Marsh & Mclennan Companies, Inc. (MRSH) Q1 2021 Earnings Call Transcript

Welcome to Marsh & McLennan's Conference Call. Today's call is being recorded. First quarter 2021 financial results and supplemental information were issued earlier this morning. They are available on the company's website at mmc.com. Please note that remarks made today may include forward-looking statements, including certain expectations related to COVID-19 and other matters. 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.

Thank you. Good morning, and thank you for joining us to discuss our first quarter results reported earlier today. I'm Dan Glaser, President and CEO of Marsh & McLennan. Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses, John Doyle of Marsh; Peter Hearn of Guy Carpenter; Martine Ferland of Mercer; and Scott McDonald of Oliver Wyman. Also with us this morning is Sarah Dewitt, Head of Investor Relations. Marsh & McLennan had an outstanding start to 2021. Our first quarter results were excellent, and we are well positioned for a very good year. Even though the pandemic is ongoing, our underlying revenue growth of 6% is the highest in over 6 years and accelerated sequentially across every business. We also grew adjusted EPS by 21% and generated significant margin expansion. Our business has proven resilient throughout the pandemic. With the global economy now beginning to turn the corner, we saw an acceleration in our growth. With 6% underlying growth to begin the year, we now expect full year 2021 underlying revenue growth to be at the high end of our 3% to 5% guidance range and possibly above. As we look ahead, the outlook for the U.S. and many of the countries we operate in is encouraging. However, many parts of the world continue to suffer with high levels of infection, and there is still a significant amount of uncertainty. GDP in the U.S. was close to flat in the first quarter and strong levels of growth are expected, starting in the second quarter, due to a rebound in demand as the impact of vaccines takes hold, along with favorable economic comparisons to a year ago. Meanwhile, in India, Brazil and many other parts of the world, case counts continue to rise and broad levels of vaccination remain a long way off. Our proprietary pandemic navigator now forecasts that the U.S. will achieve the herd immunity threshold by early to mid-summer, and we see a fairly similar timeline in the UK. These milestones bring hope for reopening and economic growth, although it will vary by country. We are also mindful that the risk exists and that there still are many unknowns, such as variants of the virus, the efficacy of vaccines on the variants, the duration of immunity and vaccine hesitancy. But we are resilient and are confident we will be able to adapt to a wide range of scenarios, just as we have since the beginning of this crisis.

Thank you, Dan, and good morning. Our first quarter results were outstanding, and we are well positioned for a very good 2021 despite the continued uncertainty associated with the pandemic. Underlying growth accelerated across all of our businesses, and our margin expansion and earnings growth were impressive. Consolidated revenue increased 9% in the first quarter to $5.1 billion, reflecting underlying growth of 6%. Operating income and adjusted operating income were both approximately $1.4 billion. Our adjusted operating margin increased 260 basis points to 29.6%. GAAP EPS was $1.91, and adjusted EPS was $1.99, up 21% compared with the first quarter a year ago. Looking at Risk & Insurance Services. First quarter revenue was $3.2 billion, up 11% compared with the year ago or 7% on an underlying basis. This marks the highest level of underlying growth since 2012. Adjusted operating income increased 17% to $1.1 billion, and our adjusted operating margin expanded 210 basis points to 36.6%. At Marsh, revenue in the quarter was $2.3 billion, up 13% compared with a year ago or 8% on an underlying basis. This was Marsh's highest level of underlying growth in nearly 2 decades. Growth in the quarter was broad-based and driven by double-digit new business growth and solid retention and was impressive considering Marsh's strong growth in the first quarter of last year. The U.S. and Canada division delivered another exceptional quarter, with underlying revenue growth of 9%. This is the highest quarterly underlying growth U.S. and Canada has achieved since we began reporting their results, and they have now averaged 6% underlying growth over the last 12 quarters. In international, underlying growth was strong at 6%, marking the highest underlying growth since 2013. EMEA was up 6%, with strong results in each region, including in the UK. Asia Pacific was up 8%, a strong rebound from the fourth quarter and comes on top of 6% growth in the first quarter of 2020. And Latin America grew 6% on an underlying basis, continuing to show sequential improvement. Guy Carpenter's revenue was $895 million, up 8% or 7% on an underlying basis, driven by strong growth in North America, EMEA, Global Specialties and Latin America Treaty. Guy Carpenter has now achieved 5% or higher underlying growth in 12 of the last 14 quarters. In the Consulting segment, revenue in the quarter was $1.9 billion, up 6% from a year ago or 3% on an underlying basis. Adjusted operating income was $370 million, and the adjusted operating margin expanded by 330 basis points to 20.5%.

Thanks Mark. Operator, we are ready to begin Q&A.

Thank you. Our first question comes from Mike Zaremski with Credit Suisse. Your line is open.

Hey, great, good morning. First question, thinking about some of your comments about organic growth, so this quarter, clearly, excellent 6%. I believe, Dan, you said that for the full year, you could potentially be over the guide. And you also said you expected Mercer’s organic growth levels to improve in 2Q. So if I understood correctly, then I think it implies that there might be some deceleration in parts of the business in later quarters. So maybe just kind of curious, were there any kind of one-time items in nature or things we should be thinking about in the back half of the year that could show less positive momentum?

Sure. So, why don’t I take that to begin with, and then I will hand off to each of our business leaders, so they can talk a little bit about their growth prospects and how they looked at the quarter and what they are looking at going forward. I would just start by saying we have got real momentum right now. The U.S. economy is getting stronger. The JLT integration is well behind us, and the combined organization is emerging from the pandemic strong, focused and on our front foot. New business generation was terrific across the business and in particular, at Marsh and Oliver Wyman. So when Scott and John speak, they can talk to you a little bit about their new business. But overall, retention was strong, growth was broad based. On the Risk & Insurance Services side, pricing is a tailwind, and we are benefiting from some disruption in flight to quality. That said, Mike, there is nothing one-off or unusual about our results. So, we are not really going to get into, in coming quarters, do we expect a deceleration. Obviously, as Mark was saying, we start to get some easier comps on the top line and some tougher comps on the expense line, but it will play itself out, and we expect to have a very strong year. But why don’t we start with Marsh, and John to just talk about growth a little bit. John?

Thanks Dan. Mike, as Dan noted, nothing particularly one-off in nature about the growth in the quarter. I was very pleased with the start to the year. Mark gave a bit of an around the world view in his prepared remarks. But just a little bit more color. Specialty growth was particularly strong in the quarter, in FINPRO, in our private equity practice, construction and energy, also very strong results in the quarter. We had good growth in benefits. Our MGA and affinity operations also had a good quarter. So, I was quite pleased with it. I think we executed well for sure. Dan talked about our new business. The renewal line was strong as well. We are very, very focused in what’s still a very difficult market for our clients. But I think we are positioned well. And as Dan noted, the economy is picking up in some important markets for us. There is still obviously some uncertainty as Dan and Mark both noted in the macros, but I am very, very pleased with the start to the year.

Thanks, John. Let me go to Peter for a couple of minutes. Peter, Guy Carpenter has grown considerably and consistently over a number of years now. But Peter, what are you thinking about growth right now?

Thanks Dan. Mike, our model is consistent growth over a long period of time. I think we have demonstrated that, as Dan said. We do benefit from the rate increases that are going on in the market. But the bulk of our income is coming from new business wins, and it’s well balanced across all of our businesses from North America, Latin America, Middle East, Asia Pacific, global specialties, all have recognized strong growth in the first quarter, and we see the same holding true for Q2. Now Q3s tend to be very small quarters for us. So, there is more volatility inherent in them. But over the past few years, we have shown once again that even with smaller quarters, based on the disciplined approach we had to new business and the approach of growing in any market condition, we have demonstrated our ability to grow.

Thanks Peter. Mike, you mentioned Mercer. So Martine, you want to talk about growth at Mercer?

Yes. Sure, Dan. We are very pleased with our quarter 1 2021 results, especially since we were facing a comparison of 5% growth same quarter last year. We have seen increased demand in our services, sequential revenue growth month-to-month during the quarter and a return to growth actually in March. We know that during the pandemic, clients have postponed discretionary work due to uncertainty and also employment levels have dropped. But now we expect tailwinds from economic and job growth partially offset, of course, by the continued structural decline in the client benefit business. But clearly, we see a return to growth for the rest of the year, starting with Q2. In terms of demand, our investment business, investment management business in particular, has lots of demand in the alternative space, and ESG and deemed investment opportunities is strong. We started the year with strong inflow. Demand for digital solutions around the whole of business is also strong. Health has been resilient through the pandemic, and we see lots of demand in our Darwin health platform and global benefit management. And we have seen quite a good uptick in Korea as well with demand for engagement surveys, transformation of the workplace, return to a new normal and redefinition of the way to work. So overall, it looks like a strong rest of the year for Mercer.

Okay. Thanks Martine. We have often said how Oliver Wyman is a bit more sensitive to business confidence, economic outlook, etcetera. Their strong growth actually bodes very well for the company overall. Scott, do you want to talk a little bit about Oliver Wyman and how you see at least the quarter and the next couple of quarters?

Yes. Happy to round out on growth for us. So, we had a really strong quarter, as you saw. I think that is driven by business confidence across really all of our sectors, particularly strong growth in the U.S. and Europe. And the growth was really widespread across all the types of business we do, whether that was a growth strategy, digital or technology transformation, some restructuring and in new areas like climate and sustainability. So, it felt really healthy. I think though, Mike, given the volatility in our business, it’s just important to maintain a long-term perspective. And we continue to be able to think we can grow the business at mid to high-single digits over the long-term. In the shorter term, with the current robust demand, the strong new sales, combined with the weaker performance from last year, we may exceed that long-term target in any quarter and possibly for the year overall.

Thanks Scott. So Mike, I know that was a lot, but I figured there would be a lot of questions on growth so we might as well go around the horn and hear from our business leaders. So anything else, Mike?

Yes, that was great. And one last quick follow-up, I believe you — Dan, you said the Marsh pricing index came in at 18%, down a little bit from 22% quarter-over-quarter. I think some investors may want to focus on that stat. So, I just wanted to get maybe potentially some more color. Pricing clearly is a tailwind. I know you said that, but I believe the majority and maybe vast majority of your revenues are on a fee basis. So, I think the beta in terms of kind of sensitivity to pricing, it’s not as influential as other brokers that are maybe more commission based. I am trying to — maybe if you can give any color around how to think about the deceleration in pricing? Thanks.

Sure. And let’s just be clear. We are on the client side of the table. Even at an 18% reading, down from 22% in the quarter sequentially, these are trying times for our clients and Marsh brokers are working really hard to put together the best package and the best solutions in the circumstances. John, you want to talk a little bit about commission versus fee and the impact of the rating environment on your overall growth just, in general terms?

Sure. Mike, about 60% of our revenue is commission based, but about 50% of Marsh’s total revenue is exposed to P&C pricing. So we have commission on the benefit side as well in some markets. As Dan noted, it’s still a very difficult market for our clients. And obviously, an uneven economy for so many of our clients. Our clients, of course, are adapting to that. Some in this market and certainly throughout 2020, are choosing to retain some more risks, whether it’s through higher retentions or lower limits. Our captive management business is experiencing pretty strong growth as well, which is an indicator of how our clients are reacting to the market. But it’s still a difficult market. The D&O market, the excess casualty market in the U.S. and the cyber markets remain the most challenging. On the other hand, the workers' compensation pricing continues to be pretty favorable for our clients and was modestly down in that product area here in the United States. So, the underwriting community is clearly concerned about elevated catastrophe activity; it was a busy catastrophe quarter in the United States in the first quarter. There is loss cost inflation and lower interest rates, but my expectation is that we will continue to see some moderation of price increases throughout the rest of the year. Again, I expect prices to be up year-over-year, but I do expect them to be up somewhat less than they were in recent quarters.

Thanks John. Next question please?

Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Hi. Thanks. Good morning. My first question, digging into another topic, expenses. In your prepared remarks, you mentioned continued low T&E in the first quarter. You also mentioned some tougher comps year-over-year. And then obviously, once we get towards herd immunity, we could start to see somewhat of a pickup in T&E. But can you just help us think through the expenses? Any sense of how we should think about kind of run rate when we kind of get through COVID in terms of what stays you guys can potentially keep on an ongoing basis?

Sure. Many companies, including Marsh & McLennan, reduced expenses significantly, particularly in the second and third quarters last year, and as you know, we started coming back later in the year. The largest reductions were in travel and entertainment and our view is that will be a gradual comeback. We believe people will travel with more purpose and more thought than pre-pandemic, and we are certainly going to encourage that within the company. We are going to try to get away from the anytime-anywhere, hop-on-an-airplane culture and pause and ask, 'Can I do this via remote access like Zoom or Teams?' There will of course be important times where you visit a client or a market. That’s absolutely essential. It is also important for us in terms of managing our carbon footprint going forward. So, I would expect a gradual return of some expenses as the world reopens. One thing to bear in mind, even though some expenses may start to come back during the year, that is actually good news because it means the world is recovering and business is getting back to normal, which has growth implications for us. Longer term, we have learned a lot during this pandemic, and we believe we can be a leaner, more agile organization. That has implications for real estate expense, which are quite heavy. I would expect we will be able to achieve some savings there over time. Do you have another question, Elyse?

Yes. Thank you. And then my second question on the capital side of things, you guys alluded to, you did one deal in the Q1. My sense is that we are kind of seeing a little bit of a slowdown around some broker deals just as we think the expectation that we could see a pickup later on in the year when there is certainty around tax reform. So, I guess I wanted to see if you guys kind of agreed with that when you were thinking through the capital plan for the year? And then did you say where we are in that $3.5 billion as of the end of Q1?

Sure. A couple of things, and then I will hand over to Mark. Overall, PayneWest is April 1, so that was not a first quarter item; it’s the beginning of the second quarter. We have been acquiring firms for our entire history, and we cultivate relationships over long stretches of time. We almost always for our important acquisitions are in exclusive discussions with the other company. We come together because we see value on both sides: we can grow better together and serve clients better together. We don’t base our M&A decisions only on short-term tax or interest rate considerations. We have a process and a budget, and we act when the right opportunities present themselves. Mark, I’ll hand it to you to talk about capital management more broadly and what we have available for this year and our expectations of how we would likely use it.

Thanks Dan. Elyse, let me run you through the plan. We still expect roughly $3.5 billion of capital deployed this year. We have already spent the $0.5 billion that we had targeted on deleveraging, as we pulled forward our July debt repayment. Dividends will run around $1 billion, and that leaves $2 billion of that $3.5 billion available for M&A and share repurchase. Dan mentioned that we closed our PayneWest, which was a meaningful deal. Our M&A pipeline remains full. It’s always hard to predict how much we will actually do, but our hope is we see a meaningful amount of M&A this year. We also expect to see a meaningful amount of share repurchase, at least enough to reduce our share count this year.

Thanks Mark. Next question please.

Our next question comes from Phil Stefano with Deutsche Bank. Your line is open.

Yes. Thanks. Good morning. Looking at the organic growth, I was surprised by the strength internationally given how vaccination rates and the impact of COVID still weigh there. I was hoping you could talk about the potential that different regions have with regard to rollout and the take-up rate of vaccinations and how we should think about economic development and the possibility of slowdowns coming as we see fourth waves that we fortunately may not get in the U.S.?

We had good international growth overall in the company, both in Marsh, and also in Oliver Wyman and Guy Carpenter. Mercer had sequential growth as well. Over the last couple of years we digested the biggest acquisition in our history, which had some impact. We have seen a nice comeback in places like Latin America and in Asia Pacific compared with what we experienced over the last year or so. The big winner in terms of turnaround was the UK. John, you want to talk about your business in the UK a little bit?

Sure Dan. Phil, of course there will be ups and downs on a global basis in any normal economy and we are still recovering and still in the pandemic. But I was very pleased with our performance in the quarter in the UK. It’s been a bit of a stress point for us over the last 18 months related to integration with JLT and some headwinds, but we saw good growth, a lot of it from our middle-market UK business, and also in the specialty areas. As noted before, strong growth in our financial lines business. The D&O market is difficult for our clients, but we saw very meaningful cyber growth in the UK and construction and energy were off to a terrific start. Elsewhere, another bright spot was very good new business growth in Australia. So, it was an improved performance by the international team, and we expect continued good momentum.

Anything else, Phil?

Yes. I have a follow-up on M&A. Dan, you had mentioned when you buy things you tend to be the sole buyer at the table. I am going to be direct: Aon and Willis are going through a transaction, and it feels like there will be businesses that ultimately need to be divested. Given your global position, can you be involved in that process and look at what might be shopped?

I think divestment would be to satisfy regulators' concerns about having enough competitors in the marketplace, so it would be unusual for them to look to us as the answer since we are a large competitor. We are open to ideas, but it’s unlikely we would be a participant in a small divestment. That said, there are plenty of high-quality firms we are in discussions with. When we look at our pipeline, we look over years, not months, and we have a very rich pipeline of companies we are speaking with. Underlying growth is the most important measure to evaluate the health of the organization. But occasionally you look at GAAP as well. For example, in Risk & Insurance Services, last year on a GAAP basis we grew 20% and followed that with 11% this quarter on a GAAP basis. We are significantly growing the organization. In consulting, it was about 5% on GAAP last year and 6% this year. We are having good underlying performance and growing a larger organization.

Our next question comes from Jimmy Bhullar with JPMorgan. Your line is open.

Hi, good morning. Most of my questions were answered, but a couple of points. First, on the deal environment, can you talk about competition for deals, especially small and mid-sized deals? Valuations have steadily gone up over the past few years. Then on pricing, you spoke about a slowdown in reinsurance and a slowdown in your index. Can you talk a little bit more detail about lines where you have seen the most noticeable change over the past three months, up or down?

Okay. I will address the M&A point, then hand off to John and Peter on the rate environment. When we look at deals, we are not chasing them. Multiples have gone up over the last several years, which means we should be more selective and understand pro forma calculations deeply, particularly with private sellers. Our goal is to buy high-quality firms that match our culture and where leaders plan to stay. Joining Marsh & McLennan is good for producers because we can develop additional mega producers post-acquisition. The capabilities and resources of the organization enable producers to be more successful. John, do you want to talk about the rating environment and what’s been moving the most?

Sure Dan. Jimmy, as I covered before, in most geographies and major product lines there was a slight moderation in the average price increase in the first quarter compared with the fourth quarter. It was pretty consistent quarter-to-quarter. So prices on average went from 22% to 18%. Our index skews to large accounts; middle market pricing is more modest. The most notable change quarter-to-quarter was in cyber, where the average price increase actually doubled from the fourth quarter into the first quarter, from the high teens to the mid-30s. As you might expect, given the exposure environment, our cyber sales are growing quite rapidly at the moment.

Thanks. Peter, do you have anything to add?

No, I would reflect much of what John says, Jimmy. Reinsurance pricing has been reasonably consistent by line of business over the past several quarters. Capacity is adequate and demand is high. Lines like cyber have been more capacity constrained, but there is still capacity available at a price. At the end of the day, reinsurer approaches have been reasonable and based on the experience and exposure of individual clients. Prices have moderated; it’s a function of exposure and experience by client. It is not a broad-based across-the-board rate increase for everybody regardless of performance.

Thank you.

Thank you. Next question please.

Our next question comes from David Motemaden with Evercore ISI. Your line is open.

Hi, good morning. I have a question about some of the disruption that the Aon-Willis deal could be having in the marketplace as you look at teams and hiring. Maybe you could just talk about how that’s progressing? Dan, I think you talked about adding 500 people in headcount last quarter in terms of strategic hires. I was wondering if you could give an update on that this quarter and how you see that progressing throughout the year?

We expect to be an employer of choice. We are a big company with 76,000 people, so whether we lose a team of 20 or hire 20, it is not a huge needle mover, but it helps build our strength. The 500 net headcount increase in the fourth quarter didn’t all come from Aon and Willis, though the majority did. In the first quarter, we are up over 100 heads net from Aon and Willis, and I would expect that kind of activity to continue. This is a competitive environment and working at Marsh & McLennan is a choice for many within our industry.

Got it. That’s helpful. Thanks for that Dan. Then another question: taking a look at other operating expenses, those were down quite a bit year-over-year. I think it was down 10.5% year-over-year versus basically flat last quarter, both against pre-COVID comps. I am wondering, were there any timing or delayed expenses this quarter outside of T&E or any other COVID-related expense reductions during the quarter?

Yes. The comparison is a bit different. Items like meetings, for example: at the start of a year companies often have planning meetings and in 2020 we did many of those in person; in 2021 we did not. So meetings, some advertising and some use of facilities were lower. We are focused on reducing other operating expenses as a way to deliver better margins and better comp-and-benefit ratios. Comp and benefit ratios were up in the quarter, which is a positive. Other operating expenses down and comp and benefit flat or up is a good result and helped deliver margin expansion.

Our next question comes from Meyer Shields of KBW. Your line is open.

Question for Peter: you have described consistent reinsurance demand and solid capacity. Does the Florida upcoming reinsurance renewals look any different than what we have seen so far in January 1 and April 1?

Peter, right over to you.

Thank you, Dan. Meyer, looking through the rest of the year and the June renewals, we have to separate Florida from the rest of the portfolio because it’s a different situation in many ways: regulatory environment, capital, capacity and legal environment. We anticipate that for the broad percentage of our portfolio, pricing will remain consistent. Florida has gone through a turbulent time not only from a loss standpoint but from erosion of capital due to heightened litigation. That has resulted in reduced demand because people are re-underwriting their books to deal with spikes in exposure. Overall, there is more than enough capacity in Florida. For non-frequency layers and more capacity layers, there will be plenty of capacity. For the lower down, higher-risk layers, pricing will go up. We are still unsure of the exact dimensions; we are expecting mid to high-single digits for loss experience in some areas, and it’s still wait-and-see. A lot of the capital in Florida comes from third-party capital, unlike much of the rest of our portfolio.

That’s tremendously helpful. I have a follow-up for John. When you look at the small account component of your domestic P&C business, can you talk about how pricing or underwriting has changed over the last 3 to 6 months?

Sure Meyer. In most market cycles, middle-market and small commercial pricing just doesn’t move with the same volatility we see in upper middle-market and large multinational accounts. Over the last couple of years it’s been consistent with that observation. Most of last year small commercial saw low-single digit price increases. It accelerated a bit in the fourth quarter to mid-single digit increases, and that’s what we observed in the first quarter as well. In that segment we do see more commission than in other parts of our business. Workers' compensation is a huge part of that business, and as I noted earlier, work comp pricing remains pretty favorable for our clients.

Thank you. I would now like to turn the call back over to Dan Glaser, President and CEO of Marsh & McLennan, for any closing remarks.

Thank you. Thanks, everybody. I want to thank our 76,000 colleagues for their perseverance under trying circumstances. These are the moments when our clients need us most. Thank you all very much, and I look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.