries or non-divested portions of Commingled entities of WTW are described in Note 6 – Related Party Transactions. As the operations comprising Willis Re DivestCo are in various legal entities owned by WTW in which the divested businesses have no direct ownership relationship, WTW’s net investment in these operations is shown as net Parent investment in lieu of stockholder’s equity in the combined financial statements.
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All accounting guidance included within the Financial Accounting Standards Board (‘FASB’) Accounting Standards Codification (‘ASC’) and related Accounting Standards Updates (‘ASU’s’) has been adopted by the divested businesses at the same date as WTW, a publicly-traded entity. As such, certain standards have been adopted prior to their required deadlines.
Risks and Uncertainties Related to the COVID-19 Pandemic
The COVID-19 pandemic has had an adverse impact on global commercial activity, including the global supply chain, and has contributed to significant volatility in the global financial markets including, among other effects, occasional declines in the equity markets, changes in interest rates and reduced liquidity on a global basis. In light of the effects on Willis Re DivestCo’s own business operations and those of their clients, suppliers and other third parties with whom they interact, WTW regularly considered the impact of COVID-19 on their businesses, taking into account their business resilience and continuity plans, financial modeling and stress testing of liquidity and financial resources. Generally, the COVID-19 pandemic did not have an adverse impact on Willis Re DivestCo’s overall financial results during 2020.
The extent to which COVID-19 impacts the divested businesses and their financial positions will depend on future developments, which are difficult to predict. These future developments may include the severity and scope of the COVID-19 outbreak, which may unexpectedly change or worsen, and the types and duration of measures imposed by governmental authorities to contain the virus or address its impact. The divested businesses continue to expect that the COVID-19 pandemic will not have a material impact on their financial position.
Significant Accounting Policies
Use of Estimates — These combined financial statements conform to U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Willis Re DivestCo’s estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Estimates and allocations are used when accounting for revenue recognition and related costs, the selection of useful lives of fixed and intangible assets, impairment testing, valuation of billed receivables from clients, discretionary compensation, income taxes, pension assumptions, amounts due to or from related parties, legal reserves and goodwill and intangible assets.
Fair Value of Financial Instruments — The carrying values of cash and cash equivalents, accounts receivable, accrued expenses, and amounts due to or from related parties approximate their fair values because of the short maturity and liquidity of those instruments.
Cash and Cash Equivalents — The divested businesses maintain separate cash accounts, including cash accounts that are swept periodically into accounts managed and held by the Parent. Cash and cash equivalents primarily consist of time deposits with original maturities of 90 days or less. In certain countries in which Willis Re DivestCo conducts business, it is subject to capital adequacy requirements. Term deposits and certificates of deposit with original maturities greater than 90 days are considered to be short-term investments.
Fiduciary Assets and Liabilities — The divested businesses collect premiums from insureds and, after deducting commissions, remit the premiums to the respective insurers. The divested businesses also collect claims or refunds from insurers on behalf of insureds. Each of these transactions is reported on the Willis Re DivestCo combined balance sheet as assets and corresponding liabilities unless such balances are due to or from the same party and a right of offset exists, in which case the balances are recorded net.
Fiduciary assets on the combined balance sheet are comprised of both fiduciary funds and fiduciary receivables:
Fiduciary Funds – Unremitted insurance premiums and claims are recorded within fiduciary assets on the combined balance sheet. Fiduciary funds are generally required to be kept in certain regulated bank accounts subject to guidelines which emphasize capital preservation and liquidity. Such funds are not available to service any WTW debt or for other corporate purposes. Notwithstanding the legal relationships with insureds and insurers, the divested businesses are entitled to retain investment income earned on fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds. The period for which the divested businesses hold such funds is dependent upon the dates the insureds remit the payment of the premiums to the divested businesses, or the dates the divested businesses receive refunds from the insurers, and the dates the divested businesses are required to forward such payments to the insurers or insureds, respectively.
Fiduciary receivables – Uncollected premiums from insureds and uncollected claims or refunds from insurers are recorded as fiduciary assets on the combined balance sheet. In certain instances, the divested businesses advance premiums, refunds or claims to insurance underwriters or insureds prior to collection. Such advances are made from fiduciary funds and are reflected in the combined balance sheet as fiduciary assets.
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Fiduciary liabilities on the combined balance sheet represent the obligations to remit all fiduciary funds and fiduciary receivables to insurers or insureds.
Accounts Receivable — Accounts receivable is stated at estimated net realizable values. The provision for billed receivables is recorded, when necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncollectible accounts. See Note 3 — Revenue for additional information about the divested businesses’ accounts receivable.
Income Taxes — Income taxes presented in the combined financial statements of Willis Re DivestCo include an allocation of current and deferred income taxes of WTW to the divested businesses’ standalone financial statements using the separate return method. The allocation of income taxes on a separate return basis requires a considerable amount of judgment and the use of both estimates and allocations. As a consequence, the results of certain transactions included in the consolidated financial statements of WTW may not be included in the separate combined financial statements of Willis Re DivestCo. Similarly, the tax treatment of certain items reflected in the combined financial statements of Willis Re DivestCo may not be reflected in the consolidated financial statements and tax returns of WTW.
Income taxes of the divested businesses as presented in the combined financial statements may not be indicative of the income taxes that the divested businesses will generate in the future. Certain operations of the divested businesses have historically been included in a consolidated return with other WTW entities. Current obligations for taxes in certain jurisdictions, where the divested businesses file a consolidated tax return with WTW, are deemed settled for purposes of the combined financial statements through the net Parent investment. Current obligations for tax in jurisdictions where the divested businesses do not file a consolidated return with WTW, including certain foreign jurisdictions and certain U.S. states, are recorded as accrued liabilities.
Following the allocation method, deferred tax assets and liabilities are recognized for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the combined 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. In making such determinations, the divested businesses consider 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. More weight is placed on evidence that is objectively verifiable.
Uncertain tax positions are recognized in the financial statements when it is more likely than not that a position will be sustained on the basis of the technical merits of the position assuming the tax authorities have full knowledge of the position and all relevant facts. The benefit recognized is the largest amount of tax benefit that is greater than 50 percent likely to be realized on settlement with the tax authority. Interest and penalties related to uncertain tax positions are included as a component of income tax expense. Uncertain tax positions are assessed at each balance sheet date.
See Note 4 — Income Taxes for additional information regarding Willis Re DivestCo’s income taxes.
Foreign Currency — Transactions in currencies other than the functional currency of the entity are recorded at the rates of exchange prevailing at the date of the transaction. Monetary assets and liabilities in currencies other than the functional currency are translated at the rates of exchange prevailing at the balance sheet date and the related transaction gains and losses are reported as income or expense in the combined statement of comprehensive income.
The results of the divested businesses whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates, and assets and liabilities are translated at year-end exchange rates and included in the combined results. Translation adjustments are presented as a separate component of other comprehensive income in the financial statements and are included in net income only upon sale or liquidation of the underlying foreign entity or divested business.
Commitments, Contingencies and Provisions for Liabilities — The Parent establishes provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in the ordinary course of business and allocates a portion of this cost to its subsidiaries, including the divested businesses. Such provisions cover claims that have been reported but not paid and also unasserted claims and related legal fees. These provisions are established based on actuarial estimates together with individual case reviews and are believed to be adequate in light of current information and legal advice. In certain cases, where a range of loss exists, the divested businesses accrue the minimum amount in the range if no amount within the range is a better estimate than any other amount. To the extent such losses can be recovered under the Parent’s insurance programs, estimated recoveries are recorded when losses for insured events are recognized and the recoveries are likely to be realized. Significant management judgment is required to estimate the amounts of such unasserted claims and the related insurance recoveries. The Parent
8
analyzes its litigation exposure based on available information, including consultation with outside counsel handling the defense of these matters, to assess its potential liability. These contingent liabilities are not discounted. Provisions for claims that have been reported but not paid and provisions for unasserted claims have been allocated to the divested businesses using revenue as the allocation basis. See Note 7 — Commitments and Contingencies.
Share-Based Compensation — The Parent has equity-based compensation plans that provide for grants of restricted stock units and stock options, as well as cash-settled share-based compensation, to employees and non-employee directors of the Parent, including certain employees of the divested businesses.
The expense related to equity-based compensation is recognized primarily on a straight-line basis over the requisite service period. The significant assumptions underlying the expense calculations include the fair value of the award on the date of grant, the estimated achievement of any performance targets and estimated forfeiture rates. The share-settled awards are classified as equity and are included as a component of net Parent investment on Willis Re DivestCo’s combined balance sheet, as the ultimate payment of such awards will not be achieved through use of the Parent’s or Willis Re DivestCo’s cash or other assets.
For cash-settled share-based compensation, a liability for the fair-value of the awards is recognized as of each reporting date. The liability for these awards is included within other current liabilities or other non-current liabilities in the combined balance sheet depending when the amounts are payable. Expense is recognized over the service period, and as the liability is remeasured at the end of each reporting period, changes in fair value are recognized as compensation cost within salaries and benefits in the combined statement of comprehensive income. The significant assumptions underlying the expense calculations include the estimated achievement of any performance targets and estimated forfeiture rates.
The total share-based compensation cost for the divested businesses was $5 million for the year ended December 31, 2020 and is included in salaries and benefits in the combined statement of comprehensive income.
Fixed Assets — Fixed assets are stated at cost less accumulated depreciation. Expenditures for improvements are capitalized; repairs and maintenance are charged to expense as incurred. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of assets.
Depreciation on internally-developed software is amortized over the estimated useful life of the asset ranging from 3 to 10 years. Depreciation on leasehold improvements is calculated over the lesser of the useful lives of the assets or the remaining lease terms. Depreciation on furniture and equipment is calculated based on a range of 3 to 10 years.
Long-lived assets are tested for recoverability whenever events or changes in circumstance indicate that their carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. Recoverability is determined based on the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
Leases — The divested businesses enter into lease agreements from time to time, primarily for the use of real estate for office space. The divested businesses determine if an arrangement is a lease at the inception of the contract, and the nature of operations is such that it is generally clear whether an arrangement contains a lease and what underlying asset is being leased. All of the leases have been determined to be operating leases. Upon entering into leases, the divested businesses obtain the right to control the use of an identified space for a lease term and recognize these right-of-use (‘ROU’) assets on the combined balance sheet with corresponding lease liabilities reflecting the obligation to make the related lease payments. ROU assets are amortized over the term of the lease.
The real estate leases are generally long-term in nature, with terms that typically range from 5 to 15 years. The real estate leases often contain options to renew the lease, either through exercise of the option or through automatic renewal. Additionally, certain leases have options to cancel the lease with appropriate notice to the landlord prior to the end of the stated lease term. As new leases are entered into, the divested businesses consider these options as lease terms are assessed and recognized as ROU assets and lease liabilities. If it is reasonably certain that the divested businesses will exercise an option to renew a lease, this period is included in the lease term. To the extent that there is an option to cancel a lease, the ROU assets and lease liabilities are recognized based upon the term that would result from using this earlier date. If a significant penalty is required to cancel the lease at an earlier date, the divested businesses assess the lease term as ending at the point when no significant penalty would be due.
9
The divested businesses had the following ROU assets and lease liabilities:
| Balance Sheet Classification |
December 31, 2020 | |||||
| Right-of-use assets |
Other non-current assets | $ | 1 | |||
| Current lease liabilities |
Other current liabilities | 1 | ||||
| Long-term lease liabilities |
Other non-current liabilities | 1 | ||||
In addition to payments for previously-agreed base rent, many of the lease agreements are subject to variable and unknown future payments, typically in the form of common area maintenance charges, which is a non-lease component as defined by ASC 842, Leases, (‘ASC 842’) or real estate taxes. These variable payments are excluded from the lease liabilities and ROU assets, and instead are recognized as lease expense within other operating expenses on the combined statement of operations as the amounts are incurred. To the extent that the divested businesses have agreed to fixed charges for common area maintenance or other non-lease components, or the base rent increases by an index or rate (most commonly an inflation rate), these amounts are included in the measurement of the lease liabilities and ROU assets. The divested businesses have elected the practical expedient under ASC 842 which allows the lease and non-lease components to be combined in the measurement of lease liabilities and ROU assets.
In addition to the leases held directly by the divested businesses, some leases are used by both the Parent and certain divested businesses. Allocations for the rent expense associated with this usage have been included within other operating expenses on the combined statement of comprehensive income. The total lease cost for the divested businesses was $3 million for the year ended December 31, 2020.
The divested businesses use the incremental borrowing rate as established by the Parent to calculate the present values of the future lease payments. Since the majority of the Parent’s debt is publicly-traded, the real estate and treasury functions are centralized, and the Parent’s subsidiaries are generally prohibited from borrowing externally, the divested businesses have determined it appropriate to use the Parent’s combined unsecured borrowing rate, adjusted for collateralization in accordance with ASC 842. Using the resulting interest rate curves from publicly-traded debt at this collateralized borrowing rate, the divested businesses select the interest rate at lease inception by reference to the lease term and lease currency.
The leases generally do not contain restrictive covenants or residual value guarantees.
Goodwill and Intangible Assets — In applying the acquisition method of accounting for business combinations, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. The fair values of intangible assets are compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value.
Acquired intangible assets are amortized over the following periods:
| Amortization basis |
Expected life (years) |
|||||
| Client relationships |
Straight-line basis |
14 | ||||
| Other |
Straight-line basis |
10 | ||||
Goodwill is tested for impairment annually by the Parent as of October 1, and whenever indicators of impairment exist. In the impairment test, the fair value of each of the Parent’s reporting units is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the difference is recognized as an impairment loss. The goodwill impairment tests performed by the Parent for the year ended December 31, 2020 has not resulted in any impairment charges. See Note 5 — Goodwill and Intangible Assets for additional information about the divested businesses’ goodwill and other intangible assets.
Pensions — Employees of the divested businesses participate in several defined benefit plans and defined contribution plans that are sponsored by other subsidiaries of the Parent (the ‘Shared Plans’). The divested businesses account for participation in the Shared Plans as multiemployer benefit plans. Accordingly, the divested businesses do not record an asset or liability to recognize the funded status of the Shared Plans. The related pension expense is allocated based on the annual contribution cost reported within salaries and benefits, or other income, net, as appropriate, in the combined statement of comprehensive income. The pension cost related to participation in the Shared Plans for the year ended December 31, 2020 was $2 million. Contributions to plans are recognized as incurred. Differences between contributions payable in the year and contributions actually paid are classified as either other assets or other liabilities in the combined balance sheet. The defined contribution plan expense for the year ended December 31, 2020 was $8 million.
Revenue Recognition — The divested businesses perform reinsurance broking services in several countries across the globe. In these broking arrangements, the divested businesses earn revenue by acting as intermediaries in the placement of effective reinsurance
10
policies. Generally, the divested businesses act as agents in reinsurance broking arrangements where the client is the party looking to cede risks to the reinsurance markets. The primary performance obligation under the majority of these arrangements is to place an effective reinsurance policy, but there can also be significant post-placement obligations in certain contracts to which the divested businesses need to allocate revenue. The most common of these is for claims handling, and these amounts are recognized over time because the customers are simultaneously consuming the benefits of these services.
Due to the nature of the majority of the broking arrangements, no single document constitutes the contract for ASC 606, Revenue From Contracts With Customers, (‘ASC 606’) purposes. The divested businesses’ services may be governed by a mixture of different types of contractual arrangements depending on the jurisdiction or type of coverage, including terms of business agreements, broker-of-record letters, statements of work or local custom and practice. This is then confirmed by the client’s acceptance of the underlying reinsurance contract. Prior to the policy inception date, the client has not accepted nor formally committed to perform under the arrangement (i.e. pay for the reinsurance coverage in place). Therefore, in the majority of broking arrangements the contract date is the date the reinsurance policy incepts.
As noted, the primary performance obligation typically consists of only the placement of an effective reinsurance policy which precedes the inception date of the policy. Therefore, most of the fulfillment costs are incurred before the divested businesses can recognize revenue and are thus deferred during the pre-placement process. Where the divested businesses have material post-placement services obligations, they estimate the relative fair value of the post-placement services using the expected cost-plus-margin approach.
Payment for the broking services usually takes the form of commissions or fees negotiated in lieu of commissions. At times, the divested businesses may receive additional income for performing these services from the reinsurance carriers’ markets, which is collectively referred to as ‘market derived income’. In situations in which the fees are not fixed but are variable, the divested businesses must estimate the likely commission per policy, taking into account the likelihood of cancellation before the end of the policy term. For proportional treaty reinsurance broking, the commissions to which the divested businesses will be entitled can vary based on the underlying individual insurance policies that are placed. The divested businesses base the estimates of transaction prices on supportable evidence from an analysis of past transactions, and only include amounts that are probable of being received or not refunded (referred to as applying ‘constraint’ under ASC 606). This is an area requiring significant judgment and results in the divested businesses estimating transaction prices that may be significantly lower than the ultimate amount of commissions that may be collected. The transaction prices are then adjusted over time as the divested businesses receive confirmations of the remuneration through receipt of treaty statements, or as other information becomes available.
The divested businesses recognize revenue for most broking arrangements as of a point in time at the later of the policy inception date or when the policy placement is complete, because this is viewed as the date when control is transferred to the client.
Interest income — Interest income is recognized as earned.
Other income — Other income includes gains on disposal of intangible assets, which primarily arise from settlements through enforcing non-compete agreements in the event of losing accounts through producer defection or the disposal of books of business.
Cost to obtain or fulfill contracts — Costs to obtain customers include commissions for brokers under specific agreements that would not be incurred without a contract being signed and executed. The divested businesses have elected to apply the ASC 606 ‘practical expedient’ which allows these costs to be expensed as incurred if the amortization period related to the resulting asset would be one year or less. The divested businesses have no significant instances of contracts that would be amortized for a period greater than a year, and therefore have no contract costs capitalized for these arrangements.
Costs to fulfill include costs incurred by the divested businesses that are expected to be recovered within the expected contract period.
The divested businesses must estimate the fulfillment costs incurred during the pre-placement of the broking contracts. These judgments include:
| • | which activities in the pre-placement process should be eligible for capitalization; |
| • | the amount of time and effort expended on those pre-placement activities; |
| • | the amount of payroll and related costs eligible for capitalization; and, |
| • | the monthly or quarterly timing of underlying reinsurance policy inception dates. |
The divested businesses amortize costs to fulfill over the period they receive the related benefits, which is typically less than a year.
11
Recent Accounting Pronouncements
The following recent accounting pronouncements are applicable to Willis Re DivestCo, but any adoption dates have been determined by the Parent and applied to these carved-out and combined financial statements.
Not adopted for 2020
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which clarifies and amends existing guidance, including removing certain exceptions to the general principles of accounting for income taxes. This ASU became effective for the divested businesses on January 1, 2021. Some of the changes must be applied on a retrospective or modified retrospective basis while others must be applied on a prospective basis. Early adoption is permitted. The divested businesses did not adopt this ASU early and it did not have an impact on the combined financial statements.
Adopted for 2020
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which amended the guidance on the impairment of financial instruments. The ASU added an impairment model (known as the current expected credit loss (‘CECL’) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses on assets measured at amortized cost, which is intended to result in more timely recognition of such losses. The ASU was also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the ASU made targeted changes to the impairment model for available-for-sale debt securities. Additional ASUs were subsequently issued which provided amended and additional guidance for the implementation of ASU No. 2016-13. All related guidance has been codified into, and is now known as, ASC 326, Financial Instruments—Credit Losses (‘ASC 326’). ASC 326 became effective for the divested businesses on January 1, 2020, at which time the divested businesses adopted it. This ASU did not have a material impact on the combined financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, previous U.S. GAAP required the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that is required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for the Parent on January 1, 2020, at which time the Parent adopted it. The amendments in this ASU are applied on a prospective basis. There was no immediate impact to the Parent’s consolidated financial statements upon adopting this ASU, and the most recent goodwill impairment test resulted in fair values in excess of carrying values for all reporting units at October 1, 2020.
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for accounting for contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This ASU became effective for the divested businesses on March 12, 2020. The divested businesses may apply the changes relating to contracts from January 1, 2020 or from a later date. The divested businesses have made no contract modifications thus far to transition to a different reference rate.
Note 3 — Revenue
Disaggregation of Revenue
The following table presents revenue by geography where the work is performed, as well as a reconciliation to total revenue for the year ended December 31, 2020.
| North America | Great Britain | Western Europe | International | Total revenue by geography |
||||||||||||||||
| Total revenue from customer contracts |
$ | 318 | $ | 314 | $ | 30 | $ | 59 | $ | 721 | ||||||||||
| Interest and other income |
3 | 2 | — | — | 5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenue |
$ | 321 | $ | 316 | $ | 30 | $ | 59 | $ | 726 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
12
Contract Balances
The divested businesses report accounts receivable, net on the combined balance sheet, which includes billed receivables and current contract assets. In addition to accounts receivable, net, the divested businesses had the following non-current contract assets and deferred revenue balances at December 31, 2020:
| Billed receivables, net of allowance for doubtful accounts of $3 million |
$ | 166 | ||
| Current contract assets |
60 | |||
|
|
|
|||
| Accounts receivable, net |
$ | 226 | ||
|
|
|
|||
| Non-current accounts receivable, net |
$ | 2 | ||
|
|
|
|||
| Non-current contract assets |
$ | 4 | ||
|
|
|
|||
| Deferred revenue |
$ | 3 | ||
|
|
|
The divested businesses receive payments from customers based on billing schedules or terms as written in their contracts. Those balances denoted as contract assets relate to situations where the divested businesses have completed some or all performance under the contract; however, their right to consideration is conditional. Contract assets result in the divested businesses’ proportional treaty arrangements due to the amounts being conditional on the volume and terms of underlying policies being placed by others. Billed receivables are recorded when the right to consideration becomes unconditional. Deferred revenue relates to payments received in advance of performance under the contract and is recognized as revenue as (or when) the divested businesses perform under the contract.
Accounts receivable are stated at estimated net realizable values. The following table presents the changes in the divested businesses’ allowance for doubtful accounts for the years ended December 31, 2020.
| Balance at January 1, 2020 |
$ | 2 | ||
| Additions charged to costs and expenses |
3 | |||
| Deductions/other movements |
(2 | ) | ||
|
|
|
|||
| Balance at December 31, 2020 |
$ | 3 | ||
|
|
|
During the year ended December 31, 2020, revenue of approximately $3 million was recognized that was reflected as deferred revenue at December 31, 2019.
During the year ended December 31, 2020, the divested businesses recognized revenue of approximately $10 million related to performance obligations satisfied in a prior period.
Performance Obligations
In accordance with ASC 606, the divested businesses have elected not to disclose the remaining performance obligations when one or both of the following circumstances apply:
| • | Performance obligations which are part of a contract that has an original expected duration of less than one year, and |
| • | Performance obligations satisfied in accordance with ASC 606-10-55-18 (‘right to invoice’). |
All of the divested businesses’ contracts are cancellable with less than one year’s notice and have no substantive penalty for cancellation.
Costs to obtain or fulfill a contract
The divested businesses incur costs to obtain or fulfill contracts which they would not incur if a contract with a customer was not executed. The following table shows the categories of costs that are capitalized and deferred over the expected life of a contract.
| Balance at January 1, 2020 |
$ | 29 | ||
| New capitalized costs |
141 | |||
| Amortization |
(140 | ) | ||
|
|
|
|||
| Balance at December 31, 2020 |
$ | 30 | ||
|
|
|
13
Note 4 — Income Taxes
Provision for income taxes
An analysis of income from operations before income taxes by taxing jurisdiction for the year ended December 31, 2020 is shown below:
| U.S. |
$ | 106 | ||
| Rest of World |
127 | |||
|
|
|
|||
| Total |
$ | 233 | ||
|
|
|
The components of the provision for income taxes for the year ended December 31, 2020 include:
| Current tax expense: |
||||
| U.S. federal taxes |
$ | 23 | ||
| U.S. state |
7 | |||
| Rest of world |
23 | |||
|
|
|
|||
| Total current tax expense |
53 | |||
|
|
|
|||
| Deferred tax benefit: |
||||
| U.S. federal taxes |
(1 | ) | ||
| U.S. state |
(1 | ) | ||
| Rest of world |
(1 | ) | ||
|
|
|
|||
| Total deferred tax benefit |
(3 | ) | ||
|
|
|
|||
| Total provision for income taxes |
$ | 50 | ||
|
|
|
Effective tax rate reconciliation
The principal reasons for the differences between the income tax amounts provided and those that would have resulted from the application of the U.S. federal statutory tax rate for the year ended December 21, 2020 are as follows:
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |
$ | 233 | ||
| U.S. federal statutory income tax rate |
21 | % | ||
| Income tax expense at U.S. federal tax rate |
49 | |||
| Adjustments to derive effective tax rate: |
||||
| Tax differentials on non-U.S. jurisdictions |
(4 | ) | ||
| Tax differentials of U.S. state taxes and local taxes |
6 | |||
| Non-deductible expenses and dividends |
(1 | ) | ||
|
|
|
|||
| Provision for income taxes |
$ | 50 | ||
|
|
|
The statutory tax rate for the U.S. of 21% has been used because significant operations are in the U.S. and the use of the 21% rate allows comparability to WTW.
Deferred income taxes
Deferred income tax assets and liabilities reflect the effect of temporary differences between the assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. A valuation allowance is recognized if it is more likely than not that a future tax benefit will not be realized.
14
Deferred income tax assets and liabilities included in the combined balance sheet at December 31, 2020 are comprised of the following:
| Deferred tax assets: |
||||
| Accrued compensation |
$ | 4 | ||
| Cost of intangible assets, net of related amortization |
1 | |||
| Accrued expenses not currently deductible |
1 | |||
| Share-based compensation |
2 | |||
|
|
|
|||
| Gross deferred tax assets |
8 | |||
| Less: valuation allowance |
— | |||
|
|
|
|||
| Net deferred tax assets |
$ | 8 | ||
|
|
|
|||
| Deferred tax liabilities: |
||||
| Accrued expenses not currently deductible |
$ | (2 | ) | |
| Accrued income and pre-payments not currently taxable |
(5 | ) | ||
|
|
|
|||
| Deferred tax liabilities |
(7 | ) | ||
|
|
|
|||
| Net deferred tax assets |
$ | 1 | ||
|
|
|
The net deferred income tax assets and the net deferred income tax liabilities are presented in the following respective captions of our combined balance sheet.
| Balance sheet classifications: |
||||
| Deferred tax assets |
$ | 3 | ||
| Other non-current liabilities |
(2 | ) | ||
|
|
|
|||
| Net deferred tax assets |
$ | 1 | ||
|
|
|
There are no material deferred tax assets related to tax loss or tax credit carryforwards; however, certain entities included in these financial statements reported tax loss carryforwards for December 31, 2020. These losses are not material on a gross basis and contributed only an insignificant amount to the gross deferred tax asset.
Management believes, based on the evaluation of positive and negative evidence, including the future reversal of existing taxable temporary differences, it is more likely than not that Willis Re DivestCo will realize the benefits of the gross deferred tax assets of $8 million at December 31, 2020.
These financial statements present the collective results of certain businesses (see Note 1 – Nature of Operations). Within these businesses there are no incidents of unremitted earnings or outside basis differences related to foreign subsidiaries for which deferred income tax consequences were not recognized.
Uncertain tax positions
At December 31, 2020, the amount of unrecognized tax benefits associated with uncertain tax positions was immaterial. There was no material activity during 2020 related to the liability for unrecognized tax benefits.
Status of tax returns
The divested businesses and their subsidiaries file separate income tax returns in various tax jurisdictions in which they operate and join WTW, as appropriate, in the filing of consolidated or combined income tax returns.
WTW has ongoing state income tax examinations in certain states for tax years ranging from calendar years ended December 31, 2014 through December 31, 2018. The statute of limitations in certain states remains open back to calendar year 2014.
15
All U.K. tax returns have been filed timely and are in the normal process of being reviewed by Her Majesty’s Revenue & Customs. Willis Re DivestCo is not currently subject to any material examinations in other jurisdictions. A summary of the tax years that remain open to tax examination in our major tax jurisdictions is as follows:
| Open Tax Years (fiscal year ending in) | ||
| U.S. — federal |
2017 and forward | |
| U.S. — various states |
2014 and forward | |
| U.K. |
2010 and forward |
Note 5 — Goodwill and Intangible Assets
Goodwill
The goodwill presented in Willis Re DivestCo’s combined financial statements was calculated on a relative fair value basis from the goodwill held by the Parent. The changes in the goodwill balances are included below for the year ended December 31, 2020:
| Goodwill - January 1, 2020 |
$ | 809 | ||
| Foreign exchange |
3 | |||
|
|
|
|||
| Goodwill - December 31, 2020 |
$ | 812 | ||
|
|
|
Intangible Assets
The intangible assets of Willis Re DivestCo have been determined on a specific identification basis. The following table reflects changes in the net carrying amounts of the components of finite-lived intangible assets for the year ended December 31, 2020:
| Client relationships | Other | Total | ||||||||||
| Balance at January 1, 2020: |
||||||||||||
| Intangible assets, gross |
$ | 7 | $ | — | $ | 7 | ||||||
| Accumulated amortization |
(3 | ) | — | (3 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Intangible assets, net - January 1, 2020 |
4 | — | 4 | |||||||||
| Intangible assets acquired |
— | 5 | 5 | |||||||||
| Amortization |
— | (1 | ) | (1 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2020: |
||||||||||||
| Intangible assets, gross |
7 | 5 | 12 | |||||||||
| Accumulated amortization |
(3 | ) | (1 | ) | (4 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Intangible assets, net - December 31, 2020 |
$ | 4 | $ | 4 | $ | 8 | ||||||
|
|
|
|
|
|
|
|||||||
The weighted-average remaining life of amortizable intangible assets at December 31, 2020 was 8 years.
The table below reflects the future estimated amortization expense for amortizable intangible assets for the next five years and thereafter:
| Years ended December 31, |
Amortization | |||
| 2021 |
$ | 1 | ||
| 2022 |
1 | |||
| 2023 |
1 | |||
| 2024 |
1 | |||
| 2025 |
1 | |||
| Thereafter |
3 | |||
|
|
|
|||
| Total |
$ | 8 | ||
|
|
|
|||
16
Note 6 — Related Party Transactions
As discussed in Note 2 — Basis of Presentation and Significant Accounting Policies, there are amounts due to or from related parties, which comprise WTW and other WTW subsidiaries and businesses which are not included in the divested businesses. These amounts primarily arise from the following types of transactions:
| • | Direct expenses, and reimbursements for such expenses, for specific colleagues or services. These colleagues and services may be provided by or to Willis Re DivestCo. |
| • | Allocated expenses for the costs of WTW corporate functions, including accounting, legal, information technology and marketing. |
| • | Royalty fees for the use of WTW trade names and other intellectual property. |
| • | Co-broking and sub-broking with other WTW non-divested subsidiaries and businesses. These amounts can be both due to and due from these other non-divested subsidiaries and businesses. |
| • | Fiduciary assets or liabilities that arise in co-broking or sub-broking arrangements. |
Costs for certain of these services are either recognized through an allocated portion of WTW’s corporate costs, or billed directly to the divested businesses, such as most employee benefit costs. Allocated corporate costs and all significant intercompany transactions are deemed to be settled for cash in the period in which the revenue or expense was recorded in the combined statement of comprehensive income. The combined statement of cash flows presents these corporate expenses as cash flows from operating activities, as these costs were incurred by WTW during its normal operations. Allocated costs of $74 million were recognized in other operating expenses in the combined statement of comprehensive income of the divested businesses for the year ended December 31, 2020.
Willis Re DivestCo has classified intercompany transactions with WTW non-divested subsidiaries and businesses, including non-trade relationships that will be cash-settled and will remain on the balance sheet or statement of comprehensive income, as related party transactions. Intercompany loans receivable of $10 million are expected to be settled in cash and have been included in amounts due from related parties on the combined balance sheet. However, non-cash settled or forgiven intercompany net receivables totaling $633 million as of December 31, 2020 are reclassified as equity transactions and included in the net Parent investment.
Additionally, as part of the consolidated cash and financing activities managed by WTW, the divested businesses have cash amounts included in accounts held and owned by WTW. These cash amounts totaled $20 million at December 31, 2020 and have been excluded from cash and cash equivalents and included as amounts due from related parties in the combined balance sheet of Willis Re DivestCo.
Note 7 — Commitments and Contingencies
Indemnification Agreements
The Parent has various agreements which provide that it may be obligated to indemnify the other party to the agreement with respect to certain matters on behalf of the divested businesses. Generally, these indemnification provisions are included in contracts arising in the normal course of business and in connection with the purchase and sale of certain businesses. It is not possible to predict the maximum potential amount of future payments that may become due under these indemnification agreements because of the conditional nature of the divested businesses’ obligations and the unique facts of each particular agreement. However, at this time the divested businesses do not believe that any potential liability that may arise from such indemnity provisions is probable or material.
Legal Proceedings
In the ordinary course of business, the divested businesses are subject to various actual and potential claims, lawsuits and other proceedings. Some of the claims, lawsuits and other proceedings seek damages in amounts which could, if assessed, be significant. The divested businesses expect the impact of claims or demands not described below to be immaterial to their combined financial statements. The divested businesses also receive subpoenas in the ordinary course of business and, from time to time, receives requests for information in connection with governmental investigations.
Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance obtained by the Parent. The terms of this insurance vary by policy year. Regarding self-insured risks, the divested businesses have established provisions which are believed to be adequate in light of current information and legal advice, or, in certain cases, where a range of loss exists, the minimum amount in the range is accrued if no amount within the range is a better estimate than any other amount. The divested businesses adjust such provisions from time to time according to developments. See Note 8 — Supplementary Information for Certain Balance Sheet Accounts for the amounts accrued at December 31, 2020 in the combined balance sheet.
17
On the basis of current information, Willis Re DivestCo does not expect that the actual claims, lawsuits and other proceedings to which it is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will ultimately have a material adverse effect on its financial condition, results of operations or liquidity. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and disputes with insurance companies, it is possible that an adverse outcome or settlement in certain matters could, from time to time, have a material adverse effect on Willis Re DivestCo’s results of operations or cash flows in particular quarterly or annual periods. In addition, given the early stages of some litigation or regulatory proceedings described below, it may not be possible to predict their outcomes or resolutions, and it is possible that any one or more of these events may have a material adverse effect on the divested businesses.
The divested businesses provide for contingent liabilities based on ASC 450, Contingencies, when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. The contingent liabilities recorded are primarily developed actuarially. Litigation is subject to many factors which are difficult to predict, so there can be no assurance that in the event of a material unfavorable result in one or more claims, the divested businesses will not incur material costs.
Note 8 — Supplementary Information for Certain Balance Sheet Accounts
Additional details of specific balance sheet accounts are detailed below.
Prepaid and other current assets consist of the following at December 31, 2020:
| Prepayments |
$ | 4 | ||
| Deferred contract costs |
30 | |||
| Corporate income and other taxes |
2 | |||
| Other current assets |
5 | |||
|
|
|
|||
| Total prepaid and other current assets |
$ | 41 | ||
|
|
|
Other non-current assets consist of the following at December 31, 2020:
| Accounts receivable, net |
$ | 2 | ||
| Non-current contract assets |
4 | |||
| Deferred compensation |
14 | |||
| Other non-current assets |
2 | |||
|
|
|
|||
| Total other non-current assets |
$ | 22 | ||
|
|
|
Salaries and employee-related liabilities consist of the following at December 31, 2020:
| Production and other incentive accruals |
$ | 102 | ||
| Accrued vacation |
7 | |||
| Other employee-related liabilities |
2 | |||
|
|
|
|||
| Total salaries and employee-related liabilities |
$ | 111 | ||
|
|
|
Other current liabilities consist of the following at December 31, 2020:
| Third-party commissions |
$ | 114 | ||
| Payroll-related liabilities |
3 | |||
| Corporate tax liabilities |
4 | |||
| Other current liabilities |
6 | |||
|
|
|
|||
| Total other current liabilities |
$ | 127 | ||
|
|
|
Provision for liabilities consists of the following at December 31, 2020:
| Claims, lawsuits and other proceedings |
$ | 10 | ||
| Other provisions |
1 | |||
|
|
|
|||
| Total provision for liabilities |
$ | 11 | ||
|
|
|
18
Other non-current liabilities consist of the following at December 31, 2020:
| Contract liabilities |
$ | 4 | ||
| Deferred compensation |
11 | |||
| Deferred and other tax liabilities |
2 | |||
| Other non-current liabilities |
4 | |||
|
|
|
|||
| Total other non-current liabilities |
$ | 21 | ||
|
|
|
Note 9 — Subsequent Events
The combined financial statements of Willis Re DivestCo are derived from the consolidated financial statements of WTW, which issued its financial statements for the year ended December 31, 2020 on February 23, 2021. Accordingly, Willis Re DivestCo has evaluated transactions or other events for consideration as recognized subsequent events in the annual financial statements through February 23, 2021. Additionally, the divested businesses have evaluated transactions and other events that occurred through the issuance of these combined financial statements on December 15, 2021, for purposes of disclosure of unrecognized subsequent events.
Divestiture Completed
On August 12, 2021, WTW entered into the SAPA with AJG whereby AJG agreed to purchase the divested businesses for cash consideration of $3.25 billion plus an earnout payable in 2025 of up to $750 million, assuming exercise of the applicable French and Dutch put options. The French put option was exercised on November 26, 2021. WTW and AJG amended the SAPA on December 1, 2021 pursuant to that certain Closing Letter Agreement (the ‘CLA’). The principal closing of the transactions contemplated by the SAPA occurred on December 1, 2021. The amendments to the SAPA under the CLA provide, among other matters, that the closing of the remainder of the transactions contemplated by the SAPA will occur on March 1, 2022 (other than in China, which the CLA provides will occur on June 1, 2022).
Following the divestiture, a number of services are continuing under a transition service agreement and certain co-broking, sub-broking and account servicing agreements.
Settlements
In October 2021, Willis Re DivestCo received $35 million from competitors in relation to the settlements of certain litigation relating to staff defections.
Note 10 — Revision of Previously Issued Financial Statements
Subsequent to the issuance of the December 31, 2020 financial statements, to reflect the guidance on restricted cash presentation in FASB ASC 230, Statement of Cash Flows, Willis Re DivestCo corrected the classification of its fiduciary funds balances on its combined statement of cash flows, by including these amounts in the total cash, cash equivalents and restricted cash amounts held at each balance sheet date. As a result, cash, cash equivalents and restricted cash balances of $44 million and $62 million at December 31, 2020 and January 1, 2020, respectively, have been revised to $1.3 billion and $1.2 billion, respectively. Additionally, the effect of exchange rate changes on cash, cash equivalents and restricted cash has been updated to include the effect of exchange rate changes on the fiduciary funds balances.
Prior to this correction, the changes in fiduciary funds were presented in fiduciary assets and liabilities on a gross basis in the cash flows from operating activities, where the amounts fully offset each period. In the current presentation, an additional line item, net proceeds from fiduciary funds held for clients, has been included within cash flows from financing activities to represent the change in fiduciary funds balances during the period. The remaining fiduciary assets and fiduciary payables, in equal and offsetting amounts, are no longer presented in the cash flows from operating activities. There was no impact to the total cash flows from operating activities as a result of these changes.
19
Exhibit 99.2
Willis Re DivestCo
Unaudited Combined Financial Statements
As of and for the Nine Months Ended September 30, 2021
Willis Re DivestCo
Unaudited Combined Financial Statements
September 30, 2021
Table of Contents
| Page | ||||
| Unaudited Combined Financial Statements: |
||||
| Condensed Combined Balance Sheet – September 30, 2021 |
1 | |||
| Condensed Combined Statement of Comprehensive Income – Nine Months Ended September 30, 2021 |
2 | |||
| Condensed Combined Statement of Cash Flows – Nine Months Ended September 30, 2021 |
3 | |||
| Condensed Combined Statement of Changes in Equity – Nine Months Ended September 30, 2021 |
4 | |||
| Notes to the Condensed Combined Financial Statements |
5 | |||
Willis Re DivestCo
Condensed Combined Balance Sheet
(In millions of U.S. dollars)
(Unaudited)
| September 30, 2021 |
||||
| ASSETS |
||||
| Cash and cash equivalents |
$ | 54 | ||
| Fiduciary assets, including related party assets of $30 |
7,553 | |||
| Accounts receivable, net |
332 | |||
| Due from related parties |
49 | |||
| Prepaid and other current assets |
23 | |||
|
|
|
|||
| Total current assets |
8,011 | |||
| Fixed assets, net |
1 | |||
| Goodwill |
812 | |||
| Intangible assets, net |
7 | |||
| Deferred tax assets |
4 | |||
| Other non-current assets |
20 | |||
|
|
|
|||
| Total non-current assets |
844 | |||
|
|
|
|||
| TOTAL ASSETS |
$ | 8,855 | ||
|
|
|
|||
| LIABILITIES AND EQUITY |
||||
| Fiduciary liabilities, including related party liabilities of $42 |
$ | 7,553 | ||
| Salaries and employee-related liabilities |
84 | |||
| Deferred revenue and accrued expenses |
7 | |||
| Due to related parties |
30 | |||
| Other current liabilities |
151 | |||
|
|
|
|||
| Total current liabilities |
7,825 | |||
| Employee-related liabilities |
11 | |||
| Provision for liabilities |
11 | |||
| Other non-current liabilities |
27 | |||
|
|
|
|||
| Total non-current liabilities |
49 | |||
|
|
|
|||
| TOTAL LIABILITIES |
7,874 | |||
| COMMITMENTS AND CONTINGENCIES |
||||
| EQUITY |
||||
| Net Parent investment |
979 | |||
| Accumulated other comprehensive income, net of tax |
2 | |||
|
|
|
|||
| Total equity |
981 | |||
|
|
|
|||
| TOTAL LIABILITIES AND EQUITY |
$ | 8,855 | ||
|
|
|
|||
See accompanying notes to the condensed combined financial statements
1
Willis Re DivestCo
Condensed Combined Statement of Comprehensive Income
(In millions of U.S. dollars)
(Unaudited)
| Nine months ended September 30, 2021 |
||||
| Revenue |
$ | 668 | ||
| Costs of providing services |
||||
| Salaries and benefits |
290 | |||
| Other operating expenses |
123 | |||
| Depreciation and amortization |
3 | |||
|
|
|
|||
| Total costs of providing services |
416 | |||
|
|
|
|||
| Income from operations |
252 | |||
| Other expense, net |
(1 | ) | ||
|
|
|
|||
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |
251 | |||
| Provision for income taxes |
(57 | ) | ||
|
|
|
|||
| NET INCOME |
$ | 194 | ||
|
|
|
|||
| Other comprehensive income, net of tax: |
||||
| Foreign currency translation |
$ | 1 | ||
|
|
|
|||
| Other comprehensive income, net of tax |
1 | |||
|
|
|
|||
| COMPREHENSIVE INCOME |
$ | 195 | ||
|
|
|
|||
See accompanying notes to the condensed combined financial statements
2
Willis Re DivestCo
Condensed Combined Statement of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
| Nine months ended September 30, 2021 |
||||
| CASH FLOWS FROM OPERATING ACTIVITIES |
||||
| NET INCOME |
$ | 194 | ||
| Adjustments to reconcile net income to total net cash from operating activities: |
||||
| Depreciation and amortization |
3 | |||
| Net periodic benefit cost of defined benefit pension plans |
2 | |||
| Provision for doubtful receivables from clients |
3 | |||
| Benefit for deferred income taxes |
(1 | ) | ||
| Share-based compensation |
2 | |||
| Other, net |
(2 | ) | ||
| Changes in operating assets and liabilities: |
||||
| Accounts receivable |
(112 | ) | ||
| Due from related parties |
(13 | ) | ||
| Due to related parties |
(2 | ) | ||
| Other assets |
18 | |||
| Other liabilities |
1 | |||
|
|
|
|||
| Net cash from operating activities |
93 | |||
|
|
|
|||
| CASH FLOWS FROM FINANCING ACTIVITIES |
||||
| Net transfers to Parent |
(86 | ) | ||
| Related party operational loans, net |
2 | |||
| Net proceeds from fiduciary funds held for clients |
358 | |||
|
|
|
|||
| Net cash from financing activities |
274 | |||
|
|
|
|||
| INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
367 | |||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash |
(17 | ) | ||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR |
1,323 | |||
|
|
|
|||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR |
$ | 1,673 | ||
|
|
|
|||
| Reconciliation of cash, cash equivalents and restricted cash: |
||||
| Cash and cash equivalents |
$ | 54 | ||
| Fiduciary funds held on behalf of clients (included in fiduciary assets) |
1,619 | |||
|
|
|
|||
| Total cash, cash equivalents and restricted cash |
$ | 1,673 | ||
|
|
|
|||
See accompanying notes to the condensed combined financial statements
3
Willis Re DivestCo
Condensed Combined Statement of Changes in Equity
(In millions of U.S. dollars)
(Unaudited)
| Net Parent Investment |
Accumulated Other Comprehensive Income |
Total Equity |
||||||||||
| Balance as of January 1, 2021 |
$ | 873 | $ | 1 | $ | 874 | ||||||
| Net transfers to Parent |
(88 | ) | — | (88 | ) | |||||||
| Net income |
194 | — | 194 | |||||||||
| Other comprehensive income |
— | 1 | 1 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance as of September 30, 2021 |
$ | 979 | $ | 2 | $ | 981 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to the condensed combined financial statements
4
Willis Re DivestCo
Notes to the Condensed Combined Financial Statements
(Tabular amounts are in millions of U.S. dollars)
(Unaudited)
Note 1 — Nature of Operations
The condensed combined financial statements of Willis Re DivestCo (or the ‘divested businesses’) present the combined results of certain businesses under the common control of Willis Towers Watson plc, a company organized under the laws of Ireland. Willis Towers Watson plc, together with its subsidiaries (‘WTW’ or the ‘Parent’), is a leading global advisory, broking and solutions company. On August 12, 2021, WTW agreed to sell its treaty reinsurance broking businesses to Arthur J. Gallagher & Co. (‘AJG’) pursuant to that certain Security and Asset Purchase Agreement (as amended from time to time, the ‘SAPA’), dated as of August 12, 2021. These divested businesses operate globally as Willis Re (‘Willis Re’) and include the operations of both entities that solely provided reinsurance services (‘Dedicated entities’) and the reinsurance portion of entities that provide both reinsurance and non-reinsurance services (‘Commingled entities’).
Notwithstanding the foregoing description, WTW has not agreed to sell the businesses in France or the Netherlands. However, AJG has granted WTW a put option with respect to such businesses, and therefore the foregoing businesses in France and the Netherlands have been included in the Willis Re DivestCo unaudited condensed combined financial statements.
The principal closing of the transactions contemplated by the SAPA occurred on December 1, 2021. See Note 9 — Subsequent Events for further details.
Note 2 — Basis of Presentation and Recent Accounting Pronouncements
Basis of Presentation
Throughout the period covered by the unaudited condensed combined financial statements, Willis Re DivestCo operated as part of WTW. Consequently, standalone financial statements have not historically been prepared for Willis Re DivestCo. These condensed combined financial statements are presented on a ‘standalone’ basis and as historically managed by WTW and were derived from the consolidated financial statements and accounting records of WTW. The accompanying unaudited condensed combined financial statements of Willis Re DivestCo are presented in accordance with accounting principles generally accepted in the United States (‘U.S. GAAP’) and with interim disclosure requirements and therefore do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The condensed combined financial statements may not be indicative of the divested businesses’ future performance and do not necessarily fully reflect what the financial position, results of operations and cash flows would have been had Willis Re DivestCo operated as a standalone company during the period presented.
In the opinion of management, these condensed combined financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed combined financial statements and results for the interim period. All intercompany accounts and transactions have been eliminated in combination. The condensed combined financial statements should be read together with the accounting policies disclosed in the Willis Re DivestCo Combined Financial Statements as of and for the Year Ended December 31, 2020 issued on December 15, 2021.
The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results that can be expected for the entire year. Willis Re DivestCo experiences seasonal fluctuations of its revenue which is typically higher during the divested businesses’ first quarter due primarily to the timing of treaty broking policy renewals. The results reflect certain estimates and assumptions made by management, including those estimates used in professional liability claims, estimated bonuses, valuation of billed and unbilled receivables and anticipated tax liabilities that affect the amounts reported in the condensed combined financial statements and related notes.
5
Recent Accounting Pronouncements
The following recent accounting pronouncements are applicable to Willis Re DivestCo, but any adoption dates have been determined by the Parent and applied to these carved-out and condensed combined financial statements.
Not Yet Adopted
There are no pending accounting pronouncements that are expected to have a significant impact on the condensed combined financial statements.
Adopted
In December 2019, the Financial Accounting Standards Board issued Accounting Standard Update No. 2019-12, Simplifying the Accounting for Income Taxes, which clarifies and amends existing guidance, including removing certain exceptions to the general principles of accounting for income taxes. Some of the changes were required to be applied on a retrospective or modified retrospective basis while others were required to be applied on a prospective basis. The divested businesses adopted this guidance as it became effective on January 1, 2021 without any impact on the condensed combined financial statements.
Note 3 — Revenue
Disaggregation of Revenue
The following table presents revenue by geography where the work is performed, as well as a reconciliation to total revenue for the nine months ended September 30, 2021.
| North America | Great Britain | Western Europe |
International | Total revenue by geography |
||||||||||||||||
| Total revenue from customer contracts |
$ | 282 | $ | 295 | $ | 33 | $ | 56 | $ | 666 | ||||||||||
| Interest and other income |
1 | 1 | — | — | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenue |
$ | 283 | $ | 296 | $ | 33 | $ | 56 | $ | 668 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Contract Balances
The divested businesses report accounts receivable, net on the condensed combined balance sheet, which includes billed receivables and current contract assets. In addition to accounts receivable, net, the divested businesses had the following non-current contract assets and deferred revenue balances at September 30, 2021:
| Billed receivables, net of allowance for doubtful accounts of $5 million |
$ | 252 | ||
| Current contract assets |
80 | |||
|
|
|
|||
| Accounts receivable, net |
$ | 332 | ||
|
|
|
|||
| Non-current contract assets |
$ | 6 | ||
|
|
|
|||
| Deferred revenue |
$ | 4 | ||
|
|
|
During the nine months ended September 30, 2021, revenue of approximately $3 million was recognized that was reflected as deferred revenue at December 31, 2020.
During the nine months ended September 30, 2021, the divested businesses recognized revenue of approximately $29 million related to performance obligations satisfied prior to 2021.
Performance Obligations
In accordance with Accounting Standards Codification (‘ASC’) 606, the divested businesses have elected not to disclose the remaining performance obligations when one or both of the following circumstances apply:
| • | Performance obligations which are part of a contract that has an original expected duration of less than one year, and |
| • | Performance obligations satisfied in accordance with ASC 606-10-55-18 (‘right to invoice’). |
6
All of the divested businesses’ contracts are cancellable with less than one year’s notice and have no substantive penalty for cancellation.
Note 4 — Income Taxes
The provision for income taxes for the nine months ended September 30, 2021 is $57 million. The effective tax rate for the nine months ended September 30, 2021 is 22.62%. The provision included the effects of a U.K. statutory tax rate change from 19% to 25% enacted in the second quarter of 2021.
Note 5 — Goodwill and Intangible Assets
Goodwill
The goodwill presented in Willis Re DivestCo’s condensed combined financial statements was calculated on a relative fair value basis from the goodwill held by the Parent. The changes in the goodwill balances are included below for the nine months ended September 30, 2021:
| Goodwill - December 31, 2020 |
$ | 812 | ||
| Foreign exchange |
— | |||
|
|
|
|||
| Goodwill - September 30, 2021 |
$ | 812 | ||
|
|
|
Intangible Assets
The intangible assets of Willis Re DivestCo have been determined on a specific identification basis. The following table reflects changes in the net carrying amounts of the components of finite-lived intangible assets for the nine months ended September 30, 2021:
| Client relationships | Other | Total | ||||||||||
| Balance at December 31, 2020: |
||||||||||||
| Intangible assets, gross |
7 | 5 | 12 | |||||||||
| Accumulated amortization |
(3 | ) | (1 | ) | (4 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Intangible assets, net - December 31, 2020 |
4 | 4 | 8 | |||||||||
| Amortization |
(1 | ) | — | (1 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at September 30, 2021: |
||||||||||||
| Intangible assets, gross |
7 | 5 | 12 | |||||||||
| Accumulated amortization |
(4 | ) | (1 | ) | (5 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Intangible assets, net - September 30, 2021 |
$ | 3 | $ | 4 | $ | 7 | ||||||
|
|
|
|
|
|
|
|||||||
The weighted-average remaining life of amortizable intangible assets at September 30, 2021 was 7 years. In accordance with the agreement to sell the divested businesses on August 12, 2021, amortization of the intangible assets ceased as the net assets of the divested businesses were classified as held-for-sale in the consolidated financial statements of Willis Towers Watson.
7
Note 6 — Related Party Transactions
There are amounts due to or from related parties, which comprise WTW and other WTW subsidiaries and businesses which are not included in the divested businesses. These amounts primarily arise from the following types of transactions:
| • | Direct expenses, and reimbursements for such expenses, for specific colleagues or services. These colleagues and services may be provided by or to Willis Re DivestCo. |
| • | Allocated expenses for the costs of WTW corporate functions, including accounting, legal, information technology and marketing. |
| • | Royalty fees for the use of WTW trade names and other intellectual property. |
| • | Co-broking and sub-broking with other WTW non-divested subsidiaries and businesses. These amounts can be both due to and due from these other non-divested subsidiaries and businesses. |
| • | Fiduciary assets or liabilities that arise in co-broking or sub-broking arrangements. |
Costs for certain of these services are either recognized through an allocated portion of WTW’s corporate costs, or billed directly to the divested businesses, such as most employee benefit costs. Allocated corporate costs and all significant intercompany transactions are deemed to be settled for cash in the period in which the revenue or expense was recorded in the condensed combined statement of comprehensive income. The condensed combined statement of cash flows presents these corporate expenses as cash flows from operating activities, as these costs were incurred by WTW during its normal operations. Allocated costs of $68 million were recognized in other operating expenses in the condensed combined statement of comprehensive income of the divested businesses for the nine months ended September 30, 2021.
Willis Re DivestCo has classified intercompany transactions with WTW non-divested subsidiaries and businesses, including non-trade relationships that will be cash-settled and will remain on the condensed combined balance sheet or statement of comprehensive income, as related party transactions. Intercompany loans receivable of $13 million are expected to be settled in cash and have been included in amounts due from related parties on the condensed combined balance sheet. However, non-cash settled or forgiven intercompany net receivables totaling $856 million as of September 30, 2021 are reclassified as equity transactions and included in the net Parent investment.
Additionally, as part of the consolidated cash and financing activities managed by WTW, the divested businesses have cash amounts included in accounts held and owned by WTW. These cash amounts totaled $19 million at September 30, 2021 and have been excluded from cash and cash equivalents and included as amounts due from related parties in the condensed combined balance sheet of Willis Re DivestCo.
Note 7 — Commitments and Contingencies
Indemnification Agreements
The Parent has various agreements which provide that it may be obligated to indemnify the other party to the agreement with respect to certain matters on behalf of the divested businesses. Generally, these indemnification provisions are included in contracts arising in the normal course of business and in connection with the purchase and sale of certain businesses. It is not possible to predict the maximum potential amount of future payments that may become due under these indemnification agreements because of the conditional nature of the divested businesses’ obligations and the unique facts of each particular agreement. However, the divested businesses do not believe that any potential liability that may arise from such indemnity provisions is probable or material.
Legal Proceedings
In the ordinary course of business, the divested businesses are subject to various actual and potential claims, lawsuits and other proceedings. Some of the claims, lawsuits and other proceedings seek damages in amounts which could, if assessed, be significant. The divested businesses expect the impact of claims or demands not described below to be immaterial to their condensed combined financial statements. The divested businesses also receive subpoenas in the ordinary course of business and, from time to time, receives requests for information in connection with governmental investigations.
Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance obtained by the Parent. The terms of this insurance vary by policy year. Regarding self-insured risks, the divested businesses have established provisions which are believed to be adequate in light of current information and legal advice, or, in certain cases, where a range of loss exists, the minimum amount in the range is accrued if no amount within the range is a better estimate than any other amount. The divested businesses adjust such provisions from time to time according to developments. See Note 8 — Supplementary Information for Certain Balance Sheet Accounts for the amounts accrued at September 30, 2021 in the condensed combined balance sheet.
8
On the basis of current information, Willis Re DivestCo does not expect that the actual claims, lawsuits and other proceedings to which it is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will ultimately have a material adverse effect on its financial condition, results of operations or liquidity. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and disputes with insurance companies, it is possible that an adverse outcome or settlement in certain matters could, from time to time, have a material adverse effect on Willis Re DivestCo’s results of operations or cash flows in particular quarterly or annual periods. In addition, given the early stages of some litigation or regulatory proceedings described below, it may not be possible to predict their outcomes or resolutions, and it is possible that any one or more of these events may have a material adverse effect on the divested businesses.
The divested businesses provide for contingent liabilities based on ASC 450, Contingencies, when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. The contingent liabilities recorded are primarily developed actuarially. Litigation is subject to many factors which are difficult to predict, so there can be no assurance that in the event of a material unfavorable result in one or more claims, the divested businesses will not incur material costs.
Note 8 — Supplementary Information for Certain Balance Sheet Accounts
Additional details of specific balance sheet accounts are detailed below.
Prepaid and other current assets consist of the following at September 30, 2021:
| Prepayments |
$ | 9 | ||
| Deferred contract costs |
4 | |||
| Corporate income and other taxes |
5 | |||
| Other current assets |
5 | |||
|
|
|
|||
| Total prepaid and other current assets |
$ | 23 | ||
|
|
|
Other non-current assets consist of the following at September 30, 2021:
| Non-current contract assets |
$ | 6 | ||
| Deferred compensation |
13 | |||
| Other non-current assets |
1 | |||
|
|
|
|||
| Total other non-current assets |
$ | 20 | ||
|
|
|
Salaries and employee-related liabilities consist of the following at September 30, 2021:
| Production and other incentive accruals |
$ | 74 | ||
| Accrued vacation |
9 | |||
| Other employee-related liabilities |
1 | |||
|
|
|
|||
| Total salaries and employee-related liabilities |
$ | 84 | ||
|
|
|
Other current liabilities consist of the following at September 30, 2021:
| Third-party commissions |
$ | 136 | ||
| Payroll-related liabilities |
3 | |||
| Corporate tax liabilities |
6 | |||
| Other current liabilities |
6 | |||
|
|
|
|||
| Total other current liabilities |
$ | 151 | ||
|
|
|
Provision for liabilities consists of the following at September 30, 2021:
| Claims, lawsuits and other proceedings |
$ | 10 | ||
| Other provisions |
1 | |||
|
|
|
|||
| Total provision for liabilities |
$ | 11 | ||
|
|
|
9
Other non-current liabilities consist of the following at September 30, 2021:
| Contract liabilities |
$ | 4 | ||
| Deferred compensation |
17 | |||
| Deferred tax liabilities |
2 | |||
| Other non-current liabilities |
4 | |||
|
|
|
|||
| Total other non-current liabilities |
$ | 27 | ||
|
|
|
Note 9 — Subsequent Events
The condensed combined financial statements of Willis Re DivestCo are derived from the condensed consolidated financial statements of WTW, which issued its financial statements for the nine months ended September 30, 2021 on October 28, 2021. Accordingly, Willis Re DivestCo has evaluated transactions or other events for consideration as recognized subsequent events in the interim financial statements through October 28, 2021. Additionally, the divested businesses have evaluated transactions and other events that occurred through the issuance of these condensed combined financial statements on January 5, 2022, for purposes of disclosure of unrecognized subsequent events.
Divestiture Completed
On August 12, 2021, WTW entered into the SAPA with AJG whereby AJG agreed to purchase the divested businesses for cash consideration of $3.25 billion plus an earnout payable in 2025 of up to $750 million, assuming exercise of the applicable French and Dutch put options. The French put option was exercised on November 26, 2021. WTW and AJG amended the SAPA on December 1, 2021 pursuant to that certain Closing Letter Agreement (the ‘CLA’). The principal closing of the transactions contemplated by the SAPA occurred on December 1, 2021. The amendments to the SAPA under the CLA provide, among other matters, that the closing of the remainder of the transactions contemplated by the SAPA will occur on March 1, 2022 (other than in China, which the CLA provides will occur on June 1, 2022).
Following the divestiture, a number of services are continuing under a transition service agreement and certain co-broking, sub-broking and account servicing agreements.
Settlements
In October 2021, Willis Re DivestCo received $35 million from competitors in relation to settlements of certain litigation relating to staff defections.
Note 10 — Revision of Previously Issued Financial Statements
Subsequent to the issuance of the September 30, 2021 financial statements, to reflect the guidance on restricted cash presentation in FASB ASC 230, Statement of Cash Flows, Willis Re DivestCo corrected the classification of its fiduciary funds balances on its combined statement of cash flows, by including these amounts in the total cash, cash equivalents and restricted cash amounts held at each balance sheet date. As a result, cash, cash equivalents and restricted cash balances of $54 million and $44 million at September 30, 2021 and January 1, 2021, respectively, have been revised to $1.7 billion and $1.3 billion, respectively. Additionally, the effect of exchange rate changes on cash, cash equivalents and restricted cash has been updated to include the effect of exchange rate changes on the fiduciary funds balances.
Prior to this correction, the changes in fiduciary funds were presented in fiduciary assets and liabilities on a gross basis in the cash flows from operating activities, where the amounts fully offset each period. In the current presentation, an additional line item, net proceeds from fiduciary funds held for clients, has been included within cash flows from financing activities to represent the change in fiduciary funds balances during the period. The remaining fiduciary assets and fiduciary payables, in equal and offsetting amounts, are no longer presented in the cash flows from operating activities. There was no impact to the total cash flows from operating activities as a result of these changes.
10
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On December 1, 2021, Arthur J. Gallagher & Co. (“Gallagher” or “the Company”) completed an acquisition (the “Acquisition”) of substantially all of the treaty reinsurance brokerage operations from Willis Towers Watson plc. (“Willis Re DivestCo”) in exchange for an aggregate purchase price of $3,578.9 million, consisting of initial cash consideration of $3.28 billion and subsequent earnout consideration fair valued at $300.0 million, subject to certain adjustments set forth in the purchase agreement (the “Purchase Agreement”).
The Company funded the purchase price with cash on hand from operations and a combination of (1) net proceeds from a May 17, 2021 follow-on common stock offering, (ii) net proceeds from the issuances of May 20, 2021 unsecure senior notes and November 9, 2021 notes, and (iii) short term borrowings (the “Acquisition Financing”), described further in Note 3 to this unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended and should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with:
| • | Audited consolidated financial statements and accompanying notes of the Company as of and for the fiscal years ended December 31, 2020 (as contained in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 8, 2021); |
| • | Unaudited consolidated financial statements and accompanying notes of the Company as of September 30, 2021 and for the nine months ended September 30, 2021 and 2020 (as contained in its Q3 2021 Interim Report on Form 10-Q filed with the SEC on October 29, 2021); |
| • | Audited combined financial statements and accompanying notes of Willis Re DivestCo as of and for the year ended December 31, 2020 and unaudited combined financial statements and accompanying notes of Willis Re DivestCo as of September 30, 2021 and for the nine months ended September 30, 2021, each of which are attached to this filing as exhibits 99.1 and 99.2. |
The unaudited pro forma condensed combined financial information is based on the historical consolidated financial statements of the Company and the historical combined financial statements of Willis Re DivestCo, as adjusted to give effect to the Acquisition and the Acquisition Financing (collectively, “the Transaction”). The unaudited pro forma condensed combined balance sheet as of September 30, 2021 gives effect to the Transaction as if it occurred or had become effective on September 30, 2021. The unaudited pro forma condensed combined statements of earnings for the nine months ended September 30, 2021 and the fiscal year ended December 31, 2020, give effect to the Transaction as if it occurred or had become effective on January 1, 2020. Further information about this basis of presentation is provided in Note 1 to this unaudited pro forma condensed combined financial information.
The following unaudited pro forma condensed combined financial information provides for pro forma adjustments giving effect to the following transactions:
| • | The Acquisition |
| • | The Acquisition Financing |
The unaudited pro forma condensed combined financial information has been prepared by us using the acquisition method of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”). Gallagher has been treated as the acquirer in the Acquisition for accounting purposes. The pro forma adjustments are based upon available information and certain assumptions that the Company believe are reasonable. The unaudited pro forma condensed combined financial information is provided
for illustrative and informational purposes only and does not purport to represent or be indicative of the consolidated results of operations or financial condition of the Company had the Transaction been completed as of the dates presented, and should not be construed as representative of the future consolidated results of operations or financial condition of the combined entity.
Provisional estimates of fair value of Willis Re DivestCo’s assets acquired and liabilities assumed and are subsequently reviewed and finalized within the first year of operations subsequent to the acquisition date to determine the necessity for adjustments. Fair value adjustments, if any, are most common to the values established for amortizable intangible assets, including expiration lists, acquired software, and for earnout liabilities, with the offset to goodwill, net of any income tax effect. Provisional estimates of fair value were used by us to initially record (and disclose herein) the acquisition of the Willis Re DivestCo as of the December 1, 2021 acquisition date. We are using independent third party valuation specialists to assist us in determining the fair value of assets acquired and liabilities assumed for the Acquisition. As of this filing, the specialists have not completed their analysis and thus these fair value estimates are provisional. These provisional fair value estimates will be subsequently reviewed and adjusted based on the results of this valuation in 2022. In addition, terms of the purchase agreement provide for various acquisition date balance sheet adjustments in the 90 day period subsequent to the acquisition date and there are twelve remaining international deferred closings, both of which may also cause goodwill adjustments to be made in 2022.
As a result of the foregoing, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condense combined financial information. Differences between these preliminary estimates and the final acquisition accounting may arise, and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the combined Company’s future results of operations and financial position.
The unaudited pro forma condensed combined financial information does not reflect any revenue impacts that occurred after the Acquisition closed, such as lost customers, and does not reflect any expected cost savings, operating synergies or revenue enhancements that the combined entity may achieve as a result of the acquisition or the costs necessary to achieve any such cost savings, operating synergies or revenue enhancements.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2021
(in millions, except share amounts)
| Arthur J. Gallagher & Co. As Reported |
Willis Re DivestCo As Adjusted (2) |
Acquisition Financing Adjustments |
Note 3 | Transaction Accounting Adjustments |
Note 4 | Pro Forma Combined |
||||||||||||||||||
| Cash and cash equivalents |
$ | 2,735.1 | $ | 20.6 | $ | 739.1 | (a) | $ | (3,280.1 | ) | (a) (f) | $ | 214.7 | |||||||||||
| Restricted cash |
3,277.2 | 1,321.7 | — | — | 4,598.9 | |||||||||||||||||||
| Premiums and fees receivable |
7,756.5 | 8,787.8 | — | — | 16,544.3 | |||||||||||||||||||
| Other current assets |
1,369.5 | 66.6 | — | (44.3 | ) | (c) (h) | 1,391.8 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total current assets |
15,138.3 | 10,196.7 | 739.1 | (3,324.4 | ) | 22,749.7 | ||||||||||||||||||
| Fixed assets — net |
454.5 | 0.6 | — | 50.0 | (d) | 505.1 | ||||||||||||||||||
| Deferred income taxes |
1,171.4 | — | — | — | 1,171.4 | |||||||||||||||||||
| Other noncurrent assets |
854.8 | 29.3 | — | (0.2 | ) | (h) | 883.9 | |||||||||||||||||
| Right-of-use assets |
330.3 | 0.8 | — | — | 331.1 | |||||||||||||||||||
| Goodwill |
6,627.5 | 812.0 | — | 1,052.8 | (b) | 8,492.3 | ||||||||||||||||||
| Amortizable intangible assets - net |
2,339.0 | 7.1 | — | 1,581.1 | (e) | 3,927.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total assets |
$ | 26,915.8 | $ | 11,046.5 | $ | 739.1 | $ | (640.7 | ) | $ | 38,060.7 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Premiums payable to underwriting enterprises |
$ | 9,161.7 | $ | 9,775.4 | — | $ | (1.2 | ) | (c) | $ | 18,935.9 | |||||||||||||
| Accrued compensation and other current liabilities |
1,536.9 | 248.1 | — | (14.7 | ) | (c) (h) | 1,770.3 | |||||||||||||||||
| Deferred revenue - current |
527.1 | 3.9 | — | 6.1 | (h) | 537.1 | ||||||||||||||||||
| Premium financing debt |
234.1 | — | — | — | 234.1 | |||||||||||||||||||
| Corporate related borrowings - current |
200.0 | — | — | — | 200.0 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total current liabilities |
11,659.8 | 10,027.4 | — | (9.8 | ) | 21,677.4 | ||||||||||||||||||
| Corporate related borrowings - noncurrent |
5,072.4 | — | 739.1 | (a) | — | 5,811.5 | ||||||||||||||||||
| Deferred revenue - noncurrent |
61.1 | — | — | — | 61.1 | |||||||||||||||||||
| Lease liabilities - noncurrent |
281.4 | 0.7 | — | — | 282.1 | |||||||||||||||||||
| Other noncurrent liabilities |
1,371.0 | 37.6 | — | 351.1 | (a) (g) (h) | 1,759.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities |
18,445.7 | 10,065.7 | 739.1 | 341.3 | 29,591.8 | |||||||||||||||||||
| Common stock |
207.3 | — | — | — | 207.3 | |||||||||||||||||||
| Capital in excess of par value |
5,962.3 | 978.9 | — | (978.9 | ) | (i) | 5,962.3 | |||||||||||||||||
| Retained earnings |
2,873.8 | — | — | (1.2 | ) | (f) | 2,872.6 | |||||||||||||||||
| Accumulated other comprehensive loss |
(623.2 | ) | 1.9 | — | (1.9 | ) | (i) | (623.2 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Shareholders’ equity attributable to controlling interests |
8,420.2 | 980.8 | — | (982.0 | ) | 8,419.0 | ||||||||||||||||||
| Shareholders’ equity attributable to noncontrolling interests |
49.9 | — | — | — | 49.9 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total stockholders’ equity |
8,470.1 | 980.8 | — | (982.0 | ) | 8,468.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 26,915.8 | $ | 11,046.5 | $ | 739.1 | $ | (640.7 | ) | $ | 38,060.7 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
For the Nine Months Ended September 30, 2021
(in millions, except share amounts)
| Arthur J. Gallagher & Co. As Reported |
Willis Re DivestCo As Adjusted (2) |
Acquisition Financing Adjustments |
Note 3 | Transaction Accounting Adjustments |
Note 4 | Pro Forma Combined |
||||||||||||||||||
| Commissions |
$ | 3,118.7 | $ | 587.9 | — | — | $ | 3,706.6 | ||||||||||||||||
| Fees |
1,696.4 | 79.7 | — | — | 1,776.1 | |||||||||||||||||||
| Supplemental revenues |
183.0 | — | — | — | 183.0 | |||||||||||||||||||
| Contingent revenues |
150.3 | — | — | — | 150.3 | |||||||||||||||||||
| Investment income |
56.0 | 2.2 | — | — | 58.2 | |||||||||||||||||||
| Net gains (losses) on divestitures |
9.0 | — | — | — | 9.0 | |||||||||||||||||||
| Revenues from clean coal activities |
919.2 | — | — | — | 919.2 | |||||||||||||||||||
| Other net revenues (losses) |
2.4 | — | — | — | 2.4 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Revenues before reimbursements |
6,135.0 | 669.8 | — | — | 6,804.8 | |||||||||||||||||||
| Reimbursements |
101.7 | — | — | — | 101.7 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total revenues |
6,236.7 | 669.8 | — | — | 6,906.5 | |||||||||||||||||||
| Compensation |
2,913.2 | 289.9 | — | — | 3,203.1 | |||||||||||||||||||
| Operating |
752.1 | 126.3 | — | — | 878.4 | |||||||||||||||||||
| Reimbursements |
101.7 | — | — | — | 101.7 | |||||||||||||||||||
| Cost of revenues from clean coal activities |
944.0 | — | — | — | 944.0 | |||||||||||||||||||
| Interest |
164.6 | 0.3 | 27.2 | (b) | — | 192.1 | ||||||||||||||||||
| Loss on extinguishment of debt |
16.2 | — | — | — | 16.2 | |||||||||||||||||||
| Depreciation |
113.7 | 1.9 | — | 7.5 | (j) | 123.1 | ||||||||||||||||||
| Amortization |
306.1 | 0.7 | — | 79.4 | (k) | 386.2 | ||||||||||||||||||
| Change in estimated acquisition earnout payables |
63.0 | — | — | — | 63.0 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses |
5,374.6 | 419.1 | 27.2 | 86.9 | 5,907.8 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Earnings before income taxes |
862.1 | 250.7 | (27.2 | ) | (86.9 | ) | 998.7 | |||||||||||||||||
| Provision (benefit) for income taxes |
28.0 | 56.7 | (6.8 | ) | (c) | (15.5 | ) | (m) | 62.4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net earnings |
834.1 | 194.0 | (20.4 | ) | (71.4 | ) | 936.3 | |||||||||||||||||
| Net earnings attributable to noncontrolling interests |
36.7 | — | — | — | 36.7 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net earnings attributable to controlling interests |
$ | 797.4 | $ | 194.0 | $ | (20.4 | ) | $ | (71.4 | ) | $ | 899.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Basic net earnings per share (5) |
$ | 3.97 | $ | 4.36 | ||||||||||||||||||||
| Diluted net earnings per share (5) |
3.88 | 4.27 | ||||||||||||||||||||||
| Dividends declared per common share |
1.44 | 1.44 | ||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
For the Twelve Months Ended December 31, 2020
(in millions, except share amounts)
| Arthur J. Gallagher & Co. As Reported |
Willis Re DivestCo As Adjusted (2) |
Acquisition Financing Adjustments |
Note 3 | Transaction Accounting Adjustments |
Note 4 | Pro Forma Combined |
||||||||||||||||||||||
| Commissions |
$ | 3,591.9 | $ | 622.9 | — | — | $ | 4,214.8 | ||||||||||||||||||||
| Fees |
1,957.9 | 97.1 | — | — | 2,055.0 | |||||||||||||||||||||||
| Supplemental revenues |
221.9 | — | — | — | 221.9 | |||||||||||||||||||||||
| Contingent revenues |
147.0 | — | — | — | 147.0 | |||||||||||||||||||||||
| Investment income |
75.9 | 5.2 | — | — | 81.1 | |||||||||||||||||||||||
| Net gains (losses) on divestitures |
(5.8 | ) | — | — | — | (5.8 | ) | |||||||||||||||||||||
| Revenues from clean coal activities |
863.5 | — | — | — | 863.5 | |||||||||||||||||||||||
| Other net revenues (losses) |
(0.4 | ) | — | — | — | (0.4 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Revenues before reimbursements |
6,851.9 | 725.2 | — | — | 7,577.1 | |||||||||||||||||||||||
| Reimbursements |
151.7 | — | — | — | 151.7 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total revenues |
7,003.6 | 725.2 | — | — | 7,728.8 | |||||||||||||||||||||||
| Compensation |
3,466.5 | 347.9 | — | — | 3,814.4 | |||||||||||||||||||||||
| Operating |
906.5 | 140.3 | — | 1.2 | (l) | 1,048.0 | ||||||||||||||||||||||
| Reimbursements |
151.7 | — | — | — | 151.7 | |||||||||||||||||||||||
| Cost of revenues from clean coal activities |
882.1 | — | — | — | 882.1 | |||||||||||||||||||||||
| Interest |
196.4 | 0.1 | 51.4 | (b) | — | 247.9 | ||||||||||||||||||||||
| Loss on extinguishment of debt |
— | — | — | — | — | |||||||||||||||||||||||
| Depreciation |
145.1 | 2.4 | — | 10.0 | (j) | 157.5 | ||||||||||||||||||||||
| Amortization |
417.3 | 1.0 | — | 105.9 | (k) | 524.2 | ||||||||||||||||||||||
| Change in estimated acquisition earnout payables |
(32.9 | ) | — | — | — | (32.9 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total expenses |
6,132.7 | 491.7 | 51.4 | 117.1 | 6,792.9 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Earnings before income taxes |
870.9 | 233.5 | (51.4 | ) | (117.1 | ) | 935.9 | |||||||||||||||||||||
| Provision (benefit) for income taxes |
12.8 | 50.2 | (12.9 | ) | (c) | (21.0 | ) | (m) | 29.1 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net earnings |
858.1 | 183.3 | (38.5 | ) | (96.1 | ) | 906.8 | |||||||||||||||||||||
| Net earnings attributable to noncontrolling interests |
39.3 | — | — | — | 39.3 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net earnings attributable to controlling interests |
$ | 818.8 | $ | 183.3 | $ | (38.5 | ) | $ | (96.1 | ) | $ | 867.5 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Basic net earnings per share (5) |
$ | 4.29 | $ | 4.31 | ||||||||||||||||||||||||
| Diluted net earnings per share (5) |
4.20 | 4.22 | ||||||||||||||||||||||||||
| Dividends declared per common share |
1.80 | 1.80 | ||||||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 – Basis of presentation
The unaudited pro forma condensed combined financial information has been prepared by Gallagher in connection with the Company’s acquisition of substantially all of the treaty reinsurance brokerage operations from Willis Towers Watson plc., Willis Re DivestCo.
The unaudited condensed combined pro forma financial information and related notes were prepared in accordance with Article 11 of Regulation S-X and are based on the historical consolidated financial statements of the Company and the historical combined financial statements of Willis Re DivestCo prepared on a carve-out basis, as adjusted to give effect to the pro forma adjustments described below.
The pro forma adjustments to the statements of earnings have been prepared as if the Transaction occurred on January 1, 2020. The pro forma adjustments to the balance sheet have been prepared as if the Transaction occurred on September 30, 2021. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements in accordance with Article 11 of Regulation S-X as amended. The pro forma adjustments are based on currently available information and certain estimates and assumptions, and therefore the actual effect of these transactions may differ from the pro forma adjustments.
Gallagher and Willis Re DivestCo’s historical financial statements were prepared in accordance with U.S. GAAP. There were no transactions and balances between the Company and Willis Re DivestCo as of the nine months ended September 30, 2021 or for the year ended December 31, 2020.
The audited combined financial statements and accompanying notes of Willis Re DivestCo as of and for the year ended December 31, 2020 and the unaudited combined financial statements and accompanying notes of Willis Re DivestCo as of September 30, 2021 and for the nine months ended September 30, 2021 and 2020, are attached to this filing as exhibits 99.1 and 99.2.
The accompanying unaudited pro forma condensed combined financial information and related notes were prepared using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, (“ASC 805”), with Gallagher considered the accounting acquirer of Willis Re DivestCo. ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. For purposes of the unaudited pro forma condensed combined balance sheet, the purchase price consideration has been allocated to the assets acquired and liabilities assumed of Willis Re DivestCo based upon management’s preliminary estimate of their fair values as of December 1, 2021. The excess of the purchase price consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. Accordingly, the purchase price allocation and related adjustments reflected in the unaudited pro forma condensed combined financial information are preliminary and subject to adjustment based on a final determination of fair value. The purchase price consideration as well as the estimated fair values of the assets and liabilities will be updated and finalized as soon as practicable, but no later than one year from the closing of the acquisition.
The pro forma adjustments are based upon available information and certain assumptions that Gallagher believes are reasonable. Management has included certain reclassification and policy alignment adjustments for consistency in presentation as indicated in the subsequent notes (see Note 2 for further details). The unaudited pro forma condensed combined financial information is provided for informational purposes only and does not purport to represent or be indicative of the consolidated results of operations or financial condition of the Company had the Transaction been completed as of the dates presented and should not be construed as representative of the future consolidated results of operations or financial condition of the combined entity.
Note 2 – Reclassification and policy alignment adjustments
Certain balances were reclassified from the Willis Re DivestCo historical financial statements so its presentation would be consistent with that of Gallagher. Additionally, an accounting policy alignment adjustment was recorded to gross up client premium receivables and payables to underwriting enterprises. These reclassifications and gross up are based on management’s preliminary analysis and have no effect on separately reported net assets, equity or net earnings attributed to common shareholders of Willis Re DivestCo.
When the Company completes its detailed review of Willis Re DivestCo’s chart of accounts and accounting policies, additional reclassification adjustments could be identified that, when conformed, could have a material impact on the combined Company’s financial information. Refer to the table below for a summary of the reclassification adjustments made to Willis Re DivestCo’s combined balance sheet as of September 30, 2021 to conform its presentation to that of Gallagher.
| Arthur J. Gallagher & Co. Presentation |
Willis Re DivestCo Presentation |
Historical Willis Re DivestCo at September 30, 2021 |
Reclassification Adjustments |
Note | Policy Alignment Adjustments |
Note | Historical Willis Re DivestCo as adjusted for Arthur J. Gallagher & Co. |
|||||||||||||||||
| Cash and cash equivalents |
Cash and cash equivalents |
54.1 | (33.5 | ) | A | — | 20.6 | |||||||||||||||||
| Restricted cash |
— | 1,321.7 | A, B | — | 1,321.7 | |||||||||||||||||||
| Fiduciary assets, including related party assets of $30 |
7,552.7 | (7,552.7 | ) | B | — | — | ||||||||||||||||||
| Premiums and fees receivable |
Accounts receivable, net |
331.7 | 6,264.5 | A, B, C | 2,191.6 | N | 8,787.8 | |||||||||||||||||
| Due from related parties |
49.4 | (49.4 | ) | C | — | — | ||||||||||||||||||
| Other current assets |
Prepaid and other current assets |
23.1 | 43.5 | C, D | — | 66.6 | ||||||||||||||||||
| Fixed assets - net |
Fixed assets, net |
0.6 | — | — | 0.6 | |||||||||||||||||||
| Deferred income taxes |
Deferred tax assets |
4.2 | (4.2 | ) | E | — | — | |||||||||||||||||
| Other noncurrent assets |
Other non-current assets |
20.0 | 9.3 | D, E, F | — | 29.3 | ||||||||||||||||||
| Right-of-use assets |
— | 0.8 | F | — | 0.8 | |||||||||||||||||||
| Goodwill |
Goodwill |
812.0 | — | — | 812.0 | |||||||||||||||||||
| Amortizable intangible assets - net |
Intangible assets, net |
7.1 | — | — | 7.1 | |||||||||||||||||||
| Total assets |
8,854.9 | — | 2,191.6 | 11,046.5 | ||||||||||||||||||||
| Premiums payable to underwriting enterprises |
— | 7,583.8 | G, I | 2,191.6 | N | 9,775.4 | ||||||||||||||||||
| Due to related parties |
29.5 | (29.5 | ) | I | — | — | ||||||||||||||||||
| Accrued compensation and other current liabilities |
Salaries and employee-related liabilities |
84.1 | 164.0 | H, I, K | — | 248.1 | ||||||||||||||||||
| Fiduciary liabilities, including related party liabilities of $42 |
7,552.7 | (7,552.7 | ) | G | — | — | ||||||||||||||||||
| Deferred revenue - current |
Deferred revenue and accrued expenses |
7.3 | (3.4 | ) | H | — | 3.9 | |||||||||||||||||
| Other current liabilities |
151.5 | (151.5 | ) | I | — | — | ||||||||||||||||||
| Employee-related liabilities |
10.7 | (10.7 | ) | J | — | — | ||||||||||||||||||
| Provision for liabilities |
10.7 | (10.7 | ) | K | — | — | ||||||||||||||||||
| Premium financing debt |
— | — | — | — | ||||||||||||||||||||
| Corporate related borrowings - current |
— | — | — | — | ||||||||||||||||||||
| Corporate related borrowings - noncurrent |
— | — | — | — | ||||||||||||||||||||
| Deferred revenue - noncurrent |
— | — | — | — | ||||||||||||||||||||
| Lease liabilities - noncurrent |
— | 0.7 | L | — | 0.7 | |||||||||||||||||||
| Other noncurrent liabilities |
Other non-current liabilities |
27.6 | 10.0 | J, L | — | 37.6 | ||||||||||||||||||
| Total liabilities |
7,874.1 | — | 2,191.6 | 10,065.7 | ||||||||||||||||||||
| Common stock |
— | — | — | — | ||||||||||||||||||||
| Capital in excess of par value |
— | 978.9 | M | — | 978.9 | |||||||||||||||||||
| Net parent investment |
978.9 | (978.9 | ) | M | — | — | ||||||||||||||||||
| Retained earnings |
— | — | — | — | ||||||||||||||||||
| Accumulated other comprehensive loss |
Accumulated other comprehensive income, net of tax |
1.9 | — | — | 1.9 | |||||||||||||||||
| Total liabilities and stockholders’ equity |
8,854.9 | — | 2,191.6 | 11,046.5 |
| A | Reclass ‘Cash and cash equivalents’ for Willis Re DivestCo to ‘Restricted cash’ and ‘Premiums and fees receivable’ for Arthur J. Gallagher & Co. |
| B | Reclass ‘Fiduciary assets’ for Willis Re DivestCo to ‘Restricted cash’ and ‘Premiums and fees receivable’ for Arthur J. Gallagher & Co. |
| C | Reclass ‘Due from related parties’ for Willis Re DivestCo to ‘Other current assets’ and ‘Premiums and fees receivable’ for Arthur J. Gallagher & Co. |
| D | Reclass ‘Prepaid and other current assets’ for Willis Re DivestCo to ‘Other noncurrent assets’ for Arthur J. Gallagher & Co. |
| E | Reclass ‘Deferred tax assets’ for Willis Re DivestCo to ‘Other noncurrent assets’ for Arthur J. Gallagher & Co. |
| F | Reclass ‘Other non-current assets’ for Willis Re DivestCo to ‘Right-of-use assets’ for Arthur J. Gallagher & Co. |
| G | Reclass ‘Fiduciary liabilities’ for Willis Re DivestCo to ‘Premiums payable to underwriting enterprises’ for Arthur J. Gallagher & Co. |
| H | Reclass ‘Deferred revenue and accrued expenses’ for Willis Re DivestCo to ‘Accrued compensation and other current liabilities’ for Arthur J. Gallagher & Co. |
| I | Reclass ‘Due to related parties’ and ‘Other current liabilities’ for Willis Re DivestCo to ‘Premiums payable to underwriting enterprises’ and ‘Accrued compensation and other current liabilities’ for Arthur J. Gallagher & Co. |
| J | Reclass ‘Employee-related liabilities’ for Willis Re DivestCo to ‘Other noncurrent liabilities’ for Arthur J. Gallagher & Co. |
| K | Reclass ‘Provision for liabilities’ for Willis Re DivestCo to ‘Accrued compensation and other current liabilities’ for Arthur J. Gallagher & Co. |
| L | Reclass ‘Other non-current liabilities’ for Willis Re DivestCo to ‘Lease liabilities - noncurrent’ for Arthur J. Gallagher & Co. |
| M | Reclass ‘Net parent investment’ for Willis Re DivestCo to ‘Capital in excess of par value’ for Arthur J. Gallagher & Co. |
| N | Reflects an adjustment to gross up client premium receivables and payables to underwriting enterprises that were not previously grossed up by Willis Re DivestCo. |
Refer to the tables below for a summary of the reclassification adjustments made to Willis Re DivestCo’s combined statements of comprehensive income for the nine months ended September 30, 2021 and the year ended December 31, 2020 to conform its presentation to that of Gallagher.
| Arthur J. Gallagher & Co. Presentation |
Willis Re DivestCo Presentation | Historical Willis Re DivestCo for the period ended September 30, 2021 |
Reclassification Adjustments |
Note | Historical Willis Re DivestCo as adjusted for Arthur J. Gallagher & Co. |
|||||||||||||||
| Commissions |
— | 587.9 | AA | 587.9 | ||||||||||||||||
| Fees |
— | 79.7 | AA | 79.7 | ||||||||||||||||
| Supplemental revenues |
— | — | — | |||||||||||||||||
| Contingent revenues |
— | — | — | |||||||||||||||||
| Investment income |
— | 2.2 | AA | 2.2 | ||||||||||||||||
| Net gains (losses) on divestitures |
— | — | — | |||||||||||||||||
| Revenues from clean coal activities |
— | — | — | |||||||||||||||||
| Other net revenues (losses) |
— | — | — | |||||||||||||||||
| Reimbursements |
— | — | — | |||||||||||||||||
| Revenue | 668.4 | (668.4 | ) | AA | — | |||||||||||||||
| Total revenues |
668.4 | 1.4 | 669.8 | |||||||||||||||||
| Compensation |
Salaries and benefits | 290.2 | (0.3 | ) | BB | 289.9 | ||||||||||||||
| Operating |
Other operating expenses | 123.4 | 2.9 | AA, BB, DD | 126.3 | |||||||||||||||
| Reimbursements |
— | — | — | |||||||||||||||||
| Cost of revenues from clean coal activities |
— | — | — | |||||||||||||||||
| Interest |
— | 0.3 | DD | 0.3 | ||||||||||||||||
| Loss on extinguishment of debt |
— | — | — | |||||||||||||||||
| Depreciation |
Depreciation and amortization | 2.6 | (0.7 | ) | CC | 1.9 | ||||||||||||||
| Amortization |
— | 0.7 | CC | 0.7 | ||||||||||||||||
| Change in estimated acquisition earnout payables |
— | — | — | |||||||||||||||||
| Total expenses |
Total cost of providing services | 416.2 | 2.9 | 419.1 | ||||||||||||||||
| Other expense, net | 1.5 | (1.5 | ) | DD | — | |||||||||||||||
| Earnings before income taxes |
|
Income from operations before taxes |
|
250.7 | — | 250.7 | ||||||||||||||
| Provision (benefit) for income taxes |
Provision for income taxes | 56.7 | 56.7 | |||||||||||||||||
| Net earnings |
Net income | 194.0 | — | 194.0 | ||||||||||||||||
| AA | Reclass ‘Revenue’ for Willis Re DivestCo to ‘Commissions’, ‘Fees’, ‘Investment income’, and ‘Operating’ for Arthur J. Gallagher & Co. |
| BB | Reclass ‘Salaries and benefits’ and ‘Other operating expenses’ for Willis Re DivestCo to ‘Operating’ and ‘Compensation’ for Arthur J. Gallagher & Co. |
| CC | Reclass ‘Depreciation and amortization’ for Willis Re DivestCo to ‘Amortization’ for Arthur J. Gallagher & Co. |
| DD | Reclass ‘Other expense, net’ for Willis Re DivestCo to ‘Operating’ and ‘Interest’ for Arthur J. Gallagher & Co. |
| Arthur J. Gallagher & Co. Presentation |
Willis Re DivestCo Presentation | Historical Willis Re DivestCo for the period ended December 31, 2020 |
Reclassification Adjustments |
Note | Historical Willis Re DivestCo as adjusted for Arthur J. Gallagher & Co. |
|||||||||||||||
| Commissions |
— | 622.9 | AA | 622.9 | ||||||||||||||||
| Fees |
— | 97.1 | AA | 97.1 | ||||||||||||||||
| Supplemental revenues |
— | — | — | |||||||||||||||||
| Contingent revenues |
— | — | — | |||||||||||||||||
| Investment income |
— | 5.2 | AA | 5.2 | ||||||||||||||||
| Net gains (losses) on divestitures |
— | — | ||||||||||||||||||
| Revenues from clean coal activities |
— | — | ||||||||||||||||||
| Other net revenues (losses) |
— | — | ||||||||||||||||||
| Reimbursements |
— | — | ||||||||||||||||||
| Revenue | 726.1 | (726.1 | ) | AA | — | |||||||||||||||
| Total revenues |
726.1 | (0.9 | ) | 725.1 | ||||||||||||||||
| Compensation |
Salaries and benefits | 348.4 | (0.5 | ) | BB | 347.9 | ||||||||||||||
| Operating |
Other operating expenses | 141.5 | (1.2 | ) | AA, BB, DD | 140.3 | ||||||||||||||
| Reimbursements |
— | — | ||||||||||||||||||
| Cost of revenues from clean coal activities |
— | — | ||||||||||||||||||
| Interest |
— | 0.1 | DD | 0.1 | ||||||||||||||||
| Loss on extinguishment of debt |
— | — | ||||||||||||||||||
| Depreciation |
Depreciation and amortization | 3.4 | (1.0 | ) | CC | 2.4 | ||||||||||||||
| Amortization |
— | 1.0 | CC | 1.0 | ||||||||||||||||
| Change in estimated acquisition earnout payables |
— | — | ||||||||||||||||||
| Total expenses |
|
Total cost of providing services |
|
493.3 | (1.6 | ) | 491.7 | |||||||||||||
| Other income, net | (0.7 | ) | 0.7 | DD | — | |||||||||||||||
| Earnings before income taxes |
|
Income from operations before taxes |
|
233.5 | — | 233.5 | ||||||||||||||
| Provision (benefit) for income taxes |
Provision for income taxes | 50.2 | 50.2 | |||||||||||||||||
| Net earnings |
Net income | 183.3 | — | 183.3 | ||||||||||||||||
| AA | Reclass ‘Revenue’ for Willis Re DivestCo to ‘Commissions’, ‘Fees’, ‘Investment income’, and ‘Operating’ for Arthur J. Gallagher & Co. |
| BB | Reclass ‘Salaries and benefits’ and ‘Other operating expenses’ for Willis Re DivestCo to ‘Operating’ and ‘Compensation’ for Arthur J. Gallagher & Co. |
| CC | Reclass ‘Depreciation and amortization’ for Willis Re DivestCo to ‘Amortization’ for Arthur J. Gallagher & Co. |
| DD | Reclass ‘Other income, net’ for Willis Re DivestCo to ‘Operating’ and ‘Interest’ for Arthur J. Gallagher & Co. |
Note 3 – Acquisition financing adjustments
Prior to the close of the Acquisition, Gallagher signed an agreement on May 12, 2021 to acquire certain Willis Towers Watson plc reinsurance, specialty and retail brokerage operations as part of a proposed regulatory remedy for the pending Aon plc and Willis Towers plc combination. To finance the planned acquisition, Gallagher:
| • | closed on a follow-on public offering of its common stock on May 17, 2021, whereby 10.3 million shares of common stock were issued for net proceeds of $1,437.9 million, after underwriting discounts and other expenses related to the offering. |
| • | closed and funded an offering of $850 million aggregate principal amount of 3.50% Senior Notes, due in 2051 (the “2051 Notes”). |
On July 26, 2021, Gallagher announced that the May 12, 2021 agreement had been terminated in conjunction with the announced termination of the Aon plc and Willis Towers Watson plc combination.
Subsequently, on August 12, 2021, Gallagher announced a new Purchase Agreement to acquire Willis Re DivestCo. In addition to the cash on hand from the above financings, to further finance the Acquisition, on November 9, 2021, Gallagher issued a 10-year $400 million aggregate principal amount of 2.50% Senior Notes (“10-year Note”) and a 30-year $350 million aggregate principal amount of 3.05% Senior Notes (“30-year Note”).
Based on Gallagher’s financing for the Acquisition, the impacts to the condensed combined pro forma balance sheet were as follows:
| (a) | Reflects the cash proceeds and related noncurrent Corporate related borrowings from the 10-year Note and 30-year Note issuance, net of issuance costs and discounts. These notes were issued in a principal amount of $750 million with issuance costs and discounts of $11.9 million amortized over the life of the notes. |
The impacts to the condensed combined pro forma statements of earnings were as follows:
| (b) | Reflects the pro forma interest expense and amortized issuance costs and discounts adjustment for the nine months ended September 30, 2021 and year-ended December 31, 2020, calculated as follows: |
| (in millions) | Amount | |||
| 2051 Notes Principal |
$ | 850 | ||
| Annual Coupon Interest Rate |
3.50 | % | ||
| Annual Interest on 2051 Notes |
29.8 | |||
| January 1, 2021 through May 19, 2021 Interest on 2051 Notes |
$ | 11.2 | ||
| Total 2051 Notes Issuance Cost and Discount |
$ | 18.7 | ||
| 2051 Notes Term (years) |
30 | |||
| Annual Amortized Debt Issuance Cost and Discount |
0.6 | |||
| January 1, 2021 through May 19, 2021 Amortized Debt Issuance Cost and Discount |
$ | 0.2 | ||
| 10-year Note Principal |
$ | 400 | ||
| Annual Coupon Interest Rate |
2.40 | % | ||
| Annual Interest on 10-year Note |
9.6 | |||
| 9 months interest on 10-year Note |
$ | 7.2 | ||
| Total 10-year Note Issuance Cost and Discount |
$ | 5.2 | ||
| 10-year Note Term (years) |
10 | |||
| Annual Amortized Debt Issuance Cost and Discount |
0.5 | |||
| 9 months Amortized Debt Issuance Cost and Discount |
$ | 0.4 | ||
| 30-year Note Principal |
$ | 350 | ||
| Annual Coupon Interest Rate |
3.05 | % | ||
| Annual Interest on 30-year Note |
10.7 | |||
| 9 months interest on 30-year Note |
$ | 8.0 | ||
| Total 30-year Note Issuance Cost and Discount |
$ | 6.70 | ||
| 30-year Note Term (years) |
30 | |||
| Annual Amortized Debt Issuance Cost and Discount |
0.2 | |||
| 9 months Amortized Debt Issuance Cost and Discount |
$ | 0.2 | ||
| Pro forma interest and amortization expense for 9 months ended September 30, 2021 |
$ | 27.2 | ||
| Pro forma interest and amortization expense for year-ended December 31, 2020 |
$ | 51.4 | ||
| (c) | Reflects the tax benefit on the interest expense related to the Acquisition Financing as the Company is subject to U.S. federal income taxes, in addition to state, local and foreign taxes. This adjustment uses the Company’s blended statutory tax rate of 25%. |
Note 4 – Willis Re DivestCo acquisition
Under the terms of the Purchase Agreement between Gallagher and Willis Towers Watson plc., the Company acquired Willis Re DivestCo for a purchase consideration of $3.6 billion. Gallagher primarily funded the cash portion of the Acquisition consideration with cash on hand from the Acquisition Financing discussed in Note 3. The Company did not legally assume any outstanding borrowings of Willis Re DivestCo. The following table summarizes the purchase consideration.
| (in millions) | Amount | |||
| Cash transferred |
$ | 3,278.9 | ||
| Earnout (1) |
300.0 | |||
| Total purchase consideration |
$ | 3,578.9 | ||
| (1) | The earnout consideration represents the acquisition date provisional fair value of the estimated future payment to Willis Towers Watson plc. based on the third-year revenue targets of Willis Re DivestCo, with a maximum payment earnout payment amount of $750 million. |
The following is a summary of the estimated fair values of the net assets acquired as if the Transaction occurred on September 30, 2021 (in millions):
| (in millions) | Amount | |||
| Cash and restricted cash |
$ | 1,342.3 | ||
| Premiums and fees receivable |
8,787.8 | |||
| Other current assets |
22.3 | |||
| Fixed assets |
50.6 | |||
| Noncurrent assets |
29.9 | |||
| Goodwill |
1,864.8 | |||
| Expiration lists |
1,588.2 | |||
|
|
|
|||
| Total assets acquired |
13,685.9 | |||
| Premiums payables to underwriting enterprises |
9,774.2 | |||
| Other current liabilities |
243.4 | |||
| Noncurrent liabilities |
89.4 | |||
|
|
|
|||
| Total liabilities assumed |
10,107.0 | |||
|
|
|
|||
| Total net assets acquired |
$ | 3,578.9 | ||
|
|
|
The preliminary estimates are based on the data available to Gallagher and may change upon completion of the final purchase price allocation. Any change in the estimated fair value of the assets and liabilities acquired may have a corresponding impact on the amount of the goodwill. In addition, only intangible assets were evaluated for fair value. The goodwill amount represents the total purchase less the preliminary fair value of net assets acquired. Goodwill will not be amortized but instead will be tested for impairment at least annually (or more frequently if indicators of impairment arise) and is deductible for tax purposes.
The impacts to the condensed combined pro forma balance sheet from the Willis Re DivestCo acquisition were as follows:
| (a) | Reflects the $3,278.9 million cash transferred and $300.0 million of provisional earnout consideration in connection with the close of the Acquisition and record goodwill associated with the Acquisition for Willis Re DivestCo. |
| (b) | Reflects an adjustment to true-up the goodwill recognized from the Acquisition for the cumulative impacts of the following transaction accounting adjustments: |
| (in millions) | Amount | |||
| Cash and earnout consideration (a) |
$ | 3,578.9 | ||
| Elimination of settled due to due from (c) |
19.9 | |||
| Fair value step up of fixed assets (d) |
(50.0 | ) | ||
| Fair value step up of intangibles (e) |
(1,581.1 | ) | ||
| DTL associated with purchase accounting (g) |
50.5 | |||
| Bonus accruals (h) |
15.4 | |||
| Elimination of historical Willis Re DivestCo equity (i) |
(980.8 | ) | ||
|
|
|
|||
| Total adjustment to goodwill (b) |
1,052.8 | |||
| Historical Willis Re DivestCo goodwill |
812.0 | |||
|
|
|
|||
| Total goodwill from Acquisition |
1,864.8 | |||
| (c) | Reflects an adjustment to Other current assets for $49.4 million, Premiums payable to underwriting enterprises for $1.2 million, and Accrued compensation and other current liabilities for $28.3 million to eliminate due to due from parent balances that were settled between Willis Re DivestCo and Willis Towers Watson Plc prior to close. |
| (d) | Reflects the adjustment to record the preliminary fair value of acquired software of $50.0 million, recorded within fixed assets within the unaudited pro forma condensed combined balance sheet. |
| (e) | Reflects the adjustment to record the preliminary fair value of the acquired expiration list of $1,588.2 million offset by the elimination of historical net intangible asset values, recorded within intangible assets within the unaudited pro forma condensed combined balance sheet. |
The fair value estimates for identifiable intangible assets are preliminary and are based upon assumptions that market participants would use in pricing an asset. The fair value of expiration lists was established using the excess earnings method, which is an income approach based on estimated financial projections developed by management for the acquired entity using market participant assumptions.
Some of the more significant inputs and assumptions inherent in the estimation of the expiration list intangible asset valuation included the long-term cash flow projections and profitability and the discount rate selected in order to estimate the inherent risk in the future cash flow stream. No
assurances can be given that the underlying inputs and assumptions used to prepare the preliminary calculations of intangible asset value will not change as the Company completes its detailed valuation analysis. For these and other reasons, actual results may vary significantly from estimated results.
| (f) | Reflects the Gallagher one-time Acquisition transaction-related costs incurred after September 30, 2021 and therefore were not reflected in the statements of earnings for the nine months ended September 30, 2021 or year-ended December 31, 2020 or balance sheet as of September 30, 2021. These transaction costs were reflected as a reduction to cash and cash equivalents with an offset through retained earnings. There were no Willis Re DivestCo transaction costs incurred after September 30, 2021. |
| (g) | Reflects $50.5 million deferred tax liability created from the expiration list assets recorded as part of purchase accounting. The deferred tax liability was calculated using an estimated statutory tax rate of 25% and is required due to the non-deductibility of amortization expense in certain tax jurisdictions. |
This adjustment to deferred tax liabilities is preliminary and remains subject to management’s final determination of the fair value of assets acquired and liabilities assumed by jurisdiction. Recognition of additional deferred tax assets and liabilities as well as adjustments to established deferred tax assets and liabilities upon a detailed analysis of the acquired assets and assumed liabilities may occur in conjunction with the finalization of the purchase accounting. These items could be material.
| (h) | Reflects the true up of bonus accruals to the date of close. |
| (i) | Reflects the adjustment to eliminate historical equity of Willis Re DivestCo as follows: |
| (in millions) | Amount | |||
| Removal of historical Capital in excess of par |
$ | 978.9 | ||
| Removal of historical Accumulated other comprehensive income (loss), net of tax |
1.9 | |||
The impacts on the condensed combined pro forma states of earnings from the Willis Re DivestCo acquisition were as follows:
| (j) | Reflects an adjustment to Depreciation for the fixed asset software depreciation expense. as follows. There was no previous software depreciation expense in the historical Willis Re DivestCo financial results to remove. |
| (in millions) | Amount | |||
| Software fair value |
$ | 50.0 | ||
| Estimated useful life |
5 years | |||
| Annual straight line depreciation expense |
10.0 | |||
| 9 month straight line depreciation expense |
7.5 | |||
| (k) | Reflects an adjustment to Amortization for the intangible expiration list amortization expense as follows. There was no previous expiration list amortization expense in the historical Willis Re DivestCo financial results to remove. |
| (in millions) | Amount | |||
| Expiration list fair value |
$ | 1,588.2 | ||
| Estimated useful life |
15 years | |||
| Annual straight line amortization expense |
105.9 | |||
| 9 month straight line amortization expense |
79.4 | |||
| (l) | Reflects the one-time Acquisition transaction-related costs incurred which have not been reflected in the historical statements of earnings for the year ended December 31, 2020 or nine months ended September 30, 2021. |
| (m) | Reflects the income tax effect of the Acquisition pro forma adjustments using an estimated blended statutory tax rate of 25%. Because the adjustments contained in the unaudited pro forma condensed combined financial information are based on estimates, the effective tax rate herein will likely vary from the effective rate in periods subsequent to the Acquisition. |
Note 5 – Net earnings per share
Basic net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the reporting period. Diluted net earnings per share is computed by dividing net earnings by the weighted average number of common and common equivalent shares outstanding during the reporting period. Common equivalent shares include incremental shares from dilutive stock options, which are calculated from the date of grant under the treasury stock method using the average market price for the period.
The pro forma basic and diluted earnings per share for the year-ended December 31, 2020 and nine months ended September 31, 2021 reflect (1) the May 17, 2021 follow-on public offering of 10.3 million shares of Gallagher common stock as if the offering occurred on January 1, 2020 and (2) the effect of pro forma adjustments on net earnings attributable to controlling interest for the respective periods.
The following table sets forth the computation of pro forma basic and diluted net earnings per share (in millions, except per share data):
| (in millions) | Nine months ended September 30, 2021 |
Year-ended December 31, 2020 |
||||||
| Net earnings attributable to controlling interests |
$ | 991.4 | $ | 1,002.1 | ||||
| Pro Forma adjustments to net earnings attributable to controlling interest |
(91.8 | ) | (134.6 | ) | ||||
|
|
|
|
|
|||||
| Pro Forma Net earnings attributable to controlling interest |
899.6 | 867.5 | ||||||
|
|
|
|
|
|||||
| Weighted average number of common shares outstanding |
201.0 | 191.0 | ||||||
| May 17, 2021 common stock offering adjustment |
5.2 | 10.3 | ||||||
|
|
|
|
|
|||||
| Pro Forma Weighted average number of common shares outstanding |
206.2 | 201.3 | ||||||
| Dilutive effect of stock options using the treasury stock method |
4.5 | 4.1 | ||||||
|
|
|
|
|
|||||
| Pro Forma Weighted average number of common and common equivalent shares outstanding |
210.7 | 205.4 | ||||||
|
|
|
|
|
|||||
| Pro Forma Basic net earnings per share |
4.36 | 4.31 | ||||||
|
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| Pro Forma Diluted net earnings per share |
4.27 | 4.22 | ||||||
Anti-dilutive stock-based awards of 1.2 million shares were outstanding at September 30, 2021 that were excluded in the computation of the dilutive effect of stock-based awards for the nine-month period then ended. These stock-based awards were excluded from the computation because the exercise prices on these stock-based awards were greater than the average market price of our common shares during the respective period, and therefore, would be anti-dilutive to earnings per share under the treasury stock method. There were no anti-dilutive stock-based awards outstanding at December 31, 2020 that were excluded in the computation of the dilutive effect of stock-based awards for the year then ended.