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3. Willis Group Holdings Ltd.


Continuing to employ a "slow and steady wins the race" approach, Willis Group Holdings Ltd. spent the past year focused on organic growth and a gradual expansion of its global footprint.

That tack seems to be working.

The London-based brokerage has been quietly carving out more market share and boosting revenues, observers say, despite softening market conditions.

After previously swearing off contingent commissions amid then-New York Attorney General Eliot Spitzer's industry probe, Willis this year said it would not take new supplemental commissions developed by some insurers in place of contingents.

While state attorneys general have approved the supplemental compensation, Willis in April announced it would reject the incentive payments.

"I just don't think that it's right...and so, we're not going to take them," Willis Chief Executive Officer Joe Plumeri said of supplemental commissions. "In my mind, I believe it's the same as a contingent--it's a conflict."

Fortunately for Willis, it weathered the compensation scandals of 2004 better than its peers, observers say.

"Of the global brokers, (Willis was) probably least impacted by loss of contingent commissions," said Greg Dickerson, analyst in New York with Fitch Ratings.

Compared with Willis rivals Marsh Inc. or Aon Corp., "the contingent commissions made up a smaller percentage of the overall revenue, roughly about 4% at the time they gave it up," and Willis "likely suffered less reputational damage than Marsh or Aon" as a result of the compensation scandals, said Mr. Dickerson.

Unlike competitors, Willis was not forced to issue an apology over contingent commissions, and Willis' settlement was reached without the filing of a lawsuit by Mr. Spitzer, Mr. Dickerson noted.

A Standard & Poor's Corp. report from May said: "In 2005 and 2006, the primary strategic goal for these global brokers was minimizing the loss of contingent commissions in an increasingly competitive market. All have restructured operations, cut expenses, sold off wholesalers, culled unprofitable businesses and refinanced liabilities to reduce financial risk and improve profitability. In 2006, the success of these moves was clearer than in 2005. Willis, thus far, has recovered the fastest."

Mr. Plumeri certainly has been pleased with Willis' performance.

"We went through the Spitzer years and recovered very, very nicely. Our margins are still in the over-20% range--without a contingent in the house and fully transparent," Mr. Plumeri said.

Indeed, last year was a good one for Willis financially; among the world's largest four brokers, Willis reported the highest increase in 2006 brokerage revenues, a 6.7% rise to $2.34 billion.

Commercial retail brokerage revenues at the world's third largest brokerage rose 5.2% to $1.32 billion.

One area that Willis has identified as a key growth target, employee benefits, saw revenues rise 21.2% to $247.6 million in 2006. Other areas of growth included reinsurance brokerage, where revenues rose 7.7% to $563.0 million, and personal lines revenue, up 34.5% to $31.8 million.

The broker's revenue growth is continuing this year. For the first quarter of 2007, Willis reported total revenues of $739 million, a 10% increase over the prior-year period.

"I looked back for about 14 quarters in a row. When I looked at the peer group, our revenues grew more than the average of the peer group...I've got to feel good about that," Mr. Plumeri said.

"From an operating performance standpoint, their performance continues to surpass their closest competitors...their margins and their organic growth continue to compare favorably" with Marsh and Aon, Fitch Ratings' Mr. Dickerson said.

In terms of a global footprint, Willis is "certainly not on the level with Marsh yet, but they have increased their ownership of Gras Savoye in France," said Mr. Dickerson.

"We own 38% of that company and probably about 2010, we will buy the rest," said Mr. Plumeri of its French associate, Paris-based Gras Savoye & Cie, which recorded brokerage revenues of $569.2 million in 2006.

"They won't grow to scale in the same time frame as their competitors," but the company is "growing at a measured pace," said Tracy Dolin, credit analyst with New York-based S&P.

"Their strategy is growth by acquisition to a limit of $100 million a year," noted Ms. Dolin, and "there are many years that go by" in which the broker doesn't reach that sum.

In 2006, Willis spent $98 million on acquisitions. In addition to the $25 million to purchase an additional 5% ownership in Gras Savoye, it completed eight acquisitions of retail and reinsurance brokerage companies--in Chile, Norway, South Africa, Sweden and the United States--with annual revenues of about $30 million for total spending of $73 million, net of cash acquired.

One blockbuster deal that would have marked a major departure from Willis' acquisition strategy failed to materialize.

Last October, a market source confirmed that Willis had made an informal bid earlier in the year to acquire its much larger rival Marsh & McLennan Cos. Inc. (BI, Oct. 23, 2006). Willis declined to comment on the matter.

For his part, Mr. Plumeri insists the company's key growth will always be organic: "That's what we do here, we build internally," he said.

Some analysts, though, question whether Willis will be able to sustain its recent growth over the long term.

Earlier this year, Merrill Lynch & Co. research analyst Jay Cohen noted in a report that Willis will be challenged to maintain its growth rate in the future due to softening market conditions.

S&P also noted in a May report on global brokers that Willis is "prone to greater earnings volatility and margin compression due to its exposure to property/casualty insurance's underwriting cycle."

But the rating agency report also said, "Willis' executive recruitment and retention strategy, as well as its expanded global scale, should result in a measurable gain in market share through 2007."

Willis increased its employee base by about 300 in 2006, bringing its total to about 13,000 worldwide.

"Our clients are sticking with us, our retention rates are high, we are opening new business around the world," said Mr. Plumeri, adding: "Our stock has done well, which is always a good thing for our shareholders."

Looking ahead, Willis will continue to focus on client service through offerings such as its Willis Quality Index to benchmark insurers and its Shaping the Future initiative to, among other things, control expenses and enhance the broker's service model, processes and technology.

"Building the systems to be able to deliver a greater knowledge, and the ability to be able to deliver greater information to our clients is very, very important," said Mr. Plumeri. "And to do it in a way that's quicker than anybody else."

On July 6, Willis' stock closed at $43.92 a share. It's 52-week high was $46.64 and its 52-week low was $31.21.