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

Marsh & McLennan Companies, Inc. (NYSE:MMC) Q4 2023 Earnings Call Transcript January 25, 2024

Marsh & McLennan Companies, Inc. beats earnings expectations. Reported EPS is $1.68, expectations were $1.63. MMC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Marsh McLennan’s earnings conference call. Today’s call is being recorded. Fourth 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 fourth quarter results reported earlier today. I’m John Doyle, 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. 2023 was an outstanding year for Marsh McLennan. Total revenue grew 10% to $22.7 billion. 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. Adjusted operating income grew 17% to $5.6 billion.

This on top of 11% growth in 2022. Our adjusted operating margin increased 130 basis points, marking the 16th consecutive year we’ve reported margin expansion, and adjusted EPS grew 17%. We invested $1.6 billion in acquisitions that added to our talent, capabilities, and scale. This was our largest year for acquisitions in nearly two decades, aside from 2019 when we acquired JLT. Our acquisition of Graham expanded MMA’s mid-Atlantic presence, Honan’s strength in our Australian middle market business, and our transaction with Westpac created one of Australia’s most competitive super funds. At the same time, we continued to optimize our portfolio, with the sale of two administration businesses at Mercer, which closed on January 1, 2024, and we delivered significant capital return to shareholders, raising our dividend by 20%, and completing $1.15 billion of share repurchases.

I’m proud of what our team achieved in 2023. Our colleagues executed on key initiatives and generated value for clients and shareholders. Our performance reflects execution of a well-defined strategy, which includes building a culture that attracts and retains top talent, strengthening our capabilities through organic and inorganic investment, positioning ourselves in segments and geographies with attractive growth and margin profiles, leveraging data insights and innovation to support clients in managing uncertainty and finding new opportunities, and delivering the power of Marsh McLennan’s perspective to help clients thrive. I just returned from the World Economic Forum where geopolitical, economic, climate, technology, and social risks were all very much top of mind for business and government leaders.

Marsh McLennan is uniquely positioned to help clients manage the broad range of outcomes they’re confronting from these issues. The launch of the Unity facility with Ukraine in November is a great example. Marsh, Oliver Wyman, and Guy Carpenter, came together to create an innovative insurance solution through a public-private partnership. Unity is now providing access to affordable war risk insurance for grain shipments in the Black Sea. The Ukrainian government’s ambition is for the facility to enable nearly 1,000 shipments annually, helping to support their economy and global food security. Launching this facility was a proud moment for us, and I can’t think of a better example of our purpose, our capabilities, and our impact in action. In so many ways, Marsh McLennan is well positioned to address today’s challenges, and we are only just beginning to harness our combined capabilities, which are a distinct advantage.

We are inspired by the possibilities, and consider it a privilege to do this important work. Our business strategy is complemented by a balanced approach to expense and capital management. We focus on generating consistent, strong earnings growth, and have a discipline of growing revenue faster than expenses. Our approach to capital allocation delivers results today, while investing to sustain growth in the future. And we are implementing new ways to operate, reduce complexity, and organize for impact. The strong value propositions of our individual businesses, the upside from bringing our collective strength to clients, and our restructuring actions, position us well for 2024. Looking to the year ahead, we continue to see a complex macro environment.

Major economies continue to face the risk of recession, but moderating inflation and the possibility of easing interest rates make a soft landing more likely. The geopolitical situation remains unsettled, with multiple wars, escalating conflict throughout the Middle East, and rising tension in the South China Sea. Despite these challenges, we continue to believe there are factors that are supportive of growth in our business. Nominal GDP expectations for 2024 remain healthy for our major markets. While inflation has moderated, it is still elevated, and tight labor markets and supply chain challenges persist. Continued low unemployment and sustained payroll growth, support demand in health and benefits and exposure unit growth in workers’ compensation.

The cost of risk continues to increase as insurers account for rising frequency and severity of catastrophe losses, the risks of social inflation, and higher reinsurance costs. Healthcare costs, driven in part by the rising cost of prescription drugs, accelerated in 2023, and are expected to remain elevated. And while short-term interest rates could ease, they remain at the highest level since the financial crisis. As we’ve stated before, we have a track record of resilience and performance across economic cycles. Now, let me turn to insurance and reinsurance market conditions. Primary insurance rates increased for the 25th consecutive quarter, with the Marsh Global Insurance Market Index up 2% overall, compared to a 3% increase in the third quarter.

Property rates increased 6% versus 7% in the third quarter, and casualty pricing continued to be up low single-digits. Workers’ compensation decreased slightly, while financial and professional liability rates were down mid-single-digits. Cyber pricing decreased modestly after several years of increases. In reinsurance, the January 1 renewals reflected a market with more balanced trading conditions than a year ago. As we expected, underwriting discipline continued, but the market was more responsive to client objectives. Capacity was generally adequate, and we saw increased demand from clients. In global property cat reinsurance, accounts without losses saw rates up modestly, while loss-impacted accounts increase between 10% and 30%. Casualty programs faced more scrutiny this year, with pressure on pro-rata seating commissions, and excess of loss pricing.

However, casualty capacity was adequate. As always, we’re helping our clients navigate these dynamic market conditions. Now, let me briefly turn to our fourth quarter financial performance, which Mark will cover in detail. We generated adjusted EPS of $1.68, which is up 14% versus a year ago. Revenue grew 7% on an underlying basis, with 8% growth in RIS, and 7% in consulting. Overall, in the fourth quarter, we had adjusted operating income growth of 16%, and our adjusted operating margin expanded 130 basis points year-over-year. In summary, 2023 was another outstanding year for Marsh McLennan. All of our businesses delivered, generating excellent revenue and earnings growth. We executed on our strategic initiatives, invested in high quality acquisitions, made the largest dividend increase in 25 years, and made meaningful share repurchases.

Looking forward, we are well positioned for 2024. We expect mid-single-digit or better underlying revenue growth, margin expansion, and strong adjusted EPS growth. Our outlook assumes current macro conditions persist. However, meaningful uncertainty remains, and the economic backdrop could be materially different than our assumptions. 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 strong fourth quarter results capped an excellent year. Our consolidated revenue increased 11% in the fourth quarter to $5.6 billion, with underlying growth of 7%. Operating income was $1.1 billion, and adjusted operating income was $1.2 billion, up 16% from a year ago. Our adjusted operating margin increased 130 basis points to 23.3%. GAAP EPS was $1.52. Adjusted EPS was $1.68, up 14%. Our full year of 2023 results were outstanding. Operating income for the year was $5.3 billion, and adjusted operating income was $5.6 billion, an increase of 17% over 2022. Adjusted EPS grew 17% to $7.99, and our adjusted operating margin expanded 130 basis points, marking our 16th consecutive year of reported margin expansion.

2023 was also a strong year for capital management. We deployed $4 billion of capital, enhanced our short-term liquidity, raised our quarterly dividend 20%, and saw Moody’s upgrade our senior unsecured debt rating to A3. Looking at risk and insurance services, fourth quarter revenue increased 11% to $3.3 billion, or 8% on an underlying basis. This result marks the 11th consecutive quarter of 8% or higher underlying growth in RIS, and continues the best stretch of growth in two decades. RIS operating income was $753 million in the fourth quarter. Adjusted operating income increased 15% to $791 million, and our adjusted margin expanded 140 basis points to 27%. For the full year, revenue in RIS was $14.1 billion, representing an increase of 11% on an underlying basis.

Adjusted operating income grew 17% for the year, and our adjusted operating margin in RIS increased 150 basis points to 31.3%. At Marsh, revenue in the quarter increased 7% to $2.9 billion, or 6% on an underlying basis. For the full year, revenue at Marsh was $11.4 billion, reflecting underlying growth of 8%. In US and Canada, underlying growth was 5% for the quarter, reflecting solid renewal and new business growth, despite continued headwinds in financial and professional lines. We also saw a headwind of nearly a point from lower flood claims in our MGA business. For the full year, underlying growth in US and Canada was strong at 7%. In international, underlying growth was 7% in the quarter, with Latin America up 11%, Asia Pacific up 10%, and EMEA up 5%.

For the full year, underlying growth in international was excellent at 9%. Guy Carpenter’s revenue was $252 million, up 9% on an underlying basis, driven by growth across global specialties in most regions. For the year, Guy Carpenter generated $2.3 billion of revenue and 10% underlying growth, our strongest year since 2003. In the consulting segment, fourth quarter revenue was $2.3 billion, up 10% from a year ago, or 7% on an underlying basis. Consulting operating income was $443 million, and adjusted operating income was $480 million, up 18%. Our adjusted operating margin expanded 130 basis points in the quarter to 21.3%. For the full year, consulting revenue was $8.7 billion, an increase of 7% on an underlying basis. Adjusted operating income for the year increased 13% to $1.7 billion, and our adjusted operating margin increased 70 basis points to 20.4%.

Mercer’s revenue was $1.4 billion in the quarter, reflecting underlying growth of 5%. This was Mercer’s 11th straight quarter of 5% or higher underlying growth, and continues the best run of growth in 15 years. Health grew 9% in the fourth quarter, reflecting strength in employer and government segments, and momentum across all regions. Wealth was up 4%, driven by growth and investment management and DB administration. Our assets under management were $420 billion at the end of the fourth quarter, up 11% sequentially, and up 22% compared to the fourth quarter of last year. Year-over-year growth was driven by our transaction with Westpac, a rebound in capital markets, and positive net flows. Career revenue increased 1%, reflecting tough comparables following a period of strong growth in the reward space.

For the year, revenue at Mercer was $5.6 billion, an increase of 7% on an underlying basis, the best result since 2008. Oliver Wyman’s revenue in the fourth quarter was 856 million, an increase of 9% on an underlying basis, like strength in Europe and the Middle East. For the full year, Oliver Wyman’s revenue was $3.1 billion, reflecting underlying growth of 8%. Adjusted corporate expense was $78 million in the quarter. Foreign exchange had very little impact on earnings in the fourth quarter and was a $0.07 headwind for the full year. Assuming exchange rates remain at current levels, we expect FX will have a negligible impact on the first quarter and full year of 2024. Total noteworthy items in the quarter were $90 million, the majority of which related to our restructuring actions, partly offset by a $58 million gain related to a legal settlement.

We reported $131 million of total restructuring costs, approximately $113 million of which relates to the program we launched in the fourth quarter of 2022. These charges largely reflect costs related to severance, lease exits, and streamlining our technology environment. We expect total charges under this program of approximately $475 million, and expect total savings of roughly $400 million, of which approximately $230 million was realized in 2023. We expect to realize the bulk of the remaining savings in 2024. To date, we’ve incurred approximately $440 million of charges under this program. Our other net benefit credit was $59 million in the quarter and $239 million for the full year. For 2024, we currently expect our other net benefit credit will be up slightly.

Cash contributions to our global defined benefit plans were $111 million in 2023. We expect a similar amount in 2024. Investment income was a loss of $1 million in the fourth quarter on both a GAAP and adjusted basis, and we aren’t currently projecting any investment income in the first quarter of 2024. Interest expense in the fourth quarter was $151 million, up from $127 million in the fourth quarter of 2022, reflecting higher levels of debt and higher interest rates. Based on our current forecast, we expect interest expense for the full year 2024 of approximately $625 million, with $159 million in the first quarter. Our adjusted effective tax rate in the fourth quarter was 25.5%. This compares with 22.9% in the fourth quarter last year, which benefited from favorable discrete items.

For the full year 2023, our adjusted effective tax rate was 24%, compared with 23.5% in 2022. Both periods benefited from favorable discrete items. 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, we expect an adjusted effective tax rate of between 25.5% and 26.5% for 2024. Turning to capital management and our balance sheet, we ended the year with total debt of $13.5 billion. Our next scheduled debt maturities are in the first quarter of 2024, when $1 billion of senior notes mature, and in the second quarter when another $600 million of notes come due. Recall that last September we issued $1.6 billion of new debt to fund these maturities.

Our cash position at the end of the fourth quarter was $3.4 billion. Uses of cash in the quarter totaled $1.1 billion, and included $354 million for dividends, $486 million for acquisitions, and $250 million for share repurchases. For the year, uses of cash totaled $4 billion and included $1.3 billion for dividends, $1.6 billion for acquisitions, and $1.15 billion for share repurchases. I want to take a minute to reiterate our approach to capital management. We have consistently followed a balanced capital management strategy that helps us deliver solid performance in the near term, while investing for sustained growth over the long term. We prioritize investment in our business, both through 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 cap. Looking ahead to 2024, based on our outlook today, we expect to deploy approximately $4.5 billion of capital across dividends, acquisitions, and share repurchases. The ultimate level of share repurchase 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. For 2024, we currently expect mid-single-digit or better underlying revenue growth, margin expansion, and strong growth in adjusted EPS.

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

John Doyle: Thank you, Mark. Andrew, we’re 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, earlier this week, we had another insurance broker who’s updating their reported EPS metric to back out intangibles. So, that does leave you guys as the only broker peer, right, that doesn’t back out intangibles out of your adjusted EPS figure. Have you guys given consideration to moving towards what’s become industry common practice?

John Doyle: Good morning, Elyse. Mark, maybe you could comment on that.

Mark McGivney: Elyse, we don’t have any current plans to change our reporting. We do provide amortization and other information that allows you to stack us up against other companies, but we don’t plan to change how we report at this point.

Elyse Greenspan: Okay. Thanks.

John Doyle: You have a follow-up, Elyse?

Elyse Greenspan: And then my second – yes, my second question. I was hoping to get more color on both the US and Canada and EMEA, which did see growth slow in the quarter. I know Mark alluded to one point headwind from lower flood business within the US and Canada. I wasn’t sure if there was anything else to point out in the quarter, and also hoping to get similar color on anything one-off within organic growth within EMEA as well.

John Doyle: Sure, Elyse, and I’ll make a couple of comments and then ask Martin to jump in. First of all, Marsh had an excellent year of growth at 8% underlying revenue growth for the year, a strong finish to the year. We saw fourth quarter of 2022 have slightly lower underlying growth as well, but we feel like we’re very well positioned. Mark made a few comments about the growth in the quarter, but Martin, maybe you could add a little bit more color.

Martin South: Yes, thank you, John. As you said, we had a very good year, with 7% growth this year. And Marsh for the quarter at 5% growth, was also the same as the prior year. MMA had an outstanding performance, driven really by great retention new business. Our M&A pipeline is robust. The US business continued to perform well. There’s some headwinds in the capital markets activity and pressure on financial minds, but our advisory business grow – it was partially offset by Canada, which is impacted more by macro headwinds. And of course, we mentioned a lot of flood claims in the MGA business. So, in EMEA, we had an excellent year in EMEA, 9% growth. Q4 was 5% growth. The European business within EMEA is the smallest quarter by some margin.

And so, it’s susceptible to some slowdown in some of the projects, but we had a very strong year, strong quarter in the Middle East, steady results in the UK. And so, that was really it. Nothing remarkable, strong momentum, we’d expect to be very confident going into next year.

John Doyle: Thanks, Martin. So, Elyse, FINPRO pricing, as Mark mentioned, flood claims and the continued slow M&A environment, all factored in in the US, but again, we feel like we’re very well positioned and demand is quite strong for us in in 2024. Operator, next question.

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

Jimmy Bhullar: Hey, good morning. So, first, just a question on the reinsurance brokerage business. Obviously, prices this year haven’t gone up like they did last year. But what have you seen in terms of terms and conditions and buying behavior? Because last year we saw the primaries retain a lot of risk and attachment points went up. Have those come back down or are like sort of terms and structures programs similar to how they were last year?

John Doyle: Yes, thanks for the question, Jimmy. Guy Carpenter just had an excellent year helping clients navigate what was a very, very choppy market in 2023. We certainly began 2024 with a more orderly market, but growth was outstanding, and I feel terrific about how we’re positioned to help clients going forward. But Dean, maybe could share a little bit more insight on the market on 1/1.

Dean Klisura: Sure. Thanks, John. And Jimmy, let me give you a little bit more color on the 1/1 renewal in reinsurance. As John stated, we saw a balanced reinsurance market at the January 1st renewal. Overall capacity was adequate for the completion of most programs across products and classes of business. Capacity did increase given rebounding capital in the marketplace and improved reinsurer returns in 2023. We estimate the dedicated reinsurance capital increased double-digit for the 1/1 renewal. Turning to property cat, which I think you’re mainly referring to, as John noted, was more consistent trading rhythm than last year. Capacity overall was adequate to cover most non-frequency cat exposed layers. But as John noted, reinsurers held firm on terms and conditions.