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Morningstar | Willis Towers Watson Is Following Its Peers' Successful Model

In January 2016, Towers Watson and Willis merged, creating a diversified brokerage and consulting firm with a mix similar to peers Aon and Marsh & McLennan. While it’s still significantly smaller than these industry leaders, their track record in pursuing this strategy suggests a favorable future. Over the long run, we think Willis Towers Watson can achieve moderate but stable growth and attractive profitability levels, although its size and management’s historical record create the potential for more transformational deals down the road.We believe there were sufficient strategic benefits to justify the combination, and integration process has gone reasonably well. Domestically, the combination could open doors for brokerage operations to move upmarket. Outside the U.S., the company’s global footprint expanded by 80 countries, and its consulting operations have opportunities to exploit the global footprint of the brokerage operations. That said, we think expectations should be somewhat tempered, and the ability to cross-sell services may be limited by the fact that, within client organizations, it is rarely the same decision-maker deciding on the provider for Willis Towers Watson’s various services. Notably, its larger peers don't attribute much value to the ability to cross-sell. However, the company also identified $100 million-$125 million in cost synergies (a little over 1% of combined revenue), and successfully realized, and even exceeded, those targets by the end of 2018.In 2018, Willis Towers Watson saw a modest headwind turn into a tailwind. As brokers generally take a percentage of premium amounts as commission, they are exposed to the direction of the insurance pricing cycle. Reinsurance pricing had been very weak in recent years, and primary pricing had started to follow suit. However, the outsize level of catastrophe losses in the back half of 2017 provided a prompt to industry pricing. Prices moved up modestly, but in our view, the industry remains well capitalized and competitive, which put a bit of a lid on price increases. Given a further spate of catastrophe losses in 2018, this trend could persist into 2019.