Marsh & McLennan Companies, Inc. (NYSE:MMC) Q3 2023 Earnings Call Transcript

Marsh & McLennan Companies, Inc. (NYSE:MMC) Q3 2023 Earnings Call Transcript October 19, 2023

Marsh & McLennan Companies, Inc. beats earnings expectations. Reported EPS is $1.47, expectations were $1.38.

Operator: Welcome to Marsh McLennan’s earnings conference call. Today’s call is being recorded. Third Quarter 2023 financial results and supplemental information were issued earlier this morning. They are available on the company’s website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the Marsh McLennan website.

During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today’s earnings release. [Operator Instructions]. I’ll now turn this over to John Doyle, President and CEO of Marsh McLennan.

John Doyle: Good morning, and thank you for joining us to discuss our third quarter results reported earlier today. I’m John Doyle, President, and CEO of Marsh McLennan. Joining me on the call is Mark McGivney, our CFO; and the CEOs of our businesses: Martin South of Marsh, Dean Klisura of Guy Carpenter, Martine Ferland of Mercer, and Nick Studer of Oliver Wyman. Also, with us this morning is Sarah Dewitt, Head of Investor Relations. Before I get into our results, I’d like to take a moment to comment on the violent attacks on Israel and the tragic events unfolding in Israel and Gaza. We, along with our colleagues, condemn all acts of terror and violence and reject hatred. Our primary focus is on ensuring the safety and well-being of our colleagues in Tel Aviv and supporting colleagues around the world who have family and friends in Israel and Gaza.

We’re also supporting our clients as they grapple with the challenges of this conflict. Turning to our third quarter results. I’m very pleased with our performance. We extended our best run of quarterly underlying revenue growth in over two decades and reported significant growth in adjusted EPS. Top-line momentum continued with 10% underlying revenue growth, on top of 8% growth in the third quarter of last year. Adjusted operating income grew 24% versus a year ago. Our adjusted operating margin expanded 170 basis points compared to the third quarter of 2022. Adjusted EPS grew 33%, and we completed $300 million of share repurchases during the quarter. These results reflect our consistent focus on delivering in the near term, while investing for sustained growth over the long term.

We are seeing the benefit of investments we’ve made in our talent and capabilities, and we continue to see opportunities to add high-quality acquisitions. During the third quarter, we announced two significant transactions. In early August, Marsh McLennan Agency acquired Graham Company, a top 100 U.S. insurance and benefits broker and risk management consultancy with 215 employees and over $70 million in revenue. Graham will provide significant business insurance and employee benefits expertise for MMA’s clients in the Mid-Atlantic. This acquisition is another example of us attracting the best agencies in the U.S. MMA is now a $3 billion revenue business. In the same month, Marsh announced an agreement to acquire Honan Insurance Group. This deal expands our Australian middle market business and our position across the Pacific region and Asia.

Honan specializes in corporate risk and employee benefits and serves over 30,000 clients. Beyond acquisitions, we continue to make targeted investments in talent, sales operations, and go-to-market strategies. We are also investing in new technologies and solutions to bring the best of Marsh McLennan to our clients. For example, Guy Carpenter recently launched the next generation of our catastrophe analytics platform, GC Advantage Point. The new platform is a critical tool to help clients drive profitable risk selection and manage catastrophe exposure in a quickly evolving risk landscape. Earlier this year, Marsh announced the launch of Cyber Pathway, an integrated cybersecurity and insurance solution for U.S. small and midsized businesses that helps enhance the resilience in a volatile threat environment.

The program provides access to key security tools and capabilities as well as insurance coverage that can grow as our clients evolve. And we are investing in technologies that enhance our internal productivity, insights for clients and improve colleague experience. One example is LenAI, Marsh McLennan’s internal AI assistant. LenAI offers the power of ChatGPT in a safe and data-secure environment and is available to all colleagues. Developed by our innovation center, it’s also helping Oliver Wyman support clients in developing their own AI capabilities. Our approach to balancing investment and growth drives consistent exceptional performance for shareholders and positions us well to deliver new solutions and insights for our clients. Turning to our strategic initiatives.

The combined value proposition of our businesses continues to gain traction with clients, especially in certain industries and lines of business. For example, we are focused on enterprise risks for healthcare clients. Our Marsh and Mercer teams are coming together to respond to emerging challenges, such as health and safety, labor actions, and workforce and liability risks from AI. In the private equity and M&A space, Mercer, Marsh, and Oliver Wyman are combining capabilities to help client’s close deals and create post-transaction value. This can include due diligence, advisory on large transformations, health and benefits carve-out transactions, and providing stop-loss solutions. And in the insurance sector, Guy Carpenter is partnering with Mercer to provide portfolio management solutions to insurance clients.

One example is our advanced balance sheet solution, which is a collaborative approach that aligns risk and return across an insurer’s balance sheet. This offering has already resulted in several regional insurers choosing to partner with Mercer for OCIO. We are also finding new ways to operate, reduce complexity, and organize for impact. As we continue to execute on our restructuring actions, we’ve identified additional opportunities to rationalize technology, reduce our real estate footprint, and realign our workforce. We now expect to achieve total savings of roughly $400 million by 2024, with total cost to achieve these savings of $425 million to $475 million. Overall, the momentum we are seeing as our businesses increasingly serve clients together, combined with our restructuring efforts, offers opportunities to deliver enhanced value for clients, drive higher growth, and be more efficient and connected.

Now let me turn to the macro environment. The outlook remains uncertain. Capital market volatility has returned with the continued rise in interest rates. The trajectory of inflation and further central bank tightening remain an open question and the geopolitical situation remains volatile. Despite the environment, we continue to perform well, and we have a track record of resilience. We believe we are well positioned to perform across economic cycles and manage our business to grow revenues faster than expenses in good as well as challenging periods. Now let me turn to insurance and reinsurance market conditions. Primary insurance rates continue to increase with the Marsh Global Insurance Market Index up 3% overall, in line with the second quarter.

Property rates increased 7% compared to 10% in the second quarter. Casualty pricing was up in the low single-digit range. Workers’ compensation increased slightly, while financial and professional liability insurance rates were down mid-single digits. Cyber insurance pricing decreased modestly after several years of increases. In reinsurance, our clients have faced consistent challenges throughout 2023. This includes elevated cat losses, core and social inflation, and continued political instability. As we look to January 1, the market appears to be more orderly than last year, but we expect underwriting discipline to continue. On the property side, we expect firm pricing, but a more stable market with adequate capacity and increased reinsurer appetite.

In casualty, the market is more cautious with reinsurers assessing prior year loss development and inflation. We expect capacity to remain stable. Overall, clients will need thorough preparation and a proactive strategy to achieve desired outcomes. We are well-positioned to help our clients navigate these dynamic market conditions. Now let me turn to our third quarter financial performance. We generated adjusted EPS of $1.57, which is up 33% from a year ago. On an underlying basis, revenue grew 10%. Underlying revenue grew 11% in RIS and 9% in Consulting. Marsh was up 8%, Guy Carpenter 8%, Mercer 8%, and Oliver Wyman grew 12%. Overall, the third quarter saw adjusted operating income growth of 24% and our adjusted operating margin expanded 170 basis points year-over-year.

For the nine months, consolidated revenue grew 10% on an underlying basis. Adjusted operating income grew 17% and our adjusted operating margin expanded 130 basis points. Adjusted EPS was $6.31, up 17% from a year ago. With our outstanding results in the third quarter and year-to-date, we remain on track for a terrific year. Based on our outlook today and assuming current market conditions persist, we now expect full-year underlying revenue growth to be 9% to 10%. We also continue to expect margin expansion for the full year and strong growth in adjusted EPS. Finally, I want to provide an update on our recently announced leadership changes. Martine Ferland, CEO of Mercer, will retire on March 31 of next year. Pat Tomlinson has been appointed President of Mercer, where he will work closely with Martine through a transition period and have responsibility for Mercer’s global health, wealth, and career practices.

A financial analyst looking at the news, analyzing the trends of the insurance market.

Pat will succeed Martine as President and CEO of Mercer upon her retirement. I’m excited to work with Pat in his new role. He brings an outstanding track record as a leader and strong knowledge of our business. He currently serves as Marsh McLennan, U.S. and Canada CEO; and Mercer President of U.S. and Canada; has had 26 years of industry experience, including the last nine years in leadership roles at Mercer. I also want to thank Martine for her leadership. In her five years as CEO of Mercer, she delivered strong growth, built and cultivated our talent, and delivered impact for our clients. This announcement is another example of our depth of exceptional talent and focus on succession planning. Overall, I am proud of our third quarter performance, which demonstrates continued execution of our strategy and continued momentum across our business.

I’m grateful to our colleagues for their focus and determination and the value they deliver to our clients, shareholders, and communities. With that, let me turn it over to Mark for a more detailed review of our results.

Mark McGivney : Thank you, John, and good morning. Our third quarter results were outstanding, continued momentum in underlying growth, strong double-digit adjusted EPS growth and significant margin expansion. Our consolidated revenue increased 13% to $5.4 billion, with underlying growth of 10%. Operating income was $996 million and adjusted operating income was $1.1 billion, up 24% from a year ago. Our adjusted operating margin increased 170 basis points to 21.3%. GAAP EPS was $1.47 and adjusted EPS was $1.57, up 33% over last year. Note that adjusted EPS in the third quarter included a $0.10 discrete tax benefit from the release of the valuation allowance on foreign deferred tax assets. Even without this benefit, our adjusted EPS grew 25% in the quarter.

For the first nine months of 2023, underlying revenue growth was 10%. Adjusted operating income grew 17% to $4.4 billion. Our adjusted operating margin increased 130 basis points and adjusted EPS increased 17% to $6.31. Looking at Risk and Insurance Services, third quarter revenue was $3.2 billion, up 12% from a year ago or 11% on an underlying basis. This result marks the tenth consecutive quarter of 8% or higher underlying growth in RIS and continues the best stretch of growth in nearly two decades. Operating income increased 21% to $640 million. Adjusted operating income increased 19% to $671 million and our adjusted operating margin expanded 100 basis points to 23.4%. For the first nine months of the year, revenue in RIS was $10.8 billion.

With underlying growth of 12%, adjusted operating income increased 18% to $3.3 billion. Margin increased 150 basis points to 32.6%. At Marsh, revenue in the quarter was $2.7 billion, up 9% from a year ago or 8% on an underlying basis. This comes on top of 8% growth in the third quarter of last year. Growth in the third quarter reflected solid new business and strong retention. In U.S. and Canada, underlying growth was 6% for the quarter, led by strong growth in MMA. In International, underlying growth was 10% and comes on top of 11% in the third quarter of last year. Latin America was up 14%. Asia Pacific was up 10% and EMEA grew 9%. For the first nine months of the year, Marsh’s revenue was $8.5 billion, with underlying growth of 9%. U.S. and Canada grew 7% and International was up 10%.

Guy Carpenter’s revenue was $359 million in the quarter, up 9% or 8% on an underlying basis, driven by strong growth across our global specialties and regions. For the first nine months of the year, Guy Carpenter generated $2 billion of revenue, 10% underlying growth. In the Consulting segment, third quarter revenue was $2.2 billion, up 13% from a year ago or 9% on an underlying basis. Consulting operating income was $424 million. Adjusted operating income increased 24% to $447 million, and the adjusted operating margin expanded 170 basis points to 20.8%. For the first nine months of 2023, consulting revenue was $6.4 billion, with underlying growth of 7%. Adjusted operating income increased 11% to $1.3 billion. The adjusted operating margin expanded 50 basis points to 20.1%.

Mercer’s revenue was $1.4 billion in the quarter, up 8% on an underlying basis. This was Mercer’s best quarter of underlying growth in 15 years. Wealth grew 7%, driven by continued demand in defined benefits consulting and higher growth in investment management. Our assets under management were $379 billion at the end of the third quarter, up 19% compared to the third quarter of last year and down 4% sequentially. Year-over-year growth was driven by our transaction with Westpac, a rebound in capital markets, and positive net flows. Health underlying growth was 8% and reflected strength in all segments and regions. Career revenue increased 7%, on top of 15% growth in the third quarter of last year. We continue to see growth in rewards and talent strategy.

For the first nine months of the year, revenue at Mercer was $4.1 billion, with 7% underlying growth. Oliver Wyman’s revenue in the quarter was $781 million, an increase of 12% on an underlying basis that reflected strength in the Middle East and Europe. For the first nine months of the year, revenue at Oliver Wyman was $2.3 billion, an increase of 8% on an underlying basis. Foreign exchange was a $0.01 headwind to EPS in the third quarter. Assuming exchange rates remain at current levels, we expect FX will have an immaterial effect on fourth quarter earnings. We reported $52 million of total restructuring costs in the quarter, approximately $37 million of which relates to the program we announced in the fourth quarter last year. These charges include costs related to severance, lease exits and streamlining our technology environment.

We’ve continued to pursue efficiencies under this program, and our outlook for savings has increased. As John noted, we now expect total charges of $425 million to $475 million and expect total savings of roughly $400 million, of which approximately $225 million will be realized in 2023. To date, we have incurred approximately $325 million of charges under this program. We currently expect to incur the majority of the remaining charges by the end of 2023 and to realize the bulk of the remaining savings in 2024. Our other net benefit credit was $62 million in the quarter. For the full year 2023, we expect our other net benefit credit will be about $240 million. Investment income was $1 million in the third quarter on a GAAP basis and $2 million on an adjusted basis.

Interest expense in the third quarter was $145 million, up from $118 million in the third quarter of 2022, reflecting higher levels of debt and higher interest rates. Based on our current forecast, we expect approximately $157 million of interest expense in the fourth quarter. Our effective adjusted tax rate in the third quarter was 20.5% compared with 24.6% in the third quarter of last year. Our tax rate in both periods benefited from favorable discrete items. The largest discrete item this quarter was a $48 million release of a valuation allowance on foreign deferred tax assets. Excluding discrete items, our effective adjusted tax rate was approximately 25.5%. When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative.

Based on the current environment, it is reasonable to assume a tax rate of around 25.5% for 2023. Turning to capital management and our balance sheet. We ended the quarter with total debt of $13.6 billion. This includes the $1.6 billion of senior notes we issued in September. Our next scheduled debt maturities are in March 2024, when $1 billion of senior notes mature and in May, when another $600 million of senior notes come due. We also recently took the opportunity to increase borrowing capacity under our credit facility, increasing the size of the facility to $3.5 billion from $2.8 billion and extending the term of the facility by 2.5 years to 2028. This was a prudent step to increase our access to short-term funding given the significant growth in our business since we last renewed the facility in April 2021.

We are also pleased that Moody’s upgraded our senior unsecured debt rating to A3 in September. We continue to expect to deploy approximately $4 billion of capital in 2023 across dividends, acquisitions and share repurchases. Our cash position at the end of the third quarter was $2.9 billion. Uses of cash in the quarter totaled $1 billion, included $353 million for dividends, $368 million for acquisitions, and $300 million for share repurchases. For the first nine months, uses of cash totaled $2.9 billion and included $944 million for dividends, $1.1 billion for acquisitions, and $900 million for share repurchases. Overall, we remain on track for a terrific 2023. Based on our outlook today and assuming current conditions persist, we expect to generate 9% to 10% full-year underlying revenue growth, strong growth in adjusted EPS and to report margin expansion for the 16th consecutive year.

And with that, I’m happy to turn it back to John.

John Doyle : Thank you, Mark. Operator, we are ready to begin Q&A.

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Q&A Session

Operator: [Operator Instructions]. And our first question comes from the line of Elyse Greenspan with Wells Fargo.

Elyse Greenspan : Hi, thanks. Good morning. My first question is on the U.S., Canada within Marsh. Organic of 6%, but that is a slowdown from where you guys were in the first part of the year. Can you just give a little bit more color on what’s causing the slowdown? And then I think in the introductory comments, you guys mentioned that MMA saw strong growth. So, can you give us a sense of the growth within MMA and the growth outside of MMA within that segment?

John Doyle: Sure, Elyse. Good morning. Thanks for the question. Again, overall, I was quite pleased with the growth — the revenue growth in the quarter. We had good growth at Marsh. Best growth at Mercer in 15 years. And again, strong performance at Guy Carpenter and Oliver Wyman. Marsh U.S., inclusive of MMA, and I would also note our MGA operation had a good quarter as well. Growth was strong. Marsh U.S. was up 6% versus 5% a year ago. Again, we caution you to look at growth at any one — at any one quarter. We think we’re well-positioned, and our team is executing well. Martin, do you have any other color on what impacted growth at Marsh this quarter?

Martin South : Yes. Thank you, John. As you said, very strong growth for Marsh across the board in International and North America. As you said, we don’t comment on specifically on MMA, but they’ve had a good quarter. The growth in the MGA business was strong. There’s partly some impact from the capital markets and some moderating growth in financial construction, cyber lines reflecting some pricing pressures. But as you say, we don’t look at this on a quarter-over-quarter basis. We look it over a longer period of time, and we feel very positive about the U.S. business and the Canadian business.

John Doyle: Thanks, Martin. Elyse, do you have a follow-up?

Elyse Greenspan : Yes. And then my second question. So, on the revised savings program, is there a way to give us a sense — you mentioned, John, it came from rationalizing tech, real estate, and realigning the workforce. How much each of those buckets are contributing to the extra savings? And then is it still fair to assume that most of the savings that you’re expecting this year should be falling to the bottom line?

John Doyle: So really, backing up a little bit, Elyse. As our business has operated more closely together, we’ve just identified additional opportunities. They’re largely in the same areas, right? It’s around realigning our workforce and mostly in functions, I would say, as opposed to market-facing workforce talent, real estate, and technology. We’ve not broken it out by group, but the costs are severance, lease terminations, and streamlining technology. So again, we’re excited about some of the opportunities that we’ve uncovered and I’m proud of the team. We’re executing against them.

Operator: And our next question comes from the line of Jimmy Bhullar with JPMorgan.

Jimmy Bhullar: Good morning. So, first question on the reinsurance market. I think you mentioned the word firm in terms of pricing. And are you expecting prices to be up further from these current levels? Or firm just means that they’ll be somewhat stable? And then how do you think that will affect your growth? At Guy Carpenter, you’ve grown double digits this year. I’m not sure how much of that is because of the tailwind from pricing.

John Doyle: Yes. Thanks, Jimmy. I did use the word firm. There’s no question. Our team at Guy Carpenter has done a terrific job this year, helping our clients navigate what’s a challenging market. As I said, I expect that the market on January 1 will certainly be more orderly than last year. But there are concerns both in the insurance and reinsurance market about rising loss costs. And so, we don’t want to project and can’t really project with accuracy and there’s still a quarter to run. We expect underwriting discipline to remain. But with that, maybe, Dean, you could offer some thoughts on Guy Carpenter and what we think of the market?