WSH is one of the few insurance companies that have remained promising in current tough global insurance markets. The company has negotiated the soft insurance pricing cycle extremely well, and has been consistently generating industry-leading operating margins and organic revenue growth over the last several years. The company's second-quarter earnings more than doubled on acquisitions and growth in its international and global operations. Over the last two months, the stock price hasn't changed much, why is it so? Will the stock show some action in the next few months?
Improving operating environment
Despite predictions of dramatic rate increases to offset reinsurer losses over the preceding 12 months, July 1 reinsurance renewals saw sufficient capacity in virtually all areas and a reasonably orderly rating environment. Greater stability in the reinsurance market was brought about by initial signs of recovery in the financial markets and a lack of major underwriting losses in the first two quarters of 2009. Anticipating a challenging year marked by exchange rate volatility and a difficult retrocession market, re insurers took aggressive steps early in the year to control their aggregates more tightly. These actions, coupled with the lower open market purchasing by residual markets in Florida and Texas, eased much of the capacity squeeze in the more demanding peak US property catastrophe zones. The Insurance Linked Securities market is showing signs of life with $1.4 billion in catastrophe bonds being issued so far in 2009, along with a modest reappearance of sidecars and some capital increases.
WSH is expected to benefit from an improved operating environment going forward and look for the insurance market to harden in 2010 following a reduction in industry capacity stemming from AIG's problems, and capital constraints due to significant investment losses incurred by many underwriters.
Historically, WSH has persevered through a declining rate environment by achieving strong new business production and maintaining solid producer and consumer retention rates. In addition, the company's exposure to faster-growing international markets has more than the offset weakness in its U.S. operations. Despite top-line headwinds, WSH has expanded its margins through aggressive cost-cutting initiatives and improved operating efficiencies.
Benefitting from Hilb Rogal&Hobbs acqusition
Willis last year expanded its North American footprint from 70 to more than 200 locations when it acquired U.S.-based middle-market broker Hilb Rogal & Hobbs (HRH).
