Willis Towers Watson Public Limited Company

Good morning and welcome to the WTW Second Quarter 2025 Earnings Conference Call. Please refer to WTWCOVE.com for the press release and supplemental information that were issued earlier today. Today's call is being recorded and will be available for the next three months on WTW'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 in the most recent form, 10K, and other subsequent WTW SEC filings. During the call, certain non-GAAP financial measures may be discussed. To provide direct comparability with prior periods, all commentary regarding the company's revenue growth results will be on a non-GAAP organic basis unless specifically stated otherwise. For reconciliations of the non-GAAP measures as well as other information regarding these Please refer to the most recent earnings release and other materials in the investor relations section of the company's website. I'll now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Good morning, everyone. Thank you for joining us for WTW's second quarter 2025 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. Julie Gabauer, our President of Health, Wealth, and Career, and Lucy Clark, our President of Risk and Broking, are also joining us for our Q&A session. In the second quarter, we delivered 5% organic growth, 150 basis points of adjusted operating margin expansion, and adjusted EPS of $2.86, up roughly 20% -over-year. Through focused execution, these results were in line with our expectations for the quarter and we remain on track to deliver on our full-year financial objectives. Our solid first half results underscore the progress we have made advancing the strategic objectives we introduced at our investor day last December. Our strategy to accelerate performance, enhance efficiency, and optimize our portfolio continues to be a key driver of our results, especially in the face of a dynamic macroeconomic environment. We remain committed to our strategy and its execution, and we are confident in the value it will continue to generate. I want to sincerely thank all WTW colleagues for their commitment in executing these objectives. Last quarter, we highlighted the impact of heightened geopolitical and macroeconomic uncertainty on our business, noting near-term headwinds in some of our consulting businesses, especially for discretionary projects, as well as potential longer-term tailwinds when conditions improve and clients begin responding more assertively to change. There were positive signs of improvement as the quarter went on, as capital markets rebounded and our businesses adapted to changes in demand and buyer sentiment. Clients are increasingly turning to us to help address the many people, risk, and capital issues they're facing amidst rising global trade, inflation, and geopolitical uncertainty. We feel positive about both our outlook and our ability to deliver for the second half of the year. In health, wealth, and career, our strong mix of recurring revenue that supports required activities and our geographical diversification continue to provide a stable foundation for growth and for margin expansion. In the current environment, there continues to be significant demand for solutions focused on managing healthcare costs, de-risking pension obligations, and core pay benchmarking work. And as we see consumer and corporate confidence begin to improve, we're also seeing increased demand for broad-based compensation design, benefits governance reviews, and merger integration support. In risk and broking, the pace of innovation and continued challenges in global trade and inflationary and geopolitical issues are elevating both business opportunities and risk. This is demonstrated in CRB's top-line performance. Q2 marks the 10th consecutive quarter where our corporate risk and broking business recorded high single-digit growth when excluding the impacts of both gain on sale activity and interest income. Our strengths and specialty and the relentless focus of our team are clearly resonating with the market and clients. I remain confident in the growth trajectory and resilience of our business amidst economic uncertainty thanks to our proven ability to help our clients thrive in challenging circumstances time and time again. In addition, our consistent strategy execution is yielding clear benefits. The company has taken a holistic and intentional approach to technology and its role in accelerating growth and enhancing efficiency. There is observable progress in many client-centric and digital efforts such as the global broking platform, AI tools supporting digital interaction, and solutions that streamline data ingestion and further automate workflows, which allow our colleagues to further differentiate WTW in the market and win new work. Our rollout of the global broking platform has demonstrated the power of seamlessly connecting brokers with the markets. The adoption of our broking platform is progressing on schedule and it has and will continue to streamline service delivery and efficiency. We're also seeing early results in AI. Through the WTW Enterprise Delivery Organization, or WEDO, we are raising AI literacy and fostering the best options throughout the company. We have several AI augmented tools that are making measurable differences for both clients and colleagues. AI-powered solutions are enhancing real-time analytics and reducing manual effort by streamlining data ingestion, analysis, and workflows. In some instances, we've seen a 75% reduction in routine work and processing time. In other areas, AI-infused voice bots, chat bots, and guided digital experiences are enhancing the client experience and satisfaction. We remain committed to harnessing the potential of our investments by balancing bold innovations with sustainable returns. The benefits we're seeing across the enterprise are measurable, and we intend to maintain pace and uphold rigor in ensuring these investments deliver net positive outcomes for our clients, our colleagues, and ultimately our shareholders. I'm looking forward to sharing more about our progress and the long-term potential benefits to both growth and marketing. This quarter, we continue to record strong new business wins, with specialty, technology, and global collaboration consistently being why we win in the market. In health, wealth, and career, our innovative products and solutions, together with our smart connections, continue to drive growth across all our business. For example, in Europe, a large global shipping and logistics company chose WTW's Global Benefits Management Program for its 70,000 employees around the world. Key to delivering this win were our deep expertise and strong reputation in global benefits management alongside innovative tools and technology. In the wealth space, our innovative Lightsight platform in the UK was selected by a prominent medical association as its new master trust pension provider. WTW won the business from one of our main competitors due to the deep technical knowledge and clear articulation of the value we provide coupled with our reputation for quality client service. In another great example, a major oil and gas company began using our career business's new AI-driven automated job leveling tool to support regular restructuring across their business areas as they go through a significant transformation and change. To quote them, we wouldn't have been able to evaluate 300 roles in three days without this tool. It was business critical to complete this work with speed and confidence while going through their transformation. In risk and broking, we continue to benefit from our specialization strategy and our ability to deliver differentiated value through technical expertise, global collaboration, and client-centric solutions. For example, after obtaining our license to act as an insurance broker in Saudi Arabia, we successfully placed property damage and comprehensive general liability insurance for one of the world's largest chemical manufacturers. Our team's deep knowledge of the industry and our ability to tailor technical solutions to this client's needs were key to winning this mandate. We look forward to the opportunities for growth in the Middle East, which remains a key market for WTW. Our ability to provide tailored, specialized solutions continues to resonate with clients and transform businesses, and it's positioning WTW to capture market share in high-growth industry sectors to fuel our own expansion. For instance, our construction specialty business is seeing strong results from sizable construction and development placements for data centers, an industry sector forecasted to experience significant global growth. Our specialty model and our depth of expertise allows us to add value throughout the data center lifecycle, from land identification, through funding and construction, powering the facility, and into operational management or divestment. In addition, our construction and natural resources teams are working together to support clients on clean energy technologies during the construction and operational stages. We expect exponential growth with rising global demand in this area. And these are two great examples in our CRB business of how our highly agile specialty business model, coupled with our expertise, allows us to spot opportunities and plan for rapid growth. Furthermore, our cutting-edge technology and analytics have proven to help clients transform their businesses. Recently, a large UK health insurer decided to engage our insurance consulting and technology business to lead their pricing transformation initiative using Radar Vision. Radar Vision is an AI-driven modeling tool for insurer clients, and it generates early, actionable insights related to inflation, markets, competitors, and customer behaviors to help insurers manage pricing, underwriting, and claims. The implementation of Radar Vision helped our clients sustain a competitive advantage in a rapidly evolving market, while also reinforcing WTW's reputation as a trusted partner in pricing transformation and analytics innovation. Lastly, I want to reinforce our commitment and disciplined approach to optimizing our portfolio. I've highlighted some of the success of our organic investments, but our inorganic growth strategy remains consistent with our prior comments, and we're deliberately patient and focused on, first, enhancing our broking and wealth presence in key markets, while strengthening our offerings in high-growth, high-emergent areas of our core business. Second, expanding our reach across the insurance value chain to further accelerate our growth, while filling gaps in our capabilities and footprint. And third, finding businesses that are good strategic fits that help us enhance our margin and free cash flow profile. We're pleased to have announced an investment in the United Arab Emirates, along with plans for Al-Futain Willis to become a wholly owned WTW business. This acquisition further enhances our value proposition and client experience delivered to global and local clients, and it directly complements our recent investments in Saudi Arabia by strengthening our presence in the Middle East. We're looking forward to continuing to work with our partners Al-Futain and the UAE to build on our years of success together. Looking ahead, we will look for ways to continue to balance our capital management strategy. We'll be intentional in delivering long-term operating and free cash flow margin expansion, which will ultimately create long-term value for our shareholders. In summary, results this quarter were solid as we delivered organic revenue growth that contributed to meaningful margin expansion across both segments. We look forward to building on these results in the second half of the year, and we remain confident in our ability to deliver on our 2025 guidance, including -single-digit organic growth, adjusted operating margin expansion, adjusted EPS growth, and ongoing improvement in free cash flow margin. And with that, I'll turn the call over to Andrew.

Thanks, Carl. Good morning, and thanks, everyone, for joining us today. In the second quarter, we delivered solid organic revenue growth of 5% and expanded adjusted operating margin by 150 basis points year over year to 18.5%, or 100 basis points of year over year improvement when excluding the tailwind from the divestiture of TransAct. Adjusted diluted earnings per share were $2.86, which is an increase of approximately 20% over the prior year. As a reminder, we completed the divestiture of TransAct on December 31, 2024, and for the full year 2025, this will create a $1.14 headwind to adjusted diluted earnings per share. As Carl discussed, our solid second quarter results reflect the strong foundation we've and the benefits of the investments in talent and technology we've made recently. Our strategy continues to resonate with clients and colleagues, and our businesses are highly resilient despite the uncertain operating environment. We are relentlessly focused on our strategic objectives, long-term shareholder value creation, and the financial framework outlined at Investor Day. Turning to our segment results, health, wealth, and career revenue grew 4% compared to the quarter of last year. We saw a sequential improvement in growth and a strengthening pipeline during the quarter, although clients remained cautious about the macro environment. 4% growth for the second quarter is in line with our expectations, and we remain on track to deliver -single-digit growth and margin expansion for HWC in 2025. As a reminder, the vast majority of HWC's business is recurring, with only a small portion Our health business achieved strong growth of 8% this quarter, or 9% growth excluding the impacts of interest income and gain on sale activity. All regions saw robust growth driven by double-digit increases outside of North America and solid performance in North America. Strong new business and focus on client retention remain key drivers of growth coupled with In North America, focused sales efforts and mid-market growth led to an increase in commissions while consulting projects increased with greater demand for cost management and legislative change projects. Looking ahead, we anticipate demand to remain strong for the health business driven by healthcare inflation and employers' ongoing need to manage costs while providing a competitive employee value proposition. We also successfully introduced our enhanced mid-market solution in North America and launched new panels and facilities. Overall, we've established a healthy pipeline for the second half of the year. Excluding the impact of interest income and gain on sale activity, health grew 8% in the first half, and we continue to expect high single-digit growth for the full year 2025. Wealth had revenue growth of 3% in the second quarter, primarily driven by the retirement business, which delivered growth across all geographies and solutions. Our core defined benefits consulting offerings remained resilient, and we saw growth in project work to support legislative changes, pension risk transfers, and workforce actions. In addition, we continue to expand our client base for our LifeSite MasterTrust and insured solutions. Our investments business saw low single-digit growth with new products and client wins offset by capital market volatility, the latter of which improved as the quarter progressed. This was a headwind we pointed out last quarter and expected it to impact investments results in the second quarter. We continue to expect low single-digit growth in the wealth business for the year. Career growth was 1% in the second quarter, with solid growth outside of North America driven by healthy demand for pay transparency support, compensation design, and employee communication projects, and a net positive increase in compensation committee appointments. As we communicated in the first quarter, advisory growth in North America was expected to be tempered by delays in certain discretionary projects. While lingering macroeconomic uncertainty may continue to impact some of our clients' decision-making, we expect revenue growth to increase in the second half due to the seasonality of compensation benchmarking surveys and increased support required to prepare for the EU pay transparency directive that goes into effect in mid-2026. Discretionary advisory project work only comprises about one-third of our career business, or less than 5% of the HWC segment. As we previously communicated, we expect career to grow low to mid-single digits in 2025. We continue to expect -single-digit growth in the long term based on our past and continued focus on product and technology offerings and recurring services. Benefits delivery and outsourcing, or BDNO, was flat versus last year's second quarter when we delivered 7% growth excluding TransAct. BDNO revenue benefited from growth and outsourcing due to increased project and core administration work in Europe, which was offset by lower commission revenue in the individual marketplace business. It is important to remember that even following the sale of TransAct, BDNO maintains a B2B2C business and so generates nearly half of its revenue in the fourth quarter. The seasonality of this business is driven by the timing of the Medicare enrollment period and new business generation, which is even more acute within individual marketplace where the fourth quarter is about 80% of its annual revenues. Accordingly, we forecast BDNO growth to be stronger in the second half of the year, especially with the expected timing of commissions, new client implementations, and new projects to support regulatory changes. We continue to expect BDNO to grow at mid-single digits for the year. HWC's operating margin in the second quarter was 23.8%, an increase of 190 basis points compared to the prior year, or an increase of 20 basis points excluding the impact of the TransAct investiture. This demonstrates our ability to consistently deliver incremental margin expansion in cyclical and macro conditions and adds to our strong track record of margin expansion in HWC. Let me move on to risk and broking, which delivered another strong quarter with revenue growth of 6% underscoring the continued momentum in the business. Our specialization strategy and our investments in talent, data, and technology continue to pay dividends. Corporate risk and broking delivered another strong quarter, growing 6% or 7% when excluding both book of business activity and fiduciary interest income. Notably, this is on top of 11% achieved in the prior year, and as Carl mentioned, this is the 10th consecutive quarter in a row of high single-digit growth when excluding book of business activity and fiduciary interest income. GRB's growth was broad-based across all regions, driven by sustained client retention in the mid-90s and strong business generation around the world. Importantly, we expanded our market presence with meaningful client wins in the Middle East, some of which Carl already highlighted. Our global specialization strategy remains a key growth driver for CRB. Our investments are yielding value as demonstrated by its growth continuing to outpace the rest of the segment. Globally, our construction, facultative, surety, and natural resource specialty lines continue to deliver strong performance, and we're meaningful contributors to CRB's 6% growth this quarter and 7% growth in the first half of this year. Our recent investment in credit risk solutions, both organically and inorganically, is also helping to accelerate performance. From a geographic perspective, our global specialty business had double-digit growth in all of our geographies, underpinned by strong client retention and new business generation. We are excited by the results we are seeing from our specialization investments, and we expect mid- to -single-digit growth to continue in CRB for 2025. In our insurance consulting and technology business, revenue was flat versus the same quarter last year. Our pipeline is strong for the second half of the year, especially on the technology sales side, but we observed a weaker consulting environment during the quarter, as well as more conservative buying behavior for large multi-year technology implementations. Consulting offers services such as reserve calculations, financial and capital modeling, and discretionary projects like transaction services for insurers, whereas technology offers software products that support advanced analytics for claims, underwriting, ratemaking, and reserving for insurance clients with large multi-year contracts that tend to have longer sales cycles. We have been making a focused effort to bring the combined proposition of consulting and technology closer together to create more value for clients and to drive growth. For the full year, we are now expecting low- to -single-digit growth in ICT. Turning back to RNB segment results overall, we are pleased with RNB's momentum -to-date, which gives us confidence in our ability to deliver mid- to -single-digit growth for the full year. RNB's operating margin was .2% for the second quarter, a 60 basis point improvement over the prior year, or 100 basis points improvement when excluding the impact of foreign exchange. This was primarily driven by operating leverage from strong organic revenue growth performance, coupled with continued expense discipline, as well as benefits from prior year transformation savings. Foreign exchange was a headwind of 40 basis points to RNB's operating margin this second quarter due to the weakening U.S. dollar, but we expect the full year foreign exchange impact to be more modest. We achieved 90 basis points of adjusted operating margin improvement in RNB so far this year, and we are committed to delivering 100 basis points of average annual adjusted operating margin expansion over the next three years. The strategic investments we made in our global bloating platform, our global placement strategy, as well as our digital automation and workflow optimization are strong foundations for additional operating leverage and efficiencies, and we will see these investments continue to deliver benefits for years to come. Finally, I will give some additional color on our enterprise level results. Adjusted operating margin for the second quarter was 18.5%, a 150 basis point improvement over the prior year, primarily driven by the strong margin expansion in the segments and prudent business expense management. The adjusted operating margin includes a 50 basis point tailwind from the transact of vestiture for the quarter. As we enter the second half of 2025, all of our businesses are operating with discipline and rigor, which gives us confidence in our ability to continue to expand margins. Foreign currency was neutral on adjusted EPS for the quarter and a negative nine cent impact for the first half of 2025. U.S. dollar has been weakening during the quarter, so I want to give you some additional color on foreign exchange. At the current spot rates, we expect an approximately five cent tailwind to adjusted EPS for the full year, though the impact may fluctuate quarter to quarter. Our U.S. GAAP tax rate for the quarter was negative .8% versus .6% in the prior year. Our adjusted tax rate for the quarter was 18% compared to .4% for the second quarter of 2024. We expect our full year 2025 tax rate to be relatively consistent with the prior year rate. We generated free cash flow of 217 million for the first six months ending June 30th, 2025, a decrease of 88 million from the prior year. This was driven by increased incentive costs, the redesign of one of our ongoing retirement programs, higher cash tax payments, and the absence of transact cash inflows, which were partially offset by reduced transformation program cash costs and operational improvements. Looking at the back half of the year, remaining transformation costs will reduce further, and the divestiture of transact will become a tailwind to free cash flow as we lap the quarters in which that business recorded net cash outflows. Additionally, we received the Willis-Ree Earnout payment in April, and we do not anticipate any material cash tax payments on it in 2025 or beyond. We remain on track to deliver on our free cash flow objective of annual margin expansion and our outlook remains largely unchanged. During the quarter, we returned 591 million to our shareholders via share repurchases of 500 million and dividends of 91 million. We view share repurchases as one of the primary methods of capital return and an attractive use of capital to efficiently deliver value to shareholders, and therefore is a central component of our capital allocation strategy. We continue to expect share repurchases to total approximately 1.5 billion in 2025, subject to market conditions and potential capital allocation to inorganic investment opportunities. As we've mentioned, we are taking a more balanced, disciplined approach to capital allocation to generate long-term shareholder value. We'll continue to be selective as we invest in talent and in our platform to ensure we're driving sustainable growth and margin expansion. In closing, we are pleased by our business performance in the first half of 2025. We are increasingly seeing the execution of our strategy manifest in our results, giving us confidence in delivering on our 2025 financial objectives and beyond. With that, let's open it up for Q&A.