Willis’s bad year: what the analysts say

Willis’s profits plunged 52% in 2011 as the broker endured a tough year of sluggish growth. The announcement came in the same week that the company made a U-turn on accepting contingent commissions on employee benefits and amid reports that chief executive Joe Plumeri was going to step down next year.

Insurance Times got the views of three analysts who have closely followed Willis on the company’s performance over the past 12 months.

The US effect
Paul Newsome of Sandler O’Neill said that Willis’ quarterly results were weak and that the management was not trying to pretend they were anything other than that.

“North America was the greatest source of weakness and it had some issues with the loan protector business, as well as the continued effects of the Hilb Rogal & Hobbs (HRH) acquisition, where it had some retention problems,” he said.

Forward thinking
Adam Klauber of William Blair said the company had been upfront about the fact that the fourth and first quarter were going to be challenging, owing to the loan protector business dropping and greater expenditure on infrastructure.

“For a while we have known compensation costs were coming up,” he said. “So there was no surprise that it was a tough quarter.

“The falling off in the US business was disappointing, but it has not fallen off a cliff.

By the back-half of the year I think the news will get better, but it is going to be a while before you see good news, unfortunately”

Adam Klauber, William Blair

“Our view is that the first quarter is not going to be a great quarter. You still have the loan protector falling off and you have tough comparisons in the US business, which is going to be a little bit weaker than expected. But, as you get into the second half, the US economy is doing okay. You are getting some good growth and, today, you are also getting higher rates, but unfortunately you don’t see that from day one because of the way the broker business works. They will broker a piece of business today and then amortise the revenue over a 12-month period, so it takes a while to build on.

“So that is why I feel pretty comfortable in the third and fourth quarter, particularly that the US number will go from negative to positive.

“You are not looking for huge growth, but you will see signs of a turnaround. Then the comparisons in the expenses should even out, because they have been spending a lot of money in the third and fourth quarter and the first quarter.

“By the back-half of the year I think the news will get better, but it is going to be a while before you see good news, unfortunately.

“I think stocks are going to be dead money in the mid-30s for the next six months and then have a better run, long-term.”

Under pressure
Meyer Shields of Stifel Nicolaus concurred that the results were weak, particularly on the production side.

“Some of it was not news - in other words, the negative direction for the loan protector portfolio, which it was very explicit about in the third quarter - so I don’t think that part was as negative.

“But, in terms of the impact of affecting producers for HRH in 2008, I think that came as a surprise. But it takes time for individual producers that were uncomfortable with the Willis culture to leave and for the business to follow them.

One of the ramifications for the next year is that Willis is going to be more proactive than it has been, but it is still facing a headwind”

Meyer Shields, Stifel Nicolaus

“I think one of the ramifications for the next year is that Willis is going to be more proactive than it has been, but it is still facing a headwind and it seems unlikely that it will be able to fully absorb that pressure, because you can only do so much.

“The story we have been consistently told by insurance companies and brokers is that the headwind for the insurance rates is diminishing, but it has not necessarily gone in every region and every line of business.

“But I do think that people were expecting some sort of boost to both revenues and profits in the fourth quarter.”