Fitch Affirms Willis Group's Ratings at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings today affirmed the 'BBB-' Issuer Default Ratings (IDRs) of Willis Group Holdings PLC (Willis), Willis North America Inc. (WNA), and Trinity Acquisition plc. The Rating Outlook is Stable. A full list of ratings actions is shown below.

KEY RATING DRIVERS

The affirmations reflect continued, solid performance of Willis' insurance brokerage operations, including positive organic growth and consolidated pre-tax profit margins that compare favorably to its closest peers.

The affirmation further reflects an expectation that projected ranges for two key credit ratios will remain at levels that are manageable for an insurance broker.

Specifically, Fitch anticipates that Willis' financial leverage as measured by reported debt-to-EBITDA will gradually return to levels near 2.5x from approximately 2.75x at year-end 2013. This key credit metric appears poised to improve marginally in 2014 if reported EBITDA continues to show moderate improvement and debt levels remain stable.

Earnings growth in the second half of 2014 may be dampened by incremental costs associated with Willis' current 'operational improvement program' which seeks to reduce expenses primarily by relocating more than 3,500 support roles from higher cost locations to lower cost relocations and workforce reductions.

Starting in the second quarter of 2014, the program is expected to be complete by the end of 2017. Willis expects the program to deliver cumulative cost savings of approximately $420 million through 2017 and annual cost savings of approximately $300 million starting in 2018.

To achieve these savings, the Company expects to incur cumulative charges amounting to approximately $410 million through the end of 2017.

The timing of the charges associated with this initiative is currently unclear. If Willis' reported debt-to-EBITDA ratio deteriorates in 2014 as a result of these expenses or for other reasons, it could lead to a rating downgrade, as for several years Willis has operated at debt-to-EBITDA levels that Fitch considers high for its current rating category of 'BBB-'. Fitch's median benchmark debt-to-EBITDA ratio for insurance brokers is 2.25x for the 'BBB' rating category.

Fitch expects the company's EBITDA-to-interest expense ratio to remain at least in the mid-single digits where it has stabilized over the past few years. Fitch considers this metric to be adequate for Willis' current rating category.

Fitch believes that more meaningful earnings growth and accompanying improvement in key credit ratios will remain elusive in the near- to medium-term due to a challenging operating environment.

Specifically, commercial insurance rates have recently flattened and are under significant pressure in reinsurance lines. This trend will slow commission-related revenue growth. The global economy could provide a modest tailwind as it appears to be growing, albeit at a tepid rate in most developed economies.

Similar to other insurance brokers that Fitch rates, Willis' ratings also reflect that the company faces contingent risks as an occasional target of litigation. While Willis purchases errors-and-omissions insurance coverage to protect itself against this exposure, such protection is not always adequate to fully indemnify the broker for monetary damages.

RATING SENSITIVITIES

Key rating triggers that could result in a downgrade include a failure to gradually reduce Willis' debt-to-EBITDA ratio from recent levels around 2.7x, or a failure to maintain average EBITDA-to-interest ratios of 5x or higher.

Fitch could also downgrade Willis' ratings if the company were to report a material goodwill impairment that cast doubt on Willis' ability to generate future earnings and cash flows.

Additionally, if Willis' required pension contributions were to increase to the point where it strained the cash flows available to service its existing debt, Fitch could downgrade Willis' ratings.

Key rating triggers that could result in an upgrade include a decrease in Willis' debt-to-EBITDA ratio to levels below 2.0x accompanied by EBITDA-to-interest ratios averaging in the high single digits.

Fitch has affirmed the following ratings with a Stable Outlook:

Willis Group Holdings PLC

--IDR at 'BBB-';

--$299 million of 4.125% senior unsecured notes due 2016 at 'BBB-';

--$496 million of 5.75% senior unsecured notes due 2021 at 'BBB-'.

Willis North America Inc.

--IDR at 'BBB-';

--$148 million 5.625% senior unsecured notes due 2015 at 'BBB-';

--$394 million 6.2% senior unsecured notes due 2017 at 'BBB-';

--$187 million 7.00% senior notes due 2019 at 'BBB-'.

Trinity Acquisition plc

--IDR at 'BBB-';

--$248 million of 4.625% senior unsecured notes due Aug. 15, 2023 at 'BBB-';

--$274 million of 6.125% senior unsecured notes due Aug. 15, 2043 at 'BBB-'.

Additional information is available on Fitch's web site at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Applicable Criteria and Relevant Research:

--'U.S. Insurance Broker Industry Sector Credit Factors' (May 4, 2012);

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

U.S. Insurance Broker Industry Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677409

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=853874

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Contacts

Fitch Ratings
Primary Analyst
Gregory Dickerson, +1 212-908-0220
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gretchen Roetzer, +1 312-606-2327
Director
or
Committee Chairperson
Douglas Meyer, +1 312-368-2061
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Gregory Dickerson, +1 212-908-0220
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gretchen Roetzer, +1 312-606-2327
Director
or
Committee Chairperson
Douglas Meyer, +1 312-368-2061
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com