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Top insurance brokers: Willis Group Holdings P.L.C.

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Willis Group Holdings P.L.C. made uneven progress on its multiyear plan to stabilize revenue growth and profitability through last year and this year, but a blockbuster merger this summer has improved the London-based broker's future prospects.

On June 30, Willis and New York-based Towers Watson & Co. unveiled plans to combine the companies in an $18 billion deal that is expected to close at the end of this year. A combined Willis Towers Watson will employ roughly 39,000 people in 120 countries and is expected to generate more than $8.2 billion in revenue.

Analysts said the merger will have a transformative effect on Willis' ability to compete with its much larger rivals, nearly doubling its size and adding a market-leading employee benefits consulting business, talent management and financial services to its property/casualty and reinsurance broking and consulting segments.

“This merger makes Willis closer in kind to the two leading companies in the industry,” said Bruce Ballentine, vice president and senior credit officer at Moody's Investors Services Inc. in New York. “Willis was already a strong player at No. 3 in global brokerage, and now they're likely going to be a considerably stronger No. 3.”

Willis grew its brokerage revenue 3.7% in 2014 to $3.77 billion, maintaining its No. 3 spot in Business Insurance's annual ranking of the world's largest commercial insurance brokers as No. 4 Arthur J. Gallagher & Co. posted double-digit growth to nip at Willis' heels.

Through the 18 months leading up to the merger's announcement, analysts said Willis' financial performance was generally underwhelming, and views of the company's near-term outlook ranged from neutral to negative.

“On an absolute value basis, Willis has been one of the poorer performers in the insurance brokerage industry,” said J. Paul Newsome, managing director at Sandler O'Neill & Partners L.P. in Chicago.

Willis' 2014 net income slipped 0.08% to $362 million in 2014, while expenses grew 5.4% to $3.16 billion, due in part to restructuring costs associated with the three-year operational improvement program it implemented last year.

“Up until this merger announcement, we had a negative outlook on Willis' ratings,” Mr. Ballentine said, noting concerns about the amount of debt Willis carries and the added debt the company will likely have to take on to complete its proposed $598.1 million acquisition of the rest of Puteaux, France-based broker Gras Savoye & Cie.

“We brought the outlook back to stable with the announcement of the merger, largely because Towers Watson is coming in with a low amount of debt, and we think the combined organization will have much stronger earning power relative to combined debt,” Mr. Ballentine said.

Willis executives said they were generally pleased with the company's 2014 results, citing positive organic growth in all four of its operating segments and early signs that the restructuring program is performing as intended.

Since April 2014, Willis has spent $67 million in nonrecurring restructuring costs tied to the program and has shed $21 million in operating expenses, reducing its organic expense growth rate to 4.6% at the end of last year vs. 7.6% in 2013, the company reported.

“Overall, I think we feel that 2014 was a very good year, and we're excited about 2015,” said Willis CEO Dominic Casserley. “With the additions of (London-based broker) Miller Insurance Services L.L.P., Gras Savoye and the ongoing impact of the operational improvement program gathering pace over time.” However, he added, “the merger with Towers Watson is a game changer.”

Mr. Casserley said one particularly attractive aspect of the merger is the opportunity to accelerate revenue growth through OneExchange, Towers Watson's private health insurance exchange, previously available only to national and multinational employers.

One of the most critical future tasks will be maintaining workforce productivity and engagement during integrations and internal restructuring planned through the next several years.

“We're very mindful that changes have a way of occupying people's attention, and historically we've dealt with that with very active and robust communication plans,” said Todd Jones, CEO of Willis North America Inc.