Willis Corroon Group P.L.C.

10 Trinity Square, London EC3P 3AX, England; 44-171-488-8111;

fax: 44-171-488-8223

1 Century Place, 26 Century Blvd., Nashville, Tenn. 37214; 615-872- 3000; fax: 615-872-3091

Internet: www.wcg.co.uk

www.wilcor.com

1996 1995

Premium volume $10.92 billion $11.05 billion

Gross revenues $1.13 billion $1.11 billion

Brokerage: Retail 51% 42%

Wholesale 12% 19%

Reinsurance 18% 17%

Personal 5% 5%

Services 8% 10%

Investment income 6% 7%

Employees 9,116 10,226

Rev./Employee $124,036 $108,945

Offices 128 130

Willis Corroon saw its restructuring and expense control efforts begin to bear fruit in 1996.

Gross revenues increased 2.7% to 725 million pounds from 706 million pounds in 1995. Converted to U.S. dollars at applicable exchange rates, that reflects a 2% increase, to $1.13 billion from $1.11 billion in 1995.

Better news came in pretax profits, which, including discontinued operations, came in at 91.6 million pounds ($142.9 million), up 82% on its 1995 level.

For 1995, Willis reported exceptional charges totaling 36.6 million pounds ($57.8 million), and the broker faced other charges in 1996. A charge of 6.3 million pounds ($9.8 million) related to Lloyd's of London's reconstruction and renewal plan; adverse exchange rate movements, which wiped 3.1 million pounds ($4.8 million) off the bottom line; and 11.3 million pounds ($17.6 million) in severance costs relating to restructuring, all cut into profits.

Staff numbers fell as part of Willis' restructuring while revenues per employee soared 14%, and Willis disposed of several non-core operations in the United States, adding 2.5 million pounds ($3.9 million) to Willis' profits.

As part of the restructuring, Willis used the proceeds from sold operations to reduce debt to zero and strengthen the balance sheet.

In the first quarter of this year, revenues including discontinued operations fell 7% to 193.9 million pounds ($328.1 million) compared with the same period last year. Pretax profits also declined 5% to 45.7 million pounds ($77.3 million). This was "in line with expectations," Executive Chairman John Reeve said in a statement. The results reflected both the highly competitive conditions in the insurance market and the strength of the British pound against the dollar and other currencies.

The increase in 1996 gross revenues is attributable to internal growth. In addition, Willis in 1996 assumed 100% ownership of two associate offices, one in Australia and another in the Netherlands. Willis also opened offices in Sao Paulo, Brazil; Santiago, Chile; and Malmo, Sweden.

So far in 1997, Willis has acquired three small U.S. offices, raised its stake in its former associate office in Brazil to 100% from 30% and agreed to buy a one-third share in French broker Gras Savoye S.A., the world's ninth-largest broker. Willis also became a licensed insurance broker in Japan and opened a representative office in Shanghai, its second in China.

Three U.S. operations were sold last year, including employee benefit consulting firm WF Corroon to Buck Consultants Inc., now owned by Pittsburgh-based Mellon Bank Corp. Willis continues to broker employee benefit plans and has a mutual arrangement with Buck to service clients.

Divestitures of non-core operations have been completed with Willis' recent announcement of the buyout of its Lloyd's members agent, Willis Faber & Dumas (Agencies) Ltd. by the agency's management. Willis Faber & Dumas contributed 14.5 million pounds ($22.6 million) to the broker's 1996 profits.

"When we looked critically at our business, there were a number of areas where we did not have particularly strong positions and where to make them strong we would have had to invest enormous amounts of money and time and effort, and we were very unsure that we would get adequate rewards on that," Mr. Reeve explained in an interview. "So we have been refocusing our business on the areas where we think we can truly succeed, and activities that don't fit with that clear, sharp focus we would rather dispose of in order to concentrate our resources in the areas where we can be most effective."

Growth in 1996 was "against a generally pretty difficult industry background of declining premiums," said Mr. Reeve. Critical business areas for Willis Corroon, such as marine insurance and non-marine reinsurance, saw "sharp declines," he added.

Rate declines varied across the group, said Group Executive Director Max Taylor, who is expected to leave Willis next year to become chairman of Lloyd's.

The soft rating environment is a "major challenge," said Mr. Reeve, "but it's one that we are overcoming" by cutting expenses, increasing revenues and offering clients various risk financing solutions.

Willis has set performance targets and strategies for individual business units, though the company would not provide details.

Currently, 80% of Willis' revenues come from the United Kingdom and the United States, though the broker is looking to increase its share from other territories.

"We've been pretty consistent over the last few years in terms of our group strengths," said Mr. Taylor. "We've got a very prominent position.*.*.in the U.K. retail market, particularly with the upper end of the market. As far as the U.K. is concerned, we have both market share and a very high level of expertise and skill."

Willis' traditional U.S. business has come from middle-market companies, or those that typically do not have a full-time risk manager. In recent years, the broker has been trying to expand on its well-established middle-market presence, turning to other group strengths, such as aerospace, marine, energy, financial and professional risks, as well as reinsurance. These businesses now are "thriving," said Mr. Taylor.

This has been brought about partly by a restructuring program begun in the fall of 1994. "Early 1995 saw

.*.*.implementation of that activity," explained Kenneth Pinkston, chairman of Willis Corroon Corp. of Nashville, Tenn., and group executive director of Willis Corroon Group P.L.C. "That resulted in improved results in 1995 and.*.*.again in 1996. And now what we are focusing on is a commercial brokerage approach-an initiative to find ways to improve the revenue, which is a challenge for all brokers in this environment."

The emphasis of the restructuring is to instigate a "best practice" environment throughout all North American operations. "We are trying to bring all offices up to a higher level of expertise and ability to deliver," said Mr. Pinkston.

Acquisitions form part of that program, but he and Mr. Reeve insisted that Willis is focused on internal revenue growth and bringing "quality people" into the organization.

The three acquisitions so far this year-the Nashville, Tenn., office of Lockton Cos., the Atlanta office of Arthur J. Gallagher & Co. and an unidentified "small independent brokerage firm" specializing in construction-had purchase prices in the region of $1.5 million to $3 million each.

More acquisitions are in the pipeline, and some have reached the evaluation stage, said Mr. Pinkston. He said he would be pleased if two more acquisitions were completed by the end of the year, and it could continue.

"As long as the environment is proper for that, we would certainly want to continue," he said. A proper environment includes willing sellers and a good fit with the Willis network and corporate philosophy.

"The key with acquisitions is that they have to fit our overall strategic focus-they have to really do something for us," said Mr. Reeve. "They have to be a very good cultural fit, particularly in terms of the quality and professionalism of the business. And they have to fit fairly stringent financial criteria we impose in that they have to be shareholder value-creating over time. . . .So acquisitions do have their place. They are a part of our strategy."

Willis continues to increase its international presence, and Mr. Taylor rebutted analysts' suggestion that the broker was historically focused on just North America and the United Kingdom.

"My view is that Willis has historically been the most geographically diversified of the brokers," he said. It's a mistake to confuse an international presence with revenues, he said, but Willis plans to increase its network of offices in 74 countries.

Although a relatively small proportion of revenues come from local operations, a much larger percentage is from clients from all over the world, he said. That substantial international client base has allowed Willis to expand into markets where it already has a presence in some form.

Since 1990, Willis has concentrated on expanding operations in three geographic regions: Europe, Asia and Latin America.

Continental European operations have spread to include a network of offices, ranging from France to Greece. "They are either owned or we have a substantial shareholding," said Mr. Taylor. Most recently, Willis agreed to buy a one-third stake in Gras Savoye, France's largest broker.

Mr. Reeve said investing in Gras Savoye fits Willis' strategy to "achieve leadership positions in particular markets." Historically, Willis and Gras Savoye had a close relationship as part of the UNISON network, in which Willis was the U.K.-based partner. That relationship was severed when Willis Faber Group P.L.C. merged with U.S. broker Corroon & Black Corp. in 1990, at which point Johnson & Higgins took over Willis' role.

However, Johnson & Higgins' acquisition by Marsh & McLennan Cos. Inc. this year removed J&H from UNISON, casting the network's future into uncertainty.

Mr. Reeve refused to say whether Willis will forge relationships with the remaining UNISON partners.

"Each former member of UNISON has to make a decision about what they want to do," he said, adding that Gras Savoye will continue to trade with UNISON members. "Ultimately, we will have to see who owns the individual members."

In any case, Willis routinely examines "a whole range of opportunities" for new business relationships, said Mr. Reeve.

The string of megamergers among the top brokers is creating opportunities for Willis in Europe. It has "made many other brokers. . .rethink their strategy, and as a result of that, we have had some opportunities that would not have occurred had the megamergers not taken place," said Mr. Reeve.

Also, Willis has attracted some'very high-caliber people" in its U.S. operations, and the broker expects to continue hiring qualified individuals and teams, Mr. Reeve said.

The Asia-Pacific region continues to attract Willis' attention. In addition to its inroads into the Japanese and Chinese markets, the broker has built a network of offices from South Korea to New Zealand, and last year acquired full ownership of Australian associate Willis Corroon Richard Oliver Pty.

Latin America is the third geographic region to attract Willis'

interest. "Our strategy in Latin America has been to establish very high-quality local reinsurance-based operations," said Mr. Taylor. Local staff members help cement relationships with local insurers, and the organization is in the process of building a retail network.

"There are a number of initiatives we are looking at in terms of how to move that forward," said Mr. Taylor.

Earlier this month, Willis bought out Brazilian broker York Willis Corroon Corretores de Seguros S.A., in which Willis previously held a 30% stake.

Through all this activity, Willis has been parrying rumors of a possible merger with rival Sedgwick Group P.L.C. Certain investment analysts have said both brokers could be digging their own graves if they don't merge, as Aon Group Inc. and Alexander & Alexander Services Inc., and J&H and M&M have done.

Willis has softened its previously hard line about the possibility of a large merger. "Well, you can never rule anything out absolutely, but that's not part of our strategy," said Mr. Reeve. "We have a clear strategy to add value on behalf of our shareholders and to develop this business further, and we think that we wish to pursue that strategy vigorously."

"We have no major strategic alliances in process," said Mr. Pinkston, though "we might consider some of a global basis."

The concept of shareholder value is an important facet of Willis' strategy. Also high on the strategy list is providing added value to the customer. Willis is moving from being a broker of traditional insurance products to becoming an adviser on a client's total risk exposure. As a consequence, Mr. Reeve expects to see more revenue coming from fees rather than commissions.

"Certainly we regard ourselves as becoming increasingly more like a professional service firm over time and less and less like a pure transaction broker," said Mr. Reeve.

The restructuring also has resulted in an 11% drop in head count between 1995 and 1996, though Mr. Reeve does not anticipate more "around the corner." The reduction helped cut Willis Corroon's cost base "to a much better level than had existed previously," he said. Willis continues to look for new ways to increase efficiency and customer service.

Last year, as part of its customer service initiative, Willis conducted market research into the wants and needs of corporate risk managers. The results showed "that there are quite different buying characteristics exhibited by clients," said Mr. Taylor. That has enabled the organization to sharpen its focus.

"We think we have a pretty good understanding of the way the market segments and the different types of corporate buyer that exist out there," said Mr. Reeve, "and we have some fairly tailored value propositions for different groups of clients."

He also sees educating clients in risk management alternatives as part of Willis' role. "We are in the business fundamentally of meeting client needs, but we are also able to change the thinking-at least sometimes-about what their problem is and what they really need."

Willis has been seeing more business from new as well as current clients as the result of the recent broker megamergers, as clients want more choice. And more customers are turning to the company as Willis communicates its strategy, said Mr. Taylor.

"Whereas historically we have tended to look at the business in terms of size, in terms of scale, in terms of how much (we) can generate in revenue, by thinking of it completely differently-in terms of where we can differentiate ourselves, where are the opportunities-we are suddenly finding a whole lot of opportunities are opening up to us," he said.

But not all is so positive. Earlier this month, Willis decided to put its insurance subsidiary Sovereign Marine & General Insurance Co. Ltd. into provisional liquidation.

Sovereign had been in runoff since 1991, and reserve strengthening since then had cost Willis 72.8 million pounds ($123.2 million), on top of runoff costs of 20 million pounds ($33.8 million). The decision to stop supporting Sovereign was made "with great sadness," said Mr. Reeve, after it lost an arbitration with London-based reinsurer AXA Reinsurance (U.K.) P.L.C., which prevented Sovereign claiming reinsurance recoveries estimated at 10 million pounds.

On examining the arbitration report, "it became clear that it could have very significant implications in terms of additional liabilities for Sovereign," explained Mr. Reeve, and an immediate consequence would have been to increase Sovereign's reserves substantially. AXA Re was only one of the reinsurers involved, said Mr. Reeve, and the arbitrator's decision could have serious implications for other reinsurance treaties held by Sovereign. London market executives say Willis' decision may have jeopardized its relationship with various companies in the London insurance market.

But, in the prevailing soft market, insurers and reinsurers are continuing to court brokers.

Willis is factoring a competitive insurance market into its plans for the next century.

"We think it's a prudent planning assumption that there is excess capital in the global insurance markets, that premium rates will continue under pressure," said Mr. Reeve. Consequently, Willis has broadened the spread of products and services it offers its clients. Willis' aim, said Mr. Reeve, is "to be innovative on behalf of the client and to seek proper reward for achieving what we think we can achieve, but it does require quite a lot of cultural change and change in the way we do our business."