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

Okay. Good afternoon, everyone. I'm pleased to introduce and start our second fireside chat of the day and introduce the management team of Willis Towers Watson. Today, our next chat -- fireside chat scheduled to last to 1:40 this afternoon, and we have with us Carl Hess, who is the President and incoming CEO for Willis Towers Watson; Andrew Krasner, who is the Chief Financial Officer; and Claudia La Hoz, and she serves as the Investor Relations Officer for Willis Towers Watson. So during the course of our conversation, you are welcome to e-mail me with questions at [email protected]. And also as follow-up, after the conversations over with, and if you have follow-on questions, of course, you can reach out to me. But you can also reach out to Claudia, who is generally really responsive to questions that you might have. So with that, a brief overview or introductory comments, I'd like to turn the mic over to Carl. And before we begin with my questions, I wanted to give you an opportunity to sort of recap the third quarter '21 results, especially in the context of all the investor conversations you've had and the time you've had to reflect since you reported on the important points that you think investors should know about at Willis Towers Watson.

Sure, Greg, and thanks. And good afternoon, everyone. To say the third quarter was a busy time for us is a bit of an understatement. I'm not sure we've had a less eventful time, but I would have had try hard. I mean we're really actually very pleased with our third quarter results. I mean we posted solid organic growth of 4% and margin improvement 120 basis points and solid EPS growth, despite -- and I do say despite all the disruption from the deal break, right? On July 26, we announced to -- 46,000 colleagues that we're heading a sharply different direction. And during the quarter, we appointed myself. We appointed a new leadership team, and we introduced a new vision, right, One Willis Towers Watson. And One Willis Towers Watson is about working across our businesses, our geographies, our functions to achieve more and be better. We're planning on driving change through new priorities to grow, simplify and transform. And for those of you who listened into our Investor Day call, that's exactly what we talked about. We're going to grow by investing in talent by capturing market share, innovating, expediting our capabilities in evolving markets and bringing curated solutions to clients. And we plan to simplify by streamlining down to two business segments, effective January 1, 3 geographies, which were already done starting in 2022. That's going to enable us to deliver more efficiency through technology and standardization. And then we're going to transform our colleague and our client experiences by streamlining our infrastructure, fortifying our operations and evaluating our real estate needs. Now we've seen some challenges and elevated attrition in certain areas of our business, mostly our Corporate Risk & Broking segment, or CRB, but we've seen that start to improve by the end of the quarter and hiring activities dramatically increased as well.

Excellent. I think that's a good segue to talk about employee retention and recruiting. It really was -- and continues to be a popular topic on all the conference calls. Retention is hard to come by. There's inflation on compensation. There's a declining available pool. So can you give us an updated perspective on employee retention, not only from a legacy perspective, but I'm also I'm interested in producer teams that have left or producers that have left that might -- you might be engaged with and might be considering coming back now that you're not going to be Aon.

Yes. I mean it's amazing we're not going to be Aon has been a draw back to the organization. So at Investor Day, we'd already counted the numbers, and we've had over 750 rehires into the organization this year. People really do believe in Willis Towers Watson is standing for something. I think that's helping. But at the enterprise level, I mean, attrition rates have remained within our normal range. But yes, attrition has been most pronounced at CRB over the last few months, but we've now gotten to the point where core CRB headcount stats has started to improve. We have alleviated a lot of the uncertainty that was caused by the proposed deal and its subsequent cancellation, having lifted those constraints, attraction and retention have improved and hiring rates and CRB are up dramatically. To your point, Greg, I mean we've been rehiring across a broad range of places. That's very intentional. There have been some high-profile rehires. I mean we just announced one in the aerospace and a few producers the U.S., but that's not necessarily representative of the majority of our new hires and nor is that where we're aspiring to do, right? We're looking to find the best talent across the industry. We have attracted -- for instance, our new Head of Brazil comes from Aon. Our new Head of Global Fac comes from ERS, right? So I think the proposition we represented actually, I think good.

Yes, that's -- that was welcome news versus the steady drip from the various periodicals that publish on you about people leaving. It's nice to see a change, and...

Yes, it is a nice change. I agree.

Yes. So the next area, and again, you mentioned this in your opening comments about the strategy going forward, and it's -- the restructuring initiative is an important piece of that strategy going forward. And you've established revenue targets and then you've also stressed margin targets. And when you're cutting expenses and then telling us, you're going to grow at the same time, that's always -- some of it seems to be moving in opposite directions. But let's focus on the restructuring piece first. Can you give us an update on how that's coming? You launched it in September. Here we are in November. What have you learned so far? You also have the experience of the legacy OIP program that was -- wasn't your design, but failed. Give us a state of the union on the restructuring initiative. As you're 2 months into it, how you see it going, et cetera?

Yes. So thanks. I mean we remain highly confident in our ability to hit the [ $300 million ] in expense savings. We talked about at Investor Day. We took a bottoms-up approach to identifying opportunities and make sure that the objectives we have are achievable, and we're carefully developed. So we've identified targets. And during Q3, we stood up our transformation management office, set up the infrastructure for it. I appointed a leader of it, et cetera. Part of the transformation offices effort to involve simplifying the structure and adjusting our matrix management. That's what we took our 4 segments down to 2 and our 4 geographies down to 3. I mean we just want to make it quicker and easier to do business with us, and we think that refining our management structure will help us to do that. We've already started the process of transitioning 2 segments and will be ready to launch in 2022. Though we've already identified the targets and have mapped out the journey to achieve those targets, it will take some time for the benefits to speak of evident. So a bit of patience, I think, is in order. The transformation project is about much more than just upgrading our technology and reducing our real estate footprint, it is about changing the way we work across the organization. We want to redesign our processes to improve operational efficiency in a way that's sustainable over time and that kind of transition doesn't happen overnight, right? I mean change efforts are going to go through a series of phases, which means while we build on executing our new capabilities, we'll need to run many of our legacy systems and existing processes in parallel, right, in order to avoid unnecessary disruption to our clients and our ongoing operations. We're modernizing the way we work to gain efficiency and agility. We want to do that thoughtfully and strategically, and that does require a fair amount of time. And so for that reason, the costs we've identified to achieve the program, while we've said it's going to cost us $750 million to achieve [ $300 million ] in savings, the costs are front-loaded and the benefits are more backloaded. Andrew talked about this at the Investor Day.

Right. And just a point of clarification. Because of OIP, and you guys both got to see that sort of evolve, you inherited it. Can -- as we think about the end of '22 and '23, if you could identify some points that all of us could hang our hat on, hey, there's some progress. We can see the progress is emerging. Somehow somewhat I think that would be very helpful to establishing credibility of the program itself because of the investor memory, a muscle memory as it relates to OIP. Does that make sense?

It does. I mean I don't think we can just say trust us for 3 years, right? I think we've got to show you how we're progressing along the way, right? How much have we spent? How much are we saving, right? And what's the direction, right? I'll leave it to my esteemed friend over there to figure throughout the exact way we can.

Okay. Well, that's good. Andrews up.

He looks ready. He looks up.

Exactly.

So the other -- when you talked about the revenue targets, and I guess I got to deal with what is known at this point and known as the historical reporting format. And so the biggest opportunity, the biggest challenge has been CRB, and there's organic piece to it. There's a margin piece to it. Before we think about going forward, maybe you can address your perspective at the historical performance of CRB from a revenue and organic and a margin perspective? Because I think the Street's perspective of it is not necessarily positive.

Yes. Fair enough. I mean during '19 and '20, right, I mean our organic growth rate were in line with the industry. And I think that's actually a testament to the strategy we had put in place beginning in '18 of emphasizing our global lines of business, right? Our global network, our capability as a specialist broker were paying off. And so obviously, when we entered into the deal with Aon, a lot of our progress on those got put into hiatus as we were trying to figure out integration. So yes, 2021 has been more of a challenge due to that, right, deal related issues. But now that we have clarity on the future of the business, I think colleagues and clients that have both reengaged. And so the worst of the disruption is behind us, and we've talked about some of the headwinds we've got out on the growth side for the next few quarters. We think that's just temporary. We expect CRB's organic growth to be mid-single digits over the long term, which is, I think, generally where the industry pitches the growth rates, CRB business being put on hold, right, as we figure out the broader merger. So we are looking to resuscitate the plans we had to further integrate Gras Savoye into our global business. So specifically or strategically, looking at our global line of business structure, where our systems can better integrate because Gras Savoye does run a number of systems that are particular to the French market and has a large affinity business, which carries with it some custom structures of those. And we think that -- and with the aggressive wall management team thoroughly behind us, right, we think that there are significant efficiency gains that we can get while preserving, I think the spirit that has made Gras Savoye such a success within the French market, right? So there are real benefits to be had from both sides. I think by putting the global backbone, right, of the Willis Towers Watson infrastructure further embedded into Gras Savoye organization while using what's been a very strong brand for us and great talent to further deepen what we could do within France and the other territories that Gras Savoye historically covered.

I know you've tried to steer clear of talking about attrition by business unit. But within CRB, if we take the Fac business out, you take exclude the Fac business because that's been -- there's been some documentation of who's left and, et cetera. It's been a little harder for us to track the departures in Europe of your producer -- of the producer first that you have. I just thought about it as you were answering this, can you give us some perspective on how the European piece is held up through the whole process.

So I mean if you look at the people who are sort of subject to the rumor market, right? I mean, as you point out right, the rumor had it that several of our European properties were proposed for disposition during the merger process. I think Willis Re was clearly what was felt the most where you had largest market concentration and two very different strategies for what was going to happen to the business and Played out a lot of that in the press. Fac is another example. The London market being the strong at uncovering where we're, in fact, as it is. You see that play out as well. The broader business that we have in Europe, right, which is not the same as London market specialty, right, but it's what we call retail, right? It's very client facing. Sort of the further you get away from reinsurance and specialty, the more stable you tend to have business. The fact that they were under the microscope merger didn't help, but it wasn't -- don't extrapolate from what you read about the London markets, I guess, the way I'd put that.

And then one other point on CRB before I pivot to HCB would be the perception of tailwinds from a pricing perspective in property casualty insurance. That has definitely seemed to be a common theme for all the brokers. And obviously, it should be benefiting you, to some degree, but it's not an area that you've really commented on because you've been focused on just stabilizing the ship post deal break. But maybe you could spend a minute and talk about your perspectives on pricing in the property casualty market. You've got a lot of experience around this and maybe I know you didn't include this as part of your 2024 guidance, but I'm sure you have a view on how pricing is going to evolve over the course of the next 24 months.

Yes, 24 months is a long time, Greg. And I I'm not sure anyone is willing to commit to quite that long-term review, right? I mean you do have markets where insurers are looking to recover what they perceive their outsized loss ratios in the last several years, and that's usually a multiyear conversation, right? It's not an immediate conversation. You do need to recognize that when you're looking at the brokers though, the clients always have a choice, right? Our clients can decide to purchase less, right, to offset price increases. So even if you accept there's a tailwind for the overall insurance industry, right? That's not necessarily distributed equally amongst all of the players in the insurance value chain.

Makes sense. Makes sense. It's something -- it's also another comment we've heard. So let's pivot to HCB for a second because I kind of view that business as sort of the crown jewel of Willis Towers Watson in so far as it's been probably one of the best performing business units in terms of at least just pure margin improvement and results. And so I guess, maybe you could understand us -- help us understand, going forward, what you see as the drivers of not only revenue growth because part of that business is the pension extra business really doesn't grow, but also the levers for margin improvement in that business?

Yes, sure. So I'll -- maybe I'll tack this bit by bit, but I do want to say that we love all our children, right? They are all my crown jewel.

I understand. That was my comment, not yours. So...

Fair enough. All right. So our retirement business, we have an incredibly strong proposition and a very mature defined benefit business and that would really, really high client retention. That is a place to build from in the emerging defined contribution market. So I look to -- we already have, I think, the #1 proposition for a DC platform in our -- in U.K., which is one of our strongest retirement businesses called LifeSight and emerging platform in the Netherlands and some opportunities in the U.S. with the passage of the Secure Act. That still look promising, and we'll look to investigate, and that's a natural adjacency for us to look to. On the Health and Benefits business and our Talent and Rewards business, right, the demand for discretionary work has picked up nicely, and it was a very nice promising pipeline. On the Talent and Rewards side, right, I mean the tight labor markets actually help here, right? Because they drive spending on HR consulting work to drive attraction and retention and employee satisfaction are a really key part of attraction and retention. Similarly, on the H&B side, the U.S. legislative changes always drive activity as clients are trying to figure out how to react to that through strategic benefit reviews. With regard to the margin side of things, yes, we've got to complain about margins in HCB, but we do think that we're going to get incremental enhancements, both from enterprise-wide initiatives, but operating margin improvement through leveraging our global platforms, shared processes, shared services approach, automation and right-shoring, right, efficient location management. And then as we continue to build out our company-wide data analytics capability, that should lead to developing new solutions within this segment as well, right?

That makes sense. And so I feel -- and again, this is my perception. May be different -- reality is oftentimes different, but my perception would be that there was really a level of integration that was starting to transcend between the Health and Benefit side, pension side and the traditional commercial brokerage side, pre-Aon Willis Towers Watson. And I guess, now where -- if that perception is right, now we're a deal break, how do we get back to that place, that level of integration where you have a collaborative team that's working in one business unit, work with another business unit? We really -- there may not -- they may not be interested in doing that.

We've actually both introduced some new efforts as well as resurrected some efforts that were designed to continue that, right? So on the new side, we've introduced the innovation and acceleration function that's designed to basically get -- make us better commercialization, right? We're really good at developing new ideas and turning them into a client project. And maybe we've been less good at turning them into 1,000 client projects. So that's, I think, a key initiative for us. The second is actually standing up a sales and client management function that's across organization so that we have a common way of approaching our diverse client base and bringing the best of Willis Towers Watson to that client. And so that is something we had started in on prior to the combination we put on pause. And so we're not starting from square one on that, but I'm actually very excited about what that can do to actually continue to bring us together as One Willis Towers Watson.

Okay. And then the final sort of -- it's the same question, CRB and the [indiscernible] organization, but through the meat grinder process known as the Aon proposed merger with Aon. There was -- we had -- we also heard of a number of Health and Benefit brokers that are left through going elsewhere and stuff within HCB. Whether that's true or not, this doesn't much matter, but maybe you can speak to recruitment in that business, considering now that you're not going to be Aon.

Yes. I mean we think we've got a strong proposition in Health and Benefits that has -- we -- it's a competitive market for talent, but we think we've got a great place to attract talent, too. And the fact that we have such strength in both consulting and broking in our Health and Benefits business really means that we can accommodate a great range of players within that. And the intellectual capital that sort of deliver a solution whether it's an insured or self-insured form is actually quite a good story to attract the best talent in the industry, too.

Okay. So I'll ask a couple more operational questions in the other 2 segments, and then I'm going to pivot. We have just about 12 minutes left then to pivot to just some capital management questions and other issues that have come up with other conversations and give -- certainly, don't want to cheat Andrew out of some time. I'm in...

We need him in.

Yes. So let's go back to the other segment, the segment that you ran for a number of years. IRR is obviously fundamentally changed on deal break. Willis Re is going to be gone Max Miller. They've been sold. And so talk to us about just the remaining businesses at IRR, what are they? And what are the growth? What are the organic characteristics? What are the margin characteristics ex the businesses, exclude the business that are being [indiscernible]?

All right. So we have two businesses, major businesses left, right? One is our insurance consulting and technology business, the insurance industry, right? On develop about -- over half of the business is software. Software that helps the industry deal with things like pricing, ratemaking, underwriting, policy management and then consulting around that. So the consulting and technology propositions are actually quite linked. We also have quite a bit of M&A work that goes through there as well as the insurance industry consolidates or spins off. So a lot of actuaries in that business, along with technology people. Drivers for that business are the growth of the industry as a whole, new creative things in the industry. So someone's got to help people come up with product and that's us, and then we sort of handle a lot of life cycle around that. We think that business should be growing in mid-single digits. Going forward, it's had a pretty good run of it recently as industry activity has generated extra work for us. The other is our investments business. Again, this business is mostly investment management, but also investment in advice at the same time, principally for pension funds and there's a big overlap with our retirement business that we think we can increase significantly. And drivers of that are -- sorry, that business has group average profitability. And again, growth rates in the mid- to single digits we see going forward. We think the opportunities there are the continued demand for OCIO, or Outsourced Chief Investment Officer services, where people basically turning the fund over to us to manage rather than just advice. And that's been -- so it now represents over half of the revenues for that business, and we think that, that will continue to increase. The margins for that work is higher than for traditional advisory work.

When you talk about the software piece, I'm just trying to think of other companies that are in the market offering similar types of services.

[indiscernible]

Okay. Exactly. Guidewire, Duck Greek, those are all competitors of yours in that software space. Is that correct?

Yes. Okay. Got it. Thank you for that clarification. So before we pivot to the capital stuff, so we have to talk about BDA. And we have to talk about it not from the businesses that you -- the private health insurance exchange or the public health insurance exchange business, but we have to talk about it from the Medicare Advantage business and TRANZACT. I think considering the news coming out of some of those standalone entities, it's just worthwhile reminding stepping back and reminding everyone what the differences with TRANZACT versus these other models and some of them are being -- are quite challenged at the moment in time and help us sort of bridge a gap of why it's going to be different with Willis Towers Watson than we see it with some of these others. And I'm speaking specifically Carl about the eHealth and GoHealth of the world. So I'm...

Yes. So maybe I could pick four things that I think differentiate us beyond just actuarial capability that lets us a bit more confident in our lifetime value calculations. So first of all, we use an internal agent workforce to get this stuff done, and we've been doing that for a while. And so history on that, I think, is important. We also have a similar model going in our B2B2C version of this and extend health. And so there's two strands of history here that I think gives us confidence in our model there. Second is, we have an incredibly close partnership with our carrier clients and so that drives higher quality enrollments. So the lead streams we get via the carrier channels are a differentiator for us. Third is, we've actually differentiated and diversified our lead sources. And so that actually helps us optimize on a more real-time basis as the cost of acquisition to various different channels fluctuate. So TV advertising rates can vary a lot. That will affect the cost of acquisitions, right? So we have other ways of getting to the end consumer beyond just that. And the mix of unique channels we have, so for instance, we've got one targeting Spanish speakers. So getting to the very large and growing Hispanic and some partner-specific campaigns, just simply, I think, let us operate in a more efficient way and a more targeted way across all these different environments. But that -- I wouldn't underestimate the effective B2B channel because we've got right, not just the TRANZACT business, but that what was Extend Health business side by side. And we're able to take advantage of synergies between the two ways of doing business.

So should I infer from that comment that as the population of people you're serving through Extend Health migrate on to a Medicare Advantage program that you're sort of populating TRANZACT into that or inserting TRANZACT into that population -- that customer population. Is that...

It's not quite that simple, right? I mean we have existing call centers that segregate the two groups, right? But we're taking advantage going forward of the overlap in service models.

Yes. And just the other piece because it's the -- you said you've had this legacy internal agent model that's gone on from the early days of TRANZACT. Should we infer from that, that the reliance on these third-party calling centers and uncontrolled call centers has really been a smaller immaterial part of TRANZACT? Or...

You've got 2 stages here, right? You've got an initial call which doesn't have to be handled by an agent, and then you've got the actual enrollment, which does, right? And so we have not moved away from having that 2-stage process since we've got a variety of ways of getting the initial lead qualified before where the turning it over. And I think to just go to a pure agent type model would be -- I'm not sure that would be the right way of going about this is what you say.

Got it. All right. Well, thanks for spending a minute on that. It's quite topical right now, as you know. Andrew, let's give you a chance to unmute your mic and -- so there's a lot of questions around capital management. You've got a stated objective to buy a bunch of stock back by the end of next year. You've got cash on the balance sheet. You've got your delevered at some point and sort of wrap up your view on capital management as it stands today. I know it's not going to be a lot different from what you said at the Investor Day, but -- so there's a good opportunity to rehash that in context of stock price and everything else.

Yes. No, absolutely right. If you look at the stock price right today and where we think it should be, right? They're just clearly an attractive return opportunity there to deploy capital into share repurchases. We've been committed to returning $4 billion of capital and share repurchases. We executed the first billion earlier this year, and the next $3 billion that we committed to start this year and wrap up by the end of next year, and that is on track to take place. Beyond that, right, we have free cash flow generation, which we targeted at the $5 billion to $6 billion over the next couple of years. And our primary focus on that cash flow is to return that to shareholders. There will be a share repurchase unless other investment opportunities come along with we can get at a higher return. And given where our share price stays, that's a very high. So that's how we're thinking about capital and share repurchases.

I did note in your slide deck, there was -- one of the bullets had changed some capital on the capital allocation. It was the last bullet something about tuck-in acquisitions might be considered. I know most of the investment community really doesn't want to hear about M&A, but maybe you could spend a second, just talk to us what you're thinking about. Obviously, you've identified share repurchases a top priority for use of excess capital, but I did note that bullet point.

Yes. Sure. Sure. And I think this -- we've been consistent about this and that we undertake an activity, right? Why you return right has to be there again, benchmarked against your bonuses. And strategically speaking, we be looking at smaller bite-size things where you would be looking to enhance more capabilities for filling geographic tax. And I think a good example of that is the transaction was announced that was back in September. We're looking to expand into [indiscernible]. That's a good example of how both to port [indiscernible].

Yes. So the impression from that is, it's small tuck-ins. Nothing that derails your initiative on share repurchase and dividends and the other...

And the transformation efforts, right? So transformational M&A is not something [indiscernible], right?

All right. Well, we have one minute left. And I guess the final question I would have -- and Andrew, this is a good opportunity. I nitpicking question, but I feel like it should be covered as just the part of organic that included disposals in it. And as we think about the benefit that happened through the first 9 months, when we think about 2022, how much of that benefit did we get through first 9 months that we should pull out of the first 9 months of 2022 -- excuse me, '21 versus '22?

No, no, that's a good question and I understand where the perspective is coming from. And if you look through the footnote of the financials and the disaggregation of revenue, would you provide some detail there to allow folks to complete their own analysis. I think year-to-date, it was about $70 million or so. But if you look back to our history, there's always a level of that activity. It's just part of the ongoing business activity, and normally, that's averaged about $20 million for the year. So there's the data that we saw.

Fair enough. Fair enough. I appreciate the clarification. I know you've said it before, but it has come. So we've hit our 40-minute time allotment, and I could, frankly, talk for another hour with you guys, but you don't have the time, and I've got other things we got to do here, too. So thank you very much, Claudia, Andrew and Carl. And for everyone listening in, I just want to remind you, you can reach out to Claudia, who's very responsive, very helpful. Certainly, have been helpful to me and answer your questions, and of course, you can e-mail me. So Carl, Andrew, Claudia, thank you for your time.

Thank you, Greg.

Thank you.

Have a good day.

You, too.