Willis CEO Sees Insur Rates Rising Into '03, If Not '04

   By Chad Bray
   Of DOW JONES NEWSWIRES

NEW YORK -- Willis Group Holdings Ltd. (WSH) sees higher insurance rates and tighter policy terms continuing into 2003, its top executive said Tuesday.

On a conference call with analysts, Chairman and Chief Executive Joe Plumeri said he wouldn't be surprised if rates continue to increase into 2004, which presents a "great opportunity" for a pure-play insurance broker like Willis. Demand for its risk-transfer services will likely continue to be strong, he said.

"Rate continues to rise around the world," Plumeri said. "It varies considerably by geography and line."

On Tuesday, the London insurance broker reported third-quarter net income of $31 million, or 18 cents a diluted share, for the period ended Sept. 30, compared with a net loss of $81 million, or 55 cents a share, a year earlier.

On an operating basis, Willis earned $64 million, or 28 cents a share. Analysts had expected the firm to report operating earnings of 28 cents a share, according to Thomson First Call.

Revenue rose to $390 million in the third quarter, up from $325 million in the prior-year period. Organic revenue, which excludes the effects of foreign exchange, acquisitions and disposals, rose 17% in the quarter.

Quarterly results included an $18 million noncash charge for performance stock options granted to management as part of Willis' 1998 buyout agreement with KKR for meeting or exceeding 2001 and 2002 targets.

The company began taking theses charges in the prior-year third quarter and they will be recognized quarterly through 2004. Willis has recognized $272 million, or 81% of the total estimated charge based on the current quarter-end stock price.

Plumeri said Willis continues to explore potential acquisitions. However, the company will only consider companies that fit its business model and can be acquired at an appropriate price, he said.

Plumeri noted that some companies are seeking extravagant multiples due to the higher rate environment or are pursuing acquisitions that ultimately aren't as easily integrated, so companies don't benefit from economies of scale. He said acquisitions in the industry will happen, but they won't be very efficient until rates soften.

In the third quarter, Willis increased its majority interest in subsidiary Willis GmbH & Co. KG, Germany's third largest broker, to 78%, completed two acquisitions in Sweden, and increased its ownership to 100% of certain business units in Australia and Indonesia.

The company also disposed of four business units outside of its core brokerage business, Plumeri said.

"As I've said before, we're not in the hobby business," he said. "If it's not a core brokerage, we don't do it.'

He said the company has disposed of almost everything he would consider a "hobby" business - one outside of Willis's new sales culture.

In North America, Willis reorganized its regional offices in the quarter, going from seven regions to 13 regions. Plumeri said the small geographic division will allow the regional officers to be more engaged in their businesses and more focused on growing the business.

Meanwhile, Plumeri said that no claim has been made against Willis in a dispute between Citigroup Inc. (C) and Industrial Risk Insurers, a unit of General Electric Co.'s (GE) Employers Reinsurance Corp., over whether Citigroup and its Salomon Smith Barney unit are covered as part of a policy extended to Silverstein Properties Inc. regarding World Trade Center 7.

The building, where Salomon Smith Barney was a tenant, was destroyed by falling debris and a later fire after the terrorist attack at the World Trade Center last year.

Willis, under the direction of Silverstein, extended a certificate of insurance to Citigroup, Plumeri said. The insurance broker believes it acted properly, he said.

"Willis did what it was instructed to do," Plumeri said. "We have no liability in the matter."

The question now is whether Citigroup can participate directly in the claims process and receive payment for losses sustained in the destruction of their offices there, Plumeri said.

At the same time, Plumeri said Willis may add one or two additional independent directors to its board in the next several months. The insurance broker recently added former U.S. Sen. Bill Bradley as one of two independent director on its board.

Willis's stock recently traded down $3.63, or 11%, at $29.35 on 250,800 shares traded. Average daily volume is 614,178 shares.

-Chad Bray, Dow Jones Newswires; 201-938-5293; chad.bray@dowjones.com

Updated October 29, 2002 10:14 a.m. EST