Willis Towers Watson Public Limited Company

Good morning. Welcome to the Willis Towers Watson fourth quarter 2020 earnings conference call. Please refer to WillisTowersWatson.com for the press release and supplemental information that was issued earlier today. Today's call is being recorded and will be available for the next three months on Willis Towers Watson's website. Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release issued this morning, as well as other disclosures in the most recent form 10-K and in other Willis-Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconsiderations of non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Best of Relations section of the company's website. I'll now turn the call over to John Haley, Willis-Towers Watson Chief Executive Officer. Please go ahead.

Thank you. And good morning, everyone. And thanks for joining us on our fourth quarter 2020 earnings call. Joining me today is Mike Barwell, our chief financial officer. Today, we'll review our results for the fourth quarter and for the full year ended December 31st, 2020. Our overall performance reflects the durability and resilience of our business model. In the fourth quarter, we continue to navigate through challenging economic conditions. and I'm pleased with our financial performance. While our revenue continues to be impacted by the pandemic, particularly in our discretionary lines of business, in many of our core businesses, we continue to experience new business generation, strong client retention rates, and increased operating leverage. We continue to reduce our controllable spending and improve our liquidity. We believe our resilience positions us well for the proposed combination with Aon, and bringing together the best of both organizations to provide opportunities for clients, for colleagues, and for shareholders. As we've continued to navigate through the COVID-19 pandemic and the resulting economic conditions, our colleagues stood in solidarity, steadfast in their collaborative spirit across geographies and segments. They managed to achieve another year of solid financial performance. To all of our 46,000 colleagues around the globe, thank you for all of your hard work. We continue to be grateful for your resilience and your focus. The ongoing dedication of our colleagues reflects the rich history of Willis Towers Watson. I'm extremely proud to have served this organization in various roles for the last 43 years. It's been a privilege to work alongside my esteemed colleagues and to build what is now Willis Towers Watson. With roots dating back to 1828, the company was formed with the goal of becoming a leading advisory, broking, and solutions company. It's especially gratifying to know that almost 200 years later, the future of our business remains bright. For this company to be any more relevant today than it was at its inception is an honor that few organizations experience. Remaining relevant over hundreds of years is not some serendipitous event. Remaining relevant requires hard work, a genuine desire to find solutions for the industries we serve, and constant innovation. Willis-Towers Watson's commitment to constant innovation is evident in part in the technology we develop for the insurance industry. Our solutions help both insurers and insurers make more informed, data-driven decisions and make them faster. For example, Connected Risk Intelligence, or CRI, is a platform which brings modern finance approaches to the corporate risk management decision process. Providing clients with the ability to optimize risk financing decisions by taking a portfolio approach allows for optimal risk retention and transfer decisions. This platform has been highly impactful for clients burdened by the hard market and COVID recession. CRI leverages a broad range of data sources and allows organizations to take advantage of insurance market inefficiencies. We also have a platform called Core Analytics, which consists of risk models, tools, and rich data sources that enable deep dives into specific risks and provide insights into risk transfer and mitigation and decision-making. In addition, we have Radar Live, which is a fast, flexible, and agile decision engine which allows prices, rules, adjustments, scores, and other metrics developed in analytical models to be deployed by insurance companies directly to their pricing, underwriting, and claim systems in real time. Software innovations like these become a launching pad for reaching underserved industries. Many industry sectors face unique risks that lack risk financing and or mitigation solutions. Small to medium-sized enterprises in established as well as emerging markets are particularly underserved. These assets can help underserved industries understand risks that dominate their concerns and quickly form strategies to protect themselves. When I think about the range of capabilities that Willis Towers Watson brings to the table to help the underserved, and I consider Aon's own data analytics and differentiated software, I see a special opportunity to create a combined firm that we believe will make an even greater difference in the global economy. Underserved organizations often need greater support in controlling and protecting their organizations from their main risks. As a combined firm, we believe our integrated data and advanced analytical capabilities will enable us to serve these industries and geographies. which we believe will allow these organizations to greatly improve their risk investment decision making and their negotiating power with the insurance market. In effect, we believe we will become capable of transforming these clients from buyers of risk protection to sellers of risk. By blending the best of both firms, we can unlock our potential for the benefit of all our stakeholders. So now let's move on to our fourth quarter results. Reported revenue for the fourth quarter was $2.8 billion, up 3% as compared to the prior year fourth quarter, up 1% on a constant currency basis, and up 2% on an organic basis. And that's all despite having a difficult comparable in the prior year of 6% organic growth over the fourth quarter of 2019. Similar to last year, we experienced solid financial performance in areas where we have a well-established market position, mature relationships, and annuity or compliance-driven business. We faced some headwinds in areas where our revenue is more dependent on discretionary project spending and where macroeconomic factors dampen markets. Net income was $483 million, down 12% for the fourth quarter, as compared to $551 million of net income in the prior year fourth quarter. Adjusted EBITDA was $1 billion, or 35.0% of revenue for the fourth quarter, as compared to 930 million, or 34.6% of revenue for the same period last year, representing a 4% increase on an adjusted EBITDA dollar basis and 40 basis points of margin improvement. For the quarter, diluted earnings per share were $3.66, a decrease of 12% as compared to the prior year. Adjusted diluted earnings per share were $5.23 for the fourth quarter, reflecting an increase of 7% compared to the prior year. Overall, it was a solid quarter. We grew revenue and adjusted earnings per share and had enhanced adjusted EBITDA margin performance. Reported revenue for the full year of 2020 increased 3% as compared to the prior year, increased 4% on a constant currency basis, and was up 2% on an organic basis. This was against a prior year comparable of 5% organic growth over the full year of 2019. So, now let's look at each of the segments in some more detail. To provide clear comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis unless specifically stated otherwise. Segment margins are calculated using segment revenue and exclude unallocated corporate costs such as amortization of intangibles, certain transaction and integration expenses resulting from mergers and acquisitions, as well as other items which we consider non-core to our operating results. The segment results include discretionary compensation. The human capital and benefits, or HCB segment, was down 1% on an organic basis and down 2% on a constant currency basis compared to the fourth quarter of the prior year. This result represents sequential revenue improvement compared to our prior quarter. The Q4 segment revenue decline was driven primarily in our talent and rewards business. Talent and rewards revenue decreased 5% as there was the decline in compensation survey sales and an accelerated delivery of surveys that shifted revenue to Q3 this year compared to Q4 in 2019. Talent and rewards experienced improving demand for our advisory services as we progressed through 2020. Our health and benefits revenue declined nominally for the quarter. We continue to grow revenue from global benefit management and local brokerage appointments outside of North America. However, this growth was offset due to a strong prior year comparable in North America. Retirement revenue was flat compared to the prior year with somewhat reduced de-risking activity in North America. being balanced by increased administration work in North America and project consulting work in Western Europe and Great Britain. Technology and administration solutions revenue increased 8%, primarily due to a non-recurring event in the prior years comparable. HCB's operating margin increased by 120 basis points compared to the prior year fourth quarter as a result of careful cost management efforts. We're really pleased with HCV's sequential improvement and strong margin growth. We remain confident about the long-term prospects of this segment. Now let's look at corporate risk and broking, or CRV, which had a revenue decrease of 1% on an organic and constant currency basis as compared to the prior year fourth quarter. North America's revenue was up by 7% in the fourth quarter, driven by new business and strong renewals across almost all lines. Revenue for Western Europe decreased 4% as the macroeconomic impact of COVID-19 put pressure on certain insurance lines, notably P&C. Great Britain and internationals' revenue declined 6% and 8% respectively for the fourth quarter. Their results were negatively impacted by a change in the remuneration model for certain lines of business. This change, which is neutral to operating income, results in lower revenue and an equal reduction to salaries and benefits expense. Absent this change, Great Britain's and international's revenue declined modestly due to headwinds from one-time non-recurring placements in the prior year in the construction and natural resource insurance lines, coupled with pressure on airline volume-driven commissions as departure volumes remain low and premium returns are common. CRB revenue was $888 million for the quarter, with an operating margin of 32.3%, compared to $877 million of revenue, with an operating margin of 30.3% in the prior year fourth quarter. The margin improvement was primarily driven by effective cost containment efforts. We're pleased with CRB's performance for the year, and we're looking forward to its future growth prospects. The pandemic and the hard insurance market have depleted the financial resilience of many organizations. Against this complex economic backdrop, CRB's global team of dedicated experts stand ready to partner with clients to help reimagine and rethink their approach to risk management. Turning to investment risk and reinsurance, or IRR, revenue for the fourth quarter was $292 million, an increase of 1% on an organic basis, and a decrease of 9% on a constant currency basis as compared to the prior year fourth quarter. Reinsurance with growth of 22% continued to lead the segment's growth through a combination of net new business and favorable renewals. The growth was partially offset by declines in other businesses with reduced demand for discretionary work having negatively impacted revenues in both the insurance consulting and technology and investments business, which were down 4% and 2% respectively. The wholesale business was down 17% on an organic basis. Although it's reported as organic, about half the decline was because we transferred wholesale special contingency risk business to the CRV segment in the fourth quarter. The remainder of the revenue decline was largely caused by COVID-19 related pressure on marine and insurance energy lines. As a reminder, We sold the Max Mateessen business in September 2020, and its revenue is not reflected in our quarter four results. IRR had an operating margin of 11.0% as compared to 9.1% for the prior year fourth quarter, having thoughtfully reduced expenses to increase profitability. During this challenging time and extended period of uncertainty, IRR remains committed to helping clients navigate the changing landscape by focusing on their business priorities, capital, strategy, operations, technology, risk, and people. Revenue for the benefits delivery and administration, or BDA segment, increased by 16% on both the constant currency and organic basis from the prior year fourth quarter. The growth in revenue was largely driven by individual marketplace, primarily by Transact, which contributed $279 million to BDA's top line this quarter, with growth in Medicare Advantage products. The benefits outsourcing business also contributed to the increase in revenue, which was largely driven by its expanded client base. The BDA segment had revenue of $693 million with a 50.7 operating margin as compared to 52.4% in the prior year fourth quarter. The margin declined as Transact's rapid growth outpaced the rest of the segment. We continue to be optimistic about the long-term growth of our BDA segment. The pandemic threatened the well-being of people all over the globe. In this time of heightened stress and uncertainty, BDA empowers employees and retirees by providing easy access to the tools they need to understand their benefits options and to take control of their health care. Overall, I'm very pleased with our results this year. We delivered steady overall financial performance with modest margin expansion and adjusted EPS growth despite the lingering economic turmoil. Our colleagues showed great resilience in adapting and rising to the challenges 2020 brought, and I couldn't be prouder of how we came together to achieve these results. Now, I'll turn the call over to Mike.

Thanks, John, and good morning, everyone. Thanks to all of you for joining us. I'd also like to echo John's sentiments and extend my gratitude to our colleagues for another solid quarter, and also to thank our clients for their continued support and trust in us in this challenging environment. I'm proud of our leadership, our colleagues, and the overall resiliency demonstrated by our businesses. So now let's turn to our financial overview. In the fourth quarter, we continue to face some headwinds from COVID-19, but we are reassured by the demand for our services and solutions, and by our ability to reduce discretionary expenses and to manage our cash. We were pleased to see another quarter of solid revenue growth, with underlying adjusted EPS growth and outstanding free cash flow improvement. So now I'll turn to the overall detailed financial results. There are a couple of significant charges incurred in the fourth quarter that we consider non-core to our operations. In addition to the $45 million in transaction integration expenses primarily related to our pending combination with Aon, We also recorded a $50 million provision for significant litigation and $24 million of restructuring costs. The restructuring costs were incurred in connection with our assessment of our ongoing strategy in certain businesses. We have realigned resources across different geographies and service lines, primarily within our talent and rewards business, to better prepare for future market demands. All of these non-court charges, the transaction integration expenses, revision for significant litigation and the restructuring costs had a negative impact on our GAAP profitability measures for the fourth quarter and the full year. However, these charges were adjusted from our non-GAAP profitability measures for the same periods. Income from operations for the fourth quarter was $587 million, or 21.2% of revenue, down 430 basis points from the prior year fourth quarter income from operations of $687 million, or 25.5% of revenue. Adjusted operating income for the fourth quarter was $820 million or 29.7% of revenue, down 40 basis points from $809 million or 30.1% of revenue in the prior year fourth quarter. Income from operations for the full year 2020 was $1.2 billion or 12.6% of revenue, down 210 basis points over the prior year of $1.3 billion or 14.7% of revenue. Adjusted operating income for the full year of 2020 was $1.9 billion or 20.1% of revenue and down 20 basis points from the prior year of $1.8 billion or 20.3% of revenue. For the fourth quarters of 2020 and 2019, our diluted EPS was $3.66 and $4.18 respectively. For the fourth quarter of 2020, our adjusted EPS was up 7% to $5.23 per share as compared to $4.90 per share in the prior year fourth quarter. For the full year 2020 and 2019, diluted EPS was $7.65 and $8.02 respectively. For the full year 2020 adjusted EPS was up 7% to $11.70 per share versus $10.96 per share in the prior year. Foreign currency rate changes caused an increase in our consolidated revenue of 42 million or 2% of revenue for the quarter compared to the prior year fourth quarter with $0.05 tailwind to adjusted diluted EPS this quarter. Foreign currency rate changes caused a decrease in our consolidated revenue of $10 million for the full year 2020 compared to the prior year with a $0.01 headwind to adjusted diluted EPS overall for the year. I'd also like to note that our fourth quarter 2020 unallocated net expenses drew $122 million from $57 million in the prior year fourth quarter. As we mentioned in our second quarter earnings call, this cost category relates to corporate functions and other unbudgeted costs that we don't directly allocate to the segments each quarter, including items such as true-ups on benefit and stock compensation expense accruals, incentive accrual adjustments, and other items. In Q4, the year-over-year increase mostly relates to incentive accrual adjustments as discretionary compensation increased alongside improved performance. Our U.S. GAAP tax rate for the fourth quarter was 19.7% versus 18.3% in the prior year. Our adjusted tax rate for the fourth quarter was 17.8% down from 19.4% rate in the prior year. For the full year, the U.S. GAAP tax rate was 23.8% for 2020 as compared to 18.8% for the prior year. While the adjusted tax rate was 20.8% compared to 20.3% for the prior year. The current year tax rate was higher as a result of enacted statutory tax rate changes in the U.K., requiring us to remeasure our U.K. deferred tax liabilities and recognize a discrete deferred tax expense of $11 million or $0.08 on an adjusted EPS basis in the third quarter of 2020. Excluding this non-recurring item, our adjusted tax rate for the full year would have been approximately 20%. Turning to the balance sheet. We ended the fourth quarter with a strong capital and liquidity position with cash and cash equivalents of $2.1 billion and full capacity in our undrawn $1.25 billion revolving credit facility. Willis-Towers Watson remains well positioned from a liquidity perspective. We aim to continue to maintain a strong and durable balance sheet and continue pushing forward our cost savings and efficiency initiatives. We continue to monitor the ever-evolving impact of the pandemic and are prepared to take appropriate measures as needed to preserve our financial position. Lastly, full-year free cash flow almost doubled to $1.6 billion from $835 million in the prior year. This far exceeds the billion we targeted as part of our original pre-COVID guidance that we gave during last year's fourth quarter earnings call, despite also having paid approximately $7 million in cash-based transaction integration costs. The remarkable year-over-year growth in free cash flow is primarily due to improvements in working capital coupled with our effective cost-contained efforts. The substantial increase in free cash flow is a testament to the hard work of our colleagues, who remain dedicated and focused on improving this performance in this area, despite all the additional demands they were juggling in 2020. In terms of capital allocation for the full year of 2020, we paid approximately $346 million in dividends. We do not expect to repurchase any shares in 2021, given certain prohibitions in the transaction agreement with AON, Pension contributions to our qualified plans totaled $129 million in 2020, and we're currently projecting contributions of $132 million for 2021. We remain committed to due leveraging in the near term. In March, we will use on-hand cash to pay the $500 million in senior notes due. We will also use our cash to fund the $210 million of payments related to the settlement of Stanford and Willis Towers Watch and merger-related litigations. Now, as a general matter, the COVID-19 pandemic did not have a material adverse impact to our overall financial results for the fourth quarter of fiscal 2020. However, the pandemic did impact revenue growth, particularly in some discretionary lines, and we expect that the effects of COVID-19 on general economic activity will negatively impact our revenue results in 2021. The duration of the pandemic, the full magnitude of its economic impact, and the subsequent speed of recovery remain unknown. In the meantime, we remain focused on maintaining a strong balance sheet, liquidity, and financial flexibility. The COVID-19 pandemic has caused considerable economic upheaval, but I'm very proud of the leadership team and the resolve of our colleagues in supporting our clients during these difficult times. These fourth quarter results are a direct reflection of the agility of our global model. Overall, we delivered solid financial performance in the fourth quarter, and I remain confident in our ability to continue driving value for all our stakeholders. I'm going to turn the call back to you, back to John.