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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
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)
 
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each Class   Name of each exchange on which registered
Ordinary Shares, nominal value $0.000115 per share   New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
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 definition of ‘large accelerated filer’, ‘accelerated filer’ and ‘smaller reporting company’ in Rule 12b-2 of the Exchange Act.
 
             
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 Act).  Yes o     No þ
 
As of February 22, 2010, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $4,787,610,612.
 
As of February 22, 2010, there were outstanding 168,829,679 ordinary shares, nominal value $0.000115 per share, of the Registrant.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of Willis Group Holdings Public Limited Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
 


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WILLIS GROUP HOLDINGS PUBLIC LIMITED COMPANY
 
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
 
Certain Definitions
 
The following definitions apply throughout this annual report unless the context requires otherwise:
 
‘Company’ or ‘Group’ or ‘Willis’ Willis-Bermuda and its subsidiaries for periods before the Effective Time and Willis-Ireland and its subsidiaries for periods after the Effective Time.
 
‘Effective Time’ 6:59 p.m. EST on December 31, 2009.
 
‘HRH’ Hilb Rogal & Hobbs Company.
 
‘shares’ The ordinary shares of Willis-Ireland, nominal value $0.000115 per share, and prior to the Effective Time, the common shares of Willis-Bermuda, par value $0.000115 per share.
 
‘Willis-Bermuda’ Willis Group Holdings Limited, a company organized under the laws of Bermuda.
 
‘Willis Group Holdings’ or ‘Willis-Ireland’ Willis Group Holdings Public Limited Company, a company organized under the laws of Ireland.


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Table of Contents
 
                 
            Page
 
Information concerning forward-looking statements     4  
 
PART I
    Business     6  
    Risk Factors     13  
    Unresolved Staff Comments     20  
    Properties     21  
    Legal Proceedings     21  
    Submission of Matters to a Vote of Security Holders     21  
 
PART II
    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     22  
    Selected Financial Data     24  
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     25  
    Quantitative and Qualitative Disclosures about Market Risk     51  
    Financial Statements and Supplementary Data     55  
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     137  
    Controls and Procedures     137  
    Other Information     139  
 
PART III
    Directors, Executive Officers and Corporate Governance     140  
    Executive Compensation     141  
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     141  
    Certain Relationships and Related Transactions, and Director Independence     141  
    Principal Accounting Fees and Services     141  
 
PART IV
    Exhibits, Financial Statement Schedules     142  
Schedule II — Valuation and Qualifying Accounts     147  
Signatures     148  
 Exhibit 10.22
 Exhibit 10.35
 Exhibit 10.37
 Exhibit 10.38
 Exhibit 21.1
 Exhibit 23.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2


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INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
 

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, that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the potential benefits of the redomicile to Ireland, the HRH acquisition or the Gras Savoye transaction, 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 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 of 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 our Shaping Our Future, Right Sizing Willis 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 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 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, such as the Gras Savoye transaction or HRH acquisition;
 
•  changes in the tax or accounting treatment of our operations;
 
•  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;
 
•  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.
 
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.
 
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



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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.
 



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PART I
 
Item 1 — Business
 

History and Development of the Company
 
Willis Group Holdings is the ultimate holding company for the Group. We trace our history to 1828 and are one of the largest insurance brokers in the world.
 
Willis Group Holdings was incorporated in Ireland on September 24, 2009 to facilitate the change of the place of incorporation of the parent company of the Group from Bermuda to Ireland (the ‘Redomicile’). At the Effective Time the common shares of Willis-Bermuda were canceled, the Willis-Bermuda common shareholders received, on a one-for-one basis, new ordinary shares of Willis Group Holdings, and Willis Group Holdings became the ultimate parent company for the Group.
 
For administrative convenience, we utilize the offices of a subsidiary company as our principal executive offices. The address is:
 
Willis Group Holdings Public Limited Company
c/o Willis Group Limited
The Willis Building
51 Lime Street
London EC3M 7DQ
England
Tel: +44 203 124 6000
 
For several years, we have focused on our core retail and specialist broking operations. In 2008, we acquired HRH, at the time the eighth largest insurance and risk management intermediary in the United States. The acquisition almost doubled our North America revenues and created critical mass in key markets including California, Florida, Texas, Illinois, New York, Boston, New Jersey and Philadelphia. In addition, we have made a number of smaller acquisitions around the world and increased our ownership in several of our associates and existing subsidiaries, which were not wholly-owned, where doing so strengthened our retail network and our specialty businesses.
 
Available Information
 
The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the ‘SEC’). You may read and copy any documents we file at the SEC’s Public Reference Room at

100 F Street, NE Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Willis Group Holdings) file electronically with the SEC. The SEC’s website is www.sec.gov.
 
The Company makes available, free of charge through our website, www.willis.com, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our proxy statement, current reports on Form 8-K and Forms 3, 4, and 5 filed on behalf of directors and executive officers, as well as any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 (the ‘Exchange Act’) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Unless specifically incorporated by reference, information on our website is not a part of this Form 10-K.
 
The Company’s Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter and Corporate Governance and Nominating Committee Charter are available on our website, www.willis.com, in the Investor Relations-Corporate Governance section, or upon request. Requests for copies of these documents should be directed in writing to the Company Secretary c/o Office of General Counsel, Willis Group Holdings Public Limited Company, One World Financial, 200 Liberty Street, New York, NY 10281.
 
General
 
We provide a broad range of insurance brokerage, reinsurance and risk management consulting services to our clients worldwide. We have significant market positions in the United States, in the United Kingdom and, directly and through our associates, in many other countries. We are a recognized leader in providing specialized risk management advisory and other services on a global basis to clients in various industries including aerospace, marine, construction and energy.
 
In our capacity as an advisor and insurance broker, we act as an intermediary between our clients and insurance carriers by advising our clients on their



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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 assist clients in the assessment of their risks, advise on the best ways of transferring suitable risk to the global insurance and reinsurance markets and then execute the transactions at the most appropriate available price, terms and conditions for our clients. Our global distribution network enables us to place the risk in the most appropriate insurance or reinsurance market worldwide.
 
We also offer clients a broad range of services to help them to identify and control their risks. These services range from strategic risk consulting (including providing actuarial analyses), to a variety of due diligence services, to the provision of practical on-site risk control services (such as health and safety or property loss control consulting) as well as analytical and advisory services (such as hazard modeling and reinsurance optimization studies). We assist clients in planning how to manage incidents or crises when they occur. These services include contingency planning, security audits and product tampering plans. We are not an insurance company and therefore we do not underwrite insurable risks for our own account.
 
We and our associates serve a diverse base of clients located in approximately 190 countries. These clients include major multinational and middle-market companies in a variety of industries, as well as public institutions and individual clients. Many of our client relationships span decades. Including our associates, we have approximately 20,000 employees around the world and a network of about 400 offices in some 100 countries.
 
We believe we are one of only a few insurance brokers in the world possessing the global operating presence, broad product expertise and extensive distribution network necessary to meet effectively the global risk management needs of many of our clients.
 
Business Strategy — Shaping Our Future
 
Our Shaping Our Future Strategy is our commitment to:
 
•  segment clients and deliver service consistent with their needs and target high growth businesses and geographies;

•  drive profitable growth through providing our clients with value and service above that provided by our competitors;
 
•  use our global scale to manage carrier relationships in the best interest of the clients and to deliver product innovation;
 
•  aim to deliver service to clients efficiently by streamlining our organization and utilizing industry leading technology. We aim to create the optimal platform by enhancing our service model, processes and technology; and
 
•  become the employer of choice by creating a clear path of career development for our people and a reward and recognition framework that recognizes team work.
 
Our Business
 
Insurance and reinsurance is a global business, and its participants are affected by global trends in capacity and pricing. Accordingly, we operate as one global business which ensures all clients’ interests are handled efficiently and comprehensively, whatever their initial point of contact. We organize our business into three segments: North America and International, which together comprise our principal retail operations, and Global. For information regarding revenues, operating income and total assets per segment, see Note 23 of the Consolidated Financial Statements contained herein.
 
Global
 
Our Global business provides specialist brokerage and consulting services to clients worldwide for the risks arising from specific industrial and commercial activities. In these operations, we have extensive specialized experience handling diverse lines of coverage, including complex insurance programs, and acting as an intermediary between retail brokers and insurers. We increasingly provide consulting services on risk management with the objective of assisting clients to reduce the overall cost of risk. Our Global business serves clients in around 190 countries, primarily from offices in the United Kingdom, although we also serve clients from offices in the United States, Continental Europe and Asia.
 
The Global business is divided into:
 
•  Global Specialties;



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•  Willis Re; and
 
•  Faber & Dumas.
 
Global Specialties
 
Global Specialties has strong global positions in Aerospace, Energy, Marine, Construction, Financial and Executive Risks and several niche businesses.
 
•  Aerospace
We are highly experienced in the provision of insurance and reinsurance brokerage and risk management services to Aerospace clients worldwide, including aircraft manufacturers, air cargo handlers and shippers, airport managers and other general aviation companies. Advisory services provided by Aerospace include claims recovery, contract and leasing risk management, safety services and market information. Aerospace’s clients include approximately 35 percent of the world’s airlines. The specialist Inspace division is also prominent in supplying the space industry through providing insurance and risk management services to approximately 40 companies.
 
•  Energy
Our Energy practice provides insurance brokerage services including property damage, offshore construction, liability and control of well and pollution insurance to the energy industry. The Energy practice clients are worldwide. We are highly experienced in providing insurance brokerage for all aspects of the energy industry including exploration and production, refining and marketing, offshore construction and pipelines.
 
•  Marine
Our Marine unit provides marine insurance and reinsurance brokerage services, including hull, cargo and general marine liabilities. Marine’s clients include ship owners, ship builders, logistics operators, port authorities, traders and shippers, other insurance intermediaries and insurance companies. Marine insurance brokerage is our oldest line of business dating back to our establishment in 1828.
 
•  Construction
Our Construction practice provides risk management advice and brokerage services for a wide range of UK and international construction activities. The clients of the Construction practice include contractors, project owners, project managers, project financiers, professional

consultants and insurers. We are the broker for many of the leading global construction firms.
 
•  Financial and Executive Risks
Our Financial and Executive Risks unit specializes in broking directors’ and officers’ insurance as well as professional indemnity insurance for corporations and professional firms. It incorporates our political risk unit, as well as structured finance and credit teams. It also places structured crime and specialist liability insurance for clients across the broad spectrum of financial institutions as well as specializing in strategic risk assessment and transactional risk transfer solutions.
 
Willis Re
 
We are one of the world’s largest intermediaries for reinsurance and have a significant market share in the world’s major markets, particularly marine and aviation. We operate this business on a global basis and our clients are both insurance and reinsurance companies.
 
We provide a complete range of transactional capabilities, including, in conjunction with Willis Capital Market and Advisory Services, risk transfer via the capital markets, as well as analytical and advisory services including enterprise risk management, hazard modeling, financial and balance sheet analysis and reinsurance optimization studies.
 
Faber & Dumas
 
Faber & Dumas, our wholesale brokerage division, was launched in October 2008 on completion of Willis’ acquisition of HRH. Faber & Dumas comprises HRH’s London-based operation Glencairn, together with our Fine Art, Jewelry and Specie, Special Contingency Risk and Hughes-Gibb units.
 
•  Glencairn principally provides property, energy, casualty and personal accident insurance to independent wholesaler brokers worldwide who wish to access the London, European and Bermudan markets.
 
•  The Fine Art, Jewelry and Specie unit provides specialist risk management and insurance services to fine art, diamond and jewelry businesses and operators of armored cars. Coverage is also obtained for vault and bullion risks.



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•  The Special Contingency Risks unit specializes in producing packages to protect corporations, groups and individuals against special contingencies such as kidnap and ransom, extortion, detention and political repatriation.
 
•  The Hughes-Gibb unit principally services the insurance and reinsurance needs of the horse racing and horse breeding industry.
 
Retail operations
 
Our North America and International retail operations provide services to small, medium and major corporate clients, accessing Global’s specialist expertise when required.
 
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. With around 120 locations, organized into seven regions including Canada, Willis North America locally delivers our global and national resources and specialist expertise through this retail distribution network.
 
In addition to being organized geographically and by specialty, our North America business focuses on four client segments: global, large national/middle-market, small commercial, and private client, with service, marketing and sales platform support for each segment.
 
•  North America Construction
The largest industry practice group in North America is Construction, which specializes in providing risk management, insurance brokerage, and surety bonding services to the construction industry. Willis Construction provides these services to around 25 percent of the Engineering News Record Top 400 contractors (a listing of the largest 400 North American contractors based on revenue). In addition, this practice group has expertise in owner controlled insurance programs for large projects and insurance for national homebuilders.
 
•  Other industry practice groups
Other industry practice groups include Healthcare, serving the professional liability and other insurance and risk management needs of private and not-for-profit health systems, hospitals and

physicians groups; Financial Institutions, serving the needs of large banks, insurers and other financial services firms; and Mergers & Acquisitions, providing due diligence, and risk management and insurance brokerage services to private equity and merchant banking firms and their portfolio companies.
 
•  Employee Benefits
Willis Employee Benefits, fully integrated into the North America platform, is our largest product-based practice group and provides health, welfare and human resources consulting, and brokerage services to all of our commercial client segments. This practice group’s value lies in helping clients control employee benefit plan costs, reducing the amount of time human resources professionals spend administering their companies’ benefit plans and educating and training employees on benefit plan issues.
 
•  Executive Risks
Another industry-leading North America practice group is Willis Executive Risks, a national team of technical professionals who specialize in meeting the directors and officers, employment practices, fiduciary liability insurance risk management, and claims advocacy needs of public and private corporations and organizations. This practice group also has expertise in professional liability, especially internet risks.
 
•  CAPPPS+
The Captive, Actuarial, Programs, Pooling and Practices Solutions (CAPPPS) group has a network of actuaries, certified public accountants, financial analysts and pooled insurance program experts who assist clients in developing, implementing and managing alternative risks financing vehicles. The program business is a leader in providing national insurance programs to niche industries including ski resorts, auto dealers, recycling, environmental, and specialty workers’ compensation.
 
•  Willis Capital Markets and Advisory Services
Willis Capital Markets and Advisory Services was established in 2009 to provide advice to insurance and reinsurance companies on a broad array of capital markets products and mergers and acquisitions.



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International
 
Our International business unit comprises our operations in Eastern and Western Europe, the United Kingdom and Ireland, Asia-Pacific, Russia, the Middle East, South Africa and Latin America.
 
Our offices provide services to businesses locally in over 100 countries around the world, making use of skills, industry knowledge and expertise available elsewhere in the Group.
 
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, specialist and reinsurance brokerage and employee benefits consulting.
 
We target large accounts and middle market clients. Recent global market conditions have resulted in excellent opportunities to recruit talented teams and individuals from the competition with new and complementary skills and relationships. Our Shaping Our Future initiative is delivering a range of efficiency and growth focused actions aimed at being the leading broker for customer service and providing a platform for sustainable and market leading growth. This includes the implementation of new client administration technology.
 
We believe the combined total revenues of our International subsidiaries and associates provide an indication of the spread and capability of our International network. The team generated over 30 percent of the Group’s total consolidated commissions and fees in 2009.
 
•  Emerging Markets
We have identified high growth markets across all International practice areas. These encompass the fast-developing, high growth regions of Eastern Europe, Russia, Asia (excluding Japan), the Middle East and South Africa. We bring particular capabilities and scale in energy, construction, marine and aerospace to these regions.
 
•  Global Markets International
Global Markets International work closely with our Global business segment to further develop access for our retail clients to global markets, and provide structuring and placing skills in the relevant areas of property, casualty, terrorism, accident & health, facultative and captives.

As part of our on-going strategy, we look for opportunities to strengthen our International market share through acquisitions and strategic investments. We have acquired a controlling interest in a broad geographic spread of other brokers — a list of the significant International subsidiaries is included in Exhibit 21.1 to this document.
 
We have also invested in associate companies; our significant associates at December 31, 2009 were GS & Cie Groupe (‘Gras Savoye’), France (31 percent holding) and Al-Futtaim Willis Co. LLC, Dubai (49 percent holding). In connection with many of our investments we retain the right to increase our ownership over time, typically to a majority or 100 percent ownership position. In addition, in certain instances our co-shareholders have a right, typically based on some price formula of revenues or earnings, to put some or all of their shares to us. On December 17, 2009 as part of a reorganization of the share capital of Gras Savoye our interest in that company reduced from 48 percent to 31 percent. In addition, we have the option to acquire a 100 percent interest in the capital of Gras Savoye in 2015. For further information on the Gras Savoye capital reorganization see ‘Item 8 — Financial Statements and Supplementary Data — Note 15 — Investments in Associates.’
 
Customers
 
Our clients operate on a global and local scale in a multitude of businesses and industries throughout the world and generally range in size from major multinational corporations to middle-market companies. Further, many of our client relationships span decades, for instance our relationship with The Tokio Marine and Fire Insurance Company Limited dates back over 100 years. No one client accounted for more than 10 percent of revenues for fiscal year 2009. Additionally, we place insurance with over 5,000 insurance carriers, none of which individually accounted for more than 10 percent of the total premiums we placed on behalf of our clients in 2009.
 
Competition
 
We face competition in all fields in which we operate based on global capability, product breadth, innovation, quality of service and price. According to the Directory of Agents and Brokers published by Business Insurance in July 2009, the 150 largest



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commercial insurance brokers globally reported brokerage revenues totaling $40 billion in 2008, of which Marsh & McLennan Companies Inc. had approximately 29 percent, Aon Corporation had approximately 18 percent and Willis had approximately 8 percent.
 
We compete with Marsh & McLennan and Aon as well as with numerous specialist, regional and local firms.
 
Insurance companies also compete with brokers by directly soliciting insureds without the assistance of an independent broker or agent.
 
Competition for business is intense in all our business lines and in every insurance market. Competition on premium rates has also exacerbated the pressures caused by a continuing reduction in demand in some classes of business. For example, rather than purchase additional insurance through brokers, many insureds have been retaining a greater proportion of their risk portfolios than previously. Industrial and commercial companies are increasingly relying upon captive insurance companies, self-insurance pools, risk retention groups, mutual insurance companies and other mechanisms for funding their risks, rather than buying insurance.
 
Additional competitive pressures arise from the entry of new market participants, such as banks, accounting firms and insurance carriers themselves, offering risk management or transfer services.
 
In 2005, we, along with Marsh & McLennan and Aon, agreed to implement certain business reforms which included codification of our voluntary termination of contingent commission arrangements with insurers. However, most other special, regional and local insurance brokers continued to accept contingent compensation and did not disclose the compensation received in connection with providing policy placement services to its customers. In February 2010, we 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 which ended many of the requirements previously imposed upon us. The new agreement no longer limits the type of compensation we can receive and lowers the compensation disclosure requirements we must make to our clients.

Our position is to refuse to accept contingent commissions from carriers in our retail brokerage business. We seek to increase revenue through higher commissions and fees that we disclose to our clients, and to generate profitable revenue growth by focusing on the provision of value-added risk advisory services beyond traditional brokerage activities. Although we continue to believe in the success of our strategy, we cannot be certain that such steps will help us to continue to generate profitable organic revenue growth.
 
Regulation
 
Our business activities are subject to legal requirements and governmental and quasi-governmental regulatory supervision in virtually all countries in which we operate. Also, such regulations may require individual or company licensing to conduct our business activities. While these requirements may vary from location to location they are generally designed to protect our clients by establishing minimum standards of conduct and practice, particularly regarding the provision of advice and product information as well as financial criteria.
 
United States
 
Our activities in connection with insurance brokerage services within the United States are subject to regulation and supervision by state authorities. Although the scope of regulation and form of supervision may vary from jurisdiction to jurisdiction, insurance laws in the United States are often complex and generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. That supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling and investment of client funds held in a fiduciary capacity. Our continuing ability to provide insurance brokerage in the jurisdictions in which we currently operate is dependent upon our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions.
 
European Union
 
The European Union Insurance Mediation Directive introduced rules to enable insurance and reinsurance intermediaries to operate and provide services within each member state of the EU on a basis



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consistent with the EU single market and customer protection aims. Each EU member state in which we operate is required to ensure that the insurance and reinsurance intermediaries resident in their country are registered with a statutory body in that country and that each intermediary meets professional requirements in relation to their competence, good repute, professional indemnity cover and financial capacity.
 
United Kingdom
 
In the United Kingdom, the statutory body is the Financial Services Authority (‘FSA’). The FSA has prescribed the methods by which our insurance and reinsurance operations are to conduct business, and has a wide range of rule-making, investigatory and enforcement powers aimed at meeting its overall aim of promoting efficient, orderly and fair markets and helping retail consumers achieve a fair deal. The FSA conducts monitoring visits to assess our compliance with regulatory requirements.
 
Certain of our activities are governed by other regulatory bodies, such as investment and securities licensing authorities. In the United States, Willis Capital Markets operates through our wholly-owned subsidiary Willis Securities, Inc., a US-registered broker-dealer and investment advisor, member FINRA/SIPC, primarily in connection with investment banking-related services and advising on alternative risk financing transactions. Willis Capital Markets provides advice on securities or investments in the EU through our wholly-owned

subsidiary Willis Structured Financial Solutions Limited, which is authorized and regulated by the FSA.
 
Our failure, or that of our employees, to satisfy the regulators that we are in compliance with their requirements or the legal requirements governing our activities, can result in disciplinary action, fines, reputational damage and financial harm.
 
All companies carrying on similar activities in a given jurisdiction are subject to regulations which are not dissimilar to the requirements for our operations in the United States and United Kingdom. We do not consider that these regulatory requirements adversely affect our competitive position.
 
See Part I, Item 1A — Risk Factors ‘Legal and Regulatory Risks’ for discussion of how actions by regulatory authorities or changes in legislation and regulation in the jurisdictions in which we operate may have an adverse effect on our business.
 
Employees
 
As of December 31, 2009 we had approximately 17,000 employees worldwide of whom approximately 3,500 were employed in the United Kingdom and 6,700 in the United States, with the balance being employed across the rest of the world. In addition, our associates had approximately 3,200 employees, all of whom were located outside the United Kingdom and the United States.
 



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Item 1A — Risk Factors
 

Risks Relating to our Business and the Insurance Industry
 
This section describes material risks affecting the Group’s business. These risks could materially affect the Group’s business, its revenues, operating income, net income, net assets, liquidity and capital resources and ability to achieve its financial targets and, accordingly should be read in conjunction with any forward-looking statements in this Annual Report on Form 10-K.
 
Competitive Risks
 
Worldwide economic conditions could have an adverse effect on our business.
 
Our business and operating results are materially affected by worldwide economic conditions. Current global economic conditions coupled with declining customer and business confidence, increasing energy prices, and other challenges, may have a significant negative impact on the buying behavior of some of our clients as their businesses suffer from these conditions. In particular, financial institutions, construction, aviation, and logistics businesses such as marine cargo are most likely to be affected. Further, the global economic downturn is also negatively affecting some of the international economies that have supported the strong growth in our International operations. Our employee benefits practice may also be adversely affected as businesses continue to downsize during this period of economic turmoil. In addition, a growing number of insolvencies associated with an economic downturn, especially insolvencies in the insurance industry, could adversely affect our brokerage business through the loss of clients or by hampering our ability to place insurance and reinsurance business. While it is difficult to predict consequences of any further deterioration in global economic conditions on our business, any significant reduction or delay by our clients in purchasing insurance or making payment of premiums could have a material adverse impact on our financial condition and results of operations.
 
The potential for a significant insurer to fail or withdraw from writing certain lines of insurance coverages that we offer our clients could negatively impact overall capacity in the industry, which could then reduce the placement of certain lines and types of insurance and reduce our revenues and

profitability. The potential for an insurer to fail could also result in errors and omissions claims by clients.
 
Since 2008, we have launched certain initiatives, such as Right Sizing Willis and Shaping Our Future, to achieve cost-savings or fund our future growth plans. In light of the global economic uncertainty, we continue to vigorously manage our cost base in order to fund further growth initiatives, but we cannot be certain whether we will be able to realize any further benefits from these initiatives or any new initiatives that we may implement.
 
We do not control the premiums on which our commissions are based, and volatility or declines in premiums may seriously undermine our profitability.
 
We derive most of our revenues from commissions and fees for brokerage and consulting services. We do not determine insurance premiums on which our commissions are generally based. Premiums are cyclical in nature and may vary widely based on market conditions. From the late 1980s through late 2000, insurance premium rates generally declined as a result of a number of factors, including the expanded underwriting capacity of insurance carriers; consolidation of both insurance intermediaries and insurance carriers; and increased competition among insurance carriers. From 2000 to 2003, we benefitted from a ‘hard’ market with premium rates stable or increasing. During 2004, we saw a rapid transition from a hard market, with premium rates stable or increasing, to a ‘soft’ market, with premium rates falling in most markets. The soft market continued to have an adverse impact on our commission revenues and operating margin from 2005 through 2008. 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 continued into 2008 with further premium rate declines averaging 10 percent across our market sectors. 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 Irish retail operations have been particularly impacted by the



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weakened economic climate and continued soft market with no material improvement in rates across most sectors. This has resulted in declines in 2009 revenues in these operations, particularly amongst our smaller clients who are especially vulnerable to the economic downturn.
 
In addition, as traditional risk-bearing insurance carriers continue to outsource the production of premium revenue to non-affiliated agents or brokers such as ourselves, those insurance carriers may seek to reduce further their expenses by reducing the commission rates payable to those insurance agents or brokers. The reduction of these commission rates, along with general volatility and/or declines in premiums, may significantly undermine our profitability.
 
Competition in our industry is intense, and if we are unable to compete effectively, we may suffer lower revenue, reduced operating margins and lose market share which could materially and adversely affect our business.
 
We face competition in all fields in which we operate, based on global capability, product breadth, innovation, quality of service and price. We compete with Marsh & McLennan and Aon, the two other providers of global risk management services, as well as with numerous specialist, regional and local firms. Competition for business is intense in all our business lines and in every insurance market, and the other two providers of global risk management services have substantially greater market share than we do. Competition on premium rates has also exacerbated the pressures caused by a continuing reduction in demand in some classes of business. For example, rather than purchase additional insurance through brokers, many insureds have been retaining a greater proportion of their risk portfolios than previously. Industrial and commercial companies have been increasingly relying upon their own subsidiary insurance companies, known as captive insurance companies, self-insurance pools, risk retention groups, mutual insurance companies and other mechanisms for funding their risks, rather than buying insurance. Additional competitive pressures arise from the entry of new market participants, such as banks, accounting firms and insurance carriers themselves, offering risk management or transfer services.
 
In 2005, we, along with Marsh McLennan and Aon, agreed to implement certain business reforms which included codification of our voluntary termination

of contingent commission arrangements with insurers. However, most other special, regional and local insurance brokers continued to accept contingent compensation and did not disclose the compensation received in connection with providing policy placement services to its customers. In February 2010, we 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 which ended many of the requirements previously imposed upon us. The new agreement no longer limits the type of compensation we will receive and lowers the compensation disclosure requirements we must make to our clients.
 
Our position is to refuse to accept contingent commissions from carriers in our retail brokerage business. We seek to increase revenue through higher commissions and fees that we disclose to our clients, and to generate profitable revenue growth by focusing on the provision of value-added risk advisory services beyond traditional brokerage activities. Although we continue to believe in the success of our strategy, we cannot be certain that such steps will help us to continue to generate profitable organic revenue growth. If we are unable to compete effectively against our competitors who are or may accept contingent commissions, we may suffer lower revenue, reduced operating margins and loss of market share which could materially and adversely affect our business.
 
Dependence on Key Personnel — The loss of our Chairman and Chief Executive Officer or a number of our senior management or a significant number of our brokers could significantly impede our financial plans, growth, marketing and other objectives.
 
The loss of our Chairman and Chief Executive Officer or a number of our senior management or a significant number of our brokers could significantly impede our financial plans, growth, marketing and other objectives. Our success depends to a substantial extent not only on the ability and experience of our Chairman and Chief Executive Officer, Joseph J. Plumeri and other members of our senior management, but also on the individual brokers and teams that service our clients and maintain client relationships. The insurance and reinsurance brokerage industry has in the past experienced intense competition for the services of



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leading individual brokers and brokerage teams, and we have lost key individuals and teams to competitors. We believe that our future success will depend in part on our ability to attract and retain additional highly skilled and qualified personnel and to expand, train and manage our employee base. We may not continue to be successful in doing so because the competition for qualified personnel in our industry is intense.
 
Legal and Regulatory Risks
 
Our compliance systems and controls cannot guarantee that we are in compliance with all potentially applicable federal and state or foreign laws and regulations, and actions by regulatory authorities or changes in legislation and regulation in the jurisdictions in which we operate may have an adverse effect on our business.
 
Our activities are subject to extensive regulation under the laws of the United States, the United Kingdom and the European Union and its member states, and the other jurisdictions in which we operate. Compliance with laws and regulations that are applicable to our operations is complex and may increase our cost of doing business. These laws and regulations include insurance industry regulations, economic and trade sanctions and laws against financial crimes such as money laundering, bribery or other corruption, such as the U.S. Foreign Corrupt Practices Act. In most jurisdictions, governmental and regulatory authorities have the authority to interpret or amend these laws and regulations and could impose penalties for non-compliance, including sanctions or civil remedies, fines, injunctions, loss of an operating license or approval, the suspension of individual employees, limitations on engaging in a particular business or redress to clients.
 
Given the increase in focus and developments in these laws over the last few years in general, and the interest expressed by UK and US regulators in the effectiveness of compliance controls relating to financial crime in our market sector in particular, we began a voluntary internal review of our policies and controls three years ago. This ongoing review includes analysis and advice from external experts on best practices, review of public regulatory decisions, and ongoing discussions with government regulators in the UK and US. We believe our compliance policies, controls and programs are

effective and we make all reasonable efforts to comply with all applicable laws and regulations, but given the complex nature of these laws and regulations, we cannot assure the complete adequacy of our policies and controls or that at all times we have been or are in compliance with all applicable laws and regulations or interpretations of these laws and regulations. The cost of compliance or the consequences of non-compliance could adversely affect our business and results of operations and expose us to negative publicity, reputational damage or harm to our client or employee relationships.
 
Our business, results of operations, financial condition or liquidity may be materially adversely affected by actual and potential claims, lawsuits, investigations and proceedings.
 
We are subject to various actual and potential claims, lawsuits, investigations 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. Because we often assist our clients with matters, including the placement of insurance coverage and the handling of related claims, involving substantial amounts of money, errors and omissions claims against us may arise which allege our potential liability for all or part of the amounts in question. Claimants can seek large damage awards and these claims can involve potentially significant defense costs. Such claims, lawsuits and other proceedings could, for example, include allegations of damages for our employees or sub-agents improperly failing to place coverage or notify claims on behalf of clients, to provide insurance carriers with complete and accurate information relating to the risks being insured or to appropriately apply funds that we hold for our clients on a fiduciary basis. 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, we have established provisions against these items which we believe to be adequate in the light of current information and legal advice, and we adjust such provisions from time to time according to developments. Our business, results of operations, financial condition and liquidity may be



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adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liabilities for which we self-insure. Our ability to obtain professional indemnity insurance in the amounts and with the deductibles we desire in the future may be adversely impacted by general developments in the market for such insurance or our own claims experience.
 
We are also subject to actual and potential claims, lawsuits, investigations and proceedings outside of errors and omissions claims. The material actual or potential claims, lawsuits and proceedings to which we are currently subject, including but not limited to errors and omissions claims, are: (1) legal proceedings and investigations relating to contingent commission arrangements, ‘bid rigging’ and ‘tying’; (2) potential claims arising out of various legal proceedings between reinsurers, reinsureds and their reinsurance brokers relating to personal accident excess of loss reinsurance placements for the years 1993 to 1998; (3) potential damages arising out of a court action, on behalf of a purported class of present and former female officer and officer equivalent employees for alleged discrimination against them on the basis of their gender; (4) claims with respect to our placement of property and casualty insurance for a number of entities which were directly impacted by the September 11, 2001 destruction of New York’s World Trade Center complex; and (5) claims relating to the collapse of The Stanford Financial Group, for which we acted as brokers of record on certain lines of insurance.
 
The ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on us. It is thus possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters. In addition, these matters continue to divert management and personnel resources away from operating our business. Even if we do not experience significant monetary costs, there may also be adverse publicity associated with these matters that could result in reputational harm to the insurance brokerage industry in general or to us in particular that may adversely affect our business, client or employee relationships.

Interruption to or loss of our information processing capabilities or failure to effectively maintain and upgrade our information processing systems could cause material financial loss, loss of human resources, regulatory actions, reputational harm or legal liability.
 
Our business depends significantly on effective information systems. Our capacity to service our clients relies on effective storage, retrieval, processing and management of information. Our information systems also rely on the commitment of significant resources to maintain and enhance existing systems and to develop new systems in order to keep pace with continuing changes in information processing technology or evolving industry and regulatory standards. The acquisition of HRH and additional information systems has added to this exposure. If the information we rely on to run our business were found to be inaccurate or unreliable or if we fail to maintain effective and efficient systems (either through a telecommunications failure, if we fail to replace redundant or obsolete computer applications or software systems or if we experience other disruptions), this could result in material financial loss, regulatory action, reputational harm or legal liability.
 
Our inability to successfully recover should we experience a disaster or other significant disruption to business continuity could have a material adverse effect on our operations.
 
Our ability to conduct business may be adversely affected, even in the short-term, by a disruption in the infrastructure that supports our business and the communities where we are located. This may include a disruption caused by restricted physical site access, terrorist activities, disease pandemics, or outages to electrical, communications or other services used by our company, our employees or third parties with whom we conduct business. Although we have certain disaster recovery procedures in place and insurance to protect against such contingencies, such procedures may not be effective and any insurance or recovery procedures may not continue to be available at reasonable prices and may not address all such losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide services. Our inability to successfully recover should we experience a disaster or other



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significant disruption to business continuity could have a material adverse effect on our operations.
 
Improper disclosure of personal data could result in legal liability or harm our reputation.
 
One of our significant responsibilities is to maintain the security and privacy of our clients’ confidential and proprietary information and the personal data of their employees. We maintain policies, procedures and technological safeguards designed to protect the security and privacy of this information in our database. However, we cannot entirely eliminate the risk of improper access to or disclosure of personally identifiable information. Our technology may fail to adequately secure the private information we maintain in our databases and protect it from theft or inadvertent loss. In such circumstances, we may be held liable to our clients, which could result in legal liability or impairment to our reputation resulting in increased costs or loss of revenue. Further database privacy, identity theft, and related computer and internet issues are matters of growing public concern and are subject to frequently changing rules and regulations. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace.
 
Financial Risks
 
We face certain risks associated with any acquisition or disposition of business or reorganization of existing investments.
 
In pursuing our corporate strategy, we may acquire or dispose of or exit businesses or reorganize existing investments. The success of this strategy is dependent upon our ability to identify appropriate opportunities, negotiate transactions on favorable terms and ultimately complete such transactions. Once we complete acquisitions or reorganizations, such as the HRH acquisition or Gras Savoye transaction, there can be no assurance that we will realize the anticipated benefits of any transaction, including revenue growth, operational efficiencies or expected synergies. For example, if we fail to recognize some or all of the strategic benefits and synergies expected from the HRH transaction, goodwill and intangible assets may be impaired in future periods. In addition, we may not be able to integrate acquisitions successfully into our existing business, and we could incur or assume unknown or

unanticipated liabilities or contingencies, which may impact our results of operations. If we dispose of or otherwise exit certain businesses, there can be no assurance that we will not incur certain disposition related charges, or that we will be able to reduce overheads related to the divested assets.
 
Our outstanding debt could adversely affect our cash flows and financial flexibility.
 
As of December 31, 2009, we had total consolidated debt outstanding of approximately $2.4 billion and our 2009 interest expense of $174 million is $69 million higher than in 2008. Although management believes that our cash flows will be more than adequate to service this debt, there may be circumstances in which required payments of principal and/or interest on this debt could adversely affect our cash flows and this level of indebtedness may:
 
•  require us to dedicate a significant portion of our cash flow from operations to payments on our debt, thereby reducing the availability of cash flow to fund capital expenditures, to pursue other acquisitions or investments in new technologies, to pay dividends and for general corporate purposes;
 
•  increase our vulnerability to general adverse economic conditions, including if we borrow at variable interest rates, which makes us vulnerable to increases in interest rates generally;
 
•  limit our flexibility in planning for, or reacting to, changes or challenges relating to our business and industry; and
 
•  put us at a competitive disadvantage against competitors who have less indebtedness or are in a more favorable position to access additional capital resources.
 
The terms of our current financings also include certain limitations. For example, the agreements relating to the debt arrangements and credit facilities contain numerous operating and financial covenants, including requirements to maintain minimum ratios of consolidated adjusted EBITDA to consolidated fixed charges and maximum levels of consolidated funded indebtedness in relation to consolidated EBITDA, in each case subject to certain adjustments.
 
A failure to comply with the restrictions under our credit facilities and outstanding notes could result in a default under the financing obligations or could



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require us to obtain waivers from our lenders for failure to comply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could cause our obligations with respect to our debt to be accelerated and have a material adverse effect on our business, financial condition or results of operations.
 
Our pension liabilities may increase which could require us to make additional cash contributions to our pension plans.
 
We have two principal defined benefit plans: one in the United Kingdom and the other in the United States. Cash contributions of approximately $122 million will be required in 2010 for our pension plans, although we may elect to contribute more. Total cash contributions to these defined benefit pension plans in 2009 were $74 million. Future estimates are based on certain assumptions, including discount rates, interest rates, fair value of assets and expected return on plan assets. Following changes to UK pension legislation in 2005, we are now required to agree to a funding strategy for our UK defined benefit plan with the plan’s trustees. In February 2009, we agreed to make full year contributions to the UK plan of $40 million for 2009 through 2012, excluding those contributions made under our salary sacrifice scheme. In addition, as certain funding targets have not been met at the beginning of 2010, a further contribution of $40 million is required for 2010. A similar, additional contribution may also be required for 2011, depending on actual performance against funding targets at the beginning of 2011. We have taken actions to manage our pension liabilities, including closing our UK and US plans to new participants and restricting final pensionable salaries.
 
The determinations of pension expense and pension funding are based on a variety of rules and regulations. Changes in these rules and regulations could impact the calculation of pension plan liabilities and the valuation of pension plan assets. They may also result in higher pension costs, additional financial statement disclosure, and accelerate and increase the need to fully fund our pension plans. Our future required cash contributions to our US and UK defined benefit pension plans may increase based on the funding reform provisions that were enacted into law. Further, a significant decline in the value of

investments that fund our pension plan, if not offset or mitigated by a decline in our liabilities, may significantly differ from or alter the values and actuarial assumptions used to calculate our future pension expense and we could be required to fund our plan with significant amounts of cash. In addition, if the US Pension Benefit Guaranty Corporation requires additional contributions to such plans or if other actuarial assumptions are modified, our future required cash contributions could increase. The need to make these cash contributions may reduce the cash available to meet our other obligations, including the payment obligations under our credit facilities and other long-term debt, or to meet the needs of our business.
 
In addition to the critical assumptions described above, our plans use certain assumptions about the life expectancy of plan participants and surviving spouses. Periodic revision of those assumptions can materially change the present value of future benefits and therefore the funded status of the plans and the resulting periodic pension expense. Changes in our pension benefit obligations and the related net periodic costs or credits may occur in the future due to any variance of actual results from our assumptions and changes in the number of participating employees. As a result, there can be no assurance that we will not experience future decreases in stockholders equity, net income, cash flow and liquidity or that we will not be required to make additional cash contributions in the future beyond those which have been estimated.
 
We could incur substantial losses if one of the financial institutions we use in our operations failed.
 
The deterioration of the global credit and financial markets has created challenging conditions for financial institutions, including depositories. As the fallout from the credit crisis persists, the financial strength of these institutions may continue to decline. We maintain cash balances at various US depository institutions that are significantly in excess of the US Federal Deposit Insurance Corporation insurance limits. We also maintain cash balances in foreign financial institutions. If one or more of the institutions in which we maintain significant cash balances were to fail, our ability to access these funds might be temporarily or permanently limited, and we could face a material liquidity problem and potentially material financial losses.



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A downgrade in the credit ratings of our outstanding debt may adversely affect our borrowing costs and financial flexibility.
 
A downgrade in the credit ratings of our debt would increase our borrowing costs and reduce our financial flexibility. In addition, certain downgrades would trigger a step-up in interest rates under the indenture for our 6.2% senior notes due 2017 and our 7.0% senior notes due 2019, which would increase our interest expense. If we need to raise capital in the future, any credit rating downgrade could negatively affect our financing costs or access to financing sources.
 
International Risks
 
Our significant non-US operations, particularly our London market operations, expose us to exchange rate fluctuations and various risks that could impact our business.
 
A significant portion of our operations is conducted outside the United States. Accordingly, we are subject to legal, economic and market risks associated with operating in foreign countries, including devaluations and fluctuations in currency exchange rates; imposition of limitations on conversion of foreign currencies into pounds sterling or dollars or remittance of dividends and other payments by foreign subsidiaries; hyperinflation in certain foreign countries; imposition or increase of investment and other restrictions by foreign governments; and the requirement of complying with a wide variety of foreign laws.
 
We report our operating results and financial condition in US dollars. Our US operations earn revenue and incur expenses primarily in US dollars. In our London market operations, however, we earn revenue in a number of different currencies, but expenses are almost entirely incurred in pounds sterling. Outside the United States and our London market operations, we predominantly generate revenue and expenses in the local currency. The table gives an approximate analysis of revenues and expenses by currency in 2009.
 
                                 
    US
  Pounds
      Other
    Dollars   Sterling   Euros   currencies
 
Revenues
    60%       10%       14%       16%  
Expenses
    59%       20%       7%       14%  
 
Because of devaluations and fluctuations in currency exchange rates or the imposition of limitations on conversion of foreign currencies into US dollars, we

are subject to currency translation exposure on the profits of our operations, in addition to economic exposure. Furthermore, the mismatch between pounds sterling revenues and expenses, together with any net sterling balance sheet position we hold in our US dollar denominated London market operations, creates an exchange exposure.
 
For example, as the pound sterling strengthens, the US dollars required to be translated into pounds sterling to cover the net sterling expenses increase, which then causes our results to be negatively impacted. Our results may also be adversely impacted if we are holding a net sterling position in our US dollar denominated London market operations: if the pound sterling weakens any net sterling asset we are holding will be less valuable when translated into US dollars. Given these facts, the strength of the pound sterling relative to the US dollar has in the past had a material negative impact on our reported results. This risk could have a material adverse effect on our business financial condition, cash flow and results of operations in the future.
 
Where possible, we hedge part of our operating exposure to exchange rate movements, but such mitigating attempts may not be successful.
 
In conducting our businesses around the world, we are subject to political, economic, legal, market, nationalization, operational and other risks that are inherent in operating in many countries.
 
In conducting our businesses and maintaining and supporting our global operations, we are subject to political, economic, legal, market, nationalization, operational and other risks. Our businesses and operations are increasingly expanding into new regions throughout the world, including emerging markets, and we expect this trend to continue. The possible effects of economic and financial disruptions throughout the world could have an adverse impact on our businesses. These risks include:
 
•  the general economic and political conditions in foreign countries, for example, the recent devaluation of the Venezuelan Bolivar;
 
•  the imposition of controls or limitations on the conversion of foreign currencies or remittance of dividends and other payments by foreign subsidiaries;



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•  imposition of withholding and other taxes on remittances and other payments from subsidiaries;
 
•  imposition or increase of investment and other restrictions by foreign governments;
 
•  difficulties in controlling operations and monitoring employees in geographically dispersed locations; and
 
•  the potential costs and difficulties in complying, or monitoring compliance, with a wide variety of foreign laws (some of which may conflict with US or other sources of law), laws and regulations applicable to US business operations abroad, including rules relating to trade sanctions administered by the US Office of Foreign Assets Control, the EU, the UK and the UN, and the requirements of the US Foreign Corrupt Practices Act as well as other anti-bribery and corruption rules and requirements in the countries in which we operate.
 
Legislative and regulatory action could materially and adversely affect us and our effective tax rate may increase.
 
There is uncertainty regarding the tax policies of the jurisdictions where we operate (which include the potential legislative actions described below), and our effective tax rate may increase and any such increase may be material. Additionally, the tax laws of Ireland and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate. For example, legislative action may be taken by the US Congress which, if ultimately enacted, could override tax treaties upon which we rely or could broaden the circumstances under which we would be considered a US resident, each of which could materially and adversely affect our effective tax rate and cash tax position. We cannot predict the outcome of any specific legislative proposals. However, if proposals were enacted that had the effect of limiting our ability to take advantage of tax treaties between Ireland and other jurisdictions (including the US), we could be subjected to increased taxation. In

addition, any future amendments to the current income tax treaties between Ireland and other jurisdictions could subject us to increased taxation.
 
Irish law differs from the laws in effect in the United States and may afford less protection to holders of our securities.
 
It may not be possible to enforce court judgments obtained in the United States against us in Ireland based on the civil liability provisions of the US federal or state securities laws. In addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of US courts obtained against us or our directors or officers based on the civil liabilities provisions of the US federal or state securities laws or hear actions against us or those persons based on those laws. We have been advised that the United States currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any US federal or state court based on civil liability, whether or not based solely on US federal or state securities laws, would not be directly enforceable in Ireland.
 
As an Irish company, Willis Group Holdings is governed by the Irish Companies Acts, which differ in some material respects from laws generally applicable to US corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or officers of the company and may exercise such rights of action on behalf of the Company only in limited circumstances. Accordingly, holders of Willis Group Holdings securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in a jurisdiction of the United States.
 


Item 1B — Unresolved Staff Comments
 
 

The Company had no unresolved comments from the SEC’s staff.

 
 



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Item 2 — Properties
 

We own and lease a number of properties for use as offices throughout the world and believe that our properties are generally suitable and adequate for the purposes for which they are used. The principal properties are located in the United Kingdom and the United States. Willis maintains over 4.1 million square feet of space worldwide.
 
London
 
In London we occupy a prime site comprising 491,000 square feet spread over a 28 story tower and adjoining 10 story building. We have a 25-year lease on this property, which expires June 2032 and we sub-let the 10-story adjoining building.
 
North America
 
In North America outside of New York and Chicago, we lease approximately 2.0 million square feet over 120 locations. In 2009, we integrated the

HRH branch system and closed or consolidated over 60 branches.
 
New York
 
In New York, we occupy 200,000 square feet of office space at One World Financial Center under a 20 year lease, expiring September 2026.
 
Chicago
 
As part of the HRH integration, we consolidated five offices in Chicago into one 140,000 square feet location leased in the Sears Tower, now renamed the Willis Tower. The lease on this property expires February 2025.
 
Rest of World
 
Outside of North America and London we lease approximately 1.3 million square feet of office space in over 190 locations.
 
 


Item 3 — Legal Proceedings
 
 

Information regarding legal proceedings is set forth in Note 18 ‘Commitments and Contingencies’ to the

Consolidated Financial Statements appearing under Part II, Item 8 of this report.
 
 


Item 4 — Submission of Matters to a Vote of Security Holders
 
 

On December 11, 2009, Willis-Bermuda held a special court-ordered meeting of its shareholders to vote:

 
 
 


 

1.  to approve a scheme of arrangement under Bermuda law pursuant to which shareholders of Willis-Bermuda would own ordinary shares of Willis-Ireland instead common shares of Willis-Bermuda for the purpose of changing the place of incorporation of the parent company of the Group from Bermuda to Ireland; and

2.  to approve the creation of distributable reserves of Willis-Ireland (through the reduction of the entire share premium account of Willis-Ireland or such lesser amount as may be determined by the board of directors of Willis-Ireland) that was previously approved by Willis-Bermuda and the other shareholders of Willis-Ireland.
 
 


The following is the tabulation of votes for each proposal:
 
                                 
Proposal
  Shares Voted For   Shares Votes Against   Shares Abstained   Broker Non-Votes
 
1. Scheme of Arrangement
    139,613,834       186,194       79,940       28,459,187  
2. Distributable Reserves
    139,616,966       184,318       78,685       28,459,187  
 
 


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PART II
 
Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 

Market Information
 
Our shares have been traded on the New York Stock Exchange (‘NYSE’) under the symbol ‘WSH’ since June 11, 2001. The high and low sale prices of our shares, as reported by the NYSE, are set forth below for the periods indicated, including trading of the common shares of Willis-Bermuda through December 31, 2009 and trading of the ordinary shares of Willis Group Holdings after that date.
 
                 
    Price Range
 
    of Shares  
    High     Low  
 
2008:
               
First Quarter
  $ 37.97     $ 30.40  
Second Quarter
  $ 37.35     $ 31.33  
Third Quarter
  $ 35.21     $ 29.76  
Fourth Quarter
  $ 33.59     $ 19.53  
2009:
               
First Quarter
  $ 26.32     $ 18.52  
Second Quarter
  $ 28.50     $ 21.12  
Third Quarter
  $ 28.67     $ 23.88  
Fourth Quarter
  $ 28.54     $ 25.06  
2010:
               
Through February 22, 2010
  $ 28.97     $ 26.07  
 
On February 22, 2010, the last reported sale price of our shares as reported by the NYSE was $28.96 per share. As of February 22, 2010 there were approximately 2,080 shareholders of record of our shares.
 
Dividends
 
We normally pay dividends on a quarterly basis to shareholders of record on March 31, June 30, September 30 and December 31. The dividend payment dates and amounts are as follows:
 
         
Payment Date
  $ Per Share  
 
January 14, 2008
  $ 0.250  
April 14, 2008
  $ 0.260  
July 14, 2008
  $ 0.260  
October 13, 2008
  $ 0.260  
January 16, 2009
  $ 0.260  
April 13, 2009
  $ 0.260  
July 13, 2009
  $ 0.260  
October 12, 2009
  $ 0.260  
January 15, 2010
  $ 0.260  

On February 2, 2010, subject to the Irish High Court approving a reduction of our share capital in order to create distributable reserves, (which under Irish law are required to facilitate the payment of a dividend), and compliance generally with the requirements of the Irish Companies Acts relating to the payment of dividends, our Board of Directors authorized a regular quarterly cash dividend of $0.26 per share, which will be payable on April 16, 2010 to shareholders of record on March 31, 2010.
 
Subject to the above, there are no governmental laws, decrees or regulations in Ireland which will restrict the remittance of dividends or other payments to non-resident holders of the Company’s shares.
 
In circumstances where one of Ireland’s many exemptions from dividend withholding tax (‘DWT’) does not apply, dividends paid by the Company will be subject to Irish DWT (currently 20%). Residents of the US should be exempted from Irish DWT provided relevant documentation supporting the exemption has been put in place. While the US-Ireland Double Tax Treaty contains provisions reducing the rate of Irish DWT in prescribed circumstances, it should generally be unnecessary for US residents to rely on the provisions of this treaty due to the wide scope of exemptions from DWT available under Irish domestic law. Irish income tax may also arise in respect of dividends paid by the Company. However, US residents entitled to an exemption from Irish DWT generally have no Irish income tax liability on dividends. An exception to this position applies where a shareholder holds shares in the Company through a branch or agency in Ireland through which a trade is carried on.
 
With respect to non-corporate US shareholders, certain dividends received before January 1, 2009 from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares that are readily tradable on an established securities market in the United States, such as our shares. Non-corporate US shareholders that do not meet a minimum holding period requirement for our shares during which they are not protected from the risk of loss or that elect to treat the dividend income



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as ‘investment income’ pursuant to section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. Non-corporate US shareholders should consult their own tax advisors regarding the application of these rules given their particular circumstances.
 
Total Shareholder Return
 
The following graph demonstrates a five-year comparison of cumulative total returns for the Company, the S&P 500 and a peer group comprised of the Company, Aon Corporation, Arthur J. Gallagher & Co., Brown & Brown Inc., and Marsh & McLennan Companies, Inc. The comparison charts the performance of $100 invested in the Company, the S&P 500 and the peer group on January 1, 2004, assuming full dividend reinvestment.
 
(CHART)
 
Unregistered Sales of Equity Securities and Use Of Proceeds
 
In addition to issuances disclosed in our quarterly filings throughout 2009 the Company issued a total of 16,119 shares, during the period from October 1, 2009 to December 31, 2009 without registration under the Securities Act of 1933, as amended (the ‘Securities Act’), in reliance upon the exemption under Section 4(2) of the Securities Act relating to sales by an issuer not involving a public offering, none of which involved the sale of more than 1 percent of the outstanding shares.

The following sales of shares related to partial consideration for the acquisition of interests in the following companies to their former shareholders, other than for the company last listed, which related to full consideration for the shares acquired:
 
             
    Number
   
Date of Sale
  of Shares  
Acquisition
 
December 21, 2009
    6,993     MGT Re Corredora de Reaseguros S.A and Newco Brokers S.A
December 21, 2009
    9,126     Burkart Risk Consulting & Partner AG
 
In connection with the Redomicile, Willis-Ireland issued a total of approximately 168,645,200 ordinary shares to holders of Willis-Bermuda common shares immediately prior to the Effective Time. The terms and conditions of the issuance of the securities were sanctioned by the Supreme Court of Bermuda after a hearing upon the fairness of such terms and conditions at which all Willis-Bermuda shareholders had a right to appear and of which adequate notice had been given. The issuance was exempt from the registration requirements of the Securities Act of by virtue of Section 3(a)(10) of the Securities Act.
 
Purchases of Equity Securities by the Issuer And Affiliated Purchasers
 
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.
 
During the year ended December 31, 2009, there were no shares repurchased. At December 31, 2009, $925 million remained under the program for future repurchases.
 
The Company filed a Tender Offer Statement on Schedule TO, dated July 8, 2009 and as amended on July 23, 2009 and August 7, 2009, with the SEC to repurchase for cash options to purchase Company shares. The tender offer expired on August 6, 2009. Approximately 1.6 million options to purchase Company shares were repurchased at an average per share price of $2.04.
 



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Item 6 — Selected Financial Data
 
Selected Historical Consolidated Financial Data
 
The selected consolidated financial data presented below should be read in conjunction with the audited consolidated financial statements of the Company and the related notes and Item 7 — ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ included elsewhere in this report.
 
The selected historical consolidated financial data presented below as of and for each of the five years ended December 31, 2009 have been derived from the audited consolidated financial statements of the Company, which have been prepared in accordance with accounting principles generally accepted in the United States of America (‘US GAAP’).
 
                                         
    Year ended December 31,  
    2005     2006     2007     2008(i)     2009  
    (millions, except per share data)  
 
Statement of Operations Data
                                       
Total revenues
  $ 2,267     $ 2,428     $ 2,578     $ 2,827     $ 3,263  
Operating income
    451       552       620       503       694  
Income from continuing operations before income taxes and interest in earnings of associates
    421       514       554       398       520  
Income from continuing operations
    292       467       426       323       457  
Discontinued operations, net of tax
                      1       2  
Net income attributable to Willis Group Holdings
  $ 281     $ 449     $ 409     $ 303     $ 438  
                                         
Earnings per share on continuing operations — basic
  $ 1.75     $ 2.86     $ 2.82     $ 2.04     $ 2.60  
Earnings per share on continuing operations — diluted
  $ 1.72     $ 2.84     $ 2.78     $ 2.04     $ 2.58  
                                         
Average number of shares outstanding
                                       
— basic
    161       157       145       148       168  
— diluted
    163       158       147       148       169  
                                         
Balance Sheet Data (as of year end)
                                       
Goodwill
  $ 1,507     $ 1,564     $ 1,648     $ 3,275     $ 3,277  
Other intangible assets
    77       92       78       682       572  
Total assets(ii)
    12,194       13,378       12,969       16,402       15,623  
Net assets
    1,281       1,496       1,395       1,895       2,229  
Total long-term debt
    600       800       1,250       1,865       2,165  
Shares and additional paid-in capital
    557       388       41       886       918  
Total stockholders’ equity
    1,256       1,454       1,347       1,845       2,180  
Other Financial Data
                                       
Capital expenditures
  $ 32     $ 55     $ 185     $ 94     $ 96  
Cash dividends declared per share
  $ 0.86     $ 0.94     $ 1.00     $ 1.04     $ 1.04  
 
 
(i) On October 1, 2008, we completed the acquisition of HRH, at the time the eighth largest insurance and risk management intermediary in the United States. The acquisition has significantly enhanced our North America revenues and the combined operations have critical mass in key markets across the US. We recognized goodwill and other intangible assets on the HRH acquisition of approximately $1.6 billion and $651 million, respectively.
 
(ii) As an intermediary, we hold funds in a fiduciary capacity for the account of third parties, typically as a result of premiums received from clients that are in transit to insurance carriers and claims due to clients that are in transit from insurance carriers. We report premiums, which are held on account of, or due from policyholders, as assets with a corresponding liability due to the insurance carriers. Claims held by, or due to, us which are due to clients are also shown as both assets and liabilities of ours. All those balances due or payable are included in accounts receivable and payable on the balance sheet. Investment income is earned on those 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 vary according to legal jurisdiction. These guidelines generally emphasize capital protection and liquidity. Fiduciary cash is not available to service our debt or for other corporate purposes.


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Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

This discussion includes references to non-GAAP financial measures as defined in Regulation G of SEC rules. 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 and year over year movements in foreign exchange from growth in revenues and commissions and fees. We believe organic revenue growth and organic growth in commissions and fees provide a measure 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 Company’s consolidated financial statements for the year ended December 31, 2009.
 
This discussion includes forward-looking statements, including under the headings ‘Business Overview and Market Outlook’, ‘Executive Summary’, ‘Operating Results — Group, Revenues’, ‘Interest in Earnings of Associates’, ‘Operating Results — Segment Information’, ‘Liquidity and Capital Resources’ and ‘Contractual obligations — pensions’. 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.
 
 


REDOMICILE
 
 

On September 24, 2009, Willis-Ireland was incorporated in Ireland to facilitate the redomicile of the Group’s parent company from Bermuda to Ireland. Willis-Ireland operated as a wholly-owned subsidiary of Willis-Bermuda until the Effective Time, when the outstanding common shares of Willis-Bermuda were canceled and Willis-Ireland 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-Ireland replaced Willis-Bermuda as the ultimate parent company of the Group and Willis-Bermuda became a wholly-owned subsidiary of

Willis-Ireland. We do not expect the Redomicile to have a material impact on our financial results. We remain subject to the SEC reporting requirements, the mandates of the Sarbanes-Oxley Act and applicable corporate governance rules of the NYSE, and we continue to report our consolidated financial results in US dollars and in accordance with US GAAP. We also comply with any additional reporting requirements of Irish Law. The shares of Willis-Ireland are traded on the NYSE under the symbol ‘WSH’, the same symbol under which Willis-Bermuda shares traded prior to the Effective Time.
 
 


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.
 
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



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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

continued into 2008 with further premium rate declines averaging 10% across our markets. The soft market had an adverse impact on our commission revenues and operating margin from 2005 through 2008.
 
In 2009, the stabilization of rates in the reinsurance market and 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 Irish retail operations have been particularly impacted by the weakened economic climate and continued soft market with no material improvement in rates across most sectors. This has resulted in declines in 2009 revenues in these operations, particularly amongst our smaller clients who are especially vulnerable to the economic downturn.
 
In 2010, our main priorities will include driving revenue growth, continuing to execute our Shaping Our Future initiative, creating incremental savings to fund growth, completing the HRH integration and leveraging our growth opportunities from our expanded footprint.
 


EXECUTIVE SUMMARY
 
 

Overview
 
Despite the difficult trading conditions in 2009, we reported 2 percent organic growth in commissions and fees in 2009 compared with 2008. This reflected growth in Global operations, in particular in Reinsurance, and many of our International businesses partly offset by a fall in organic commissions and fees in our North America, UK and Irish retail operations where revenues were adversely impacted by the continued soft market and weak economic conditions.
 
Operating margin for full year 2009 was 21 percent compared with 18 percent for 2008. The increase over 2008 was attributable to organic growth in commissions and fees, continuing control of costs and favorable foreign exchange movements, offset by increased pension costs and amortization of intangible assets.

Results from continuing operations: 2009 compared with 2008
 
Net income from continuing operations in 2009 was $436 million, or $2.58 per diluted share, compared with $302 million, or $2.04 per diluted share, in 2008. This increase included organic growth in commissions and fees, a reduction in costs associated with our 2008 expense review from $0.45 per diluted share in 2008 to $0.11 per diluted share for severance costs, in 2009 and a one-time tax release in 2009 relating to a change in UK tax law in 2009 equivalent to $0.16 per diluted share.
 
Total revenues from continuing operations at $3,263 million for 2009 were $436 million, or 15 percent, higher than in 2008. Organic revenue growth of 2 percent and a 19 percent benefit from net acquisitions and disposals in 2009, driven by the fourth quarter 2008 acquisition of HRH, were partly offset by a negative 4 percent impact from foreign currency translation and a $31 million decrease in investment income compared to 2008.



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Organic revenue growth of 2 percent comprised 5 percent net new business growth (which constitutes the revenue growth from business won over the course of the year net of the revenue from existing business lost) and a 3 percent negative impact from declining premium rates and other market factors.
 
Operating margin at 21 percent was 3 percentage points higher than in 2008 with the increase mainly reflecting:
 
•  2 percent organic growth in commissions and fees;
 
•  the realization of savings from prior years’ Shaping Our Future initiatives and disciplined cost control;
 
•  a favorable year over year impact from foreign currency translation, equivalent to 3 percentage points; and
 
•  a $10 million gain from the sale of part of our interest in Gras Savoye;
 
partly offset by
 
•  a $66 million increase in pension costs, mainly driven by lower asset levels in our UK pension plan and excluding the $12 million US curtailment gain and the impact of the UK salary sacrifice scheme;
 
•  a $31 million reduction in investment income; and
 
•  a $64 million increase in the amortization of intangible assets, including additional charges in respect of intangible assets recognized on the HRH acquisition.
 
Results from continuing operations: 2008 compared with 2007
 
Net income from continuing operations in 2008 was $302 million, or $2.04 per diluted share, compared with $409 million, or $2.78 per diluted share, in 2007. The benefits of good organic revenue growth, improved margins in our International and Global operations and a lower effective tax rate were more than offset by a $0.45 per diluted share impact of charges for the 2008 expense review and a $0.27 per diluted share year over year impact from foreign exchange.
 
HRH’s fourth quarter results, net of related funding costs and intangible asset amortization, contributed $0.04 per diluted share. New shares issued as part

consideration for the HRH acquisition had an $0.11 dilutive impact on full year diluted earnings per share.
Total revenues at $2,827 million were $249 million, or 10 percent, higher than in 2007. Organic revenue growth of 4 percent, a 7 percent benefit from net acquisitions and disposals primarily reflecting the HRH acquisition and a 1 percentage point benefit from foreign currency translation were partly offset by lower investment and other income. Organic revenue growth of 4 percent reflected net new business growth of 6 percent and a 2 percent negative impact from declining rates and other market factors.
 
Operating margin at 18 percent in 2008 was 6 percentage points lower than in 2007 with the decrease mainly reflecting:
 
•  the $92 million charge for the 2008 expense review, equivalent to 4 percentage points;
 
•  an adverse year over year impact from foreign currency translation, equivalent to approximately 2 percentage points; and
 
•  a $22 million increase in intangible asset amortization, of which $21 million related to HRH;
 
partly offset by
 
•  increased productivity, with revenues per full time equivalent (‘FTE’) employee increasing to $190,000 in 2008 compared with $186,000 in 2007;
 
•  HRH’s $38 million operating income in fourth quarter 2008, equivalent to 1 percentage point; and
 
•  good cost control, the realization of savings from 2007’s Shaping Our Future initiatives and lower pension costs.
 
Discontinued operations
 
Income from discontinued operations relates to the disposals of our Bliss & Glennon and Managing Agency Group US-based wholesale insurance operations in the second and third quarters of 2009, respectively. There were no net gains or losses recognized on these disposals. These disposals were made as part of our plan to dispose of non-core HRH activities.



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HRH acquisition and integration
 
On October 1, 2008, we completed the acquisition of HRH, at the time the eighth largest insurance and risk management intermediary in the United States.
 
We remain confident that the acquisition of HRH:
 
•  substantially improves our position in key markets such as New York, Atlanta, California, Texas, Chicago, Boston, and Florida;
 
•  greatly strengthens our position as a middle market broker and adds critical mass in the large account, Employee Benefits, small commercial and private client areas; and
 
•  enables our North America operation to deliver enhanced value to clients through a more robust and diversified platform.
 
The integration of HRH with the existing Willis North America business was a key priority throughout 2009 and the process is now substantially complete. We believe that the goals we set for the integration are being successfully met, as we have:
 
•  maintained high producer and client retention levels;
 
•  reduced our expense base through synergies and other cost savings. On a combined basis, we achieved approximately $205 million of cost savings in 2009; and
 
•  for over 90 percent of HRH’s contingent commissions we have either converted them into higher standard commissions or we have reaffirmed with carriers that the existing agreements will remain in force for so long as permitted by the regulatory authorities or until the commissions are converted, whichever occurs first.
 
We recognized goodwill and other intangible assets on the HRH acquisition of approximately $1.6 billion and $0.6 billion, respectively.
 
Gras Savoye
 
In December 2009, we completed a leveraged transaction with the original family shareholders of Gras Savoye and Astorg Partners, a private equity fund, to reorganize the capital of Gras Savoye. As a result of this transaction:
 
•  we received cash proceeds, less costs, of $155 million which we used to pay down debt;

•  we have one-third of the voting rights;
 
•  we reduced our ownership interest from 49 percent to 31 percent;
 
•  we recognized a gain of $10 million on disposal;
 
•  the previous put option exercisable by the Gras Savoye shareholders until 2011 has been eliminated; and
 
•  we have a new call option to acquire a 100 percent interest in Gras Savoye in 2015.
 
We believe that the revised structure enhances our financial flexibility, while at the same time retaining Gras Savoye as a key strategic partner.
 
As a consequence of the reduction in our ownership interest we expect earnings from our associates to be approximately $10 million lower in 2010 compared with 2009.
 
2008 Expense Review, Shaping Our Future and Right Sizing Willis
 
Our Shaping Our Future strategy is a series of initiatives designed to deliver profitable growth. As part of this we have invested in key hires and initiatives in 2008 and 2009 and we have funded these initiatives from a thorough review in 2008 of all businesses to identify additional opportunities to rationalize our expense base.
 
Additionally, in the latter part of 2008 and in light of the global economic uncertainty, we launched Right Sizing Willis to reinforce our cost saving initiatives. Right Sizing Willis initiatives include talent management to either improve or manage out poor performers, location optimization and aggressive reduction of discretionary spending.
 
In 2009 we incurred pre-tax severance costs of $24 million relating to approximately 450 positions which have been eliminated ($17 million net of tax), equivalent to $0.11 per diluted share, in connection with our Right Sizing Willis initiatives.
 
In 2008, we incurred a pre-tax charge of $92 million ($66 million net of tax, equivalent to $0.45 per diluted share) comprising:
 
•  $42 million to buy out remuneration packages that no longer align with the Group’s overall remuneration strategy;
 
•  $24 million of severance costs relating to approximately 350 positions which have been eliminated; and



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•  $26 million of other operating expenses, including property and systems rationalization costs.
 
In light of the current global economic uncertainty, we continue to vigorously manage our cost base in order to fund further growth initiatives. Our current funding for growth initiatives emphasize cost discipline including talent management, location optimization and robust management of discretionary spending.
 
In 2009, we realized approximately $100 million of gross benefits from previous initiatives, including:
 
•  approximately $30 million from global placement, which reflects increased commissions from working closely with our carrier partners;
 
•  approximately $20 million from client profitability, which aims to achieve increased remuneration from our clients in return for the value we deliver; and
 
•  approximately $15 million from a program of initiatives within Reinsurance focused on enhancing our client offering, including implementation of a global sales model, improving service delivery, developing further cutting edge analytical capabilities and hiring of additional production and specialist product resources.
 
Cash and financing
 
Cash at December 31, 2009 was $191 million, $15 million higher than at December 31, 2008.
 
In March 2009, we issued 12.875% senior notes due 2016 in an aggregate principal amount of $500 million to Goldman Sachs Mezzanine Partners which generated net proceeds of $482 million. These proceeds, together with $208 million of cash generated from operating activities and cash in hand, were used to pay down the $750 million outstanding on our interim credit facility as of December 31, 2008.
 
In September 2009, we issued $300 million of 7% senior notes due 2019. We then launched a tender offer on September 22, 2009 to repurchase any and all of our $250 million 5.125% senior notes

due July 2010 at a premium of $27.50 per $1,000 face value. Notes totaling $160 million were tendered and repurchased on September 29, 2009.
 
Total debt, total equity and the capitalization ratio at December 31, 2009 were as follows:
 
                 
    December 31,
    December 31,
 
    2009     2008  
    (millions, except percentages)  
 
Long-term debt
  $ 2,165     $ 1,865  
Short-term debt
    209       785  
                 
Total debt
  $ 2,374     $ 2,650  
                 
Total equity
  $ 2,229     $ 1,895  
                 
Capitalization ratio
    52 %     58 %
                 
 
Liquidity
 
Our principal sources of liquidity are cash from operations, cash and cash equivalents of $191 million at December 31, 2009 and $300 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.
 
Share buybacks
 
The Board has authorized a share buyback program for $1 billion, of which $925 million remains available.
 
In 2008, we repurchased 2.3 million shares at a cost of $75 million. We did not make any repurchases in 2009.
 
We currently target a debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortization) ratio of below 2.5 times. Once we are in a position to remain at or below this ratio, we would consider recommencing our stock buy back program. At December 31, 2009 the actual ratio was 2.6 times. However, there can be no assurance that we will achieve our target debt to EBITDA ratio or recommence our stock buyback program.
 



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OPERATING RESULTS — GROUP
 
Revenues
 
2009 compared with 2008
 
                                                 
                      Change attributable to:  
                      Foreign
    Acquisitions
    Organic
 
                %
    currency
    and
    revenue
 
    2009     2008     change     translation     disposals(i)     growth(i)(ii)  
    (millions)                          
 
Global
  $ 822     $ 784       5 %     (3 )%     4 %     4 %
North America
    1,368       905       51 %     %     54 %     (3 )%
International
    1,020       1,055       (3 )%     (8 )%     1 %     4 %
                                                 
Commissions and fees
  $ 3,210     $ 2,744       17 %     (4 )%     19 %     2 %
                                                 
Investment income
    50       81       (38 )%                        
Other income
    3       2       50 %                        
                                                 
Total revenues
  $ 3,263     $ 2,827       15 %                        
                                                 
 
 
(i) Organic revenue growth excludes the impact of foreign currency translation, the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, market remuneration, including contingent commissions related to the HRH acquisition, investment income and other income from reported revenues.
 
Acquisitions and disposals includes the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, and contingent commissions related to the HRH acquisition.
 
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited.
 
(ii) From fourth quarter 2008, we have changed our methodology for the calculation of organic growth in commissions and fees. Previously, organic growth included growth from acquisitions from the date of acquisition. Under the new method, the first twelve months of commissions and fees generated from acquisitions are excluded from organic growth in commissions and fees.
 

Revenues for 2009 at $3,263 million were $436 million, or 15 percent higher than in 2008, reflecting a 19 percent benefit from net acquisitions and disposals, principally attributable to HRH, and organic growth in commissions and fees of 2 percent, offset by a 4 percent adverse year over year impact from foreign currency translation and lower investment income.
 
Our International and Global operations earn a significant portion of their revenues in currencies other than the US dollar. For the year ended December 31, 2009, reported revenues were adversely impacted by the year over year effect of foreign currency translation: in particular due to the strengthening of the US dollar against the pound sterling and against the euro, compared with 2008.
 
Investment income was $50 million for 2009, $31 million lower than 2008, with the decrease reflecting significantly lower average interest rates

in 2009. The impact of rate decreases on our investment income was partially mitigated by our forward hedging program. In 2009 this generated additional income of $27 million compared with LIBOR based rates. We expect to see a lower benefit from our forward hedging program in 2010.
 
Organic growth in commissions and fees was 2 percent for 2009, despite a negative 3 percent impact from declining premium rates and other market factors. Overall organic growth comprises good growth in our Global operations and many of our International operations, partly offset by declines in our North America, UK and Irish retail operations reflecting the weak economic environments and continuing soft market conditions in these territories. Organic revenue growth by segment is discussed further in ‘Operating Results — Segment Information’ below.
 
 



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2008 compared with 2007
 
                                                 
                      Change attributable to:  
                      Foreign
    Acquisitions
    Organic
 
                %
    currency
    and
    revenue
 
    2008     2007     change     translation     disposals(i)     growth(i)(ii)  
    (millions)                          
 
Global
  $ 784     $ 750       5 %     %     3 %     2 %
North America
    905       751       21 %     %     22 %     (1 )%
International
    1,055       962       10 %     1 %     %     9 %
                                                 
Commissions and fees
  $ 2,744     $ 2,463       12 %     1 %     7 %     4 %
                                                 
Investment income
    81       96       (16 )%                        
Other income
    2       19       (89 )%                        
                                                 
Total revenues
  $ 2,827     $ 2,578       10 %                        
                                                 
 
 
(i) Organic revenue growth excludes the impact of foreign currency translation, the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, market remuneration, including contingent commissions related to the HRH acquisition, investment income and other income from reported revenues.
 
Acquisitions and disposals includes the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, and contingent commissions related to the HRH acquisition.
 
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited.
 
(ii) From fourth quarter 2008, we have changed our methodology for the calculation of organic growth in commissions and fees. Previously, organic growth included growth from acquisitions from the date of acquisition. Under the new method, the first twelve months of commissions and fees generated from acquisitions are excluded from organic growth in commissions and fees.
 

Our 2008 total revenues at $2,827 million were $249 million, or 10 percent, higher than in 2007, reflecting a 7 percent benefit from net acquisitions and disposals, principally attributable to HRH, organic commissions and fee growth of 4 percent and a 1 percent benefit from foreign currency translation, partly offset by lower investment and other income.
 
For the year ended December 31, 2008, reported revenues in International benefited from the year over year weakening of the US dollar against the euro, compared with 2007. However, in our Global operations the revenue line benefit of the stronger euro was offset by sterling weakening against the US dollar, compared with 2007.
 
Investment income was $81 million for 2008, $15 million lower than in 2007, with the decrease reflecting lower average interest rates in 2008.

Other income was $2 million for 2008, $17 million lower than in 2007 which benefited from a higher than usual level of proceeds from the sale of books of business.
 
Organic growth in commissions and fees in 2008 was 4 percent compared with 2007, reflecting:
 
•  net new business growth of 6 percent which comprised good growth in our International and Global Specialties businesses offset by lower revenues in North America and Reinsurance;
 
partly offset by
 
•  a negative 2 percent impact from premium rates and other market factors in 2008. The impact of significant rate decreases in both periods was tempered by the benefit of other market factors, including higher commission rates, client profitability analyses, higher insured values and changes in limits or exposures.
 
 



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General and administrative expenses
 
                         
    2009     2008     2007  
    (millions, except percentages)  
 
Salaries and benefits
  $ 1,827     $ 1,638     $ 1,448  
Other
    595       603       460  
                         
General and administrative expenses
  $ 2,422     $ 2,241     $ 1,908  
                         
Salaries and benefits as a percentage of revenues
    56 %     58 %     56 %
Other as a percentage of revenues
    18 %     21 %     18 %
 

2009 compared with 2008
 
General and administrative expenses at $2,422 million for 2009 were $181 million, or 8 percent, higher than 2008. The increase was mainly attributable to:
 
•  $414 million impact from HRH, equivalent to approximately 18 percentage points; and
 
•  a $66 million increase in pension costs, equivalent to approximately 3 percentage points. This excludes the $12 million US curtailment gain and $8 million due to the introduction of a salary sacrifice scheme in the UK. The increase attributable to the salary sacrifice scheme was marginally more than offset by a reduction in salaries and payroll taxes;
 
partly offset by
 
•  a year over year benefit from foreign currency translation of $172 million, equivalent to approximately 8 percentage points. This includes the impact of losses on forward contracts being more than offset by gains relating to the significant year over year strengthening of the US dollar against the pound sterling (in which our London market based operations incur the majority of their expenses), and the euro, together with the benefit of lower foreign exchange losses relating to the UK sterling pension asset;
 
•  the $92 million reduction in costs associated with our 2008 expense review, equivalent to 4 percentage points, of which $66 million related to salaries and benefits and $26 million to other expenses; and
 
•  disciplined control of all discretionary costs, with significant savings in travel and entertaining, advertising, printing and a number of other areas.

Salaries and benefits
 
Salaries and benefits were 56 percent of revenues for 2009, compared with 58 percent in 2008 reflecting the benefits of:
 
•  good cost controls, including our previous Shaping Our Future and 2008 expense review initiatives, together with the initial benefits from our Right Sizing Willis initiatives in 2009; and
 
•  a $12 million curtailment gain realized on the closure of our US defined benefit pension plan to accrual of benefit for future service, equivalent to approximately 0.5 percentage points (see below);
 
partly offset by
 
•  a $66 million increase in pension costs, mainly driven by lower asset levels in our UK pension plan and excluding the $12 million US curtailment gain and the impact of the UK salary sacrifice scheme.
 
Effective May 15, 2009, we closed our US defined benefit pension plan to future accrual and recognized a curtailment gain of $12 million in second quarter 2009. As a result the full year 2009 charge for the US plan was $7 million compared with an expected $39 million charge had the plan not been closed to future accrual.
 
We have also suspended the company match for our US 401(k) plan which benefited 2009 by $9 million compared with 2008.
 
UK salary sacrifice scheme
 
With effect from April 2009, the Company offered UK employees an alternative basis on which to fund contributions into the UK pension plans. UK employees can now agree to sacrifice an amount of their salary and in return the Company makes additional pension contributions on their behalf, equivalent to the value of the salary sacrificed.



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From a payroll tax perspective, this is a more efficient method of making pension contributions.
 
As a result of this change, the Company made additional pension contributions of $8 million, with a marginally higher saving in salaries and payroll taxes.
 
Other expenses
 
Other expenses were 18 percent of revenues for 2009 compared with 21 percent in 2008, reflecting the benefit of:
 
•  the non-recurrence of $26 million of costs eliminated by the 2008 expense review, equivalent to 5 percentage points; and
 
•  a reduction in discretionary expenses driven by our Right Sizing Willis initiatives;
 
partly offset by
 
•  foreign currency translation losses of $40 million arising on forward contracts maturing in 2009, compared with losses on the equivalent contracts in 2008 of $12 million.
 
2008 compared with 2007
 
General and administrative expenses at $2,241 million for 2008 were $333 million, or 18 percent, higher than in 2007 of which:
 
•  $135 million, or 7 percentage points, was attributable to the fourth quarter acquisition of HRH;
 
•  $92 million, or 5 percentage points, was attributable to the charge for the 2008 expense review, of which $66 million related to salaries and benefits and $26 million to other expenses; and
 
•  a foreign exchange loss of $68 million, or 4 percentage points, including $34 million related to the revaluation of our UK pension benefits asset together with $23 million relating to sterling purchases to fund the Company’s contributions to the plan.
 
Salaries and benefits
 
Salaries and benefits were 58 percent of 2008 revenues, compared with 56 percent in 2007, with the increase reflecting:
 
•  the $66 million charge relating to the 2008 expense review; and

•  continued hiring in targeted development areas including selected US regions; targeted International growth areas such as Spain, Italy, Denmark and Brazil; and a number of our London specialty businesses;
 
partly offset by
 
•  increased productivity: average revenues per FTE employee were approximately $190,000 in 2008 compared with $186,000 in 2007;
 
•  the benefits of cost controls and previous Shaping Our Future initiatives; and
 
•  a $15 million reduction in pension charges. This decrease was mainly attributable to an increase in the expected return on assets in the UK pension plan reflecting higher opening asset levels due to the significant additional contributions we have made.
 
Other expenses
 
Other expenses were 21 percent of revenues in 2008 compared with 18 percent in 2007, with the increase reflecting:
 
•  $33 million additional other expenses in fourth quarter 2008 as a result of the HRH acquisition, equivalent to approximately 1 percentage point;
 
•  the $26 million charge relating to the 2008 expense review, equivalent to approximately 1 percentage point; and
 
•  a $34 million foreign exchange loss related to the revaluation of our UK pension benefits asset. This asset is a sterling denominated asset but a portion of the asset is held within our UK London market operations, which are US dollar denominated for accounting purposes. As the US dollar strengthened significantly against sterling in 2008, the revaluation of the sterling pension benefit asset gave rise to a foreign exchange loss.
 
We have a program that hedges our sterling cash outflows from our London market operations, a part of which hedges the sterling denominated cash contributions into the UK pension plan. However, we do not hedge against the pension benefits asset or liability recognized for accounting purposes.
 
The effects of the above increases were partly mitigated by the benefits of our continued focus on cost controls.
 



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Amortization of intangible assets
 

Amortization of intangible assets of $100 million in 2009 was $64 million higher than in 2008.
 
The significant year over year increase was primarily attributable to additional charges of $58 million in 2009 in respect of intangible assets recognized on the HRH acquisition, including $7 million of accelerated amortization relating to the HRH brand name. Following the success of our integration of HRH into our previously existing North America operations, we announced on October 1, 2009 that we were changing the name of

our North America operations from Willis HRH to Willis North America. Consequently the intangible asset recognized on the acquisition of HRH relating to the HRH brand name has been fully amortized.
 
Amortization of intangible assets of $36 million in 2008 was $22 million higher than in 2007 with the increase primarily attributable to a $21 million charge in fourth quarter 2008 in respect of intangible assets recognized on the HRH acquisition.
 
 


Operating income and margin (operating income as a percentage of revenues)
 
                         
    2009     2008     2007  
    (millions, except percentages)  
 
Revenues
  $ 3,263     $ 2,827     $ 2,578  
Operating income
    694       503       620  
Operating margin or operating income as a percentage of revenues
    21 %     18 %     24 %
 
 

2009 compared with 2008
 
Operating margin was 21 percent for 2009 compared with 18 percent for 2008. This increase reflected the impact of:
 
•  a reduction in costs associated with our 2008 expense review from $92 million in 2008 to $24 million for severance costs in 2009;
 
•  2 percent organic growth in fees and commissions;
 
•  the $12 million US pension curtailment gain recognized in second quarter 2009; and
 
•  a further improvement in productivity, with revenues per FTE employee increasing to $191,000 in 2009 compared with $190,000 in 2008;
 
partly offset by
 
•  a $66 million increase in pension costs, excluding the $12 million US curtailment gain and the $8 million impact of the UK salary sacrifice scheme discussed above;
 
•  a $64 million increase in amortization of intangible assets, principally attributable to HRH; and
 
•  the $31 million year over year decline in investment income.

2008 compared with 2007
 
Operating margin was 18 percent in 2008 compared with 24 percent in 2007. This decrease reflected the impact of:
 
•  the $92 million charge for the 2008 expense review, equivalent to 4 percentage points;
 
•  a negative 2 percentage point impact from foreign exchange movements;
 
•  a $22 million increase in intangible asset amortization, of which $21 million related to HRH;
 
•  our continued investments in targeted new hires and Shaping Our Future initiatives; and
 
•  lower investment and other income;
 
partly offset by
 
•  increased productivity, with revenues per FTE employee increasing to $190,000 in 2008 compared with $186,000 in 2007;
 
•  a $38 million benefit from the operating income contribution of HRH in the fourth quarter; and
 
•  good cost control, the realization of savings from Shaping Our Future initiatives and lower pension costs.
 
 



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Interest expense
 
                         
    2009     2008     2007  
    (millions)  
 
Interest expense
  $ 174     $ 105     $ 66  
 

Interest expense in 2009 of $174 million was $69 million higher than in 2008. This increase primarily reflects higher average debt levels following the HRH acquisition, but also includes $5 million of premium and costs relating to the early repurchase in September 2009 of $160 million of our 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value.
 
We are currently reviewing opportunities to reduce future interest costs, in the short-term, through a fixed / floating interest rate swap.

Interest expense in 2008 of $105 million was $39 million higher than in 2007. This increase primarily reflects higher average debt levels, and in particular: $18 million additional interest expense relating to the term loan and interim credit facilities connected with the HRH acquisition; a $9 million charge for amortization of debt fees associated with these facilities; and a $9 million additional interest expense in 2008 due to fixed term $600 million senior notes issued in March 2007.
 
 


Income taxes
 
                         
    2009     2008     2007  
    (millions, except percentages)  
 
Income from continuing operations before taxes
  $ 520     $ 398     $ 554  
Income tax charge
    96       97       144  
Effective tax rate
    18 %     24 %     26 %
 
 

2009 compared with 2008
 
The effective tax rate in 2009 was 18 percent compared with 24 percent in 2008. The decrease in rate reflects:
 
•  a $27 million release relating to a 2009 change in tax law. As at June 30, 2009 we held a provision of $27 million relating to tax that would potentially be payable should the unremitted earnings of our foreign subsidiaries be repatriated. Following a change in UK tax law effective in third quarter 2009, these earnings may now be repatriated without additional tax cost and, consequently, the provision has been released; and
 
•  an $11 million release relating to uncertain tax positions due to the closure of the statute of limitations on assessments for previously unrecognized tax benefits. There was a similar $5 million release of uncertain tax positions in 2008.
 
Excluding the benefit of these tax credits, the effective tax rate for 2009 would be 26 percent.

2008 compared with 2007
 
The effective tax rate in 2008 was 24 percent compared with 26 percent in 2007, with the decrease in rate reflecting:
 
•  a change in the geographical mix of profits with a greater proportion of profits being earned outside the United States;
 
•  non-taxable exchange gains arising from the significant movement in the exchange rate between the US dollar and sterling; and
 
•  a decrease in the statutory rate of corporation tax in the UK from 30 percent in 2007 to an effective rate of 28.5 percent in 2008;
 
partly offset by
 
•  the benefit of a $10 million release of uncertain tax provisions in 2007 compared to a $5 million release in 2008. Both 2008 and 2007 benefited from the release of tax provisions relating to prior tax periods following the resolution of tax issues surrounding prior debt refinancing; and
 
•  a one-off benefit of $4 million in 2007 relating to the restatement of the closing UK deferred tax liabilities to reflect the reduced rate of corporation tax applicable on the reversal of those liabilities.
 


 
 


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Interest in earnings of associates
 

Interest in earnings of associates, net of tax, was $33 million in 2009, $11 million higher than in 2008. These increases reflect improved performance and an increased ownership share in Gras Savoye, our largest associate, for most of the year. As described within the ‘Executive Summary’ section above, our interest in Gras Savoye reduced from

49 percent to 31 percent following the reorganization of that company’s capital in December 2009. As a result of this transaction we currently estimate that the interest in earnings of associates will be approximately $10 million lower in 2010 compared with 2009.
 
 


Net income and diluted earnings per share from continuing operations
 
                         
    2009     2008     2007  
    (millions, except percentages)  
 
Net income from continuing operations
  $ 436     $ 302     $ 409  
Diluted earnings per share from continuing operations
  $ 2.58     $ 2.04     $ 2.78  
Average diluted number of shares outstanding
    169       148       147  
 
 

2009 compared with 2008
 
Net income from continuing operations for 2009 was $436 million compared with $302 million in 2008. The $134 million increase primarily reflected the $191 million increase in operating income, discussed above, partly offset by the $69 million increase in interest expense.
 
Diluted earnings per share from continuing operations for 2009 increased to $2.58 compared to $2.04 in 2008 as the benefit of the increased net income was partly offset by a 21 million increase in average diluted shares outstanding due primarily to the shares issued on October 1, 2008 for the HRH acquisition. The additional shares issued had a negative $0.36 impact on earnings per diluted share in 2009.
 
Foreign currency translation had a year over year $0.27 positive impact on earnings per diluted share in 2009.

2008 compared with 2007
 
Net income for 2008 was $302 million, or $2.04 per diluted share, compared to $409 million, or $2.78 per diluted share, in 2007 with the decrease mainly reflecting the impact of:
 
•  the $66 million post-tax charges associated with the 2008 expense review, equivalent to $0.45 per diluted share; and
 
•  a year over year accounting loss of $0.27 per diluted share primarily relating to the retranslation of our sterling denominated UK pension benefits asset;
 
partly offset by
 
•  strong organic revenue growth in 2008;
 
•  a year over year benefit from a lower effective tax rate of $0.09 per diluted share; and
 
•  HRH’s fourth quarter results, net of related funding costs and intangible amortization, contributed $0.04 per diluted share.
 
 


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.
 
 



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The following table is a summary of our operating results by segment for the three years ended December 31, 2009:
 
                                                                         
    2009     2008(i)     2007(i)  
          Operating
    Operating
          Operating
    Operating
          Operating
    Operating
 
    Revenues     Income     Margin     Revenues     Income     Margin     Revenues     Income     Margin  
    (millions)           (millions)           (millions)        
 
Global
  $ 835     $ 255       31 %   $ 814     $ 240       29 %   $ 796     $ 224       28 %
North America
    1,386       328       24 %     922       142       15 %     786       152       19 %
International
    1,042       276       27 %     1,091       306       28 %     996       251       25 %
                                                                         
Total Retail
    2,428       604       25 %     2,013       448       22 %     1,782       403       23 %
Corporate & Other(ii)
          (165 )     n/a             (185 )     n/a             (7 )     n/a  
                                                                         
Total Consolidated
  $ 3,263     $ 694       21 %   $ 2,827     $ 503       18 %   $ 2,578     $ 620       24 %
                                                                         
 
 
(i) In 2008, the Company changed its basis of segmental allocation for central costs. All accounting adjustments for foreign exchange hedging activities and foreign exchange movements on the UK pension plan asset or liability are held at the Corporate level, together with legal costs that are managed centrally.
 
(ii) Corporate & Other comprises the following:
 
                         
    2009     2008     2007  
    (millions)  
 
Amortization of intangible assets
  $ (100 )   $ (36 )   $ (14 )
Foreign exchange hedging
    (48 )     (47 )     (7 )
HRH integration costs
    (18 )     (5 )      
Gain on disposal of operations
    13             2  
2008 expense review
          (92 )      
Gain on disposal of London headquarters
          7       14  
Costs associated with the redomicile of the Company’s parent company
    (6 )            
Other
    (6 )     (12 )     (2 )
                         
    $ (165 )   $ (185 )   $ (7 )
                         
 
Global
 

Our Global operations comprise Global Specialties, Reinsurance and Faber & Dumas, our wholesale brokerage division launched in fourth quarter 2008 on completion of the HRH acquisition. Faber & Dumas comprises HRH’s London-based wholesale operation, Glencairn, together with our previously

existing Fine Art, Jewelry and Specie; Special Contingency Risk and Hughes-Gibb units. The following table sets out revenues, organic revenue growth and operating income and margin for the three years ended December 31, 2009:
 


                         
    2009     2008     2007  
    (millions, except percentages)  
 
Commissions and fees
  $ 822     $ 784     $ 750  
Investment income
    13       30       46  
                         
Total revenues
  $ 835     $ 814     $ 796  
                         
Operating income(i)
  $ 255     $ 240     $ 224  
Organic revenue growth(ii)(iii)
    4 %     2 %     %
Operating margin(i)
    31 %     29 %     28 %
 
 
(i) In 2008, the Company changed its basis of segmental allocation for central costs. All accounting adjustments for foreign exchange hedging activities and foreign exchange movements on the UK pension plan asset or liability are held at the Corporate level, together


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with legal costs that are managed centrally. As a result of this change, $1 million net operating profit for full year 2007, previously allocated to the Global segment, has been reported within Corporate.
 
(ii) Organic revenue growth excludes the impact of foreign currency translation, the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, market remuneration, including contingent commissions related to the HRH acquisition, investment income and other income from reported revenues. Our method of calculating this measure may differ from that used by other companies and therefore comparability may be limited.
 
(iii) In fourth quarter 2008, we changed our methodology for the calculation of organic growth in commissions and fees. Previously, organic growth included growth from acquisitions from the date of acquisition. Under the new method, the first twelve months of commissions and fees generated from acquisitions are excluded. Comparatives have been adjusted accordingly.
 

Revenues: 2009 compared with 2008
 
Commissions and fees of $822 million were $38 million, or 5 percent, higher in 2009 compared with 2008 of which 4 percent was attributable to the acquisition of the HRH UK wholesale business, Glencairn and 4 percent to organic revenue growth. These were partly offset by a 3 percent negative impact from foreign exchange movements.
 
Net new business growth was 5 percent and there was a 1 percent adverse impact from rates and other market factors. Reinsurance led the growth in net new business. Global Specialties organic revenues were slightly higher than in 2008, as growth in Marine, Aerospace and Financial and Executive Risks was offset by reductions elsewhere. There was continued softness in most specialty rates although there were signs of stabilization and firming in some areas, including Aerospace and Energy. The Faber & Dumas businesses continue to be adversely impacted by the weakening economic environment.
 
There was a sharp decline in investment income in 2009 compared with 2008 as global interest rates fell markedly in the latter half of 2008 and early 2009.
 
Productivity continued to improve with a 3 percent rise in revenues per FTE employee to $358,000 in 2009 compared with 2008. Client retention remained steady at 90 percent for the full year 2009.
 
Revenues: 2008 compared with 2007
 
Commissions and fees were $34 million, or 5 percent, higher in 2008 compared with 2007 of which 3 percent was attributable to the net impact of acquisitions and disposals, mainly due to HRH’s UK-based specialty business. There was no net impact from foreign currency translation as a benefit from the euro strengthening year over year against the dollar was offset by a negative impact from sterling weakening against the dollar.

Organic revenue growth was 2 percent as the benefit of good growth in Global Specialties was partly offset by lower commissions and fees in Reinsurance.
 
Global Specialties organic revenue growth reflected the benefit of good growth in Marine, Financial Institutions, Bloodstock, Jewelry, Specie and Global Markets and was achieved despite significant rate reductions.
 
Organic revenue growth in Reinsurance in 2008 was adversely impacted by a combination of declining rates and a reduction in amounts reinsured. We continue to make investments in Reinsurance to strengthen capital markets and analytics capabilities throughout the soft market and are beginning to see the positive results of this investment as we moved into 2009.
 
Client retention levels in Global improved to approximately 90 percent in 2008 compared with approximately 89 percent in 2007.
 
Operating margin: 2009 compared with 2008
 
Operating margin was 31 percent in 2009 compared with 29 percent in 2008. This improvement reflected a significant benefit from foreign currency translation, together with organic revenue growth, particularly driven by our Reinsurance business, and good cost controls including a reduction in discretionary expenses. The benefit of these was partly offset by a significant increase in the UK pension expense and the sharp reduction in investment income.
 
Despite an overall reduction in headcount since December 31, 2008, we continue to recruit selectively for our Global businesses. In first quarter 2009, we recruited a reinsurance team from Carvill. This team provides specialty, casualty and professional liability experience. We have also recruited specialty expertise in Marine, Aerospace and Faber & Dumas.



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Operating margin: 2008 compared with 2007
 
Operating margin in our Global operations was 29 percent in 2008 compared with 28 percent in 2007, as the benefit of organic revenue growth in Global Specialties was partly offset by the impact of lower revenues in Reinsurance and an adverse impact from foreign exchange.
 
Operating margin in Global Specialties increased in 2008 compared with 2007 as the benefit from organic revenue growth, lower pension costs and our Shaping Our Future initiatives more than offset

further spend on targeted hires and strategic initiatives.
 
Operating margin in Reinsurance in 2008 was broadly in line with 2007 as the impact of lower commissions and fees was largely offset by the benefits of Shaping Our Future initiatives, lower pension costs and the positive results of our continued investments to strengthen capital markets and analytics capabilities throughout the soft market.
 


North America
 
                         
    2009     2008     2007  
    (millions, except percentages)  
 
Commissions and fees
  $ 1,368     $ 905     $ 751  
Investment income
    15       15       18  
Other income(i)
    3       2       17  
                         
Total revenues
  $ 1,386     $ 922     $ 786  
                         
Operating income
  $ 328     $ 142     $ 152  
Organic revenue growth(ii)(iii)
    (3 )%     (1 )%     1 %
Operating margin
    24 %     15 %     19 %
 
 
(i) Other income represents gains on disposals of intangible assets, including books of business. Prior to January 1, 2008 these gains were reported within total commissions and fees but were excluded from organic revenue growth with effect from April 1, 2007. As a result of this change, $17 million previously reported within North America’s commissions and fees in 2007, has been transferred to other income.
 
(ii) Organic revenue growth excludes the impact of foreign currency translation, the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, market remuneration, including contingent commissions related to the HRH acquisition, investment income and other income from reported revenues. Our method of calculating this measure may differ from that used by other companies and therefore comparability may be limited.
 
(iii) In fourth quarter 2008, we changed our methodology for the calculation of organic growth in commissions and fees. Previously, organic growth included growth from acquisitions from the date of acquisition. Under the new method, the first twelve months of commissions and fees generated from acquisitions are excluded. Comparatives have been adjusted accordingly.
 
 

Revenues: 2009 compared with 2008
 
Commissions and fees in North America were 51 percent higher in 2009 compared with 2008 reflecting the uplift from the additional revenues of HRH, partly offset by 3 percent negative organic growth. Our North America operations were significantly adversely impacted by soft market conditions, the weakened US economy and a reduction in project based revenues which more than offset a positive impact from net new business. In particular, our Construction division has seen significant declines. However, we saw the rate of decline moderate in the third quarter of 2009 and North America reported 1 percent organic growth

for the fourth quarter of 2009, despite a 6 percent rate headwind.
 
Our primary focus in North America in 2009 was the integration of HRH into our existing operations and the improvement of margin. Additionally, in the second half of the year we refocused our efforts on revenue growth and we believe this has led to over 10 percent new business generation in parts of the business during that time period.
 
Despite the difficult market conditions, our productivity measured in terms of revenue per FTE employee remained high and with a marginal increase to $226,000 for 2009 compared with $225,000 for 2008.



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Revenues: 2008 compared with 2007
 
Commissions and fees in North America were $154 million, or 21 percent, higher in 2008 compared with 2007, of which $174 million was attributable to HRH’s fourth quarter 2008 revenues. Excluding HRH, organic commissions and fees declined by 1 percent reflecting the soft market conditions.
 
Chicago, Atlanta, Houston, Boston and Knoxville all generated growth in excess of 5 percent, though several offices recorded significant declines in the difficult market conditions.
 
The integration of the HRH acquisition made good progress in fourth quarter 2008 with only 2 percent attrition of legacy HRH producers since the announcement of the HRH acquisition in June 2008.
 
Client retention levels improved to approximately 91 percent in 2008, an increase of approximately 3 percentage points from 2007, and productivity continued to improve with an approximately 2 percent rise in revenues per FTE employee in 2008 compared with 2007.
 
Operating margin: 2009 compared with 2008
 
Operating margin in North America was 24 percent in 2009 compared with 15 percent in 2008. The higher margin reflected:
 
•  the acquisition of HRH and the synergies and cost savings achieved from the integration of HRH with our existing North America operations;
 
•  a reduction in underlying expense base reflecting the benefits of our 2008 Expense Review and Right Sizing Willis initiatives; and
 
•  a $9 million benefit from the curtailment of the US pension scheme relating to our North America retail employees;
 
partly offset by
 
•  the decline in organic revenues against the backdrop of the soft market and weak economic conditions discussed above.

HRH integration
 
The integration of HRH into our existing operations is now substantially complete and, reflecting this success, we changed the name of our North America retail operations from Willis HRH to Willis North America on October 1, 2009. Progress to date includes:
 
•  maintaining high producer and client retention levels;
 
•  reducing our expense base through synergies and other cost savings. On a combined basis, we achieved approximately $205 million of cost savings in 2009; and
 
•  as of December 31, 2009, for over 90 percent of HRH’s contingent commissions we have either converted them into higher standard commissions or we have reaffirmed with carriers that the existing agreements will remain in force for so long as permitted by the regulatory authorities or until the commissions are converted, whichever occurs first.
 
Operating margin: 2008 compared with 2007
 
Operating margin in North America in 2008 was 15 percent compared with 19 percent in 2007. The decrease of 4 percentage points reflected:
 
•  lower commissions and fees, reflecting the soft market conditions;
 
•  a $15 million decrease in other income compared with 2007 which benefited from higher than usual proceeds from the sale of books of business; and
 
•  continued spend on targeted new hires and other initiatives;
 
partly offset by
 
•  the acquisition of HRH which contributed $37 million of operating income in fourth quarter 2008; and
 
•  the benefit of increased revenue per FTE employee and other cost savings.
 



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International
 
                         
    2009     2008     2007  
    (millions, except percentages)  
 
Commissions and fees
  $ 1,020     $ 1,055     $ 962  
Investment income
    22       36       32  
Other income(i)
                2  
                         
Total revenues
  $ 1,042     $ 1,091     $ 996  
                         
Operating income(ii)
    276       306       251  
Organic revenue growth(iii)(iv)
    4 %     9 %     8 %
Operating margin(ii)
    26 %     28 %     25 %
 
 
(i) Other income represents gains on disposals of intangible assets, including books of business. Prior to January 1, 2008 these gains were reported within total commissions and fees but were excluded from organic revenue growth with effect from April 1, 2007. As a result of this change, $2 million previously reported within International’s commissions and fees in 2007, has been transferred to other income.
 
(ii) In 2008, the Company changed its basis of segmental allocation for central costs. All accounting adjustments for foreign exchange hedging activities and foreign exchange movements on the UK pension plan asset or liability are held at the Corporate level, together with legal costs that are managed centrally. As a result of this change, $1 million net operating loss for full year 2007 previously allocated to the International segment, has been reported within Corporate.
 
(iii) Organic revenue growth excludes the impact of foreign currency translation, the first twelve months of net commission and fee revenues generated from acquisitions, the net commission and fee revenues related to operations disposed of in each period presented, market remuneration, including contingent commissions related to the HRH acquisition, investment income and other income from reported revenues. Our method of calculating this measure may differ from that used by other companies and therefore comparability may be limited.
 
(iv) In fourth quarter 2008, we changed our methodology for the calculation of organic growth in commissions and fees. Previously, organic growth included growth from acquisitions from the date of acquisition. Under the new method, the first twelve months of commissions and fees generated from acquisitions are excluded. Comparatives have been adjusted accordingly.
 

Revenues: 2009 compared with 2008
 
Commissions and fees in International were $35 million, or 3 percent, lower in 2009 compared with 2008 as double digit new business generation in many of our International units was more than offset by an adverse impact from foreign exchange of 8 percent, a 3 percent adverse impact from rates and other market factors, and significantly lower revenues in our UK and Irish retail operations.
 
A significant part of International’s revenues are earned in currencies other than the US dollar which has strengthened significantly, on average, on a year over year basis against a number of these currencies, most notably the euro, pound sterling, Danish kroner and Australian dollar, consequently reducing International revenues on a year over year basis when reported in US dollars.
 
Despite the slowdown of the global economy, International continued its organic growth. Excluding our UK and Irish retail divisions, organic revenue growth was 8 percent in 2009, with Latin America and Asia, led by Brazil, Columbia and China, all reporting strong organic growth. However, our UK and Irish retail division, which

represents approximately 20 percent of International’s operations, saw a 6 percent revenue decline, reflecting weak local economic conditions.
 
Productivity in International continues to improve with revenues per FTE employee increasing by 4 percent in 2009 compared with 2008.
 
Client retention levels remained high at approximately 90 percent for 2009.
 
Revenues: 2008 compared with 2007
 
Commissions and fees in International were $93 million, or 10 percent, higher in 2008 compared with 2007.
 
Foreign currency translation benefited 2008 revenues by 1 percent compared with 2007.
 
Organic revenue growth of 9 percent in 2008 was achieved despite declining rates in most countries.
 
We have seen consistent growth in our International business over the last three years, with all twelve quarters in this period showing growth of 5 percent or higher, with Spain, Denmark and Latin America continuing to contribute significantly.



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Productivity in International continued to improve with revenues per FTE employee rising by 6 percent in 2008 compared with 2007 and average client retention levels remaining high at approximately 91 percent.
 
Operating margin: 2009 compared with 2008
 
Operating margin in International was 26 percent in 2009 compared with 28 percent in 2008. The benefits of:
 
•  the strong organic revenue growth outside of Ireland; and
 
•  focused expense management including savings in discretionary costs driven by our Right Sizing Willis initiatives;
 
were more than offset by
 
•  increased pension expense for the UK pension plan;
 
•  a sharp reduction in investment income reflecting lower global interest rates; and
 
•  a weak performance by our Irish retail operations reflecting their difficult market conditions.

Operating margin: 2008 compared with 2007
 
Operating margin in International was 28 percent in 2008 compared with 25 percent in 2007, with the 3 percentage point improvement reflecting the strong organic revenue growth, increased productivity and continued expense discipline partly offset by significant investment in targeted hires and the adverse impact of declining rates in most countries.
 
Venezuela
 
On January 8, 2010 the Venezuelan government announced its intention to devalue its currency (Bolivar). Effective January 1, 2010, the Venezuelan economy has been designated as hyper-inflationary and, consequently, all future exchange movements will flow through the income statement.
 
Our preliminary estimate of the impact of these changes on our 2010 income statement is that diluted earnings per share for the Group may be approximately $0.03 lower than it would otherwise have been.
 
Currently, we do not anticipate any material impact on our balance sheet from the devaluation.
 


CRITICAL ACCOUNTING ESTIMATES
 
 

Our accounting policies are described in Note 2 to the Consolidated Financial Statements. Management considers that the following accounting estimates or assumptions are the most important to the presentation of our financial condition or operating performance. Management has discussed its critical accounting estimates and associated disclosures with our Audit Committee.
 
Pension expense
 
We maintain defined benefit pension plans for employees in the US and UK. Both these plans are now closed to new entrants and, with effect from May 15, 2009 we closed our US defined benefit plan to future accrual. New entrants in the UK are offered the opportunity to join a defined contribution plan and in the United States are offered the opportunity to join a 401(k) plan. We also have smaller defined benefit schemes in Ireland, Germany, Norway and the Netherlands. These schemes have combined total assets of $120 million and a combined net liability for pension benefits of $30 million as of December 31,

2009. Elsewhere, pension benefits are typically provided through defined contribution plans.
 
We make a number of assumptions when determining our pension liabilities and pension expense which are reviewed annually by senior management and changed where appropriate. The discount rate will be changed annually if underlying rates have moved whereas the expected long-term return on assets will be changed less frequently as longer term trends in asset returns emerge. Other material assumptions include rates of participant mortality, the expected long-term rate of compensation and pension increases and rates of employee termination.
 
We recorded a net pension charge on our UK and US defined benefit pension plans in 2009 of $32 million, compared to a net pension credit of $25 million in 2008, an increased expense of $57 million.



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The UK plan charge was $63 million higher reflecting:
 
•  lower asset returns from lower asset levels following the decline in the equity markets;
 
•  additional pension contributions of $8 million in connection with the pension related salary sacrifice scheme; and
 
•  higher amortization from significant asset losses,

partly offset by
 
•  changes to the plan that cap the impact of future salary rises on pension benefits.
 
The US pension charge was $6 million lower in 2009 compared with 2008 reflecting the closure of the scheme and the resulting $12 million curtailment gain.
 
Based on December 31, 2009 assumptions, we expect the net pension charge in 2010 to increase by $2 million for the UK plan and decrease by $6 million for the US plan.
 


UK plan
 
                                 
          Impact of a
             
    As disclosed
    0.50 percentage
    Impact of a
       
    using
    point increase
    0.50 percentage
    One year
 
    December 31,
    in the expected
    point increase
    increase in
 
    2009
    rate of return
    in the discount
    mortality
 
    assumptions     on assets(i)     rate(i)     assumption(i)(ii)  
    (millions)  
 
Estimated 2010 expense
  $ 29     $ (9 )   $ (16 )   $ 6  
Projected benefit obligation at December 31, 2009
    1,811       n/a       (141 )     36  
 
 
(i) With all other assumptions held constant.
 
(ii) Assumes all plan participants are one year younger. Expected long-term rates of return on plan assets are developed from the expected future returns of the various asset classes using the target asset allocations. The expected long-term rate of return used for determining the net UK pension expense in 2009 remained unchanged at 7.8 percent, equivalent to an expected return in 2009 of $127 million. The expected and actual returns on UK plan assets for the three years ended December 31, 2009 were as follows:
 
                 
    Expected
    Actual
 
    return on
    return on
 
    plan
    plan
 
    assets     assets  
    (millions)  
 
2009
  $ 127     $ 234  
2008
    184       (509 )
2007
    182       99  
 
 

During the latter half of 2008 the value of assets held by our pension plans was significantly adversely affected by the turmoil in worldwide markets. The holdings of equity securities by our UK and US pension plans were particularly affected in 2008, but have recovered, to some extent, in 2009.
 
Rates used to discount pension plan liabilities at December 31, 2009 were based on yields prevailing at that date of high quality corporate bonds of appropriate maturity. The selected rate used to discount UK plan liabilities was 5.8 percent compared with 6.5 percent at December 31, 2008

with the decrease reflecting a reduction in UK long-term bond rates in the second half of 2009. The lower discount rate and reduced inflation assumption generated an actuarial gain of $208 million at December 31, 2009.
 
Mortality assumptions at December 31, 2009 were unchanged from December 31, 2008. The mortality assumption is the 100 percent PNA00 table without an age adjustment. As an indication of the longevity assumed, our calculations assume that a UK male retiree aged 65 at December 31, 2009 would have a life expectancy of 22 years.
 



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US plan
 
                                 
          Impact of a
             
    As disclosed
    0.50 percentage
    Impact of a
       
    using
    point increase
    0.50 percentage
    One year
 
    December 31,
    in the expected
    point increase
    increase in
 
    2009
    rate of return
    in the discount
    mortality
 
    assumptions     on assets(i)     rate(i)     assumption(i)(ii)  
          (millions)        
 
Estimated 2010 expense
  $ 1     $ (3 )   $ (1 )   $ 2  
Projected benefit obligation at December 31, 2009
    686       n/a       (42 )     18  
 
 
(i) With all other assumptions held constant.
 
(ii) Assumes all plan participants are one year younger.
 

The expected long-term rate of return used for determining the net US pension scheme expense in 2009 was 8.0 percent, consistent with 2008. The rate used to discount US plan liabilities at December 31, 2009 was 6.1 percent, determined based on expected plan cash flows discounted using

a corporate bond yield curve, a small reduction from 6.3 percent at December 31, 2008. The expected and actual returns on US plan assets for the three years ended December 31, 2009 were as follows:
 


                 
    Expected
    Actual
 
    return on
    return on
 
    plan assets     plan assets  
    (millions)  
 
2009
  $   36     $ 86  
2008
    47       (142 )
2007
    44       46  
 
 

The mortality assumption at December 31, 2009 is the RP-2000 Mortality Table (blended for annuitants and non-annuitants), projected to 2010 by Scale AA (December 31, 2008: projected to 2009 by Scale

AA). As an indication of the longevity assumed, our calculations assume that a US male retiree aged 65 at December 31, 2009, would have a life expectancy of 18 years.
 
 


 

Intangible assets
 
Intangible assets represent the excess of cost over the value of net tangible assets of businesses acquired. We classify our intangible assets into three categories:
 
•  Goodwill;
 
•  ‘Customer and Marketing Related’ includes client lists, client relationships, trade names and non-compete agreements; and
 
•  ‘Contract-based, Technology and Other’ includes all other purchased intangible assets.
 
Client relationships acquired on the HRH acquisition are amortized over twenty years in line with the pattern in which the economic benefits of the client relationships are expected to be consumed. Over 80 percent of the client relationships intangible will have been amortized after 10 years. Non-compete agreements acquired in connection with the HRH acquisition are amortized

over two years on a straight line basis. Intangible assets acquired in connection with other acquisitions are amortized over their estimated useful lives on a straight line basis. Goodwill is not subject to amortization.
 
To determine the allocation of intangible assets between goodwill and other intangible assets and the estimated useful lives in respect of the HRH acquisition we considered a report produced by a qualified independent appraiser. The calculation of the allocation is subject to a number of estimates and assumptions. We base our allocation on assumptions we believe to be reasonable. However, changes in these estimates and assumptions could affect the allocation between goodwill and other intangible assets.
 
Impairment review
 
We review all our intangible assets for impairment periodically (at least annually) or whenever events or circumstances indicate impairment may have



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occurred. Application of the impairment test requires judgment, including:
 
•  the identification of reporting units;
 
•  assignment of assets, liabilities and goodwill to reporting units; and
 
•  determination of fair value of each reporting unit.
 
The fair value of each reporting unit is estimated using a discounted cash flow methodology and, in aggregate, validated against our market capitalization. This analysis requires significant judgments, including:
 
•  estimation of future cash flows which is dependent on internal forecasts;
 
•  estimation of the long-term rate of growth for our business;
 
•  the estimation of the useful life over which cash flows will occur; and
 
•  determination of our weighted average cost of capital.
 
We base our fair value estimates on assumptions we believe to be reasonable. However, changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.
 
Our annual goodwill impairment analysis, which we performed during the fourth quarter of 2009, did not result in an impairment charge (2008: $nil, 2007: $nil).
 
Income taxes
 
We recognize deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carry-forwards. We estimate deferred tax assets and liabilities and assess the need for any valuation allowances using tax rates in effect for the year in which the differences are expected to be recovered or settled taking into account our business plans and tax planning strategies.
 
At December 31, 2009, we had gross deferred tax assets of $390 million (2008: $362 million) against which a valuation allowance of $92 million (2008:

$85 million) had been recognized. To the extent that:
 
•  the actual future taxable income in the periods during which the temporary differences are expected to reverse differs from current projections;
 
•  assumed prudent and feasible tax planning strategies fail to materialize;
 
•  new tax planning strategies are developed; or
 
•  material changes occur in actual tax rates or loss carry-forward time limits,
 
we may adjust the deferred tax asset considered realizable in future periods. Such adjustments could result in a significant increase or decrease in the effective tax rate and have a material impact on our net income.
 
Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. We recognize the benefit of uncertain tax positions in the financial statements when it is more likely than not that the position will be sustained on examination by the tax authorities. The benefit recognized is the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized on settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company adjusts its recognition of these uncertain tax benefits in the period in which new information is available impacting either the recognition or measurement of its uncertain tax positions. In 2009, $11 million was released relating to uncertain tax positions due to the closure of the statute of limitations on assessments for previously unrecognized tax benefits. There was a similar $5 million release of uncertain tax positions in 2008.
 
Commitments, contingencies and accrued liabilities
 
We purchase professional indemnity insurance for errors and omissions claims. The terms of this insurance vary by policy year and self-insured risks have increased significantly over recent years. We have established provisions against various actual and potential claims, lawsuits and other proceedings relating principally to alleged errors and omissions in connection with the placement of insurance and reinsurance in the ordinary course of business. Such provisions cover claims that have been reported but not paid and also claims that have been incurred but



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not reported. These provisions are established based on actuarial estimates together with individual case

reviews and are believed to be adequate in the light of current information and legal advice.
 


NEW ACCOUNTING STANDARDS
 
 

New accounting standards issued during the year that would have a significant impact on the

Company’s reporting are described in Note 2 to the Consolidated Financial Statements.
 
 


LIQUIDITY AND CAPITAL RESOURCES
 
 

During 2009, we have taken a number of actions to significantly improve our debt maturity profile:
 
•  in March 2009, we issued 12.875% senior notes due 2016 in an aggregate principal amount of $500 million to Goldman Sachs Mezzanine Partners which generated net proceeds of $482 million. These proceeds, together with $208 million cash generated from operating activities and cash in hand, were used to pay down the $750 million outstanding on our interim credit facility as of December 31, 2008; and
 
•  in September 2009, we issued $300 million of 7.0% senior unsecured notes due 2019. We then launched a tender offer on September 22, 2009 to repurchase any and all of our $250 million 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value. Notes totaling $160 million were tendered and repurchased on September 29, 2009.
 
Since December 31, 2009 we have:
 
•  repurchased on the open market a further $7 million of July 2010 bonds; and
 
•  repaid the full value of $9 million in respect of a fixed rate loan note due 2010.
 
Once the remaining $83 million of senior notes due July 2010 are repaid, the only mandatory repayments over the next 5 years are the scheduled repayments on our $700 million 5-year term loan and $4 million due on a fixed rate loan note due 2012.
 
In the short term, our capital management priority is debt reduction and we are currently targeting a debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortization) ratio of below 2.5 times. Once we are in a position to remain at or below this ratio, we would consider recommencing our stock buyback program. At December 31, 2009 the actual ratio was 2.6 times. However, there can be no assurance that we will achieve our target debt

to EBITDA ratio or recommence our stock buyback program.
 
Liquidity
 
Our principal sources of liquidity are cash from operations, cash and cash equivalents of $191 million at December 31, 2009 and remaining availability of $300 million under our revolving credit facility.
 
As of December 31, 2009, our short-term liquidity requirements consisted of:
 
•  payment of interest on debt and $110 million of mandatory repayments under our 2013 term loan;
 
•  payment of the $90 million principal outstanding on our senior notes due July 2010;
 
•  capital expenditure; and
 
•  working capital.
 
Our long-term liquidity requirements consist of:
 
•  the principal amount of outstanding notes; and
 
•  borrowings under our 2013 term loan and 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.
 
In an effort to reduce future cash interest payments as well as future amounts due at maturity, we may from time to time seek to retire or purchase our outstanding debt through tender offers, cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such actions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
 
In September 2009, Standard and Poor’s and Moody’s revised their outlook on the Company to Stable from Negative. We believe that the improved



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outlook and our current ratings allow us more flexibility in our capital planning.
 
We continue to identify and implement further actions to control costs and enhance our operating performance, including cash flow. These actions include the rationalization of our cost base through our ongoing Right Sizing Willis initiatives to achieve the best structure within the current environment.
 
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 of 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.
 
Operating activities
 
2009 compared to 2008
 
Net cash provided by operations was $418 million in 2009 compared with $224 million in 2008. The $194 million increase between 2008 and 2009 mainly reflects:
 
•  a $198 million increase in net income before the non-cash charge for amortization of intangible assets; and
 
•  a reduction in pension scheme contributions to $82 million in 2009, compared with $154 million in 2008;
 
partly offset by
 
•  the timing of cash collections and other working capital movements.

2008 compared to 2007
 
Net cash from operations in 2008 was $51 million lower than in 2007, mainly reflecting:
 
•  an $81 million decrease in net income before the non-cash charge for amortization of intangible assets; and
 
•  a $65 million increase in cash payments for interest reflecting higher average debt levels, particularly following the funding of the HRH acquisition;
 
partly offset by
 
•  a $46 million reduction in additional contributions to our UK and US defined benefit pension plans;
 
•  the benefit of a $14 million reduction in taxes paid; and
 
•  the timing of cash collections and other working capital movements.
 
Investing activities
 
2009 compared to 2008
 
Total net cash inflow from investing activities was $102 million in 2009 compared with an outflow of $1,033 million in 2008, reflecting:
 
•  the $926 million net cash outflow attributable to the HRH acquisition in 2008;
 
•  $113 million cash received in 2009 in respect of investments in associates, compared with $31 million paid in 2008. The 2009 receipt includes $155 million from the reorganization of Gras Savoye, less $42 million settled in January 2009 for an additional investment in Gras Savoye made in December 2008; and
 
•  a $40 million increase in net proceeds from sale of operations, mainly attributable to the second quarter 2009 disposal of Bliss & Glennon.
 
2008 compared to 2007
 
Total net cash used in investing activities was $1,033 million in 2008 compared with $181 million in 2007. The movement was attributable to:
 
•  an $899 million net increase in the cost of acquisitions, primarily reflecting $926 million attributable to the HRH acquisition; and



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•  a reduction in proceeds from disposals of operations, investments and other assets of $14 million;
 
partly offset by
 
•  a reduction in fixed asset spend of $91 million, principally attributable to sharply reduced expenditure on our new London and US headquarters buildings following their completion.
 
Financing activities
 
Net cash used in financing activities was $516 million in 2009 compared with an inflow of $808 million in 2008 and an outflow of $193 million in 2007.
 
Long-term debt
 
In March 2009, we issued $500 million of senior notes due 2016 at 12.875%.
 
We used the $482 million net proceeds of the notes, together with $208 million cash generated from operating activities and $60 million cash in hand, to pay down the $750 million outstanding on our interim credit facility as of December 31, 2008.
 
In September 2009, we issued $300 million of 7.0% senior notes due 2019. We then launched a tender offer on September 22, 2009 to repurchase any and all of our $250 million 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value. Notes totaling $160 million were tendered and repurchased on September 29, 2009.
 
In December 2009, we applied the net cash proceeds of $155 million from the Gras Savoye transaction, together with other cash in hand, to reduce the balance outstanding on the 5-year term loan by approximately $180 million to

$521 million, of which $27 million related to our first mandatory debt repayment.
 
As of December 31, 2009, there were no amounts outstanding under our $300 million revolving credit facility (2008: $nil; 2007: $50 million).
 
Share buybacks
 
We did not buyback any shares in 2009. There remains $925 million under the current buyback authorization.
 
In 2008, we repurchased 2.3 million shares at a cost of $75 million and in 2007 we repurchased 11.5 million shares for $480 million of cash.
 
In 2009, the Company filed a Tender Offer Statement with the SEC to repurchase for cash options to purchase Company shares. The tender offer expired on August 6, 2009. Approximately 1.6 million options to purchase Company shares were repurchased at an average per share price of $2.04.
 
Dividends
 
Cash dividends paid in 2009 were $174 million compared with $146 million in 2008 and $143 million in 2007.
 
The $28 million increase primarily reflects dividend payments on the 24 million additional shares issued in connection with the fourth quarter 2008 acquisition of HRH. In February 2010, we declared a quarterly cash dividend of $0.26 per share, an annual rate of $1.04 per share, subject to the Irish High Court approving a reduction of our share capital in order to create distributable reserves, (which under Irish law are required to facilitate the payment of a dividend), and compliance generally with the requirements of the Irish Companies Act relating to the payment of dividends.
 



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CONTRACTUAL OBLIGATIONS
 
Our contractual obligations at December 31, 2009 were:
 
                                         
          Payments due by  
                2011-
    2013-
       
Obligations
  Total     2010     2012     2014     After 2014  
    (millions)  
 
5.125% senior notes due 2010
  $ 90     $ 90     $     $     $  
5.625% senior notes due 2015
    350                         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  
Interest on senior notes
    1,014       147       285       285       297  
6.000% loan notes due 2010
    9       9                    
6.000% loan notes due 2012
    4             4              
Term loan expires 2013
    521       110       219       192        
Interest on term loan
    31       12       16       3        
                                         
Total debt and related interest
    3,419       368       524       480       2,047  
Operating leases(i)
    1,329       152       199       136       842  
Pensions
    426       122       244       60        
                                         
Total contractual obligations
  $ 5,174     $ 642     $ 967     $ 676     $ 2,889  
                                         
 
 
(i) Presented gross.
 

Debt facilities
 
In March 2009, we issued 12.875% senior notes due 2016 in an aggregate principal amount of $500 million to Goldman Sachs Mezzanine Partners which generated net proceeds of $482 million. These proceeds, together with $208 million cash generated from operating activities and cash in hand, were used to pay down the $750 million outstanding on our interim credit facility as of December 31, 2008.
 
In September 2009, we issued $300 million of 7.0% senior notes due 2019. We then launched a tender offer on September 22, 2009 to repurchase any and all of our $250 million 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value. Notes totaling approximately $160 million were tendered and repurchased on September 29, 2009.
 
In December 2009, we applied the net cash proceeds of $155 million from the Gras Savoye transaction, together with other cash in hand, to reduce the balance outstanding on the 5-year term loan by approximately $180 million to $521 million.

Since the end of the year, we have:
 
•  repurchased a further $7 million of July 2010 bonds; and
 
•  repaid the full value of $9 million in respect of a fixed rate loan note due 2010.
 
Once the remaining $83 million of July 2010 bonds are repaid, the only mandatory repayments over the next 5 years are the scheduled repayments on our $700 million 5-year term loan and $4 million due on a fixed rate loan note due 2012.
 
Operating leases
 
We lease our London headquarters building under a 25 year operating lease, which expires in 2032. Annual rentals are $31 million per year and we have subleased approximately 30 percent of the premises under leases up to 15 years. The outstanding contractual obligation for lease rentals at December 31, 2009 was $785 million and the amounts receivable from subleases was $100 million.



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Pensions
 
Contractual obligations for our pension plans reflect the contributions we expect to make over the next five years into our US and UK plans. These contributions are based on current funding positions and may increase or decrease dependent on the future performance of the two plans.
 
In the UK, we are required to agree a funding strategy for our UK defined benefit plan with the plan’s trustees. In February 2009, we agreed to make full year contributions to the UK plan of $40 million for 2009 through 2012, excluding amounts in respect of the salary sacrifice scheme. In addition, as certain funding targets have not been met at the beginning of 2010, a further contribution

of $40 million is required for 2010. A similar, additional contribution may also be required for 2011, depending on actual performance against funding targets at the beginning of 2011.
 
For the US plan, expected contributions are the contributions we will be required to make under US pension legislation based on our December 31, 2009 balance sheet position. We currently expect to contribute $30 million in 2010 and $30 million per year from 2011 to 2014.
 
The total contributions for all plans are currently estimated to be approximately $120 million in 2010 excluding amounts in respect of the salary sacrifice scheme.
 


OFF-BALANCE SHEET TRANSACTIONS
 
 

Apart from commitments, guarantees and contingencies, as disclosed in Note 18 to the 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.
 
 



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Item 7A — Quantitative and Qualitative Disclosures about Market Risk
 

Financial Risk Management
 
We are exposed to market risk from changes in foreign currency exchange rates and interest rates. In order to manage the risk arising from these exposures, we enter into a variety of interest rate and foreign currency derivatives. We do not hold financial or derivative instruments for trading purposes.
 
A discussion of our accounting policies for financial and derivative instruments is included in Note 2 — Basis of Presentation and Significant Accounting Policies of Notes to the Consolidated Financial Statements, and further disclosure is provided in Note 22 — Financial Instruments of Notes to the Consolidated Financial Statements.
 
Foreign exchange risk management
 
Because of the large number of countries and currencies we operate in, movements in currency exchange rates may affect our results.
 
We report our operating results and financial condition in US dollars. Our US operations earn revenue and incur expenses primarily in US dollars. Outside the United States, we predominantly generate revenues and expenses in the local currency with the exception of our London market operations which earns revenues in several currencies but incurs expenses predominantly in pounds sterling.
 
The table below gives an approximate analysis of revenues and expenses by currency in 2009.
 
                                 
    US
    Pounds
          Other
 
    Dollars     Sterling     Euros     currencies  
 
Revenues
    60%       10%       14%       16%  
Expenses
    59%       20%       7%       14%  
 
Our principal exposures to foreign exchange risk arise from:
 
•  our London market operations; and
 
•  translation.
 
London market operations
 
In our London market operations, we earn revenue in a number of different currencies, principally US dollars, pounds sterling, euros and Japanese yen, but incur expenses almost entirely in pounds sterling.

We hedge this risk as follows:
 
•  to the extent that forecast pound sterling expenses exceed pound sterling revenues, we limit our 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; and
 
•  to the extent our London market operations earn significant revenues in euros and Japanese yen, we limit our 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.
 
Generally, it is our policy to hedge at least 25 percent of the next 12 months’ exposure in significant currencies. We do not hedge exposures beyond three years.
 
In addition, we are also exposed to foreign exchange risk on any net sterling asset or liability position in our London market operations. Where this risk relates to short-term cash flows, we hedge all or part of the risk by forward purchases or sales.
 
However, where the foreign exchange risk relates to any sterling pension assets benefit or liability for pensions benefit, we do not hedge the risk. Consequently, if our London market operations have a significant pension asset or liability, we may be exposed to accounting gains and losses if the US dollar and pounds sterling exchange rate changes. We do, however, hedge the pounds sterling contributions into the pension plan.
 
Translation risk
 
Outside our US and London market operations, we predominantly earn revenues and incur expenses in the local currency. When we translate the results and net assets of these operations into US dollars for reporting purposes, movements in exchange rates will affect reported results and net assets. For example, if the US dollar strengthens against the euro, the reported results of our Eurozone operations in US dollar terms will be lower. We do not hedge translation risk.
 
The table below provides information about our foreign currency forward exchange contracts, which are sensitive to exchange rate risk. The table



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summarizes the US dollar equivalent amounts of each currency bought and sold forward and the weighted average contractual exchange rates. All

forward exchange contracts mature within four years.


                                                                 
    Settlement date before December 31,  
    2010     2011     2012     2013  
          Average
          Average
          Average
          Average
 
    Contract
    contractual
    Contract
    contractual
    Contract
    contractual
    Contract
    contractual
 
December 31, 2009
  amount     exchange rate     amount     exchange rate     amount     exchange rate     amount     exchange rate  
    (millions)           (millions)           (millions)           (millions)        
 
Foreign currency sold
                                                               
US Dollars sold for sterling
  $ 168     $ 1.77=£1     $ 63     $ 1.57=£1     $ 30     $ 1.52=£1             n/a  
Euro sold for US Dollars
    84     1=$1.42       63     1=$1.41       38     1=$1.42             n/a  
Japanese Yen sold for US Dollars
    24     ¥ 97.03=$1       21     ¥ 92.89=$1       11     ¥ 88.73=$1       2     ¥ 83.95=$1  
                                                                 
Total
  $ 276             $ 147             $ 79             $ 2          
                                                                 
Fair Value(1)
  $ (15 )           $             $ 1             $          
 
                                                 
    Settlement date before December 31,  
    2009     2010     2011  
          Average
          Average
          Average
 
    Contract
    contractual
    Contract
    contractual
    Contract
    contractual
 
December 31, 2008
  amount     exchange rate     amount     exchange rate     amount     exchange rate  
    (millions)           (millions)           (millions)        
 
Foreign currency sold
                                               
US Dollars sold for sterling
  $ 247     $ 1.85=£1     $ 144     $ 1.80=£1     $ 32     $ 1.63=£1  
Euro sold for US Dollars
    83     1=$1.40       67     1=$1.43       17     1=$1.43  
Japanese Yen sold for US Dollars
    18     ¥ 106.08=$1       15     ¥ 100.20=$1       8     ¥ 97.34=$1  
                                                 
Total
  $ 348             $ 226             $ 57          
                                                 
Fair Value(1)
  $ (55 )           $ (26 )           $ (4 )        
 
 
(1) Represents the difference between the contract amount and the cash flow in US dollars which would have been receivable had the foreign currency forward exchange contracts been entered into on December 31, 2009 or 2008 at the forward exchange rates prevailing at that date.
 
 

Income earned within foreign subsidiaries outside of the UK is generally offset by expenses in the same local currency but the Company does have exposure to foreign exchange movements on the net income of these entities. The Company does not hedge net income earned within foreign subsidiaries outside of the UK.
 
Interest rate risk management
 
Our operations are financed principally by $1,840 million fixed rate senior notes issued by subsidiaries and $521 million under a 5-year term loan facility. Of the fixed rate senior notes, $90 million are due 2010, $350 million are due 2015, $500 million are due 2016, $600 million are due 2017 and $300 million are due 2019. The 5-year term loan facility amortizes at the rate of $27 million per quarter. As of December 31, 2009 we had access to, but had not drawn $300 million under a 5-year revolving credit facility. The interest rate applicable to the bank borrowing is variable according to the period of each individual drawdown.

We are also subject to market risk from exposure to changes in interest rates based on our investing activities where our primary interest rate risk arises from changes in short-term interest rates in both US dollars and pounds sterling.
 
As a consequence of our insurance and reinsurance broking activities, there is a delay between the time we receive cash for premiums and claims and the time the cash needs to be paid. We earn interest on this float, which is included in our consolidated financial statements as investment income.
 
This float is regulated in terms of access and the instruments in which it may be invested, most of which are short-term in maturity. We manage the interest rate risk arising from this exposure primarily through the use of interest rate swaps. It is our policy that, for currencies with significant balances, a minimum of 25 percent of forecast income arising is hedged for each of the next three years.
 
The table below provides information about our derivative instruments and other financial



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instruments that are sensitive to changes in interest. For interest rate swaps, the table presents notional principal amounts and average interest rates analyzed by expected maturity dates. Notional principal amounts are used to calculate the contractual payments to be exchanged under the contracts. The duration of interest rate swaps varies

between one and four years, with re-fixing periods of three months. Average fixed and variable rates are, respectively, the weighted-average actual and market rates for the interest hedges in place. Market rates are the rates prevailing at December 31, 2009 or 2008, as appropriate.


                                                         
    Expected to mature before December 31,                 Fair
 
December 31, 2009
  2010     2011     2012     2013     Thereafter     Total     Value(1)  
    ($ millions, except percentages)  
 
Fixed rate debt
                                                       
Principal ($)
    99               4               1,750       1,853       2,088  
Fixed rate payable
    5.13 %             6.00 %             8.14 %     8.12 %        
Floating rate debt
                                                       
Principal ($)
    110       109       110       192               521       521  
Variable rate payable
    2.85 %     3.54 %     4.17 %     4.54 %             4.16 %        
Interest rate swaps
                                                       
Principal ($)
    235       240       40       90               605       17  
Fixed rate receivable
    5.20 %     4.37 %     1.84 %     2.80 %             4.72 %        
Variable rate payable
    0.54 %     1.10 %     2.34 %     2.77 %             1.85 %        
Principal (£)
    77       58       61                       196       7  
Fixed rate receivable
    5.21 %     5.71 %     4.90 %                     5.23 %        
Variable rate payable
    0.86 %     1.25 %     2.44 %                     1.78 %        
Principal (€)
    16       57       18                       91       2  
Fixed rate receivable
    4.30 %     4.08 %     2.30 %                     3.55 %        
Variable rate payable
    1.19 %     1.48 %     2.22 %                     1.69 %        
 
 
(1) Represents the net present value of the expected cash flows discounted at current market rates of interest as appropriate.
 


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    Expected to mature before December 31,                 Fair
 
December 31, 2008
  2009     2010     2011     2012     2013     Thereafter     Total     Value(1)  
    ($ millions, except percentages)  
 
Short-term investments
                                                               
Principal ($)
    7       5                                       12       12  
Fixed rate receivable
    4.82 %     3.75 %                                     4.41 %        
Principal (£)
    7       1                                       8       8  
Fixed rate receivable
    5.50 %     4.75 %                                     5.42 %        
Fixed rate debt
                                                               
Principal ($)
            250                               950       1,200       881  
Fixed rate payable
            5.13 %                             6.02 %     5.97 %        
Floating rate debt
                                                               
Principal ($)
    785       140       140       140       245               1,450       1,450  
Variable rate payable
    3.21 %     3.94 %     4.53 %     4.85 %     5.15 %             4.51 %        
Interest rate swaps
                                                               
Principal ($)
    350       235       240                               825       29  
Fixed rate receivable
    4.69 %     5.14 %     4.45 %                             4.72 %        
Variable rate payable
    2.36 %     2.03 %     1.61 %                             1.85 %        
Principal (£)
    71       70       52       44                       237       8  
Fixed rate receivable
    4.83 %     5.11 %     5.69 %     5.07 %                     5.25 %        
Variable rate payable
    3.78 %     3.03 %     2.68 %     2.92 %                     2.98 %        
Principal (€)
    72       15       56                               143       2  
Fixed rate receivable
    3.97 %     4.14 %     4.04 %                             4.04 %        
Variable rate payable
    3.51 %     2.86 %     2.75 %                             2.88 %        
 
 
(1) Represents the net present value of the expected cash flows discounted at current market rates of interest as appropriate.

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WILLIS GROUP HOLDINGS PLC
 
Item 8 — Financial Statements and Supplementary Data
 
Index to Consolidated Financial Statements and Supplementary Data
 
         
    Page
 
    56  
    57  
    58  
    59  
    61  
    63  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Willis Group Holdings Public Limited Company
Dublin, Ireland
 
We have audited the accompanying consolidated balance sheets of Willis Group Holdings Public Limited Company and subsidiaries (the ‘Company’) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Willis Group Holdings Public Limited Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
As discussed in Note 2 to the consolidated financial statements, on January 1, 2009, the Company adopted the noncontrolling interest guidance from Accounting Standards Codification 810, Consolidations (formerly Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB 51). The Company has retrospectively adjusted all periods presented in the consolidated financial statements for the effect of this change.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
Deloitte LLP
London, United Kingdom
February 26, 2010


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WILLIS GROUP HOLDINGS PLC
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                         
    Years ended December 31,  
    2009     2008     2007  
    (millions, except per share data)  
 
REVENUES
                       
Commissions and fees
  $ 3,210     $ 2,744     $ 2,463  
Investment income
    50       81       96  
Other income
    3       2       19  
                         
Total revenues
    3,263       2,827       2,578  
                         
EXPENSES
                       
Salaries and benefits (including share-based compensation of $39 million, $40 million and $33 million (Note 4))
    (1,827 )     (1,638 )     (1,448 )
Other operating expenses
    (595 )     (603 )     (460 )
Depreciation expense
    (60 )     (54 )     (52 )
Amortization of intangible assets
    (100 )     (36 )     (14 )
Gain on disposal of London headquarters (Note 5)
          7       14  
Net gain on disposal of operations (Note 6)
    13             2  
                         
Total expenses
    (2,569 )     (2,324 )     (1,958 )
                         
OPERATING INCOME
    694       503       620  
Interest expense
    (174 )     (105 )     (66 )
                         
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES
    520       398       554  
Income taxes (Note 7)
    (96 )     (97 )     (144 )
                         
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST IN EARNINGS OF ASSOCIATES
    424       301       410  
Interest in earnings of associates, net of tax (Note 15)
    33       22       16  
                         
INCOME FROM CONTINUING OPERATIONS
    457       323       426  
Discontinued operations, net of tax (Note 8)
    2       1        
                         
NET INCOME
    459       324       426  
Less: net income attributable to noncontrolling interests
    (21 )     (21 )     (17 )
                         
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 438     $ 303     $ 409  
                         
AMOUNTS ATTRIBUTABLE TO WILLIS GROUP HOLDINGS SHAREHOLDERS
                       
Income from continuing operations, net of tax
  $ 436     $ 302     $ 409  
Income from discontinued operations, net of tax (Note 8)
    2       1        
                         
NET INCOME ATTRIBUTABLE TO WILLIS GROUP HOLDINGS
  $ 438     $ 303     $ 409  
                         
EARNINGS PER SHARE — BASIC AND DILUTED (Note 9)
                       
BASIC EARNINGS PER SHARE
                       
 — Continuing operations
  $ 2.60     $ 2.04     $ 2.82  
                         
DILUTED EARNINGS PER SHARE
                       
 — Continuing operations
  $ 2.58     $ 2.04     $ 2.78  
                         
CASH DIVIDENDS DECLARED PER SHARE
  $ 1.04     $ 1.04     $ 1.00  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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WILLIS GROUP HOLDINGS PLC
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,  
    2009     2008  
    (millions, except share data)  
 
ASSETS
               
Cash and cash equivalents
  $ 191     $ 176  
Fiduciary funds — restricted (Note 11)
    1,683       1,854  
Short-term investments (Note 11)
          20  
Accounts receivable, net of allowance for doubtful accounts of $20 million in 2009 and $24 million in 2008
    8,638       9,131  
Fixed assets, net of accumulated depreciation of $257 million in 2009 and $236 million in 2008 (Note 12)
    352       312  
Goodwill (Note 13)
    3,277       3,275  
Other intangible assets, net of accumulated amortization of $179 million in 2009 and $79 million in 2008 (Note 14)
    572       682  
Investments in associates (Note 15)
    156       273  
Deferred tax assets (Note 7)
    82       76  
Pension benefits asset (Note 16)
    69       111  
Other assets
    603       492  
                 
TOTAL ASSETS
  $ 15,623     $ 16,402  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Accounts payable
  $ 9,686     $ 10,314  
Deferred revenue and accrued expenses
    301       471  
Deferred tax liabilities (Note 7)
    29       21  
Income taxes payable
    46       18  
Short-term debt (Note 17)
    209       785  
Long-term debt (Note 17)
    2,165       1,865  
Liability for pension benefits (Note 16)
    187       237  
Other liabilities
    771       796  
                 
Total liabilities
    13,394       14,507  
                 
COMMITMENTS AND CONTINGENCIES (Note 18)
               
EQUITY
               
Shares, $0.000115 nominal value; Authorized: 4,000,000,000; Issued and outstanding, 168,661,172 Shares in 2009 and 166,757,654 Shares in 2008
           
Additional paid-in capital
    918       886  
Retained earnings
    1,859       1,593  
Accumulated other comprehensive loss, net of tax (Note 19)
    (594 )     (630 )
Treasury shares, at cost, 54,310 Shares in 2009 and 83,580 Shares in 2008
    (3 )     (4 )
                 
Total Willis Group Holdings stockholders’ equity
    2,180       1,845  
Noncontrolling interests
    49       50  
                 
Total equity
    2,229       1,895  
                 
TOTAL LIABILITIES AND EQUITY
  $ 15,623     $ 16,402  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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WILLIS GROUP HOLDINGS PLC
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Years ended December 31,  
    2009     2008     2007  
    (millions)  
 
CASH FLOWS FROM OPERATING ACTIVITIES
                       
Net income
  $ 459     $ 324     $ 426  
Adjustments to reconcile net income to total net cash provided by operating activities:
                       
Income from discontinued operations
    (2 )     (1 )      
Net gain on disposal of operations, fixed and intangible assets and short-term investments
    (14 )     (2 )     (20 )
Gain on disposal of London headquarters (Note 5)
          (7 )     (14 )
Depreciation expense
    60       54       52  
Amortization of intangible assets
    100       36       14  
(Release of) addition to provision for doubtful accounts
    (1 )     (8 )     2  
Provision for deferred income taxes
    (21 )     46       66  
Excess tax benefits from share-based payment arrangements
    (1 )     (6 )     (9 )
Share-based compensation (Note 4)
    39       40       33  
Undistributed earnings of associates
    (21 )     (13 )     (10 )
Changes in operating assets and liabilities, net of effects from purchase of subsidiaries:
                       
Fiduciary funds — restricted
    221       (224 )     216  
Accounts receivable
    618       (599 )     455  
Accounts payable
    (773 )     782       (722 )
Additional funding of UK and US pension plans
          (107 )     (153 )
Other assets
    (102 )     (277 )     6  
Other liabilities
    (137 )     130       (68 )
Effect of exchange rate changes
    (4 )     56       1  
                         
Net cash provided by continuing operating activities
    421       224       275  
Net cash used in discontinued operating activities
    (3 )            
                         
Total net cash provided by operating activities
    418       224       275  
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Proceeds on disposal of fixed and intangible assets
    20       6       27  
Additions to fixed assets
    (96 )     (94 )     (185 )
Acquisitions of subsidiaries, net of cash acquired
          (940 )     (41 )
Acquisition of investments in associates
    (42 )     (31 )     (1 )
Proceeds from reorganization of investments in associates (Note 6)
    155              
Proceeds from sale of continuing operations, net of cash disposed
    4       11        
Proceeds from sale of discontinued operations, net of cash disposed
    40              
Proceeds on sale of short-term investments
    21       15       19  
                         
Net cash provided by (used in) continuing investing activities
    102       (1,033 )     (181 )
Net cash provided by discontinued investing activities
                 
                         
Total net cash provided by (used in) investing activities
    102       (1,033 )     (181 )
                         
 
 
(Continued on next page)


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WILLIS GROUP HOLDINGS PLC
 
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
 
                         
    Years ended December 31,  
    2009     2008     2007  
    (millions)  
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM OPERATING AND INVESTING ACTIVITIES
    520       (809 )     94  
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from draw down of revolving credit facility
                50  
Proceeds from issue of short-term debt, net of debt issuance costs
          1,026        
Proceeds from issue of long-term debt, net of debt issuance costs
          643        
Repurchase of 2010 senior notes
    (160 )            
Repayments of debt
    (929 )     (641 )     (200 )
Senior notes issued, net of debt issuance costs
    778             593  
Repurchase of shares (Note 21)
          (75 )     (480 )
Proceeds from issue of shares
    18       15       25  
Excess tax benefits from share-based payment arrangements
    1       6       9  
Dividends paid
    (174 )     (146 )     (143 )
Acquisition of noncontrolling interests
    (33 )     (7 )     (40 )
Dividends paid to noncontrolling interests
    (17 )     (13 )     (7 )
                         
Net cash (used in) provided by continuing financing activities
    (516 )     808       (193 )
Net cash provided by discontinued financing activities
                 
                         
Total net cash (used in) provided by financing activities
    (516 )     808       (193 )
                         
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    4       (1 )     (99 )
Effect of exchange rate changes on cash and cash equivalents
    11       (23 )     11  
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    176       200       288  
                         
CASH AND CASH EQUIVALENTS, END OF YEAR
  $ 191     $ 176     $ 200  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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WILLIS GROUP HOLDINGS PLC
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME
 
                         
    December 31,  
    2009     2008     2007  
    (millions, except share data)  
 
SHARES OUTSTANDING (thousands)
                       
Balance, beginning of year
    166,758       143,094       153,003  
Shares issued
    486       24,720       406  
Repurchase of shares (Note 21)
          (2,270 )     (11,515 )
Exercise of stock options and release of non vested shares
    1,417       1,214       1,200  
                         
Balance, end of year
    168,661       166,758       143,094  
                         
ADDITIONAL PAID-IN CAPITAL
                       
Balance, beginning of year
  $ 886     $ 41     $ 388  
Issue of shares under employee stock compensation plans and related tax benefits
    18       20       35  
Repurchase of shares (Note 21)
          (55 )     (432 )
Issue of shares for acquisitions
    12       840       16  
Share-based compensation
    39       40       33  
Acquisition of noncontrolling interests
    (33 )            
Repurchase of out of the money options
    (4 )            
Gains on sale of treasury shares
                1  
                         
Balance, end of year
    918       886       41  
                         
RETAINED EARNINGS
                       
Balance, beginning of year
    1,593       1,463       1,250  
Adjustment for uncertain tax positions
                (4 )
                         
      1,593       1,463       1,246  
Net income attributable to Willis Group Holdings(a)
    438       303       409  
Dividends
    (172 )     (154 )     (143 )
Repurchase of shares (Note 21)
          (19 )     (49 )
                         
Balance, end of year
    1,859       1,593       1,463  
                         
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX
                       
Balance, beginning of year
    (630 )     (153 )     (178 )
Foreign currency translation adjustment(b)
    27       (89 )     17  
Unrealized holding loss(c)
    (1 )            
Pension funding adjustment(d)
    (33 )     (355 )     7  
Net gain (loss) on derivative instruments(e)
    43       (33 )     1  
                         
Balance, end of year
    (594 )     (630 )     (153 )
                         
 
 
(Continued on next page)


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WILLIS GROUP HOLDINGS PLC
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND
COMPREHENSIVE INCOME — (Continued)
 
                         
    December 31,  
    2009     2008     2007  
    (millions, except share data)  
 
TREASURY SHARES
                       
Balance, beginning of year
    (4 )     (4 )     (6 )
Shares reissued under stock compensation plans
    1             2  
                         
Balance, end of year
    (3 )     (4 )     (4 )
                         
TOTAL WILLIS GROUP HOLDINGS SHAREHOLDERS’ EQUITY
    2,180       1,845       1,347  
                         
NONCONTROLLING INTERESTS
                       
Balance, beginning of year
    50       48       42  
Net income
    21       21       17  
Dividends
    (17 )     (13 )     (7 )
Purchase of subsidiary shares from noncontrolling interests, net
    (10 )     (4 )     (6 )
Acquisition of noncontrolling interests
    5              
Foreign currency translation
          (2 )     2  
                         
Balance, end of year
    49       50       48  
                         
TOTAL EQUITY
  $ 2,229     $ 1,895     $ 1,395  
                         
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO WILLIS GROUP HOLDINGS(a+b+c+d+e)
  $ 474     $ (174 )   $ 434  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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WILLIS GROUP HOLDINGS PLC
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
1.   NATURE OF OPERATIONS
 
Willis Group Holdings plc (‘Willis Group Holdings’) (formerly Willis Group Holdings Limited (‘Willis-Bermuda’) — see Note 2 — Redomicile to Ireland) and subsidiaries (collectively, the ‘Company’ or the Group) 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
 
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 24 and 25.
 
Recent Accounting Pronouncements and Significant Accounting Policies
 
These consolidated financial statements conform to accounting principles generally accepted in the United States of America (‘US GAAP’). Presented below are summaries of:
 
•  Recent accounting pronouncements; and
 
•  Significant accounting policies followed in the preparation of the consolidated financial statements.
 
Recent Accounting Pronouncements
 
Accounting Standards Codification
 
During third quarter 2009, the new Accounting Standards Codification (‘ASC’) was issued by the Financial Accounting Standards Board (‘FASB’). The ASC has become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. The ASC is not intended to change or alter existing GAAP and therefore all references to GAAP remain throughout this document.


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WILLIS GROUP HOLDINGS PLC
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Business Combinations
 
New accounting guidance related to business combinations was effective from January 1, 2009. This guidance made substantial changes to how entities account for business combinations, establishing principles and requirements for how the acquirer:
 
•  recognizes and meas