“We achieved steady 2% organic growth in commissions and fees in a quarter complicated by a number of factors, including the impact from our operational review charge, further deterioration in the results of the Loan Protector business we talked about last quarter, and some favorable factors, including tax-related adjustments," said Joe Plumeri, Chairman and Chief Executive Officer, Willis Group Holdings.
“Underlying all of this, however, organic growth within the Global and International segments came in strong – especially in light of the difficult markets. That growth was offset by negative 4% reported and organic growth in our North America segment driven by the disappointing Loan Protector results. Excluding the impact from that business, reported and organic growth in North America would have been flat. Importantly, we continue to execute against our plan to reduce expenses while implementing revenue initiatives and we believe we are well positioned for growth in 2012.”
Third Quarter 2011 Financial Results
Reported net income for the third quarter of 2011 was $60 million, or $0.34 per diluted share, compared with $64 million, or $0.37 per diluted share, in the same period a year ago. Reported net income for the third quarter of 2011 was negatively impacted by a $15 million (or $0.06 on a per diluted share basis) charge related to the 2011 operational review, as detailed later in the release.
Adjusted net income per diluted share, which excludes the impact of items detailed later in the release, was $0.41 in the third quarter of 2011, an increase of 11% compared with $0.37 in the third quarter of 2010. Foreign currency movements increased earnings per diluted share by $0.01 compared with the third quarter of 2010.
Total reported revenues for the quarter ended September 30, 2011 were $762 million compared with $733 million for the same period last year, an increase of 4%. Total commissions and fees were $755 million, an increase of 4% from $723 million in the third quarter of 2010. Foreign currency movements increased reported commissions and fees by 2% compared with the year ago period. Investment income was $7 million, compared with $10 million in the third quarter of 2010.
Organic growth in commissions and fees was 2% compared with the third quarter of 2010. Organic growth reflected net new business growth driven by improved client retention and new business generation.
North America Segment
In the North America segment, reported and organic commissions and fees declined 4% compared with the third quarter of 2010. The decline in commissions and fees was primarily due to lower revenue generated by Loan Protector. Excluding the Loan Protector results from both periods, organic commission and fee growth in the North America segment was flat compared with the third quarter of 2010.
The North America segment continues to face headwinds from ongoing softness in the overall insurance rate environment and a lack of sustained improvement in the US economy. Operating margin was 19.5% compared to 21.3% in the third quarter of 2010, primarily due to lower commissions and fees as a result of the decline in the Loan Protector business, partially offset by cost savings, largely driven by the 2011 operational review.
International Segment
The International segment reported 11% growth in commissions and fees compared with the same period in 2010, including a 6% favorable impact from foreign currency movements. Organic growth in commissions and fees was 5%, including double-digit expansion in Latin America and Eastern Europe. Continental Europe grew low-single digits, while the UK and Ireland retail market was down slightly. Operating margin was 1.9% compared with 4.3% in the third quarter of 2010. Higher amortization of retention awards and continued investment in future growth were the primary drivers of the margin decline, partially offset by the net effect of favorable foreign exchange movements.
Global Segment
The Global segment, which comprises the Reinsurance, Global Specialties, London Markets Wholesale, and Willis Capital Markets & Advisory business units, reported 12% growth in commissions and fees compared with the third quarter of 2010, including a 3% favorable benefit from foreign currency movements. Organic growth in commissions and fees was 9%. Each of the business units recorded positive growth, highlighted by Reinsurance which grew low double digits, driven primarily by new business growth and secondarily by revenues that may or may not recur in future periods related to a profitability initiative in that business unit. Global Specialties grew mid-single digits, driven by Energy, Marine and Construction while London Markets Wholesale and Willis Capital Markets & Advisory, each also had a positive quarter. Operating margin was 22.4% compared with 23.1% in the year ago quarter. The decrease in operating margin was driven by the net effect of unfavorable foreign currency movements and higher amortization of retention awards, partially offset by lower pension expense and strong growth in commissions and fees.
Other
Reported salaries and benefits were $490 million compared with $462 million in the third quarter of 2010. Salaries and benefits, as a percentage of revenues, were 64.3% compared with 63.0% in the third quarter of 2010. Reported salaries and benefits included $7 million of severance and other costs associated with the 2011 operational review charge. Excluding the impact of the charge, salaries and benefits as a percentage of revenues would have been 63.4%.
Incentive compensation included $48 million of amortization of cash retention payments in the third quarter of 2011 compared with $28 million in the third quarter of 2010. As of September 30, 2010, December 31, 2010 and September 30, 2011, approximately $193 million, $173 million, and $243 million, respectively, was included in other assets on the balance sheet, representing the unamortized portion of cash retention payments made before those dates.
Reported other operating expenses were $147 million compared with $129 million in the third quarter of 2010. Reported other operating expenses included $8 million of costs associated with the 2011 operational review. Other operating expenses were favorably impacted by a $5 million release of funds related to potential legal liabilities. Third quarter 2010 other operating expenses benefited from the release of a $7 million legal accrual. Other operating expenses, as a percentage of revenues, were 19.3% compared with 17.6% in the third quarter of 2010. Excluding the impact of the 2011 operational review charge, other expenses as a percentage of revenues would have been 18.2%.
Reported operating margin was 11.8% compared with 14.5% for the same period last year. Excluding the 2011 operational review charge, adjusted operating margin was 13.8% compared with 14.5% a year ago. The decline in the third quarter 2011 adjusted operating margin compared to the comparable prior period was primarily due to the negative impact attributable to Loan Protector’s reduced financial performance and increased amortization of retention awards, partially offset by savings associated with the 2011 operational review.