Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and issue-level ratings for Willis Towers Watson plc (WTW) and related entities at 'BBB'.

Fitch has also affirmed issue-level ratings for senior unsecured notes issued by its subsidiaries, Trinity Acquisition plc and Willis North America Inc.

The Rating Outlook remains Positive to reflect improved organic trends, some operating profitability improvement in 3Q23 and EBITDA leverage that could position the rating higher over time. However, Fitch would look for evidence of sustained improvements in EBITDA margins and FCF in the coming years to position the issuer for a higher rating.

The IDR and security ratings impact approximately $5.2 billion of debt outstanding as of September 2023, not including the company's $1.5 billion senior unsecured revolving credit facility. Fitch believes WTW will be focused in the coming years on improving its operating profitability and maintaining a balanced approach to capital allocation. Pricing and industry trends remain reasonably favorable, which should continue to benefit WTW along with its peers in insurance brokerage, although macro uncertainty and rising rates present some risks.

WTW's ratings reflect the company's position as one of the global leaders in the insurance brokerage and HR consulting industries, stable financial leverage, good financial flexibility with a strong cash generation profile, and historically stable profits and margins.

Key Rating Drivers

Organic Trends: WTW's organic growth remains positive despite execution challenges in recent years, with organic revenue having accelerated to the 7%-9% range YTD 2023 from low/mid-single digit in 2022. Management appears to have moved past client retention issues witnessed in 2021 following its terminated merger with Aon plc (BBB+/Stable) and could see organic revenues increase by mid-single-digits percentage in 2024-2025. The improved organic trends is encouraging, but Fitch would look for further evidence of this improvement being sustained over a longer timeframe prior to an upgrade, given WTW's organic growth trends historically were below those of its large peers.

Margins Lower than Peers: Fitch would look for more evidence of sustained margin improvement from the company, given its 2023 downward revision of its margins and medium-term FCF guide. WTW historically had lower EBITDA and FCF margins than some of its larger peers and lowered its medium-term FCF guide earlier this year. Its EBITDA is in the mid-20% range, or below certain peers that generate high-20% to mid-30%.

FCF margins were in the low- to high-single digit percentage range over much of the past cycle (higher in 2021 due to a one-time merger termination payment that benefited cash flow) versus some peers that operate more regularly in excess of 10%. Management has implemented cost reduction initiatives to improve its profitability and is targeting $380 million of run-rate cost savings, or 400-500 basis points of margin improvement from 2020-2024.

Strong Market Position: Fitch views WTW's market position as a global leader in many of its end markets as a credit positive. The company has diverse operations in HR and employee benefits consulting, insurance brokerage and benefits administration. WTW is one of the four largest insurance brokers globally, which provides it a unique value proposition for its large, multi-national clients. Its strong market share enables the company to compete for business on a global basis and helps its customers navigate global employee and insurance-related issues.

Stable Business Model: WTW operates a fairly predictable business in an industry that performs well throughout the economic cycle. Parts of its business include project-based and consulting work that is more cyclical, but this is balanced against more stable insurance operations. WTW grew revenue organically each year since 2007, including through the 2008 recession (exceeding certain of its large peers that reported low single-digit declines at the time) and during the pandemic. Revenue and earnings are well diversified by customers, although there is some geographic concentration, with the U.S. and UK comprising 54% and 18% of 2022 revenue, respectively. The company is also meaningfully diversified by types of services offered.

Financial Flexibility: Fitch views WTW's financial flexibility favorably, although notes its FCF generation has been more volatile than certain of its peers. The company generated $256 million of post dividend FCF in 2022 and $1.1 billion to $1.4 billion in 2020-2021. Its 2023 FCF generation is on track to grow yoy but is still being heavily impacted by cash expenses related to cost savings initiatives. FCF in the next few years is projected to be meaningfully above the approximate $150 million to $260 million range generated each year from 2009-2014, or prior to the 2016 merger between Willis Group Holdings plc and Towers Watson & Co.

WTW's disciplined capital management strategy provides ample ability to access the capital markets, reinvest in the business and capitalize on growth opportunities. WTW also has a large unrestricted cash balance of $1.2 billion at September 2023 and full capacity under its $1.5 billion revolving credit facility. The company has been actively repurchasing its common shares, and Fitch believes buybacks will be a key use of FCF in the coming years.

Stable Financial Leverage: WTW's EBITDA leverage is relatively low for the rating category and expects management could continue to operate in the low- to mid-2.0x range in the next few years, although share repurchases and M&A could be factors that increase leverage beyond the upper-end of this range. EBITDA leverage was relatively stable historically and in the 2.0x-3.0x range for much of the past cycle since 2009 (low-2.0x as of September 2023). The company does not have a stated leverage target but indicated it is committed to maintaining its investment grade ratings.

Derivation Summary

WTW's ratings reflect the company's strong competitive position as one of the global leaders in insurance brokerage and HR and employee benefits consulting, moderate financial leverage, good financial flexibility with a strong cashflow generation profile, and historically strong profits and margins. WTW is smaller and moderately less diversified than higher-rated industry peers Aon plc (BBB+/Stable) and Marsh & McLennan Companies, Inc. (A-/Stable). The company is similar size and has relatively similar leverage to Arthur J. Gallagher & Co. (AJG; BBB+/Stable), but AJG operates with higher margins, higher FCF (margins and absolute dollar) and a more sustained historic track record of executing both organically and with M&A.

WTW is among the four largest North American insurance brokers. It operates with lower EBITDA and FCF margins versus its larger peers, which is a point of differentiation with respect to Fitch's IDR. EBITDA leverage in recent years in the 2.0x to 3.0x range (low-2.0x currently) is relatively close to peers and manageable for the rating category. It has underperformed peers, however, both in organic revenue trends and profitability (margins). Fitch believes the company's strong share position, solid margins and cash flows, and moderate leverage position the rating well at the 'BBB' rating category relative to Fitch-rated peers in the insurance brokerage and business services industries.

Key Assumptions

Organic growth remains in the mid-single digit percentage range in the next few years;

EBITDA margins expand toward the high-20% range through 2026, driven by operating leverage on higher revenue and cost savings initiatives;

Capex remains near 3% of revenue over the ratings horizon;

Capital allocation priorities remain skewed toward shareholder returns via a combination of dividends and share repurchases in the coming years. Fitch does not forecast incremental M&A, although the company has acknowledged it is opened to inorganic growth.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Material and sustained improvements to operating fundamentals, including revenue growth or EBITDA/FCF margins;

EBITDA margins sustained in the high-20% or higher range and/or FCF margins sustained at 10% or higher;

EBITDA leverage, defined as debt/EBITDA, sustained below 2.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA leverage sustained above 3.0x for a sustained period with a credible de-leveraging plan;

A material change in strategy and/or deterioration of financial profile or operating performance.

Liquidity and Debt Structure

Strong Liquidity: WTW is well positioned from a liquidity perspective, with a sizeable cash balance, historically strong cash flow generation and access to cash on its revolver. The company had approximately $1.2 billion of non-restricted cash at September 2023. It generated solid post-dividend FCF that ranged $157 million to nearly $1.5 billion from 2016-2022. It also has full capacity available under its $1.5 billion senior unsecured revolving credit facility.

Debt Profile: WTW's financial flexibility is supported by strong banking relationships, committed bank lines, and access to a range of debt and equity markets in the U.S. and U.K. The company has a well-laddered debt maturity schedule, consisting mostly of senior unsecured notes with maturities ranging from 2024-2049 issued under two financing subsidiaries - Willis North America Inc. and Trinity Acquisition plc. It also has a $1.5 billion senior unsecured revolving credit facility in place, with full capacity as of June 2023. WTW's track record of accessing the capital markets through debt and equity issuances suggests the capital markets will continue to be a source of future capital.

Issuer Profile

WTW is one of the world's largest insurance brokerage and HR consulting firms, with 2022 revenue and EBITDA of $8.8 billion and $2.1 billion, respectively. The company functions as an insurance middleman and does not underwrite insurable risks, with the majority of its revenue derived from either commissions or fees for brokerage or consulting services.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2023 Electronic News Publishing, source ENP Newswire