Willis Towers Watson Public Limited Company Q2 FY2025 earnings call

• Delivered 5% organic growth, 150 basis points of adjusted operating margin expansion, and adjusted EPS of $2.86 in Q2. - Health, Wealth & Career's recurring revenue and geographical diversification provide a stable foundation. Risk & Broking's pace of innovation and focus on specialty resonate with the market. - Progress in technology efforts such as the global broking platform, AI tools, etc. - Strong new business wins in various areas, e.g., Health, Wealth & Career's innovative products, Risk & Broking's specialty placements. - Commitment to portfolio optimization, including an inorganic growth strategy focusing on enhancing broking and wealth presence, expanding the insurance value chain, and finding strategic fits.

Health, Wealth & Career: Revenue grew 4% in the second quarter. Health business achieved 8% growth excluding interest income and gain on sale activity, with double-digit growth outside North America. Wealth had 3% revenue growth driven by the retirement business. Career grew 1% with solid growth outside North America. BD&O was flat versus last year's second quarter. Risk & Broking: Delivered 6% revenue growth, with Corporate Risk & Broking recording high single-digit growth for the 10th consecutive quarter excluding gain on sale activity and interest income. Its specialization strategy and investments in talent, data, and technology are paying dividends.

• Expect mid-single-digit organic growth, adjusted operating margin expansion, adjusted EPS growth, and ongoing improvement in free cash flow margin for the full year 2025. - HWC expects mid-single-digit growth and margin expansion. - R&B expects mid- to high single-digit organic growth. - ICT expects low single to mid-single-digit growth for the full year. - Bain and Willis joint venture revised cost estimate to $0.20 for the year.

• Macro-economic uncertainty impacting business, especially for discretionary projects. - Geopolitical and trade issues affecting Risk & Broking's business opportunities and risks. - Interest rate environment and rate fluctuations potentially impacting revenues.

Q: So I wanted to ask about HWC organic...

A: Thanks, Rob, for the question. So HWC grew 4% compared to the second quarter last year, and that was in line with our expectations. We're seeing demand remains strong for our global benefits management for pensions, for outsourcing, where we won many notable new appointments that I mentioned earlier, right? We feel confident in our pipeline, and we continue to expect that HWC is going to have mid-single-digit organic revenue growth and margin expansion for the full year.

Q: You had mentioned in the Health that outside of North America, your growth was quite strong, up in the double digits. Was that attributable to any kind of macro volatility, tariffs, that sort of thing? Or is that more just underlying momentum?

A: For outside of North America, our health growth was driven by momentum, as you suggested, and the very significant health care cost inflation that organizations are experiencing outside of the U.S.

Q: You had mentioned in the guidance, I saw you guys lowered the cost for the Bain and Willis joint venture. I think it's now expected to be $0.20 for the year, right? And I think prior was $0.25 to $0.35. So I guess my question there is, are you guys behind original hiring plans? Or is there some other factor related to the change in guide there? And will you guys be ready to transact with that entity by January 1, 2026?

A: Yes, sure. It's Andrew, I'll take the first part. So the launch is progressing in line with our expectations. The revised estimate is simply due to having better insight into the expense picture for the remainder of the year. So we're very satisfied with the progress made so far and continue to be excited about our reentry into the reinsurance space.

Q: You had mentioned in the Health that outside of North America, your growth was quite strong, up in the double digits. Was that attributable to any kind of macro volatility, tariffs, that sort of thing? Or is that more just underlying momentum?

A: For outside of North America, our health growth was driven by momentum, as you suggested, and the very significant health care cost inflation that organizations are experiencing outside of the U.S.

Q: Some other brokers in the quarter have talked about the impact of the rate environment, particularly large ticket property business on growth this quarter. I'm curious, was there any impact on CRB? And maybe just remind us what the potential impact of just the pricing environment could have on your revenues?

A: Yes. Sure, Brian. It's Lucy, thanks for the question. So that's right. We've seen rates in certain classes continuing to trend downward. We've seen that in the market since the beginning of last year. Like the others have said, most lines are softening. The most affected part of the market is the large and complex property segment. And the part of the market where rates are still hardening is the North American casualty, excess, umbrella, auto. The important thing to remember about where the rating is, is that after many years of market hardening across all lines, this was expected. We planned for it. The industry will have planned for it. Obviously, we didn't know exactly where it was going to go, but we knew directionally. And so where carriers still consider that they're getting rate adequacy, the conditions will continue to improve for clients. So rate has been a moderate headwind for us. But the 2 elements that affect how it impacts us are how clients decide to behave and the makeup of our overall book. And just in terms of clients, right, sometimes they take the savings, sometimes they use the opportunity of a really good market to buy more. And in terms of the makeup of our book, we're about half property, half casualty. We skew to the middle market, so we're not as impacted by large and complex property, and we have a good balance between commission and fees. And just as an overall observation, we've made significant investments in the business over the last 3 years, and those investments are continuing to pay off. So we can't predict the extent to which rates may continue to decline, but we do not rely on pricing to drive our organic growth. And we remain well positioned and confident about our mid- to high single-digit organic growth guidance for Risk & Broking.

Q: I wanted to dial in on ICT growth expectations over the balance of the year. I understand it's just one of many moving pieces and that there can be a lot of lumpy transactions that influence growth in the line. But in terms of thinking about the rest of this year, what are you guys thinking might drive higher organic growth? And what assumptions are you making about client spend management as you look into the next 6 months?

A: Yes. First, let me take a bit of a step back, right, just give everyone a quick refresher on some key points about ICT. It represents about 11% of the segment, and it's focused on delivering top-tier technology solutions and trusted consulting services to insurance carriers. That's the client base. On the consulting, we deliver both recurring services like reserve calculations as well as discretionary project work for things like securities issuance or M&A amongst insurance companies. On the technology side, we do software products that support underwriting, ratemaking and reserving for clients, and those are typically larger and multiyear contracts. And while we are seeing and continue to see significant value in the combined approach of consulting and technology offerings due to the softer consulting environment, we're now expecting low to mid-single-digit growth for the full year. I don't know, Lucy, you want to elaborate.

A: Yes. Yes, sure. Thanks. Thanks, Katie, for the question. We feel good about the ICT business. We're particularly confident about the strong technology pipeline we have for the second half of the year. As we've seen in the past, the timing of some large-scale finance or technology transformations often create variability in the timing of results. So some clients are taking a more measured approach to investment in the second quarter due to economic conditions, our underlying pipeline and opportunities remain strong. And so our long-term outlook for ICT remains mid- to high single-digit organic growth.

Q: Two long-term questions. Carl, you mentioned AI in your prepared script. I'm wondering if you can elaborate a little bit more in terms of your efforts there in terms of increasing efficiencies, automating, and how you're thinking about that from a long-term perspective? And then, Julie, Health within HWC has been a key driver. Obviously, things are looking very good for this year. I'm wondering if you can talk a little bit about longer term in terms of the next 3 to 5 years and particularly how much work you expect in terms of plan redesign given the health care inflation that's occurring.

A: Sure. And I'll treat that as 2 questions. Let me get to the AI one first, and I'll let Julie get that first. I talked about this in my prepared remarks, right? And we've been implementing various forms of AI for years, such as advanced analytics, machine learning models, right? And that helps drive efficiency and deliver our client solutions. We use these types of AI for -- in our risk modeling for clients and in other risk management solutions. Let me give an example, right? Coverage Clarified in our construction business. That uses AI to verify that insurance coverage is adequate and contractually compliant, which is otherwise a pretty time-consuming and labor-intensive manual process. We built Coverage Clarified in-house, and we estimate it's making our process up to 40% more efficient. And that's just one example, right? We continue to explore opportunities to use AI to improve the overall client experience, streamline our internal processes and to enhance both client and our decision-making. Now as always, we're doing it thoughtfully and responsibly by putting our clients first and in full alignment with our values and applicable legal and regulatory requirements. I'm sure my general counsel is out there smiling somewhere, to ensure the quality of our advice solutions and what clients expect and what they're accustomed to getting from WTW. So we intend to balance innovation with sustainable return, and we see long-term potential benefits to both growth and margins from our AI investments. Julie?

A: Sure. And thanks for the question on Health, Mark. Look, as you know, health care coverage is a significant component of the employee value proposition in virtually all countries around the world. And the cost of that coverage is meaningful relative to other components, particularly in some large economies like the U.S. The drivers of cost increase are there currently, I mentioned before, prescription drug, there's overall utilization. There are new treatments that are driving high-cost claims. And we don't see those changing in the short term for sure, but also in the medium term. So organizations will need to continue to keep an eye on this component of their total compensation and benefits costs, and we expect long term to see high single-digit growth over this -- for this business.