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Another Earnings Miss at Willis Group

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Willis Group Holdings plc reported first-quarter 2014 adjusted net income of $1.36 per share, missing the Zacks Consensus Estimate by 4.9%. The results also lagged the prior-year quarter number by 6.9%.

Including loss on disposal of operations of 1 cent per share, Willis Group reported net income of $1.35 per share, up 8.9% year over year.

Operational Updates

Willis Group’s total revenue in the quarter was $1.097 billion, up 4.4% year over year due to higher commissions and fees. Results missed the Zacks Consensus Estimate of $1.098 billion by a whisker.

Total commissions and fees reported by Willis Group were $1.09 billion, up 4.2% year over year. The improvement was driven by solid contributions from all the three segments. Favorable foreign currency translations also added to the upside.

Willis Group’s investment income of $4 million was on par with the year-ago quarter level.

Total expenses at Willis Group of $771 million were almost flat year over year.

In the quarter under review, adjusted operating income of Willis Group was $326 million, down 0.3% year over year. Adjusted operating margin contracted 140 basis points (bps) to 29.7%. The downfall was attributable to higher salary and benefits as well as other operating expenses. However, higher commissions and fees limited the downfall.

Quarterly Segment Update

Global: Organic growth in commissions and fees was 2.0% in the quarter while the same was 3.5% on a reported basis.

The improvement was driven by mid-single digit growth in Willis Re.

Operating margin was 40.6%, deteriorating 310 bps year over year.

North America: Commissions and fees grew 4.7% on an organic basis and 3.9% on a reported basis.

The improvement came on the back of better performances across most of Willis North America's geographic regions.

Operating margin was 25.9% in the reported quarter, expanding 290 bps year over year.

International: Commissions and fees increased 7.2% on an organic basis and 5.7% on a reported basis. Results were driven by mid-teen increase in Eastern Europe, low single-digit increase in Western Europe, low-teens growth in Latin America and strong performance in Asia. These improvements were, however, partially mitigated by a slight decline in Australasia.

Operating margin of 29.9% in the quarter improved 60 bps year over year.

Dividend and Share Repurchase Update

The board of directors of Willis Group approved a quarterly dividend to 30 cents per share. The dividend will be paid on July 15, 2014 to shareholders of record as of June.

Willis Group also intends to repurchase $200 million shares in 2014.
Financial Position

Willis Group exited the quarter with cash and cash equivalents of $734 million, up 7.8% from the 2013-end level.

Total long-term debt dropped nearly 0.2% to $2.31 billion as on March 31, 2014 from the 2013-end level.

Cash from operations was $5 million, a huge fall from $39 million in the year-ago quarter.

Update on Operational Improvement Program

To realize operational efficiencies, invest in new growth avenues and strengthen its client services, Willis Group has announced an operational improvement program. Costs savings from the programs are estimated to be $5 million in 2014, $45 million in 2015, $135 million in 2016, $235 million in 2017 and $300 million annually thereafter.  

The company also expects to incur $410 million through 2017 due to this operational improvement program.

The program will start in the second quarter of 2014, with completion expected by 2017.

Performance of Other Insurance Brokers

Brown & Brown Inc. (BRO - Free Report) reported operating net income of 40 cents per share for the first quarter of 2014, which missed the Zacks Consensus Estimate by a couple of cents but improved 11% year over year.

AON plc’s (AON - Free Report) first-quarter 2014 operating earnings of $1.28 per share exceeded the Zacks Consensus Estimate of $1.17 and improved 15% year over year.

Arthur J Gallagher & Co. (AJG - Free Report) reported first-quarter 2014 operating net earnings of 39 cents a share that outperformed the Zacks Consensus Estimate by 52% and the prior-year quarter number by 22%.

Zacks Rank

Willis Group presently holds a Zacks Rank #4 (Sell).

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