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Coverage Initiation: Willis Group Holdings plc
Value Line recently initiated coverage of Willis Group Holdings (WSH), in its flagship product, The Value Line Investment Survey. The company is one of the largest insurance brokers in the world. It provides a broad range of insurance brokerage, reinsurance, and risk management consulting services to its clients worldwide. It primarily serves as an intermediary between clients and insurance carriers by consulting clients on certain risk management requirements. The company provides its services to customers in various industries, including aerospace, marine, construction, and energy. The company was founded in 1828 and is based in London, England. It was incorporated in Ireland in 2009 and had roughly 17,500 employees as of December 31, 2012. It has 400 offices in nearly 120 countries.
Willis derives most of its revenues from commissions and fees for the brokerage and consulting services it offers. The company does not determine the insurance premiums in which its commissions are based, and therefore fluctuations in premiums charged by insurance companies have a direct impact on operating results. Clients include major multinational firms, as well as middle-market companies, public institutions, and individual clients. No one client represents more than 10% of total sales. Willis has significant market positions in the United States, U.K., and several other countries.
The company is organized into three business segments: North America, International, and Global. Roughly 50% of total 2012 revenue was generated in the U.S., with no other country accounting for more than 20% of sales. The North America division provides risk management, insurance brokerage, related risk services, and employee benefits brokerage and consulting to clients in the U.S., Canada, and Mexico. The International division consists of Willis’ operations in Europe, Asia, Australia, the Middle East, South Africa, and Latin America. Services include risk management, insurance brokerage, reinsurance brokerage, and employee benefits consulting. The Global group provides specialist brokerage and consulting services to clients worldwide for risks arising from specific industrial and commercial businesses.
The company faces competition in all fields in which it operates. Its largest competitors are Marsh & McLennan (MMC) and Aon Corporation (AON). In 2012, both firms each had roughly 26% of the total global revenue for the commercial insurance broker industry. Willis was the third largest company, with about 8% of total sales. The company also faces intense competition from smaller, regional, and local firms.
Willis faces several risks in its business. As we mentioned, the company does not control the premiums on which its commissions are based, so volatility in these premiums can hurt profitability. Willis also has a considerable amount of debt on its balance sheet. As of December 31, 2012, long-term debt was roughly $2.3 billion, or 58% of total capital. Servicing a debt load of this size can limit the cash flows that would otherwise be used to fund capital expenditures, pursue acquisitions, or invest in new technologies.
The company has emerged from a difficult 2012, and has been reporting solid results thus far this year. Organic sales growth has returned and margins have improved, and this has allowed Willis to return to more stable profit growth. The stock price has responded to the better news, and has risen nicely throughout the year. We note that the company also offers a decent dividend yield of roughly 2.5%. However, as we mentioned, there is a certain degree of risk associated with the company, most notably the sizable amount of debt on its balance sheet.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.