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Today's Viewpoint: A MarshBerry Publication

Willis Towers Watson (NASDAQ: WLTW) reported second quarter 2021 adjusted Earnings Per Share (EPS) of $2.66 on revenue of $2.29 billion, above consensus estimates of $1.96 on $2.23 billion. This compares to 1Q21 adjusted EPS of $3.64 on $2.6 billion. 2Q21 organic growth increased by 8% year-over-year (YoY), up from 4% in 1Q21. Adjusted operating margin improved by 390 basis points.

Free cash flow for the first six months of 2021 was $287 million, down 48% YoY due to net legal settlement payments of approximately $185 million for the previously-announced Stanford and Willis Towers Watson merger settlements, higher incentive compensation, and benefit-related items of about $249 million. Management added that free cash flow on an adjusted basis would have increased 31% YoY without these one-off items.

Below are notable takeaways from the second quarter:

  • 2Q21 revenue from the Human Capital & Benefits (HCB) segment totaled $836 million, vs. $767 million in 2Q20, or up 9% YoY. This compares to 1Q21 revenue of $875 million, which was up 3% YoY. On an organic basis, HCB’s revenue increased by 5% YoY driven by increased demand for advisory services.
  • The Talent and Rewards business had 22% revenue growth, led by higher demand for advisory work from employers working with the challenging labor market. Second quarter operating margin in the HCB segment was 23%, a slight increase from the 20.9% posted in 2Q20. CEO John Haley said of the segment: “We anticipate continued strong demand for broad-based rewards and transaction projects in the second half of the year with demand evident across all geographies.”
  • Health and Benefits revenue increased by 1% in 2Q21, driven by advisory work in North America, global benefits management, and local brokerage appointments outside of North America. This was partly offset by lower commission-based revenue, tied to prior year book sales.
    • Management expects a stronger second half in 2021 for the Health and Benefits segment boosted by U.S. legislative changes and pent-up demand for strategic benefits reviews.
  • Corporate Risk & Broking (CRB) segment revenue increased by 8% organically in 2Q21. Overall, operating margins for 2Q21 increased to 22.9% from 19.2% in 2Q20.
    • As the economy continues to improve, WLTW sees higher demand for mitigating asset exposures and other insurance and risk mitigation strategies. CEO John Haley commented: “We expect to see investment in large-scale infrastructure projects, building volumes and transportation and increasing deal volume and M&A.”
  • Within the Investment, Risk & Reinsurance (IRR) segment that includes wholesale and reinsurance brokerage, 2Q21 revenue was $400 million, a 3% decrease (7% decrease constant currency and 15% increase organic) YoY. However, IRR’s operating margin of 33.3% was an increase over the 28.7% operating margin produced in 2Q20.
    • Most lines of business contributed to organic growth with reinsurance growth benefiting from new business wins and favorable renewal factors. Advisory-related fees and contingent performance fees boosted performance in the Investment business and Insurance Consulting and Technology businesses.
  • The Business Delivery & Administration (BDA) segment reported second quarter revenue of $242 million, a 16% (14% increase organic) increase over 2Q20 revenue of $209 million. First quarter 2021 operating margin was -4.3%, vs. the -4.2% for the same period in 2020.
    • Organic growth was again predominantly attributable to TRANZACT, WLTW’s direct-to-consumer line of insurance products, which generated revenue of $116 million in the second quarter driven by growth in sales of Medicare Advantage.
  • Of the recently terminated merger with Aon plc (AON), WLTW noted that the merger encountered a regulatory impasse with the U.S. Department of Justice. CEO John Haley elaborated: “Working closely with Aon, we decided to terminate our agreement. We’re confident this is the right decision for Willis Towers Watson, for our colleagues, for our clients and for all of our stakeholders, including our shareholders. AON has already paid the $1 billion termination fee.”
  • WLTW is reinstating its share buyback program, which was suspended to comply with the terms of the agreement with AON. The share repurchase program is increasing by $1 billion, including $500 million in accelerated share repurchases and $500 million in WLTW’s normal program. The company expects to be able to execute a majority or all of the repurchases by year end 2021.
  • While WLTW expects to deliver margin expansion for the full year 2021 and over the long-term, it sees an increase in investments in people, operations and technology during the second half of the year. There will also likely be higher T&E expenses over this period, with some offset through technology allowing for remote work and business.

Overall, WLTW delivered a strong second quarter. Management believes WLTW is in a great place as a stand-alone business, in light of the termination of the merger with AON. WLTW will continue to work on shareholder value creation, with a focus on return on capital, cash flow delivery, and increased debt capacity for flexibility.

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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.

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