We are downgrading Willis Group Holdings plc ( WSH ) to Underperform from Neutral on the back of weak performance in the third quarter. Operating earnings in the quarter fell short of the Zacks Consensus Estimate as well as the year-ago results. Lower revenue coupled with higher expenses weighed on the performance. Top line also missed the expectation and was lower than the year-ago numbers due to lower commissions and fees and lower investment income.
The company has been experiencing a decline in investment income over the past few years, a trend that continues into the third quarter, due to lower average interest rates. We expect investment income to remain under pressure in the near term as interest rates have continued to experience sharp declines across the globe.
The Loan Protector business acquired through the Hilb Rogal and Hobbs purchase has been experiencing a revenue dip since the second quarter of 2011 due to client loss through attrition and merger and acquisition activity, tightened commission and drag in foreclosure. Willis, therefore, expected weak performance at the Loan Protector business to adversely affect the North America segment, continuing even into 2012.
However, these negatives are somewhat offset by organic growth in commissions and fees driven by better performances in Global operations and International operations. Alongside, Willis opts for strategic acquisitions, which continue to aid its performances and help it write more business going forward, thereby aiding top-line growth.
Willis also remains focused on enhancing shareholders wealth. Its dividend yield of 3.19% is much superior than the industry yield of 1.77% as well as that of its nearest peer, Aon plc ( AON ), with a dividend yield of 1.12% and Marsh & McLennan Companies Inc. ( MMC ), with a yield of 2.66%. Also, with shares repurchased in the third quarter, the company exhausted its authorization.
Willis currently carries a Zacks #3 Rank, translating into a short-term Hold rating. Arthur J Gallagher &Co. ( AJG ), another competitor, and Marsh & McLennan, share the same Zacks Rank.