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Categorized | Financial, Insurance

Towers Watson Willis deal points up woes

Posted on June 30, 2015

The Willis Tower (C), formerly known as the Sears Tower, dominates the southern end of the downtown skyline on March 4, 2015 in Chicago, Illinois. The building, completed in 1973, was the world's tallest for more than two decades. It is reported to be up for sale with an asking price of $1.5 billion. (Photo by Scott Olson/Getty Images)©Getty

Joe Plumeri, the former Willis chief executive who led the insurance broker’s New York flotation in 2001, is variously described as colourful, forcible and irrepressible — not most peoples’ idea of a deputy chief executive.

But, under a deal struck with consultancy group Towers Watson, his successor — Dominic Casserley, the suave British management consultant who took over at Willis in 2013 — will become just that: second in command to Towers’ John Haley as CEO.

    His role in the combined company signals just how tough it has become to broker contracts between companies and insurers, and make money in a notoriously cyclical market.

    It also highlights the expanding role of consultants in advising employers and staff, at a time when individuals are being made to bear more responsibility for securing healthcare and employee benefits.

    Tellingly, Willis’ shares have barely moved in the past year while Towers’ shares are up 21 per cent, valuing the company at 22.5 times 2015 earnings.

    Willis, which is in an uncomfortable third place behind fellow insurance brokers Marsh & McLennan and Aon Benfield, has struggled to grow its share of the market of top tier corporate clients. A majority of its customers remain mid-market businesses.

    For the 187-year old company, which started out as a marine hull broker in London’s seaport, Tuesday’s deal with Towers Watson is another route to market. Towers, itself formed from a merger five years ago, advises the world’s biggest companies on issues ranging from pensions, risk, investment and employee benefits to board remuneration and recruitment. In turn, Towers’ Mr Haley hopes to use Willis’ operations in Europe and Asia to turn itself into a more geographically diverse business.

    Both chief executives have their eyes on the opportunities they see in Towers’ OneExchange — the private healthcare exchange offering multiple policies to employees and retirees.

    Healthcare exchanges have been growing rapidly in the US. In 2015, the number of people enrolled in private health insurance exchanges doubled to 6.1m compared with a year earlier, according to Accenture — continuing 100 per cent annual growth rate recorded since 2013. Accenture estimates that 40m people will obtain their cover through this route by 2018.

    Towers Watson Willis, as the combined entity will be known, said on Tuesday that its exchange had more than 1m users — and its goal was a 25 per cent share of the total market.

    In a recent note on Towers Watson, Marc Macron, an analyst at RW Baird, said the company was increasingly seen as “the highest quality provider in the space” by employers, having saved them an average of $1,400 per employee in the first year of enrolment.

    In three years’ time, the introduction of a so-called “Cadillac tax” in the US, as part of the part of the “ObamaCare” reforms, is expected to prompt more companies to move their employees on to these insurance exchanges.

    Josh Weisbrod, a partner in Bain’s healthcare practice in New York, said: “There’s been a steady trend of employees bearing a greater portion of their healthcare costs over the past few years, as employers have re-examined their role in health benefits.”

    Tuesday’s deal has been under discussion for some time. Mr Casserley said that by May, the parties were ready to finalise the terms: a merger of equals based on the market capitalisation of both groups.

    Combined, the business will have nearly 40,000 staff in 120 countries, earning about $8bn in revenues and $1.7bn in earnings before interest, tax, depreciation and amortisation. Its market capitalisation will be about $18bn.

    Revenue synergies have not been disclosed but Mr Haley and Mr Casserley have identified up to $125m in cost synergies over the next three years.

    Willis’ shareholders will get 50.1 per cent of the company. But Towers’ shareholders will get 2.649 shares in Willis, plus a $4.87 dividend — rather less than Towers’ opening share price of close to $138 on Tuesday.

    Industry analysts at The Insurance Insider said: “The all stock tie-up has triggered a mixed response from investors, as it looks set to be materially dilutive to shareholders in Towers Watson and accretive to Willis”.

    Eamonn Flanagan, insurance analyst at Shore Capital, said: “Willis appears to be struggling to deliver on its own costs savings plans without damaging its own franchise and is losing key personnel. Towers Watson appears to be highly rated at 22.5 times 2015 forecast earnings on the basis of its healthcare exchanges where we await real revenue delivery”.

    Both sides clearly have a lot to prove.