Today's Viewpoint: A MarshBerry Publication

Willis Towers Watson (NYSE: WLTW) reported third quarter 2021 adjusted diluted Earnings Per Share (EPS) of $1.73, up 32% from the prior year and above the consensus estimate of $1.58. Total revenue for the third quarter was $2.0 billion (vs. the consensus estimate of $2.1 billion), a 4% increase (7% organic growth) compared to 3Q20.

Segment results for the quarter for WLTW’s business units included:

  • 3Q21 revenue within the Human Capital & Benefits (HCB) segment was $852 million, an increase of 7% year-over-year. Organic growth was up 6% for the quarter. Third quarter operating margin in the HCB segment was 28.4%, an increase from the 26.3% posted in 3Q20.
  • Talent and Rewards had strong results in the quarter driven by market demand for rewards advisory work and talent and compensation products. Health and Benefits revenue benefited from increased consulting work and commissions in North America. The segment also saw the continued expansion of local portfolios and global benefits management appointments outside of North America.
  • Corporate Risk & Broking (CRB) saw segment revenue in 3Q21 of $697 million, an increase of 7% (6% increase in organic) over 3Q20’s revenues of $649 million. The operating margin for the segment in 3Q21 was 16.3%, compared to 12.5% in 3Q20.
  • North America once again positively contributed to organic growth with strong renewals, led by Financial, Executive and Professional Risks (FINEX) insurance lines. Revenue in International, Great Britain and Western Europe expanded with new business generation and strong renewals across several insurance lines, particularly FINEX and Retail.
  • Within the Investment, Risk & Reinsurance (IRR) segment, inclusive of wholesale and reinsurance brokerage, 3Q21 revenue was $172 million, a 22% decrease (10% increase in organic growth), from $220 million reported in the third quarter of 2020. IRR’s operating margin of 12.9%, vs. the 9.3% operating margin in the prior year 3Q.
  • For this segment, IRR revenue excluded the reinsurance line of business, now reported as discontinued operations. Results exclude revenue from Max Mathisen, which was sold in September 2020; and Miller, IRR’s wholesale broking subsidiary, which was sold in March 2021.
  • The Business Delivery & Administration (BDA) segment reported third quarter revenue of $242 million, a 7% (7% increase organic) increase over 3Q20’s $226 million. Third quarter 2021 operating margin was negative 7.9%, vs. the negative 5.3% for the same period in 2020.
  • Organic growth was mainly attributable to TRANZACT, WLTW’s direct-to-consumer line of insurance products, which generated revenue of $111 million in the third quarter, driven by growth in sales of Medicare Advantage and Life. Benefits outsourcing also increased revenue as this division continued to see expansion in its client base.

Additional takeaways from the third quarter 2021 earnings call included:

  • WLTW commented on producer turnover having an impact on its revenue. The company saw the most impact in its CRB segment in the second and third quarters of 2021, resulting in lower organic growth vs. the industry in 2021. However, CEO John Haley said: “We expect the gap to narrow by the end of the first half of 2022. During the third quarter, we focused on stemming attrition and hiring health. On a net basis, core CRB headcount is down about 100 colleagues or just under 1% as compared to the third quarter of last year.”
  • The company is improving incentive plans and believes attrition rates have already peaked for CRB. The company believes that most of the business disruption is done and reiterated its longer-term outlook for the business.
  • CEO John Haley is retiring, and President Carl Hess will step into the CEO role. WLTW plans to appoint a new global leadership team; as well as streamline two business segments and three geographics at the start of 2022. The company also plans on streamlining infrastructure “by fortifying our operations and by evaluating our real estate needs.”
  • WLTW expects to generate $10 billion to $11 billion of cash through 2024 and plans to deploy net capital to repurchase shares to capitalize on short-term price opportunities. CFO Andrew Krasner elaborated on the earnings call: “At current price levels, Willis Towers Watson stock continues to be our highest return opportunity…As part of our Investor Day discussion, we communicated approximately $4 billion of near-term share repurchase activity. With the first $1 billion completed, we will commence repurchases with the remaining component of that in 2021 and expect to conclude that during 2022.”

Overall, WLTW is confident that strong momentum, a robust balance sheet, and the right leadership will help drive strong results into year end and over the long-term. CFO Andrew Krasner noted: “This year, our core performance metrics have been clouded by discontinued operations reporting a onetime $1 billion termination fee, divestitures and a still evolving economic recovery.” The company gave guidance of around 6% organic revenue growth and an adjusted operating margin of 19.5% (or 20% on a continuing operations basis) for the full year 2021; with a fiscal year-end 2024 goal of 24%-25% adjusted operating margin.

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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.