Willis Group Outperforms - Analyst Blog

Willis Group Holdings plc (WSH) reported its second-quarter 2010 adjusted net income from continuing operations of 54 cents, lagging the Zacks Consensus Estimate of 57 cents by 3 cents. Results compare favorably with 52 cents in second quarter 2009. Adjusted net income from continuing operations was $92 million compared with $88 million in the prior year quarter.

Including loss on disposal of operations of $3 million or 2 cents per share, Willis reported net income of $89 million or 52 cents per share compared with $87 million or 52 cents per share. The prior-year quarter included integration costs of $1 million.

Total revenue of Willis in the quarter was $799 million, up 2% year-over-year. The improvement was driven by an increase in commissions and fees, partially offset by a decline in investment income.

Commissions and fees of Willis increased 2% year over year due to strong performance by its Global and International segments. However, North America segment reported lower commissions and fees. Also, foreign currency movements unfavorably impacted commissions and fees.

Investment income of Willis declined 17% year-over-year attributable to lower interest rate.

Total expense of Willis increased 1.8% year over year to $630 million.

Segment Update

Global: Commissions and fees increased 4% with an organic growth of 7% in the quarter under review. Operating margin was 31.8% compared with 35.4% in second-quarter of 2009.

North America: Commissions and fees declined 2% year over year while organic decline was 1% year-over-year. A tepid insurance market and lackluster US economy weighed on the benefits on new business growth, improved client retention, and positive growth in the employee benefits practice. Operating margin decreased 180 basis points year-over-year to 20.5% in the quarter.

International: Commissions and fees increased 6% year-over-year while organic growth was 8% year-over-year. All regions performed strongly with double- digit growth recorded in Latin America, Asia and Eastern Europe. The UK and Ireland retail markets recorded modestly positive growth after several negative quarters. Operating margin was 23.5% compared with 23% in second-quarter 2009.

Operating income was $171 million or 21.4% of revenue, compared with $166 million or 21.2% of revenue.

Financial Update

Cash and cash equivalents balance of Willis at the end of the quarter was $139 million compared with $191 million at the end of fourth quarter 2009.

Long-term debt at the end of second-quarter 2010 declined to $2.15 billion from $2.17 billion at fourth-quarter 2009.

Dividends

The board of directors of Willis declared a quarterly cash dividend of 26 cents per share. The dividend is payable on October 15, 2010 to shareholders of record on September 30, 2010. The dividend represents an annual rate of $1.04 per share.

With Willis recording new business growth and high client retention and expanding operating margins by focusing on cost reduction, we expect the company to post solid results with economic recovery gaining pace. We maintain a “Neutral” recommendation on Willis. The quantitative Zacks #3 Rank (Hold) for the company indicates no clear directional pressure on the shares over the near term.