Willis Towers Watson Public Limited Company (WTW) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining Stifel's CSI Conference 2020. My name is Shlomo Rosenbaum. I'm the business services analyst here at Stifel, and I want to welcome everybody for coming. This is our third CSI conference, but our first virtual CSI conference and hopefully our last virtual CSI conference. And I'm looking forward to, hopefully, next year, seeing everybody in person at our conference. I want to welcome John Haley, who's the CEO of Willis Towers Watson, someone that I've known from covering the companies that he has been the CEO of through their transitions over the last 10 -- 12 years actually, from Watson Wyatt to Towers Watson to Willis Towers Watson. And I want to thank you very much for joining us, John. I want to -- the format, what we're going to have for the fireside chat is I'm going to ask John to give us a very quick couple of minutes just overview of the company, after which, I'm going to start out with Q&A. And we -- through the webcast, I'm going to ask investors, if they have any questions, to please submit them through the webcast, and I will read those questions and pose those questions to John through the discussion. And with that, John, thank you very much. Now if you wouldn't mind just giving our -- the investor base over here a several -- couple minute overview of Willis Towers Watson, then we can jump into questions.

Sure. So thanks, Shlomo. And it's a pleasure to be here with you on this virtual conference. As you said, we've known each other for a lot of years now, and it's great to have a chance to get together, even virtually. So Willis Towers Watson is a company with roughly $9 billion in revenue. To a first approximation, we have 4 global segments that we operate in, and to a first approximation, they're like 40%, 30%, 20%, 10%. So the 40% segment is Human Capital & Benefits. Human Capital & Benefits is comprised of our retirement consulting. We mostly work for defined benefit plans there around the world. That is about 40% of the 40%. So roughly about 16% of our overall operation is retirement. We're the -- I think, the world's leader in the working for large, complex defined benefit plans, and we have a long history in that. This is a business that is not a growing business. It's going to be from 0% to 2% growth, we think, over the next several years. But it is a business we've been in a long time, and we're very good at it, and we operate it very efficiently. We have health care -- both health care consulting, health care brokerage work that we do, and that's about another 40% of the Human Capital & Benefits line of business. And then we have Talent and Rewards, which is a work around compensation, performance management, change management, communication. We do a lot of work on that. That's the remaining 20% of the Human Capital & Benefits. So the second largest business we have is Corporate Risk & Broking. It's about roughly 30% -- a little over 30% of our overall revenues. And there, we work on brokerage services for clients around the world. By the way, we're in about 120 to 140 countries, somewhere in that neighborhood, and we serve firms around there. We are -- our biggest operations, of course, are in the North America and then in the U.K. Our third largest business is Investment, Risk & Reinsurance. Investment, Risk & Reinsurance is a combination. It's got the old Willis Re, which is now -- and that's about 10% of our overall revenues -- 8% to 10% of our overall revenues. And it's one of the, I think, top -- it's not necessarily the biggest, but it's a top reinsurance operation. We're very proud of that. And again, very efficient and profitable. We have an investment consulting business. We consult mostly the defined benefit plans, but also do some sovereign wealth plans and charitable organizations. We function as the Chief Investment Officer with our delegated investment services. And we have about $2 trillion of money that we advise in our investment consulting operation. We also have, as part of Investment, Risk & Reinsurance, our insurance consulting operation. It's derived from the old Tillinghast, which was part of Towers Watson; and the old Watson Wyatt insurance consulting. It's the largest actuarial consulting operation in the world for insurance companies, and it's where we also do a lot of our software development for this general area. And so that's about 20% of the company. And then about 10% of the company is our BDA, our Benefits Delivery & Administration. That has a new TRANZACT acquisition from last year. It's our fastest-growing operation. And so Shlomo, is that what you are looking for, that kind of summary?

Yes. That's perfect.

And if you don't mind, I'm going to kind of just jump into the questions that people have been asking, most topical have to do with the virus right now and the impact on the business. So could you talk about which parts of your business are -- were impacted more than you initially expected? What were impacted less? When we had the last earnings call, the company actually was not yet very impacted by the coronavirus and if you can kind of talk about what you're seeing.

Yes. So thanks, Shlomo. And I think we have a diversified client portfolio. First, let me say that. We're in all different industries and geographies. No single client makes up more than 1% of our revenue, and -- except for the insurance industry, which, of course, were involved in through reinsurance and brokerage and consulting on retirement and health care. We do a fair amount there. But no other sector makes up more than 10% of our revenue mix. So we think our exposure to any client-specific distress is relatively minimal. A significant portion of our services are either [ renewitized ] or recurring work, which is not really that discretionary. And about 20%, we would say, is reasonably discretionary. Those are the ones where we can see clients defer or cancel projects. And I think when we talked -- at the last earnings call, when we talked about it, we were saying we just didn't know what would happen with that other 20%. And I think even now, where the recovery overall is still a little uncertain, we would say we still don't know for sure what will happen. But having said that, let me just maybe run through. In Human Capital & Benefits, so I talked about retirement. There is some project-driven work on retirement. On the other hand, one of the things we've seen from previous downturns is there's a lot of questions that come up in the course of the downturn, where people are wondering about how well funded their pension plan is, wondering about impacts on expected contributions, there are some opportunities around derisking work. So I think we see some potential exposure, but maybe not right in the beginning with that in retirement and maybe even some upside. One thing to keep in mind with retirement is we're often working and paid for by the trusts. And so there's not the same level of sensitivity around cash flow there as there might be from some of our other clients. Human capital and -- the health care work that we do in Human Capital & Benefits, we do the program design and insurance placement work, but then we also do consulting projects. It's possible that clients may decide to cancel or postpone some of their consulting projects. On the other hand, we see some upside in people looking, particularly as we get a little further along, about how the COVID-19 crisis means they should reconfigure their businesses going forward. So in both retirement and health care, 80% of the Human Capital & Benefits, we see some potential for a few things being canceled, but we see the offsetting opportunities coming up. I think where we see the sensitivity in this area would really be in Talent and Rewards, where these are more discretionary projects, they can easily be delayed and we might not see as much of that coming up. So that's where we would see the major sensitivity there. Investment, Risk & Reinsurance, we might see some pressure on our investment business. A component of our fees are tied to assets under management. There's also some consulting advisory work that could be curtailed. But again, we see many funds reevaluating their investment strategy and risk tolerance, and so that could equally drive some demand up. We could see some benefit in Reinsurance if rates increase in response to lost activities. So all in all, Investment, Risk & Reinsurance, I don't think we see a lot of concern mainly there right now. Corporate Risk & Broking, we think our services are fairly resilient. If you look back at 2008, 2009, and this was when Willis was a separate firm, you'll see they continued to grow revenue in those years. Nevertheless, new business is harder to win when you're not in the office. Some construction and energy projects will be down around the world. Our aviation business could be impacted due to lower volumes. I think when we think about the sensitivities for Corporate Risk & Broking, Shlomo, what we really think about is insurance tends not to be a discretionary item, but the amount of insurance you buy could be affected by the underlying economic activity, so particularly construction and engineering, maybe aviation, if there's a lot of scaling back of the business aviation would be doing. It's not that they won't buy insurance. It's that they might buy some less -- lower levels of insurance. Similarly for marine business. On the other hand, we're seeing a bit of a tailwind from pricing now. And then finally, BDA, our smallest business, it's our most durable business. We're not expecting much pressure there at all. So I think, if you think about this, I would say we probably -- in the earnings call, when we talked about this, we were a little -- we said everything really depends on how the recovery unfolds. And it's the underlying economic activity, it's not anything about our businesses specifically that we're really worried about. And I think we're pretty much in that position still.

Okay. Great. And then as you're managing your business, and you're managing it in a different way now because, as we talked about before we got into this call, you've kind of been locked down for the last 3 months. Is there anything that you feel like you took away from this time about managing a company that's really large global business that you think you'd manage the business differently even when everything has really just opened up?

Yes. Thanks. That's a good question. So what happened is we discovered a couple of things during this. First of all, our ability to work from home was much greater than we had ever realized. And we've seen our colleagues really just step up and be meeting our client service needs all across the board and do it extraordinarily efficiently. So that was something that was, I think, a little bit of a surprise for us there. What we've done with the -- I put together -- I just can't remember. Back in April I think it was, a new normal task force, we called it. And the focus of the new normal task force was to make recommendations about what we would do when we came back because one of the things we understood was that there were some learnings from here and we didn't want to assume that business would be the same going forward. We are operating right now with 90-plus percent of our people not working in the office. We expect to maintain that posture probably at least through the end of the third quarter. And we want to take this time to understand how we can work going forward. There's certainly a number of things we found we're much more efficient at than we would have thought. We want to look at how we could continue those. We talk with our colleagues about -- not about return to work but about return to the office because everybody's been working and delivering, as I said, the strong client service levels. One of the things we don't know though is we've -- what we've demonstrated is that over a 3-month period or a 4-month period, we can work incredibly efficiently, but that's on the back of decades of having worked together in offices and having built up relationships and everything. What we don't know is does that mean we can do some of this stuff indefinitely going forward, and I think that's part of what we're trying to figure out, Shlomo. But we're not taking it for granted that we're going to -- in fact, what we're assuming is that we won't go back to the way things had been completely, but we just don't know how much we need to. And that's part of our task force's charge.

Okay. Interesting. One of the -- just so -- when I've talked about this with other CEOs and things, a lot of the CEOs are saying, "Hey, as I'm seeing this happen and seeing our efficiency, we're feeling like we might end up with the workplace being more as a meeting place versus an actual workplace in terms of having -- we don't need the same real estate footprint, people don't have to be in there every day" and things like that. I don't know if your thought is around -- thinking around those lines as well.

So our thought is that, that is certainly a possible thing. I just want to be careful, as I said, about extrapolating, just because something works when you're building up on having been in the office and had relationships that you're drawing on over the years, you should assume that that's a sustainable thing for years to go forward either. So I think -- but we haven't ruled that out. And frankly, I think we would expect that we will not go back at all to the way things had been. It's just how we'll handle that. I mean the other thing I would say is this. On our colleagues, the impact has been a little bit uneven. I mean we have people in some jurisdictions where it's not conducive to working at home and we need to figure out how we handle that.

Okay. I want to pose some of the questions that are showing up here in the webcast. One of the participants is asking if you're already seeing delays in your business already. Because from what we talked about beforehand, it sounded like there's challenges, in some ways, in some of the new business, but is some of the existing business that you were planning on getting pushed out a little bit?

Yes. I mean, I think the -- we have -- well I want to be -- we're obviously going to come out with our second quarter earnings later. And so I don't want to be getting into anything like that. But I would just say the -- we're not seeing anything that is a big change to the way we do things right now with this exception: new business is lower than what we would have anticipated. On the other hand, retention of existing business is higher. And I think that just shows -- first of all, our clients have been focused on different things so they're not necessarily moving business the way they did before. I suspect that's something that people see across a lot of industries.

Yes. I would assume so also. Then, could you just talk a little bit about -- there is a lag in -- we saw this with the Watson Wyatt business in 2008, '09 in terms of when it actually impacted the business. It took us several quarters before a lot of other companies were feeling the downturn. And then afterwards, that's when you guys started to see it. What -- can you talk about the -- just touch on the items that caused this lag before your company starts to see the hit that other companies take.

Yes. So I think a major element of that at that time, Shlomo, was the retirement business. So as I mentioned when I was talking about COVID-19, one of the things we find with retirement is that, in some prior downturns, you would have people get a lot of questions about what's going on with their plan and the funded status and everything, and so you get a surge in demand actually as we entered the 2008, 2009 financial downturn. And then about 9 months in, they had that all figured out, and then there was a little less activity. There was just less activity occurring in retirement. So we had that lagged impact there. In 2008, 2009, retirement was 40% of our overall business, and 40% by revenues and a bigger portion by profit. So that was the significant component to that lag there. This one is a little different than the prior one. I think we probably saw some similar things in health care, not as pronounced as in retirement, in terms of some lags there the last time. And again, I'm not sure how that will work out this time.

Okay. And then maybe just -- you talked a little bit about the last time insurance is considered not very discretionary. You said that this time, things that you might see a little bit differently would be the impact and might cause people to just insure less or, I guess, take less of a level of insurance. Is there anything else that we should think about in terms of contrasting now to -- we talked a little bit about the Watson Wyatt or Towers Watson part. What about the Willis part of the business?

No, I think that's the major thing. So insurance, as I said, generally not discretionary. But on the other hand, we have some sectors of the economy that have certainly been hit very, very hard in the short run, and the question is how quickly they recover. So hospitality is one, clearly, aviation and a number of those like that. If those sectors are still way down at the end of the year and as we go into some renewals for things, are they going to be in a position where they've shut down parts of their operation and are buying less insurance? It's not that insurance is no longer -- becomes discretionary. It's just that the size of the operations and the scale of the operations might be such that they're buying less.

Got it. Maybe we could switch a little bit to the pending of, I guess, merger with Aon. Can you talk a little bit about what -- just from a ground level practically, what will the combined business be able to do that each can't do on its own? Like where's the cross-sell opportunity? Where do you leverage the unique assets? How does 1 plus 1 equal 3?

Yes. Thanks. So I think when we're looking at this combination, we thought about 3 areas that we would add some value, and one of them was that just there are some synergies that always occur when you bring together 2 organizations. And the synergies, I think, are the least interesting part of it and by far, the smallest part of the whole thing. In fact, when you look at the synergies we've projected, they're actually relatively small compared to a lot of other combinations. And I think part of that is that we see this as an opportunity to start working on new solutions for clients. So the other part of it -- the second part of it is that really, even though we're in the same businesses, a lot of the work we do, we have quite complementary capabilities. So for example, in -- when we look at data and analytics, and Aon has just been terrific in data and analytics that they've been able to gather and to provide to their clients and especially to provide to carriers and to help them. That kind of data and analytics will now be available to Willis Towers Watson clients. And so that will be a source of additional competencies and services that we can provide. On the other hand, some of the client-facing technology that we have from our insurance consulting operation, we've taken that and used that to construct software and other tools for our Reinsurance business and for our Corporate Risk & Broking business, and that will now be available to Aon colleagues. We have similar types of complementary services in health care. We have similar -- there are complementary areas in our geographical distribution that we think will come together and provide some value that we can spread across the combined client base. But I think perhaps what we see as the biggest deal is when we think about client needs and how the insurance industry in particular has responded to client needs, we see the really incredible amount of unmet needs. And that's true whether we talk about cyber, whether we talk about intellectual property, climate risk. We think when we get out of just the specific insurance and start thinking about retirement and health care, I think it's easy to look at vast areas there that are -- the needs that are just not being addressed at all. And what I think we see with the combination coming in is we will have the capability to build on some things that each of us might have been doing in this area -- in some of these areas, but together, we'll have the expertise and the capability to develop new solutions that neither organization could have done on its own.

Okay. And with the size of the 2 companies, there's a question actually from the webcast that's asking how likely is it that you're going to have to really divest assets in order to get antitrust approval from U.S. regulators because you do -- both of you do have very large presences here.

We -- when we -- so we've had some extraordinarily good, I think, legal and economic advice, both Willis Towers Watson and Aon, and of course, we're pooling that as we go to talk to regulators. When we look at the relevant markets that we play in, these are vast markets, and we are expecting to go in and be -- and not have to do major divestitures. Now having said that, look, the regulators have their job to do, and we respect that, and we're going to work with them. But our going-in position, and we think it's quite a reasonable position, is there are no divestitures required.

Okay. Interesting. And I mean, your business is similar -- there are a lot of similarities between your business and Aon's business. And one of the things that I wanted to ask is that you guys have been investing in internal technology and some of the things to go ahead and improve like cash collections and stuff like that. Is it still full steam ahead? Because a lot of the stuff that you're investing in might end up just being redundant come February of next year.

So I think we -- first of all, one of the reasons that the combination with Aon was so attractive to me, and I think it's a great case at Aon, is when we looked at where we were headed, both Aon and Willis Towers Watson were headed towards a common goal. I mean we were in different paths along the journey. In some cases, we were ahead of them. In a lot of cases, they were ahead of us. So it wasn't all exactly the same, but we were moving towards a similar thing. And in fact, I would say it's a global professional services firm approach where we're bringing together all of the capabilities, and we're not getting things stuck down in silos. It's an approach where we have state-of-the-art approaches to profitability, to cash flow, et cetera. And so I think all of those things we're interested in continuing. Now some of the areas like -- some of the things that we've been introducing on improving our cash flow, I think we're going to want to continue those through this year. Whether we can get some benefit of learnings from Aon as to how they've done that, we'd be excited to do that. But that's not the kind of thing we can talk with them about right now because we want to be careful to not do what they call gun jumping at the regulator. So we need to be careful about that. When I think about the technology investments we're making though, whether it's our work in quantum technology or whether it's some of the things we're doing around climate and some of the modeling we're using to advance things there, I think those are the kind of things that the Aon/Willis Towers Watson combination is going to be very much more focused on even than we are right now. So we're not doing a lot of that. What we have, some -- I think there may be some internal systems that we're going to have to rationalize between both Willis Towers Watson and Aon. Whose systems we use and how we do that, I think those are open questions.

Okay. And we're going to leave off with one last question. Just a little bit about the BDA segment, which is actually fairly unique, I think. The growth in the exchanges was very strong for a while, then it's been kind of muted. So I wanted to ask you what kind of changed there. And then the TRANZACT business that you bought was growing really, really well. And I wanted to ask you if you see that kind of growth going forward for a sustained period of time.

Yes. So first of all, on the Retiree Exchange business that we had before, we've had great success in that business and in the first 7 years, just incredible explosive growth. Now if you look at the Fortune 100 who have retiree medical plans, which is really our -- companies that have retiree medical plans or our target market there, 67% have moved them -- their retirees to an exchange. And of the ones that have moved the retirees to exchange, we've gotten 70% of that business. So we've done extraordinarily well by any stretch of the imagination. We have 1.8 million members, and we're by far the market leader in the large employer-sponsored space. The problem is that 67% of the companies have already moved, so we pretty much saturated that market. We've now shifted our focus -- we've always been focused on the public sector, but we've shifted to be even more focused on that. Pipeline is healthy, but it's somewhat different than private industry. I think there's a longer lead time for the sale. There's a lot of different interested parties. So we think the growth there is going to be episodic, that we'll see there. I think -- and that's true for -- that just means that we've really, as I said, saturated, a lot of the market that we had identified when we first got in to the Retiree Exchange business. We do see a couple of other opportunities there, before I jump on to TRANZACT. One is the pre-65 is being energized by the current economic conditions, and there's a reentry of some large carrier partners and also ICHRAs emerging. So effective January 1 of this year, employers of any size can reimburse employees for health care costs through an HRA account. This is like a defined contribution approach to health care. Our exchange business is prepared to provide services to employers who decide that ICHRA is right for the organization since we already administer HRA accounts on our own platform and we also help individuals evaluate their individual and family plan options. So we've picked up some small clients this year. WTW is going to manage all aspects of their ICHRA plan, and we'll -- we see that as an emerging market for us. Coming on to TRANZACT. We did that last year. We amended the earn-out portion of that acquisition agreement to lower the potential earn-out from $200 million to approximately 1 -- about $17 million, but then we agreed to pay an additional $117.5 million in upfront purchase price that was as part of closing. So we changed the purchase price there. This allowed the company to reduce its earn-out exposure and lower the potential overall consideration paid for TRANZACT by about $65.5 million if the full earn-out objectives were to be achieved. TRANZACT has been performing way better than expected, and we had a substantial growth percentage, about 50% last year. We think the outlook for that is very good growth for the next several years. Their closest competitor is valued at about $3 billion, and we paid $1.3 billion for TRANZACT. So we feel pretty good about that deal. We loved it when we did it, when we first talked about it. We loved it even more when we closed, and we liked it even more today.

Okay. That's great. John, I want to really thank you for taking the time to be here with us today, especially, I think, today is your -- isn't that your shareholder meeting today?

Yes, we got that done this morning though, Shlomo. It was a virtual meeting.

All right. Well again, we appreciate the time. And thank you very much for the update and the insights.

Thanks a lot, Shlomo. Good to talk to you. Have a good day.

Have a good day.

Thanks.