Second year in a row, we're pleased to have John Haley, CEO of Willis Towers Watson. John led one of the largest business combinations of the past several years when Towers Watson merged with Willis. John had joined a predecessor company to Towers Watson 40 years ago.
Yes.
Which is longer than I've been at BofA Merrill, has served in a number of different roles over the years. It's been a couple of years now since the Willis Towers Watson merger, 2017 brought evidence of why you put these two businesses together, I think. We want to certainly get an update on that and how the business is going in general. Let me start with the merger. Again, probably a bigger picture question, but you've had probably now a couple of years to see how it's worked out. Highlight what you think the key accomplishments are, and disappointments, if you will.
Sure. Thanks, Jay. We brought together Willis and Towers Watson back in January 1st of 2016, just over two years ago. The reason we brought them together was that I was with Towers Watson. We'd been a consulting service, as we looked out, we were finding that increasingly our customers, our clients, in order for us to do consulting assignments, they were also asking for us to provide tools and products. If we're doing a compensation consulting assignment, they wanted tools to administer their compensation programs. If we were doing insurance consulting in China, they wanted us to provide some software to help understand what was going on inside the company, et cetera. This was a phenomenon throughout the world.
We were recognizing that building products and tools and solutions had to be a bigger part of what we did, not because we wanted to get away from the consulting, but because we wanted to make sure it continued to prosper. At the same time, Willis, coming from the brokerage and solutions area, was looking at clients who were asking more and more for consultative and advisory services. As we looked at these two organizations, as I was talking with Dominic Casserley, who was the CEO of Willis at the time, we said there's a convergence to this ABS, advisory, brokering, and solutions, that we see coming. I had had a strategy in place at Towers Watson for us to get better at creating tools and products and then selling them.
The creation had gone well, but what was slower for us was we didn't have a natural entree into the middle market, and that's where you really sell a lot of the tools and products. I thought this was something that would really help in our strategic development and maybe with less execution risk, although mergers have their own execution risks. Now 2 years later, as we look at this, I think the two organizations have come together very well. They're working together very well across the whole field, and there's a lot of instances of the kinds of things I wanted to see. Towers Watson ran healthcare exchanges in the U.S., and we wanted to get more business from the middle market, which we didn't naturally sell to. The Willis brokers have helped bring a lot of that business to us.
There's a Global Benefits solution that Towers Watson had developed, but we needed a brokerage arm to actually implement it. We've been able to work together in that. We've had our Insurance Consulting and Technology work very closely with Willis Re, customizing some of their products for them. We're seeing a lot of developments across the organization on that, and I think that's what feels very good. If you ask about a disappointment, I would say the single biggest disappointment we saw was in 2016. We created four global lines of business, four global segments in the new company. The largest was Human Capital and Benefits, and that's about 42% of the firm. It had consulting on retirement. Towers Watson, we were the world's largest consultant to large corporations on their global pension plans.
It had the healthcare consulting we do and the administration of some of these plans, our exec comp, et cetera. We combined that with the Willis had a lot of healthcare, had almost $1 billion worth of healthcare and retirement brokerage business. We put them together in one segment. We had Corporate Risk and Broking came over entirely untouched from Willis. That's the second largest segment, about 35%. We had two larger segments, one which was an amalgam of a number of different things from each of the two firms, Investment, Risk and Reinsurance, and finally, the healthcare exchanges. I thought the Corporate Risk and Broking and the healthcare exchanges, because they came over intact, would have the fewest merger issues. It turned out that what we did was we made new organization for Corporate Risk and Broking.
We introduced a matrix environment, particularly in North America, made it so complex that the biggest stumbling block we had was Corporate Risk and Broking right out in 2016. That was a disappointment because I regarded it as a self-inflicted wound.
Although that business, I guess you brought in, was it Todd Jones, too?
I brought Todd Jones in. I decided to change leaders in October of 2016. Todd Jones, who had been with Willis for a long while, was a broker himself. That business, interestingly enough, hadn't had a broker who was its leader for a while. We brought him in, and Todd streamlined the organization, changed it around. We went from negative growth in the fourth quarter of 2016 to positive, in North America, where the biggest issue is, to flat in the first half, and then market leading at the end of 2017.
Yeah, that was another question I had. That was a pretty notable improvement. I guess it's fair to say you have fully addressed the structural issues that you brought in Todd to essentially solve?
I think that's right. I think we addressed the major structural issues. I think one of the things we think at the firm, we're very proud of some of the progress we've made in the two years in terms of what we've been able to deliver, and we're delivering on pretty much everything we promised to the shareholders. One of the things that we also are is not satisfied. We see a lot of improvement opportunities in a lot of the different areas of the organization.
I guess the other benefit of the merger, which you talked about initially, which came to pass, was the tax rate, the tax savings and putting them together. Tax rate potentially could go up a little bit. I'm assuming that doesn't change how you look at the business or how you price business at all. Is it too small a change?
It's too small a change. I think what happened is, of course, having been with Towers Watson for all those years, I was used to working in an environment where you had a 35%, 36% effective tax rate. Down in the low 20s now is an environment which gives us more money to invest in our people, tools, and products.
The cost savings also came through. The revenue synergies, there were parts of the firm where you seemed to hit it or even exceed it. There were other parts where you missed, all in probably pretty close. Where you missed it, was there a reason that fell short? Could it have been prevented?
Yeah. Probably most things could have been prevented with perfect hindsight. Let me just say, we had three merger synergies that we identified. One was a Global Benefits solution, which I referenced earlier, and we thought we could sell about $75 million of those by the end of 2018. I think we pretty much got there by the end of 2017, or we're pretty close. We'll be well over the $75 million we'd projected there. The other was the mid-market exchanges, the healthcare exchanges in the U.S. The very first year, we had a bang-up year and enrolled about 70,000 people in the mid-market exchanges. This last year, with a lot of the discussion about potentially cutting back Obamacare in the U.S., et cetera, that's had a bit of a chilling effect on the exchange market.
Even though the private exchanges and the public exchanges are different things, I think people were just sort of on the sidelines with a wait and see attitude. We still like the exchange market a lot going forward. We think that we actually still publish our results in the exchanges. A lot of our competitors have decided not to. We feel pretty good about our leadership position there. We think that's a long-run positive for us. The lower end of our estimate, that was about $100 million. We'll be right around the $100 million. We could be a little below. I'm assuming that 2018 will be a year that looks a little bit more like 2016 than it did this last year. Finally, the large company P&C.
We said we thought we could use some of Towers Watson's contacts in the large company P&C market to sell Willis' services there. We had set a target of about $200 million by the end of 2018. Our best guess now is we'll come in about $150 million. Not because we're not selling enough clients, although it's a little bit that. We don't have quite as many sales as we would've thought. We're pretty close. The average sale size is lower than we had anticipated. That's coming in a little bit lower. That's something, though, that we see continuing in 2019 and beyond. In other words, we think there's lots of opportunity to grow our large company P&C business. To put it in context, right now with the growth we've had, that brings us to about a 5% market share in the U.S.
If I look at Great Britain, where Willis has been for a lot longer, they're about 15%-18% in the large company P&C. I'd like to get well up into the double digits before I'd be happy there. At the same time, we had an additional $25 million of revenue synergies that we hadn't identified, and that came between our Insurance Consulting and Technology and our reinsurance brokerage operations.
All in, it's worked reasonably well.
All in, it is pretty close.
Looking at the fourth quarter numbers, you had really strong organic growth. Generally, when we are looking at brokers and consulting companies, when the growth is up, the margins go up, too. It did not seem that the growth was matched by margin improvement. What held back the margins, and I hate to look at one quarter, but it is the most recent quarter?
It is a fair enough comment. I would say this, that if you look at 2016 versus 2017, I think our margins went up from something like 22.3% to 23.2%, 23.3% for the year. We had a pretty good margin improvement over the year. We did invest somewhat more heavily in a couple of areas than we had originally anticipated. We invested a lot in analytics and tools for Human Capital and Benefits. A lot of that was related to this Global Benefits solution I talked about. Our most significant investment was in underwriting and capital management around technology for brokerage of the future. We also invested in The Asset Management Exchange.
We rolled out The Asset Management Exchange in February of 2017 in the U.K. We have about, I think it is about $5 billion in that at the end of the year. We are going to be rolling that out in the U.S. later this year probably. Also, we took a small restructuring hit in Human Capital and Benefits that we think will improve things for 2018. All told, if we had not done some of these unusual things, we would have been about 23.5%. If we look at it from 22.3%-23.5%, and then the sort of add on there, we are targeting 25% for 2018.
Got it. On the benefits side, what do you see as the biggest growth opportunities?
We're involved in healthcare in many different ways around the world. We have the private Exchange Solutions, those service both the retirees, where the retirees can call in and we offer, particularly for Medicare, it's a very seamless type of thing. We offer all the usual Medicare supplement plans, et cetera. We have over 100 carriers that we're affiliated with, so we have at least five carriers in every ZIP code in the U.S., and we can give them a choice of any of the plans they want to pick. In the active exchanges, again, we're the leader, we think, in that market, that's where we'll work with corporations to take their regular health plans and offer bronze, silver, gold, and then let the employee pick not just what type of plan they have, but also which carrier network they go to.
Giving the employee the choice of carrier network is really very important in some cases. We're involved there. We think healthcare is a field that's going to we have a several hundred million dollar healthcare consulting operation. We expect to see a lot of developments. I think when you see players like Amazon and Warren Buffett and the others getting involved in some of these new initiatives, we love the fact that healthcare is such a dynamic market. That's one that we see, yes.
Obviously, you're a big player in the U.K. Brexit. I assume you follow the developments there very closely. Are you disappointed or encouraged by the stuff you're hearing out of the U.K.'s politicians?
I think I would say that generally, I'm a bit of an Anglophile, and so I tend to think that the U.K. will get it right in the end. Maybe as Churchill says, after they've tried everything else. I think you can drive yourself crazy following the daily or weekly machinations of what's going on there. I do tend to be optimistic, though. I'm hopeful the politicians will get it right. I do think it's interesting because when we talk about that among ourselves, Brexit may or may not be good for the U.K., I don't know. Actually, we're relatively insulated as a company for it because one of the things we haven't talked a lot about, but as we did the merger with Towers Watson and Willis, we also merged in Gras Savoye, which was the largest regional broker in France.
Now we have an enormous operation in France. We're an Irish company ourselves. We have big operations in Germany. We are relatively prepared, I think, no matter what happens with Brexit.
A lot of confusing noise, either way, you guys should be okay.
I think we're prepared for whatever happens there.
I just wanted to ask about the reinsurance broking business. Your two biggest competitors seem to be growing there. You're really not.
Yeah.
This is tough. Each quarter, it's a lumpy business. I kind of get that. Do you see any underlying issues that you're losing share to them?
I don't think so. Although it's difficult to make comparisons. What happens is in Willis traditionally, and still in Willis Towers Watson, our reinsurance operation, Willis Re, is a treaty reinsurance operation, and we have our facultative in the Corporate Risk and Broking in CRB. What has happened over the years is that we've seen a number of people elect not to buy treaty reinsurance and instead to buy facultative in a rifle shot type of environment, or as they cut back on some of those, they switch to that instead. Our facultative has been growing relatively fast. If we combine the two of them, we look more like our competitors then. It is something that's hard to pick up. Well, it's impossible to pick up from the public statement.
The treaty, again, you lose one treaty, and it's going to cause a major change.
Exactly.
You gain one treaty.
It goes like that.
Yeah. Any questions from the audience? Yeah. Could you talk a little bit more about your operations in France and Germany, what you're doing in there and what the prospects are?
Sure. I think France, with the Gras Savoye operation, we acquired a very large regional broker. Gras Savoye was based in France, not just strong in Paris, which is where most people are, but also throughout all the French regions. They also had operations throughout Francophone Africa and Asia. That was, I can't remember how many countries, but it was north of 40 or 50, I think, that Gras Savoye was in. In any event, the biggest part of the operation was in France, and so we love the positioning we have there. I do think this notion of being very strong in all the regions of France, there's nothing quite else like that there. We paired that with a Towers Watson consulting operation that was a relatively smaller consulting operation in Western Europe. A big one, but not as big as some of the others.
In Germany, it's a little bit of the opposite. We had a bigger consulting operation in Germany in the Towers Watson operation, then paired that with a Willis broking operation that wasn't quite as big as the French one. In both cases, though, we love the prospects of what's going on in continental Europe. We're excited about our growth. We had talked earlier about margins. I think throughout continental Europe, we see opportunity for margin improvement.
I want to just touch on inflation, something obviously the equity market has been concerned about. I guess the CPI data was a little bit elevated this morning. How does this affect your business?
Yeah. I think at the levels we're talking about, we don't see a lot. We don't expect to see a lot of impact on us. Now, if I think about the basic brokerage or the basic consulting businesses, a small amount of inflation is probably not going to have much of an impact on that. Indeed, the economy, sometimes, particularly in Talent and Rewards in a low inflationary environment, low to medium inflation environment is where we actually do fairly well. There's a lot of opportunity for consulting around people and people movement. I think in some of those inflationary things, you might see a little more people switching jobs a little bit, and that would help us overall. It won't have much of an impact there.
From the business itself, if rates go up, in equilibrium, we pay more for our debt. We gain on the float. Actually, we think those gains will offset any debt increases.
I would think on the insurance broking business, if inflation results in higher claims severity, that's good for you.
It's good for us if the premiums go up. The kind of things we're talking about now are a quarter % here, a quarter % there.
True. It's more in the future if it does continue to heat up.
Yeah.
Let me just end with, I started with a bigger picture, I'll end with a bigger picture. If I ask you three most, let's call it significant growth opportunities broadly for your company in 2018 and 2019?
I think within the healthcare exchanges, one of the big and growing businesses is the administration of the accounts, whether it's the Health Savings Accounts, the retiree health accounts, et cetera. We acquired a company called Acclaris a few years ago, and they had a white label business. We're now pretty much out of that white label business, and we're using that capability to move the retirees on our exchange network and on our other administration onto our own services. We think that's a big growth area for the future. We're going to move some of the existing ones on, but we also think that's a big growth area for the future there. I think in the brokerage world, cyber insurance is something that we're very excited about. This is very early stages of the development of this market.
There's an opportunity for us at Willis Towers Watson to play a role in developing what kinds of data we need, what kinds of coverages insurers are going to write, and help shape that for the future. Finally, I would reference the broader healthcare market. We think, as we said, healthcare is a very dynamic market. We expect to see a lot of growth there.
Great. Any last-minute questions? All right. John, thank you so much for stopping by.
Thank you.
Excellent.