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Willis organic growth disappoints analysts

Despite reporting strong earnings, broker Willis Group disappointed analysts with its lack of organic growth for the fourth quarter.

The firm - which was last month linked with a takeover approach for its larger rival Marsh & McLennan Cos - posted adjusted fourth quarter net income of $95mn, or $0.66 a share.

Although the figure was down on the $151mn, or $1.00 a share recorded in the prior-year period - a result helped by a $71mn tax credit - it beat analysts' consensus estimates of $0.59 a share, as a lower tax rate boosted earnings by $0.08 a share, offset by a foreign exchange impact of $0.05 a share.

But a zero percent organic growth rate for the fourth quarter as new business wins were wiped out by falling premium rates was highlighted by Bear Stearns analyst David Small.

Small said he was particularly concerned by the broker's 7 percent negative organic growth in North America for the period, which he compared with AJ Gallagher's recently reported flat organic growth in the region.

"We are generally surprised by this disparity," the analyst declared, adding: "Investors are likely to be disappointed with the lack of growth in the quarter and the significant decline in organic growth in both North America and Global segments."

Willis said its Global segment was "significantly affected" by negative organic growth in its reinsurance business, which was hit by falling insurance premium rates and higher retentions by primary carriers through the year.

However, Small suggested that the firm's "ability to maintain margins coupled with compelling valuation should limit downside risk".

Willis reported a healthy operating margin of 23.6 percent for the quarter, compared to 21.3 percent in the prior-year period.

And for the full year operating margin was 24 percent, up on 22.7 percent in 2006, as the group reported full year profits of $409mn, or $2.78 a share, down from 2006 - although prior year net income of $449mn was impacted by the sale of the firm's London headquarters and costs associated with its "Shaping our Future" initiatives.

Total 2007 revenues were $2.6bn, up 6 percent on the previous year, with organic growth of 3 percent.

Small suggested Willis' ability to "post strong margins in the face of significant top-line declines supports the view that 1) Willis' cost structure appears more variable than its peers; and 2) [its] 2008 margin guidance is achievable even if market conditions remain difficult".

He added that negative trends in reinsurance are also likely to hit other large brokers as they report this month.

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