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Although 2011 was a challenging year for Willis Group Holdings P.L.C., the London-based company still managed to increase its brokerage revenues at a higher rate than it had in the prior year, maintaining its position at No. 3 in Business Insurance's 2012 ranking of the world's largest insurance brokers.
Gross revenues rose 3.2%, to $3.45 billion in 2011. Most of that increase, analysts said, came from organic growth in the company's global and international segments, which separately reported increases of 7% and 5%, respectively, in commissions and fees for 2011.
However, Willis' profits fell by more than 50% last year, to $219 million from $470 million in 2010. Analysts pegged the steep decline in net income to a series of nonrecurring expenses, including a $180 million pretax charge related to the company's 2011 operational review, as well as an $11 million settlement with the United Kingdom's Financial Services Authority.
“I'd call it poor, improving to fair,” said Meyer Shields, a Baltimore-based analyst for Stifel Nicolaus & Co., when asked to describe Willis' financial performance since the beginning of 2011.
One of the more significant drags on Willis' overall growth, Mr. Shields said, was the North America segment's loan protector unit, a small specialty business included in the 2008 acquisition of Hilb, Rogal & Hobbs Co. that caters to lending houses. That unit benefited heavily from a sudden spike in foreclosure activity in 2010, but accounted for approximately 50% of the drop in revenue last year, according to Willis' 2011 annual earnings report.
Tom Mitchell, an analyst at New York-based Miller Tabak & Co. L.L.C., said the company failed to predict that the unit's performance in 2010 would prove “unsustainably strong.”
Despite the difficulties Willis endured in 2011, Chairman and CEO Joe Plumeri said in an interview he remains optimistic about the company's prospects going forward. While brokerage revenues for the first three months of 2012 remained mostly flat compared with 2011, the company's net income ballooned to $225 million from $34 million a year ago, largely on the back of cost savings through the 2011 operational review. “As much as the challenges ahead of us really center on execution of our strategy, I think the challenges we've had are behind us,” Mr. Plumeri said.
That strategy, he said, mainly refers to the continuing implementation of industry-based risk advisory models and analytics programs rolled out last summer as part of the company's Sales 2.0 initiative. Mr. Plumeri said early feedback from clients has been encouraging.
“I'm pretty pleased about the rollout, because we were able to do all of that at a time when the economy is not so great, and while there was still a soft market out there in the insurance industry,” Mr. Plumeri said. “Every company has to stand for something, and this approach clearly states what we stand for.”
Additionally, Willis appears to have been spared any significant backlash from investors and clients in the wake of recent controversies regarding its collection of commissions. In March, the company discovered that employees in one of its North American units had fraudulently overstated $28 million in commissions and fees from 2005 to 2011. However, “These kinds of mistakes tend to happen from time to time,” Mr. Mitchell said. “I don't think it represents a threat to the business model.”
The brokerage also announced in February it would begin accepting contingent commissions on some of its employee benefits accounts to offset a constriction in its revenue streams set in motion by caps placed on health insurers' medical-loss ratios under the federal Patient Protection and Affordable Care Act.
“We sent letters to every single client in this business unit, informing them of the changes under way with the insurance carrier community,” Mr. Plumeri said. “They understand the market forces in play. Although we didn't welcome the changes, we had to adapt to remain competitive.”
One challenge analysts said Willis' board of directors will need to address as soon as possible is the uncertainty surrounding Mr. Plumeri's future with the firm. With less than a year remaining on his current contract, Mr. Plumeri declined to comment on whether he is seeking an extension beyond 2013.
During a February conference call with investors, he said he would continue to concentrate his efforts on the business of running Willis as long as his contract allows him to do so.
“It seems fairly clear that Joe Plumeri's contract will not be extended,” Mr. Shields said. “It's a very big deal. Joe has certainly made a very big imprint on Willis' operating culture and reputation, and replacing him would be a challenge.”
Lockton Cos. L.L.C.'s ability to meet the needs of large risk management accounts, retain clients and attract talent is helping push the broker closer to the $1 billion mark in annual revenue, observers say.