We'll get started with our next presenter now. First-time presenter at this conference. First time this company has existed at this time of the year. Willis Towers Watson is the next company. I'm very pleased to introduce John Haley. He is CEO of the company. John has led one of the largest business combinations of the past several years with the Towers Watson merger with Willis. He had joined the predecessor company 40 years ago, so he has tremendous experience in this business, and actually was involved with three really transformational mergers before this one. John has clearly put his imprint on this company, and it's a company that we see today. It's been just over a year since the merger between Willis Towers Watson or Willis and Towers Watson.
Maybe I'll start with this, kind of a big picture question of how you saw, in retrospect, 2016 and top two or three priorities for 2017, and then we'll dive in further on different subjects.
Sure. Thanks, Jay. I think when we were putting the merger together between Willis and between Towers Watson, one of the things we were looking for was we were, both Willis and Towers Watson, in their own separate ways, were moving towards sort of a convergence on a position of providing both advisory as well as broking and solutions. I know from the Towers Watson side, where I came from, I had found that our clients, when we were working on consulting projects, were increasingly looking for us to provide tools or products as part of that, and decided that we as an organization need to get better at doing that.
As part of that strategy we put in place, we've done some things to work on the infrastructure we had for innovation. We also decided we needed to develop a bigger presence in the mid-market, because when you're going to sell tools, you need to be selling to the middle market, and we were just a large market organization. Willis had been moving from the brokerage and solution space to an advisory space. We wanted to put these two organizations together because we thought there was some convergence, and we laid out a lot of the synergies that we thought would come from that when we did the deal. I think as we looked at it, we were acutely conscious of this as being a merger, which is unlike most of them. Most mergers are scale mergers, where you just get bigger at what you do.
For example, when we created Towers Watson, it's between Towers Perrin and Watson Wyatt, two companies that were in the same space, all in exactly the same countries, did the same thing, we just got bigger. This is a scope merger, there's very little overlap between them. What you're bringing together is different capabilities and offering a wider array to clients. This is the intro to the answer to your question, which is to say.
Can I just follow up on that?
Yeah, sure.
That's a very interesting perspective. Now you've done both of them, maybe this isn't a fair question, which merger is harder to do, the scale or the scope? I know they're different.
They're different.
Is one harder?
They each have their own challenges, and they each have some things that make them a little bit easier, I guess, too. In a scale merger, one of the things that happens is you know the business intimately, and the business leaders all know the business intimately because you're coming from the same side. One of the things that happens in a scale merger, though, that's interesting is with the colleagues that you have in each of the companies, they tend to be a little more nervous about what happens in a scale merger because the people that they've been competing with are now part of the same company. They don't know which one is going to be in charge.
When you have client teams, they might have both have been working for the same client from different companies to begin with, and now there's a little confusion as to what the roles are going to be. In a scope merger by contrast, whoever's on the management team, there's probably half of the business that they don't know about, that's somewhat unfamiliar to them. That makes that a little more challenging. It takes a little more time to do that. On the other hand, one of the things we saw with Willis Towers Watson was there wasn't the same concern about working together with colleagues. We saw people spontaneously reaching across to the other side almost as soon as we consummated the merger. They're both very different.
I think the other thing I'd say about a scale merger is when you do that, the cultures are fairly similar probably to begin with, and you're accommodating perhaps more diverse cultures when you're doing a scope merger.
Got it. As you look at 2017, key priorities for you.
Yeah. When I look at that, I think what we wanted to do was to bring together these two organizations and have them working together. I think I had talked to our investors at the end of 2015 when we were getting ready to do the deal, and we were seeking the approval, and I had told them that I thought that if there was a one-year horizon was what they were investing in, that we were probably not the stock for them because I expected with a scope merger that it would be a little bumpy. Indeed, 2016 was bumpy. Not that I anticipated exactly what the bumps would be, just I thought there would be some out there. I also told them that I thought if they were looking out over three years, that we could do pretty well for them.
I still feel that way. We're now past 2016. I think there are a few things we said. We put out some aggressive targets for 2018 to deliver on. There were four things that we thought would get us to our results. One of them was getting our tax rate down. I think we're way ahead of schedule on the tax rate. I think that's pretty much a done deal. We said we would repurchase a certain amount of shares. I think we're well on the way to doing that. We said we would improve our margins, and I think we've seen some margin improvement, some modest margin improvement come in in 2016, and I think we'll see that accelerate through 2017 and into 2018. I feel reasonably good about that.
One of the reasons 2016 was a disappointment for me was that we did not grow in our Corporate Risk and Broking area. I think that's what we need to turn around for 2017 and 2018.
Well, you mentioned in a scope merger, you don't necessarily know the other business as well. You don't know it intimately, as you said.
Right.
Was that part of the issue for you that you got this new business, you were relying on other people to run it? How much of an issue was that?
I think there was an effect from that. What happens is when you By the way, it's not quite 40 years, it's not till April.
I think it's almost
When you've been in a business for a long time, I think you know intimately how things work and what the effects are at the front line and what the troops are feeling. When you come into a new business, you do rely more on other people like that then. I think one of the things that I've worked on in 2016 is to build exactly the right team at the operating committee level.
Building the right team is not necessarily about the, it's about the chemistry among them, the chemistry with you, making sure you get people that know the kind of things that are going to be able to advance what you want. We've made some changes to the operating committee level during the course of this year, and I feel very good about the team we have there now.
Got it. You did talk about recently the cost savings being at the higher end of the initial range. What drove that? What added cost savings were you able to find to reach that level or expect to reach that level?
I think when we did the cost savings for Towers Watson, let me go back to that, we had suggested we could find cost savings of $80 million. At the end of the three years, we actually had $130 million that we got, those dropped to the bottom line. We had a pretty good over-performance there. I think generally, when we do these things, when we give the numbers, we tend to look at the things that we can identify for sure, there's likely to be some upside. When we did this merger, we identified between $100 million-$125 million of cost savings. What happens is, because we identified the range, we're probably not going to go much above the upside because instead of just saying $100 million, we said $100-$125.
The fact that we're coming out at about $125 million isn't necessarily a surprise because we had identified something that would easily get us to $100 million. I think we're within this range, in all the mergers we've done, we've had a very good track record of delivering on cost synergy. I think that was something we felt good about from the beginning.
It wasn't like you found something brand new.
No.
It was kind of within the plan, you were able to execute. You think you'll be able to execute and achieve it.
Exactly.
Got it. You did announce, I guess, a restructuring in the second half of the year in your Human Capital and Benefits segment. What was the rationale for that?
Sure. This restructuring is almost exclusively to do with the part that came over from Towers Watson. The Human Capital and Benefits, which is the single largest segment we have, is 42% of the company, and it includes the retirement consulting, the healthcare consulting, and the talent and rewards consulting that came over from Towers Watson. It also includes almost $1 billion of revenue that came over from Willis that was healthcare brokerage and retirement brokerage work that we did there, too. What we were focused on is that particularly in retirement, we thought that we could do some things to help our leverage model and make it even more profitable than it is. Retirement is a relatively slow-growing business, and it has been slow-growing for a while, and we've consistently been improving the way we can do things by both automation and some outsourcing.
This was an opportunity for us to take advantage of that in the leverage model. The restructuring we did was something where it was a voluntary program for people to leave. We got the folks, I think almost everybody came through the voluntary route of having done that. We eliminated 450 positions, and 325 of them were in retirement.
How many people work in retirement? What kind of percentage is that?
Oh, gosh.
Roughly.
I don't know. Let's see. Retirement is probably about just under 20% of the business by revenue, and that's probably a reasonable estimate.
A decent amount of people.
A decent amount of people, yeah.
Okay.
Yeah, probably 5,000 or 6,000 people in total in retirement.
I guess one of the concerns people have is you have this restructuring. On top of that, you've got the Operational Improvement Program for legacy Willis. You've got the merger between the companies, some acquisitions that Willis had made, Gras Savoye New management in some places, like the corporate benefits and broking business, it seems like there is a lot going on at this company.
Yes.
Arguably, it can be distracting. How do you respond to someone who says there's too much going on at this company now?
I think there is a lot going on, and frankly, I think that was probably one of the things that contributed to some of the bumpiness we had in 2016, is that we had a lot of balls in the air. I am not sure we have too much going on. I think there is a number of things we have to work on. When you look at it, though, a lot of these things can be classified into some similar types of initiatives. Whether it is the cost restructuring or whether it is the OIP or some things like that, there is a whole issue around margin improvement, and margin improvement is something we have to do. There is an issue around our revenue growth. We have to get the revenue growth.
There is frankly two or three different things, and it is only when you get to the lower level that you start multiplying a lot more of them. I think there is always a bit of a culture shock when you bring two companies together, and we talked about the issue of learning about the different parts of the business. I see that part as being mostly behind us now.
What was the biggest positive surprise you had as you got to know the old Willis business and the Corporate Risk and Broking business?
There was something that I sort of thought was the case, to have it confirmed was certainly gratifying. When you go out and you meet the folks in Willis who were the brokers, and you see how they interact, these are folks who are bright folks who are very much focused on the client and delivering a good client experience. It is built into the DNA in the same way that I saw that with the Towers Watson folks. I think one of the things that has been a unifying theme between the two companies in bringing them together is this notion of clients first and the notion of how we work with them. It is working with clients in a way where you roll up the sleeves and work with them as partners.
I think it resonates across the organization to see how that works.
Let me just open it up for audience questions. Any? We got one right down front, if you don't mind.
Can I just ask a very big-picture question about what you're seeing or what you expect in terms of insurance pricing and what other sort of broad industry trends are you monitoring right now?
I think on pricing, I would say we see a bit of a slowdown of the slowdown, it's not clear we see a necessary improvement in pricing or even a flattening of that. I think there are some of our folks that, particularly in the reinsurance, are hopeful that maybe with pricing where it is, people will buy more reinsurance. Overall, I think we see pricing as a modest headwind that we'll be facing over the next year or so.
Any other broad industry trends that you're looking at?
No, I don't think there are any other broad industry trends that we're monitoring there. I think one of the things we're interested in, of course, is it's not just the pricing on the existing products you have, but there are issues around expanding your market into new products like cyber, and we're obviously interested in that kind of development.
Any other questions? Let's just hit on the tax issue. This comes up almost every session these days given the potential changes. I know it's early, we don't have specific proposals yet, but your tax structure is obviously somewhat unique relative to most of the companies that we cover. I'm sure you've thought about the potential outcomes. What are those? As you think about what could happen, what could be good, what could be bad? What are you concerned about? What are you excited about? Just specifically from a tax standpoint.
Yeah. Taxes are one of these things where, in fact, the details matter immensely. We are an Irish-domiciled company, so we obviously have taxes for our U.S. operations that we have to pay, but it's the U.S. operations taxes that would be affected by any change to tax reform or anything like that. If the rate goes to, say, 20% and things happen that affect us particularly, like a loss of interest deduction, things that adversely affect the way our royalty payments work and everything, in the worst case, I think we could see our tax rate go up by a couple of percent or so. If the rate goes to 15% and those things happen, it's obviously a lot less of an impact and maybe even favorable.
If the rates go down, but instead of losing interest deduction, but you get only a limit on the interest, it's an entirely different story. I think the answer is, under the worst case, we could see it going up a couple of points, but it's not anything that gives us heartburn one way or another.
Yeah, it doesn't sound like even if it was a good scenario, you would benefit by more than a couple points either.
Exactly. It's not anything that is going to be the biggest deal in the world.
Your ability to reduce the tax rate after you did the merger.
Yeah
Was predicated on what actions did you specifically take to do that?
Well,
The intra-company debt mostly?
Intra-company debt was really the biggest part of that. I know some folks have asked us why we couldn't target a lower tax rate, but I think we as a company tend to be reasonably conservative. We don't want to be walking up to the edge in terms of what we're doing on taxes. We like to be comfortably within the mainstream.
You're obviously a truly global business, given the talk around potential changes in trade, it obviously must attract your attention. Are there any things you're hearing out of Washington that you find concerning?
I think, one of the things that we didn't touch on in the taxes, of course, is the border-adjusted tax. I happen to personally think that's a very bad idea, it's not anything that we think has a big impact on us. Although, to tell you the truth, if I talk to four different tax people about how the border-adjusted taxes affects professional service firms, I get eight different answers. I don't think anybody really knows about that yet. I am somebody who believes very strongly in free trade, when I hear things that could potentially restrict free trade, that bothers me and concerns me. It doesn't necessarily bother me as much from a Willis Towers Watson perspective, as much as from a global business perspective.
Are you engaging in any lobbying efforts at this point?
No, we're not a company that goes in for a lot of lobbying. I think if there are things that are very central to us and to our existence, we would certainly get involved on those, we don't tend to get involved on just general issues.
Got it. Questions from the audience. Yeah, on my right, your left over there.
Thanks. Could you talk more about the weakness in brokerage revenue in 2016 that you highlighted and what you're doing to turn that around? What metrics you're seeing that give you confidence in the improvement in revenue? Thanks.
Sure. When we brought the two firms together, we created four global business segments, and two of those were segments that came over from their legacy company pretty much intact. One of them was our exchange business in the U.S. Exchange Solutions. The other was Corporate Risk and Broking. The other two, Investment, Risk and Reinsurance and Human Capital and Benefits, were combinations of businesses from each of the legacy companies. When I was first thinking about things, I thought that Corporate Risk and Broking would be a segment that would have relatively little change. In actual fact, they probably have experienced the most change of any of the segments. The reason was this. The way Willis used to be run, it was on a geographical basis, generally, with reinsurance run as a global line of business.
When we got to the new Willis Towers Watson, and we were reporting by segments like this, in Corporate Risk and Broking, there was a whole global line of business structure put in place at the same time as we had the existing geographic structure there. I think that created an enormous amount of confusion. All of a sudden, we had all these new people in new jobs. It was unclear who was responsible for different things, and it caused a great deal of internal focus among the Corporate Risk and Broking folks, and I think it just sort of hamstrung us for having quick action. What happened is, with that internal focus, I think that's why we saw the revenue decline. In fact, if you believe that that's what happens, what would the symptoms be that you would see?
I think when people tend to focus internally, the first thing they do, to the extent they are working externally, is they take care of their existing clients, and then what cut back on is new business activity. That's precisely what we saw. Our retention, we target having retention in the low 90s. Our target retention was at 93%, exactly what we had targeted and where it's been for several years. What we suffered on was the new business, where we weren't getting enough people out for that. We put in a new leader of Corporate Risk and Broking in October, and one of the things he's done is to simplify the overall structure and to streamline that and to come out very strongly with the message to folks to be spending time externally rather than internally.
I think that kind of change is going to be quite significant, and it's really the reason I feel optimistic about what we'll do in 2017.
I know in the past when Todd was running the U.S. business, he would obviously pay attention to metrics like the pipeline, what the new business pipeline looked like. Do you have any sense of how that metric is looking now or how it's changing at this point?
I think we have a revenue that we put out for the year of low single digit growth in the Corporate Risk and Broking. When we look at the pipeline we have, it's consistent with that. I expect that what we'll see, though, is it'll be something where we'll get better each quarter throughout the year in terms of that.
I assume Given that improvement over the year from a revenue standpoint, the margin improvement, should that be similar? In other words, the more improvement in the second half of the year?
Yeah, a little bit. In fact, the biggest driver of the margin improvement that we expect is not, for example, the operating leverage, because if you grow at 3% and your expenses are up at two, it's a little bit of. We have this Operational Improvement Program, and it's taking those savings and having them drop to the bottom line that is the largest driver of margin improvement.
Got it. On the exchange business, you do have a likely change in the healthcare system in the U.S. with the repeal of the ACA. In what ways, and we don't know exactly what it's going to look like, that's the problem, can you envision a way where a new healthcare system can impact negatively the exchange business? Is it just totally removed?
No. The reason I say, we have very little contact with the public exchanges in our business. We run private healthcare exchanges. What does that mean? We run things for retirees, particularly companies that have a retiree population out there that is covered by a retiree medical plan eligible for Medicare. The company, instead of providing this under their own plan, gives them a stipend. We find companies can save 15%-20% of the cost by going with us to do this. It's a very good benefit for the companies themselves. We are connected to over 100 insurance companies. These are all individual policies these retirees are buying. We cover, we have at least five in every ZIP code in the U.S. We're connecting them with them, there's nothing to do with any of the public exchanges.
These are all like they're buying Medicare Advantage or Part D coverage or whatever. For the people who are not yet eligible for Medicare, those are instances where we might have to access the public exchanges to connect them with that. It's actually a business that we're not particularly fond of doing. We only do it sometimes to accommodate clients. Then in the active employee world, basically, this is just a regular health group plan that's done under an exchange. The only time we run into the public exchanges even there is when there's some clients that maybe don't cover people for healthcare because they're relatively lower paid or part-timers or something, and they sometimes ask us to connect them to the public exchanges.
Frankly, if they went away and clients couldn't force us to deal with that, it wouldn't be the worst thing in the world from my perspective.
Separately, the Liazon business, that was an acquisition you made two and a half years ago, maybe three now?
Yeah, 2013, November of 2013.
Boy, time flies. Give us a, not a postmortem, but give us your view of how that has gone since you've done that deal.
Yeah. I think, Liazon was a deal to get us into the being better able to service the mid and small case market. In some ways, doing the Liazon deal set us up where the Willis deal made a lot more sense because Willis was giving us access to a lot of the middle market in the U.S., which as Towers Watson, we didn't have. That's the fastest-growing part of the exchanges. When I look at things now, the retiree market, Towers Watson has dominated the retiree market, and now Willis Towers Watson, I think of all the really big cases that have gone on to an exchange, we have all but one. We're clearly the leader there.
In the active exchanges, which ultimately will be, it's the smaller part of the business now, it contributes less to growth, but ultimately will probably be the biggest part. Because of the work we did with Liazon and because of the way we've been able to be successful in the big case market, we just had our most successful year ever in terms of selling, and we've already signed up. To get one or two big clients a year is usually quite a coup. We have five that have signed up for 2018 already. We're very excited about our prospects in that market, and I think Liazon's been a part of that.
Great. Last question. Right here. Why don't you just yell it out and we'll repeat the question.
Can you please give us your capital, again, what happened related to the integration, significant profits going forward, [inaudible] .
Yeah. What happened is Willis had some stock options that they had issued a few years ago, and some folks exercised them, and the cash that we got from the stock options was put in, I guess, operating cash, and so it became part of free cash flow, and it shouldn't have been in there. It meant that our free cash flow was, we had recorded it at $745 million, but it was actually $702. We discovered this, and we did our earnings call, I guess, last Thursday. There was a question of, well, it's not even that significant. Should we file anything? I'm actually a believer that if it's anywhere questionable, you should get it out. We decided to file something and put it out there.
I think it's really unfortunate from my perspective because whether it was $702 or $745, it was a pretty good number, and I think people liked it. It was an unusual aspect. One of the things that we do right now is we close the Willis books, we close the Towers Watson, and we add them together. Starting in 2018, we're going to have a brand new integrated finance system. I don't think there will be any scope for doing things like this. This still shouldn't have occurred, and I'm embarrassed by it, but I don't think it was a big deal.
Good stuff. Let's wrap it up here. John, thank you very much.
Jay, thanks a lot.
Great. Thank you.