Willis Group Holdings plc (WSH) reported second-quarter 2014 adjusted net income of 49 cents per share, missing the Zacks Consensus Estimate by nearly 17%. The results also lagged the prior-year quarter number by 16.9% due to higher expenses.
Including 12 cents increase in the valuation allowance on deferred tax assets, 7 cents devaluation of the Venezuelan currency, 3 cents adverse foreign currency movements, and 1 cent charge from Operational Improvement Program, Willis Group reported net income of 26 cents per share, down about 56% year over year.
Willis Group’s total revenue in the quarter was $935 million, up 4.5% year over year attributable to higher commissions and fees. The company also witnessed modest growth in reinsurance and improvement in investment income. The top line surpassed the Zacks Consensus Estimate of $925 million.
Commissions and fees improved 4.5% on better performance in emerging markets and North America. Willis Group’s investment income of $4 million was up 33.3%.
Total expenses at Willis Group increased 6.3% year over year to $784 million. Higher business development expenses, and increased professional fees associated with acquisitions and systems resulted in the increase.
Despite revenue improvement, the higher magnitude of expense increase resulted in a 3.2% decline in the adjusted operating income of Willis Group to $151 million. Adjusted operating margin contracted 130 basis points (bps) to 16.1%.
Quarterly Segment Update
Global: Organic growth in commissions and fees was 3.4% in the quarter while the same was 5.1% on a reported basis.
Better performances at Willis Insurance UK drove the mid single-digit improvement. Willis Re also improved modestly.
Operating margin was 29.1%, down 160 bps year over year.
North America: Commissions and fees grew 4.8% on an organic basis and 4% on a reported basis.
The improvement came on the back of better performance at North America, led by double-digit growth in the Northeast and Atlantic regions. Construction and Surety businesses also improved in mid and high single digits, respectively.
Operating margin was 25.9%, up 210 bps year over year.
International: Commissions and fees increased 5.6% on an organic basis and 6.7% on a reported basis. The improvement was led by a high single-digit increase in Eastern Europe, with better performances in both Russia and Poland. Latin America was up mid-teens driven by sturdy results in Brazil. Growth in Global Wealth Solutions business fueled the solid Asian performance. While Australasia was up low single digits, Western Europe grew less than 1%.
Operating margin of 10.3% deteriorated 210 bps year over year.
Dividend and Share Repurchase Update
The board of directors of Willis Group approved a quarterly dividend to 30 cents per share. The dividend will be paid on Oct 15, 2014 to shareholders of record as of Sep 30.
Willis Group spent $83 million in the quarter to buy back nearly 2 million shares, taking the total amount spent to $121 million for the repurchase of about 3 million shares to date since Feb 2014. Willis Group intends to repurchase $200 million shares in 2014.
Willis Group exited the quarter with cash and cash equivalents of $708 million, down 11% from the 2013-end level.
Total long-term debt declined 0.4% to $2.3 billion as of Jun 30, 2014 from the 2013-end level.
Cash from operations was $147 million in the quarter, up 50% year over year.
Willis Group presently carries a Zacks Rank #3 (Hold).
Performance of Other Insurance Brokers
While AON plc (AON) outperformed the Zacks Consensus Estimate, Brown & Brown Inc. (BRO) and Arthur J Gallagher & Co. (AJG) missed the same in the second quarter.