Willis Group Holdings (WSH) continues to report higher commissions and fees. The expense-saving and efficiency-enhancing initiatives, large global presence, new business growth and solid client retention is also encouraging.
However the soft insurance market and the stressed US economy will likely restrict any significant top-line growth. We thus retain our Neutral rating on the company.
Organic growth in commissions and fees, which forms the major component of Willis’ revenue, continues to post growth driven by strong new business production. With solid retention levels and new business growth, we expect the company to increase revenues.
Also, to reduce operating expenses, during 2008 Willis undertook a cost savings initiative. HRH integration synergies combined with rightsizing generated cost savings over $200 million. Willis expects cost savings of approximately $65 million to $75 million in 2011, reaching annualized savings of approximately $95 million to $105 million beginning in 2012.
Willis has produced a stable cash flow for the past several years. This trend has enabled the company to continue paying dividends.
On the flip side, total expenses of Willis has been increasing every year. It increased 12% in the second quarter largely due to an increase in salaries and benefits driven by higher incentive compensation. Willis expects salary and benefits expenses will increase by $100 million in 2011.
Also, the company expects depreciation expense for the remainder of 2011 to be approximately $17 million per quarter, and amortization of intangible assets expense for full year 2011 to be approximately $68 million and interest expense for the remainder of 2011 to be approximately $34 million per quarter.
The company has been experiencing a decline in investment income over the past few years, a trend that continued through 2010, due to lower average interest rates.
Willis Group reported a solid second quarter with earnings ahead of the Zacks Consensus Estimate as well as year ago earnings, driven primarily by higher commissions and fees.
The Zacks Consensus Estimate for third-quarter 2011 is 37 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.88 per share and $3.33 per share.
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), Aon Corporation (AON) and Marsh & McLennan Companies Inc. (MMC).
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WILLIS GP HLDGS (WSH): Free Stock Analysis Report
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