Willis Group Holdings plc (WSH) reported third-quarter 2014 adjusted net income of 14 cents per share, missing the Zacks Consensus Estimate by a couple of cents. The bottom line also lagged the prior-year quarter number by 26% due to higher expenses.
Including 8 cents cost related to Operational Improvement Program and 10 cents unfavorable foreign currency impact, Willis Group incurred net loss of 4 cents per share, narrower than loss of 16 cents incurred in the year-ago quarter.
Operational Updates
Willis Group’s total revenue in the quarter was $812 million, up 2.1% year over year attributable to higher commissions and fees. The company also witnessed modest growth in reinsurance. The top line missed the Zacks Consensus Estimate of $925 million.
Commissions and fees improved 2.5% on better performance in the International market (led by emerging markets) and North America.
Willis Group’s investment income of $4 million was flat year over year.
Total expenses at Willis Group increased 7.3% year over year to $778 million. Higher salaries and benefits, and operating expense resulted in the rise.
Despite revenue improvement, the higher magnitude of expense increase resulted in a 16.4% decline in the adjusted operating income of Willis Group to $51 million. Adjusted operating margin contracted 160 basis points (bps) to 6.3%.
Quarterly Segment Update
Global: Organic growth in commissions and fees declined 0.4% in the quarter.
Soft performances at Willis Insurance UK that were down mid single digits induced the decline.
Operating margin was 9.6%, down 1,660 bps year over year.
North America: Commissions and fees grew 3.4% on an organic basis.
The improvement came on the back of better performance at North America, led by mid single-digit growth in the Midwest and Atlantic regions. The Human Capital practice was up mid single digits. However, Construction was down mid single digits.
Operating margin was 14.9%, up 60 bps year over year.
International: Commissions and fees increased 6.3% on an organic basis. The improvement was led by a high mid-teens increase in Eastern Europe, with better performances in both Russia and Poland. Latin America was up double digits driven by strong results from Brazil and Argentina. Western Europe grew in mid single digits. Operations in Asia were flat, as growth in China and the Global Wealth Solutions business was offset by a decline in Hong Kong.
Operating margin was (3.7%) compared with (3.8%) in the year-ago quarter.
Dividend and Share Repurchase Update
The board of directors of Willis Group approved a quarterly dividend of 30 cents per share. The dividend will be paid on Jan 15, 2015 to shareholders of record as of Dec 31.
Willis Group spent $82 million in the quarter to buy back nearly 1.9 million shares, taking the total amount spent to $203 million for the repurchase of about 4.8 million shares to date since Feb 2014. Willis Group exhausted its authorization by buying back 5.1 million shares for $213 million through Oct 10.
Update on Operational Improvement Program
The company expects to realize cost savings of at least $8 million in 2014 and $60 million in 2015. Annualized cost savings from 2014 and 2015 actions are expected at approximately $120 million by the end of the Program, or 40% of the expected $300 million annualized savings. Cost savings projection is $135 million for 2016 and $235 million for 2017. Spending on the program will be $40 million in 2014 and in $130 million in 2015. About $240 million is predicted to be incurred in 2016 and 2017.
Savings generated by the program in both third-quarter 2014 and year to date were approximately $2 million. Restructuring charges were $17 million in the quarter.
The program was announced in Apr 2014.
Financial Position
Willis Group exited the quarter with cash and cash equivalents of $656 million, down 18% from the 2013-end level.
Total long-term debt declined 7.1% to $2.2 billion on Sep 30, 2014 from the 2013-end level.
Cash from operations was $129 million in the quarter, down 44% year over year.
Zacks Rank
Willis Group presently carries a Zacks Rank #3 (Hold).
Performance of Other Insurance Brokers
While Blue Capital Reinsurance Holdings Ltd. (BCRH) outperformed the Zacks Consensus Estimate, Brown & Brown Inc. (BRO) and Arthur J Gallagher & Co. (AJG) reported in line with our expectations.
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