Willis Group Holdings Limited reported 2007 fourth-quarter net income dropped 36 percent but still managed to beat analysts' earnings per share estimates by 7 cents a share.
The London-based insurance brokerage firm reported today that its net income in the fourth quarter dropped to $95 million, off by $53 million compared to the same period last year, translating into earnings per share of 66 cents, a 28 cent decline over 2006. Revenues rose 3 percent, or $18 million, to $639 million.
For the year, net income was off 9 percent, or $40 million, to $409 million. Earnings per share were down 6 cents to $2.78 a share. Revenues rose 6 percent, or $150 million, to $2.6 billion.
The company's organic growth stood at zero percent, prompting a question from Bear Stearns financial analyst David Small: "Where's the growth?" He noted that North America segment organic growth dropped 7 percent, while rival broker Arthur J. Gallagher managed zero percent in the quarter.
"We are generally surprised by this disparity," he said.
On the positive side, he said profitability remained strong, "roughly in line with our expectations."
Mr. Small said other negative trends displayed by Willis, particularly in the reinsurance area where competitive pricing is impacting performance, could bode ill for other large brokers when they report.
Aon, he said, should "reap the benefits of their expanded facultative team," and because large brokers generate revenues from fees, their top line should be stable.
On the organic growth side, besides North America, Willis reported its global division also suffered a 7 percent decline in organic growth, while its international division reported 9 percent growth.
Overall, commissions and fees were up 3 percent and investment income rose 4 percent in the quarter.
For the year, organic growth in commissions and fees rose 3 percent.
During an investors conference call held today, Joe Plumeri, Willis chairman and chief executive officer, said that performance in North America was affected by the closing of unprofitable offices and the release of underperforming brokers.
He said the segment is back on track and will show positive earnings in the first quarter of 2008.
The broker's reinsurance segment was affected by a combination of historically light earnings that occur in the fourth quarter, rate softening, increased retentions by insurance companies, and the effects of Florida's creation of a state reinsurance program, Mr. Plumeri said.
The segment, he noted, has not lost clients and should witness positive income growth in the first quarter of 2008 as some clients begin to purchase more reinsurance.
When asked about price declines, Grahame Millwater, chief operating officer and chairman of Willis Re, said the broker did not anticipate pricing would be as soft as it is. "It took us by surprise," he said. "We anticipated a soft market; we just didn't anticipate such a soft market particularly in the second half of 2007."
Mr. Plumeri said the softness is being driven by traditional forces, competition for markets and slight catastrophe losses producing surplus.
He called the rate reductions "ridiculously" soft in some lines, and said the soft market is more severe in the United States than Europe, but not by much.
The company said it anticipates taking a $60-to-$90 million charge in the first quarter of 2008 for cost savings opportunities. The charges, it estimates, will lead to $20-to-$40 million in annual savings in 2008 and rise in 2009.
Mr. Plumeri said the charge resulted from an ongoing search to find cost savings within the company and was not in reaction to soft market conditions.
Willis also announced that it would increase its quarterly cash dividend by 1 cent to 26 cents a share and an annual rate of $1.04 a share. The dividend will be paid on April 14 to shareholders of record as of March 31.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.