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Willis Group Holdings plc (WSH - Analyst Report) reported second-quarter 2012 adjusted net income from continuing operations of 59 per share, beating the Zacks Consensus Estimate by a penny. Results were 3% lower than 61 cents earned in the year-ago quarter. Adjusted net income from continuing operations was $104 million, down 3% year over year.

Lower expenses in the quarter largely aided the outperformance.

Adjusting for insurance recovery of $3 million or 2 cents, the company reported net income of $107 million or 61 cents per share, a substantial improvement from $84 million or 48 cents in the year-ago quarter. The year-ago quarter recorded 2011 Operational Review charges of $12 million or 7 cents and FSA regulatory settlement charge of $11 million or 6 cents.

Operational Performance

Total revenue in the quarter decreased 2.2% year over year to $842 million due to lower   commissions and fees and lower investment income. Also, revenues lagged the Zacks Consensus Estimate of $870 million.

Commissions and fees went down 1.7% year over year to $837 million in the quarter, as foreign currency translation had a negative impact on it.

Investment income also declined 37.5% from the year-ago quarter to $5 million, attributable to lower net yields on cash and cash equivalents.

Total expense decreased 5.9% year over year to $663 million, primarily due to a decline in salaries and benefits and lower operating expense.

In the quarter under review, adjusted operating income was $174 million, down 6% year over year. Operating margin contracted 80 basis points to 20.7%.

Segment Update

Global: Organic growth in commissions and fees was 7% in the quarter, while reported growth was 5%.

Organic growth was primarily driven by high double-digit increase in Reinsurance business, which benefited from new business growth and improved rate environment.

Operating margin was 48.1%, expanding 80 basis points year over year.

North America: Commissions and fees declined 3% year over year on an organic basis while it slipped 4% on a reported basis. Soft performance at the Loan Protector business led to poor numbers.

Operating margin in the quarter contracted 340 basis points.

International: Commissions and fees increased 2% year over year on an organic basis, while on a reported basis, it declined 6%. Asia and Latin America reported high single-digit growth while Continental Europe grew in the low single-digits. The UK business declined in the mid single-digits.

Operating margin contracted 510 basis points to 16.4%.

Financial Update   

The cash and cash equivalent balance at quarter end stood at $407 million, down 6.4% from 2011 end.

Long-term debt increased 1.8% to $2.4 billion from 2011 end.

Dividends and Share Buybacks

Willis spent $37 million to buyback 1.04 million shares in the quarter. Willis expects to repurchase shares worth almost $100 million in 2012.

The company’s Board authorized a dividend of 27 cents to the shareholders of record at September 28, payable on October 15.

Zacks Rank

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

Marsh & McLennan Companies Inc. (MMC - Analyst Report), which competes with Willis Group, also shares a Zacks #3 Rank and is scheduled to release its second quarter results on August 7, before the bell.


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