Willis Group Holdings plc (WSH) reported its fourth-quarter 2010 adjusted net income from continuing operations of 57 cents, beating the Zacks Consensus Estimate by 2 cents. Results are ahead of 47 cents earned in fourth-quarter 2009. Adjusted net income from continuing operations was $98 million, up 22% from $80 million in the prior-year quarter.
The beat may likely be attributable to higher commissions and fees coupled with lower operating expenses.
Full-year 2010 adjusted net income from continuing operations of $2.75 per share came in 2 cents above the Zacks Consensus Estimate and 8 cents above the year-ago earnings of $2.67. Adjusted net income from continuing operations increased 4% to $470 million from 2009.
Operational Performance
Total revenue at Willis in the quarter was $835 million, up 1.3% year over year. The improvement was driven by an increase in commissions and fees. Revenue fell slightly short of the Zacks Consensus Estimate of $839 million. Full-year revenue improved 2% to gross $3.3 billion and came almost in line with the Zacks Consensus Estimate.
Commissions and fees increased 2% 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. Full -year commissions and fees increased 3% from 2009.
Investment income of Willis in the fourth quarter declined 40% from the year-ago quarter largely due to lower interest rates. Full-year investment income declined 24% year over year.
Total expense increased 1% year over year to $658 million. An increase in salaries and benefits driven by higher incentive compensation, partially offset by lower operating expense largely led to the overall climb. Full-year expense increased 0.7% from 2009.
In the quarter under review, adjusted operating income was $177 million, up 2% form $174 million in the prior-year quarter.
Operating margin expanded 120 basis points largely driven by solid growth in organic commissions and fees, somewhat muted by higher incentive compensation, unfavorable foreign currency movements and lower investment income.
Adjusted operating income in 2010 was $767 million, up 8% form 2009 while operating margin expanded 120 basis points year over year.
Segment Update
Global: Commissions and fees increased 6% with an organic growth of 6% in the quarter under review. Operating margin was 10.7%, contracting 150 basis points as strong growth in commissions and fees was more than offset by unfavorable foreign currency movements and lower investment income.
Full-year commissions and fees increased 6% with an organic growth of 6%.
North America: Reported as well as organic growth in commissions and fees remained flat year over year in the fourth quarter. Operating margin contracted 50 basis points as the benefit from new business generation was more than offset by higher incentive compensation.
Full- year commissions and fees decreased 1%.
International: Commissions and fees increased 2% year over year while organic growth was 8% in the quarter. All regions performed strongly with double-digit growth recorded in North America and Asia. Operating margin expanded 150 basis points as the positive benefit from continued strong organic growth was partially offset by investments to support growth, and unfavorable foreign currency movements.
Full-year commissions and fees increased 5% with an organic growth of 6%.
Financial Update
The cash and cash equivalent balance of Willis at 2010 end was $316 million, up 43% form $221 million at the end of 2009.
Long-term debt at the end of 2010 declined 0.4% to $2.157 billion from 2009 end.
The board of directors declared a quarterly cash dividend of 26 cents per share. The dividend will be paid on April 15, 2011 to shareholders of record as on March 31, 2011. The annualized dividend is $1.04 per share.
Looking Forward
Willis expects salaries and benefits expense to increase by $100 million in 2011 from the 2010 level. The increase is expected from incremental expense due to higher amortization of cash retention payments, reinstatement of annual salary reviews for all employees and reinstatement of a 401k match for North American employees. The company also expects $20 million to $25 million from these heads will continue through to 2012 as incremental expense.
Willis will review all businesses to better align its resources with its growth strategies. As a result it expects to incur pre-tax charges of approximately $110 million to $130 million in the first quarter of 2011. Also, the company expects the operational review to result in cost savings of approximately $65 million to $80 million in 2011, reaching annualized savings of approximately $90 million to $100 million in 2012.
Our Take
With Willis recording new business growth along with high client retention and expanding operating margins by virtue of cost reduction, 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.
Headquartered in London, United Kingdom, Willis Group Holdings plc and its subsidiaries provide a broad range of insurance brokerage, reinsurance and riskmanagement 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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