Willis Towers Watson PLC Q4 FY2021 Earnings Call

Good morning. Welcome to the WTW Fourth Quarter 2021 Earnings Conference Call. Please refer to wtwco.com for the press release and supplemental information that was issued earlier today. Today's call is being recorded and will be available for the next 3 months on WTW's website. Some of the comments in today's call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of the other risk factors, investors should review the forward-looking statements section of the earnings press release issued this morning as well as other disclosures in the most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company's website. I will now turn the call over to Carl Hess, WTW's Chief Executive Officer. Please go ahead.

Good morning, everyone, and thank you for joining us for WTW's Fourth Quarter 2021 Earnings Call. Joining me today is Andrew Krasner, our Chief Financial Officer. I'm pleased to be here today for my first earnings call as WTW's CEO. I've officially been on the job for about 6 weeks, and it is truly an honor to lead this company. WTW looks very different than it did over 30 years ago when I first joined the company, and it's been an extraordinary journey, one defined by continuous innovation and change. As we move forward as an independent company, we recognize the need to grow, simplify and transform. Our recently refreshed brand and new magic stock ticker, WTW, are key signals of this new era. Our new brand evolves our identity to both reflect our rich history and also inspire our future. We may have a new brand, a new ticker and a new leadership team to set us on a bolder path, but certain things will never change: our client focus, teamwork, integrity, respect and excellence. These are our values. They are in our DNA and at the core of everything we do. WTW leadership and colleagues are excited about this bold new approach, and we hope you are, too. I'm pleased to report that we continue to see progress in our independent path forward. As we mentioned back in October, we executed on our incentive plans, which provide both short-term and long-term retention benefits, and these have been well received. We've also seen significant measurable improvements in colleague engagement. Meanwhile, the pace at which we've been attracting new talent to fuel our path forward has been truly impressive. We hired more people in the second half of 2021 than we hired during the entire year in 2020, and the elevated attrition levels we saw in 2021 are behind us. We also made some early progress in our transformation program, which Andrew will expand upon later in the call. Last but not least, we've been steadfast in applying financial discipline as illustrated by our full year margin to year-over-year margin improvement. As careful stewards of our financial assets, we plan to continue our emphasis on returning capital to shareholders through share repurchases, which we believe provide the highest return opportunity. We're encouraged by the progress we're making on our strategic initiatives. While we have hard work ahead of us in 2022, we're kicking things off with renewed energy and conviction. Our talented colleagues will strive to meet and exceed the expectations of the clients and individuals we are privileged to serve. In the current environment, our clients are striving to create continuity and clarity in an environment of ongoing disruption. Future-focused leaders acknowledge that risk has become a mainstream element of business decisions and will remain so. Today, the frequency and complexity of threats continue to increase due to factors including geopolitics, economic volatility, population health, climate change, supply chain, talent and technology. To combat threats and create opportunity, organizations must connect current and future risks; act on environmental, social and governance and sustainability commitments; and build organizational resilience. The time to act is now. WTW's unique perspective connects solutions, strengthens organizations and helps clients better prepare for and thrive in an uncertain future. For example, WTW designed the world's first parametric insurance solution for Belize's sovereign debt restructuring. This unique transaction includes targeted insurance protection to cover Belize's loan servicing obligation in the event of certain natural catastrophes such as hurricanes. Hurricanes can create large-scale devastation and disruption to economic activity, thereby halting development. The custom solution allows Belize to focus scarce financial resources on recovery rather than debt servicing and reflects WTW's commitment to using our expertise to shape and fortify resilience in the communities we serve. Before we discuss our fourth quarter results, I want to take a moment to directly address our talented and valued colleagues. We have an exciting future ahead, filled with opportunity, and I'm delighted you're here to be part of it. Thank you for your hard work and dedication, and most of all, thank you for your commitment. I'm truly appreciative of your efforts to drive our vision to be the best company in the business and achieve our full potential as One WTW. I'm proud of the company we've built, and I'm excited to be leading us through the next phase of our journey. So now let's turn to our financial results. Please note that all metrics referenced are on a continuing operations basis, except where stated otherwise. As a reminder, we substantially completed the sale of Willis Re on December 1, 2021. We recorded a gain of $2.3 billion in connection with the disposal of Willis Re. That gain is included in many of our GAAP profitability measures, which we'll point out as we move through the commentary. Overall, our results aligned with our expectations. But to be crystal clear, they do not reflect the near- and long-term potential of this company to drive organic growth and margin expansion. As mentioned earlier, our hiring levels are among the highest in recent history, and we're confident that the peak of colleague departures is behind us. For the full year, we posted 6% organic revenue growth, and our adjusted operating margin was 19.9%. While the results reflect the expected delayed impact of disruptions experienced earlier in 2021, the underlying strength of our business and our early progress on executing our strategy gives me confidence that we remain on track to deliver strong shareholder value over the longer term. Reported revenue for the fourth quarter was $2.7 billion, up 1% as compared to the prior year fourth quarter, up 2% on a constant currency basis and up 4% on an organic basis. Income from operations was $690 million or 25.5% of revenue for the fourth quarter as compared to $579 million or 21.7% of revenue in the prior year fourth quarter. Adjusted operating income was $868 million or 32.1% of revenue for the quarter, up 170 basis points from $812 million or 30.4% of revenue in the same period last year. For the quarter, diluted earnings per share, which include discontinued operations, were $19.19 as compared to $3.66 in the fourth quarter of prior year. Adjusted diluted earnings per share were $5.67 for the fourth quarter, reflecting an increase of 9% when compared to $5.19 in the prior year. Now let's take a look at each of our segments in more detail. To provide clear comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis, unless specifically stated otherwise. Segment margins are calculated using segment revenue and exclude unallocated corporate costs such as amortization of intangibles, certain transaction and integration expenses resulting from mergers and acquisitions as well as other items which we consider noncore to our operating results. The segment results include discretionary compensation. The Human Capital & Benefits, or HCB, segment revenue was up 3% on an organic basis and constant currency basis compared to the fourth quarter of the prior year. For the full year of 2021, HCB revenue grew 3% organically. Technology and Administration Solutions revenue grew 11% in the fourth quarter primarily due to increased project work in Great Britain and Western Europe. Our Health and Benefits revenue increased 6% for the quarter. The increase reflects robust demand in H&B consulting and a gain recorded in connection with a one-off book of business settlement, offset by slower growth in brokerage. The settlement relates to an isolated incident of senior staff departures earlier in 2021. Talent and Rewards revenue increased 3% in the quarter, following growth of 17% in Q3 and 22% in Q2. Throughout the year, this growth has represented a rebound from the 2020 slowdown in discretionary projects, plus increasing market demand, particularly for products like compensation benchmarking surveys. The lower growth in Q4 relative to the prior two quarters reflects the typical seasonality of compensation survey sales, which peaked in Q2 and Q3, as well as some capacity constraints for advisory services. With expectations for continued strong demand in product and advisory services and having ramped up hiring in the fourth quarter, we are well positioned. Retirement revenue was down 1% compared to the prior year fourth quarter, with increased funding and Guaranteed Minimum Pension equalization work in Great Britain offset by declines in North America due to a reduction in work in Canada to implement regulatory changes and lower demand for bulk lump sum projects. HCB's operating margin was 31.2% for the fourth quarter compared to 31.3% in the prior year fourth quarter. On a full year basis, HCB's operating margin improved to 27.0% from 26.0% in the prior year. Year-over-year, excluding the impact of currency and gains from book of business settlements, HCB's margin declined by 150 basis points for the fourth quarter but increased by 90 basis points for the full year. The fourth quarter margin declined as a result of higher expense growth driven by hiring to meet expected strong market demand as we build capacity for robust revenue growth. The full year margin increase reflects continued sustainable expense reduction efforts. Historically, HCB has had industry-leading margins, and we believe that trend will continue. HCB's overall market tailwinds should continue to drive organic growth momentum for HCB. Both our near-term and long-term outlook on the segment remain positive, and our expectations for revenue growth are unchanged from what we communicated at Investor Day: mid-single-digit growth. Now let's look at Corporate Risk & Broking, or CRB, which had a revenue increase of 1% on an organic and constant currency basis as compared to the prior year fourth quarter. For the full year of 2021, CRB revenue grew 5% organically. Our hiring levels are the highest in recent history, and colleague departure levels have decreased. North America's revenue was up by 4% in the fourth quarter, including gains recorded in connection with book of business sales and settlements. The book sales and settlements relate to producer departures occurring earlier in 2021. International's revenue increased 10% compared to prior year. There was strong performance in M&A in Asia and Australasia and natural resources in Eastern Europe. Latin America also contributed to International's revenue growth with new business wins in Brazil and Central America. Great Britain's revenue declined 5% as a result of lost business and timing. The decline reflects the delayed impact of disruption from earlier in 2021. Revenue for Western Europe was down 5% due to the departure of senior staff prior to the deal termination, which continue to pressure the business in certain geographies. Although earlier departures have hindered our growth for several quarters, we are seeing some positive momentum. New client wins include one of the largest commercial and retail banks in the region. CRB's operating margin was 31.2% for the fourth quarter compared to 32.3% in the prior year fourth quarter. On a full year basis, CRB's operating margin improved to 23.0% from 21.2% in the prior year. Excluding the impact of currency and the benefit of book and business sales and settlements, the margin declined 240 basis points for the fourth quarter, but increased by 80 basis points for the full year. The fourth quarter decline was mostly due to investments to support future growth. The full year margin expansion reflects the continuation of effective cost management. CRB's organic growth trailed industry expected averages for the last three quarters of 2021 primarily as a result of elevated colleague departures and reduced hiring during the period when the business combination was pending, two trends that we believe are now behind us. Currently, we expect to see lower growth in the first half of 2022 compared to the second half of 2022 as the gap versus industry expected averages narrows. While events in previous quarters have challenged us and temporary headwinds from those events remain, our outlook for CRB remains positive with mid-single-digit revenue growth over the longer term. Turning to Investment, Risk & Reinsurance, or IRR. Revenue for the fourth quarter was $199 million, an increase of 32% on an organic basis and a decrease of 2% on a constant currency basis as compared to the prior year fourth quarter. IRR revenue includes a gain from a book of business settlement, which relates to reinsurance assets that did not transfer in connection with the sale of Willis Re. IRR excludes all other revenue associated with the Reinsurance line of business, which has been reported as discontinued operations. It also excludes revenue from Max Matthiessen, which was sold in September of 2020; and Miller, WTW's wholesale broking subsidiary sold in March of 2021. These sales account for the wide disparity between organic and constant currency. The Insurance Consulting and Technology, or ICT, business, where revenue was up 5%, led the segment's growth with increased demand for advisory work alongside technology sales. Our investment businesses grew revenue by 11% from new business, growth in delegated assets under management and, to a lesser extent, increased performance fees. IRR's operating margin was 25.3% for the fourth quarter compared to 12.5% in the prior year fourth quarter. On a full year basis, IRR's operating margin improved to 19.5% from 14.5% in the prior year. Excluding the impact of currency and the benefit of book of business settlements, the margin declined 240 basis points for the quarter, but increased by 220 basis points for the full year. The fourth quarter decline was primarily caused by the headwind created from divestitures. The prior year fourth quarter margin includes the contribution of the now divested Miller subsidiary, while the current year fourth quarter margin does not, which distorts comparability. The Miller subsidiary was sold in March of 2021. The full year margin expansion was the result of careful cost management efforts, combined with strong top line growth from the two businesses that remain in IRR, ICT and investments. Turning to the Benefits Delivery & Administration segment, or BDA. Revenue increased by 5% on an organic and constant currency basis from the prior year fourth quarter. The growth in revenue was largely driven by Individual Marketplace due to a favorable shift in the revenue timing for our B2B Medicare exchange business, along with continued strength in our direct-to-consumer business. The Benefits Outsourcing business also contributed significantly to BDA's revenue growth with increased project work driven by temporary federal policy changes affecting group health care plans. BDA's operating margin was 49.2% in the fourth quarter and 22.4% for the full year, having declined year-over-year by 110 basis points and 150 basis points, respectively. The year-over-year margin decline for both the fourth quarter and the full year was the result of increased investing in resources for the 2022 annual enrollment period, coupled with headwinds on lead conversions. The BDA segment has posted 10% organic growth for two consecutive years, and we continue to feel positive about the momentum of this segment. Overall, our financial results for 2021 are in line with our expectations, reflecting the complexity of navigating a significant strategic shift along with some bright spots, highlighting our commitment to profitable growth. I'm pleased we effectively managed our cost and delivered margin expansion and adjusted EPS growth despite top line growth pressures. In closing, I want to reiterate my gratitude to our colleagues and also thank our clients and shareholders for their support. I believe the company is well positioned to capitalize on the opportunities that lie ahead. I look forward to reinvigorating growth and to successfully executing our transformation plan. I am confident the best is yet to come as we boldly look to lead and shape our industry going forward. And with that, I'll turn the call over to Andrew.

Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us. As expected, the fourth quarter performance faced headwinds from the delayed impact of disruptions from earlier in the year. They reflect the challenges we've previously identified and are actively working to address. To that end, we continue to push forward with our strategic goals as we finished up the year and made some early progress on our transformation efforts. In the fourth quarter, we incurred restructuring charges totaling $26 million. From the actions taken in 2021, we expect to have annualized savings of $20 million, primarily from the reduction of real estate costs, the benefits of which will be recognized in 2022. The $20 million gets us two-thirds of the way towards our $30 million annualized run rate savings goal for 2022. For the full year 2021, we generated profitable growth, increasing adjusted operating margin to 19.9% from 18% in the prior year. The adjusted operating margin expansion was comprised of 150 basis points of underlying growth stemming from financial discipline. This was coupled with around 100 basis points of growth from gains on book of business sales and settlements partially offset by around 60 basis point headwind from prior divestitures and FX. The expansion of our adjusted operating margin, despite top line growth pressures, highlights our dual commitments to growing profitably and focusing on cost management. As a result, we continue to expect margin improvement each year as we deliver on our 2024 margin goals. Now I'll turn to the overall detailed financial results. Income from operations for the fourth quarter was $687 million or 25.4% of revenue, up from the prior year fourth quarter income from operations of $579 million or 21.7% of revenue. Adjusted operating income for the fourth quarter was $868 million or 32.1% of revenue, up 170 basis points from $812 million or 30.4% of revenue in the prior year fourth quarter. For the fourth quarters of 2021 and 2020, our diluted EPS from continuing operations were $4.54 and $3.62, respectively. For the fourth quarter of 2021, our adjusted EPS was up 9% to $5.67 per share as compared to $5.19 per share in the prior year fourth quarter. Further, discontinued operations represented a $14.64 loss on a diluted EPS basis for the fourth quarter of 2021 and a $0.04 on diluted EPS basis for the fourth quarter of 2020. Total diluted EPS, including both continuing and discontinued operations, increased to $19.19 for the fourth quarter of 2021 compared to the prior year fourth quarter of $3.66. Foreign currency rate changes caused a decrease in our consolidated revenue of $19 million or 1% of revenue for the quarter compared to the prior year fourth quarter with a $0.06 headwind to adjusted diluted earnings per share this quarter. Our U.S. GAAP tax rate for the fourth quarter was 20.8% versus 19.5% in the prior year. Our adjusted tax rate for the fourth quarter was 21.1%, up from the 17.6% rate in the prior year. The increase was due to the geographic distribution of profits. Turning to the balance sheet. We ended the fourth quarter with a strong capital and liquidity position with cash and cash equivalents of $4.7 billion and full capacity on our undrawn $1.5 billion revolving credit facility. WTW remains well positioned from a liquidity perspective. We continue to have significant financial flexibility, which allows us to invest in transforming the company's operations to unlock growth potential while simultaneously returning capital to shareholders. Free cash flow, which includes discontinued operations, was $1.9 billion in the year ended 2021 compared to $1.6 billion in the prior year. The increase in year-over-year free cash flow was due to the receipt of the termination fee, net of increased transaction and integration fees of $948 million. This was partially offset by net legal settlement payments of approximately $185 million for the previously announced Stanford and Willis Towers Watson merger settlements and higher compensation and benefit payments of approximately $250 million and $383 million in tax payments primarily related to the disposal of Willis Re. Absent these items, free cash flow would have been $1.8 billion, up 15% versus the prior year. I want to point out that we made some changes to our statement of cash flows to reflect new guidance on restricted cash presentation in FASB ASC 230. These changes consisted of revising the classification of WTW's fiduciary fund balances on a consolidated statement of cash flows for the last three years. These revisions had no impact to our cash flow from operating activities or free cash flow metrics. In terms of capital allocation, we paid $374 million in dividends for the year ended December 31, 2021, and repurchased 7.2 million shares for $1.6 billion. We remain committed to deploying excess capital and cash flow into share repurchases. As part of our Investor Day discussion, we communicated approximately $4 billion of near-term share repurchases and a willingness to fund further share repurchases using our free cash flow unless other investment opportunities with superior return potential arise. At current price levels, we believe that repurchasing WTW stock continues to be our highest return opportunity, and we have significant resources to capitalize upon that. With $1.6 billion completed in 2021 and another $1 billion completed through today, the pace of our share repurchases highlights the conviction we have in the future of WTW and the plans we laid out at Investor Day despite the current headwinds. We expect to conclude the remainder of the roughly $4 billion of repurchases as expeditiously as practical, depending on market conditions and other factors. At our Investor Day, we also announced our plans to streamline the structure of our organization by changing from four segments to two segments effective January 1, 2022. We are now operating under that new structure with just two segments: Risk and Broking and Health, Wealth and Career. Accordingly, going forward, our financial reports, supplemental disclosures and related commentary will reflect our new structure. Our 2021 financial results are a reflection of our resilience and our focus on strategic priorities. Although we have had near-term business challenges, we have undeniably strong assets, which gives me confidence in our ability to continue driving value for all our stakeholders. There is a lot of opportunity ahead, and we remain focused on executing our strategy and setting the path for sustainable success. And now I'll turn the call back to Carl.

Thanks, Andrew. And now we'll take your questions.

Our first question will come from the line of Greg Peters from Raymond James.

I want to first focus in on the organic revenue results. And more importantly, I'm looking at your slide deck, Slide 11, where you talk about the expectation of delivering mid-single-digit organic revenue growth for 2022. If I were to read the tea leaves, getting the most pushback on the results for last year was driven by the unusual book sales and other anomalies going through it. So Carl and Andrew, maybe you could give us a little bit more color on why you think you're going to be able to produce a mid-single-digit organic revenue result for the full year. And it certainly seems like the Risk and Broking will have some headwinds at least in the first half of the year. So some additional color there would be helpful.

Sure, Greg. A couple of points. We're expecting mid-single-digit organic revenue growth for the company. Though we're not giving segment level guidance on that, a few clarifying points: we do think CRB is going to continue to gain traction throughout the year. The events in prior quarters have challenged us, and there are temporary headwinds from those events that remain. We're highly confident in our hiring strategy. We've indicated before that hiring precedes revenue when it comes to people. When we look at what's required, we think the broking business during the next two quarters will be building acceleration, and we'll see the gap narrow with CRB peers in the second half of the year. For the remaining two-thirds of the company, we think they'll perform at peer levels or better. The comments about CRB, which is a major part of our business, leave out the two-thirds or so of the rest of the company. Market tailwinds should continue to drive organic growth momentum in HCB and BDA businesses, where we have a strong portfolio of related businesses helping organizations and individuals in health, wealth and career. So I think our strategy remains very much in line with the financial perspective that we outlined at our Investor Day in the fall.

Carl, in that answer, you highlighted hires. Maybe you could just give us some additional color on the hires versus what had transpired last year, which was a lot of departures.

I'll focus on CRB, where much of the concern has been. We are keeping a very close eye on those areas, and we acknowledge that we have a lot of work before us, but here are some things that make us confident. Our incentive plan activity regarding retention completed in Q4 was very well received, and we are encouraged by the results. We've seen colleague departures trend downwards since Q3 in CRB. That trend makes us optimistic we are heading in the right direction. Joiners are positive; as I mentioned in our prepared remarks, we've been hiring— we built investment headroom to continue to execute on our hiring strategy into 2022. In CRB specifically in Q4, we had the highest net positive rate in terms of joiners outnumbering leavers amongst all of our segments. Looking at the data that's just come out, January is our biggest hiring month in CRB over the last two years at all levels, including senior hires.

I guess the final question would be as you're hiring — bringing in new people, there's a lag between the time they hit the books and hit the P&L from an expense standpoint to the time they're actually producing and generating revenue. Depending on the situation, that lag can be up to over a year. So what I'm ultimately getting at is you're making these investments and yet you're also forecasting adjusted margin expansion for 2022. How do you reconcile the investment piece, which seems necessary, versus your expectation for adjusted margin improvement?

We agree revenue trails hiring, and we've allowed for that in how we model the timing. We think if we're successful, the results will show that path, and that's one reason we expect lower growth in CRB in the first half compared to the second half of the year as the gap to industry narrows.

And Greg, on the margin point: the margin expansion is for the entire company, and the investment hiring is more focused on one segment.

Our next question will come from the line of Mike Zaremski from Wolfe Research.

Question on the HCB segment. Last quarter, and I think this quarter too, you talked about continued momentum expected there. I think revenue growth is a little light. Maybe you can unpack. I know you called out some capacity constraints. I see you also called out Retirement being slightly negative. Are there any kind of one-time items or anything we should be thinking about?

Let me start with Retirement, then address capacity issues. Our outlook for Retirement, which is a large business, is positive. Healthy pension funding positions as the result of interest and equity market movements during 2021 provide good opportunities for derisking and bulk lump sum work in North America. In Great Britain, the trend for risk transfer from company-sponsored pension schemes to the insurance sector is expected to continue, and we view 2022 as a good year for derisking because of the healthy funding position. It also depends on pricing—the availability of assets that offer a decent yield and that insurers can back annuities with will influence activity. 2021 saw about GBP 43 billion of bulk annuity and longevity swap transactions completed. We think that number will exceed GBP 55 billion for 2022, which would be the biggest year ever, and we are well positioned to capture a significant share. On the other hand, when schemes are well funded there is less demand for funding advice. We continue to work on Guaranteed Minimum Pensions and momentum for our LifeSight product that we discussed at Investor Day. In North America, bulk lump sum activity has been more muted the last several years, and as a result there's probably less potential volume going forward. We do expect an increase in BDA activity over 2021, but this is dependent on what happens with interest rates over the next few months. Regarding the capacity constraints, these are most pronounced in our Talent and Rewards business, which has a large share of project-oriented revenue. We have been addressing hiring in Talent and Rewards as well, and we think that will give us the opportunity to capture market share as we go forward.

That's helpful. As a follow-up, switching to free cash flow levels: you called out $250 million of incentives and benefit-related items negatively impacted free cash flow for the year. That kind of grew year-over-year. Are those items going to fall off in 2022? And have you broken out the free cash flow impact of one-time items related to the cost-cutting measures you're taking?

We do expect those numbers to abate going forward. On the transformation spend, yes, it will impact cash and we will break that out as we continue to report on that program separately.

Our next question will come from the line of Michael Phillips from Morgan Stanley.

Carl, I want to go back to recruiting on CRB. Can you say how close you are today to where you want to be in absolute level of producers in that segment?

We've made good progress, but we continue to search for talent globally. We're happy with progress but view it as a journey. Part of the objective is getting back to where we were, and part is achieving our growth ambitions over the next several years. We're actively in the market.

Follow-up: recruiting efforts are difficult across the industry. It seems it might be more difficult for a company going through turmoil. Anything you can share on any premium you might be paying? Are you paying 20%, 30%, 40% premium to get people in the door versus normal?

I don't think we pay any unusual premium compared to others. If anything, our new strategy is resonating with people. We're an independent company with determined ambitions in the marketplace, and conversations with prospective talent have been very positive. Clients, carrier partners and talent seem to be voting for the strength and viability of WTW as an employer of choice.

Our next question will come from the line of Elyse Greenspan from Wells Fargo.

You said results aligned with your expectations. It seems the slowdown in CRB got worse this quarter. Realizing that was in line with expectations, could you help us think through expectations from here? How should we think about growth trending in the first half of the year relative to the 1% in the quarter, if we exclude the book of business gains? Can you help us think about extracting growth within that segment?

Revenue decreases from people leaving don't occur immediately due to renewal cycles, etc. The Q4 numbers weren't a surprise to us; we had our fingers on the pulse. The people we've been bringing in over the past few months will take time to ramp up, and we've built that into how we view our financial model. We think we can continue to grow while maintaining our margin path to 2024 targets. We're balancing competing objectives as we build the business.

On the book of business gains, I calculated that was probably around 2.5% on revenue in the quarter, assuming it's all high margin. When you say mid-single-digit or greater organic for 2022, does that assume any further gains on book of business?

Your math on the revenue calculation is about right. In terms of expectations around book of business sales, we expect to revert to more normalized levels over time. We don't anticipate anything near the level from 2021.

On pension income for 2022, you gave a year-over-year decline. What's the overall pension income you expect for 2022?

I don't think we're going to get into that level of granularity on the quantum of changes in pension income. It is about a $20 million year-over-year decline in pension and noncash pension income for 2022, as noted on Slide 11.

Our next question will be from the line of Paul Newsome from Piper Sandler.

A quick two-part. First, the book of business settlements: is that pure profit or are there related expenses? Second, any updated view on the debt structure given how much stock you're repurchasing?

On the book of business margin: essentially yes, they are relatively high margin, although there are some expenses that get put against them. On debt structure and share repurchases: we're comfortable with our leverage; it's in line with discussions we've had with the rating agencies and allows us appropriate financial flexibility to pursue share repurchases or strategic opportunities.

Our next question will come from the line of David Motemaden from Evercore ISI.

Carl, follow-up on headcount. Last quarter you talked about core CRB headcount being down 100 people (3Q '21 versus 3Q '20). What was that in the fourth quarter? And how has that been trending in the first part of Q1?

In the fourth quarter, joiners exceeded leavers by a decent margin, so headcount is now up. January was our best hiring month in quite a while across levels, so we're making up for lost time.

Our next question will come from the line of Ryan Tunis from Autonomous Research.

On BDA, growth was a little slower than expected this quarter. TRANZACT was only up about 2%-3% in Q4. Do you think the structural growth rate of that business has changed approaching 2022? Can you discuss trends you're seeing?

The overall market TRANZACT operates in is large and increasing as people turn 65. We're happy about the market and TRANZACT's ability to expand within it. On a full year basis, TRANZACT had $661 million of revenue and 17% organic growth, and it's ahead of our original projections by a year. Q4 was lower than anticipated largely due to advertising and programs generating lower leads and diversions than planned. Those investments didn't realize expected results and impacted margin. For 2022, the team has reviewed the situation and is implementing strategies across carrier partners to improve member experience and maintain membership. We remain confident in TRANZACT and have high expectations for the business.

Our next question will come from the line of Mark Hughes from Truist.

On TRANZACT, did you see anything in terms of lapse rates or turnover in the customer base?

Everything we saw in that business was consistent with expectations, and nothing stood out as an outlier. We continue to monitor the book as it develops.

Our next question will come from the line of Yaron Kinar from Jefferies.

First, the comp and benefit ratio improved about 400 basis points year-over-year. Can you talk about the main drivers for that improvement and how you see that ratio developing into 2022 as the hires come in?

Part of the trend in comp and benefits relates to the impact of attrition and colleague retention over time. Also, the mix of pay with discretionary compensation provides tools to align compensation with firm performance. We expect compensation percentages to return toward more historical levels. As hiring continues, there will be absolute dollar impacts, but percentage-wise we expect relative consistency.

Your next question will come from the line of Meyer Shields from KBW.

Carl, I appreciate the disclosure on book sales and settlements. If I take Andrew's comment about a 100 basis point impact for the full year, that implies about $113 million. What's the normal run rate? What do you budget for that in a typical year?

I won't get into specific budgeting figures, but if you look back over recent history you can see that normalized levels are significantly less than what we experienced in 2021.

We believe the retention measures we've put in place should be effective in returning to normalized levels.

Our next question will come from the line of Brian Meredith from UBS.

How are you balancing cost saves versus the need to invest in the business, particularly CRB, for hiring and organic growth? What impact might wage inflation have on offsetting cost savings?

We built a compensation program that is more weighted toward variable pay, which helps manage through inflation. A pillar of our program is using scale to move back-office work to centers of excellence to improve client and colleague experience while providing cost relief. There's alignment between our transformation strategy and our ability to respond to inflationary pressures.

Our next question will come from the line of Mark Marcon from Baird.

Regarding comp and benefits, how should we think about that on a normalized basis? The last half of 2021 was impacted by departures. If you're implementing the plan and assuming variable compensation is roughly in line with revenue expectations, how should comp and benefits trend and what sort of leverage or deleverage would we see? And separately, how are engagement scores progressing and how do you expect them to be six months to a year from now?

We expect compensation percentages to return toward historical levels. As hiring continues, absolute dollars will increase but percentages should remain relatively consistent. Also note the prior year comparables include divestitures and FX impacts that affect comparisons.

We ran an all-colleague survey in the fourth quarter and saw engagement is up versus prior measurements, which is a positive result. We apply lessons from our client work to ourselves and will continue to monitor engagement and demonstrate WTW as a great place to work for current and prospective colleagues.

Follow-up from the line of David Motemaden from Evercore ISI.

Backing into it, it looks like book of business settlements for full year were about $90 million to $100 million for 2021. Is that a good baseline to think about future lost revenue? Some of that might already be reflected in results. Is that a reasonable drag to consider for 2022?

Book of business settlements typically are a multiple of the revenue amount given industry transaction multiples, so you'd have to consider that when thinking about the revenue impact.

Another follow-up from the line of Yaron Kinar from Jefferies.

You commented on narrowing the revenue gap to peers. Given peers have also been hiring, and you still have a lag from earlier departures, how can you close the gap?

We said we expect to narrow the gap. We remain an attractive destination for talent and believe we can hire alongside the industry. As we return to a steady state, we expect to approach industry levels.

Our next follow-up will be from the line of Meyer Shields from KBW.

What's the impact of foreign exchange on fourth quarter EPS and margins?

In the fourth quarter, FX was a headwind of about $19 million on revenue, roughly $0.06 on adjusted EPS. The main component was the weakness of the dollar against the euro.

I would like to thank everyone for joining us this morning. We look forward to updating you on our first quarter earnings call in the spring.

This will conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.