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

Thank you for joining us live. This is the Bank of America U.S. Insurance Conference, our annual insurance event here in the States. We're very pleased for our next session to have Carl Hess, the CEO, of the rebranded WTW, formerly Willis Towers Watson. Carl has been with the company or its predecessor companies for 30 years. He's had a variety of roles. He ran the Investment, Risk & Reinsurance business. He was from the Towers Watson side. He was Head of Investments. He was a consultant at the retirement business. He has probably worked in every single place that you within the organization. And now he's the CEO. And we're really pleased to have him here. So thank you, Carl. We really appreciate your time. And I have a bunch of questions.

But if you're watching this, you're probably watching it through an app called Veracast. [Operator Instructions] So let's start with the rebranding a little bit and WTW, One WTW. Now I've been doing this for about 25 years. I remember when Willis bought Hilb, Rogal & Hobbs. We've been -- obviously been at Towers Watson to Willis merger. [indiscernible]. Miller, it's seem that you sold Miller, you sold Max Matthiessen. You've sold the Reinsurance business. I sort of think in the preliminary years, there was a -- one idea I had of Willis -- I don't know if that's Willis today. Is the culture at Willis a Towers Watson culture? Is it a uniquely Willis Towers Watson culture? What is the DNA in there? What does the One WTW represent?

Yes. Thanks, Josh. At the end of the day, right, One WTW is about 1 broad culture. And while our colleagues may have come from different predecessor firms, over time, and together, and that's come through common values and goals, and that's resulted in forming One WTW. Our colleagues have drawn key insights from each other. Their strongest attributes have transformed our differences. And we do come from a variety of backgrounds. That's the benefit and sometimes the drawback of being a multiline firm, right? There are a lot of different people under the hood. But at the end of the day, our values, right, our client focus, our integrity, our respect, our emphasis in excellence, that's our DNA. It's at the core of everything we do. And in many ways, we've been operating as One WTW for years because we know that when our individual talents are combined, we unlock our collective potential. And together, we're a group of highly intelligent people [ he says basally ] right, who care deeply about clients. Who show up for each other in meaningful ways. And that's what makes our culture special. And why we win in the market and why we celebrate each other's successes. Our vision, right, is to be the best company we can be, and that's for the benefit of all of our stakeholders. So in summary, we have a culture that brings colleagues together from all across the company to address client issues. And we have a great foundation in place to build from within, and that's why we're taking the following steps. We're built being a magnet for the most accomplished and most talented -- aspiring and accomplished talent in the industry. We are offering clients the best advice broking and solutions in the areas we specialize in, right, people, risk and capital. We are making a difference in the communities in which we live and work, and we are going to deliver significant value for our shareholders.

And it takes a lot of things to make a successful company. And when I think about culture, some companies have sales cultures, some are technology cultures, some are knowledge cultures. I mean, of course, you want to be all of those things. But is there a leading sort of spirit that embraces what Willis or what WTW is about? I mean...

Yes, there are a couple of things where, I mean we take that everybody can contribute very seriously. And it's not just everyone can contribute, but everyone should contribute. When my colleague has a problem, I have a problem. When my client has a problem, it's everybody's problem to solve. We're doing our dourness to make sure that everyone has a chance come up with new ideas. And that we properly -- it's not about just coming up with ideas, of course, it's about commercializing those ideas. So everyone should be absolutely empowered to contribute. When we come up with something, right, then it's about using all 40,000 plus of us to deliver on that. And so having the organizational discipline to make my colleague's idea my idea and have it appear not just once, but 1,000 or better yet at 1 million times.

In 2015 -- or in 2014 Willis acquired Max Matthiessen. In 2015, it acquired Miller. Also, in 2015, Willis acquired the portion of Gras Savoye it didn't already own. And in that time, it's disposed of Max Matthiessen and Miller. Under your leadership, you acquired Leaderim out of Israel. Recently, Gras Savoye is still part of the WTW team, and I believe will start rebranding as a WTW business going forward. And when we think about what's worked and what hasn't worked, now what kind of acquisitions worked for WTW? And why? And why didn't the other ones worked?

Yes. So at the beginning and the end of the day, we're not afraid to evaluate our portfolio, and we are constantly assessing our strategy to ensure that the assets we have and the assets we'd like to have are aligned with them. As we evolve, as WTW evolves due to changes in the business or the macro environment, we change our plans. When it comes to Max Matthiessen and Miller, we decided we were no longer the best owners for those businesses and made a decision that best served all parties involved. That's not to say we weren't successful owners of them, right? And despite the fact we sold those businesses, both performed well and performed not just well, but better while they were a part of WTW. And note that on some of them, we recorded some notable gains. When it comes to sort of the whys and wherefores of the deals, right? I mean with Miller, you had a channel conflict with our retail business, Miller's customers where our retail businesses competitors. And Max Matthiessen, a fabulous business, but Swedish financial counseling isn't necessarily noted for synergies with the rest of our portfolio. I think Gras Savoye has been a part of WTW just as long as Towers Watson has been a part of WTW. And we think that business has done really well, and it's an instrumental part of our portfolio. And you mentioned Leaderim. The acquisition of Leaderim reflects our global strategy to work with high-performing, high potential businesses and thriving markets. And welcoming them into WTW, strengthen our footprint and capabilities in Israel and the Middle East. And Leaderim will benefit from leveraging our global WTW expertise and growth. It's a real win-win.

So we talk about acquisitions and dispositions at WTW, but that's not really been the story. I mean, if you look at like a Gallagher or a Marsh, Brown Baldwin. I think doing bolt-on acquisitions has been a huge part of what their business model has been about for the past 5 to 10 years, if not longer. And that's a core competency integrating regular bolt-on acquisitions. It's not what Willis is necessarily doing. But to what extent, a, do you think that, that strategy is an important component of being a successful insurance brokerage? To what extent have interest rates and the cheap capital been a function about why that's been a successful strategy? And three, in my mind, I look at a lot of the margin expansion of your competitors, which have been very successful, but it's come from doing those bolt-ons. And I don't know how successful the margin expansion be without a bolt-on strategy. And so coming back to WTW, if bolt-on is not a strategy, where does margin expansion come from? Or maybe I'm wrong, maybe they would have been successful. But where do you put the bolt-on phenomenon? And if you're not going to do it, what does it mean for you?

Yes. I mean the bolt-on strategy has served some players in the market really well. But obviously, as you pointed, targets have become very expensive due to macroeconomic conditions. At WTW, we've been taking a more focused approach, right? We're pursuing opportunistic small tuck-ins and bolt-ons to strengthen our capabilities and expand our geographic reach. The later in examples are perfect example of this. So we do have a bolt-on strategy, but we look for targets that can leverage our platform to enhance growth and profitability. We are not simply aiming to be a rollover machine, it's not our focus, right? If you look at sort of our footprint, right, strong, strong specialists capabilities and a global footprint. We like things that reinforce that, not just simply scale for the sake of scale or focus.

And so in terms of reevaluating the Willis portfolio, I think one of the major new stories and surprises is the sale of Willis Re. Why was the right time to sell Willis Re? I mean, 2 parties can both be happy. You can be happy yet you sold at Gallagher having that they brought it. People are very bullish on Gallagher's opportunity at Willis Re. To what extent had Willis Re run its course but what it could do for the Willis organization? And to what extent did that factor into your view that it was time to part ways?

I guess a couple of things I'd like to point out. One is the much wanted synergy between reinsurance broking and retail broking are largely 1 way that is it's reinsurance brokers benefit from having a retail arm. And I can assure you from the long years of experience, not vice versa. So in terms of thinking about what are you getting from having reinsurance broking, often the answer is, well, you get models, you get -- that you can help develop into the retail market. We retain that capability. In fact, we think we're the market leader with our Insurance Consulting and Technology business that has those models and analytics that actually we sell to the insurance industry. So we don't think we're missing a step there at all. And I guess I'd point out one more macroeconomic factor, right? $1 of every $7 right now of reinsurance capital is provided by the financial markets, and that trend has gone only one direction. That may be fine for the procurement of reinsurance, but it's not necessarily a favorable sign for the reinsurance broking industry as fees for issuing a CAT bond are a lot lower than for broking a treaty. So at the end of the day, we don't think the divestiture of Willis Re is going to hinder us at all from executing on the margin improvement goals we outlined at the Investor Day. We don't think that the absence of a reinsurance broking business has a negative effect on our retail broking business and the ability to [indiscernible]. It's going to be very interesting to see what happens as the capital markets collide with the reinsurance markets. As what's the reinsurance brokers' role going to be going forward as opposed to other players like large securities institutions that can help insurers manage their overall book of risk. We do think that WTW will continue to have a role to play in this universe, and we'll see where it goes.

So again, people can ask questions they want using the Veracast app to write them in. We do have a question coming in from the outside. It involves the weaker organic growth we've seen in the company in the last couple of quarters. I'm wondering if this is a trend that requires a full year of experience in the book as it content to play through. Does that mean the next 2 quarters will be weak? And in particular, they want to know about the book of business settlements that were done. Does this weigh on the growth until they play through? And also why is Willis Towers Watson or WTW allow its producers to buy books out from the company? What's in those books? And why did that make sense?

Very good. And so that was a 3-part question. I have a noted inability to remember all 3 parts to your question, so you have the prompts me as I go along.

For the next couple of quarters, given what we saw last...

Yes. No, no, I got it. so in terms of growth, right, I mean we spent 1.5 years plus to basically be able to not hire anybody, while the merger was hanging over our heads. And being a target for talent acquisition by the rest of the industry. Coming off of Independence Day, we resumed our talent acquisition. And while we are making good headway, we have a ways to go yet. And that is definitely impeding our ability to grow as fast as the competition. We anticipate that over the course of the year, that will cease to be as a larger headwind as it has been. With respect to book sales, the 20 -- as we've talked about in our quarterly calls, right, the 2021 was a heavy period of book sales for us. And book sales represent short-term revenue and give up of revenue in the future. So it's a clearly a headwind for us in 2022, but we believe that book sales should normalize to historic levels going forward and that will dissipate over the course of the year. With respect to sort of why sell a book? The way this typically happens is a producer belief and a number of changes of broker record letters will follow fourth with. So the cow is already well out of the barn, and you're now talking about how to make sure that you're getting some value for a book that's leaving you anyway. This doesn't -- this isn't in particular of Willis. It's pretty bog standard to the U.S. producer model. And so it's not anything that's specific to us in the least. But nonetheless, given the phenomenon, the merger hanging over the head during '20 and '21, it's more pronounced for us than perhaps for others. We don't anticipate that to be a permanent feature going forward.

So in terms of the idea of being the third alternative and competing with Marsh and Aon, I think you've said in the past that when WTW wants to compete, they compete well. It doesn't want to compete in every area, however. So I mean, I think that's been said a number of times, what is going to change this time around? I mean, nothing has changed, maybe it's just a matter of execution. But if that's the goal to be the third option, why is WTW the third option and not the up and coming -- Gallagher was getting bigger and stronger? What sort of the embedded talents are there WTW that make it the most likely candidate to be the third choice per se where you want to compete?

Yes. So to be in the third choice is not simply about scale. So up and coming, which is about bigger doesn't necessarily mean a choice when it comes to the sort of market. We think it's possible to take share of the large accounts space because we've invested significantly in our data our analytics and our advisory services since the formation of WTW back in 2016. This is a differentiator I already sort of pointed out our Insurance Consulting and Technology business, right? That's a unique asset in the industry, we think. In addition, our focus on deep industry and product expertise without geographic boundaries and our global line of business strategy sets us apart. This differentiation is particularly pronounced against our middle market competitors, but also we think we're ahead of our large account rivals who are playing catch up in this space. Our Connected Risk Intelligence model offers large corporates ability for the first time to truly optimize the risk dollar. It can evaluate risk types, not in isolation. But as a portfolio, take into account the correlation and dependencies of each risk against the other, analyzing literally millions of options to provide an efficient frontier of optimal risk retention and risk transfer programs. You can see I'm an actuary heart, this gets me really excited. There's nothing like it on the market. And we think Connected Risk Intelligence is a game changer. That's not at all -- but that's not all but differentiates us. It's the way we approach these accounts with -- our approach isn't just like how do we transact, right? It's let's out the problem is before we suggest solutions. And we figure out that problem what the problem is through analytics, through consultancy and through industry and product expertise. This is resonating. We think we're being known as not just the analytic broker, but the smart broker. I don't mean that as an intelligent point. I mean going about things smartly, right? And while we continue to develop and continue to innovate, we're bringing in talent to help us execute on this strategy and fill in the gaps resulting from the elevated attrition levels I already talked about from 2021.

Although -- and you did say in the fourth quarter, you were not higher. So that's correct, yes?

That's correct. And that trend has continued into 2021. So January is even stronger with respect to our retail broking business.

So I do have a question coming in from the outside, pretty straightforward. Since acquisitions is inexpensive, stocks use cheap, free cash flow is great, and the balance sheet has net cash. Is there any reason why you would not continue buyback at the same pace you did in January?

We feel that every -- our capital allocation strategy, right, we treat buybacks as the benchmark for any investment. And so at our current price level, we anticipate continuing with the buyback strategy we announced at our Investor Day.

Okay. Mac recon our picture. The demand for some of the things that WTW sells are for some strong tailwinds. You have a macro recovery, you have a tight labor market. There's consulting revenues from future work right now. Pricing in insurance is up notably. There seems to be a heightened awareness of risk following code that makes people want to protect themselves better and come and stick themselves better. To what extent is this a particularly fertile marketplace to -- that it can't be relied upon to last forever? To what extent are there certain things that you're selling right now that are core competencies versus the things that there will be an annuity over time versus things that might be transitory? Are we in the best possible scenario from an industry standpoint for insurance and consultancy?

Yes. And things can always get better. And we're very unlikely to just sort of say it's good enough now, and let's just hope it continues. I mean for the last 2 years, our clients have been striving to create continuity and clarity in an environment of, let's just say, ongoing disruption. I mean -- and since commerce began, right, adapting in uncertain changing environments become -- it's fundamental to business success. And our client base includes future focused leaders, and they acknowledge that risk is a mainstream element of business decisions and it's going to remain so. And today's challenges are fueled by the frequency and complexity of threats across risk categories like geopolitics, economic volatility, population health, climate change, supply chain talent technology. And we can serve our clients across all of these, right? So few forward-looking leaders know that the time is acting now by engaging people and activating purpose to combat these threats and create opportunity, right? And there's 3 real imperatives here if you're going to thrive on: connect, future and current risks; act on ESG and sustainability; and build organizational resilience. And better use of data analytics supports all these 3 areas. And WTW's unique perspective and capabilities can help organizations solve for these issues. I'm really happy with our placement on this, right? And while recent events have indeed challenged us, right, leadership actions demonstrate it's possible for businesses to manage through uncertainty, and we can help them do that, right? If we can collectively work with our clients to focus on these 3 imperatives, organizations will be better and stronger for the future, and that's a good sign for us.

Let's talk about the insurance pricing environment. Very strong. It's been probably in the large case market, third year of double-digit pricing increases. A lot of insurance carriers are reporting combined ratios that include an underwriting margin in the 10% range right now. To what extent -- you run a major insurance brokerage, and your job is to save your clients' money. To what extent are brokers working hard to push back on the price increase and say, look, you're making a lot of money already, this is -- you had still things that -- despite that, the pricing continues to be strong. To what extent are you offering your clients self-insurance as an option to -- or help them manage -- given that, look, cash is very -- are you self-insuring at this point or there even going to be cash in your balance sheet? But where is the market going? What is Willis or the Willis part of WTW doing to help their clients save money given what's going on right now?

Yes. We think this sort of thing plays really to our strengths. We see it as an opportunity to demonstrate our analytical capabilities. Late to the rise of crisis, clients do have to be much more discerning in their insurance purchasing. And remember, the premium is not the problem, this premium is a solution with 1 caveat, you have to buy it right. And that means you really have to understand your risks in terms of the frequency of events, the consequences of events and the price of the hedge. All of our investments over the past few years have been helped -- about helping our clients understand so they can make better decisions and better risk trade-offs. So that they become better informed and position themselves as sellers of risk, not buyers of insurance. The role of the broker and its interactions with carriers is no longer -- it's no longer about just wrangling a discount, it's about providing -- proving to the market that the risk is worthy of a certain price. And to do that, you need sophisticated risk and analytics, which we have. Clients should only buy insurance that they can get a return on the risk dollar spent. And if they get a better return retaining the risk, they should do so. And so the key for us is about being able to advise on that equation, and we know that we're ahead of our competitors and be able to provide that advice through both in the mid-market through our core algorithmic models. And in the large space through our consultancy and industry expertise, coupled with models such as Connected Risk Intelligence that I spoke about earlier.

Do you think that Willis and the brokerage industry is on the of cusp of being able to rein in some of the -- this insurance price inflation? Where do you think we stand here?

Insurance pricing is a combination of factors, right, including the ways you can determine sort of how you can properly allocate capital at an insurance company. What the appetite is for risk, what the attractiveness of other investment options are rather than providing capital to the insurance industry. And the brokerages can't control all that by any means, right? What we can control is working with our clients to determine whether to -- whether buying insurance is the most appropriate use of their dollar, right, that I alluded to before. And at some point, that's a natural check in the process, right? If coverage becomes too expensive, people will just go naked or self-finance. We work with them to make those decisions.

So I mean one thing that -- obviously restructuring is an issue. The company spent a lot of money to get on the right restructuring path. You said in the past, you talked about WTW's past restructurings as having failed to do the desired outcome for those. And a lot of times in these restructuring, there are goalposts that we want to hit and certain things. And in general, there should be goalposts for companies. If you want to think about -- a, sort of thinking about, how would you tell investors, look, on a 1-year plan, on a 2-year plan, on a 3-year plan, these are the -- look at everything, but what are the essential features that you believe are going to be most telling that, a, the restructuring avatar would also be that we're already speaking. A lot of people look at just the organic growth number. Should we expect competitive organic growth 1 year from today? Or like what are the basics that you would tell everyone, this is what you should focus on, and you will see this, this is the indicator of success?

Yes. So we outlined our goals for the next 3 years at Investor Day regarding EPS growth and margin. And those remain our priorities, and we are taking steps to make sure that our management team and our colleagues broadly are highly aligned to those priorities. You should evaluate our success based on our progress against those goals. And while it's still early in the program, I'm pleased to say we've already taken actions that will get us 2/3 of the way toward our $30 million annualized run rate savings goal for 2022, which sets us on the right path to achieve our longer-term margin expansion goals. On Investor Day, we also outlined targets for revenue growth, right, free cash flow and adjusted EPS. And we think all these metrics are important since each represents a promise made to our shareholders. We believe the comp committee of our Board of Directors is ultimately going to improve an exact comp plan that I described that aligns our rewards with our successful completion of all these targets. So a bit of all of the above, Josh, right?

Right. So let's talk about the comp plan a little bit. We don't know exactly. I mean, I'm just -- I'm going to talk a little about the past. I mean, back in 2016, there was a comp plan that was absolute stock return in what became a bull market for stocks anyways. Combined with hitting an EPS number who -- the accounting for that number changed when ASC 606 accounting standards got adopted. So there's some question whether it was even hit or not. Ultimately, I think that was a terrible way of aligning shareholder and management expense. If you're advising the comp committee, you can't factor in everything. I certainly know that you wouldn't repeat the -- or maybe you would because it paid well in 2018 for maybe not such great performance. What is the right comp plan? I mean, is it very difficult to understand? Is it easy to understand? How should we know that, a, you're going to hit your goals? And b, the goals are going to be good for shareholders?

Yes. So our Board of Directors, right, has this responsibility. We do have the world's largest exec comp consultancy in our -- in-house, right? So -- but we obviously use external consultants to work with the Board. Look, we can [indiscernible] and that was in consultation with the Board and others, right, which are aimed at creating longer-term sustainable improvements to our operation and our financial performance. And yes, I think we should be paid for performance where we successfully complete those goals outlined at Investor Day. By focusing of the long-term value creation, I think we're aligning our interest with those of our shareholders. But at the end of the day, right, it's the comp committee that's going to determine how our exec comp plans are structured. And there is a robust place -- process in place for reviewing those plans, which include benchmarking against market best practices, review and approval by the comp committee. And they do have an independent consultant, I assure you. In addition, we do have a regular shareholder engagement process that involves obtaining feedback on exec comp. And that design process and monitoring gives us confidence that the structure of our plans will properly align our rewards with the creation of long-term shareholder value.

I have no outside question coming in, and it seems pretty straightforward. Why has there been such weakness in Medicare growth across the industry in the fourth quarter? Should we expect that to continue? And do you expect TRANZACT to remain ahead of peers?

So the fourth quarter, I think, had a number of factors that affected the industry. They -- first of all, I mean, trying to operate that business in a pandemic environment with a potential client base that may not be fully in the meta world presented share of challenges. In addition, it requires licensing. And so maintaining an adequate amount of licensed agents who can close deals in a work-from-home environment represent a particular challenge for that area of our business and for our competitors. The product design, some of the carrier levels and their particular thing, some of that translate into results for others. And I think that, that will in turn, look toward their focusing on best-in-class partners going forward and we do think that's an opportunity for us. Some of the pandemic-related headwinds that we and others face should dissipate over, we hope, right, COVID willing, over the upcoming periods. And we think this remains a very attractive market, especially given the number of people becoming 65 every single day for us to be able to continue to grow in. And I guess one more point is we do have a unique advantage here in our B2B2C business in this space, what used to be called Extend Health, and that diversification of channel is something that is, we think, a very helpful diversifier and base for us to build on.

And then finally, a question about free cash flow versus adjusted net income. Aon and yourselves and maybe Gallagher going forward was going to begin deducting amortization expense from adjusted net income. And some of the argument is, well, these were things we bought in the past that tend to -- but except the cost of having bought them like, please don't deduct it. But ultimately, when I look at adjusted free cash flow or cash flow deployed to shareholders over time and adjusted net income, the 2 don't necessarily relate. How should investors think about free cash flow relative to your reporting of adjusted net income? Is that adjusted net income a good indicator of actual cash being generated for shareholders? Or what should we really think is the right way to track how much value Willis is delivering for shareholders?

Okay. There are a lot of layers to that question. So I'll give you a few specific points to consider, I think that I'll cover everything you talked about. First, recent history and deployment of cash. We don't think our recent historical trends should be considered as a guide for how we deploy capital. The reason for that simple -- for 18 months, while the Aon transaction was pending, we were prohibited from doing stock buybacks. And then after the deal was canceled, we started repurchasing shares at an accelerated pace, a pace that was faster than our pre-deal cadence. So our activity over the last couple of years skews the average and doesn't really serve as a useful indicator of our future plans. Second, adjusted operating income, right? That reflects what we consider core. And pension income, for example, it's an important part of our rewards package for our colleagues and should be considered noncore to our earnings, though. And for this reason, when you're looking to understand our core earnings, the metric we focus on is adjusted operating income, not adjusted net income. And that's also the reason we're targeting improvements to our adjusted operating income margin as part of our 2024 goals. We do think as we improve adjusted operating income, we're going to see free cash flow improve as well. And these 2 metrics will work in unison and increase the amount of cash we have on hand to deploy. And third, right, how do we think about deploying cash? Well, as part of our Investor Day discussion, we communicated about $4 billion of near-term share repurchases and the willingness to fund further share repurchases using our free cash flow unless other investment opportunities with superior return potential rise. That's that discipline I spoke about earlier. We have already repurchased $2.6 billion in stock and plan to complete the remaining $1.4 billion as soon as we can, depending on market conditions and other factors. And as I said, right, at current price levels, we think that repurchasing our stock continues to be our highest return opportunity. We do have resources to capitalize on that.

Well, we are out of time, a minute over. But I hope that you have a strong day talking to investors. And everyone, we have a homeowners panel coming up next, so people should be tuned into that. Carl, thank you for your time. A lot of exciting things going on at Willis, and -- or WTW. It's now WTW, everyone. Just -- I'm working on that myself. And all the best. We'll be in touch, and everyone, stay tuned.

Thank you, Josh.