Investing.com -- On Tuesday, Fitch Ratings upgraded the Long-Term Issuer Default Rating (IDR) for Willis Towers Watson plc (NASDAQ: WTW ) and related entities to ’BBB+’ from ’BBB’. The ratings agency also enhanced the issue-level ratings for senior unsecured notes issued by Willis North America Inc. and Trinity Acquisition plc to ’BBB+’ from ’BBB’. The Rating Outlook remains stable.

The upgrade is a reflection of operational and margin improvements over the past few years, solid organic trends that are anticipated to continue, and Fitch’s expectation of EBITDA leverage below 2.5x over the ratings horizon. The revised IDR and security ratings influence approximately $5.3 billion of debt outstanding as of year-end 2024, excluding the $1.5 billion senior unsecured Revolving Credit Facility (RCF).

Willis Towers Watson is recognized as one of the global leaders in the insurance brokerage and human resource (HR) benefits consulting industries. It operates as one of the largest insurance brokers and benefits consulting firms. The company’s ratings are an indication of its solid market position, stable financial leverage, good financial flexibility with a strong cash generation profile, and historically stable profits and margins.

In the past two years, WTW’s organic growth has improved, with organic revenue growth of 5%-8% since 2022. The company aims for mid-single-digit revenue growth over the long term. Despite improvements in organic trends, Fitch attributes the growth to industry tailwinds, including a relatively strong pricing environment from recent years.

WTW has a strong market position, offering diverse operations in HR and employee benefits consulting, insurance brokerage, and benefits administration. The company’s market share allows it to compete for business on a global scale and assist its customers in managing global employee and insurance-related issues.

The company’s business model is stable, with a history of organic revenue growth each year since 2007. Its revenue and earnings are well-diversified by customer, with the U.S. and U.K. comprising 52% and 19% of 2024 revenue, respectively. The company also offers a wide range of services.

WTW has demonstrated solid financial flexibility, although Free Cash Flow (FCF) generation has been more volatile than its peers. Fitch projects that post-dividend FCF could be $1 billion or more annually in the next few years. The company also has a large unrestricted cash balance of $1.8 billion as of year-end 2024 and full capacity under its $1.5 billion RCF.

EBITDA leverage is relatively low for the rating category at 2.0x at year-end 2024. However, the company could pursue more M&A in the future after focusing on internal restructuring in recent years. The company targets leverage in the 2.0x to 2.5x range.

Fitch-calculated EBITDA margins improved by 370 basis points in 2021-2024, reflecting solid revenue growth and restructuring. However, its margins in the mid- to high-20% range are below those of larger industry peers, which operate in the 30% to 35% range.

WTW is among the four largest North American insurance brokers. It operates with lower EBITDA and FCF margins compared to its larger peers. EBITDA leverage in recent years in the low- to mid-2.0x range is relatively close to or better than peers and manageable for the rating category. Fitch believes the company’s strong share position, stable margins, solid cash flow generation, 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.

Fitch’s key assumptions for the company include organic growth remaining in the low- to mid-single digit percentage range in the next few years, EBITDA margins expanding modestly toward the high-20% range through 2028, and capital allocation in the next few years being more balanced between M&A, share repurchases, and dividends.

Potential factors that could lead to a negative rating action include EBITDA leverage sustained above 2.75x, deterioration in operating fundamentals leading to weaker revenue trends, margin underperformance, compression of cash flows, or CFO-Capex/debt sustained below 15%. On the other hand, EBITDA leverage sustained below 2.25x, sustained improvements to operating fundamentals, including revenue growth or EBITDA/FCF margins, or CFO-Capex/debt sustained above 25% could lead to a positive rating action.

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