Willis Revenues Up 5.4% in Third Quarter

Willis Group recorded third quarter organic commissions and fees growth of 5.7%. The Group's three business units each contributed positively to this quarter's performance, with Willis North America contributing growth of 3.9%, Willis International contributing growth of 7.8% and Willis Global contributing growth of 6.4%.

Willis Group reported a net loss from continuing operations of $(27) million, or $(0.15) per diluted share, in the third quarter of 2013 after recording a $60 million loss related to early extinguishment of debt and an expense of $1 million for related fees. These results compare to reported earnings per diluted share of $0.15 in the third quarter of 2012. Foreign currency movements had no net impact on earnings per diluted share during the quarter.

Adjusted net income from continuing operations, which excludes the after-tax impact of the previously noted charges and other items detailed in note 3 of the supplemental financial information included in this press release, was $0.19 per diluted share in the third quarter of 2013 compared to $0.22 per diluted share, in the same period a year ago. However, both reported and adjusted results in the third quarter of 2012 would have been $0.07 per diluted share lower had the previously disclosed change to remuneration policy been effective from the beginning of 2012.

"Once again we delivered strong top line results, our fourth consecutive quarter of mid-single digit organic growth with positive contributions from each of our businesses," said Willis Group CEO, Dominic Casserley. "We believe this is in line with the goals we laid out at our Investor Conference in July of growing revenues with positive operating leverage to improve cash flow and deliver strong shareholder returns."

Casserley added: "Also, during the quarter, we strengthened our balance sheet by effectively refinancing portions of our nearer term debt into new debt with maturities out ten and thirty years. We accomplished that while decreasing our overall debt costs."

Third quarter 2013 financial results

Revenues

Total revenues, which includes commissions and fees, investment income, and other income, were $795 million in the third quarter of 2013, an increase of 5.4% compared to the year ago quarter.

Total reported commissions and fees for Willis Group improved to $791 million in the third quarter of 2013, up from $749 million in the prior year quarter. Commissions and fees in the third quarter of 2013 were unfavorably impacted by $4 million of foreign currency movements. Third quarter 2013 organic commissions and fees grew 5.7% relative to the third quarter of 2012.

Willis North America segment

The North America segment achieved 3.9% organic commissions and fees growth in the third quarter of 2013 compared to the third quarter of 2012.

Growth in commissions and fees was reported across most of North America's geographic regions. Similarly, almost all of the major industry practices recorded positive growth with the two largest practices, Human Capital and Construction, growing low single digits and mid-single digits, respectively, during the quarter.

Willis International segment

The International segment achieved 7.8% organic growth in commissions and fees in the third quarter 2013 compared with the same period in 2012.

Operations in Western Europe were flat in the quarter, with growth in some countries offset by declines in others. Eastern Europe recorded low double digit growth. Operations in the U.K. declined mid-single digits. Latin America operations grew mid-teens with strong growth from a number of the larger countries in the region. Operations in Asia grew high double digits and Australasia was up low double digits.

Willis Global segment

The Global segment,which comprises Willis Re, Specialty, Placement, and Willis Capital Markets and Advisory, achieved 6.4% organic growth in commissions and fees in the third quarter of 2013, compared with the third quarter of 2012.

Global segment growth was led by Willis Re which recorded growth in the high single digits. The Specialties reinsurance business reported growth in the mid-teens, driven by new business. North America reinsurance business reported growth in the high single digits and the International reinsurance business grew mid-single digits.

Global Specialty grew mid-single digits, with good growth from new business. Most notable was the strong performance from Financial and Executive risks, and P&C and Construction during the quarter.

Expenses

Total reported expenses, which include salaries and benefits, other operating expenses, depreciation expense, amortization of intangible assets, and gains and losses on disposal of operations, were $720 million in the third quarter of 2013, compared with $684 million in the third quarter of 2012, an increase of 5.3%. Total expenses were favorably impacted by $4 million of foreign currency movements in the third quarter of 2013 and the quarter over quarter comparison was negatively impacted by the previously disclosed change in remuneration policy, discussed below.

Reported salaries and benefits were $541 million in the third quarter of 2013, compared with $502 million in the third quarter of 2012, an increase of 7.8%. Had the previously disclosed change in remuneration policy been effective from January 1, 2012, comparable salaries and benefits in the third quarter of 2012 would have been approximately $17 million higher and the quarter over quarter increase in salaries and benefits would have been 4.2%.

This remaining increase in reported salaries and benefits was primarily due to increased headcount relative to the prior year and annual salary reviews, partially offset by favorable foreign currency movements amounting to $3 million in the quarter.

Reported salaries and benefits were equivalent to 68.1% of revenues in the third quarter of 2013 and, had the previously disclosed change in remuneration policy been effective from January 1, 2012, salaries and benefits would have been 68.8% of revenues in the third quarter of 2012.

Other operating expenses in the third quarter of 2013 were $144 million, compared to $146 million in the year ago period, a decrease of 1.4%.

Other operating expenses in the third quarters of 2013 and 2012 were impacted by items detailed in note 2 of the supplemental financial information. After adjusting for these items, other operating expenses were $8 million or 5.9% higher in third quarter 2013 compared to the year ago period. This increase was primarily driven by higher business development expenses and professional fees.

Depreciation and Amortization of intangible assets were $21 million and $14 million respectively, in both third quarter 2013 and 2012.

Operating margin

Willis Group reported and adjusted operating margin was 9.4% and 9.6%, respectively, in the third quarter 2013. This compares to reported and adjusted operating margin in third quarter 2012 of 9.3% and 10.9%, respectively. The decline in adjusted operating margin was primarily driven by higher salary and benefits and other operating expenses (as discussed above); partially offset by higher commissions and fees.

Interest expense

Interest expense was $30 million in the third quarter of 2013 compared with $32 million in the year ago quarter.

Early extinguishment of debt

Willis Group recorded a $60 million loss related to the previously announced early extinguishment of debt that was executed during the quarter in conjunction with the refinancing of a portion of the Company's outstanding debt, as described below in "Balance sheet and capital management highlights." The Company also reported a $1 million expense (recorded within Other operating expenses) for related fees.

Tax

Despite reporting a pre-tax net loss of $(15) million for the quarter ended September 30, 2013, the Company recorded $11 million of tax expense in the period. This was driven by the charges related to the early extinguishment of debt that was issued by Willis North America. As previously disclosed, the Company has maintained a valuation allowance against net U.S. deferred tax assets. Therefore, no tax benefit was recognized for the debt extinguishment charges recorded during the quarter, resulting in a higher consolidated tax expense. When looking at the quarter's results excluding the extinguishment charges, the tax rate was approximately 24%. For the nine months ended September, 30, 2013, the reported tax rate was approximately 23%. The reported tax rate for the three months and nine months ended September 30, 2012 was 26% and 24%, respectively.

Nine months 2013 financial results

Reported net income from continuing operations, for the nine months ended September 30, 2013 was $297 million, or $1.67 per diluted share, compared with $358 million, or $2.03 per diluted share, in the same period a year ago.

Adjusted earnings from continuing operations per diluted share, which excludes the impact of items detailed in note 3 of the supplemental financial information, were $2.22 for the nine months ended September 30, 2013 compared with $2.13 in the comparable period of 2012. However, both reported and adjusted results in the first nine months of 2012 would have been $0.14 per diluted share lower had the previously disclosed change to remuneration policy been effective from the beginning of 2012. Net foreign currency movements decreased earnings by $0.04 per diluted share in the nine months ended September 30, 2013.

Total commissions and fees were $2,722 million for the first nine months of 2013, compared to $2,591 million for the first nine months of 2012. Organic growth in commissions and fees was 5.3% in the first nine months of 2013.