Willis Group Pushes Ahead of Estimate (MMC) (WSH)

Zacks

Willis Group Holdings plc (WSH) reported its second-quarter 2011 adjusted net income from continuing operations of 61 cents per share, beating the Zacks Consensus Estimate by 3 cents. Results are also ahead of 54 cents earned in second-quarter 2010. Adjusted net income from continuing operations was $108 million, up 17.4% from $92 million in the prior-year quarter.

The beat may likely be attributable to higher commissions and fees.

Adjusting for an operational review charge of $12 million or 7 cents, and FSA regulatory settlement of $11 million or 6 cents per share, the company reported earnings of $85 million or 48 cents per share, compared with $89 million or 52 cents per share in the prior-year quarter.

Operational Performance

Total revenue at Willis in the quarter was $863 million, up 8% year over year. The improvement was driven by an increase in commissions and fees.

Commissions and fees increased 8% year over year in the quarter due to strong performance at Global and International segments. However, the North America segment reported lower commissions and fees.

Investment income of Willis in the first quarter declined 20% from the year-ago quarter to $8 million.

Total expense increased 12% year over year to $706 million. An increase in salaries and benefits coupled with an increase in operating expense led to the overall climb.

In the quarter under review, adjusted operating income was $186 million, up 9% from $171 million in the prior-year quarter. Operating margin expanded 20 basis points largely driven by solid growth in organic commissions and fees, somewhat muted by unfavorable foreign currency movements and higher investments.

Segment Update

Global: Organic growth in commissions and fees increased 3% in the quarter under review while reported growth increased 9%.

Operating margin was 32.5%, contracting 220 basis points driven by strong growth in commissions and fees and lower pension expense, partially offset by unfavorable foreign currency movements.

North America: Commissions and fees declined 2% while organic growth remained flat compared to the prior-year quarter.

Operating margin contracted 180 basis points due to flat organic growth in commissions and fees.

International: Commissions and fees increased 21% year over year while organic growth was 6% in the quarter. All regions performed strongly with double-digit growth in Latin America and Eastern Europe while Asia posted single digit growth.

Operating margin expanded 240 basis points as growth in commissions and fees and favorable foreign currency movements was partially offset by higher incentive compensation.

Financial Update

The cash and cash equivalent balance of Willis at quarter end was $317 million, a trifle higher than $316 million at the end of 2010.

Long-term debt increased 6.9% to $2.31 billion from 2010 end.

Dividends

The board of directors declared a quarterly cash dividend of 26 cents per share. The dividend will be paid on October 15, 2011 to shareholders of record as on September 30, 2011. The annualized dividend is $1.04 per share.

Looking Forward

Willis will review all businesses to align them with its resources and growth strategies. As a result, it expects to incur pre-tax charges of approximately $130 million in 2011.

Also, the company expects the operational review to result in cost savings of approximately $65 million to $75 million in 2011, reaching annualized savings of approximately $95 million to $105 million beginning in 2012.

Peer Comparison

Marsh & McLennan Companies Inc. (MMC), which competes with Willis Group, reported its second quarter operating earnings of 50 cents per share, a couple of cents higher than the Zacks Consensus Estimate of 48 cents but significantly higher than the loss of 6 cents per share in the year-ago quarter.

With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of top line growth in all lines of businesses and reduced operating expenses that also drove the operating margin. These were partially offset by investment loss, higher compensation and benefits along with tax expenses.

Our Take

With Willis recording new business growth along with high client retention and expanding operating margins by virtue of lower costs, we expect the company to post solid results with economic recovery gaining pace.

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

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