On Sep 23, 2014, we issued an updated research report on Willis Group Holdings plc (WSH).
In the second quarter, Willis Group’s operating earnings missed the Zacks Consensus Estimate by nearly 17% and year-ago earnings by 16.9% due to higher expenses. However, the top line fared well on both counts attributable to higher commissions and fees. The company also witnessed modest growth in reinsurance and improvement in investment income.
Willis Group’s operating expenses have been rising over the last few years. The company should strive to maintain a high magnitude of increase in total revenue than expense or its operating margin will suffer. Nonetheless, its operational improvement program estimates some cost savings in 2014 and substantially in 2015. It also launched a redundancy program in the U.K. that will eliminate 200 positions in 2014.
Willis Group engages in acquisitions to ramp up its inorganic growth profile. In Aug 2014, Willis Ireland acquired a range of Irish pension and financial advisory businesses from IFG Group plc to solidify its pensions business and strengthen its operational performance and commitment to improve wealth-planning services. Recently, Willis Re Inc., inked a deal to buy SurePoint Reinsurance Advisors, LLC to ramp up its accident and health insurance business. The buyouts will help Willis Group to solidify its global Human Capital and Benefits practice besides improving premiums writings.
However, lower-than-expected earnings accretion from the acquisitions might weigh on overall results. In addition, competitions from industry majors as well as on premium rates have resulted in lower demand in some classes of business.
Though investment income witnessed an improvement in the last quarter, we wait to see its sustainability in the low interest rate environment.
With respect to returning value to shareholders, the company has spent $121 million on the repurchase of about 3 million shares to date since Feb 2014. Willis Group intends to repurchase $200 million shares in 2014.
The Zacks Consensus Estimate has been witnessing downturn over the last 60 days. It declined 4.5% to $2.53 in 2014 and 4.4% to $2.81 in 2015.The insurance broker currently carries s Zacks Rank #5 (Strong Sell).
Better ranked stocks in the insurance industry include American Financial Group Inc. (AFG), Erie Indemnity Company (ERIE) and ACE Limited (ACE). All these carry a Zacks Rank #2 (Buy).
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