Willis Group Beats Estimates - Analyst Blog

Willis Group Holdings plc (WSH) reported its third-quarter 2010 adjusted net income from continuing operations of 37 cents, beating the Zacks Consensus Estimate of 31 cents by 6 cents. Results are way behind 53 cents in third-quarter 2009. Adjusted net income from continuing operations was $64 million, down 28% from $90 million in the prior-year quarter.

The beat may likely be attributable to higher commissions and fees coupled with lower operating expenses.

Total revenue at Willis in the quarter was $733 million, up 1.1% year over year. The improvement was driven by an increase in commissions and fees.

Commissions and fees increased 1.3% year over year in the quarter due to strong performance at Global and North America segments. However, the International segment reported lower commissions and fees. Also, foreign currency movements unfavorably impacted commissions and fees.

Investment income of Willis was $10 million, flat year over year.

Total expense decreased 2.5% year over year to $627 million. A decline in operating expense, due to benefits realized from the release of a previously established $7 million legal accrual and foreign currency movements, was partially offset by an increase in salaries and benefits attributable to increased head count and higher incentive compensation.

In the quarter under review, operating income was $106 million, up 12% form $95 million in the prior-year quarter. Operating margin, at 14.5%, increased 320 basis points year over year. The expansion was largely driven by solid growth in organic commissions and fees, positive impact of foreign currency movements and cost control measures. However, the higher incentive compensation was a partial offset.

Segment Update

Global: Commissions and fees increased 3% with an organic growth of 4% in the quarter under review. Operating margin was 19.7% compared with 18.8% in third-quarter 2009.

North America: Both commissions and fees improved 2% year over year. Organic growth too registered a growth of 2%. Benefits from new business growth and improved client retention were to some extent muted by a tepid insurance market and a lackluster US economy. Operating margin declined 10 basis points year over year to 21.4% in the quarter.

International: Commissions and fees decreased 2% year over year while organic growth was 6%. All regions performed strongly with double-digit growth recorded in Latin America, Asia and Eastern Europe. The retail markets in the UK, Continental Europe and Ireland recorded single-digit growth. The negative impact of foreign currency movement more than offset the strong organic growth, resulting in an operating margin of 9.6% compared with 13.4% in third-quarter 2009.

Financial Update

The cash and cash equivalent balance of Willis at the end of the quarter was $141 million compared with $191 million at the end of fourth-quarter 2009.

Long-term debt at the end of third-quarter 2010 declined to $2.20 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 January 14, 2011, to shareholders of record as on December 31, 2010. The dividend represents an annual rate of $1.04 per share.

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