Willis Group Holdings Limited (WSH) reported third-quarter earnings of 46 cents per share. Excluding certain items, adjusted earnings were 53 cents. Results were significantly ahead of the Zacks Consensus Estimate of 38 cents. Results were also far ahead of the prior-year period’s earnings of 25 cents and adjusted earnings of 32 cents.
Results reflected strong contribution from the Hilb Rogal & Hobbs Company (HRH) acquisition. Also, on an organic basis, Willis reported decent growth in International and Global operations, though it was partly offset by a fall in organic commissions and fees in North America.
The company continues to experience the benefits from its “Shaping Our Future” initiatives and strong client retention in the midst of a soft market. These positives offset the reduction in investment income and increased expenses.
Net earnings from continuing operations increased to $78 million or 46 cents per share from $36 million or 25 cents a share in the year-earlier quarter. Results also benefited from a $29 million income tax credit.
Revenues were up 25% year-over-year to $725 million primarily driven by the HRH acquisition. Organic growth in commission and fees was 2% and reflected 5% net new business growth, offset by a negative 3% from declining premium rates and other factors.
The International business segment contributed 3% organic growth in commissions and fees, driven by growth in new business and continued benefits from growth initiatives that more than offset the soft rate environment and weakness in the UK and Ireland retail markets. Results were strong in Europe and Latin America.
The Global segment’s organic growth in commissions and fees was 4% year-over-year, driven by positive growth in Global Specialties and Reinsurance businesses. While the Reinsurance business experienced high single-digit growth, aerospace, marine and financial and executive risks specialties also posted strong performances.
However, the soft insurance markets, coupled with an increase in weakness in the U.S. economy, led to a decline of around 3% in the North America segment’s commissions and fees. Willis, however, remains focused on the integration of the HRH and continued expense management.
Adjusted operating margin was 13.1%, up 100 basis points (bps) from the year-ago quarter. Unfavorable foreign currency impact was 150 bps in the quarter.
Investment income was $10 million, down from $22 million in the year-ago quarter, driven by significant lower average interest rates in 2009. Expenses were up 25% year-over-year to $643 million.
As of Sept. 30, 2009, cash and cash equivalents totaled $203 million and total debt was $2.6 billion. The company issued $300 million of senior notes due 2019 at 7.0% and repurchased $160 million of its 5.125% senior notes due July 2010 at a premium of $27.50 per $1,000 face value.
We are encouraged to see Willis’ strong organic growth in revenues from its International Business and Global segments, with strong client retention. The “Shaping Our Future” initiatives are also contributing to the growth. The recent acquisition of Hilb Rogal & Hobbs Company has contributed to the company’s top line and going forward, we expect this acquisition to add to the company’s revenues in North America and bolster its leadership in attractive growth markets.
We believe that Willis’ efforts to streamline its businesses as well as cost saving initiatives should deliver strong financial performance over the next several years, though these initiatives will come for a price. Hence, we continue with our Neutral recommendation on the shares of Willis.
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