10-Q 1 u09352e10vq.htm FORM 10-Q e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 001-16503
 
 
 
 
WILLIS GROUP HOLDINGS PUBLIC
LIMITED COMPANY
(Exact name of registrant as specified in its charter)
 
     
Ireland   98-0352587
(Jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
c/o Willis Group Limited
51 Lime Street, London, EC3M 7DQ, England
(Address of principal executive offices)
 
(011) 44-20-3124-6000
(Registrant’s telephone number, including area code)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of July 31, 2010, there were outstanding 170,276,062 ordinary shares, nominal value $0.000115 per share and 40,000 ordinary shares, nominal value €1, of the Registrant.
 


 

 
WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010

Table of Contents
 
             
        Page
 
Information Concerning Forward-Looking Statements     3  
 
PART I — Financial Information
      5  
      51  
      68  
      68  
 
PART II — Other Information
      69  
      69  
      69  
      69  
      69  
      69  
      69  
Signatures     70  
 EX-10.1
 EX-10.2
 EX-10.3
 EX-10.4
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
 
Certain Definitions
 
The following definitions apply throughout this quarterly report unless the context requires otherwise:
 
     
‘We’, ‘Us’, ‘Company’, ‘Group’, ‘Willis’ or ‘Our’
  Willis-Ireland and its subsidiaries and, prior to the effective time of the redomicile of the parent company discussed in Note 2 to the Notes to the Condensed Consolidated Financial Statements, Willis-Bermuda and its subsidiaries
‘Willis Group Holdings’ or ‘Willis-Ireland’
  Willis Group Holdings Public Limited Company, a company organized under the laws of Ireland
‘Willis-Bermuda’
  Willis Group Holdings Limited, a company organized under the laws of Bermuda
‘shares’
  The ordinary shares of Willis-Ireland, nominal value $0.000115 per share
‘HRH’
  Hilb Rogal & Hobbs Company


2


Table of Contents

 
 

We have included in this document ‘forward-looking statements’ within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included in this document that address activities, events or developments that we expect or anticipate may occur in the future, including such things as our outlook, future capital expenditures, growth in commissions and fees, business strategies, competitive strengths, goals, the benefits of new initiatives, growth of our business and operations, plans, and references to future successes are forward-looking statements. Also, when we use the words such as ‘anticipate’, ‘believe’, ‘estimate’, ‘expect’, ‘intend’, ‘plan’, ‘probably’, or similar expressions, we are making forward-looking statements.
 
There are important uncertainties, events and factors that could cause our actual results or performance to differ materially from those in the forward-looking statements contained in this document, including the following:
 
•  the impact of any regional, national or global political, economic, business, competitive, market, environmental and regulatory conditions on our global business operations;
 
•  the impact of current financial market conditions on our results of operations and financial condition, including as a result of any insolvencies or other difficulties experienced by our clients, insurance companies or financial institutions;
 
•  our ability to continue to manage our significant indebtedness;
 
•  our ability to compete effectively in our industry;
 
•  our ability to implement or realize anticipated benefits of the Shaping Our Future, Right Sizing Willis, Funding for Growth initiatives or any other new initiatives;
 
•  material changes in commercial property and casualty markets generally or the availability of insurance products or changes in premiums

  resulting from a catastrophic event, such as a hurricane, or otherwise;
 
•  the volatility or declines in other insurance markets and the premiums on which our commissions are based, but which we do not control;
 
•  our ability to retain key employees and clients and attract new business;
 
•  the timing or ability to carry out share repurchases or take other steps to manage our capital and the limitations in our long-term debt agreements that may restrict our ability to take these actions;
 
•  any fluctuations in exchange and interest rates that could affect expenses and revenue;
 
•  rating agency actions that could inhibit our ability to borrow funds or the pricing thereof;
 
•  a significant decline in the value of investments that fund our pension plans or changes in our pension plan funding obligations;
 
•  our ability to achieve the expected strategic benefits of transactions;
 
•  changes in the tax or accounting treatment of our operations;
 
•  any potential impact from the new US healthcare reform legislation;
 
•  the potential costs and difficulties in complying with a wide variety of foreign laws and regulations and any related changes, given the global scope of our operations;
 
•  our involvements in and the results of any regulatory investigations, legal proceedings and other contingencies;
 
•  underwriting, advisory or reputational risks associated with non-core operations;
 
•  our exposure to potential liabilities arising from errors and omissions and other potential claims against us; and
 
•  the interruption or loss of our information processing systems or failure to maintain secure information systems.



3


Table of Contents

The foregoing list of factors is not exhaustive and new factors may emerge from time to time that could also affect actual performance and results.
 
For additional factors see also Part I, Item 1A ‘Risk Factors’ included in Willis’ Form 10-K for the year ended December 31, 2009. Copies of the 10-K are available online at http://www.sec.gov or www.willis.com.
 
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove to be

inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included in this document, our inclusion of this information is not a representation or guarantee by us that our objectives and plans will be achieved.
 
Our forward-looking statements speak only as of the date made and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document may not occur, and we caution you against unduly relying on these forward-looking statements.
 



4


Table of Contents

 
Item 1 —  Financial Statements
 
WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                 
    Three months ended
    Six months ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (millions, except per share data)  
 
REVENUES
                               
Commissions and fees
  $ 789     $ 772     $ 1,752     $ 1,687  
Investment income
    10       12       19       25  
Other income
                      2  
                                 
Total revenues
    799       784       1,771       1,714  
                                 
EXPENSES
                               
Salaries and benefits (including share based compensation of $13 million, $10 million, $25 million and $15 million (Note 3))
    (456 )     (443 )     (942 )     (923 )
Other operating expenses
    (135 )     (139 )     (284 )     (277 )
Depreciation expense
    (16 )     (14 )     (31 )     (28 )
Amortization of intangible assets
    (21 )     (23 )     (42 )     (47 )
Net loss on disposal of operations
    (2 )           (2 )      
                                 
Total expenses
    (630 )     (619 )     (1,301 )     (1,275 )
                                 
OPERATING INCOME
    169       165       470       439  
Interest expense
    (41 )     (43 )     (84 )     (81 )
                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN (LOSS) EARNINGS OF ASSOCIATES
    128       122       386       358  
Income taxes
    (35 )     (31 )     (102 )     (93 )
                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN (LOSS) EARNINGS OF ASSOCIATES
    93       91       284       265  
Interest in (loss) earnings of associates, net of tax
    (2 )           18       26  
                                 
INCOME FROM CONTINUING OPERATIONS
    91       91       302       291  
Discontinued operations, net of tax (Note 4)
                      1  
                                 
NET INCOME
    91       91       302       292  
Less: net income attributable to noncontrolling interests
    (2 )     (4 )     (9 )     (12 )
                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 89     $ 87     $ 293     $ 280  
                                 
AMOUNTS ATTRIBUTABLE TO WILLIS GROUP HOLDINGS SHAREHOLDERS
                               
Income from continuing operations, net of tax
  $ 89     $ 87     $ 293     $ 279  
Income from discontinued operations, net of tax
                      1  
                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 89     $ 87     $ 293     $ 280  
                                 
EARNINGS PER SHARE — BASIC AND DILUTED (Note 5)
                               
BASIC EARNINGS PER SHARE
                               
— Continuing operations
  $ 0.52     $ 0.52     $ 1.73     $ 1.67  
                                 
DILUTED EARNINGS PER SHARE
                               
— Continuing operations
  $ 0.52     $ 0.52     $ 1.71     $ 1.66  
                                 
CASH DIVIDENDS DECLARED PER SHARE
  $ 0.26     $ 0.26     $ 0.52     $ 0.52  
                                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
                 
    June 30,
    December 31,
 
    2010     2009  
    (millions, except share data)  
 
ASSETS
               
Cash and cash equivalents
  $ 139     $ 191  
Fiduciary funds — restricted
    1,977       1,683  
Accounts receivable, net of allowance for doubtful accounts of $20 million in 2010 and $20 million in 2009
    9,687       8,638  
Fixed assets, net of accumulated depreciation of $253 million in 2010 and $257 million in 2009
    346       352  
Goodwill (Note 10)
    3,271       3,277  
Other intangible assets, net of accumulated amortization of $221 million in 2010 and $179 million in 2009 (Note 11)
    528       572  
Investments in associates
    151       156  
Deferred tax assets
    91       82  
Pension benefits asset
    121       69  
Other assets
    709       603  
                 
TOTAL ASSETS
  $ 17,020     $ 15,623  
                 
 
LIABILITIES AND EQUITY
Accounts payable
  $ 10,975     $ 9,686  
Deferred revenue and accrued expenses
    240       301  
Deferred tax liabilities
    28       29  
Income taxes payable
    93       46  
Short-term debt (Note 12)
    193       209  
Long-term debt (Note 12)
    2,154       2,165  
Liability for pension benefits
    171       187  
Other liabilities
    737       771  
                 
Total liabilities
    14,591       13,394  
                 
COMMITMENTS AND CONTINGENCIES (Note 7)
               
EQUITY
               
Shares, $0.000115 nominal value; Authorized: 4,000,000,000; Issued and outstanding, 170,216,447 shares in 2010 and 168,661,172 shares in 2009. Shares, €1 nominal value; Authorized: 40,000; Issued and outstanding, 40,000 shares in 2010 and 2009
           
Additional paid-in capital
    951       918  
Retained earnings
    2,063       1,859  
Accumulated other comprehensive loss, net of tax (Note 14)
    (610 )     (594 )
Treasury shares, at cost, 57,310 shares, $0.000115 nominal value in 2010 and 54,310 shares, $0.000115 nominal value in 2009 and 40,000 shares, €1 nominal value, in 2010 and 2009
    (3 )     (3 )
                 
Total Willis Group Holdings stockholders’ equity
    2,401       2,180  
Noncontrolling interests
    28       49  
                 
Total equity
    2,429       2,229  
                 
TOTAL LIABILITIES AND EQUITY
  $ 17,020     $ 15,623  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


6


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 
    Six months ended
 
    June 30,  
    2010     2009  
    (millions)  
 
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 302     $ 292  
Adjustments to reconcile net income to total net cash provided by operating activities:
               
Income from discontinued operations
          (1 )
Net loss/(gain) on disposal of operations, fixed and intangible assets and short-term investments
    3       (3 )
Depreciation expense
    31       28  
Amortization of intangible assets
    42       47  
Benefit for deferred income taxes
    (17 )     (17 )
Excess tax benefits from share-based payment arrangements
    (1 )      
Share-based compensation (Note 3)
    25       15  
Undistributed earnings of associates
    (14 )     (19 )
Non-cash Venezuela currency devaluation
    12        
Effect of exchange rate changes on net income
    (2 )     18  
Changes in operating assets and liabilities, net of effects from purchase of subsidiaries:
               
Fiduciary funds — restricted
    (362 )     (60 )
Accounts receivable
    (1,262 )     (1,114 )
Accounts payable
    1,548       1,164  
Additional funding of UK and US pension plans
    (19 )      
Other assets
    (111 )     (141 )
Other liabilities
    (19 )     3  
                 
Net cash provided by continuing operating activities
    156       212  
Net cash used in discontinued operating activities
          (4 )
                 
Total net cash provided by operating activities
    156       208  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds on disposal of fixed and intangible assets
    4       9  
Additions to fixed assets
    (45 )     (38 )
Acquisitions of subsidiaries, net of cash acquired
    (15 )     (3 )
Acquisition of investments in associates
    (1 )     (41 )
Proceeds from sale of operations, net of cash disposed
          37  
Proceeds on sale of short-term investments
          21  
                 
Total net cash used in continuing investing activities
    (57 )     (15 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from draw down of revolving credit facility
    30       95  
Proceeds from issue of short-term debt, net of debt issuance costs
          1  
Repayments of debt
    (70 )     (750 )
Senior notes issued, net of debt issuance costs
          482  
Proceeds from issue of shares
    17       12  
Excess tax benefits from share-based payment arrangements
    1        
Dividends paid
    (89 )     (87 )
Acquisition of noncontrolling interests
    (4 )     (14 )
Dividends paid to noncontrolling interests
    (22 )     (9 )
                 
Total net cash used in continuing financing activities
    (137 )     (270 )
                 
DECREASE IN CASH AND CASH EQUIVALENTS
    (38 )     (77 )
Effect of exchange rate changes on cash and cash equivalents
    (14 )     4  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    191       176  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 139     $ 103  
                 
Cash and cash equivalents — reported as discontinued operations
           
                 
Cash and cash equivalents — continuing operations
  $ 139     $ 103  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


7


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.   NATURE OF OPERATIONS
 
Willis Group Holdings and its subsidiaries provide a broad range of insurance and reinsurance broking and risk management consulting services to its clients worldwide, both directly and indirectly through its associates. The Company provides both specialized risk management advisory and consulting services on a global basis to clients engaged in specific industrial and commercial activities, and services to small, medium and major corporates through its retail operations.
 
In its capacity as an advisor and insurance broker, the Company acts as an intermediary between clients and insurance carriers by advising clients on risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance risk with insurance carriers through the Company’s global distribution network.
 
2.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying condensed consolidated financial statements (‘Interim Financial Statements’) have been prepared in accordance with accounting principles generally accepted in the United States of America (‘US GAAP’).
 
The Interim Financial Statements are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company’s management considers necessary for a fair presentation of the financial position as of such dates and the operating results and cash flows for those periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the six month period ended June 30, 2010 may not necessarily be indicative of the operating results for the entire fiscal year.
 
These Interim Financial Statements should be read in conjunction with the Company’s consolidated balance sheets as of December 31, 2009 and 2008, and the related consolidated statements of operations, cash flows and changes in equity for each of the three years in the period ended December 31, 2009 included in the Current Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2010.
 
Redomicile to Ireland
 
On September 24, 2009, Willis Group Holdings was incorporated in Ireland, in order to effectuate the change of the place of incorporation of the parent company of the Group. Willis Group Holdings operated as a wholly-owned subsidiary of Willis-Bermuda until December 31, 2009, when the outstanding common shares of Willis-Bermuda were canceled and Willis Group Holdings issued ordinary shares with substantially the same rights and preferences on a one-for-one basis to the holders of the Willis-Bermuda common shares that were canceled. Upon completion of this transaction, Willis Group Holdings replaced Willis-Bermuda as the ultimate parent company and Willis-Bermuda became a wholly-owned subsidiary of Willis Group Holdings.
 
This transaction was accounted for as a merger between entities under common control: accordingly, the historical financial statements of Willis-Bermuda for periods prior to this transaction are considered to be the historical financial statements of Willis Group Holdings. No changes in capital structure, assets or liabilities resulted from this transaction, other than Willis Group Holdings has provided a guarantee of amounts due under certain borrowing arrangements of two of its subsidiaries as described in notes 17 and 18.
 
Devaluation of Venezuelan currency
 
With effect from January 1, 2010, the Venezuelan economy was designated as hyper-inflationary. The Venezuelan government also devalued the Bolivar Fuerte in January 2010. As a result of these actions, the Company recorded a $12 million charge in other operating expenses to reflect the re-measurement of its net assets denominated in Venezuelan Bolivar Fuerte at January 1, 2010.


8


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
2.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 
Recent Accounting Pronouncements
 
Variable Interest Entities
 
In June 2009, the FASB issued new accounting guidance which amends the evaluation criteria to identify the primary beneficiary of a Variable Interest Entity (‘VIE’) and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics:
 
•  the power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and
 
•  the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
 
This new accounting guidance became effective January 1, 2010. The implementation of this guidance did not have a material effect on the Company’s financial position or results of operations.
 
3.   SALARIES AND BENEFITS
 
Severance costs
 
The Company incurred severance costs of $11 million in the six months ended June 30, 2010 (2009: $18 million). These costs relate to approximately 320 positions that have been or will be eliminated as part of the Company’s continuing focus on managing expense. Of these costs, $3 million were incurred in the three months ended June 30, 2010 (2009: $2 million). Severance costs for these employees were recognized pursuant to the terms of their existing benefit arrangements or employment agreements.
 
Cash retention awards
 
The Company makes annual cash retention awards to its employees. Employees must repay a proportionate amount of these awards if they voluntarily leave the Company’s employ (other than in the event of retirement or permanent disability) before a certain time period, currently three years. The Company makes cash payments to its employees in the year it grants these retention awards and recognizes these payments ratably over the period they are subject to repayment, beginning in the quarter in which the award is made. The unamortized portion of cash retention awards is recorded within other assets.
 
The following table sets out the amount of cash retention awards made and the related amortization of those awards for the three and six months ended June 30, 2010 and 2009:
 
                                 
    Three months
    Six months
 
    ended
    ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (millions)  
 
Cash retention awards made
  $ 16     $ 29     $ 185     $ 140  
Amortization of cash retention awards included in salaries and benefits
    32       26       60       44  
 
Unamortized cash retention awards totaled $217 million as of June 30, 2010
(December 31, 2009: $98 million; June 30, 2009: $142 million).


9


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
3.   SALARIES AND BENEFITS (Continued)
 
Share-based compensation
 
The Company incurred share-based compensation, reported within salaries and benefits, of $25 million in the six months ended June 30, 2010 (2009: $15 million) of which $13 million was incurred in the three months ended June 30, 2010 (2009: $10 million).
 
During the six months ended June 30, 2009, the Company recorded a $7 million credit relating to the accumulated compensation expense for certain 2008 awards which were dependent upon performance targets which the Company no longer expects to achieve.
 
4.   DISCONTINUED OPERATIONS
 
On April 15, 2009, the Company disposed of Bliss & Glennon, a US-based wholesale insurance operation acquired as part of the acquisition of HRH in 2008. Gross proceeds were $41 million.
 
Bliss & Glennon’s net assets at April 15, 2009 were $39 million, of which $34 million related to identifiable intangible assets and goodwill. In addition, there were costs and income taxes relating to the transaction of $2 million. No gain or loss was recognized on this disposal.
 
On September 1, 2009, the Company disposed of Managing Agency Group (‘MAG’), another US-based wholesale insurance operation acquired as part of the acquisition of HRH in 2008. MAG achieved a breakeven result in the first half of 2009.
 
Amounts of revenue and pre-tax income reported in discontinued operations include the following:
 
         
    Six months
 
    ended
 
    June 30,
 
    2009  
    (millions)  
 
Revenues
  $ 7  
         
Income before income taxes
    1  
Income taxes
     
         
Income from discontinued operations
  $ 1  
         
Gain on disposal of discontinued operations, net of tax
     
         
Discontinued operations, net of tax
  $ 1  
         


10


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
4.   DISCONTINUED OPERATIONS (Continued)
 
Net assets and liabilities of discontinued operations consist of the following:
 
         
    Bliss and
 
    Glennon
 
    April 15,
 
    2009  
    (millions)  
 
Assets
       
Cash and cash equivalents
  $ 1  
Fiduciary funds — restricted
    9  
Accounts receivable
    17  
Fixed assets
    1  
Intangible assets
    34  
Other assets
    2  
         
Total assets
  $ 64  
         
Liabilities
       
Accounts payable
  $ 24  
Other liabilities
    1  
         
Total liabilities
  $ 25  
         
Net assets of discontinued operations
  $ 39  
         
 
5.   EARNINGS PER SHARE
 
Basic and diluted earnings per share are calculated by dividing net income attributable to Willis Group Holdings by the average number of shares outstanding during each period. The computation of diluted earnings per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue shares were exercised or converted into shares or resulted in the issue of shares that then shared in the net income of the Company. At June 30, 2010, time-based and performance-based options to purchase 12.3 million and 8.6 million (2009: 15.3 million and 9.3 million) shares, respectively, and 1.7 million (2009: 1.2 million) restricted shares, were outstanding.


11


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
5.   EARNINGS PER SHARE (Continued)
 
Basic and diluted earnings per share are as follows:
 
                                 
    Three months ended
    Six months ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (millions, except per share data)  
 
Net income attributable to Willis Group Holdings
  $ 89     $ 87     $ 293     $ 280  
                                 
Basic average number of shares outstanding
    170       168       169       167  
Dilutive effect of potentially issuable shares
    1             2       1  
                                 
Diluted average number of shares outstanding
    171       168       171       168  
                                 
Basic earnings per share:
                               
Continuing operations
  $ 0.52     $ 0.52     $ 1.73     $ 1.67  
Discontinued operations
                      0.01  
                                 
Net income attributable to Willis Group Holdings shareholders
  $ 0.52     $ 0.52     $ 1.73     $ 1.68  
                                 
Dilutive effect of potentially issuable shares
                (0.02 )     (0.01 )
                                 
Diluted earnings per share:
                               
Continuing operations
  $ 0.52     $ 0.52     $ 1.71     $ 1.66  
Discontinued operations
                      0.01  
                                 
Net income attributable to Willis Group Holdings shareholders
  $ 0.52     $ 0.52     $ 1.71     $ 1.67  
                                 
 
Options to purchase 13 million shares were not included in the computation of the dilutive effect of stock options for the three and six months ended June 30, 2010 because the effect was antidilutive (three and six months ended June 30, 2009: 23.9 million).
 
6.   PENSION PLANS
 
The components of the net periodic benefit cost of the UK, US and international defined benefit plans are as follows:
 
                                                 
    Three months ended June 30,  
    UK pension
    US pension
    Intl pension
 
    benefits     benefits     benefits  
    2010     2009     2010     2009     2010     2009  
    (millions)  
 
Components of net periodic benefit cost (income):
                                               
Service cost
  $ 9     $ 5     $     $ 1     $ 2     $ 2  
Interest cost
    24       24       10       10       2       2  
Expected return on plan assets
    (33 )     (32 )     (10 )     (8 )     (2 )     (1 )
Amortization of unrecognized prior service gain
    (1 )     (1 )                        
Amortization of unrecognized actuarial loss
    9       8             3       1        
Curtailment gain
                      (12 )            
                                                 
Net periodic benefit cost (income)
  $ 8     $ 4     $     $ (6 )   $ 3     $ 3  
                                                 
 


12


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
6.   PENSION PLANS (Continued)
 
                                                 
    Six months ended June 30,  
    UK pension
    US pension
    Intl pension
 
    benefits     benefits     benefits  
    2010     2009     2010     2009     2010     2009  
    (millions)  
 
Components of net periodic benefit cost:
                                               
Service cost
  $ 18     $ 10     $     $ 7     $ 3     $ 3  
Interest cost
    49       46       20       20       4       4  
Expected return on plan assets
    (69 )     (61 )     (21 )     (17 )     (4 )     (3 )
Amortization of unrecognized prior service gain
    (2 )     (2 )                        
Amortization of unrecognized actuarial loss
    18       16       1       5       1       1  
Curtailment gain
                      (12 )            
                                                 
Net periodic benefit cost
  $ 14     $ 9     $     $ 3     $ 4     $ 5  
                                                 
 
For the six months ended June 30, 2010, the Company had made contributions of $43 million, $13 million and $4 million to the UK, US and international defined benefit pension plans (2009: $26 million, $7 million and $3 million), respectively. The Company expects to contribute approximately $86 million to the UK defined benefit pension plan, $30 million to the US plan and $8 million to the international plan for the full year 2010.
 
Effective May 15, 2009, the Company closed the US defined benefit plan to future accrual. Consequently, a curtailment gain of $12 million was recognized during the three and six months ended June 30, 2009.
 
7.   COMMITMENTS AND CONTINGENCIES
 
Claims, Lawsuits and Other Proceedings
 
The Company is subject to various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in connection with the placement of insurance and reinsurance in the ordinary course of business. Similar to other corporations, the Company is also subject to a variety of other claims, including those relating to the Company’s employment practices. Some of the claims, lawsuits and other proceedings seek damages in amounts which could, if assessed, be significant.
 
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. The terms of this insurance vary by policy year and self-insured risks have increased significantly in recent years. In respect of self-insured risks, the Company has established provisions which are believed to be adequate in the light of current information and legal advice, and the Company adjusts such provisions from time to time according to developments.
 
On the basis of current information, the Company does not expect that the actual claims, lawsuits and other proceedings, to which the Company is subject, or potential claims, lawsuits and other proceedings relating to matters of which it is aware will ultimately have a material adverse effect on the Company’s 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 in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
 
The material actual or potential claims, lawsuits and other proceedings, of which the Company is currently aware, are:

13


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
7.   COMMITMENTS AND CONTINGENCIES (Continued)
 
Inquiries and Investigations
 
In connection with the investigation commenced by the New York State Attorney General in April 2004 concerning, among other things, contingent commissions paid by insurers to insurance brokers, in April 2005, the Company entered into an Assurance of Discontinuance (‘Original AOD’) with the New York State Attorney General and the Superintendent of the New York Insurance Department and paid $50 million to eligible customers. As part of the Original AOD, the Company also agreed not to accept contingent compensation and to disclose to customers any compensation the Company will receive in connection with providing policy placement services to the customer. The Company also resolved similar investigations commenced by the Minnesota Attorney General, the Florida Attorney General, the Florida Department of Financial Services and the Florida Office of Insurance Regulation for amounts that were not material to the Company.
 
Similarly, in August 2005 HRH entered into an agreement with the Attorney General of the State of Connecticut (the ‘CT Attorney General’) and the Insurance Commissioner of the State of Connecticut to resolve all issues related to their investigations into certain insurance brokerage and insurance agency practices and to settle a lawsuit brought in August 2005 by the CT Attorney General alleging violations of the Connecticut Unfair Trade Practices Act and the Connecticut Unfair Insurance Practices Act. As part of this settlement, HRH agreed to take certain actions including establishing a $30 million national fund for distribution to certain clients, enhancing disclosure practices for agency and broker clients, and declining contingent compensation on brokerage business. The Company has co-operated fully with other similar investigations by the regulators and/or attorneys general of other jurisdictions, some of which have been concluded with no indication of any finding of wrongdoing.
 
On February 16, 2010, the Company entered into the Amended and Restated Assurance of Discontinuance with the Attorney General of the State of New York and the Amended and Restated Stipulation with the Superintendent of Insurance of the State of New York (the ‘Amended and Restated AOD’) on behalf of itself and its subsidiaries named therein. The Amended and Restated AOD was effective February 11, 2010 and supersedes and replaces the Original AOD.
 
The Amended and Restated AOD specifically recognizes that the Company has substantially met its obligations under the Original AOD and ends many of the requirements previously imposed. It relieves the Company of a number of technical compliance obligations that have imposed significant administrative and financial burdens on its operations. The Amended and Restated AOD no longer limits the types of compensation the Company can receive and has lowered the compensation disclosure requirements to clients that the AOD originally imposed.
 
The Amended and Restated AOD requires the Company to: (i) in New York, and each of the other 49 states of the United States, the District of Columbia and U.S. territories, provide compensation disclosure that will, at a minimum, comply with the terms of the applicable regulations, as may be amended from time to time, or the provisions of the AOD that existed prior to the adoption of the Amended and Restated AOD; and (ii) maintain its compliance programs and continue to provide appropriate training to relevant employees in business ethics, professional obligations, conflicts of interest and antitrust and trade practices compliance. In addition, in placing, renewing, consulting on or servicing any insurance policy, it prohibits the Company from directly or indirectly (a) accepting from or requesting of any insurer any promise or commitment to use any of the Company’s brokerage, agency, producing or consulting services in exchange for production of business to such insurer or (b) knowingly place, renew or consult on or service a client’s insurance business through a wholesale broker in a manner that is contrary to the client’s best interest.
 
In 2006, the European Commission issued questionnaires pursuant to its Sector Inquiry or, in respect of Norway, the European Free Trade Association Surveillance Authority, related to insurance business practices,


14


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
7.   COMMITMENTS AND CONTINGENCIES (Continued)
 
including compensation arrangements for brokers, to at least 150 European brokers including our operations in nine European countries. The Company responded to the European Commission questionnaires and has filed responses with the European Free Trade Association Surveillance Authority for two of its Norwegian entities. The European Commission reported on a final basis on September 25, 2007, expressing concerns over potential conflicts of interest in the industry relating to remuneration and binding authorities when assuming a dual role for clients and insurers and also over the nature of the coinsurance market. The Company continues to co-operate with both the European Commission and the European Free Trade Association Surveillance Authority.
 
Since August 2004, the Company and HRH (along with various other brokers and insurers) have been named as defendants in purported class actions in various courts across the United States. All of these actions have been consolidated into a single action in the US District Court for the District of New Jersey (‘MDL’). There are two amended complaints within the MDL, one that addresses employee benefits (‘EB Complaint’) and one that addresses all other lines of insurance (‘Commercial Complaint’). HRH was a named defendant in the EB Complaint, but has since been voluntarily dismissed. HRH is a named defendant in the Commercial Complaint. The Company is a named defendant in both MDL complaints. Each of the EB Complaint and the Commercial Complaint seeks monetary damages, including punitive damages, and equitable relief and makes allegations regarding the practices and conduct that have been the subject of the investigation of state attorneys general and insurance commissioners, including allegations that the brokers have breached their duties to their clients by entering into contingent compensation agreements with either no disclosure or limited disclosure to clients and participated in other improper activities. The complaints also allege the existence of a conspiracy among insurance carriers and brokers and allege violations of federal antitrust laws, the federal Racketeer Influenced and Corrupt Organizations (‘RICO’) statute and the Employee Retirement Income Security Act of 1974 (‘ERISA’). In separate decisions issued in August and September 2007, the antitrust and RICO Act claims were dismissed with prejudice and the state claims were dismissed without prejudice from the Commercial Complaint.
 
In January 2008, the Judge dismissed the ERISA claims with prejudice from the EB Complaint and the state law claims without prejudice. Plaintiffs filed a notice of appeal regarding the dismissal of the antitrust and RICO claims and oral arguments on this appeal were heard in April 2009 but there is no indication when a ruling will be issued. Additional actions could be brought in the future by individual policyholders. The Company disputes the allegations in all of these suits and has been and intends to continue to defend itself vigorously against these actions. The outcomes of these lawsuits, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.
 
Reinsurance Market Dispute
 
Various legal proceedings are pending, have concluded or may commence between reinsurers, reinsureds and in some cases their intermediaries, including reinsurance brokers, relating to personal accident excess of loss reinsurance for the years 1993 to 1998. The proceedings principally concern allegations by reinsurers that they have sustained substantial losses due to an alleged abnormal ‘spiral’ in the market in which the reinsurance contracts were placed, the existence and nature of which, as well as other information, was not disclosed to them by the reinsureds or their reinsurance broker. A ‘spiral’ is a market term for a situation in which reinsureds and reinsurers reinsure each other with the effect that the same loss or portion of that loss moves through the market multiple times.
 
The reinsurers concerned have taken the position that, despite their decisions to underwrite risks or a group of risks, they are no longer bound by their reinsurance contracts. As a result, they have stopped settling claims and are seeking to recover claims already paid. The Company also understands that there have been at least


15


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
7.   COMMITMENTS AND CONTINGENCIES (Continued)
 
two arbitration awards in relation to a ‘spiral’, among other things, in which the reinsurer successfully argued that it was no longer bound by parts of its reinsurance program. Willis Limited, the Company’s principal insurance brokerage subsidiary in the United Kingdom, acted as the reinsurance broker or otherwise as intermediary, but not as an underwriter, for numerous personal accident reinsurance contracts, including two contracts that were involved in one of the arbitrations. Due to the small number of reinsurance brokers generally, Willis Limited also utilized other brokers active in this market as sub-agents, including brokers who are parties to the legal proceedings described above, for certain contracts and may be responsible for any errors and omissions they may have made. In July 2003, one of the reinsurers received a judgment in the English High Court against certain parties, including a sub-broker Willis Limited used to place two of the contracts involved in this trial. Although neither the Company nor any of its subsidiaries were a party to this proceeding or any arbitration, Willis Limited entered into tolling agreements with certain of the principals to the reinsurance contracts tolling the statute of limitations pending the outcome of proceedings between the reinsureds and reinsurers.
 
Two former clients of Willis Limited, American Reliable Insurance Company and one of its associated companies (collectively, ‘ARIC’), and CNA Insurance Company Limited and two of its associated companies (‘CNA’) terminated their respective tolling agreements with Willis Limited and commenced litigation in September 2007 and January 2008, respectively, in the English Commercial Court against Willis Limited. ARIC alleged conspiracy between a former Willis Limited employee and the ARIC underwriter as well as negligence and CNA alleged deceit and negligence by the same Willis Limited employee both in connection with placements of personal accident reinsurance in the excess of loss market in London and elsewhere. ARIC asserted a claim of approximately $257 million (plus unspecified interest and costs). On June 9, 2009, Willis Limited entered into a settlement agreement pursuant to which Willis Limited agreed to pay a total of $139 million to ARIC in two installments. All installments have been paid by the Company. Each party has also released and waived all claims it may have against any of the other parties arising out of or in connection with the subject matter of the litigation. The settlement includes no admission of wrongdoing by any party. The $139 million required to fund the settlement agreement was covered by errors and omissions insurance.
 
On September 11, 2009, Willis Limited entered into a settlement agreement pursuant to which Willis Limited agreed to pay a total of $130 million to CNA in two instalments which were paid in 2009. Each party has also released and waived all claims it may have against any of the other parties arising out of or in connection with the subject-matter of the litigation. The settlement includes no admission of wrongdoing by any party. The Company has partially collected and believes it will collect in full the $130 million required to fund the settlement agreement from errors and omissions insurers.
 
Various arbitrations relating to reinsurance continue to be active and from time to time the principals request co-operation from the Company and suggest that claims may be asserted against the Company. Such claims may be made against the Company if reinsurers do not pay claims on policies issued by them. The Company cannot predict at this time whether any such claims will be made or the damages that may be alleged.
 
Gender Discrimination Class Action
 
In March 2008, the Company settled an action in the United States District Court for the Southern District of New York commenced against the Company in 2001 on behalf of an alleged nationwide class of present and former female officer and officer equivalent employees alleging that the Company discriminated against them on the basis of their gender and seeking injunctive relief, money damages, attorneys’ fees and costs. Although the Court had denied plaintiffs’ motions to certify a nationwide class or to grant nationwide discovery, it did certify a class of approximately 200 female officers and officer equivalent employees based in the Company’s offices in New York, New Jersey and Massachusetts. The settlement agreement provides for injunctive relief


16


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
7.   COMMITMENTS AND CONTINGENCIES (Continued)
 
and a monetary payment, including the amount of attorney fees plaintiffs’ counsel are entitled to receive, which was not material to the Company. In December 2006, a former female employee, whose motion to intervene in the class action was denied, filed a purported class action in the United States District Court, Southern District of New York, with almost identical allegations as those contained in the suit that was settled in 2008, except seeking a class period of 1998 to the time of trial (the class period in the settled suit was 1998 to the end of 2001). The Company’s motion to dismiss this suit was denied and the Court did not grant the Company permission to immediately file an appeal from the denial of its motion to dismiss. The parties are in the discovery phase of the litigation. The suit was amended to include one additional plaintiff and another has filed an arbitration demand that includes a class allegation.
 
The Court has decided that, to the extent a class is ever certified, the class period will end at the end of 2007 and not up to the time of trial as plaintiffs had sought. The Company cannot predict at this time what, if any, damages might result from this action.
 
World Trade Center
 
The Company acted as the insurance broker, but not as an underwriter, for the placement of both property and casualty insurance for a number of entities which were directly impacted by the September 11, 2001, destruction of the World Trade Center complex, including Silverstein Properties LLC, which acquired a 99-year leasehold interest in the twin towers and related facilities from the Port Authority of New York and New Jersey in July 2001. Although the World Trade Center complex insurance was bound at or before the July 2001 closing of the leasehold acquisition, consistent with standard industry practice, the final policy wording for the placements was still in the process of being finalized when the twin towers and other buildings in the complex were destroyed on September 11, 2001. There have been a number of lawsuits in the United States between the insured parties and the insurers for several placements and other disputes may arise in respect of insurance placed by us which could affect the Company including claims by one or more of the insureds that the Company made culpable errors or omissions in connection with our brokerage activities. However, the Company does not believe that our role as broker will lead to liabilities which in the aggregate would have a material adverse effect on our results of operations, financial condition or liquidity.
 
Stanford Financial Group
 
On July 2, 2009, a putative class action complaint, captioned Troice, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:09-CV-01274-N, was filed in the U.S. District Court for the Northern District of Texas against Willis Group Holdings, Willis of Colorado, Inc. and a Willis associate, among others, relating to the collapse of The Stanford Financial Group (‘Stanford’), for which Willis of Colorado, Inc. acted as broker of record on certain lines of insurance. The complaint generally alleged that the defendants actively and materially aided Stanford’s alleged fraud by providing Stanford with certain letters regarding coverage that they knew would be used to help retain or attract actual or prospective Stanford client investors. The complaint alleged that these letters, which contain statements about Stanford and the insurance policies that the defendants placed for Stanford, contained untruths and omitted material facts and were drafted in this manner to help Stanford promote and sell its allegedly fraudulent certificates of deposit. The putative class consisted of Stanford investors in Mexico and the complaint asserted various claims under Texas statutory and common law and sought actual damages in excess of $1 billion, punitive damages and costs. On August 12, 2009, the plaintiffs filed an amended complaint, which, notwithstanding the addition of certain factual allegations and Texas common law claims, largely mirrored the original and sought the same relief.
 
On July 17, 2009, a putative class action complaint, captioned Ranni v. Willis of Colorado, Inc., et al., C.A. No. 09-22085, was filed against Willis Group Holdings and Willis of Colorado, Inc. in the U.S. District Court


17


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
7.   COMMITMENTS AND CONTINGENCIES (Continued)
 
for the Southern District of Florida, relating to the same alleged course of conduct as the Troice complaint described above. Based on substantially the same allegations as the Troice complaint, but on behalf of a putative class of Venezuelan and other South American Stanford investors, the Ranni complaint asserts a claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as various claims under Florida statutory and common law, and seeks damages in an amount to be determined at trial and costs.
 
On or about July 24, 2009, a motion was filed by certain individuals (collectively, the ‘Movants’) with the U.S. Judicial Panel on Multidistrict Litigation (the ‘JPML’) to consolidate and coordinate in the Northern District of Texas nine separate putative class actions — including the Troice and Ranni actions described above, as well as other actions against various Stanford-related entities and individuals and the Commonwealth of Antigua and Barbuda — relating to Stanford and its allegedly fraudulent certificates of deposit.
 
On August 6, 2009, a putative class action complaint, captioned Canabal, et al. v. Willis of Colorado, Inc., et al., C.A. No. 3:09-CV-01474-D, was filed against Willis Group Holdings, Willis of Colorado, Inc. and the same Willis associate, among others, also in the Northern District of Texas, relating to the same alleged course of conduct as the Troice complaint described above. Based on substantially the same allegations as the Troice complaint, but on behalf of a putative class of Venezuelan investors, the Canabal complaint asserted various claims under Texas statutory and common law and sought actual damages in excess of $1 billion, punitive damages, attorneys’ fees and costs.
 
On or about August 10, 2009, the Movants filed with the JPML a Notice of Related Action that referred the Canabal action to the JPML. On October 6, 2009, the JPML ruled on the transfer motion, transferring seven of the subject actions (including the Troice and Ranni actions) — i.e., the original nine actions minus two that had since been dismissed — for consolidation or coordination in the Northern District of Texas. On October 27, 2009, the parties to the Canabal action stipulated to the designation of that action as an ‘xyz case’ properly part of the new Stanford MDL proceeding in the Northern District of Texas.
 
On September 14, 2009, a complaint, captioned Rupert, et al. v. Winter, et al., Case No. 2009C115137, was filed on behalf of 97 Stanford investors against Willis Group Holdings, Willis of Colorado, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). Based on substantially the same allegations as the Troice complaint, the Rupert complaint asserts claims under the Securities Act of 1933, as well as various Texas statutory and common law claims, and seeks rescission, damages, special damages and consequential damages of $79.1 million, treble damages of $237.4 million under the Texas Insurance Code, attorneys’ fees and costs. On October 20, 2009, certain defendants, including Willis of Colorado, Inc., (i) removed the Rupert action to the U.S. District Court for the Western District of Texas, (ii) notified the JPML of the pendency of this additional ‘tag-along’ action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. In November 2009, the JPML issued a conditional transfer order (the ‘CTO’) for the transfer of the Rupert action to the Northern District of Texas. On December 22, 2009, the plaintiffs filed a motion to vacate, or alternatively stay, the CTO, to which Willis of Colorado, Inc. responded on January 4, 2010. On April 1, 2010, the JPML denied the plaintiffs’ motion to vacate the CTO and issued a final transfer order for the transfer of the Rupert action to the Northern District of Texas.
 
On December 18, 2009, the parties to the Troice and Canabal actions stipulated to the consolidation of those actions and, on December 31, 2009, the plaintiffs therein, collectively, filed a Second Amended Class Action Complaint, which largely mirrors the Troice and Canabal predecessor complaints, but seeks relief on behalf of a worldwide class of Stanford investors. Also on December 31, 2009, the plaintiffs in the Canabal action filed


18


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
7.   COMMITMENTS AND CONTINGENCIES (Continued)
 
a Notice of Dismissal, dismissing the Canabal action without prejudice. On February 25, 2010, the defendants filed motions to dismiss the Second Amended Class Action Complaint in the consolidated Troice/Canabal action. Those motions are currently pending. On May 24, 2010, the plaintiffs in the consolidated Troice/Canabal action filed a motion for leave to file a Third Amended Class Action Complaint, which, among other things, adds several Texas statutory claims. That motion is also currently pending.
 
The defendants have not yet responded to the Ranni or Rupert complaints.
 
Additional actions could be brought in the future by other investors in certificates of deposit issued by Stanford and its affiliates. The Company disputes these allegations and intends to defend itself vigorously against these actions. The outcomes of these actions, however, including any losses or other payments that may occur as a result, cannot be predicted at this time.
 
St. Jude
 
In January 2009, Willis of Minnesota, Inc. was named as a third party defendant in a lawsuit between American Insurance Company (‘AIC’) and St. Jude Medical, Inc. (‘St. Jude’) pending in the United States District Court, District of Minnesota, that arose out of a products liability insurance program for St. Jude in which AIC provided one layer of insurance and the Company acted as the broker. St. Jude is seeking a judgment against AIC requiring AIC to pay its policy limits of $50 million plus interest and costs for certain personal injury claims filed against St. Jude and denied by AIC. To the extent there is a finding that AIC does not have to provide coverage for these claims, St. Jude has alternatively alleged standard errors and omissions claims against the Company for the same amount. While the Company cannot predict the outcome of any litigation, the Company believes AIC should provide coverage and believes that St. Jude should have a favorable outcome against AIC. If St. Jude prevails against AIC, St. Jude’s claims against the Company become moot. The Company continues to vigorously defend itself and disputes the allegations made against it. Pending the outcome of summary judgment motions, the case may proceed to trial in November 2010.
 
Commitments
 
In December 2009, the Company made a capital commitment of $25 million to Trident V, LP, an investment fund managed by Stone Point Capital. The first capital call was made and met in April 2010 and was for $1 million. As at June 30, 2010 there had been $2 million of capital calls, all of which have been met.
 
8.   DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
 
Accounting for derivative financial instruments
 
In addition to the note below, see Note 9 for information about the fair value hierarchy for derivatives.
 
Primary risks managed by derivative financial instruments
 
The Company uses derivative financial instruments to manage exposures arising from its operating activities. The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates.
 
Interest rate risk
 
As a result of its operating activities, the Company receives cash for premiums and claims which it deposits in short-term investments denominated in US dollars and other currencies. The Company earns interest on these funds, which is included in the financial statements as investment income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity. In


19


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
8.   DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
 
order to manage interest rate risk arising from these financial assets, the Company enters into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest in the significant currencies of these short-term investments. The use of interest rate contracts essentially converts groups of short-term variable rate investments to fixed rates.
 
The fair value of these contracts is recorded in other assets and other liabilities. For contracts that qualify as accounting hedges, changes in fair value are recorded as a component of other comprehensive income. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings. If contracts are deemed not to qualify for hedge accounting, changes in fair value are recorded in other operating expenses.
 
At June 30, 2010, the Company had the following derivative financial instruments that were designated as cash flow hedges of interest rate risk:
 
                         
          Notional
    Fair
 
          amount(i)     value  
          (millions)  
 
US dollar
    Receive fixed — pay variable     $ 590     $ 16  
Pound Sterling
    Receive fixed — pay variable       175       6  
Euro
    Receive fixed — pay variable       102       2  
 
 
(i) Notional amounts are reported in US dollars translated at spot rates at June 30, 2010.
 
During the six months ended June 30, 2010, the Company entered into a series of interest rate swaps for a total notional amount of $350 million to receive a fixed rate and pay a variable rate on a semi-annual basis, with a maturity date of July, 15, 2015. The Company has designated and accounts for these instruments as fair value hedges against its $350 million 5.625% senior notes due 2015. The fair values of the interest rate swaps are included within other assets or other liabilities and the fair value of the hedged element of the senior notes is included within the principal amount of the debt.
 
At June 30, 2010 and December 31, 2009 the Company’s interest rate swaps were designated as hedging instruments.
 
Foreign currency risk
 
The Company’s primary foreign exchange risks arise:
 
•  from changes in the exchange rate between US dollars and Pounds Sterling as its London Market operations earn the majority of their revenues in US dollars and incur expenses predominantly in Pounds Sterling, and may also hold a significant net sterling asset or liability position on the balance sheet. In addition, the London Market operations earn significant revenues in euros and Japanese yen; and
 
•  from the translation into US dollars of the net income and net assets of its foreign subsidiaries, excluding the London Market operations which are US dollar denominated.
 
The foreign exchange risks in its London Market operations are hedged as follows:
 
•  to the extent that forecast Pound Sterling expenses exceed Pound Sterling revenues, the Company limits its exposure to this exchange rate risk by the use of forward contracts matched to specific, clearly identified cash outflows arising in the ordinary course of business;
 
•  to the extent the UK operations earn significant revenues in euros and Japanese yen, the Company limits its exposure to changes in the exchange rate between the US dollar and these currencies by the use of forward contracts matched to a percentage of forecast cash inflows in specific currencies and periods; and


20


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
8.   DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
 
Foreign currency risk (Continued)
 
 
•  to the extent that the net sterling asset or liability position in its London Market operations relate to short-term cash flows, the Company limits its exposure by the use of forward purchases and sales. These forward purchases and sales are not effective hedges for accounting purposes.
 
The Company does not hedge net income earned within foreign subsidiaries outside of the UK.
 
The fair value of foreign currency contracts is recorded in other assets and other liabilities. For contracts that qualify as accounting hedges, changes in fair value resulting from movements in the spot exchange rate are recorded as a component of other comprehensive income whilst changes resulting from a movement in the time value are recorded in interest expense. If contracts are deemed not to qualify for hedge accounting, the total change in fair value is recorded in interest expense. Amounts held in comprehensive income are reclassified into earnings when the hedged exposure affects earnings.
 
At June 30, 2010 and December 31, 2009 the Company’s foreign currency contracts were all designated as hedging instruments.
 
The table below summarizes by major currency the contractual amounts of the Company’s forward contracts to exchange foreign currencies for Pounds Sterling and US dollars at June 30, 2010:
 
                 
          Fair
 
    Sell(i)     value  
    (millions)  
 
US dollar
  $ 363     $ (19 )
Euro
    137       19  
Japanese yen
    63       (3 )
 
 
(i) Foreign currency notional amounts are reported in US dollars translated at spot rates at June 30, 2010.
 
Derivative financial instruments
 
The table below presents the fair value of the Company’s derivative financial instruments and their balance sheet classification at June 30, 2010:
 
                     
        Fair value  
    Balance sheet
  June 30,
    December 31,
 
Derivative financial instruments designated as hedging instruments:   classification   2010     2009  
        (millions)  
 
Assets:
                   
Interest rate swaps (cash flow hedges)
  Other assets   $ 24     $ 27  
Interest rate swaps (fair value hedges)
  Other assets     14        
Forward exchange contracts
  Other assets     21       8  
                     
Total derivatives designated as hedging instruments
      $ 59     $ 35  
                     
Liabilities:
                   
Interest rate swaps
  Other liabilities   $     $ (1 )
Forward exchange contracts
  Other liabilities     (24 )     (22 )
                     
Total derivatives designated as hedging instruments
      $ (24 )   $ (23 )
                     


21


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
8.   DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
 
Derivative financial instruments (Continued)
 
The table below presents the effects of derivative financial instruments in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity for the three and six months ended June 30, 2010 and 2009:
 
                                 
                    Location of
  Amount of
 
                    gain (loss)
  gain (loss)
 
          Location of
  Amount of
    recognized
  recognized
 
          gain (loss)
  gain (loss)
    in income
  in income
 
          reclassified
  reclassified
    on derivative
  on derivative
 
    Amount of
    from
  from
    (Ineffective
  (Ineffective
 
    gain (loss)
    accumulated
  accumulated
    hedges and
  hedges and
 
    recognized
    OCI(i) into
  OCI(i) into
    ineffective
  ineffective
 
    in OCI(i)
    income
  income
    element of
  element of
 
    on derivative
    (Effective
  (Effective
    effective
  effective
 
Derivatives in cash flow hedging relationships   (Effective element)     element)   element)     hedges)   hedges)  
    (millions)         (millions)         (millions)  
 
Three months ended June 30, 2010
                               
Interest rate swaps
  $ 6     Investment income   $ (6 )   Other operating expenses   $  
Forward exchange contracts
    7     Other operating expenses     2     Interest expense      
                                 
Total
  $ 13         $ (4 )       $  
                                 
Three months ended June 30, 2009
                               
Interest rate swaps
  $ 3     Investment income   $ (7 )   Other operating expenses   $  
Forward exchange contracts
    27     Other operating expenses     13     Interest expense      
                                 
Total
  $ 30         $ 6         $  
                                 
Six months ended June 30, 2010
                               
Interest rate swaps
  $ 11     Investment income   $ (13 )   Other operating expenses   $  
Forward exchange contracts
    4     Other operating expenses     7     Interest expense      
                                 
Total
  $ 15         $ (6 )       $  
                                 
Six months ended June 30, 2009
                               
Interest rate swaps
  $ 9     Investment income   $ (12 )   Other operating expenses   $ (1 )
Forward exchange contracts
    33     Other operating expenses     30     Interest expense      
                                 
Total
  $ 42         $ 18         $ (1 )
                                 
 
 
(i) OCI means other comprehensive income. Amounts above shown gross of tax.
 
For interest rate swaps all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For foreign exchange contracts only the changes in fair value resulting from movements in the spot exchange rate are included in this assessment.


22


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
8.   DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
 
Derivative financial instruments (Continued)
 
At June 30, 2010, the Company estimates there will be no material reclassification of net derivative gains or losses from other comprehensive income into earnings within the next twelve months.
 
Fair value hedges
 
The table below presents the effects of derivative financial instruments in fair value hedging relationships on the consolidated statements of operations for the three and six months ended June 30, 2010. The Company did not have any derivative financial instruments in fair value hedging relationships during 2009.
 
                             
              Loss
    Ineffectiveness
 
        Gain
    recognized
    recognized in
 
Derivatives in fair value hedging
  Hedged item in fair value hedging
  recognized
    for hedged
    interest
 
relationships   relationship   for derivative     item     expense  
              (millions)        
 
Three months ended June 30, 2010
                           
Interest rate swaps
  5.625% Senior notes due 2015   $ 12     $ (12 )   $  
                             
Six months ended June 30, 2010
                           
Interest rate swaps
  5.625% Senior notes due 2015   $ 14     $ (14 )   $  
                             
 
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
 
9.   FAIR VALUE MEASUREMENT
 
The following table presents, for each of the fair value hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis:
 
                                 
    June 30, 2010  
    Quoted
                   
    prices in
                   
    active
                   
    markets
    Significant
    Significant
       
    for
    other
    other
       
    identical
    observable
    unobservable
       
    assets     inputs     inputs        
    Level 1     Level 2     Level 3     Total  
    (millions)  
 
Assets at fair value:
                               
Cash and cash equivalents
  $ 139     $     $     $ 139  
Fiduciary funds — restricted
    1,977                   1,977  
Derivative financial instruments
          59             59  
                                 
Total assets
  $ 2,116     $ 59     $     $ 2,175  
                                 
Liabilities at fair value:
                               
Derivative financial instruments
  $     $ 24     $     $ 24  
Changes in fair value of hedged debt(i)
          14             14  
                                 
Total liabilities
  $     $ 38     $     $ 38  
                                 
 
 
(i) Changes in the fair value of the underlying hedged debt instrument since inception of the hedging relationship are included in long-term debt.


23


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
9.   FAIR VALUE MEASUREMENT (Continued)
 
 
                                 
    December 31, 2009  
    Quoted
                   
    prices in
                   
    active
    Significant
    Significant
       
    markets for
    other
    other
       
    identical
    observable
    unobservable
       
    assets     inputs     inputs        
    Level 1     Level 2     Level 3     Total  
    (millions)  
 
Assets at fair value:
                               
Cash and cash equivalents
  $ 191     $     $     $ 191  
Fiduciary funds — restricted
    1,683                   1,683  
Derivative financial instruments
          35             35  
                                 
Total assets
  $ 1,874     $ 35     $     $ 1,909  
                                 
Liabilities at fair value:
                               
Derivative financial instruments
  $     $ 23     $     $ 23  
                                 
Total liabilities
  $     $ 23     $     $ 23  
                                 
 
The estimated fair value of the Company’s financial instruments held or issued to finance the Company’s operations is summarized below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that the Company would realize upon disposition nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
 
                                 
    June 30, 2010     December 31, 2009  
    Carrying
    Fair
    Carrying
    Fair
 
    amount     Value     amount     Value  
          (millions)        
 
Assets:
                               
Cash and cash equivalents
  $ 139     $ 139     $ 191     $ 191  
Fiduciary funds — restricted
    1,977       1,977       1,683       1,683  
Derivative financial instruments
    59       59       35       35  
Liabilities:
                               
Short-term debt
  $ 193     $ 193     $ 209     $ 211  
Long-term debt
    2,154       2,415       2,165       2,409  
Derivative financial instruments
    24       24       23       23  
 
The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments:
 
Cash and Cash Equivalents — The estimated fair value of these financial instruments approximates their carrying values due to their short maturities.
 
Fiduciary Funds — Restricted — Fair values are based on quoted market values.
 
Short-Term Debt and Long-Term Debt — Fair values are based on quoted market values.


24


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
9.   FAIR VALUE MEASUREMENT (Continued)
 
Derivative Financial Instruments — Market values have been used to determine the fair value of interest rate swaps and forward foreign exchange contracts based on estimated amounts the Company would receive or have to pay to terminate the agreements, taking into account the current interest rate environment, current foreign currency forward rates and counterparty risk. The fair value of the Company’s derivative financial instruments is computed based on an income approach using appropriate valuation techniques including discounted future cash flows and other methods that are consistent with accepted methodologies for pricing financial instruments.
 
10.   GOODWILL
 
Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. Goodwill is not amortized but is subject to impairment testing annually and whenever facts or circumstances indicate that the carrying amounts may not be recoverable. As part of the evaluation the estimated future discounted cash flows associated with the underlying business operation are compared to the carrying amount of goodwill to determine if a write-down is required. If such an assessment indicates that the discounted future cash flows are not sufficient, the carrying amount is reduced to the estimated fair value.
 
When a business entity is sold, goodwill is allocated to the disposed entity based on the fair value of that entity compared to the fair value of the reporting unit in which it is included.
 
The changes in the carrying amount of goodwill by operating segment for the six months ended June 30, 2010 and the year ended December 31, 2009 are as follows:
 
                                 
          North
             
    Global     America     International     Total  
          (millions)        
 
Balance at December 31, 2008
  $ 1,046     $ 1,810     $ 419     $ 3,275  
Goodwill acquired during 2009
    4       1       14       19  
Purchase price allocation adjustments
    24       (4 )           20  
Goodwill disposed of during 2009
          (27 )     (1 )     (28 )
Foreign exchange
    (9 )                 (9 )
                                 
Balance at December 31, 2009
  $ 1,065     $ 1,780     $ 432     $ 3,277  
Other movements(i)
          (2 )     1       (1 )
Foreign exchange
    (5 )                 (5 )
                                 
Balance at June 30, 2010
  $ 1,060     $ 1,778     $ 433     $ 3,271  
                                 
 
 
(i) North America — tax benefit arising on the exercise of fully vested HRH stock options which were issued as part of the acquisition of HRH in 2008.
 
11.   OTHER INTANGIBLE ASSETS
 
Other intangible assets are classified into the following categories:
 
•  ‘Customer and Marketing related’ includes
 
  •  Client Relationships,
 
  •  Client Lists,
 
  •  Non-compete Agreements,
 
  •  Trade Names; and
 
•  ‘Contract based, Technology and Other’ includes all other purchased intangible assets.


25


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
11.   OTHER INTANGIBLE ASSETS (Continued)
 
 
The major classes of amortizable intangible assets are as follows:
 
                                                 
    June 30, 2010     December 31, 2009  
    Gross
          Net
    Gross
          Net
 
    carrying
    Accumulated
    carrying
    carrying
    Accumulated
    carrying
 
    amount     amortization     amount     amount     amortization     amount  
    (millions)  
 
Customer and Marketing Related:
                                               
Client Relationships
  $ 689     $ (170 )   $ 519     $ 691     $ (138 )   $ 553  
Client Lists
    9       (7 )     2       9       (6 )     3  
Non-compete Agreements
    36       (32 )     4       36       (23 )     13  
Trade Names
    11       (10 )     1       11       (10 )     1  
                                                 
Total Customer and Marketing Related
    745       (219 )     526       747       (177 )     570  
                                                 
Contract based, Technology and Other
    4       (2 )     2       4       (2 )     2  
                                                 
Total amortizable intangible assets
  $ 749     $ (221 )   $ 528     $ 751     $ (179 )   $ 572  
                                                 
 
The aggregate amortization of intangible assets for the six months ended June 30, 2010 was $42 million (2009: $47 million), of which $21 million was recognized in the three months ended June 30, 2010 (2009: $23 million). The total amortizable intangible assets are expected to be amortized over the following periods:
 
                                                         
    Remainder of
                                     
    2010     2011     2012     2013     2014     Thereafter     Total  
                (millions)                    
 
Amortization of intangible assets
  $ 39     $ 67     $ 61     $ 56     $ 50     $ 255     $ 528  
                                                         
 
12.   DEBT
 
Short-term debt consists of the following:
 
                 
    June 30,
    December 31,
 
    2010     2009  
    (millions)  
 
Current portion of 5-year term loan facility
  $ 110     $ 110  
5.125% senior notes due 2010
    83       90  
6.000% loan notes due 2010
          9  
                 
    $ 193     $ 209  
                 


26


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
12.   DEBT (Continued)
 
Long-term debt consists of the following:
 
                 
    June 30,
    December 31,
 
    2010     2009  
    (millions)  
 
5-year term loan facility
  $ 356     $ 411  
Revolving credit facility
    30        
6.000% senior notes due 2012
    4       4  
5.625% senior notes due 2015
    364       350  
12.875% senior notes due 2016
    500       500  
6.200% senior notes due 2017
    600       600  
7.000% senior notes due 2019
    300       300  
                 
    $ 2,154     $ 2,165  
                 
 
During the six months ended June 30, 2010, the Company entered into a series of interest rate swaps for a total notional amount of $350 million to receive a fixed rate and pay a variable rate on a semi-annual basis, with a maturity date of July 15, 2015. The Company has designated and accounts for these instruments as fair value hedges against its $350 million 5.625% senior notes due 2015. The fair values of the interest rate swaps are included within other assets or other liabilities and the fair value of the hedged element of the senior notes is included within the principal amount of the debt.
 
The 5-year term loan facility bears interest at LIBOR plus 2.250% and is repayable at $27 million per quarter, with a final payment of $115 million due in the fourth quarter of 2013. Drawings under the revolving credit facility also bear interest at LIBOR plus 2.250% and the facility expires on October 1, 2013.
 
13.   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
Supplemental disclosures regarding cash flow information and non-cash flow investing and financing activities are as follows:
 
                 
    Six months ended
 
    June 30,  
    2010     2009  
    (millions)  
 
Supplemental disclosures of cash flow information:
               
Cash payments for income taxes, net of cash received
  $ 56     $ 66  
Cash payments for interest
    82       76  
                 
Supplemental disclosures of non-cash flow investing and financing activities:
               
Issue of stock on acquisitions of subsidiaries
  $     $ 1  
Issue of stock on acquisitions of noncontrolling interests
          10  
                 
Acquisitions:
               
Fair value of assets acquired
  $ 1     $ 6  
Less: Liabilities assumed
          (35 )
                 
Net assets (liabilities) acquired, net of cash acquired
  $ 1     $ (29 )
                 


27


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
14.   COMPREHENSIVE INCOME
 
a) The components of comprehensive income are as follows:
 
                                 
    Three months ended June 30,     Six months ended June 30,  
    2010     2009     2010     2009  
          (millions)        
 
Net income
  $ 91     $ 91     $ 302     $ 292  
Other comprehensive income, net of tax:
                               
Foreign currency translation adjustment (net of tax of $nil, $nil, $nil and $nil)
    (29 )     4       (35 )     5  
Pension funding adjustment (net of tax of $(2) million, $1 million, $(5) million and $(2) million)
    6             12       6  
Net unrealized gain on derivative instruments (net of tax of $(2) million, $(10) million, $(2) million and $(17) million)
    7       26       7       43  
                                 
Other comprehensive (loss) income (net of tax of $(4) million, $(9) million, $(7) million and $(19) million)
    (16 )     30       (16 )     54  
                                 
Comprehensive income
    75       121       286       346  
Noncontrolling interests
    (2 )     (4 )     (9 )     (12 )
                                 
Comprehensive income attributable to Willis Group Holdings
  $ 73     $ 117     $ 277     $ 334  
                                 
 
b) The components of accumulated other comprehensive loss, net of tax, are as follows:
 
                 
    June 30,
    December 31,
 
    2010     2009  
    (millions)  
 
Net foreign currency translation adjustment
  $ (81 )   $ (46 )
Net unrealized holding loss
    (2 )     (2 )
Pension funding adjustment
    (542 )     (554 )
Net unrealized gain on derivative instruments
    15       8  
                 
Accumulated other comprehensive loss, attributable to Willis Group Holdings
  $ (610 )   $ (594 )
                 


28


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
15.   EQUITY AND NONCONTROLLING INTERESTS
 
The components of equity and noncontrolling interests are as follows:
 
                                                 
    June 30, 2010     June 30, 2009  
    Willis
                Willis
             
    Group
                Group
             
    Holdings
    Noncontrolling
    Total
    Holdings
    Noncontrolling
    Total
 
    stockholders     interests     equity     stockholders     interests     equity  
    (millions)  
 
Balance at beginning of period
  $ 2,180     $ 49     $ 2,229     $ 1,845     $ 50     $ 1,895  
Comprehensive income:
                                               
Net income
    293       9       302       280       12       292  
Other comprehensive (loss) income, net of tax
    (16 )           (16 )     54             54  
                                                 
Comprehensive income
    277       9       286       334       12       346  
Dividends
    (89 )     (22 )     (111 )     (87 )     (9 )     (96 )
Additional paid-in capital
    33             33       22             22  
Purchase of subsidiary shares from noncontrolling interests
          (4 )     (4 )           (9 )     (9 )
Foreign currency translation
          (4 )     (4 )                  
                                                 
Balance at end of period
  $ 2,401     $ 28     $ 2,429     $ 2,114     $ 44     $ 2,158  
                                                 
 
The effects on equity of changes in Willis Group Holdings ownership interest in its subsidiaries are as follows:
 
                 
    June 30,
    June 30,
 
    2010     2009  
    (millions)  
 
Net income attributable to Willis Group Holdings
  $ 293     $ 280  
                 
Transfers from noncontrolling interest:
               
Decrease in Willis Group Holdings’ paid-in capital for purchase of noncontrolling interests
    (14 )     (15 )
                 
Net transfers from noncontrolling interest
    (14 )     (15 )
                 
Change from net income attributable to Willis Group Holdings and transfers from noncontrolling interests
  $ 279     $ 265  
                 
 
16.   SEGMENT INFORMATION
 
During the periods presented, the Company operated through three segments: Global, North America and International. Global provides specialist brokerage and consulting services to clients worldwide for specific industrial and commercial activities and is organized by specialism. North America and International predominantly comprise our retail operations which provide services to small, medium and major corporates, accessing Global’s specialist expertise when required.


29


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
16.   SEGMENT INFORMATION (Continued)
 
The Company evaluates the performance of its operating segments based on organic revenue growth and operating income. For internal reporting and segmental reporting, the following items for which segmental management are not held accountable are excluded from segmental expenses:
 
  i)     costs of the holding company;
 
  ii)    foreign exchange loss from the devaluation of the Venezuelan currency;
 
  iii)   foreign exchange hedging activities, foreign exchange movements on the UK pension plan asset and foreign exchange gains and losses from currency purchases and sales;
 
  iv)    amortization of intangible assets;
 
  v)     gains and losses on the disposal of operations and major properties;
 
  vi)    significant legal and regulatory settlements which are managed centrally;
 
  vii)   integration costs associated with the acquisition of HRH; and
 
  viii)  costs associated with the redomicile of the Company’s parent company from Bermuda to Ireland.
 
The accounting policies of the operating segments are consistent with those described in Note 2 — Basis of Presentation and Significant Accounting Policies to the Company’s current Report on Form 10-K for the year ended December 31, 2009. There are no inter-segment revenues, with segments operating on a revenue-sharing basis equivalent to that used when sharing business with other third-party brokers.
 
Selected information regarding the Company’s operating segments is as follows:
 
                                                         
    Three months ended June 30, 2010  
                                        Interest in
 
                            Depreciation
          Earnings of
 
    Commissions
    Investment
    Other
    Total
    and
    Operating
    Associates,
 
    and Fees     Income     Income     Revenues     Amortization     Income     net of tax  
    (millions)  
 
Global
  $ 216     $ 1     $     $ 217     $ 5     $ 69     $  
                                                         
North America
    326       5             331       6       68        
International
    247       4             251       5       59       (2 )
                                                         
Total Retail
    573       9             582       11       127       (2 )
                                                         
Total Operating Segments
    789       10             799       16       196       (2 )
Corporate and Other(i)
                            21       (27 )      
                                                         
Total Consolidated
  $ 789     $ 10     $     $ 799     $ 37     $ 169     $ (2 )
                                                         
 


30


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
16.   SEGMENT INFORMATION (Continued)
 
                                                         
    Three months ended June 30, 2009  
                                        Interest in
 
                            Depreciation
          Earnings of
 
    Commissions
    Investment
    Other
    Total
    and
    Operating
    Associates,
 
    and Fees     Income     Income     Revenues     Amortization     Income     net of tax  
    (millions)  
 
Global
  $ 207     $ 2     $     $ 209     $ 3     $ 74     $  
                                                         
North America
    332       4             336       6       75        
International
    233       6             239       5       55        
                                                         
Total Retail
    565       10             575       11       130        
                                                         
Total Operating Segments
    772       12             784       14       204        
Corporate and Other(i)
                            23       (39 )      
                                                         
Total Consolidated
  $ 772     $ 12     $     $ 784     $ 37     $ 165     $  
                                                         
 
                                                         
    Six months ended June 30, 2010  
                                        Interest in
 
                            Depreciation
          Earnings of
 
    Commissions
    Investment
    Other
    Total
    and
    Operating
    Associates,
 
    and Fees     Income     Income     Revenues     Amortization     Income     net of tax  
    (millions)  
 
Global
  $ 517     $ 3     $     $ 520     $ 9     $ 207     $  
                                                         
North America
    687       9             696       12       161        
International
    548       7             555       10       162       18  
                                                         
Total Retail
    1,235       16             1,251       22       323       18  
                                                         
Total Operating Segments
    1,752       19             1,771       31       530       18  
Corporate and Other(i)
                            42       (60 )      
                                                         
Total Consolidated
  $ 1,752     $ 19     $     $ 1,771     $ 73     $ 470     $ 18  
                                                         
 

31


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
16.   SEGMENT INFORMATION (Continued)
 
                                                         
    Six months ended June 30, 2009  
                                        Interest in
 
                            Depreciation
          Earnings of
 
    Commissions
    Investment
    Other
    Total
    and
    Operating
    Associates,
 
    and Fees     Income     Income     Revenues     Amortization     Income     net of tax  
    (millions)  
 
Global
  $ 482     $ 5     $     $ 487     $ 6     $ 201     $  
                                                         
North America
    703       8       2       713       11       169        
International
    502       12             514       11       151       26  
                                                         
Total Retail
    1,205       20       2       1,227       22       320       26  
                                                         
Total Operating Segments
    1,687       25       2       1,714       28       521       26  
Corporate and Other(i)
                            47       (82 )      
                                                         
Total Consolidated
  $ 1,687     $ 25     $ 2     $ 1,714     $ 75     $ 439     $ 26  
                                                         
 
 
(i) Corporate and Other includes the costs of the holding company, foreign exchange loss from the devaluation of the Venezuelan currency, foreign exchange hedging activities, foreign exchange movements on the UK pension plan asset, foreign exchange gains and losses from currency purchases and sales, amortization of intangible assets, gains and losses on disposal of operations and major properties, significant legal and regulatory settlements, integration costs associated with the acquisition of HRH and the costs associated with the redomicile of the Company’s parent company from Bermuda to Ireland.
 
The following table reconciles total consolidated operating income, as disclosed in the operating segment tables above, to consolidated income from continuing operations before income taxes and interest in earnings of associates:
 
                                 
    Three months ended
    Six months ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (millions)  
 
Total consolidated operating income
  $ 169     $ 165     $ 470     $ 439  
Interest expense
    (41 )     (43 )     (84 )     (81 )
                                 
Income from continuing operations before income taxes and interest in earnings of associates
  $ 128     $ 122     $ 386     $ 358  
                                 
 
The Company does not routinely evaluate the total asset position by segment, and the following allocations have been made based on reasonable estimates and assumptions:
 
                 
    June 30,
    December 31,
 
    2010     2009  
    (millions)  
 
Total assets:
               
Global
  $ 11,192     $ 9,542  
                 
North America
    3,954       4,408  
International
    1,755       2,246  
                 
Total Retail
    5,709       6,654  
                 
Total Operating Segments
    16,901       16,196  
Corporate and Other
    119       (573 )
                 
Total Consolidated
  $ 17,020     $ 15,623  
                 

32


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES
 
On July 1, 2005, Willis North America Inc. (‘Willis North America’) issued senior notes totaling $600 million under its February 2004 registration statement. On March 28, 2007, Willis North America issued further senior notes totaling $600 million under its June 2006 registration statement. On September 29, 2009, Willis North America issued senior notes totaling $300 million under its June 2009 registration statement. The debt securities are jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Group Holdings, Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, Willis Group Limited, Trinity Acquisition plc, TA I Limited, TA II Limited, TA III Limited and TA IV Limited.
 
Presented below is unaudited condensed consolidating financial information for:
 
  i)   Willis Group Holdings, which is a guarantor, on a parent company only basis;
 
  ii)  the Other Guarantors, which are all 100 percent directly or indirectly owned subsidiaries of the parent;
 
  iii)  the Issuer, Willis North America;
 
  iv)  Other, which are the non-guarantor subsidiaries, on a combined basis;
 
  v)  Consolidating adjustments; and
 
  vi)  Consolidated Company.
 
The equity method has been used for all investments in subsidiaries in the unaudited condensed consolidating balance sheets of Willis Group Holdings, the Other Guarantors and the Issuer. Investments in subsidiaries in the unaudited condensed consolidating balance sheet for Other represents the cost of investment in subsidiaries recorded in the parent companies of the non-guarantor subsidiaries.
 
The entities included in the Other Guarantors column are Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, Trinity Acquisition plc, TA I Limited, TA II Limited, TA III Limited, TA IV Limited and Willis Group Limited.


33


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Three months ended June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 789     $     $ 789  
Investment income
          2             13       (5 )     10  
Other income
                                   
                                                 
Total revenues
          2             802       (5 )     799  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (466 )     10       (456 )
Other operating expenses
    369       8       (61 )     (436 )     (15 )     (135 )
Depreciation expense
                (2 )     (14 )           (16 )
Amortization of intangible assets
                      (21 )           (21 )
Gain on disposal
                      2,433       (2,435 )     (2 )
                                                 
Total expenses
    369       8       (63 )     1,496       (2,440 )     (630 )
                                                 
OPERATING INCOME (LOSS)
    369       10       (63 )     2,298       (2,445 )     169  
Investment income from Group undertakings
          218       117       65       (400 )      
Interest expense
          (79 )     (38 )     (154 )     230       (41 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN LOSS OF ASSOCIATES
    369       149       16       2,209       (2,615 )     128  
Income taxes
          (7 )     16       (45 )     1       (35 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN LOSS OF ASSOCIATES
    369       142       32       2,164       (2,614 )     93  
Interest in loss of associates, net of tax
                      (6 )     4       (2 )
                                                 
INCOME FROM CONTINUING OPERATIONS
    369       142       32       2,158       (2,610 )     91  
Discontinued operations, net of tax
                                   
                                                 
NET INCOME
    369       142       32       2,158       (2,610 )     91  
Less: Net income attributable to noncontrolling interests
                            (2 )     (2 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    (280 )     97       (35 )           218        
                                                 
NET INCOME (LOSS) ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 89     $ 239     $ (3 )   $ 2,158     $ (2,394 )   $ 89  
                                                 


34


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Three months ended June 30, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 772     $     $ 772  
Investment income
                2       (93 )     103       12  
Other income
                                   
                                                 
Total revenues
                2       679       103       784  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (445 )     2       (443 )
Other operating expenses
    1       79       32       (241 )     (10 )     (139 )
Depreciation expense
                (2 )     (12 )           (14 )
Amortization of intangible assets
                      (26 )     3       (23 )
                                                 
Total expenses
    1       79       30       (724 )     (5 )     (619 )
                                                 
OPERATING INCOME (LOSS)
    1       79       32       (45 )     98       165  
Investment income from Group undertakings
    23       100       22       175       (320 )      
Interest expense
          (113 )     (46 )     (59 )     175       (43 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES
    24       66       8       71       (47 )     122  
Income taxes
          (18 )     (4 )     (18 )     9       (31 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN EARNINGS OF ASSOCIATES
    24       48       4       53       (38 )     91  
Interest in earnings of associates, net of tax
                                   
                                                 
INCOME FROM CONTINUING OPERATIONS
    24       48       4       53       (38 )     91  
Discontinued operations, net of tax
                                   
                                                 
NET INCOME
    24       48       4       53       (38 )     91  
Less: Net income attributable to noncontrolling interests
                      (1 )     (3 )     (4 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    63       (46 )     137             (154 )      
                                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 87     $ 2     $ 141     $ 52     $ (195 )   $ 87  
                                                 


35


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Six months ended June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 1,752     $     $ 1,752  
Investment income
          5       1       18       (5 )     19  
Other income
                                   
                                                 
Total revenues
          5       1       1,770       (5 )     1,771  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (957 )     15       (942 )
Other operating expenses
    565       (26 )     (59 )     (730 )     (34 )     (284 )
Depreciation expense
                (4 )     (27 )           (31 )
Amortization of intangible assets
                      (42 )           (42 )
Gain on disposal
                      2,435       (2,437 )     (2 )
                                                 
Total expenses
    565       (26 )     (63 )     679       (2,456 )     (1,301 )
                                                 
OPERATING INCOME (LOSS)
    565       (21 )     (62 )     2,449       (2,461 )     470  
Investment income from Group undertakings
          551       173       488       (1,212 )      
Interest expense
          (211 )     (80 )     (211 )     418       (84 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES
    565       319       31       2,726       (3,255 )     386  
Income taxes
          (4 )     9       (119 )     12       (102 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN EARNINGS OF ASSOCIATES
    565       315       40       2,607       (3,243 )     284  
Interest in earnings of associates, net of tax
                      14       4       18  
                                                 
INCOME FROM CONTINUING OPERATIONS
    565       315       40       2,621       (3,239 )     302  
Discontinued operations, net of tax
                                   
                                                 
NET INCOME
    565       315       40       2,621       (3,239 )     302  
Less: Net income attributable to noncontrolling interests
                      (3 )     (6 )     (9 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    (272 )     132       (30 )           170        
                                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 293     $ 447     $ 10     $ 2,618     $ (3,075 )   $ 293  
                                                 


36


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Six months ended June 30, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 1,687     $     $ 1,687  
Investment income
                4       21             25  
Other income
                      2             2  
                                                 
Total revenues
                4       1,710             1,714  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (928 )     5       (923 )
Other operating expenses
          69       43       (386 )     (3 )     (277 )
Depreciation expense
                (4 )     (24 )           (28 )
Amortization of intangible assets
                      (47 )           (47 )
                                                 
Total expenses
          69       39       (1,385 )     2       (1,275 )
                                                 
OPERATING INCOME
          69       43       325       2       439  
Investment income from Group undertakings
    45       193       138       181       (557 )      
Interest expense
          (199 )     (84 )     (211 )     413       (81 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES
    45       63       97       295       (142 )     358  
Income taxes
          (18 )     (3 )     (79 )     7       (93 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN EARNINGS OF ASSOCIATES
    45       45       94       216       (135 )     265  
Interest in earnings of associates, net of tax
                      26             26  
                                                 
INCOME FROM CONTINUING OPERATIONS
    45       45       94       242       (135 )     291  
Discontinued operations, net of tax
                      1             1  
                                                 
NET INCOME
    45       45       94       243       (135 )     292  
Less: Net income attributable to noncontrolling interests
                      (3 )     (9 )     (12 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    235       129       34             (398 )      
                                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 280     $ 174     $ 128     $ 240     $ (542 )   $ 280  
                                                 


37


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Balance Sheet
 
                                                 
    As at June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
ASSETS
                                               
Cash and cash equivalents
  $     $     $ 81     $ 58     $     $ 139  
Fiduciary funds — restricted
                      1,977             1,977  
Accounts receivable
    3,726       5,776       4,231       12,443       (16,489 )     9,687  
Fixed assets
                44       304       (2 )     346  
Goodwill
                      1,715       1,556       3,271  
Other intangible assets
                      498       30       528  
Investments in associates
                      (48 )     199       151  
Deferred tax assets
                      110       (19 )     91  
Pension benefits asset
                      121             121  
Other assets
    19       254       59       969       (592 )     709  
Investments in subsidiaries
    2,369       3,781       1,066       3,831       (11,047 )      
                                                 
TOTAL ASSETS
  $ 6,114     $ 9,811     $ 5,481     $ 21,978     $ (26,364 )   $ 17,020  
                                                 
LIABILITIES AND EQUITY
                                               
Accounts payable
  $ 3,668     $ 10,573     $ 3,107     $ 10,250     $ (16,623 )   $ 10,975  
Deferred revenue and accrued expenses
                      273       (33 )     240  
Deferred tax liabilities
          3       19       25       (19 )     28  
Income taxes payable
          128             263       (298 )     93  
Short-term debt
                193                   193  
Long-term debt
          500       1,650       4             2,154  
Liability for pension benefits
                      171             171  
Other liabilities
    45       14       40       621       17       737  
                                                 
Total liabilities
    3,713       11,218       5,009       11,607       (16,956 )     14,591  
                                                 
Total Willis Group Holdings stockholders’ equity
    2,401       (1,407 )     472       10,366       (9,431 )     2,401  
Noncontrolling interests
                      5       23       28  
                                                 
Total equity
    2,401       (1,407 )     472       10,371       (9,408 )     2,429  
                                                 
TOTAL LIABILITIES AND EQUITY
  $ 6,114     $ 9,811     $ 5,481     $ 21,978     $ (26,364 )   $ 17,020  
                                                 


38


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Balance Sheet
 
                                                 
    As at December 31, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
ASSETS
                                               
Cash and cash equivalents
  $     $     $ 104     $ 87     $     $ 191  
Fiduciary funds — restricted
                      1,683             1,683  
Accounts receivable
          4,428       4,185       9,294       (9,269 )     8,638  
Fixed assets
                35       317             352  
Goodwill
                      1,722       1,555       3,277  
Other intangible assets
                      542       30       572  
Investments in associates
                      76       80       156  
Deferred tax assets
                      97       (15 )     82  
Pension benefits asset
                      69             69  
Other assets
          99       35       909       (440 )     603  
Investments in subsidiaries
    2,180       3,693       1,132       3,867       (10,872 )      
                                                 
TOTAL ASSETS
  $ 2,180     $ 8,220     $ 5,491     $ 18,663     $ (18,931 )   $ 15,623  
                                                 
                                                 
LIABILITIES AND EQUITY
                                               
Accounts payable
  $     $ 6,887     $ 3,169     $ 9,042     $ (9,412 )   $ 9,686  
Deferred revenue and accrued expenses
                      324       (23 )     301  
Deferred tax liabilities
                15       29       (15 )     29  
Income taxes payable
          86             205       (245 )     46  
Short-term debt
                200       9             209  
Long-term debt
          500       1,661       4             2,165  
Liability for pension benefits
                      187             187  
Other liabilities
                40       715       16       771  
                                                 
Total liabilities
          7,473       5,085       10,515       (9,679 )     13,394  
                                                 
Total Willis Group Holdings stockholders’ equity
    2,180       747       406       8,144       (9,297 )     2,180  
Noncontrolling interests
                      4       45       49  
                                                 
Total equity
    2,180       747       406       8,148       (9,252 )     2,229  
                                                 
TOTAL LIABILITIES AND EQUITY
  $ 2,180     $ 8,220     $ 5,491     $ 18,663     $ (18,931 )   $ 15,623  
                                                 


39


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Cash Flows
 
                                                 
    Six months ended June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
  $ 569     $ 321     $ 42     $ (20 )   $ (756 )   $ 156  
                                                 
CASH FLOWS FROM INVESTING ACTIVITIES
                                               
Proceeds on disposal of fixed and intangible assets
                      4             4  
Additions to fixed assets
                (13 )     (32 )           (45 )
Acquisitions of subsidiaries, net of cash acquired
                      (15 )           (15 )
Acquisitions of investments in associates
                      (1 )           (1 )
Proceeds on sale of short-term investments
                                   
                                                 
Net cash used in investing activities
                (13 )     (44 )           (57 )
                                                 
CASH FLOWS FROM FINANCING ACTIVITIES
                                               
Proceeds from draw down of revolving credit facility
                30                   30  
Proceeds from issue of short-term debt, net of debt issuance costs
                                   
Repayments of debt
                (61 )     (9 )           (70 )
Senior notes issued, net of debt issuance costs
                                   
Proceeds from issue of shares
    17                               17  
Amounts owed by and to Group undertakings
    (542 )     (189 )     (21 )     752              
Excess tax benefits from share-based payment arrangements
                      1             1  
Dividends paid
    (44 )     (132 )           (669 )     756       (89 )
Acquisition of noncontrolling interests
                      (4 )           (4 )
Dividends paid to noncontrolling interests
                      (22 )           (22 )
                                                 
Net cash (used in) provided by financing activities
    (569 )     (321 )     (52 )     49       756       (137 )
                                                 
DECREASE IN CASH AND CASH EQUIVALENTS
                (23 )     (15 )           (38 )
Effect of exchange rate changes on cash and cash equivalents
                      (14 )           (14 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                104       87             191  
                                                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $     $     $ 81     $ 58     $     $ 139  
                                                 
Cash and cash equivalents reported as discontinued operations
                                   
                                                 
Cash and cash equivalents reported as continuing operations
  $     $     $ 81     $ 58     $     $ 139  
                                                 


40


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Cash Flows
 
                                                 
    Six months ended June 30, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 48     $ 42     $ 143     $ 3     $ (28 )   $ 208  
                                                 
CASH FLOWS FROM INVESTING ACTIVITIES
                                               
Proceeds on disposal of fixed and intangible assets
                      9             9  
Additions to fixed assets
                (9 )     (29 )           (38 )
Acquisitions of subsidiaries, net of cash acquired
                      (3 )           (3 )
Acquisitions of investments in associates
                      (41 )           (41 )
Proceeds from sale of operations, net of cash disposed
                      37             37  
Proceeds on sale of short-term investments
                      21             21  
                                                 
Net cash used in investing activities
                (9 )     (6 )           (15 )
                                                 
CASH FLOWS FROM FINANCING ACTIVITIES
                                               
Proceeds from draw down of revolving credit facility
                95                   95  
Proceeds from issue of short-term debt, net of debt issuance costs
                      1             1  
Repayments of debt
                (750 )                 (750 )
Senior notes issued, net of debt issuance costs
          482                         482  
Proceeds from issue of shares
    12                               12  
Amounts owed by and to Group undertakings
    42       (524 )     532       (50 )            
Dividends paid
    (87 )                 (28 )     28       (87 )
Acquisition of noncontrolling interests
    (12 )                 (2 )           (14 )
Dividends paid to noncontrolling interests
                      (9 )           (9 )
                                                 
Net cash used in financing activities
    (45 )     (42 )     (123 )     (88 )     28       (270 )
                                                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    3             11       (91 )           (77 )
Effect of exchange rate changes on cash and cash equivalents
                      4             4  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                      176             176  
                                                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 3     $     $ 11     $ 89     $     $ 103  
                                                 
Cash and cash equivalents — reported as discontinued operations
                                   
                                                 
Cash and cash equivalents — continuing operations
  $ 3     $     $ 11     $ 89     $     $ 103  
                                                 


41


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES
 
In March 2009, Trinity Acquisition plc issued senior notes totaling $500 million in a private transaction. The debt securities are jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Group Holdings, Willis Netherlands B.V., Willis Investment UK Holdings Limited, TA I Limited, TA II Limited, TA III Limited, TA IV Limited, Willis Group Limited and Willis North America. This debt has not been registered with the Securities and Exchange Commission. If and when registered, any necessary financial statements will be provided.
 
The Company filed a shelf registration on Form S-3 under which Willis Group Holdings may offer debt securities, preferred stock, ordinary stock and other securities. In addition, Trinity Acquisition plc may offer debt securities (‘the Subsidiary Debt Securities’). The Subsidiary Debt Securities, if issued, will be guaranteed by certain of the Company’s subsidiaries.
 
Presented below is unaudited condensed consolidating financial information required under the existing shelf registration for:
 
  (i)    Willis Group Holdings, which will be a guarantor, on a parent company only basis;
 
  (ii)   the Other Guarantors, which are all 100 percent directly or indirectly owned subsidiaries of the parent;
 
  (iii)   the Issuer, Trinity Acquisition plc;
 
  (iv)   Other, which are the non-guarantor subsidiaries, on a combined basis;
 
  (v)    Consolidating adjustments; and
 
  (vi)   Consolidated Company.
 
The equity method has been used for investments in subsidiaries in the unaudited condensed consolidating balance sheets of Willis Group Holdings, the Other Guarantors and the Issuer. Investments in subsidiaries in the unaudited condensed consolidating balance sheet for Other, represents the cost of investment in subsidiaries recorded in the parent companies of the non-guarantor subsidiaries.
 
The entities included in the Other Guarantors column are Willis Netherlands Holdings B.V., Willis Investment UK Holdings Limited, TA I Limited, TA II Limited and TA III Limited.


42


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Three months ended June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 789     $     $ 789  
Investment income
          2             13       (5 )     10  
Other income
                                   
                                                 
Total revenues
          2             802       (5 )     799  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (466 )     10       (456 )
Other operating expenses
    369       11       2       (502 )     (15 )     (135 )
Depreciation expense
                      (16 )           (16 )
Amortization of intangible assets
                      (21 )           (21 )
Gain on disposal
                      2,433       (2,435 )     (2 )
                                                 
Total expenses
    369       11       2       1,428       (2,440 )     (630 )
                                                 
OPERATING INCOME
    369       13       2       2,230       (2,445 )     169  
Investment income from Group undertakings
          162       30       208       (400 )      
Interest expense
          (43 )     3       (231 )     230       (41 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN LOSS OF ASSOCIATES
    369       132       35       2,207       (2,615 )     128  
Income taxes
          (1 )     (10 )     (25 )     1       (35 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN LOSS OF ASSOCIATES
    369       131       25       2,182       (2,614 )     93  
Interest in loss of associates, net of tax
                      (6 )     4       (2 )
                                                 
INCOME FROM CONTINUING OPERATIONS
    369       131       25       2,176       (2,610 )     91  
Discontinued operations, net of tax
                                   
                                                 
NET INCOME
    369       131       25       2,176       (2,610 )     91  
Less: Net income attributable to noncontrolling interests
                            (2 )     (2 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    (280 )     108       36             136        
                                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 89     $ 239     $ 61     $ 2,176     $ (2,476 )   $ 89  
                                                 


43


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Three months ended June 30, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 772     $     $ 772  
Investment income
                      (91 )     103       12  
Other income
                                   
                                                 
Total revenues
                      681       103       784  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (445 )     2       (443 )
Other operating expenses
    1       2       (22 )     (110 )     (10 )     (139 )
Depreciation expense
                      (14 )           (14 )
Amortization of intangible assets
                      (26 )     3       (23 )
                                                 
Total expenses
    1       2       (22 )     (595 )     (5 )     (619 )
                                                 
OPERATING INCOME (LOSS)
    1       2       (22 )     86       98       165  
Investment income from Group undertakings
    23       8       62       227       (320 )      
Interest expense
          (41 )     (32 )     (145 )     175       (43 )
                                                 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES
    24       (31 )     8       168       (47 )     122  
Income taxes
          11       (5 )     (46 )     9       (31 )
                                                 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST IN EARNINGS OF ASSOCIATES
    24       (20 )     3       122       (38 )     91  
Interest in earnings of associates, net of tax
                                   
                                                 
INCOME (LOSS) FROM CONTINUING OPERATIONS
    24       (20 )     3       122       (38 )     91  
Discontinued operations, net of tax
                                   
                                                 
NET INCOME (LOSS)
    24       (20 )     3       122       (38 )     91  
Less: Net income attributable to noncontrolling interests
                      (1 )     (3 )     (4 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    63       (6 )     13             (70 )      
                                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 87     $ (26 )   $ 16     $ 121     $ (111 )   $ 87  
                                                 


44


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Six months ended June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 1,752     $     $ 1,752  
Investment income
          5             19       (5 )     19  
Other income
                                   
                                                 
Total revenues
          5             1,771       (5 )     1,771  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (957 )     15       (942 )
Other operating expenses
    565       15       19       (849 )     (34 )     (284 )
Depreciation expense
                      (31 )           (31 )
Amortization of intangible assets
                      (42 )           (42 )
Gain on disposal
                      2,435       (2,437 )     (2 )
                                                 
Total expenses
    565       15       19       556       (2,456 )     (1,301 )
                                                 
OPERATING INCOME
    565       20       19       2,327       (2,461 )     470  
Investment income from Group undertakings
          192       111       909       (1,212 )      
Interest expense
          (83 )     (49 )     (370 )     418       (84 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES
    565       129       81       2,866       (3,255 )     386  
Income taxes
          (1 )     (22 )     (91 )     12       (102 )
                                                 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN EARNINGS OF ASSOCIATES
    565       128       59       2,775       (3,243 )     284  
Interest in earnings of associates, net of tax
                      14       4       18  
                                                 
INCOME FROM CONTINUING OPERATIONS
    565       128       59       2,789       (3,239 )     302  
Discontinued operations, net of tax
                                   
                                                 
NET INCOME
    565       128       59       2,789       (3,239 )     302  
Less: Net income attributable to noncontrolling interests
                      (3 )     (6 )     (9 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    (272 )     319       209             (256 )      
                                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 293     $ 447     $ 268     $ 2,786     $ (3,501 )   $ 293  
                                                 


45


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Operations
 
                                                 
    Six months ended June 30, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
REVENUES
                                               
Commissions and fees
  $     $     $     $ 1,687     $     $ 1,687  
Investment income
                      25             25  
Other income
                      2             2  
                                                 
Total revenues
                      1,714             1,714  
                                                 
EXPENSES
                                               
Salaries and benefits
                      (928 )     5       (923 )
Other operating expenses
          2       (20 )     (256 )     (3 )     (277 )
Depreciation expense
                      (28 )           (28 )
Amortization of intangible assets
                      (47 )           (47 )
                                                 
Total expenses
          2       (20 )     (1,259 )     2       (1,275 )
                                                 
OPERATING INCOME (LOSS)
          2       (20 )     455       2       439  
Investment income from Group undertakings
    45       16       100       396       (557 )      
Interest expense
          (81 )     (39 )     (374 )     413       (81 )
                                                 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES
    45       (63 )     41       477       (142 )     358  
Income taxes
          20       (14 )     (106 )     7       (93 )
                                                 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST IN EARNINGS OF ASSOCIATES
    45       (43 )     27       371       (135 )     265  
Interest in earnings of associates, net of tax
                      26             26  
                                                 
INCOME (LOSS) FROM CONTINUING OPERATIONS
    45       (43 )     27       397       (135 )     291  
Discontinued operations, net of tax
                      1             1  
                                                 
NET INCOME (LOSS)
    45       (43 )     27       398       (135 )     292  
Less: Net income attributable to noncontrolling interests
                      (3 )     (9 )     (12 )
EQUITY ACCOUNT FOR SUBSIDIARIES
    235       189       161             (585 )      
                                                 
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 280     $ 146     $ 188     $ 395     $ (729 )   $ 280  
                                                 


46


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Balance Sheet
 
                                                 
    As at June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
ASSETS
                                               
Cash and cash equivalents
  $     $     $     $ 139     $     $ 139  
Fiduciary funds — restricted
                      1,977             1,977  
Accounts receivable
    3,726       1,972       2,568       17,910       (16,489 )     9,687  
Fixed assets
                      348       (2 )     346  
Goodwill
                      1,715       1,556       3,271  
Other intangible assets
                      498       30       528  
Investments in associates
                      (48 )     199       151  
Deferred tax assets
                      110       (19 )     91  
Pension benefits asset
                      121             121  
Other assets
    19       159       15       1,108       (592 )     709  
Investments in subsidiaries
    2,369       3,318       2,510       2,878       (11,075 )      
                                                 
TOTAL ASSETS
  $ 6,114     $ 5,449     $ 5,093     $ 26,756     $ (26,392 )   $ 17,020  
                                                 
LIABILITIES AND EQUITY
                                               
Accounts payable
  $ 3,668     $ 6,838     $ 1,287     $ 15,805     $ (16,623 )   $ 10,975  
Deferred revenue and accrued expenses
                      273       (33 )     240  
Deferred tax liabilities
                      47       (19 )     28  
Income taxes payable
          18       51       322       (298 )     93  
Short-term debt
                      193             193  
Long-term debt
                500       1,654             2,154  
Liability for pension benefits
                      171             171  
Other liabilities
    45                   675       17       737  
                                                 
Total liabilities
    3,713       6,856       1,838       19,140       (16,956 )     14,591  
                                                 
Total Willis Group Holdings stockholders’ equity
    2,401       (1,407 )     3,255       7,611       (9,459 )     2,401  
Noncontrolling interests
                      5       23       28  
                                                 
Total equity
    2,401       (1,407 )     3,255       7,616       (9,436 )     2,429  
                                                 
TOTAL LIABILITIES AND EQUITY
  $ 6,114     $ 5,449     $ 5,093     $ 26,756     $ (26,392 )   $ 17,020  
                                                 


47


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Balance Sheet
 
                                                 
    As at December 31, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
ASSETS
Cash and cash equivalents
  $     $     $     $ 191     $     $ 191  
Fiduciary funds — restricted
                      1,683             1,683  
Accounts receivable
          698       2,489       14,720       (9,269 )     8,638  
Fixed assets
                      352             352  
Goodwill
                      1,722       1,555       3,277  
Other intangible assets
                      542       30       572  
Investments in associates
                      76       80       156  
Deferred tax assets
                      97       (15 )     82  
Pension benefits asset
                      69             69  
Other assets
          37       17       989       (440 )     603  
Equity accounted subsidiaries
    2,180       3,051       2,366       2,882       (10,479 )      
                                                 
TOTAL ASSETS
  $ 2,180     $ 3,786     $ 4,872     $ 23,323     $ (18,538 )   $ 15,623  
                                                 
                                                 
LIABILITIES AND EQUITY                                                
Accounts payable
  $     $ 3,040     $ 1,289     $ 14,769     $ (9,412 )   $ 9,686  
Deferred revenue and accrued expenses
                      324       (23 )     301  
Deferred tax liabilities
                      44       (15 )     29  
Income taxes payable
          1       32       258       (245 )     46  
Short-term debt
                      209             209  
Long-term debt
                500       1,665             2,165  
Liability for pension benefits
                      187             187  
Other liabilities
                      755       16       771  
                                                 
Total liabilities
          3,041       1,821       18,211       (9,679 )     13,394  
                                                 
Total Willis Group Holdings stockholders’ equity
    2,180       745       3,051       5,108       (8,904 )     2,180  
Noncontrolling interests
                      4       45       49  
                                                 
Total equity
    2,180       745       3,051       5,112       (8,859 )     2,229  
                                                 
TOTAL LIABILITIES AND EQUITY
  $ 2,180     $ 3,786     $ 4,872     $ 23,323     $ (18,538 )   $ 15,623  
                                                 


48


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Cash Flows
 
                                                 
    Six months ended June 30, 2010  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 569     $ 132     $ 80     $ 131     $ (756 )   $ 156  
                                                 
CASH FLOWS FROM INVESTING ACTIVITIES
                                               
Proceeds on disposal of fixed and intangible assets
                      4             4  
Additions to fixed assets
                      (45 )           (45 )
Acquisitions of subsidiaries, net of cash acquired
                      (15 )           (15 )
Acquisitions of investments in associates
                      (1 )           (1 )
Proceeds on sale of short-term investments
                                   
                                                 
Net cash used in investing activities
                      (57 )           (57 )
                                                 
CASH FLOWS FROM FINANCING ACTIVITIES
                                               
Proceeds from draw down of revolving credit facility
                      30             30  
Proceeds from issue of short-term debt, net of debt issuance costs
                                   
Repayments of debt
                      (70 )           (70 )
Senior notes issued, net of debt issuance costs
                                   
Proceeds from issue of shares
    17                               17  
Amounts owed by and to Group undertakings
    (542 )           (80 )     622              
Excess tax benefits from share-based payment arrangements
                      1             1  
Dividends paid
    (44 )     (132 )           (669 )     756       (89 )
Acquisition of noncontrolling interests
                      (4 )           (4 )
Dividends paid to noncontrolling interests
                      (22 )           (22 )
                                                 
Net cash used in financing activities
    (569 )     (132 )     (80 )     (112 )     756       (137 )
                                                 
DECREASE IN CASH AND CASH EQUIVALENTS
                      (38 )           (38 )
Effect of exchange rate changes on cash and cash equivalents
                      (14 )           (14 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                      191             191  
                                                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $     $     $     $ 139     $     $ 139  
                                                 
Cash and cash equivalents reported as discontinued operations
                                   
                                                 
Cash and cash equivalents reported as continuing operations
  $     $     $     $ 139     $     $ 139  
                                                 


49


Table of Contents

WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
18.   FINANCIAL INFORMATION FOR PARENT GUARANTOR, OTHER GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES (Continued)
 
Condensed Consolidating Statement of Cash Flows
 
                                                 
    Six months ended June 30, 2009  
    Willis
                               
    Group
    The Other
                Consolidating
       
    Holdings     Guarantors     The Issuer     Other     adjustments     Consolidated  
    (millions)  
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
  $ 48     $ (65 )   $ 29     $ 224     $ (28 )   $ 208  
                                                 
CASH FLOWS FROM INVESTING ACTIVITIES
                                               
Proceeds on disposal of fixed and intangible assets
                      9             9  
Additions to fixed assets
                      (38 )           (38 )
Acquisitions of subsidiaries, net of cash acquired
                      (3 )           (3 )
Investments in associates
                      (41 )           (41 )
Proceeds from sale of operations, net of cash disposed
                      37             37  
Proceeds on sale of short-term investments
                      21             21  
                                                 
Net cash used in investing activities
                      (15 )           (15 )
                                                 
CASH FLOWS FROM FINANCING ACTIVITIES
                                               
Proceeds from draw down of revolving credit facility
                      95             95  
Proceeds from issue of short-term debt, net of debt issuance costs
                      1             1  
Repayments of debt
                      (750 )           (750 )
Senior notes issued, net of debt issuance costs
                482                   482  
Proceeds from issue of shares
    12                               12  
Amounts owed by and to Group undertakings
    42       65       (511 )     404              
Dividends paid
    (87 )                 (28 )     28       (87 )
Acquisition of noncontrolling interests
    (12 )                 (2 )           (14 )
Dividends paid to noncontrolling interests
                      (9 )           (9 )
                                                 
Net cash (used in) provided by financing activities
    (45 )     65       (29 )     (289 )     28       (270 )
                                                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    3                   (80 )           (77 )
Effect of exchange rate changes on cash and cash equivalents
                      4             4  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                      176             176  
                                                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 3     $     $     $ 100     $     $ 103  
                                                 
Cash and cash equivalents — reported as discontinued operations
                                   
                                                 
Cash and cash equivalents — continuing operations
  $ 3     $     $     $ 100     $     $ 103  
                                                 


50


Table of Contents

Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

This discussion includes references to non-GAAP financial measures as defined in the rules of the Securities and Exchange Commission (‘SEC’). We present such non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. Organic revenue growth and organic growth in commissions and fees exclude the impact of acquisitions and disposals, period-over-period movements in foreign exchange, legacy contingent commissions assumed as part of the HRH acquisition, and investment and other income from growth in revenues and commissions and fees. We believe organic revenue growth and organic growth in commissions and fees provide measures that the investment community may find helpful in assessing the performance of operations

that were part of our operations in both the current and prior periods, and provide a measure against which our businesses may be assessed in the future. These financial measures should be viewed in addition to, not in lieu of, the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2010.
 
This discussion includes forward-looking statements, including under the headings ‘Business Overview and Market Outlook’, ‘Executive Summary’, ‘Operating Results — Group, Interest in Earnings of Associates’, ‘Operating Results — Segments’ and ‘Liquidity and Capital Resources.’ Please see ‘Information Concerning Forward-Looking Statements’ for certain cautionary information regarding forward-looking statements and a list of factors that could cause actual results to differ materially from those predicted in the forward-looking statements.
 
 


BUSINESS OVERVIEW AND MARKET OUTLOOK
 
 

We provide a broad range of insurance broking, risk management and consulting services to our clients worldwide. Our core specialty businesses include Aerospace; Energy; Marine; Construction; Financial and Executive Risks; Fine Art, Jewelry and Specie; Special Contingency Risks; and Reinsurance. Our retail operations provide services to small, medium and major corporations and the employee benefits practice, our largest product-based practice group, provides health, welfare and human resources consulting and brokerage services. Our Willis Capital Markets & Advisory division (‘WCMA’) acts as a financial advisor on mergers and acquisitions and capital markets products, primarily focusing on the insurance and reinsurance sector and may place or underwrite securities.
 
In our capacity as advisor and insurance broker, we act as an intermediary between our clients and insurance carriers by advising our clients on their risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance risk with insurance carriers through our global distribution network.
 
We derive most of our revenues from commissions and fees for brokerage and consulting services and do not determine the insurance premiums on which our commissions are generally based. Fluctuations

in these premiums charged by the insurance carriers have a direct and potentially material impact on our results of operations. Commission levels generally follow the same trend as premium levels as they are derived from a percentage of the premiums paid by the insureds. Due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, they may vary widely between accounting periods. Reductions in premium rates, leading to downward pressure on commission revenues (a ‘soft’ market), can have a potentially material impact on our commission revenues and operating margin.
 
A ‘hard’ market occurs when premium uplifting factors, including a greater than anticipated loss experience or capital shortages, more than offset any downward pressures on premiums. This usually has a favorable impact on our commission revenues and operating margin.
 
From 2000 through 2003, we benefited from a hard market with premium rates stable or increasing. During 2004, we saw a rapid transition from a hard market to a soft market, with premium rates falling in most markets. Rates continued to decline in most sectors through 2005 and 2006, with the exception of catastrophe-exposed markets. In 2007, the market softened further with decreases in many of the market sectors in which we operated and this



51


Table of Contents

continued into 2008 with further premium rate declines averaging 10% across our markets.
 
In 2009, the benefit of rate increases in the reinsurance market and stabilization in some specialty markets was offset by the continuing soft market in other sectors and the adverse impact of the weakened economic environment across the globe.
 
Our North America and UK and Ireland retail operations have been particularly impacted by the weakened economic climate and continued soft market with no material improvement in rates across most sectors; clients retaining higher levels of risk; and lower levels of insured activity. This resulted in declines in 2009 revenues in these operations, particularly amongst our smaller clients who are especially vulnerable to the economic downturn.

The difficult market conditions have continued into first half 2010 and we expect the market to remain challenging throughout the remainder of 2010.
 
Our main priorities in the second half of 2010 continue to be:
 
•  reinforcement of our sales and revenue culture to drive growth;
 
•  execution of our ongoing Shaping Our Future initiatives, creating incremental savings to fund growth and leveraging growth opportunities from our global footprint; and
 
•  further strengthening of the balance sheet and reduction in our debt to EBITDA (earnings before interest, tax, and depreciation and amortization) ratio.
 


EXECUTIVE SUMMARY
 
 

Overview
 
Despite the continued difficult trading conditions, we reported 2 percent growth in total revenues and 4 percent organic commissions and fees growth in second quarter 2010, and 3 percent growth in total revenues and 4 percent organic commissions and fees growth in first half 2010, compared with the same periods in 2009. This reflected positive organic growth in the second quarter of 8 percent for International and 7 percent for our Global operations, partly offset by a 1 percent fall in our North America operations, where revenues were adversely impacted by the soft market and continued weak economic conditions. In first half 2010, Global achieved 7 percent organic growth, International 6 percent and North America was flat compared with first half 2009.
 
Operating margin for both second quarter 2010 and second quarter 2009 was 21 percent, and for first half 2010 operating margin increased to 27 percent, compared with 26 percent in first half 2009. This improvement was the product of organic growth in commissions and fees and continuing control of costs, partly offset by investment in new client-facing hires and other growth initiatives.
 
Results from continuing operations for second quarter 2010
 
Net income from continuing operations in second quarter 2010 was $89 million, or $0.52 per diluted

share, compared with $87 million, or $0.52 per diluted share, in second quarter 2009.
 
Total revenues from continuing operations at $799 million for second quarter 2010 were $15 million, or 2 percent, higher than in second quarter 2009. This was driven by organic revenue growth of 4 percent, partly offset by a 2 percent adverse impact from foreign currency translation.
 
Organic revenue growth of 4 percent comprised 6 percent net new business growth (which constitutes the revenue growth from business won over the course of the quarter, net of the revenue from existing business lost) offset by a 2 percent negative impact from declining premium rates and other market factors.
 
Operating margin at 21 percent was in line with second quarter 2009, as the benefits of:
 
•  4 percent organic growth in commissions and fees;
 
•  a favorable period-over-period impact from foreign currency translation of about 1 percentage point as the adverse impact of foreign currency on our revenues was more than offset by a favorable impact on our expense base and lower hedging losses when compared with 2009; and
 
•  strict controls over new hires and replacements, letting go of poor performers and savings from actions taken in prior years;



52


Table of Contents

were offset by:
 
•  a $12 million increase in incentive expenses comprising a $6 million increase in the amortization of cash retention awards and a $6 million increase in the accrual for bonuses;
 
•  a $10 million increase in pension charges in second quarter 2010, primarily due to the non-recurrence of a $12 million pre-tax curtailment gain realized in second quarter 2009; and
 
•  disciplined investment in new client-facing hires and other growth initiatives.
 
Results from continuing operations for the six months ended June 30, 2010
 
Net income from continuing operations for first half 2010 was $293 million, or $1.71 per diluted share, compared with $279 million, or $1.66 per diluted share, in same period 2009.
 
Total revenues at $1,771 million for the first half of 2010 were $57 million, or 3 percent, higher than in 2009, as organic revenue growth of 4 percent, driven by our Global and International operations, and a 1 percent benefit from foreign currency translation, were partly offset by a reduction in investment and other income and a 1 percent decrease attributable to contingent commissions assumed as part of the HRH acquisition.
 
Operating margin at 27 percent in first half 2010 was 1 percentage point higher than in 2009 as the benefits of:
 
•  4 percent organic growth in commissions and fees;
 
•  a favorable period-over-period impact from foreign currency translation of about 1 percentage point, excluding the impact from the devaluation of the Venezuelan currency; and
 
•  strict controls over new hires and replacements, letting go of poor performers and savings from actions taken in prior years;
 
were partly offset by:
 
•  a $14 million reduction in legacy contingent commissions assumed in the acquisition of HRH;
 
•  a $14 million increase in incentive expenses comprising a $16 million increase in the amortization of cash retention and a $2 million decrease in the accrual for bonuses;

•  a charge of $12 million relating to the devaluation of the Venezuelan currency in January 2010;
 
•  a $10 million increase in share-based compensation charge, largely due to the non-recurrence of a $7 million pre-tax credit in first quarter 2009;
 
•  disciplined investment in new client-facing hires and other growth initiatives; and
 
•  a $6 million reduction in investment income driven by lower average interest rates in first half 2010 compared with 2009.
 
Venezuela currency devaluation
 
With effect from January 1, 2010 the Venezuelan economy was designated as hyper-inflationary. The Venezuelan government also devalued the Bolivar Fuerte in January 2010. As a result of these actions, we recorded a $12 million charge in other expenses in first half 2010 to reflect the re-measurement of our net assets denominated in Venezuelan Bolivar Fuerte at January 1, 2010.
 
Shaping Our Future and Funding for Growth
 
Our Shaping Our Future and Funding for Growth strategies are a series of initiatives designed to deliver profitable growth. These initiatives focus on three key areas:
 
•  an organic growth program designed to drive revenue growth. This program includes achieving retention and new business metrics across our businesses; increasing the productivity and effectiveness of our revenue-generating employees and recruiting the best talent in the industry; and continued development in key markets and potential growth areas such as China, Brazil, Employee Benefits, Facultative and WCMA;
 
•  Shaping Our Future which is driving our efficiency and profitability and includes longer term initiatives designed to enhance our infrastructure and processes, and make optimal use of our locations, including our support centers such as the offshore center in Mumbai; and
 
•  Funding for Growth is the initiative to manage our cost base. We have identified performance management and corporate savings that, as we execute on, will enable us to fund investments in areas such as technology and new key hires.



53


Table of Contents

Acquisitions
 
During first half 2010, we acquired:
 
•  an additional 39 percent of our Chinese operations at a total cost of approximately $17 million, bringing our ownership to 90 percent as at June 30, 2010; and
 
•  an additional 15 percent of our Colombian Retail operations at a total cost of approximately $1 million, bringing our ownership to 80 percent as at June 30, 2010.
 
Discontinued operations
 
No operations were discontinued during first half 2010.
 
Net income in first half 2009 included $1 million, recognized in the first quarter, from our Bliss & Glennon and Managing Agency Group US-based wholesale insurance operations, both of which were disposed of during 2009.
 
Cash and financing
 
Cash at June 30, 2010 was $139 million, $52 million lower than at December 31, 2009.
 
Total cash generated from operating activities in first half 2010 was $156 million compared with $208 million in the same period 2009. Net cash generated from operating activities in first half 2010 is after the payment of incentive awards of which $185 million were paid as cash retention awards (2009: $140 million), for details of which see below under: ‘Operating Results — General and administrative expenses — Salaries and benefits — Cash retention awards’.

In first half 2010, we made $54 million of mandatory repayments against the 5-year term loan, thereby reducing the outstanding balance at June 30, 2010 to $466 million. We also repaid in full a $9 million fixed rate loan due 2010 and repurchased $7 million of 5.125% senior notes due July 2010.
 
In July 2010, we repaid the remaining $83 million of the 5.125% senior notes due July 2010.
 
At June 30, 2010, we have $30 million outstanding under our revolving credit facility, compared with $95 million at June 30, 2009 and nil at December 31, 2009. Drawings under the facility are typically higher in the first half of the year due to the timing of incentive awards.
 
Total debt, total equity and the capitalization ratio at June 30, 2010 and December 31, 2009 were as follows:
 
                 
    June 30,
    December 31,
 
    2010     2009  
    (millions, except percentages)  
 
Long-term debt
  $ 2,154     $ 2,165  
Short-term debt
    193       209  
                 
Total debt
  $ 2,347     $ 2,374  
                 
Total equity
  $ 2,429     $ 2,229  
                 
Capitalization ratio
    49 %     52 %
                 
 
Liquidity
 
Our principal sources of liquidity are cash from operations, cash and cash equivalents of $139 million at June 30, 2010 and $270 million remaining availability under our revolving credit facility.
 
Based on current market conditions and information available to us at this time, we believe that we have sufficient liquidity to meet our cash needs for at least the next 12 months.
 



54


Table of Contents

OPERATING RESULTS — GROUP
 
Revenues
 
                                                         
                            Change attributable to:        
                      Foreign
    Acquisitions
          Organic
 
                %
    currency
    and
    Contingent
    revenue
 
Three months ended June 30,   2010     2009     Change     translation     disposals     commissions(b)     growth(a)  
    (millions)                                
 
Global
  $ 216     $ 207       4 %     (2 )%     (1 )%     %     7 %
North America
    326       332       (2 )%     %     %     (1 )%     (1 )%
International
    247       233       6 %     (4 )%     2 %     %     8 %
                                                         
Commissions and fees
  $ 789     $ 772       2 %     (2 )%     %     %     4 %
                                                         
Investment income
    10       12       (17 )%                                
Other income
                %                                
                                                         
Total revenues
  $ 799     $ 784       2 %                                
                                                         
 
                                                         
                            Change attributable to:        
                      Foreign
    Acquisitions
          Organic
 
                %
    currency
    and
    Contingent
    revenue
 
Six months ended June 30,   2010     2009     Change     translation     disposals     commissions(b)     growth(a)  
    (millions)                                
 
Global
  $ 517     $ 482       7 %     1 %     (1 )%     %     7 %
North America
    687       703       (2 )%     %     %     (2 )%     %
International
    548       502       9 %     1 %     2 %     %     6 %
                                                         
Commissions and fees
  $ 1,752     $ 1,687       4 %     1 %     %     (1 )%     4 %
                                                         
Investment income
    19       25       (24 )%                                
Other income
          2       (100 )%                                
                                                         
Total revenues
  $ 1,771     $ 1,714       3 %                                
                                                         
 
 
(a) Organic commissions and fees growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; (iii) the net commission and fee revenues related to operations disposed of in each period presented; (iv) in North America, legacy contingent commissions assumed as part of the acquisition of HRH in 2008 and that had not been converted into higher standard commission; and (v) investment income and other income from reported revenues.
 
(b) Included in North America reported commissions and fees were legacy HRH contingent commissions of $2 million in the second quarter 2010 and $10 million in first half 2010 compared with $4 million and $24 million in the second quarter and first half of 2009, respectively.
 
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited.
 
Second quarter 2010
 

Revenues for the second quarter 2010, at $799 million, were $15 million, or 2 percent, higher than 2009. The increase reflects 4 percent organic growth in commissions and fees, partly offset by a negative 2 percent impact from foreign currency translation.
 
Investment income in second quarter 2010 was $2 million lower than 2009, with the decrease reflecting lower average interest rates in second quarter 2010 compared with 2009. The impact of rate decreases on our investment income was partially mitigated by our forward hedging program,

from which we expect to generate additional income in 2010 compared to current LIBOR based rates.
 
Our International and Global operations earn a significant portion of their revenues in currencies other than the US dollar, including the Euro and Pound Sterling. In the three months ended June 30, 2010, reported revenues were adversely impacted by the period-over-period effect of foreign currency translation, in particular due to the weakening of the Euro and Pound Sterling against the US dollar during the quarter, compared with same period 2009.



55


Table of Contents

Organic growth in commissions and fees was 4 percent for the second quarter of 2010. International achieved 8 percent growth with positive contributions from all regions; Global achieved 7 percent growth of which 5 percent was attributable to WCMA and North America reported 1 percent negative growth, reflecting the continued soft market and ongoing weakened economic conditions, partially mitigated by growth in new business.
 
Six months ended June 30, 2010
 
Revenues for the first half 2010, at $1,771 million, were $57 million, or 3 percent, higher than 2009. The increase reflects the benefit of 4 percent organic growth in commissions and fees and a 1 percent period over period favorable impact from foreign currency translation, partly offset by a 1 percent reduction in legacy contingent commissions, together with smaller reductions in investment and other income.

In the six months ended June 30, 2010, reported revenues in our International and Global operations were favorably impacted by the period-over-period effect of foreign currency translation, as the relative effect of the second quarter 2010 weakening of the Euro against the US dollar more than offset its first quarter 2010 strengthening. This increased the US dollar value of both our Euro revenues and London Market based revenues earned in Euros, compared with first half 2009.
 
Organic growth in commissions and fees was 4 percent for the first half of 2010. Global achieved 7 percent growth, driven by strong growth in our WCMA business; International achieved 6 percent growth; and North America was flat, as the benefit of growth in new business was offset by the impact of the continued soft market and ongoing weakened economic conditions.
 
Organic revenue growth by segment is discussed further in ‘Operating Results — Segment Information’ below.
 


General and administrative expenses
 
                                 
    Three months
    Six months
 
    ended June 30,     ended June 30,  
    2010     2009     2010     2009  
    (millions, except percentages)  
 
Salaries and benefits
  $ 456     $ 443     $ 942     $ 923  
Other
    135       139       284       277  
                                 
General and administrative expenses
  $ 591     $ 582     $ 1,226     $ 1,200  
                                 
Salaries and benefits as a percentage of revenues
    57 %     57 %     53 %     54 %
                                 
Other as percentage of revenues
    17 %     18 %     16 %     16 %
                                 
 
Salaries and benefits
 
 

Second quarter 2010
 
Salaries and benefits were 57 percent of revenues in both second quarter 2010 and 2009, reflecting the benefits of:
 
•  a period-over-period benefit from foreign currency translation driven primarily by the strengthening of the US dollar against the Pound Sterling, in which our London Market based operations incur the majority of their salaries and benefits expense; and
 
•  strict controls over new hires and replacements, letting go of poor performers and savings from actions taken in prior years, including Shaping Our Future and Right Sizing Willis initiatives in 2008 and 2009;

offset by:
 
•  a $12 million increase in incentive expenses comprising a $6 million increase in the amortization of cash retention awards — see below — and a $6 million increase in the accrual for bonuses;
 
•  a $10 million increase in pension charges in second quarter 2010, primarily due to the non-recurrence of a $12 million curtailment gain realized in second quarter 2009 on the closure of our US defined benefit pension plan to accrual of benefit for future service, partly offset by related cost savings in 2010; and



56


Table of Contents

•  disciplined investment in new client-facing hires and other growth initiatives.
 
Six months ended June 30, 2010
 
Salaries and benefits were 53 percent of first half 2010 revenues, compared with 54 percent in 2009 reflecting the benefits of:
 
•  a $7 million reduction in severance costs due to fewer positions being eliminated and at a lower average cost per head. In first half 2010 we identified approximately 320 positions that have been or will be eliminated as part of our continued focus on managing expense; this compares with some 350 positions eliminated in first half 2009;
 
•  strict controls over new hires and replacements, letting go of poor performers and savings from actions taken in prior years, including Shaping Our Future and Right Sizing Willis initiatives; and
 
•  a period-over-period benefit from foreign currency translation driven primarily by the strengthening of the US dollar against the Pound Sterling;
 
partly offset by:
 
•  a $14 million increase in incentive expenses comprising a $16 million increase in the amortization of cash retention awards — see below — and a $2 million decrease in the accrual for bonuses;
 
•  a $10 million increase in share-based compensation mainly reflecting the non-recurrence of a $7 million credit in first half 2009. The credit in 2009 related to accumulated compensation expense for certain 2008 awards which were dependent upon performance targets which the Company did not achieve; and
 
•  disciplined investment in 250 new client-facing hires and spending on other growth initiatives.
 
Cash retention awards
 
We have a cash retention award program in place. We started making cash retention awards in 2005 to a small number of employees. With the success of the program, we have expanded it over time to include more staff and we believe it is a contributing factor to the reduction in employee turnover we have seen in recent years.

Salaries and benefits do not reflect the unamortized portion of annual cash retention awards made to employees. Employees must repay a proportionate amount of these cash retention awards if they voluntarily leave our employ (other than in the event of retirement or permanent disability) before a certain time period, currently three years. We make cash payments to our employees in the year we grant these retention awards and recognize these payments ratably over the period they are subject to repayment, beginning in the quarter in which the award is made.
 
During the second quarter and first half of 2010, we made $16 million and $185 million of cash retention payments respectively compared with $29 million and $140 million in the same periods of 2009. Salaries and benefits in the second quarter and first half of 2010 include $32 million and $60 million respectively of amortization of cash retention payments made on or before June 30, 2010 compared with $26 million and $44 million in the same periods of 2009. As of June 30, 2010, December 31, 2009 and June 30, 2009, we included $217 million, $98 million and $142 million, respectively, in other assets on the balance sheet, which represented the unamortized portion of cash retention payments made on or before those dates.
 
Other expenses
 
Second quarter 2010
 
Other expenses were 17 percent of revenues in second quarter 2010 compared with 18 percent in 2009, as increases in travel and entertaining expenses in support of our revenue growth initiatives were more than offset by smaller savings elsewhere and a net positive period-over-period impact from foreign currency translation.
 
Six months ended June 30, 2010
 
Other expenses were 16 percent of revenues in both first half 2010 and same period 2009, despite the $12 million first quarter 2010 charge relating to the devaluation of the Venezuelan currency. This charge, together with increases in travel and entertaining expenses in support of our revenue growth initiatives, were offset by savings elsewhere and the benefit of significantly lower losses on forward rate contracts.
 



57


Table of Contents

Amortization of intangible assets
 

Amortization of intangible assets for second quarter 2010 was $21 million compared with $23 million in 2009 and for the six months ended June 30, 2010 was $42 million compared with $47 million in 2009.

The period-over-period decreases primarily reflect the declining charge for the amortization of the HRH customer relationship intangible which is being amortized in line with the underlying discounted cash flows.
 
 


Operating income and margin (operating income as a percentage of revenues)
 
                                 
    Three months
    Six months
 
    ended June 30,     ended June 30,  
    2010     2009     2010     2009  
    (millions, except percentages)  
 
Revenues
  $ 799     $ 784     $ 1,771     $ 1,714  
Operating income
    169       165       470       439  
Operating margin or operating income as a percentage of revenues
    21 %     21 %     27 %     26 %
 
 

Second quarter 2010
 
Operating margin was 21 percent in both second quarter 2010 and 2009, as the benefits of:
 
•  4 percent organic growth in commissions and fees;
 
•  a favorable period-over-period impact from foreign currency translation equivalent to approximately 1 percentage point, primarily reflecting the decreased dollar value of our net Pound Sterling expense base driven by the period-over-period weakening of the Pound Sterling against the US dollar; and
 
•  strict controls over new hires and replacements, letting go of poor performers and savings from actions taken in prior years, including Shaping Our Future and Right Sizing Willis initiatives;
 
were offset by:
 
•  a $12 million increase in incentive expenses comprising a $6 million increase in the amortization of cash retention awards and a $6 million increase in the accrual for bonuses;
 
•  a $10 million increase in pension charges in second quarter 2010, primarily due to the non-recurrence of a $12 million pre-tax curtailment gain realized in second quarter 2009 on the closure of our US defined benefit pension plan to accrual of benefit for future service, partly offset by related cost savings in 2010; and
 
•  disciplined investment in new client-facing hires and other growth initiatives.

Six months ended June 30, 2010
 
 
Operating margin at 27 percent in first half 2010 was 1 percentage point higher than in 2009, with the increase reflecting the benefit of:
 
 
•  4 percent organic growth in commissions and fees;
 
 
•  a favorable period-over-period impact from foreign currency translation of approximately 1 percentage point, excluding the impact from the devaluation of the Venezuelan currency. This reflects the net benefit of: lower losses on our forward rate hedging program; partly offset by the weakening of the Euro against the US dollar, reducing the US dollar value of our net Euro income and a stronger period-over-period Pound Sterling which increases the US dollar value of our net Pound Sterling expense base; and
 
 
•  strict controls over new hires and replacements, letting go of poor performers and savings from actions taken in prior years, including Shaping Our Future and Right Sizing Willis initiatives;
 
partly offset by:
 
 
•  a $14 million reduction in legacy contingent commissions assumed on the acquisition of HRH;
 
 
•  a $14 million increase in incentive expenses comprising a $16 million increase in the amortization of cash retention awards and a $2 million decrease in the accrual for bonuses;
 
•  a charge of $12 million relating to the devaluation of the Venezuelan currency in January 2010;



58


Table of Contents

•  a $10 million increase in share-based compensation charge, largely due to the non-recurrence of a $7 million pre-tax credit in first quarter 2009;
 
•  disciplined investment in new client-facing hires and other growth initiatives; and

•  a $6 million reduction in investment income driven by lower average interest rates in first half 2010 compared with 2009.
 
Operating segment margins are discussed in ‘Operating Results — Segment Information’ below.
 


Interest expense
 
 

Interest expense in second quarter 2010 of $41 million was $2 million lower than in 2009, largely reflecting interest expense savings arising from the period-over-period reduction in the outstanding balances on our term loan and revolving credit facility debt.
 
Interest expense in first half 2010 of $84 million was $3 million higher than in 2009, largely

reflecting the higher coupon payable on the $500 million of 12.875% senior unsecured notes issued in March 2009 to refinance part of the lower coupon interim credit facility relating to the HRH acquisition, partly offset by interest expense savings arising from the period-over-period reduction in term loan and revolving credit facility balances.
 
 


Income taxes
 
                                         
    Three months
    Six months
       
    ended June 30,     ended June 30,        
    2010     2009     2010     2009        
    (millions, except percentages)        
 
Income before taxes and interest in earnings of associates
  $ 128     $ 122     $ 386     $ 358          
Income tax charge
    35       31       102       93          
Effective tax rate
    27 %     25 %     26 %     26 %        
 
 

The effective tax rate for first half 2010 at 26 percent was consistent with first half 2009 as the benefit of a $3 million prior year tax credit was offset by there being no tax credits in relation to the $12 million

charge relating to the devaluation of the Venezuelan currency and the net loss on disposal of operations.
 
Excluding these items, the underlying tax rate at 26 percent remains in line with full year 2009.
 
 


Interest in earnings of associates
 
 

Interest in earnings of associates, net of tax, in first half 2010 of $18 million was $8 million lower than in first half 2009. This fall is primarily driven by the reduction from 49 percent to 31 percent in our ownership interest in Gras Savoye, as part of the reorganization of their capital structure in December 2009. Interest receivable on the vendor financing we

provided as part of the capital reorganization is also recorded under this caption. As previously advised, we continue to expect that the reduction in our ownership of Gras Savoye will reduce the 2010 interest in earnings of associates by approximately $10 million compared with 2009.
 
 


Net income and diluted earnings per share from continuing operations
 
                                 
    Three months
    Six months
 
    ended June 30,     ended June 30,  
    2010     2009     2010     2009  
    (millions, except per share data)  
 
Net income from continuing operations
  $ 89     $ 87     $ 293     $ 279  
Diluted earnings per share from continuing operations
  $ 0.52     $ 0.52     $ 1.71     $ 1.66  
Average diluted number of shares outstanding
    171       168       171       168  


59


Table of Contents

Second quarter 2010
 
Net income from continuing operations for second quarter 2010 was $89 million compared with $87 million in 2009. This increase reflected the benefit of:
 
•  the $4 million net increase in operating income discussed above; and
 
•  decreased interest expense, largely reflecting a period-over-period reduction in the outstanding balances on our term loan and revolving credit facility debt;
 
partly offset by:
 
•  the reduction in earnings from associates.
 
Diluted earnings per share from continuing operations for second quarter 2010 at $0.52 were in line with 2009.
 
Foreign currency translation had a $0.03 favorable net impact on earnings per diluted share.
 
Diluted share count in second quarter 2010 was 171 million compared with 168 million in 2009 which had a negative $0.01 impact on earnings per diluted share.

Six months ended June 30, 2010
 
Net income from continuing operations for first half 2010 was $293 million compared with $279 million in 2009. The $14 million increase primarily reflected the $31 million increase in operating income partly offset by the $8 million decrease in earnings from associates, net of tax, as a result of the Gras Savoye reorganization, and a $9 million increase in the tax charge.
 
Foreign currency translation, excluding the impact of the Venezuelan currency devaluation, had a $0.09 favorable impact on earnings per diluted share. This was largely offset by a $0.07 per diluted share negative impact from the Venezuela currency devaluation in January 2010.
 
Diluted earnings per share from continuing operations for first half 2010 increased to $1.71, compared to $1.66 in 2009 as the benefit of the increased net income was partly offset by a 3 million increase in average diluted shares outstanding.
 
 


OPERATING RESULTS — SEGMENT INFORMATION
 
 

We organize our business into three segments: Global, North America and International. Our Global business provides specialist brokerage and consulting services to clients worldwide for risks arising from specific industries and activities. North America and International comprise our retail

operations and provide services to small, medium and major corporations.
 
The following table is a summary of our operating results by segment for the three and six months ended June 30, 2010 and 2009:
 


                                                 
    Three months ended June 30, 2010     Three months ended June 30, 2009  
          Operating
    Operating
          Operating
    Operating
 
    Revenues     income     margin     Revenues     income     margin  
    (millions)           (millions)        
 
Global
  $ 217     $ 69       32 %   $ 209     $ 74       35 %
                                                 
North America
    331       68       21 %     336       75       22 %
International
    251       59       24 %     239       55       23 %
                                                 
Total Retail
    582       127       22 %     575       130       23 %
Corporate & Other(i)
          (27 )     n/a             (39 )     n/a  
                                                 
Total Consolidated
  $ 799     $ 169       21 %   $ 784     $ 165       21 %
                                                 
 

60


Table of Contents

                                                 
    Six months ended June 30, 2010     Six months ended June 30, 2009  
          Operating
    Operating
          Operating
    Operating
 
    Revenues     income     margin     Revenues     income     margin  
    (millions)           (millions)        
 
Global
  $ 520     $ 207       40 %   $ 487     $ 201       41 %
                                                 
North America
    696       161       23 %     713       169       24 %
International
    555       162       29 %     514       151       29 %
                                                 
Total Retail
    1,251       323       26 %     1,227       320       26 %
Corporate & Other(i)
          (60 )     n/a             (82 )     n/a  
                                                 
Total Consolidated
  $ 1,771     $ 470       27 %   $ 1,714     $ 439       26 %
                                                 
 
 
(i) Corporate & Other comprises the following:
 
                                 
    Three months
    Six months
 
    ended June 30,     ended June 30,  
    2010     2009     2010     2009  
 
Amortization of intangible assets
  $ (21 )   $ (23 )   $ (42 )   $ (47 )
Net loss on disposal of operations
    (2 )           (2 )      
Foreign exchange hedging
    (2 )     (9 )     (6 )     (23 )
Foreign exchange on the UK pension plan asset
    2       (8 )     6       (7 )
HRH integration costs
          (1 )           (4 )
Venezuelan currency devaluation
                (12 )      
Other
    (4 )     2       (4 )     (1 )
                                 
    $ (27 )   $ (39 )   $ (60 )   $ (82 )
                                 
 

Global
 
Our Global operations comprise Global Specialties, Reinsurance, Faber & Dumas and as of 2010, WCMA.
 
Faber & Dumas includes Glencairn, our London-based wholesale brokerage operation and our Fine Art, Jewelry and Specie; Special Contingency Risk and Hughes-Gibb units. WCMA provides financial

advice on mergers and acquisitions and capital markets products and may place or underwrite securities.
 
The following table sets out revenues, organic revenue growth and operating income and margin for the quarter and six month periods ended June 30, 2010 and 2009:
 


                                 
    Three months
    Six months
 
    ended June 30,     ended June 30,  
    2010     2009     2010     2009  
    (millions, except
    (millions, except
 
    percentages)     percentages)  
 
Commissions and fees
  $ 216     $ 207     $ 517     $ 482  
Investment income
    1       2       3       5  
                                 
Total revenues
  $ 217     $ 209     $ 520     $ 487  
                                 
Operating income
  $ 69     $ 74     $ 207     $ 201  
Organic revenue growth(a)
    7 %     7 %     7 %     6 %
Operating margin
    32 %     35 %     40 %     41 %
 
 
(a) Organic commissions and fees growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; (iii) the net commission and fee revenues related to operations disposed of in each period presented; and (iv) investment income and other income from reported revenues.

61


Table of Contents

 

Revenues
 
Commissions and fees of $216 million were $9 million, or 4 percent, higher in second quarter 2010 compared with second quarter 2009. Organic revenue growth of 7 percent was partly offset by a negative 2 percent impact from foreign currency translation and a net 1 percent impact from acquisitions and disposals.
 
Our young WCMA business contributed 5 percent of Global’s organic revenue growth in the quarter, substantially due to a single capital markets transaction. WCMA is a transaction oriented business and we therefore expect its results will be more variable than some of our other businesses.
 
Reinsurance and our Global Specialties businesses also saw organic growth in second quarter 2010, driven by good net new business generation despite the adverse impact of the continued difficult rate environment and soft market in many of the specialty classes.
 
Global Specialties reported strong growth in the quarter driven by strong contributions from Financial and Executive Risks, and Energy.
 
Second quarter growth in Reinsurance was more modest and was headed by growth in new business, especially Marine and Aviation. Despite high loss levels earlier in the year, rates remain soft except for marine and energy.
 
Organic revenue growth for first half 2010 was 7 percent. Both Global Specialties and Reinsurance recorded good new business generation including Reinsurance growth in North America, Europe and Asia. The growth in North America was partly driven by the team recruited from Carvill in first quarter 2009. As a result of strong reinsurance

underwriting profits in 2009, with the exception of marine and energy, there has been a general but disciplined softening of rates in 2010 which remain a significant headwind for growth.
 
Client retention levels remained high at 89 percent for the first six months of 2010.
 
Operating margin
 
Operating margin in our Global operations was 32 percent in second quarter 2010, compared with 35 percent in 2009 and 40 percent in first half 2010, compared with 41 percent in 2009.
 
These margins reflect the benefits of good organic revenue growth and disciplined cost control.
 
Offsetting this was the impact of foreign currency translation. The London Market businesses within our Global operations earn revenues in US dollars, Pounds Sterling and Euros and primarily incur expenses in Pounds Sterling. In addition, they are exposed to exchange risk on certain sterling-denominated balances. In both the three and six months ended June 30, 2010, foreign currency translation adversely impacted Global’s margin by approximately 4 percentage points and 2 percentage points respectively when compared with 2009.
 
Margins were also impacted by costs associated with selective recruitment, including the team recruited from Carvill late in first quarter 2009, and higher share-based compensation, in part due to the non-recurrence of a credit in first quarter 2009.
 
Excluding the impact of foreign currency translation, Global’s operating margin was 1 percent higher in both the three and six months ended June 30, 2010 compared with 2009.
 
 


North America
 
 

Our North America business provides risk management, insurance brokerage, related risk services and employee benefits brokerage and consulting to a wide array of industry and client segments in the United States and Canada.

The following table sets out revenues, organic revenue growth and operating income and margin for the quarter and six month periods ended June 30, 2010 and 2009:
 


 


62


Table of Contents

                                 
    Three months ended June 30,     Six months ended June 30,  
    2010     2009     2010     2009  
    (millions, except percentages)     (millions, except percentages)  
 
Commissions and fees
  $ 326     $ 332     $ 687     $ 703  
Investment income
    5       4       9       8  
Other income
                      2  
                                 
Total revenues
  $ 331     $ 336     $ 696     $ 713  
                                 
Operating income
  $ 68     $ 75     $ 161     $ 169  
Organic revenue growth(a)
    (1 )%     (8 )%     %     (7 )%
Operating margin
    21 %     22 %     23 %     24 %
 
 
(a) Organic commissions and fees growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; (iii) the net commission and fee revenues related to operations disposed of in each period presented; (iv) in North America, legacy contingent commissions assumed as part of the acquisition of HRH in 2008 and that had not been converted into higher standard commission; and (v) investment income and other income from reported revenues.
 
Included in North America reported commissions and fees were legacy HRH contingent commissions of $2 million in the second quarter 2010 and $10 million in the first half of 2010 compared with $4 million and $24 million in the corresponding periods of 2009, respectively.
 

Revenues
 
Our North America segment continues to be impacted by headwinds from soft insurance market conditions and ongoing weakness in the US economy.
 
Commissions and fees of $326 million were $6 million, or 2 percent, lower for the three months ended June 30, 2010 compared with 2009, reflecting the continued adverse impact of the soft market conditions and a $2 million decrease in legacy contingent commissions assumed as part of the HRH acquisition.
 
Organic revenue growth was negative 1 percent in second quarter 2010 compared with 2009 as the benefits of:
 
•  strong new business, with improved client retention;
 
•  positive growth in the employee benefits practice; and
 
•  a $3 million benefit from a one-time accounting adjustment related to the HRH acquisition within the specialty businesses;
 
were more than offset by:
 
•  a negative 4 percent impact from rate declines and other market factors; and

•  continued weakness in our Construction business reflecting the ongoing economic challenges in that sector.
 
Commissions and fees of $687 million were $16 million, or 2 percent, lower for first half 2010 than in 2009, of which $14 million was attributable to a decrease in legacy contingency commissions assumed as part of the HRH acquisition. Organic revenue growth was flat for the six months ended June 30, 2010 as the benefits of net new business generation and the $3 million one-time accounting adjustment in the second quarter were offset by the impact of the soft market conditions and weak US economy.
 
Net new business in the second quarter and first half of 2010 was driven by some of our specialist businesses, with healthcare, financial institutions, professional lines and technology/telecom businesses all reporting strong growth. Our employee benefits practice, which represents approximately 20 percent of North America commissions and fees, showed growth of 2 percent in second quarter 2010 with some positive signs including modest headcount stabilization. Although we currently believe the new US healthcare legislation could be beneficial for our business, at this time, its potential impact is uncertain. In our Construction business declines in fees and commissions were single digits in first half 2010


63


Table of Contents

compared with the double digit declines in last quarter 2009.
 
Net new business growth also includes the benefit of higher standard commissions where these have been negotiated in lieu of contingent commissions. These higher standard commissions however may not have been negotiated at the same level or be received in the same periods as the related contingent commissions. Furthermore, the business to which they related may not have been renewed.
 
Client retention levels remained stable at 92 percent for the first six months of 2010.
 
Operating margin
 
Operating margin in North America was 21 percent in second quarter 2010 compared with 22 percent in same period 2009 and 23 percent in first half 2010,

compared with 24 percent in 2009. The lower margins mainly reflected the impact of:
 
•  the non-recurrence of a $9 million benefit in second quarter 2009 from the curtailment of the US pension scheme relating to our North America retail employees; and
 
•  the period-over-period reduction in legacy HRH contingent commissions of $14 million in first half 2010, of which $2 million relate to second quarter;
 
partly offset by the benefit of:
 
•  lower period-over-period pension charges, excluding the second quarter 2009 curtailment gain; and
 
•  strong cost controls.
 


International
 
 

Our International business comprises our retail operations in Eastern and Western Europe, the United Kingdom and Ireland, Asia-Pacific, Russia, the Middle East, South Africa and Latin America. The services provided are focused according to the characteristics of each market and vary across offices, but generally include direct risk

management and insurance brokerage and employee benefits consulting.
 
The following table sets out revenues, organic revenue growth and operating income and margin for the quarter and six month periods ended June 30, 2010 and 2009:
 


                                 
    Three months
    Six months
 
    ended June 30,     ended June 30,  
    2010     2009     2010     2009  
    (millions, except
    (millions, except
 
    percentages)     percentages)  
 
Commissions and fees
  $ 247     $ 233     $ 548     $ 502  
Investment income
    4       6       7       12  
                                 
Total revenues
  $ 251     $ 239     $ 555     $ 514  
                                 
Operating income
  $ 59     $ 55     $ 162     $ 151  
Organic revenue growth(a)
    8 %     5 %     6 %     5 %
Operating margin
    24 %     23 %     29 %     29 %
 
 
(a) Organic commissions and fees growth excludes: (i) the impact of foreign currency translation; (ii) the first twelve months of net commission and fee revenues generated from acquisitions; (iii) the net commission and fee revenues related to operations disposed of in each period presented; (iv) investment income and other income from reported revenues.
 
 

Revenues
 
Commissions and fees of $247 million were $14 million, or 6 percent, higher for the three months ended June 30, 2010 compared with 2009 of which 8 percent was attributable to organic revenue growth, 2 percent to acquisitions and disposals and a negative 4 percent to foreign currency translation. Net new business growth was 11 percent and there

was a negative 3 percent impact from rates and other market factors.
 
For the six months ended June 30, 2010, commissions and fees were $46 million, or 9 percent, higher compared with 2009 of which 6 percent was attributable to organic revenue growth, 2 percent to acquisitions and disposals and 1 percent to foreign currency translation.



64


Table of Contents

A significant part of International’s revenues are earned in currencies other than the US dollar. The US dollar has strengthened against a number of these currencies in second quarter 2010 compared with the same period in 2009, most notably the Euro, Pound Sterling and Australian dollar. Consequently, revenues reported in US dollars have decreased by 4 percent as a result of foreign currency translation in second quarter 2010 compared to same period 2009.
 
For the six months ended June 30, 2010, as a whole, the US dollar weakened against the Euro, Pound Sterling and Australian dollar as the relative effect of its second quarter strengthening was more than offset by first quarter 2010 weakening when compared with the same periods of 2009. Consequently, revenues reported in US dollars have increased by 1 percent as a result of foreign currency translation in first half 2010, compared to 2009.
 
Organic revenue growth was strongest in emerging markets with Latin America, in particular Brazil and Chile, Asia, in particular China and Indonesia, and Russia all reporting strong growth in second quarter and first half 2010. Despite the challenging

economic environment in continental Europe, overall growth was positive in both second quarter and first half 2010 with good contributions from Switzerland and Italy. Spain reported strong growth in the second quarter. Organic revenue growth was also positive in our UK and Irish retail operations as we begin to see signs of an improving economy in the United Kingdom, and consequent growth in our UK revenues partly offset by negative growth in our Irish revenues. Our employee benefits practice, which represents approximately 10 percent of International commissions and fees, continued to perform well in the first half of 2010 with growth in the mid single digits.
 
Client retention levels remained high at 92 percent for the first six months of 2010.
 
Operating margin
 
Operating margin in International was 24 percent in second quarter 2010 compared with 23 percent in second quarter 2009 and 29 percent in both first half 2010 and same period 2009 as the benefit of strong revenue growth and focused expense management has been largely offset by spending on initiatives to drive future growth.
 


CRITICAL ACCOUNTING ESTIMATES
 
 

The accounting estimates or assumptions that management considers to be the most important to the presentation of our financial condition or operating performance are discussed in our Annual

Report on Form 10-K for the year ended December 31, 2009.
 
There were no significant additions or changes to these assumptions in first half 2010.
 
 


NEW ACCOUNTING STANDARDS
 
 

There were no new accounting standards issued during the second quarter 2010 that would have a

significant impact on the Company’s reporting.
 
 


LIQUIDITY AND CAPITAL RESOURCES
 
 

In the short term, our capital management priority is debt reduction. Total debt as of June 30, 2010 decreased to $2.3 billion, compared with $2.4 billion at December 31, 2009.
 
In first half 2010, we made $54 million of mandatory repayments against the 5-year term loan due 2013, thereby reducing the outstanding balance as at June 30, 2010 to $466 million. We also repaid in full a $9 million fixed rate loan due 2010 and repurchased $7 million of 5.125% senior notes due July 2010.

In July 2010, we repaid the remaining $83 million of the 5.125% senior notes due July 2010.
 
At June 30, 2010, we have $30 million outstanding under our $300 million revolving credit facility, compared with $95 million at June 30, 2009 and $nil at December 31, 2009. Drawings under the facility are typically higher in the first half of the year due to incentive payments in the first quarter.
 
Following the repayment of the $83 million of 5.125% senior notes that matured in July 2010, the only other mandatory debt repayments over the 12 month period from June 30, 2010 are scheduled



65


Table of Contents

repayments on our $700 million 5-year term loan totaling $110 million.
 
Fiduciary funds
 
As an intermediary, we hold funds generally in a fiduciary capacity for the account of third parties, typically as the result of premiums received from clients that are in transit to insurers and claims due to clients that are in transit from insurers. We report premiums, which are held on account of, or due from, clients as assets with a corresponding liability due to the insurers. Claims held by, or due to, us which are due to clients are also shown as both assets and liabilities. All these balances due or payable are included in accounts receivable and accounts payable on the balance sheet. We earn interest on these funds during the time between the receipt of the cash and the time the cash is paid out. Fiduciary cash must be kept in certain regulated bank accounts subject to guidelines, which generally emphasize capital preservation and liquidity, and is not generally available to service our debt or for other corporate purposes.
 
Own funds
 
As of June 30, 2010, we had cash and cash equivalents of $139 million, compared with $191 million at December 31, 2009 and $270 million of our $300 million revolving credit facility remained available to draw.
 
Operating activities
 
Total cash generated from operating activities in first half 2010 was $156 million compared with $208 million in first half 2009. Cash generated from operating activities in first half 2010 is after the payment of incentive awards, of which $185 million were paid as cash retention awards (2009: $140 million).
 
Investing activities
 
Total net cash used in investing activities was $57 million in the six months ended June 30, 2010 compared with $15 million in the same period of 2009.
 
The increase in cash used in investing activities of $42 million was mainly attributable to:
 
•  the net proceeds in first half 2009 of $37 million received on the disposal of Bliss and Glennon;

•  the $21 million proceeds on sale of our short-term investments in first half 2009, as we liquidated our own funds portfolio;
 
•  an increase of $7 million in the net investment in tangible fixed assets in first half 2010 compared with the same period in 2009, mainly reflecting increased spend on infrastructure projects; and
 
•  a $12 million increase in acquisitions of subsidiaries, primarily comprising cash payments for the deferred consideration relating to previous acquisitions;
 
partly offset by:
 
•  the payment in first half 2009 of $41 million in respect of an additional 5 percent interest in Gras Savoye.
 
Financing activities
 
Net cash used in financing activities was $137 million in the six months ended June 30, 2010 compared with $270 million in the same period of 2009.
 
The decrease in cash used in financing activities of $133 million was mainly attributable to:
 
•  a $268 million net outflow in 2009 relating to the repayment/refinancing of $750 million of the then outstanding interim credit facility. As part of the refinancing we issued $500 million of 12.875% senior unsecured notes in March 2009 and received net proceeds of $482 million;
 
partly offset by:
 
•  a $65 million reduction in the drawdown against our revolving credit facility from $95 million in first half 2009 to $30 million in first half 2010; and
 
•  first half 2010 debt repayments of $70 million comprising: the $54 million of mandatory repayments against the 5-year term loan; a repurchase of $7 million of July 2010 bonds; and the repayment of a $9 million fixed rate loan due 2010.
 
Share buybacks
 
There have been no share buybacks in first half 2010. There remains $925 million under the current buyback authorization.



66


Table of Contents

Dividends
 
Cash dividends paid in first half 2010 were $89 million compared with $87 million in same period 2009. The $2 million change reflects a small increase in the number of shares as a result of share

option exercises during 2009. In July 2010, we declared a quarterly cash dividend of $0.26 per share, an annual rate of $1.04 per share and unchanged from the prior year.
 


CONTRACTUAL OBLIGATIONS
 
 

There have been no material changes to our contractual obligations since December 31, 2009,

except for contractual, planned payments.
 
 


OFF-BALANCE SHEET TRANSACTIONS
 
 

Apart from commitments, guarantees and contingencies, as disclosed in Note 7 to the Condensed Consolidated Financial Statements, the Company has no off-balance sheet arrangements

that have, or are reasonably likely to have, a material effect on the Company’s financial condition, results of operations or liquidity.
 



67


Table of Contents

Item 3 —  Quantitative and Qualitative Disclosures about Market Risk
 

There has been no material change with respect to market risk from that described in the Company’s

Annual Report on Form 10-K for the year ended December 31, 2009.
 
 


Item 4 —  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
 

As of June 30, 2010, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chairman and Chief Executive Officer and the Chief Financial Officer and Global Group Financial Controller, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that the information required to be included in the

Company’s periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to them as appropriate to allow for timely decisions regarding required disclosure.
 
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 



68


Table of Contents

 
PART II — OTHER INFORMATION
 
Item 1 — Legal Proceedings
 
Information regarding legal proceedings is set forth in Note 7 — ‘Commitments and Contingencies’ to the Condensed Consolidated Financial Statements (Unaudited) appearing in Part I, Item 1 of this report and incorporated herein by reference.
 
Item 1A — Risk Factors
 
There have been no material changes to the risk factors described in Part I, Item 1A ‘Risk Factors’ included in the Form 10-K for the year ended December 31, 2009.
 
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
 
During the quarter ended June 30, 2010, no shares were issued by the Company without registration under the Securities Act of 1933, as amended.
 
The Company may purchase shares, from time to time in the open market or through negotiated trades with persons who are not affiliates of the Company, at an aggregate purchase price of up to $1 billion under an open-ended program approved by the Board of Directors. The Company did not repurchase any of its own shares during the quarter covered by this report.
 
Item 3 — Defaults Upon Senior Securities
 
None.
 
Item 4 — (Removed and Reserved)
 
Item 5 — Other Information
 
None.
 
Item 6 — Exhibits
 
         
  10 .1   Form of Time-Based Restricted Share Units Award Agreement granted under the HRH 2007 Share Incentive Plan
  10 .2   Form of Performance-Based Restricted Share Units Award Agreement granted under the HRH 2007 Share Incentive Plan
  10 .3   Form of Time-Based Share Option Agreement granted under the HRH 2007 Share Incentive Plan
  10 .4   Form of Performance-Based Share Option Agreement granted under the HRH 2007 Share Incentive Plan
  31 .1   Certification Pursuant to Rule 13a-14(a)
  31 .2   Certification Pursuant to Rule 13a-14(a)
  32 .1   Certification Pursuant to 18 U.S.C. Section 1350
  32 .2   Certification Pursuant to 18 U.S.C. Section 1350
  101 .INS*   XBRL Instance Document
  101 .SCH*   XBRL Taxonomy Extension Schema Document
  101 .CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
  101 .DEF*   XBRL Taxonomy Extension Definition Linkbase Document
  101 .LAB*   XBRL Taxonomy Extension Label Linkbase Document
  101 .PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
 
 
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed furnished and not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


69


Table of Contents

 
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 thereunto duly authorized.
 
Willis Group Holdings plc
(Registrant)
 
  By: 
/s/  Michael K. Neborak
Michael K. Neborak
Group Chief Financial Officer
(Principal Financial and Accounting Officer)
 
Dated: August 6, 2010


70