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Morningstar | Willis Towers Watson Delivers Strong 4Q, Concludes Merger Integration Program

Willis Towers Watson’s fourth-quarter results were solid and in line with what we’ve seen from peers. Excluding currency impacts, acquisitions, and an accounting change, revenue was up 6% year over year, a bit higher than our expectation of normalized growth for the company. The quarter was notable for the conclusion of the company’s integration program, which in our view has been executed successfully. We will maintain our $155 fair value estimate and narrow moat rating.

On the brokerage side, Willis Towers Watson saw solid growth, with the corporate risk and broking segment up 5% year over year on an organic basis and the investment, risk and reinsurance segment up 8%. We think this side of the business continues to see a slight uplift from improving insurance pricing, and another relatively large dose of catastrophe losses this year could help maintain this trend in 2019.

The consulting side also delivered good growth, with the human capital and benefits and benefits delivery and administration segments up 4% and 8%, respectively. We continue to believe the benefits delivery and administration segment has the strongest long-term growth prospects on the consulting side, but at only 10% of overall revenue, its impact will be limited, with the mature human capital and benefits segment continuing to be a bit of a drag.

Excluding the accounting change and one-time items, EBITDA margins in the quarter improved to 24.5% from 23.3% last year. We are encouraged to see the company execute on the cost synergies that management identified as part of the merger of the two firms, and we would note that the company materially exceeded its initial targets. However, with the integration program now completed, we expect any further margin improvement to be much more modest.

While the quarter was strong, the company did issue relatively modest guidance for 2019. However, in our view, any shortfall from expectations is largely due to currency headwinds and a modestly higher tax rate, issue that don’t have a material impact on our long-term view.