Outlook Seems Positive for Willis

KBW analysts expect Willis Group Holdings to outperform the market going forward.

After Willis Group Holdings Chairman and CEO Joseph Plumeri finished his presentation at the Keefe Bruyette & Woods' Annual Insurance Conference, KBW equity research analysts concluded Willis would outperform the market and rated the stock as a "buy."

The 12th annual KBW conference at the Crown Plaza Times Square Manhattan in New York on Sept. 5-6 drew about 150 industry experts to hear presentations from the senior management of about 45 underwriters and brokers.

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"Our priorities, for the most part, [are] winning in the middle market," said Plumeri, who noted that 70 percent of Willis' revenue comes from commissions.

In the second quarter, the global insurance broker with more than 400 offices in 120 countries, saw organic growth increase internationally, with high single-digit growth in Asia and Latin America, and mid single-digit growth in Eastern Europe.

Willis just opened its 23rd branch in China, Plumeri said, with the business in that country approaching $40 million. "We are the largest broker in China," he said.

Plumeri said Willis also has "a huge presence" in Africa, which may become the next emerging growth region, turning BRIC -- Brazil, Russia, India and China -- into BRICA.

At the same time, Plumeri said the company has seen a 3 percent organic revenue decline in North America, compared to the second quarter of 2011, with challenges continuing to result from its $2.1 billion October 2008 acquisition of Hilb Rogal and Hobbs -- which took place in a soft market as the "economy [was] falling apart."

He said attrition following the acquisition and the subsequent loss of their accounts negatively impacted the company.

"Revenue growth has been below where management would like to see it since the HRH acquisition," according to an analysis by KBW, "largely due to the soft P&C market and the company's exposure to economically sensitive end markets, such as construction and employee benefits."

In addition, Plumeri said, Willis' North American business has suffered from "previously disclosed fraudulent activity," which allegedly took place between 2005 and 2001 and involves more than $28 million in possibly fraudulent overstatements of commissions and fees by associates within the company's employee benefits group.

He noted its global segment -- consisting of Willis Re, global specialties and Willis Faber & Dumas -- saw an overall 5 percent increase in commissions and fees, with 7 percent organic growth, compared to the second quarter last year. The company's international segment, with $1.03 billion in commissions and fees last year, is up 6 percent, with 1 percent organic growth.

In North America, the company has seen a 3 percent organic decline in commissions and fees.

At the same time, he said, Willis has "no debt to pay off," has strong cash flow and "the balance sheet is in great shape." It previously announced a plan to complete $100 million in stock buybacks in 2012.

"You have North America that hasn't made a contribution in three-and-a-half years and your margins of the company are still over 20 percent, which says something about the underlying infrastructure of the company," Plumeri said.

--By Anne Freedman

October 11, 2012

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