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We are upgrading our recommendation on Willis Group Holdings plc (WSH - Analyst Report) to Neutral from Underperform on the back of solid first quarter results that benefited from improved top line coupled with lower expenses.

Counting on the positives, organic growth in commissions and fees, which forms the major component of Willis’ revenue, continues to post positive numbers. Growth of 2% in the first quarter was driven by strong new business growth and improving premium rates along with other favorable market factors.

Also, the company pursues strategic acquisition, which continues to aid its performances. Willis Italy acquired Broking Italia SRL to augment its presence in Italy. With solid retention levels, new business growth and strategic acquisitions, we expect the company’s top line to increase further.

In order to reduce operating expenses Willis undertook a cost saving initiative in 2008. The operational review was completed in 2011 and cost the company $180 million. Willis expects cost savings of $135 million in 2012, up from approximately $115 million to $125 million expected earlier. 

Willis Group has consistently tried to enhance its shareholders value via dividend increase as well as share buyback. The board has authorized a 3.8% hike in its dividend besides approving a share buyback authorization worth $100 million. With a solid financial position, we expect the company to continue paying back shareholders, thereby retaining investor confidence in the stock. 

On the flip side, The Loan Protector business continues to experience a dip in revenues, adversely impacting the North America segment. The company expects weak performance at the Loan Protector business to continue in 2012.

The company has been experiencing decline in investment income over the past few years, a trend that continued through 2011 and into the first quarter of 2012, due to lower average interest rates. We expect investment income to remain under pressure in the near term as interest rates continue to witness sharp declines across the globe. Nevertheless, Willis Group’s forward hedging program to some extent offset the effect of low interest rates.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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

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