Willis Group Beats Bottom Line

Willis Group Holdings plc (WSH - Analyst Report) reported its third-quarter 2011 adjusted net income from continuing operations of 41 cents per share, beating the Zacks Consensus Estimate by 4 cents. Results are also ahead of 37 cents earned in third-quarter 2010. Adjusted net income from continuing operations was $72 million, up 12.5% from $64 million in the prior-year quarter.

The beat may likely be attributable to higher commissions and fees.

Adjusting for an operational review charge of $11 million or 6 cents and notes and write-off of unamortized debt issuance costs of $1 million or 1 cent per share, the company reported earnings of $60 million or 34 cents per share, compared with $64 million or 37 cents per share in the prior-year quarter.

Operational Performance

Total revenue at Willis in the quarter was $762 million, up 4% year over year. The improvement was driven by an increase in commissions and fees. Revenue, however, lagged the Zacks Consensus estimate of $765 million.

Commissions and fees increased 4.4% year over year in the quarter due to strong performance at Global and International segments. However, the North America segment reported lower commissions and fees.

Investment income of Willis in the third quarter declined 30% from the year-ago quarter to $7 million.

Total expense increased 7.2% year over year to $672 million. An increase in salaries and benefits coupled with an increase in operating expense led to the overall climb.

In the quarter under review, adjusted operating income was $105 million, down 1% from $106 million in the prior-year quarter. Operating margin contracted 70 basis points largely due adverse effect of Loan Protector’s reduced financial performance and increased amortization of retention awards, partially offset by savings associated with the 2011 operational review.

Segment Update

Global: Organic growth in commissions and fees increased 9% in the quarter under review while reported growth increased 12%.

Operating margin was 22.4%, contracting 70 basis points due to unfavorable foreign currency movements and higher amortization of retention awards, partially offset by lower pension expense and strong growth in commissions and fees.

North America: Organic as well as reported decline in commissions and fees were 4% in the quarter under review.

Operating margin contracted 180 basis points due to decline organic growth in commissions and fees.

International: Commissions and fees increased 11% year over year while organic growth was 5% in the quarter. All regions performed strongly with double-digit growth in Latin America and Eastern Europe while Continental Europe posted low single digit growth.

Operating margin contracted 240 basis points as primarily due to higher amortization of retention awards and continued investment in future growth, partially offset by favorable foreign exchange movements.

Financial Update    

The cash and cash equivalent balance of Willis at quarter end was $363 million, 15% higher than $316 million at the end of 2010.

Long-term debt increased 6% to $2.3 billion from 2010 end.

Dividends

The board of directors declared a quarterly cash dividend of 26 cents per share. The dividend will be paid on January 13, 2012 to shareholders of record as on December 30, 2011. The annualized dividend is $1.04 per share.

Looking Forward

Willis will review all businesses to align them with its resources and growth strategies. As a result, it expects to incur pre-tax charges of approximately $160 million in 2011, up from $130 million expected earlier.

Also, the company expects the operational review to result in cost savings of approximately $75 million in 2011, reaching annualized savings of approximately $115 million to $125 million beginning in 2012. The expectations were revised from cost savings of approximately $65 million to $75 million in 2011 with annualized savings of approximately $95 million to $105 million beginning in 2012.

The company now expects to deliver 2011 adjusted earnings in he band of $2.70 and $2.80 per share and reach 2011 adjusted operating margin in the mid-22% range.

We retain our “Neutral” recommendation on Willis over the long term. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the stock over the near term.

Headquartered in London, the United Kingdom, Willis Group Holdings plc and itssubsidiaries provide a broad range of insurance brokerage, reinsurance and risk management consulting services to its worldwide clients, both directly and through its associates. The company competes with Aon Corporation (AON - Snapshot Report), Arthur J Gallagher & Co. (AJG - Snapshot Report) and Marsh & McLennan Companies Inc. (MMC - Analyst Report).

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