“Our results this quarter reflect the strength of the Willis culture, with great teamwork and cooperation across the businesses, a commitment to growth and focus on cost control,” said Joe Plumeri, Chairman and Chief Executive Officer, Willis Group Holdings. “Our global diversity and cooperation across businesses continued to deliver results, as each segment recorded positive organic growth in commissions and fees in the face of continued soft rate and economic conditions in a number of the regions in which we operate.”
Third Quarter 2010 Financial Results
Reported net income from continuing operations for the quarter ended September 30, 2010 was $64 million, or $0.37 per diluted share, compared with $78 million, or $0.46 per diluted share, in the same period a year ago.
Excluding certain items, which are detailed later in this release, adjusted net income per diluted share from continuing operations was $64 million, or $0.37 per diluted share, in the third quarter of 2010 compared with $90 million, or $0.53 per diluted share in the third quarter of 2009. Foreign currency movements favorably impacted earnings by $0.02 per diluted share compared with the third quarter of 2009.
Total reported revenues for the quarter ended September 30, 2010 were $733 million compared with $725 million for the same period last year, an increase of 1 percent. Total commissions and fees rose 1 percent to $723 million from the third quarter of 2009. Investment income was $10 million in the third quarter of 2010, unchanged from the third quarter of 2009.
Organic growth in commissions and fees was 4 percent in the third quarter of 2010 compared with the third quarter of 2009. Net new business growth of 6 percent reflected strong new business generation of 13 percent and steady client retention. Partially offsetting net new business growth was a 2 percent negative impact from declining premium rates and other market factors.
The North America segment reported a 2 percent increase in commissions and fees in the third quarter of 2010 compared with the third quarter of 2009. Organic commissions and fees increased 2 percent in the third quarter of 2010 compared with the negative 3 percent impact in the same period a year ago. Strong growth was recorded across a number of geographic regions, and the segment continued to benefit from specialist industry expertise. Organic growth was supported by increases in both new business generation and client retention. Soft insurance market conditions and ongoing weakness in the US economy continue to weigh on the segment. Operating margin was 21.4 percent in the third quarter of 2010, in line with 21.5 percent in the third quarter of 2009.
The International business segment reported a 2 percent decrease in commissions and fees compared with the same period in 2009, primarily due to unfavorable foreign currency movements. Organic growth in commissions and fees was 6 percent in the third quarter of 2010, with positive contributions across all regions, including continued double-digit performance in Latin America, Asia and Eastern Europe. Continental Europe and the
UK and Ireland retail market both recorded positive single digit organic growth. Operating margin was 9.6 percent in the third quarter of 2010 compared with 13.4 percent in the year ago period, as margin expansion from strong organic growth was offset by continued support of growth and unfavorable foreign currency movements.
The Global segment, which comprises the Reinsurance, Global Specialties, Faber & Dumas, and Willis Capital Markets & Advisory divisions, reported 3 percent growth in commissions and fees and 4 percent organic growth in commissions and fees in the third quarter of 2010 compared with the third quarter of 2009. Reinsurance and Global Specialties divisions each grew mid-single digits. Reinsurance continued to generate strong new business despite ongoing market softness, while Global Specialties, particularly Financial and Executive Risks, Inspace, Aerospace and Construction were significant contributors to organic growth in the quarter. Operating margin was 19.7 percent in the third quarter of 2010, up from 18.8 percent in the year ago quarter.
Reported salaries and benefits were $462 million in the third quarter of 2010, an increase of 3 percent, compared with $449 million in the third quarter of 2009. Salaries and benefits, as a percentage of revenues, were 63.0 percent in the third quarter of 2010 compared with 61.9 percent in the third quarter of 2009. The rise in salaries and benefits expense was primarily attributable to increased headcount and higher incentive compensation, moderated by favorable foreign currency movements and lower stock-based compensation expense. Incentive compensation included $28 million of amortization of cash retention payments in the third quarter of 2010 compared with $22 million in the third quarter of 2009. As of September 30, 2010, December 31, 2009 and September 30, 2009, the Company included $193 million, $98 million, and $121 million, respectively, in other assets on the balance sheet, which represented the unamortized portion of cash retention payments made before those dates.
Reported other operating expenses were $129 million in the third quarter of 2010 compared with $151 million in the third quarter of 2009. Other operating expenses in the third quarter of 2010 benefited from the release of a previously established $7 million legal accrual and foreign currency movements. Other operating expenses, as a percentage of revenues, were 17.6 percent in the third quarter of 2010 compared with 20.8 percent in the third quarter of 2009.
Reported operating margin was 14.5 percent for the quarter ended September 30, 2010 compared with 11.3 percent for the same period last year, an increase of 320 basis points. Adjusted operating margin was 14.5 percent for the quarter ended September 30, 2010 compared with 13.1 percent a year ago, an increase of 140 basis points. Adjusted operating margin benefited from continued solid growth in organic commissions and fees, rigorous expense management and favorable foreign currency movements, partially offset by higher incentive compensation. Adjusted operating income for the third quarter of 2009 was impacted by certain items, which are detailed later in this release.
Nine Months 2010 Financial Results
Reported net income from continuing operations for the nine months ended September 30, 2010 was $357 million, or $2.09 per diluted share, compared with $357 million, or $2.13 per diluted share, in the same period a year ago. Reported net income from continuing operations for the first nine months of 2010 and 2009 was impacted by certain items, which are detailed later in this release.
Adjusted earnings per diluted share from continuing operations were $2.18 for the nine months ended September 30, 2010 compared with $2.21 in the comparable period of 2009. Foreign currency movements favorably impacted adjusted earnings per diluted share by $0.11 in the nine months ended September 30, 2010 compared to the same period in 2009.
Total reported revenues for the nine months ended September 30, 2010 were $2,504 million compared with $2,439 million for the same period last year, an increase of 3 percent. Total commissions and fees were $2,475 million, up 3 percent compared with the first nine months of 2009. Investment income was $29 million through the first nine months of 2010, down 17 percent from $35 million in the same period a year ago, due to lower interest rates.
Organic growth in commissions and fees was 4 percent in the first nine months of 2010 compared with the same period of 2009. This growth reflected net new business won of 6 percent, partially offset by a negative 2 percent impact from declining premium rates and other market factors.
Reported operating margin was 23.0 percent for the nine months ended September 30, 2010 compared with 21.4 percent for the same period last year. Excluding items detailed later in this release, adjusted operating margin was 23.6 percent for the first nine months of 2010 compared with 22.1 percent a year ago.
Tax
Income tax expense for the quarter ended September 30, 2010 was $10 million, compared to an income tax credit of $29 million for the comparable period a year ago.
As in prior years, a $7 million credit was recognized in the third quarter of 2010, compared with an $11 million credit in the year ago quarter, further to
the closure of the statute of limitations on assessments relating to previously unrecognized tax benefits.
In addition, the third quarter 2009 tax credit also reflected the release of a $27 million provision following a change to UK tax law.
The effective tax rate was 15.2 percent for the quarter ended September 30, 2010 and 24.8 percent for the nine months ended September 30, 2010. Excluding the impact of nonrecurring items, which are detailed later in this release, the underlying tax rate for the quarter and nine months ended
September 30, 2010 was approximately 26.0 percent, the same as the 2009 full year rate.
Capital
As of September 30, 2010, cash and cash equivalents totaled $141 million and total debt was $2.3 billion. Total equity was $2.5 billion.
Dividends
The Board of Directors declared a regular quarterly cash dividend on the Company’s ordinary shares of $0.26 per share (an annual rate of $1.04 per share). The dividend is payable on January 14, 2011 to shareholders of record at December 31, 2010.
Conclusion
“We do not anticipate significant near term changes to the external environment in which we operate. The pace of economic recovery is expected to remain modest in a number of key geographies and the overall rate environment remains soft. However I continue to believe that we have established, and continue to build,