Good morning. Welcome to the Willis Tower Watson's Third Quarter 2020 Earnings Conference Call. Please refer to the willistowerswatson.com for 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..

Okay. Thank you. Good morning, everyone, and thank you for joining us on our third quarter 2020 earnings call. Joining me today is Mike Burwell, our Chief Financial Officer. In the third quarter, we continued to navigate through challenging economic conditions. Nevertheless, I'm pleased with our financial performance.

While our revenues continue to be impacted by the pandemic and the lockdown, particularly, in our discretionary lines of business, our overall performance reflects the durability and resilience of our business model.

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 through prudent cash flow management.

As we navigate through the COVID-19 lockdown and the resulting economic conditions, the well-being of our colleagues, clients and communities remains at the forefront. It has been an arduous but transformative year.

With great changes come new opportunities for growth, which is why we continue to be excited about the proposed Aon and Willis Towers Watson combination.

COVID-19 has highlighted deficiencies in the way the world approaches people, risk and capital issues, and we believe our combination with Aon will allow us to more proactively support our clients in developing solutions to problems that are inadequately managed today.

COVID-19 has shown the world that the widespread cost of extreme events far exceeds the upfront cost of prudent preparatory measures. Climate risk is one such area where we see protection gaps and building greater resilience is critical.

Similar to the COVID-19 pandemic, climate change will challenge many countries with the potential for profound socioeconomic destructions, highlighting the critical need for more efficient, risk-informed investment decision making to help save lives and economies from the foreseeable shocks in the years and decades ahead..

Thanks, John, and good morning to everyone. Thanks to all of you for joining us. I'd like to extend my gratitude to our colleagues for another solid quarter as well as thank our clients for their continued support and trust in us through this challenging environment.

I'm proud of our leadership, our colleagues and our overall resiliency demonstrated by our businesses..

Thanks, Mike. And now we'll take your questions..

And your first question comes from the line of Paul Newsome with Piper Sandler..

So obviously, the theme today with brokers is that the excellent margin control that everyone's had.

Any thoughts as we get into the next quarter or beyond about, just if you'll have to increase the -- about the spending just because hopefully, things are getting a little bit back to normal again?.

Yes. So I think, look, we expect that situation is going to evolve and change during, say, 2021, but I think we really don't know exactly how it's going to evolve. I think we know it's going to be different than it is today, but we don't think it's going to go back to where it was prior to COVID-19 also.

To the extent we have some more expenses, say, travel and entertainment, things like that, we'll only be undertaking them when they're justified by generating the extra revenue. So while we expect expenses to increase, we're going to try to do that only where we also have the corresponding revenue increases..

Great. And completely different question.

Obviously, we're looking at a changing political environment well with the ACA possibly being affected by a quarterly, any thoughts on that business and the outlook, just given the changing regulatory environment?.

No. I mean I think what we would say is, we think that the services that we provide, I talked at the end of my remarks about how the -- particularly the services we provide in BDA let employees and individuals take control of their benefits and their health care. And I think that's a theme that you see around the world.

Whatever way politicians or the particular methods they use for providing health care, they want individuals to be in charge of their own health care and take responsibility for it. And so, we feel pretty good about the services we provide..

Our next question comes from the line of Elyse Greenspan with Wells Fargo..

My first question on CRB, you guys pointed to a one-off sale in North America, I think you gave the impact of Great Britain, the one-off item there that the GB piece would have been up 2%.

What would all of CRB have done in the quarter, if we adjust for the onetime in North America and Great Britain?.

Yes, Elyse, I mean, we would have been a slight -- we have been flat overall to a slight increase. It's kind of really where we would have been for the quarter. Obviously, when we look at the quarter, overall, we look at the year-to-date results. And when we look at that, we feel like we're operating pretty favorably in comparison to the market.

And so that's kind of how we think about it..

Okay. Great. And then wholesale, I think I heard you guys say that, that was down 12% within IRR. I know you guys, like there's been -- it's been disclosed, right, about the potential sale of Miller.

I'm not sure if that had an impact or if we just get a little bit more color on what you saw within wholesale? And is anything there kind of onetime to the Q3? And how we should think about the trajectory of that business from here?.

Yes. So when we look at Miller overall, thank you for the question, Elyse. One of the things that happens with Miller is that they insure a lot of events and in particular, sporting events, and so obviously, there's been a lot of those that haven't transpired or being put on hold.

And so that's what we really saw in terms of driving the reduction in revenue growth for the quarter. Now we continue to evaluate strategic alternatives, as we said, for Miller. Miller has been a very strong and performing business for us, but that's the direct reason of why the decline in Miller for the quarter..

Is the sporting event more pronounced to the Q3 than other quarters? Or would that be even throughout the year?.

No, it's a little bit more in the Q3..

Okay. And then my last question on the tax rate, you pointed to, I think there was a U.K. statutory change that led to the elevation in the quarter.

Is there any impact on your go-forward tax rate?.

Yes. So as I just received feedback, Elyse, yes, so we did -- the U.K. did raise their statutory rate by 2%. As I said, it had a $11 million – approximately $11 million impact on our tax calculation for the quarter in terms of setting that up on our deferred tax liabilities. But also, we could not adjust for that on a onetime basis.

So that had $0.08 impact into our results for the quarter. So -- and then for the year, we will -- it will have a slight impact for us thinking about the year, but nonetheless, not -- within a -- think about it within roughly a 1% kind of number for the year..

Okay and then if I can just shove one more in. The free cash flow is $1 billion year-to-date. That had obviously been a major focus of Willis Towers Watson. I know you guys pulled all of your guidance at the start of COVID like, most other players in the space. But that was your free cash flow target for the year.

So obviously, you guys have hit that 1 quarter ahead of time.

Anything specific to the free cash flow conversion for the past couple of quarters? Or has it just been kind of blocking and tackling in all the things that you guys have focused on in terms of payables and receivables really drive that conversion up?.

Yes, Elyse, so thank you for pointing that out. It's really the effort by our colleagues. Our colleagues have worked extremely hard on this. Overall, as we have -- as a collective group, as a leadership team in terms of driving and focused on this. So as you know, it has been something a topic of conversation that's happened historically.

We've continued to focus on how it is that we manage our relationships with our clients, doing the right things in the face of the pandemic. But equally been very focused on making sure that we have the right terms and we collect our cash appropriately. And so -- as well as pay appropriately.

And so all those things factored into our continued focus on it. And it's -- we're proud that we -- where we sit through the third quarter, and we'll look to continue to deliver as we move forward in the fourth quarter..

Your next question comes from the line of Greg Peters with Raymond James..

My first question would be just an update on the merger. Can you talk about the role of the U.K.

regulator and your merger process? Especially, in the context of Brexit? And do you still anticipate minimal disposals?.

Yes. So look, Greg, thanks for the question. Unfortunately, we can't comment on any specific approvals obtained or still outstanding. There are several global antitrust filings that are required in connection with the proposed transaction. And the specific process varies by jurisdiction.

But I can tell you, we are still planning to submit all of our antitrust filings in required jurisdictions. And we're still expecting to have all clearances in the first half of 2021..

Got it. The second question, so I was looking just at the consolidated income statement, I think it's on Page 15 of your press release.

And it's clear that the operating -- other operating expenses are down and I think that's just a reflection of your tight control over T&E, but I was struck by the salary and benefits line, which as a percentage of the revenue inched up, I think it was like 64.5% last year. And then this year, it's above 66%.

So can you walk us through maybe on a consolidated basis and maybe at the segment level, why salary and benefits as a percentage of revenue is running higher in the third quarter this year than it did the third quarter last year..

Sure. Greg, so thank you for the question. And in terms of looking at S&B, we obviously have -- bring the right talent on board is important for each of our businesses. And in particular, when you look at the growth that we've had in our BDA segment, specifically, we've brought on more talent in that particular business overall.

Obviously, we have -- think about our overall incentive compensation numbers in terms of that we accrue on a year-over-year basis in terms of thinking about it. So we -- it is just a function of the people and our drive associated with it.

We looked at impacting resources -- overall is a decision of last resort, not that we wouldn't impact people, but that was a decision of last resort. And so our colleagues have bonded together to drive cost benefits out. And we, as a leadership team, have been really managing that line, the best that we can.

Yes, it's up slightly, in my mind, comparison to the prior year. But we've been able to offset a heck of a lot of other costs through that. And we have -- just cut that off immediately with the level of talent that you're continuing to bring into the organization in terms of what that looks like. So....

Yes. And maybe I'll just add that, I think, Greg, we've -- we're looking to try to get to an incentive compensation for this year that is around the same as we were last year. Although the actual way we accrue that by quarter sometimes varies a little bit. And I think we did accrue more this quarter than we did the same quarter last year.

We're still looking to get to around the same bonus pool. I mean ideally, we'd like to even have it be slightly better, but we're looking to get to around the same bonus pool as we had last year. We also have some headwinds from stock compensation as we get charges for that as the stock price goes up..

Got it. Just my final -- I know you threw in a comment around TRANZACT and you're in the annual enrollment period for that business right now.

Can you give us an update from where you sit on how that business looks to grow in the fourth quarter this year?.

Well, I mean, it's too early for us to say anything about what the fourth quarter is going to be like this year. I think that's really just beginning. But overall, as I think we said on the prior calls, too, we're very excited about this business.

I think we were incredibly enthused, when we were able to acquire TRANZACT and fold it into Willis Towers Watson. And we're even more enthused about the business today. So we feel pretty good about the long-range prospects here. And we think it's a perfect fit with the rest of the organization..

Your next question comes from the line of Mark Marcon with Baird..

Congrats on the free cash flow. That was really, great to see.

Wondering, you're not giving us any guidance for the fourth quarter, but I'm wondering if you can just talk across the different segments, HCB, CRB, IRR and BDA, just in terms of what you were seeing as the quarter unfolded in terms of new business development efforts? And how that may potentially end up impacting the fourth quarter and a little bit beyond that, just because there's obviously a lag between when new engagements are signed, and they actually turn into revenue.

And then also, if you could tell us what the impact would be with Max Matthiessen in terms of that being disposed?.

Yes. So I'll let Mike go through and give us some thoughts about the new business. But let me just make 1 comment at the beginning. As we -- we're not giving any guidance because in today's -- with today's world, it's just so hard to know how things are going to impact -- things are going to impact from 1 quarter to another.

I will note, though, that last year, the fourth quarter of 2019 was an extraordinarily good quarter for us. And so we're facing a tough comparable in that fourth quarter. But as I had referenced in response to an earlier question, we're still looking to try to get to about the same results as we had last year.

But Mike, do you want to go run through this?.

Yes, John, thanks. And then Mark, I mean, again, under the -- we're not -- the fourth quarter hasn't happened. Not giving guidance, but just giving you some sense.

Our HCB business as John referenced in his prepared remarks, to it, our retirement business, we're very pleased with its performance in terms of it serving the marketplace, and we continue to be very pleased with where it's performing in the context of a very difficult economic environment.

Our Talent and Rewards business is going to continue to be -- you got discretionary spending that's out there. And so frankly, it's performed better than we expected, to tell you the truth, given where it had previously been -- when we look back in the financial crisis, on our Talent and Rewards business and how well that group has done overall.

H&B, we talked about it this quarter, having 1% growth. We continue to believe H&B will continue to perform well. And so -- and that business is very focused on managing its cost appropriately. And so that's kind of how we think about our that business. The only other one I commented on is our TAS business.

And as John said in his prepared remarks, we had a very -- a year-over-year basis, we had a very large project that transpired in the prior year. We didn't have it in the current year, and that will continue to have some impact as it looks at the fourth quarter.

But again, from an overall margin standpoint, the group has done a very good job in managing its costs overall. On CRB, the CRB team, when we look at its revenue growth and we adjust for the question that Elyse asked, just in terms of prior year sales, we're pleased with where CRB sits on a year-to-date basis.

And when we look at its growth trajectory, we believe that it will -- should perform at market levels, and we don't see any reason why it won't. And the group, again, similar to the HCB comments, been very focused on managing its margins properly.

And cost management, and we don't see anything different from that leadership team in terms of what business they're doing. When I look at our IRR business, obviously, we've divested Max. We will -- in terms of its -- we think it's a very good time to divest of Max.

It's a very good business, and we think it will continue to thrive under its new ownership structure, but it's been a great business for us. And -- so we'll have -- obviously have that out in the fourth quarter. Our reinsurance business is growth at 7%.

When we compare that to others, we believe that's at -- if not market-leading, at least at the comparable basis, to the marketplace overall. And our ICT business, in terms of the group, continues to do very well. They've got some tremendous talent in that business and continue to improve on their technology sales overall.

Our investment business increased this quarter 4%, continued expansion in the delegated investment services. We're very pleased with their performance and what they've continued to do in very, very tough market conditions.

And as I said, our wholesale business was down and we really believe that was a direct link back to the canceled sporting events, events overall, in particular, sporting events, and we've seen these kinds of rebounds happen and -- as it relates to the wholesale business. So we will wait and see.

I'm not giving any projections there, but we're very pleased with that management team and their ability to be able to deliver, if you look at historical -- their historical ability to deliver. If we go to our BDA business, I think John really covered that in his comments earlier. Overall, we're very pleased with BDA.

And obviously, all the action is going to happen here in the fourth quarter, given the open enrollment period of time. So we continue to watch that. But very, very pleased with that team in terms of what business they're doing. So try to give you a little bit more color, Mark, as much as possible and thinking about those businesses.

But as John said in his comments earlier, we're going to manage cost effectively. We will spend where it's appropriate to drive revenue growth. And our management team as well as all our colleagues are very focused on that objective in delivering for all stakeholders..

And maybe I would just add two quick things here to Mike, to what you gave there. First of all, I think you referenced this, but just to sort of emphasize it, our Talent and Rewards business, it's down, but this is a business that has a large percentage of discretionary projects.

And we feel like this is -- they have performed extraordinarily well here. When we compare it to either what I think others are doing in the market or we go back and we compare it to the downturns in the early 2000s, Talent and Rewards has performed extraordinarily well.

And just to give you a sense of the difficulty in looking at some of these things, I could take our bulk lump sum activity. So we're continuing to expect a sort of a healthy pipeline there.

But with this low or near 0 interest rate environment, some sponsors are going to step back from these initiatives because of the reduced funded status in their pension plans.

On the other hand, so other sponsors are going to look at the reduced lender status and say, jeez, we're going to be spending a longer time on the PBGC premium cap because of this reduced funded status. That actually increases the ROI for doing the BLS project. So which of those 2 things is going to be predominant? We don't really know at the moment.

I mean we're still -- as I said, we still continue to expect a healthy pipeline, but probably, nominally, lower than last year. But that could pick up going into 2021..

Great. And then just to make sure I heard most of the comments correctly. The general sense I got is, as Mike was going through everything was, there probably, doesn't sound like there was a huge deterioration as you went month-to-month to month through the last quarter, just in terms of sales activity. It sounded like, it was generally more stable.

Is that a correct interpretation?.

Yes. I think that's correct..

Okay. And then just Max Matthiessen, just what's the revenue impact going to be on a quarterly basis? On an annualized basis in terms of taking them out..

Mike, you have that, don't you?.

Yes. Yes, just getting it here, Mark..

Sure.

And then while you're looking at that, just to go back to Greg's question, was there -- do you sense that there's any more regulatory challenge or less regulatory challenge with regards to Aon than what you previously anticipated? Or is it basically just in line?.

So I would say, I think that there's nothing that has been any kind of a big surprise in terms of what we've done with the regulators. I think when we put the combination together, we felt that there were some very good arguments as to why this combination made sense and why there should be -- we should be able to go ahead without any restrictions.

But it doesn't matter what we think. What matters is what the regulators think. And so we've been working with them, and we've been submitting all the information. As I said, we haven't been asked for anything, which is any kind of a big surprise to us at all. And we're -- as we stand, we've been working very cooperatively, and we're on our schedule..

And Mark, back, think about Max Matthiessen roughly about $25 million in revenue per quarter..

Our next question comes from the line of Mark Hughes with Truist?.

In the impact of climate change and the efforts you're making to deal with that, what do you think it means for your business in terms of growth opportunities, if there's more losses, more risks, more volatility? How do you think about that?.

Well I think there's 2 things. I would say that a lot of the work we've been doing in climate change has evolved out of the capabilities that we have in the work we normally do for clients.

So we've been working with them on risk management and on having insurance against things like hurricanes or other things that are a result that can be impacted by climate change. So we have that capability, we're working with them.

A lot of the work that we're doing, for example, around the Coalition for Climate Resilient Investment is not really revenue-generating work, but it is work that we think is an important contribution that we're uniquely positioned to provide to the market. In the long run, though, climate change is going to impact almost every part of our business.

It's going to be impacting the severity of some of these long tail or extreme events that are occurring. And so we're going to have to be helping to model that. We're happy helping to work with clients on risk mitigation. We're going to have to be working with them to build in resilience.

I mentioned about how we're working with some of the largest financial institution in the world to evaluate their loan portfolio for its exposure to climate. We're going to be working with -- in our investment consulting operations, understanding how pension plans and other investors want to take climate into account in their investments.

And this is something that actually we've had about a 15-year track record, as I said, of having been working on that. And in our Talent and Rewards business, we're going to be working to help put these kind of metrics into executive compensation plans. So we see this as impacting the whole broad range of businesses we have..

And your final question comes from the line of Sean Reitenbach with KBW..

This might be a little similar to past question. But thinking about HCB, and you mentioned clients having to rethink talent, rewards and such.

Is that project flow you're starting to see already? Or is that kind of projected demand that we will really start to contribute to growth in 2021 as the economic environment stabilizes and such?.

I think this is closer to saying, when I went through on the bulk lump sum activity, I said, here are some reasons why it could increase and here's some reasons why it might be tamped down somewhat. I think with T&R, those are some reasons why we think it might increase, but it's not like we're really seeing a lot of that yet..

Okay.

And then thinking about the -- like reinsurance and insurance rate environment and such in conversations with clients, what are the discussions about the rate environment? Are you preparing them for significant -- maybe like multiple renewals of high rate increases? I know 1 industry CEO mentioned, the industry still hasn't seen a real response from reinsurers.

So that could further kind of provide more momentum and longer duration of this hardening market?.

Yes. I mean I think, look, we -- one of the things we do with our clients is to discuss the environment and the pricing environment and what's out there. Of course, we like to think we'll be able to do a better job for them than others. So they probably have a little bit less of a rate increase..

And there are no further questions. I would now like to turn the call back over to Mr. John Haley, Willis Towers Watson's Chief Executive Officer. Please go ahead..

Okay. Thanks very much, everyone, for joining us on this call, and we look forward to updating you in February, on the full year's results. Have a good day..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..