News Column

WILLIS GROUP HOLDINGS PLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 6, 2014

This discussion includes references to non-GAAP financial measures as defined in Regulation G of the rules of the Securities and Exchange Commission ('SEC'). We present such non-GAAP financial measures, specifically, organic growth in commissions and fees, underlying operating margin, underlying operating income, underlying earnings before interest, tax, depreciation and amortization 'EBITDA', underlying net income and underlying earnings per diluted share, 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 growth in commissions and fees excludes the impact of acquisitions and disposals, period over period movements in foreign currency, and investment and other income from growth in revenues. Underlying operating income, underlying EBITDA, underlying net income and underlying earnings per diluted share are calculated by excluding the impact of certain specified items and period over period movements in foreign currency from operating income, net income, and earnings per diluted share, respectively, the most directly comparable GAAP measures. Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measures should be viewed in addition to, not in lieu of, these condensed consolidated financial statements for the three and six months ended June 30, 2014. This discussion includes forward-looking statements included under the headings 'Executive Summary', 'Review of Consolidated Results' and 'Liquidity and Capital Resources'. Please see '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 those statements. EXECUTIVE SUMMARY Business Overview We provide a broad range of insurance broking, risk management and consulting services to our clients worldwide and organize our business into three segments: Global, North America and International. Our Global business provides specialist brokerage and consulting services to clients worldwide arising from specific industries, activities and risks and includes the following business units: Property, Casualty and Construction, Natural Resources; Transport, which incorporates our Aerospace and Marine businesses; People, Political and Terrorism risk; Fine Art, Jewelry and Specie; Hughes-Gibbs; Financial and Executive risks; Willis Capital Markets & Advisory; UK retail operations; Facultative and Wholesale solutions; Reinsurance; and Captives management. North America and International comprise our retail operations, excluding the UK. Our retail operations provide services to small, medium and large corporations. Included in our retail operations is the Human Capital and Benefits practice, our largest product-based practice group, which provides health, welfare and human resources consulting and brokerage services. 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 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. Commission levels generally follow the same trend as premium levels as they are derived from a percentage of the premiums paid by the insureds. Fluctuations in these premiums charged by the insurance carriers can therefore have a direct and potentially material impact on our results of operations. Due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenues may vary widely between accounting periods. A period of low or declining premium rates, generally known as a 'soft' or 'softening' market, generally leads to downward pressure on commission revenues and can have a material adverse impact on our commission revenues and operating margin. A 'hard' or 'firming' market, during which premium rates 93 -------------------------------------------------------------------------------- Table of Contents Willis Group Holdings plc rise, generally has a favorable impact on our commission revenues and operating margin. Rates, however, vary by geography, industry and client segment. As a result and due to the global and diverse nature of our business, we view rates in the aggregate. Market Conditions Market conditions in our industry are generally defined by factors such as the strength of the economies in the various geographic regions in which we serve around the world, insurance rate movements, and insurance and reinsurance buying patterns of our clients. The industry and market in general throughout 2011 and early 2012 experienced modest increase in catastrophe-exposed property insurance and reinsurance pricing levels driven by significant catastrophe losses including the Japanese earthquake and tsunami, the New Zealand earthquake and, late in 2012, Super Storm Sandy. Also during that period, direct carriers in North America, facing persistent low investment returns, started to modestly raise rates in certain products. This firming rate environment, however, generally did not extend beyond North America to impact our International retail business. Early in 2013 the reinsurance market was generally flat, however, as the year progressed we saw changing market sentiment driven by changes in the sources of capital and increases in capital supply in the reinsurance market, most notably within the North American catastrophe-exposed property market. The influx of third-party capital coupled with changes to reinsurance buying patterns and regulatory complexity is leading to growing complexity in the reinsurance market and a softening of prices. We have noted a continuation of this trend, and signs of acceleration, towards softening reinsurance rates across almost all classes of business and geographies as positive 2013 results for traditional reinsurers and the supply of capital from third-party investors have added further to the oversupply of capacity. While we are feeling the impact of the softening rates to a degree, we are helping to guide clients through complex decisions in an evolving marketplace. The outlook for our business, operating results and financial condition continues to be challenging due to the global economic condition. There are signs of improving conditions both in the US, and within certain European Union countries, including a return to sustained GDP growth in certain countries. However, if conditions in the Global economy, including the US, the UK and the Eurozone deteriorate, there will likely be a negative effect on our business as well as the businesses of our clients. In the face of this challenging economic environment we have adopted a strategy to invest selectively in growth areas, defined by geography, industry sector and client segment, and to better coordinate our three segments so as to, among other things, bring our clients greater access to the Company's specialty areas and analytical capabilities. Our growth strategy also involves increasing our investment in, and deployment of, our analytical capabilities. Financial Performance Consolidated Financial Performance Results: second quarter 2014 Total revenues of $935 million for second quarter 2014 were $45 million, or 5.1 percent, higher than in second quarter 2013. Excluding $5 million of favorable foreign currency movements, underlying total revenues were $40 million, or 4.5 percent, higher than the year ago period. Total commissions and fees for second quarter 2014 were $930 million, up $45 million or 5.1 percent, from $885 million in the prior year quarter. The increase reflects organic commissions and fees growth of 4.5 percent and a positive 0.7 percent impact from foreign currency movements partially offset by a negative 0.1 percent impact from acquisitions and disposals. Total expenses in second quarter 2014 of $787 million were $64 million, or 8.9 percent, higher than in second quarter 2013. Excluding negative foreign currency movements of $16 million and $3 million of restructuring charges relating to the Operational improvement program, total expenses were $45 million, or 6.1 percent higher than the year ago period. The income tax charge of $59 million for second quarter 2014 was $30 million higher than the second quarter 2013 charge of $29 million. The $30 million increase was primarily due to a $21 million increase in the valuation allowance against deferred tax assets related to changes in the mix of deferred tax assets and liabilities and provisions for uncertain tax positions. In addition, a charge of $13 million was recognised in the quarter reflecting the impact of including the US in the estimated annual effective tax rate applied to the ordinary income of the prior quarter. 94



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Interest in losses of associates, net of tax, was $3 million in both second quarter 2014 and 2013. Net income attributable to Willis shareholders was $47 million or $0.26 per diluted share in second quarter 2014 compared to net income of $105 million or $0.59 per diluted share in second quarter 2013. Foreign currency movements had a $0.03 negative impact on earnings per diluted share in second quarter 2014 compared to second quarter 2013. Results: six months ended June 30, 2014 Total revenues of $2,032 million for first half 2014 were $91 million, or 4.7 percent, higher than in first half 2013. Excluding $8 million of favorable foreign currency movements, total revenues increased $83 million, or 4.3 percent versus the year ago period. Total commissions and fees for first half 2014 were $2,020 million, up $89 million or 4.6 percent, from $1,931 million in the prior year. The increase reflects organic commissions and fees growth of 4.3 percent and a positive 0.5 percent impact from foreign currency movements, partially offset by a negative 0.2 percent impact from acquisitions and disposals. Total expenses of $1,558 million were $65 million, or 4.4 percent, higher than in first half 2013. Excluding $23 million of negative foreign currency movements, $3 million first half 2014 expense relating to the operational improvement program and $46 million first half 2013 expense relating to the expense reduction initiative, total expenses increased $85 million, or 5.8 percent, versus the year ago period. The income tax charge of $122 million for first half 2014 was $45 million higher than the first half 2013 charge of $77 million. The $45 million increase in the tax charge is due to a $21 million increase in the valuation allowance against deferred tax assets related to changes in the mix of deferred tax assets and liabilities and provisions for uncertain tax positions. In addition the first half 2014 tax rate is higher than the year ago period primarily due to the expectation of paying current taxes in the US in 2014, which resulted in a higher tax charge on US income in the current period compared with the prior period. Interest in earnings of associates, net of tax, increased by $4 million mainly due to the year-on-year improvement in the results of Gras Savoye, our principal associate. Net income attributable to shareholders was $293 million or $1.61 per diluted share in first half 2014 compared with net income of $324 million or $1.83 per diluted share in first half 2013. Foreign currency movements had a $0.06 negative impact on earnings per diluted share in first half 2014 compared to first half 2013. Underlying Operating Income, Underlying Operating Margin, Underlying EBITDA, Underlying Net Income and Underlying Earnings per Diluted Share Our non-GAAP measures of underlying operating income, underlying EBITDA (earnings before interest, taxes, depreciation and amortization), underlying net income and underlying earnings per diluted share are calculated by excluding the impact of certain items (as detailed below) from operating income, net income, and earnings per diluted share, respectively, the most directly comparable GAAP measures. The following items are excluded from operating income and net income as applicable: (i) restructuring charges relating the Operational improvement program;



(ii) foreign exchange loss from the devaluation of the Venezuelan currency;

(iii) deferred tax valuation allowance;

(iv) costs associated with the 2013 Expense Reduction Initiative;

(v) gains and losses on the disposal of operations;

(vi) foreign currency movements; and

(vii) depreciation and amortization.

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Table of Contents Willis Group Holdings plc We believe that excluding these items, as applicable, from operating income, net income and earnings per diluted share enhances the comparative analysis of our results of operations. We use these and other measures to establish Group performance targets and evaluate the performance of our operations. Please see additional discussion of non-GAAP financial measures in the section below. As set out in the tables below, underlying operating income was down $5 million, or 3.2 percent, at $151 million in second quarter 2014 compared to $156 million in second quarter 2013. Underlying operating margin at 16.1 percent in second quarter 2014 was down 130 basis points compared with second quarter 2013, while second quarter 2014 underlying net income was $83 million, $17 million lower than in second quarter 2013. Underlying earnings per diluted share were $0.49 in second quarter 2014, compared with $0.59 in second quarter 2013. A reconciliation of reported operating income, the most directly comparable GAAP measure, to underlying operating income for the three and six months ended June 30, is as follows (in millions, except percentages): Three months ended June 30, % Change Six months ended June 30, % Change 2014 2013 2014 2013 Total revenue $ 935$ 890 5.1 $ 2,032$ 1,941 4.7 Excluding: Foreign currency movements - 5 - 8 Underlying total revenue $ 935$ 895 4.5 $ 2,032$ 1,949 4.3 Operating income, GAAP basis $ 148$ 167



(11.4 ) $ 474$ 448 5.8 Excluding: Operational improvement program (a)

3 - 3 - Expense reduction initiative (b) - - - 46 Foreign currency movements - (11 ) - (15 )



Underlying operating income (c) $ 151$ 156

(3.2 ) $ 477$ 479 (0.4 )

Operating margin, GAAP basis, or operating income as a percentage of total revenues 15.8 % 18.8 % 23.3 % 23.1 % Underlying operating margin, or underlying operating income as a percentage of underlying total revenues (c) 16.1 % 17.4 % 23.5 % 24.6 %



_________________________________

(a) Restructuring charge relating to the Operational improvement program. See 'Operational improvement program' section below.



(b) Charge related to the assessment of the Company's organizational design. See

'2013 Expense Reduction Initiative' section below.

(c) For prior periods, underlying measures have been rebased to current period

exchange rates to remove the impact of foreign currency movements when comparing periods. 96



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A reconciliation of reported net income, the most directly comparable GAAP measures, to EBITDA and underlying EBITDA, is as follows (in millions, except per share data):

Three months ended June 30, % Change Six months ended June 30, % Change 2014 2013 2014 2013

Net income $ 47 $ 105 (55.2 ) $ 293$ 324 (9.6 ) Add back: Net income attributable to noncontrolling interest 1 2 5 6 Interest in losses (earnings) of associates, net of tax 3 3 (16 ) (12 ) Income tax charge 59 29 122 77 Interest expense 35 32 67 63 Other expense (income) 3 (4 ) 3 (10 ) Depreciation 24 21 47 47 Amortization 12 14 25 28 EBITDA $ 184 $ 202 (8.9 ) $ 546$ 523 4.4 Adjusting items: Operational improvement program 3 - 3 - Expense reduction initiative - - - 41 Foreign currency movements - (11 ) - (14 ) Underlying EBITDA (a) $ 187 $ 191 (2.1 ) $ 549$ 550 (0.2 )



_________________________________

(a) For prior periods, underlying measures have been rebased to current period

exchange rates to remove the impact of foreign currency movements when comparing periods. 97

-------------------------------------------------------------------------------- Table of Contents Willis Group Holdings plc A reconciliation of reported net income and reported earnings per diluted share, the most directly comparable GAAP measures, to underlying net income and underlying earnings per diluted share, is as follows (in millions, except per share data): Per diluted share Three months ended June 30, Three months ended June 30, 2014 2013 % Change 2014 2013 % Change Net income attributable to Willis Group Holdings plc, GAAP basis $ 47$ 105 (55.2 ) $ 0.26$ 0.59 (55.9 ) Excluding: Operational improvement program, net of tax ($1, $nil) 2 - 0.01 - Venezuela currency devaluation, net of tax ($1, $nil) 13 - 0.07 - Deferred tax valuation allowance 21 - 0.12 - Net gain on disposal of operations, net of tax ($2, $nil) - - - - Foreign currency movements - (5 ) 0.03 - Underlying net income (c) $ 83$ 100 (17.0 ) $



0.49 $ 0.59 (16.9 )

Average diluted shares outstanding, GAAP basis 182 178 Per diluted share Six months ended June 30, Six months ended June 30, 2014 2013 % Change 2014 2013 % Change Net income attributable to Willis Group Holdings plc, GAAP basis $ 293$ 324 (9.6 ) $ 1.61$ 1.83 (12.0 ) Excluding: Operational improvement program, net of tax ($1, $nil) (a) 2 - 0.01 - Venezuela currency devaluation, net of tax ($1, $nil) 13 - 0.07 - Deferred tax valuation allowance 21 - 0.12 - Expense reduction initiative, net of tax ($nil, $8) (b) - 38 - 0.22 Net loss on disposal of operations, net of tax ($1, $nil) 2 - 0.01 - Foreign currency movements - (11 ) 0.06 - Underlying net income (c) $ 331$ 351 (5.7 ) $



1.88 $ 2.05 (8.3 )

Average diluted shares outstanding, GAAP basis 182 177



_____________________________

(a) Restructuring charge relating to the Operational improvement program. See 'Operational improvement program' section below.



(b) Charge related to the assessment of the Company's organizational design. See

'2013 Expense Reduction Initiative' section below.

(c) For prior periods, underlying measures have been rebased to current period

exchange rates to remove the impact of foreign currency movements when

comparing periods. In the current three and six month periods only,

underlying EPS excludes the $0.03 and $0.06, respectively, negative year

over year impact of foreign currency movements in order to assist

comparability to EPS figures that have been disclosed in prior periods.

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Table of Contents Business discussion Pension Expense We recorded net pension income on our UK defined benefit pension plan of $3 million in second quarter 2014 and $2 million in second quarter 2013. The $1 million increase was primarily due to higher expected returns on plan assets, partially offset by higher interest and service costs. On our US defined benefit pension plan we recorded a net pension income of $2 million in second quarter 2014 compared with $1 million in second quarter 2013. The increase was primarily due to higher expected returns on plan assets in second quarter 2014 compared to second quarter 2013. On our other defined benefit pension plans, we recorded a net pension cost of $1 million in second quarter 2014 compared with $2 million in second quarter 2013. We recorded net pension income on our UK defined benefit pension plan of $6 million in first half 2014 and $3 million in first half 2013. The $3 million increase was primarily due to higher expected returns on plan assets, partially offset by higher interest and service costs. On our US defined benefit pension plan we recorded a net pension income of $4 million in first half 2014 compared with $2 million in first half 2013. The $2 million increase was primarily due to higher expected returns on plan assets. On our other defined benefit pension plans, we recorded a net pension cost of $2 million in first half 2014 compared with $3 million in first half 2013. Associates The Company currently owns approximately 30 percent of Gras Savoye, as does the private equity firm Astorg Partners and the original family shareholders. The previous Shareholders' Agreement provided a call option for us to acquire full ownership of the company in 2015. An amended Agreement, which we signed on April 15, 2013, extends the exercise date of the call option by one year to June 2016, providing additional time for all parties to plan for the proposed transition in 2016. Additionally, the call option is based on an agreed-upon formula for determining enterprise and equity value of Gras Savoye in 2016 based on Gras Savoye's 2014 and 2015 consolidated accounts. The formula is based on a weighting of revenue and EBITDA averaged over a one-to-two year period to which certain pre-determined market multiples would be applied, the potential range of market multiples having been narrowed from the previous agreement. Acquisitions and Disposals In second quarter 2014, the Company: disposed of the trade and assets of certain offices in Texas that were previously part of our North America retail operations; and



agreed to acquire a controlling stake of approximately 75 percent in Max

Matthiessen, a leading employee benefits adviser in Sweden, for approximately $205 million. Completion of the transaction is subject to regulatory approval which we hope to receive in September. In first quarter 2014, the Company agreed to acquire Charles Monat Limited, a market-leading life insurance solutions adviser to high net worth clients and the transaction was completed once regulatory approval was received in second quarter 2014. The acquisition represents a key enhancement to our expanding Global Wealth Solutions practice, particularly in Asia. The Company also disposed of Insurance Noodle, a small online wholesale business in Willis North America and Philadelphia Benefits, LLC a small local service-oriented wholesale agency. 99

-------------------------------------------------------------------------------- Table of Contents Willis Group Holdings plc Operational Improvement Program In April 2014, the Company announced an operational improvement program that will allow the Company to continue to strengthen its client service, realize operational efficiencies, and invest in new capabilities for growth. The program began in the second quarter of 2014 and is expected to be complete by the end of 2017. This program is expected to deliver cumulative cost savings of approximately $420 million through 2017 and annual cost savings of approximately $300 million starting in 2018. The estimated phasing of cost savings is: approximately $5 million in 2014, approximately $45 million in 2015, approximately $135 million in 2016 and approximately $235 million in 2017. The estimated cost savings are before any potential reinvestment for future growth. To achieve these savings, the Company expects to incur cumulative charges amounting to approximately $410 million through the end of 2017. Total charges, actual savings and timing may vary positively or negatively from these estimates due to changes in the scope, underlying assumptions or execution risk of the restructuring plan throughout its duration. The main elements of the program will include: Movement of more than 3,500 support roles from higher cost locations to



Willis facilities in lower cost locations, bringing the ratio of employees

in higher cost versus lower cost locations from approximately 80:20 to approximately 60:40;



Net workforce reductions in support positions;

Lease consolidation in real estate and reductions in ratios of seats per

employee and square footage of floor space per employee; and

Information technology systems simplification and rationalization.

The Company expects that about 70 percent of the annualized 2018 savings will come from role relocation and reduction, and about 30 percent of the savings from real estate, information technology and other areas. As the program proceeds, we will provide regular updates on the associated savings from the program as well as the charge. In addition, we will also disclose certain key operational metrics that will demonstrate how the program is making the changes which drive savings, including the ratio of roles in higher cost locations to lower cost locations, the ratio of seats per employee, and square footage of floor space per employee. In second quarter 2014 we recognised restructuring costs of $3 million related to the operational improvement program. These costs primarily relate to the elimination of 35 support positions from our operations in North America and the cost of professional services engagement to support the program. 2013 Expense Reduction Initiative The Company recorded a pre-tax charge of $46 million in the first quarter of 2013 related to the assessment of the Company's organizational design. In connection with this assessment, we incurred the following pre-tax charges: $29 million of severance and other staff-related costs towards the elimination of 207 positions; and $17 million of Other operating expenses and Depreciation resulting from the rationalization of property and systems.



The Company did not incur any further charges related to this review.

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Table of Contents Business discussion Business Strategy Today we operate in attractive growth markets with a diversified platform across geographies, industries, segments and lines of business. We aim to become the risk advisor, insurance and reinsurance broker of choice globally.



We will achieve this by being completely focused on:

where we compete and that means the areas where we can succeed by:

Geography - we will re-balance our business mix towards faster growing geographies, with both developed and developing markets Client Segmentation - we will segment our client offering to provide distinct offerings to different types of client, focusing on the value we provide to our clients Sector - we will build business lines around our industry



and sector

strength e.g. Human Capital and Employee Benefits.



How we compete which will be centered on meeting the needs of our client by:

Connection - leading to more cross-selling

Innovation - competing on analytics and innovation

Investment - focusing on earnings accretion, competitive position and fit

Through these strategies we aim to grow revenue with positive operating leverage, grow cash flows and generate compelling returns for investors.

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Changes to Segmental and Income Statement Presentation

During first quarter 2014, the Company announced a number of changes to the structure of its operations that are effective from January 1, 2014.

The principal changes to the components of the North America, Global and International reporting segments are:

the UK retail business, previously reported within the International

reporting segment, has been combined with our Specialty businesses and is

now reported within the Global reporting segment;

the Mexican retail business, previously reported within the North America

reporting segment, is now reported within the International reporting

segment; and

the US captive consulting business and facultative reinsurance businesses,

both previously reported within the North America reporting segment, are now reported within the Global reporting segment. The Company has made additional changes to the segmental financial information that are now used and reported to evaluate performance and to support decision making. We will continue to use organic growth in commissions and fees, as well as underlying growth in commissions and fees and operating income, to evaluate segment performance however, operating income has been changed to reflect the following:



amortization of intangibles, previously reported in Corporate and other,

is now reported in operating expenses for each of the reporting segments;

and



certain leadership, project and other costs relating to group functions

and the non-servicing or financing elements of the defined benefit pension

scheme cost (income), previously allocated to each of the reporting segments are now reported in Corporate and other. Finally, the Company has made changes to the presentation of certain items in the Consolidated Statement of Operations. Certain foreign exchange gains and losses, primarily from balance sheet revaluation, and gains and losses from the disposal of operations, previously reported within total operating expenses, are now reported in a new income statement line item, 'Other income (expense)', which is now reported below Operating income (loss). The impact of the changes to the selected financial data described above, has been retrospectively applied to the second quarter 2013 results. Changes to non-GAAP financial measures Effective from April 1, 2014 we have made changes to the non-GAAP financial measures that we use to provide additional meaningful methods of evaluating the Company's operating performance. We have also introduced underlying EBITDA: a new non-GAAP financial measure. Previously we excluded certain specified items from operating margin, operating income, net income and earnings per share to calculate adjusted operating margin, adjusted operating income, adjusted net income and adjusted earnings per share.



From April 1, 2014 we will exclude, in addition to these certain specified items, period over period foreign currency movements from operating margin, operating income, net income and earnings per share to calculate underlying operating margin, underlying operating income, underlying EBITDA, underlying net income and underlying earnings per share.

These changes have been made as we believe the new measures enhance the comparative analysis of our results of operations and are consistent with how we assess performance and manage the Company's operations.

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REVIEW OF CONSOLIDATED RESULTS The following table is a summary of our revenues, operating income, operating margin, net income and diluted earnings per share (in millions, except per share data and percentages): Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 REVENUES Commissions and fees $ 930 $ 885 $ 2,020$ 1,931 Investment income 4 3 8 7 Other income 1 2 4 3 Total revenues 935 890 2,032 1,941



EXPENSES

Salaries and benefits (575 ) (529 ) (1,145 ) (1,097 ) Other operating expenses (173 ) (159 ) (338 ) (321 ) Depreciation expense (24 ) (21 ) (47 ) (47 ) Amortization of intangible assets (12 ) (14 ) (25 ) (28 ) Restructuring costs (3 ) - (3 ) - Total expenses (787 ) (723 ) (1,558 ) (1,493 ) OPERATING INCOME 148 167 474 448 Other (expense) income, net (3 ) 4 (3 ) 10 Interest expense (35 ) (32 ) (67 ) (63 )



INCOME BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES

110 139 404 395 Income taxes (59 ) (29 ) (122 ) (77 ) INCOME BEFORE INTEREST IN EARNINGS OF ASSOCIATES 51 110 282 318



Interest in (losses) earnings of associates, net of tax

(3 ) (3 ) 16 12 NET INCOME 48 107 298 330 Less: net income attributable to noncontrolling interests (1 ) (2 ) (5 ) (6 )



NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS $ 47 $ 105 $ 293$ 324

Salaries and benefits as a percentage of total revenues 61.5 % 59.4 % 56.3 % 56.5 % Other operating expenses as a percentage of total revenues 18.5 % 17.9 % 16.6 % 16.5 %



Operating margin (operating income as a percentage of total revenues)

15.8 % 18.8 % 23.3 % 23.1 % Diluted earnings per share $ 0.26$ 0.59$ 1.61$ 1.83 Average diluted number of shares outstanding 182 178 182 177 103

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Table of Contents Willis Group Holdings plc Revenues



Total revenues for the Group and by segment for the three and six months ended June 30, 2014 and 2013 are shown below (millions, except percentages):

Attributable to: Organic Foreign commissions currency Acquisitions and and fees Three months ended June 30, 2014 2013 % Change translation disposals growth (a) Global $ 368$ 350 5.1 % 2.1 % (0.4 )% 3.4 % North America 340 327 4.0 % - % (0.8 )% 4.8 % International 222 208 6.7 % (0.5 )% 1.6 % 5.6 % Commissions and fees $ 930$ 885 5.1 % 0.7 % (0.1 )% 4.5 % Investment income 4 3 33.3 % Other income 1 2 (50 )% Total revenues $ 935$ 890 5.1 % Attributable to: Organic Foreign commissions currency Acquisitions and and fees Six months ended June 30, 2014 2013 % Change translation disposals growth (a) Global $ 810$ 777 4.2 % 1.7 % (0.2 )% 2.7 % North America 709 682 4.0 % (0.1 )% (0.8 )% 4.9 % International 501 472 6.1 % (1.2 )% 0.7 % 6.6 % Commissions and fees 2,020 1,931 4.6 % 0.5 % (0.2 )% 4.3 % Investment income 8 7 14.3 % Other income 4 3 33.3 % Total revenues $ 2,032$ 1,941 4.7 %



_________________________________

(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; and (iii) the net commission and fee

revenues related to operations disposed of in each period presented.

Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. Second quarter 2014 Revenues of $935 million for second quarter 2014 were $45 million, or 5.1 percent, higher than in same period of 2013. Excluding the $5 million, or 0.6 percent, favorable impact of foreign currency movements, underlying revenues increased $40 million, or 4.5 percent. Total commissions and fees for second quarter 2014 were $930 million, up $45 million or 5.1 percent, from $885 million in the prior year quarter. This reflects organic commissions and fees growth of 4.5 percent and a positive 0.7 percent impact from foreign currency movements partially offset by a negative 0.1 percent impact from acquisitions and disposals. The Global segment reported 5.1 percent growth in reported commissions and fees. Excluding the positive 2.1 percent impact from foreign currency movements and the negative 0.4 percent impact from acquisitions and disposals, organic growth in commissions and fees was 3.4 percent. Organic growth was primarily driven by certain specialties businesses and Willis Re North America tempered by poor performance in the UK retail business and the impact of declining rates in the Willis Re International and Willis Re Specialty businesses. The North America segment reported 4.0 percent growth in reported commissions and fees. This reflected organic commissions and fees growth of 4.8 percent partially offset by a 0.8 percent negative impact from acquisitions and disposals. Growth in commissions and fees was reported across most of North America's geographic regions, led by double-digit growth in the 104



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Northeast and Atlantic regions. Similarly, many of the major industry and product practices reported solid growth. Strong growth in project business helped the Construction and Surety businesses report mid single-digit and high-single digit growth, respectively. The International segment reported 6.7 percent growth in reported commissions and fees. Organic growth of 5.6 percent and growth from the acquisition of Charles Monat Limited of 1.6 percent was partially offset by a 0.5 percent negative impact from foreign currency movements. Operations in Western Europe grew less than one percent in the quarter, but with strong performances in Iberia and Norway. Eastern Europe was up high single-digits, with good results in Russia and Poland. Latin America operations grew mid-teens with very strong results in Brazil, Venezuela and Argentina. Operations in Asia were strong, led by growth in our Global Wealth Solutions business, while Australasia was up low single-digits. Investment income increased $1 million to $4 million in second quarter 2014 from $3 million in second quarter 2013. Other income was $1 million in second quarter 2014, a decrease of $1 million from $2 million reported in second quarter 2013. Six months ended June 30, 2014 Total revenues of $2,032 million for first half 2014 were $91 million, or 4.7 percent, higher than in the same period of 2013. Excluding the $8 million, or 0.4 percent, favorable impact of foreign currency movements underlying revenues increased $83 million, or 4.3 percent. Total commissions and fees for first half 2014 were $2,020 million, up $89 million, or 4.6 percent, from $1,931 million in the prior year. This reflects organic commissions and fees growth of 4.3 percent and a positive 0.5 percent impact from foreign currency movements partially offset by a 0.2 percent negative impact from acquisitions and disposals. The Global segment reported 4.2 percent growth in reported commissions and fees. Excluding the positive 1.7 percent impact from foreign currency movements and the negative 0.2 percent impact from acquisitions and disposals organic growth in commissions and fees was 2.7 percent. Growth was primarily driven by certain specialty business and Reinsurance although was partially offset by declining reinsurance rates and poor performance in the UK retail business, as the Insolvency business continues to be significantly impacted by the improving economy. The North America segment reported 4.0 percent growth in reported commissions and fees. This reflected organic commissions and fees growth of 4.9 percent partially offset by a 0.8 percent negative impact from acquisitions and disposals and a 0.1 percent adverse impact from foreign currency movements. Growth in commissions and fees was reported across most of the segment's regions, led by mid-single digit growth in the Northeast region and high single-digit growth in the Atlantic and south regions. The International segment reported 6.1 percent growth in reported commissions and fees. Organic growth of 6.6 percent and growth from acquisitions and disposals of 0.7 percent were partially offset by adverse foreign currency movements of 1.2 percent. Operations in Western Europe grew less than one percent in first half 2014. However, there was a strong performance in Iberia. Eastern Europe was up low double-digits primarily as a result of Russia. Latin America operations grew strongly principally driven by Brazil and Venezuela. Growth in first half 2014 was positively impacted by $9 million related to the revenue recognition adjustment in China that negatively impacted revenue in the fourth quarter of 2013. Excluding the 190 basis point impact of this adjustment, organic growth in International would have been 4.7 percent. Salaries and Benefits Second quarter 2014 Salaries and benefits of $575 million for second quarter 2014 were $46 million, or 8.7 percent higher than the same period of 2013. Excluding the $12 million, or 2.4 percent, negative impact from foreign currency movements, Salaries and benefits increased $34 million, or 6.3 percent. The $34 million, or 6.3 percent, increase was primarily driven by new hires, including revenue-producing talent, client service and risk management capabilities; annual salary reviews across the business, including mandatory salary increases in Latin America; and increases in incentives linked to growth in commissions and fees. 105 -------------------------------------------------------------------------------- Table of Contents Willis Group Holdings plc Six months ended June 30, 2014 Salaries and benefits of $1,145 million for first half 2014 were $48 million, or 4.4 percent, higher than the same period of 2013. Excluding the $16 million negative impact from foreign currency movements and the $29 million charge related to the 2013 expense reduction initiative, Salaries and benefits increased $61 million, or 5.6 percent. The $61 million, or 5.6 percent, increase was driven primarily by the increase in headcount, annual salary reviews across the business, including mandatory increase in Latin America; and increases in incentives linked to growth in commissions and fees. Other Expenses Second quarter 2014 Other operating expenses increased by $14 million, or 8.8 percent, versus the year ago period. Excluding the $4 million unfavorable impact from foreign currency movements other operating expenses increased $10 million, or 6.1 percent. The $10 million, or 6.1 percent, increase was primarily due to higher business development expenses and increased professional fees related to acquisitions and systems related projects. Depreciation expense was $24 million in second quarter 2014 and $21 million in second quarter 2013. The $3 million increase in the charge in second quarter 2014 was as a result of systems going live late in 2013. Amortization of intangible assets was $12 million in second quarter 2014 and $14 million in second quarter 2013. Restructuring costs were $3 million in second quarter 2014 compared with $nil in second quarter 2013. Six months ended June 30, 2014 Other operating expenses increased by $17 million, or 5.3 percent, versus the year ago period. Excluding the $6 million unfavorable impact from foreign currency movements and the $12 million 2013 charge related to the expense reduction initiative, other operating expenses increased $23 million or 7.3 percent. The $23 million, or 7.3 percent, increase was primarily due to higher business development expenses and professional fees related to acquisitions and systems related projects. Depreciation expense was $47 million in both first half 2014 and first half 2013 as the non-recurrence of the $5 million charge related to the 2013 expense reduction initiative was offset by increased depreciation as new systems came on line in late 2013. Amortization of intangible assets was $25 million in first half 2014, down $3 million from first half 2013. Restructuring costs were $3 million in first half 2014 compared with $nil in first half 2013. Other (expense) income, net Other expense in second quarter 2014 was $3 million compared with other income of $4 million in second quarter 2013. The $7 million movement versus the year ago period is primarily due to the impact of the the re-measurement of Venezuelan bolivar denominated assets, as a result of the Venezuelan government's expansion of use of the auction market rate, partially offset by other movements in foreign exchange, and a gain recognised on the disposal of operations. Other expense in first half 2014 was $3 million compared with other income of $10 million in second half 2013. The $13 million movement versus the year ago period is primarily due to the impact of the the re-measurement of Venezuelan bolivar denominated assets. Interest Expense Interest expense in second quarter 2014 was $35 million compared with $32 million for the same period of 2013. The $3 million increase in interest expense is primarily due to the non-recurrence of the benefit from the terminated interest rate swap, following the refinancing late in 2013, and the fees related to the new $400 million revolving credit facility. Interest expense in first half 2014 was $67 million compared with $63 million for the same period of 2013. The $4 million increase in interest expense is primarily due to the non-recurrence of the benefit from the terminated interest rate swap. 106



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Table of Contents Business discussion Income Taxes The reported tax rate in second quarter 2014 was approximately 54 percent, compared to approximately 21 percent for second quarter 2013. Included within the reported tax expense in the second quarter 2014 is a non-cash tax adjustment amounting to $21 million reflecting an increase in the valuation allowance against deferred tax assets. This was an incremental increase to the existing valuation allowance caused by the release of provisions for uncertain tax positions. Excluding this non-cash adjustment, the underlying tax rate for second quarter 2014 is approximately 35 percent. The increase in the underlying rate is predominantly driven by how we spread the full year expected tax charge over the course of the year. We had been spreading the US tax charge on a straight line basis, however, this quarter we have been able to adjust our methodology and record the whole of the group tax charge in line with profits earned to date. This has resulted in an additional tax charge in second quarter 2014 of $13 million. The reported tax rate in first half 2014 was approximately 30 percent, compared to approximately 19 percent for first half 2013. The period over period increase in the tax rate is largely due to the increase in valuation allowance discussed above, and the expectation of paying current taxes in the US in 2014, which resulted in a higher tax charge on US income in the current period compared with the prior period. Interest in Earnings of Associates Interest in earnings of associates, net of tax, was a loss of $3 million in both second quarter 2014 and 2013. Interest in earnings of associates, net of tax, was $16 million in first half 2014, up $4 million from $12 million in first half 2013. This $4 million increase was mainly due to the year-on-year improvement in the results of our associates, primarily Gras Savoye, our principal associate. We expect full year 2014 earnings from associates of between $10 million and $15 million compared with a $nil profit for full year 2013. While this is our current estimate, as we do not have control over our Associates, actual results may not be in line with that estimate.



LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We believe that our balance sheet and cash flow provide us with the platform and flexibility to remain committed to our previously stated goals of:

investing in the business for growth;

value-creating merger and acquisition activity;

returning a steadily rising dividend to shareholders; and

the repurchase of shares. Our principal sources of liquidity are cash from operations, available cash and cash equivalents and amounts available under our four revolving credit facilities, excluding the UK facility, which is solely for use by our main regulated UK entity in certain exceptional circumstances, and the Willis Securities facility which is available for regulatory purposes related to securities underwriting only. Our principal short-term uses of liquidity and capital resources are operating expenses, capital expenditures, dividends to shareholders, funding defined benefit pension plans and the repurchase of shares. Our long-term liquidity requirements consist of the principal amount of outstanding notes; borrowings under our seven-year term loan and revolving credit facilities; and our pension contributions as discussed below. As at June 30, 2014, cash and cash equivalents were $708 million, a decrease of $88 million compared to December 31, 2013. Included within cash and cash equivalents is a proportion held for regulatory capital adequacy requirements, including $89 million held within our regulated UK entities. 107 -------------------------------------------------------------------------------- Table of Contents Willis Group Holdings plc Cash flows from operating activities increased to $152 million in the first half 2014 from $137 million in the year-ago period. In addition, funds were provided in first half 2014 of $18 million from the sales of certain offices in Texas and of Insurance Noodle as well as $93 million proceeds from the issue of shares. On March 3, 2014, Willis Securities, Inc., a wholly-owned indirect subsidiary of Willis Group Holding plc, entered into a $300 million revolving note and cash subordination agreement. The $300 million revolving note facility is available for drawing from March 3, 2014 through April 28, 2015. The aggregate unpaid principal amount of all advances must be repaid on or before March 4, 2016. On April 28, 2014, the company entered into an amendment to the $300 million revolving note and cash subordination agreement to increase the amount of financing and to extend both the end date of the original credit period and the original repayment date. As a result of this amendment, the revolving credit facility was increased from $300 million to $400 million. The end date of the credit period was extended to April 28, 2015 from March 3, 2015 and the repayment date was extended to April 28, 2016 from March 3, 2016. Proceeds under the Willis Securities credit facility will be used for regulatory capital purposes related to securities underwriting only, which will allow Willis Securities to meet or exceed capital requirements of regulatory agencies, self-regulatory agencies and their clearing houses, including the Financial Industry Regulatory Authority. Advances under the credit facility shall bear interest at a rate equal to (a) for Eurocurrency Loans, LIBOR plus 1.50% to 2.25%, and (b) for base rates Loans, the highest of (i) the Federal Funds rates plus 0.5%, (ii) the "prime rate" as announced by SunTrust Bank, and (iii) LIBOR plus 1.00%, plus 0.5% to 1.25%, in each case, based upon the Company's guaranteed senior-unsecured long term debt rating. In addition, Willis Securities will also pay a commitment fee equal to 0.25% to 0.40% of the committed amount of the credit facility that has not been borrowed. As at June 30, 2014 there was $nil drawn down on all four of the revolving credit facilities (December 31, 2013: $nil). During the six months ended June 30, 2014 we made one drawing totaling $250 million and one repayment of $250 million on the Willis Securities facility. The primary uses of funds during the first half 2014 include $358 million of payments made for cash incentive awards relating to 2013, $103 million of dividends paid, $54 million cash contributions, including employees' salary sacrifice contributions, to our defined benefit schemes, capital expenditure of $54 million related to leasehold improvements, information technology and transformation projects, $117 million for the repurchase of shares, $41 million to acquire subsidiaries, $6 million for payments to acquire other investments, $15 million of dividends paid to noncontrolling interests, $8 million repayment of debt and $3 million of debt fees paid associated with the $300 million revolving note facility taken out in the first quarter. The Company is authorized to buy back its ordinary shares by way of redemption, and will consider whether to do so from time to time based on many factors including market conditions. In February 2014, Willis announced that it intended to buy back $200 million in shares in 2014 to offset the increase in shares outstanding resulting from the exercise of employee stock options. Based on the settlement date, the Company bought back 2,755,000 shares for a total cost of $117 million in first half 2014. 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 the next twelve months. The impact of movements in liquidity, debt and EBITDA in the quarter had a positive impact on the interest coverage ratio and the leverage ratio. Both ratios remain well within the requirements of the revolving credit facility covenants.



Debt

Total debt, total equity and the capitalization ratio at June 30, 2014 and December 31, 2013 were as follows (millions, except percentages):

108



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Table of Contents Business discussion June 30, 2014 December 31, 2013 Long-term debt $ 2,302 $ 2,311 Short-term debt and current portion of long-term debt 15



15

Total debt $ 2,317 $



2,326

Total Willis Group Holdings stockholder's equity $ 2,444 $

2,215 Capitalization ratio 48.7 % 51.2 % On July 23, 2013, we entered into an amendment to our existing credit facilities to extend both the amount of financing and the maturity date of the facilities. As a result of this amendment, our revolving credit facility was increased from $500 million to $800 million. The maturity date on the $300 million term loan was extended to July 23, 2018, from December 16, 2016. There was no increase to the amount outstanding on the term loan as a result of this amendment. The 7-year term loan facility expiring 2018 bears interest at LIBOR plus 1.50% and is repayable in quarterly installments and a final repayment of $186 million is due in the third quarter of 2018. Drawings under the $800 million revolving credit facility bear interest at LIBOR plus 1.50% and the facility expires on July 23, 2018. These margins apply while the Company's debt rating remains BBB-/Baa3. As of June 30, 2014, $nil was outstanding under this revolving credit facility. On August 15, 2013, the Company issued $250 million of 4.625% senior notes due 2023 and $275 million of 6.125% senior notes due 2043. The effective interest rates of these senior notes are 4.696% and 6.154%, respectively, which include the impact of the discount upon issuance. On July 25, 2013, the Company commenced an offer to purchase for cash any and all of its 5.625% senior notes due 2015 and a portion of its 6.200% senior notes due 2017 and its 7.000% senior notes due 2019 for an aggregate purchase price of up to $525 million. On August 22, 2013, the proceeds from the issue of the senior notes due 2023 and 2043 were used to fund the purchase of $202 million of 5.625% senior notes due 2015, $206 million of 6.200% senior notes due 2017 and $113 million of 7.000% senior notes due 2019. Pension contributions UK Plan In first half 2014, the Company made cash contributions of $41 million (first half 2013: $49 million) into the UK defined benefit pension plan, and $6 million (first half 2013: $6 million) in respect of employees' salary sacrifice contributions. Contributions to the UK defined benefit pension plan in 2014 are expected to total $84 million (full year 2013: $88 million), , of which approximately $23 million relates to on-going contributions calculated as 15.9 percent of active plan members' pensionable salaries and approximately $61 million relates to contributions towards funding the deficit. In addition, for full year 2014, the Company expects to contribute approximately $12 million to the UK defined benefit pensions plan related to employees' salary sacrifice contributions (full year 2013: $12 million). Further contributions will be payable based on a profit share calculation (equal to 20 percent of EBITDA in excess of $900 million per annum as defined by the revised schedule of contributions) and an exceptional return calculation (equal to 10 percent of any exceptional returns made to shareholders, for example, share buybacks and special dividends). In respect of 2014, any such contributions will be paid in 2015 on finalization of the calculations. Aggregate contributions under the deficit funding contribution and the profit share calculation are capped at 312 million ($533 million) over the six-year period ended December 31, 2017. The schedule of contributions is automatically renegotiated after three years and at any earlier time jointly agreed by the Company and the Trustee. 109 --------------------------------------------------------------------------------

Table of Contents Willis Group Holdings plc US Plan We made cash contributions to our US defined benefit plan of $2 million in first half 2014, compared with $18 million in first half 2013. For the US plan, expected contributions are the contributions we are required to make under US pension legislation based on our December 31, 2013 balance sheet position. In full year 2014, we expect to contribute approximately $30 million (full year 2013: $40 million). Other Plans We made cash contributions to our other defined benefit pension plans of $5 million in first half 2014, and $4 million in first half 2013. In full year 2014, we expect to contribute approximately $9 million to these other plans (full year 2013: $10 million).


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