S&P Ups Willis Outlook to Positive; Affirms ‘BBB-‘ Rating

December 15, 2005

Standard & Poor’s Ratings Services announced that it has revised its outlook on Willis Group Holdings Ltd. to positive from stable and has affirmed its “BBB-” counterparty credit and senior unsecured debt ratings on Willis.

“The positive outlook reflects our belief that Willis’ competitive position would be significantly enhanced should the company maintain its strong and industry-leading margins while increasing market share in the next 12 to 24 months due to recent strategic decisions,” explained S&P credit analyst Donovan Fraser.

The bulletin notes: “In 2005, the company capitalized on market disruptions in the wake of industry investigations by embarking on a series of high-profile hires from its main competitors while at the same time paying incentives to retain key executives and realigning its cost structure through efficiency initiatives announced in the first quarter of 2005. Standard & Poor’s believes that the company’s current investment in personnel and expense reduction initiatives is a prudent long-term strategy.

“In the short to medium-term the company might experience some continued though marginal decline in operating performance. The rating action also contemplates the reduced potential that ongoing regulatory investigations will trigger allegations that would materially impact Willis’ competitive or financial condition. This is because of recent regulatory and private-party settlements and the passage of time.

“The ratings are based on the company’s good competitive position as the world’s third-largest broker, strong though moderating operating margins, and good financial profile as measured by leverage and coverage metrics commensurate with the rating.”

However S&P also notes: “Offsetting the company’s strengths is continued uncertainty regarding the implementation of the company’s new business model absent volume and profit-based contingent commissions (market remuneration fees).” S&P said it “believes that Willis’ ROR might decline in the near to intermediate term but remain more than 18 percent in 2005 and improve to more than 20 percent in 2006 while continuing to remain above its peer group average. In the long run, Willis’ ability to replace prior market remuneration revenue with transparent fee-based revenue will determine future earnings growth. ”

S&P also indicated that it “believes that the net effect of the company’s executive recruitment and retention strategy should result in a measurable gain in market share in the next 12 to 24 months once newly hired producers have the opportunity to attract and bind new business.” The rating agency “further expects that the company will stay consistent with its long-term goals of maintaining financial leverage at about 30 percent and interest coverage in excess of 10x. Should the company’s strategic direction lead to market share gains while maintaining strong operating results, Standard & Poor’s would consider an upgrade.

“Conversely, should market share gains not materialize, the company may be left with increased expenses relative to its recent lean averages that may lead to continued margin compression and a reversion to the mean operating statistics of the industry. At such time, Standard & Poor’s would consider revising the outlook to stable and perhaps negative.”

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