Marsh & McLennan Companies, Inc. (NYSE:MMC) Q4 2022 Earnings Call Transcript

Marsh & McLennan Companies, Inc. (NYSE:MMC) Q4 2022 Earnings Call Transcript January 26, 2023

President and Chief Executive Officer: Mark McGivney – Chief Financial Officer Martin South – President and CEO, Marsh Dean Klisura – President and CEO, Guy Carpenter Martine Ferland – President and CEO, Mercer Nick Studer – President and CEO, Oliver Wyman

Operator: Welcome to Marsh McLennan’s Earnings Conference Call. Today’s call is being recorded. Fourth quarter 2022 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 in 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. 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 fourth quarter results reported earlier today. I’m John Doyle, the President and CEO of Marsh McLennan. Joining me on the call today 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. I am excited to be leading this call today for the first time as President and CEO. Marsh McLennan is an outstanding company with unique capabilities in the critical areas of risk, strategy and people. We help clients address their greatest challenges and find new possibilities as they navigate dynamic environments.

We have exceptional talent, a wide range of solutions and a track record of execution in financial performance. Our leadership team is focused on delivering the full capabilities of Marsh McLennan to our clients, continuously improving the client and colleague experience, efficiently managing capital and driving growth and value for shareholders. Over the past year, I’ve been meeting with colleagues and clients to exchange ideas about how we can accelerate impact for clients and enable their success. These conversations reinforce my conviction that we are in the right businesses with strong brands and deep client relationships. I am confident that we have meaningful opportunity at the intersections of our businesses, where together our scale, data, insights and solutions are highly valued by clients.

The strength of our unique value proposition has us well positioned for the years ahead. Today, we are focused, aligned, and succeeding together as our results demonstrate. 2022 was an outstanding year for Marsh McLennan. We generated 9% underlying revenue growth, continuing our best period of growth in more than two decades with each of our businesses delivering strong results. Our total revenue surpassed $20 billion and adjusted operating income grew 11% to $4.8 billion. This was on top of 18% growth in 2021. We reported adjusted margin expansion for the 15th consecutive year. Adjusted EPS growth was 11%. I am particularly pleased with this performance as our results included costs related to our strategic investments in talent and the continued normalization of T&E.

These results also came on top of 24% growth in 2021, and we delivered significant capital return to shareholders raising our dividend by 10% and completing $1.9 billion of share repurchases the largest annual amount in our history.

Avascent: We overcame significant foreign exchange and capital market headwinds to generate these results through execution, growth and exceptional client engagement. I’m particularly proud of these achievements amid a year of seamless leadership transitions at Marsh and Guy Carpenter. Our purpose and strategy underpin our performance. Marsh McLennan makes a difference in the moments that matter for our clients, colleagues, and our communities. Turning purpose into practice our strategy focuses on several core elements, promoting a culture that attracts and retains top talent in our business, investing to strengthen our capabilities organically and inorganically, positioning ourselves in segments and geographies with attractive fundamentals, leveraging data and insights to help clients become more resilient and find new opportunities, and delivering Marsh McLennan’s full value proposition to enable client success.

We complement our colleague and client facing strategy with our approach to expense and capital management. We focus on growing revenue faster than expenses, which contributes to annual margin expansion and adjusted EPS growth, and we manage capital allocation to balance performance in the near-term with investing for the long term. We are accelerating collaboration across our business to drive greater growth and efficiency. We are implementing new ways to operate, reduce complexity and organize for impact. In this regard, we took actions in the fourth quarter to align our workforce and skillsets with evolving needs, rationalized technology, and reduced our real estate footprint. Together, these actions resulted in an approximately $230 million of charges.

Based on our outlook today, we expect they will drive $125 million to $150 million of savings in 2023. Overall, they reflect an opportunity to accelerate impact for clients, reinvest in our capabilities, and to be more efficient and connected.

P&C:

ceded: Now, let me turn to our fourth quarter financial performance. We generated adjusted EPS of $1.47 which is up 8% versus a year ago or 12%, excluding the impact of foreign exchange. On an underlying basis, revenue grew 7%. Underlying revenue grew 8% in RIS and 6% in consulting. Marsh grew 6%. Guy Carpenter grew 5%. Mercer grew 5%, and Oliver Wyman grew 8%. Overall the fourth quarter saw adjusted operating income growth of 13%, and our adjusted operating margin expanded 160 basis points year-over-year. As we look ahead to 2023, we see a mixed economic picture. While there is a risk of recession for major economies, we also believe there are many factors that remain supportive of growth for our business. Softer real GDP growth is offset by elevated inflation, which drives higher insured values and loss costs.

P&C insurance rates continue to increase as insurers account for rising frequency and severity of catastrophe losses, the risks of social inflation and higher reinsurance costs. Healthcare costs continue to rise due to higher wages and labor shortages in the healthcare sector. The U.S. labor market continues to remain among the tightest employment environments of the past half century with 3.5% unemployment and over $10 million unfilled jobs and short-term interest rates are at the highest level since the financial crisis increasing our fiduciary income. When the world is volatile and uncertain, demand for our services typically rises. This year’s global risks report, which we just published in collaboration with the World Economic Forum highlights that risks confronting our clients extend well beyond economic and insurance cycle concerns.

The report identified the cost of living crisis, failure to mitigate and adapt to climate change, extreme weather, natural resource crises, the erosion of social cohesion, cybercrime and geo-economic confrontation among the top risks facing society over the near-term and next decade. In these areas and many others, we are working with clients to meet these challenges, build resilience and capture new opportunities. Our colleagues are inspired by the opportunity to work on these critical issues and to make a difference in the moments that matter. Looking forward, we are well positioned for 2023 and beyond. We expect mid-single-digit or better underlying revenue growth in 2023, another year of margin expansion and strong growth in adjusted EPS.

Our outlook assumes current macro conditions persist, but meaningful uncertainty exists and the economic backdrop could be materially different than our assumptions. However, we have a track record of resilience across economic cycles. In summary, 2022 was an outstanding year for Marsh McLennan, one in which all of our businesses delivered strong performance. We generated record revenues and earnings, saw the benefit of recent investments in growth, continued to execute on our acquisition strategy and made record share repurchases. We are proud of the focus and determination of our colleagues and the value they deliver to our clients and shareholders. We closed the year on a high note and look forward to another year of strong performance in 2023.

With that, let me turn it over to Mark for a more detailed review of our results.

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Mark McGivney: Thank you, John, and good morning. We are pleased with our strong fourth quarter results, which capped another terrific year. We delivered strength on strength from a financial performance perspective and continued to invest organically and inorganically. These investments combined with the actions we took in the fourth quarter, position us well for another good year in 2023. Consolidated revenue decreased 2% in the fourth quarter to $5 billion. As a reminder, the fourth quarter last year included a large gain related to Marsh India. Foreign exchange was also a meaningful headwind to GAAP revenue growth. However, on an underlying basis, revenue increased 7%. Operating income in the fourth quarter was $680 million and adjusted operating income increased 13% to $1 billion.

Our adjusted operating margin increased 160 basis points to 22%. GAAP EPS was $0.93 and adjusted EPS was $1.47. Our full year, 2022 results were outstanding. Operating income for the year was $4.3 billion and adjusted operating income was $4.8 billion, an increase of 11% over 2021. Adjusted EPS grew 11% to $6.85 and our adjusted operating margin expanded 80 basis points marking our 15th consecutive year of reported margin expansion. 2022 was also a strong year for capital management. We deployed $3.9 billion of capital, enhanced our short-term liquidity, raised our dividend 10% and saw Moody’s lift our rating outlook to positive. Looking at risk and insurance services, fourth quarter revenue decreased 3% to $2.9 billion. Note that RIS in specifically Marsh is where the India gain affected our revenue comparisons.

On an underlying basis, revenue in RIS increased 8%, the strong result reflecting the momentum in our business and our resilience in the face of macro headwinds and on economic uncertainty. RIS operating income was $472 million in the fourth quarter. Adjusted operating income increased 23% to $685 million. The adjusted margin expanded 290 basis points to 25.6%. For the year, revenue in RIS was $12.6 billion and increase of 5% with underlying growth of 9%. Adjusted operating income growth for the year was impressive at 15%, our adjusted operating margin in RIS increased 130 basis points to 29.8%. At Marsh revenue in the quarter decreased 6% to $2.7 billion, but was up 6% on an underlying basis. This comes on top of a tough comparison to the fourth quarter of last year, which saw strong M&A and SPAC related activity.

For the full year revenue at Marsh was $10.5 billion, an increase of 3% or 8% on an underlying basis. In U.S. and Canada, underlying growth was 5% for the quarter, a solid result given the headwind from lower M&A and capital markets activity. We expect this headwind to persist into the first quarter, but normalize as we enter the second quarter. For the full year underlying growth in U.S. and Canada was excellent at 7%. In international, underlying growth was 8% in the quarter with Asian Pacific up 12%, EMEA up 7%, and Latin America up 4%. For the full year underlying growth in international was strong at 10%. Guy Carpenter’s revenue was $171 million, up 5% on an underlying basis. For the year revenue was $2 billion, an increase of 8% or 9% on an underlying basis.

Based on our current outlook, we expect Guy Carpenter’s growth in 2023 to benefit from a tightening reinsurance market. In the Consulting segment, fourth quarter revenue was $2.1 billion flat versus the prior year. Revenue grew 6% on an underlying basis. Consulting operating income was $336 million, and adjusted operating income was $407 million, down 1% reflecting continued foreign exchange and capital markets headwinds. The adjusted operating margin was 20% in the fourth quarter, a decrease of 20 basis points. For the full year Consulting revenue was $8.1 billion, an increase of 8% on an underlying basis. Adjusted operating income for the year increased 4% to $1.5 billion, while our adjusted operating margin decreased 10 basis points to 19.7%.

Mercer’s revenue was $1.3 billion in the quarter, up 5% on an underlying basis. This is a good result considering the impact of capital markets on our investments business. Wealth was flat on an underlying basis due to year-over-year declines in both equity and fixed income markets. Solid growth in defined benefits helped mitigate the drop in investments. Our assets under management were $345 billion at the end of the fourth quarter, up 9% sequentially, but down 17% from the fourth quarter of last year due to market declines in foreign exchange, which more than offset strong positive net flows. Health revenue grew 8% on an underlying basis in the fourth quarter, reflecting strength in employer and government segments and momentum across all regions.

Career revenue increased 12% on an underlying basis, reflecting continued demand in rewards, talent strategy, and workforce transformation. For the year revenue at Mercer was $5.3 billion, an increase of 6% on an underlying basis, the highest result since 2008. Oliver Wyman’s revenue in the fourth quarter was $765 million, an increase of 8% on an underlying basis, a solid result considering a tough comparison to 22% growth in the fourth quarter of 2021. For the full year, Oliver Wyman’s revenue was $2.8 billion, an increase of 13% on an underlying basis, building on the 21% growth in 2021. As we look to 2023, we expect growth at Oliver Wyman to slow given rising economic uncertainty. Adjusted corporate expense was $68 million in the quarter.

Foreign exchange was a $0.05 headwind in the fourth quarter, and for the full year was a $0.12 headwind. Assuming exchange rates remain at current levels, we expect FX to be a $0.03 headwind in 2023 with $0.05 in the first quarter and $0.02 in the second quarter, reversing to a modest tailwind in the second half. I want to spend a minute on the $344 million of noteworthy items in the quarter, the majority of which related to actions we initiated last year, as well as the final exit of JLT’s headquarters in London. The largest category of noteworthy items in the quarter was $233 million relating to restructuring activities which are focused on workforce actions, rationalizing technology, and reducing our overall real estate footprint. The charges included severance associated with headcount reductions, as well as provisions related to real estate actions.

Although we expect some reinvestment of the savings from these actions, the majority will flow to earnings. Based on our outlook today, we expect the benefit to earnings in 2023 could be $125 million to $150 million. We anticipate further actions under this program, which will continue through 2023 and possibly into 2024. We are still refining estimates of future opportunities, but at this point, we don’t see additional charges in 2023 or 2024 exceeding the amounts taken in 2022. As we typically do on our fourth quarter calls, will give a brief update on our global retirement plans. Our other net benefit credit was $57 million in the quarter and $235 million for the full year. For 2023, based on our current expectations, we anticipate our other net benefit credit will be about $235 million.

Cash contributions to our global defined benefit plans were $169 million in 2022. We expect cash contributions will be roughly $107 million in 2023. Investment income was a loss of $6 million in the fourth quarter on a GAAP basis and a loss of $5 million on an adjusted basis, and mainly reflects losses in our private equity portfolio. Given current market conditions, we anticipate negligible investment income in the first quarter of 2023. This compares to $17 million of investment income in the first quarter of 2022 on an adjusted basis. Interest expense in the fourth quarter was $127 million. Based on our current forecast, we expect interest expense for the full year of 2023 of approximately $565 million. This reflects an increase in long-term debt and higher interest rates on commercial paper, which we use for efficient working capital management.

Our adjusted effective tax rate in the fourth quarter was 22.9%. This compares with 20.6% in the fourth quarter last year. Both periods benefited from favorable discrete items. For the full year 2022 our adjusted effective tax rate was 23.5% compared with 23.6% in 2021. Excluding discrete items, our adjusted effective tax rate for the full year was approximately 25%. 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 25% to 26% for 2023. Turning to capital management in our balance sheet, we ended the year with total debt of $11.5 billion. This includes the $1 billion of senior notes we issued in October.

We used a portion of the proceeds from this offering to redeem $350 million of senior notes that were scheduled to mature in March, 2023. Our next scheduled debt maturity is in October, 2023 when $250 million of senior notes mature. Our cash position at the end of the fourth quarter was $1.4 billion. Uses of cash in the quarter totaled $1 billion and included $298 million for dividends, $395 million for acquisitions, and $350 million for share repurchases. For the year uses of cash totaled $3.9 billion and included $1.1 billion for dividends, $806 million for acquisitions, and $1.9 billion for sherry purchases. As a reminder, we have a balanced capital management strategy that supports our consistent focus on delivering solid performance in the near-term while investing for sustained growth over the long-term.

We prioritize reinvestment in the business, both for organic investments and acquisitions. We favor attractive acquisitions over share repurchases and believe they are the better value creator for shareholders and the company over the long-term. However, we also recognize that returning capital to shareholders generates meaningful returns for investors over time, and each year we target raising our dividend and reducing our share count. Looking ahead to 2023, based on our outlook today, we expect to deploy approximately $4 billion of capital across dividends, acquisitions, and share purchases. The ultimate level of share purchase will depend on how the M&A pipeline develops. As John noted, there is significant uncertainty in the outlook for the global economy.

However, we feel good about our momentum and position, and despite the uncertainty, there are factors that remain supportive of growth in our business. Based on our outlook today for 2023, we expect mid-single digit or better underlying revenue growth, margin expansion, and strong growth in adjusted EPS. And with that, I’m happy to turn it back to John.

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

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Q&A Session

Operator: Certainly. And our first question comes from the line of David Motemaden with Evercore ISI.

David Motemaden: Hi, good morning. I had a question first just on the restructuring actions and sort of wanted to just take a step back and just ask, is this a, are you instituting a downturn playbook just based on something you are seeing in the revenue environment that it hasn’t shown up in results yet, but is that something that you’re seeing and this is a defensive move or should I think of this as more of an offensive move, just from picking up some low hanging fruit that you see just sort of offer improving your efficiency throughout the organization?

John Doyle: Good morning, David. There’s nothing defensive about the move, right? We took steps to align our workforce and skill sets with the evolving needs of our clients. You know, as I noted, when I outlined some of the highlights of the global risk report, those client challenges and opportunities are constantly evolving in dynamic and we’ve also identified some opportunities to create some greater efficiencies across our businesses. We’re working more closely together. We’ve rationalized some technology, reduced our real estate footprint. So it’s not an indication of what we think the economic outlook is.

David Motemaden: Got it, thanks. And then maybe just if you could just talk about some of the three drivers that you spoke of, I guess it was real estate, technology and workforce. Any way to size which, how much of that benefit is coming from each of those buckets and how we should think about some of the future actions that you might be taking?

John Doyle: Yes, it’s a mix. It’s fairly balanced between the three different areas. And you know, as Mark noted, we’re still doing some work and we see some further opportunities. However, I think it’s likely that further charges would be less than what we took in the fourth quarter here. But again we’re challenging ourselves looking at where we’ve got talent, how it comes together, matching that against evolving needs in the marketplace and then pushing ourselves to operate in a different way and a more efficient way.

David Motemaden: Great. Thank you.

John Doyle: Thanks, David. Operator, next question?

Operator: Thank you. And our next question comes from the line of Jimmy Bhullar with JP Morgan.

Jamminder Bhullar: Hey, good morning, Jimmy. Hey, so John, you mentioned a little bit in your comments on just the hard market in reinsurance and also the firm market in commercial lines. Can you talk a little bit more about what you’re seeing, if you’re seeing any changes in client behavior, whether more sort of self-insurance or higher retention rates at both Marsh and Guy Carpenter?

John Doyle: Sure, thanks Jimmy for the question. You know, as I noted in my comments, it was a very challenging January 1st property cat renewal. We expected it to be a challenging renewal season prior to Ian, and then Ian of course exacerbated it. You know, I did mention that some of the higher costs are offset a bit by higher retentions. My comments there were primarily about reinsurance and not insurance. But I’ll ask Dean and Martin to comment a bit in a second, but what I would say I commented on the higher cat losses over the last several years. Reinsurers of course now have a higher cost to capital, inflation mark to market losses on the asset side of their balance sheet, just FX as well, a number of the big reinsurers and a lot other cat programs in the United States created some FX challenges as well.

So, just a number of different factors led to a really reevaluation of pricing and capacity deployment from some of the bigger capital providers. But Dean, maybe you’ll, you can go first and give an overview.

Dean Klisura: Yes, sure. Thanks John. I think in terms of client buying patterns, at January 1 in reinsurance, I mean, you mentioned increased retentions, attachment points. I mean, that was reinsured driven, right? Attachment points were up substantially for many of our clients, not only in the United States, but in all geographies with January 1 cat renewals. So our clients were forced to take more risk, more volatility on their balance sheets. In terms of buying patterns, that inflation driven demand for additional limit, everybody talked about all fall didn’t really materialize. Clients mostly bought the same amount of cat limit they bought last year. Maybe up incrementally, maybe our global clients bought a little bit more, but in terms of limit, some of that limit that was eliminated at the bottom end of cat programs was put on top of programs, right?

So clients made that up. But in terms of buying more, I think for many clients it was cost-prohibitive given the rate increases that John outlined around property cat, very challenging terms and conditions. You know, really reinsurers had the upper hand in this marketplace around pricing, attachment point and very challenging terms and conditions.

John Doyle: Thanks, Dean. Martin, do you want to share some observations about the insurance market?

Martin South:

D&O:

D&O: In terms of behavior, our clients are constantly looking at the optimization of their programs. Our captive management business grew nearly double digits in the quarter and for the year as clients retained some more of their risk and we have a wide range of value propositions to help our clients for the risks which they retain and they manage. And so we feel bullish that the changing market is not going to dampen our growth.

John Doyle: So Jimmy, it remains a dynamic and challenging market for our clients. Higher cat losses, risks of core inflation, social inflation. So we continue to observe underwriting discipline broadly speaking across the market. Do you have a follow up?

Jamminder Bhullar: Yes, just for Mark on fiduciary investment income, it’s obviously gone up a lot and even sequentially up to over 50% from 3Q and 4Q. Do you expect — should we expect a further increase in that over time? Because what we’ve seen recently is in some of the regions rates are actually flattish over the past several months. So is there more of sort of a lag effect of what’s happened with rates in fiduciary investment income or has the portfolio mostly reset higher?