We are downgrading our recommendation on
Willis Group Holdings plc
(
WSH
) to Underperform from Neutral due to the headwind from The Loan
Protector business that is expected to weigh on its North American
results.
The Loan Protector business acquired through the Hilb Rogal and
Hobbs purchase has experienced a revenue dip. The decline was
largely due to client loss through attrition and merger and
acquisition activity, tightened commission and drag in
foreclosure.
The company, therefore, expects weak performance at the Loan
Protector business to adversely affect the North American segment's
earnings before income tax by $27 million to $30 million for the
full year 2011. North American segment suffered a revenue decline
of 5% in the third quarter. Management also estimates contribution
from The Loan Protector business to fall to $10-$14 million of
pretax operating income annually from $40 million in 2010.
Also, total expense of Willis has been increasing every year. In
the third quarter, total expense increased 7% year over year
largely due to an increase in salaries and benefits, driven by an
increase in amortization of cash retention awards. Willis expects
salary and benefits expense to increase by $100 million in
2011.
Also, the company expects depreciation expense to be
approximately $17 million in the fourth quarter, and amortization
of intangible assets expense for full year 2011 to be approximately
$69 million and interest expense to be approximately $34 million in
fourth quarter.
Willis has also been experiencing a decline in investment
income over the past few years, a trend that continued through
2010, due to lower average interest rates.
Counting on the positives, organic growth in commissions and
fees, which forms the major component of Willis' revenue, has
exceeded its peers on an average. In the third quarter, it grew 4%,
driven by strong new business growth, partially offset by declining
premium rates and other adverse market factors. With solid
retention levels and new business growth, we expect the company to
increase revenues.
In order to reduce operating expenses, during 2008, Willis
undertook a cost saving initiative. Year to date, the company
realized cost savings of $48 million, of which $24 million was
realized in the third quarter. Willis expects cost savings of
approximately $75 million in 2011, reaching annualized savings of
approximately $115 million to $125 million beginning in 2012.
Willis Group's third quarter earnings were ahead of the Zacks
Consensus Estimate as well as the year ago earnings, driven
primarily by higher commissions and fees. The expense-saving and
efficiency-enhancing initiatives also contributed to growth.
The Zacks Consensus Estimate for fourth-quarter 2011 is 48 cents
per share. For full years 2011 and 2012, the Zacks Consensus
Estimates are, respectively, $2.77 per share and $3.06 per
share.
The quantitative Zacks #5 Rank (short-term Strong Sell rating)
for the company indicates downward 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 risk management 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
).
GALLAGHER ARTHU (
AJG
): Free Stock Analysis Report
AON CORP (
AON
): Free Stock Analysis Report
MARSH &MCLENNAN (
MMC
): Free Stock Analysis Report
WILLIS GP HLDGS (
WSH
): Free Stock Analysis Report
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