Marsh & Mclennan Companies, Inc. (MRSH) Q2 2021 Earnings Call Transcript

Welcome to Marsh & McLennan's Conference Call. Today's call is being recorded. Second 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.

Good morning, and thank you for joining us to discuss our second 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 Nick Studer of Oliver Wyman. Also with us this morning is Sarah Dewitt, Head of Investor Relations. I'd like to welcome Nick, who became CEO of Oliver Wyman July 1. Nick has led many of Oliver Wyman’s major practices in his 23 years with the business and I look forward to seeing Oliver Wyman continue to grow and thrive under his leadership. On behalf of the Executive Committee, I also want to thank Scott McDonald for his many contributions during his distinguished career at the firm. Marsh & McLennan had an outstanding second quarter. We are well-positioned and benefiting from an abundance of opportunities. We are stronger and have broader capabilities, benefiting from what may be the strongest economic rebound in nearly four decades led by our largest region, the U.S. There is high demand for our advice and solutions in this time of uncertainty and in the face of challenging market conditions. We are seeing a flight to quality and stability, which is contributing to high levels of business growth and client retention. And it's helping us attract talent. There's a long runway for growth as we think about major protection gaps around the world, new emerging risks, digitization, the workforce of the future and under-penetrated markets such as small commercial. We are focused on capitalizing on these opportunities and I am proud of our execution in the quarter. We generated record second quarter revenue and earnings, the best underlying growth of any quarter in two decades, and delivered an excellent year-to-date performance. The strength of our results was broad-based at each of our businesses and virtually all of our major geographies, seeing an acceleration in growth. Our adjusted EPS increased by an impressive 33% and we generated margin expansion despite challenging expense comparisons.

Thank you, Dan, and good morning. Our results were excellent with record second quarter revenue and earnings, the best quarterly underlying growth in two decades, meaningful margin expansion and significant growth in adjusted earnings. Highlights from our second quarter performance included the strongest underlying growth since the first quarter of 2003, the strongest growth in Guy Carpenter in 15 years, a solid rebound of 6% at Mercer, and record reported underlying growth in Oliver Wyman. Second quarter growth and adjusted earnings per share were also impressive, rising at the fastest pace of any quarter in more than a decade. Consolidated revenue increased 20% in the second quarter to $5 billion, reflecting underlying growth of 13%. Operating income in the quarter was $1.2 billion, an increase of 39% over the prior year. Adjusted operating income increased 24% to $1.2 billion, and our adjusted operating margin increased to 26.4%.

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

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

Hi, thanks. Good morning. My first question is on the organic growth outlook, recognizing the comps do get a little bit harder in the second half of the year, but the Q3 was still negative last year. So, I guess my question is, given what you know now, it sounds like you guys are positive, but a little bit cautious about the economy. Is it possible, it sounds like it's still possible, we could see double-digit organic growth over the remaining two quarters of the year?

So, we obviously, as Mark was saying, we've got momentum, and we feel very good about how we're positioned, and we're not that fearful about the economy. We are fearful about continuing waves of COVID, but the economies have adjusted somewhat in many parts of the world and are more resilient certainly than they were in the spring of 2020. And so the economic impact won't be as severe as what we've seen, even with continuing waves of COVID. Last quarter Elyse, we said that 2021 growth would be at the high end of our 3% to 5% range and possibly higher. I think at 9% underlying growth through six months, it's safe to say that we're in the higher category. We feel very good about our position. We're going to have a very good year. And 2021 is just going to set a new base for us. We intend to grow revenues and earnings in 2022 as well. So, this is not going to be a one-year wonder.

Okay, that's helpful. And then my second question was on the margin side. So, you guys, you know, Dan, I think you both said that some T&E has not fully come back, but also the pretty impressive revenue growth helped drive that margin improvement as well. So, we think about the back half of the year and T&E coming back, can you just help us think through the resulting impact on the margins, especially if revenue remains strong, maybe the second half could also see some margin improvement?

Well, I'll start by saying that we absolutely expect margin expansion in the year, and this will be our 14th consecutive year of margin expansion. Margins are an outcome of how we run the business. We grow our revenue every year at a pace that's faster than how we grow our expenses. I think you may be overly optimistic about T&E really roaring back in the back half of this year. I think it's going to be very gradual, and slow, actually. Companies, not just Marsh & McLennan, will travel with more purpose and be more thoughtful about traveling. I think clients will expect the same of providers like ours. We do expect and hope that over time T&E gets back to roughly 2019 levels, but we may be quite a way away from that point-in-time. We were very pleased with our margin expansion in the quarter. That was driven by our top line — that's where it largely came from — and it helped us overcome a comparable, which was a minus 5% expense. Look at our margins: they are up 30 basis points, but that's on top of 430 basis points of margin expansion in the second quarter of last year. So, we like where we are. We will grow margins for the year. It may not be every quarter — I don't know that right now — but ultimately we feel good for the year. Next question please.

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

Hi, good morning. So, just on organic growth, again, obviously you mentioned easy comps, were there any other tailwinds, such as maybe pent-up demand in certain industries or just the benefit of higher price hikes in PNC that might not repeat to the same extent in future periods?

The high levels of growth were not just because of easy comps at all. Guy Carpenter’s comp was a 9 last year; March was a 1. So, it was not exactly easy comps across the board. I think that the real momentum right now, as the U.S. economy is getting stronger, the combined organization is emerging from the pandemic stronger than what we went into it and focused on being on the front foot. New business generation was terrific across the businesses, and our growth was broad-based. Retention is strong, pricing is a tailwind, and we're benefiting from disruption and flight to quality and stability. So, there are a lot of factors underpinning our revenue growth, and we feel very good about revenue growth into the future.

Okay. And then on share buybacks, I think you spent over $300 million in 2Q, over $400 million for the first half. And that's a higher pace than you typically did prior to the pandemic. So, is it more of a catch up from not buying back stock last year or is — should we assume this is going to be more of a run rate going forward?

We're not catching up. Every year is its own adventure. Ultimately, as we've said before, we start every period believing in a balanced approach to capital management. We don't spend the same money in each of our three principal buckets of dividend, acquisition and share repurchase every year, but we don't have an approach that favors one versus the other in principle. Share repurchases in large part are a function of what our acquisition activity looks like. Every year might not be perfectly balanced, but the first half was pretty balanced. Our uses were $478 million of dividends, $434 million of share repurchases, and $473 million of acquisition. So, it is a balanced approach and I think you’ll see that from us. As Mark was saying, we have $3.5 billion or more to deploy. We are a cash generation type of company. So, this again is not a one-year wonder. This is an every-year approach: we're going to put money toward our dividend, we're going to grow our dividend, we're going to acquire high-quality firms and we're going to buy back our own shares. That's going to be year-after-year.

Okay, thank you.

Next question please.

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

Hi, thanks. Good morning. I wanted to talk a little bit more about the expenses. Other operating expenses were up not as much as I would have thought. It sounds like T&E continues to be a benefit. That's not going to roar back, but still up only 6% year-over-year, despite a pretty tough comp on the expense side. I'm wondering if there was anything else one-off in there? And relatedly, are you guys realizing more sustainable expense saves as a result of some of the operational changes due to COVID-19? Like real estate expense saves, and that sort of thing?

It's a good question, David. We certainly are going to realize a number of efficiency gains over the next several years, and that's real — as you mentioned real estate becoming more purposeful, T&E or traveling in general. Also, we've been undergoing some significant modernization projects on technology and operations, and those benefits will show up more in the future than they do right now. The biggest growth in our expenses frankly is compensation. I think that's a good thing: our variable cost is going up along with our growth. We're in the market, we're hiring. In the first six months of this year our headcount has grown nearly 2,000. Most of that is coming within Marsh, as they're capitalizing on the opportunity they see with their two biggest competitors having some element of distraction and uncertainty. So, the growth of expense is coming from headcount and compensation, and we feel pretty good about that. We can manage that over time. But we’re in the market right now building our business and building on the already industry-leading pool of talent we have.

Great. Yeah, that's good to hear. I guess maybe just a follow-up on that headcount. I mean, that nearly 2,000 headcount growth this year is definitely more than I was thinking. How much of a tail does that have? Like, is that something that you think can continue through the end of the year or is that something that once the short-term opportunity runs its course, it's back to a more normal course where you guys are still getting talent, it's just not as significant?

I think talent begets talent. People are attracted to work in environments with smart, creative, dedicated people. The more people like that you have the more talent you attract. It's clear that the issues at Willis and Aon in particular are creating a short-term opportunity that will run its course one way or the other. I was just looking at the stats recently: hiring from Aon and Willis post the announcements is three times higher on a net basis than it was in the 16 months prior to the announcements. So that's not going to run forever, but ultimately, we're doing our best to continue to build capabilities within our already formidable firm.

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

Thanks. So, two questions I think related to what you were talking about. First, when you talk about the flight to stability, was that a headwind or a tailwind to margins in the quarter?

I think the flight to stability indicates that our account protection levels in our new business are higher than they otherwise would be. So that would be a benefit not only to revenue, but also to margins, because the revenue is higher than it would otherwise be. It's not having a negative impact on expense.

Okay, perfect. And then obviously, the reinsurance organic growth has been fantastic for a long time. It seems like there are a lot of new companies out there. I was hoping you could give us a little bit more color on what's happening in the competitive environment?

We're very pleased with Guy Carpenter’s performance over a number of years, but I'll hand off to Peter so we can dig in a little bit deeper. Peter, you want to take that?

Yeah. Thanks, Dan. Thanks, Meyer. We've enjoyed a terrific run over the past several years. Our model is based on consistent growth over a long period of time, and we're able to capitalize on that model as a result of a very compelling proposition. We're disciplined around both sales and pipeline, which has resulted in new business wins. As we look at our new business wins over the past several quarters, the amount of new business coming from new clients has grown significantly; to the extent that in Q2 2021, 56% of our revenue growth from new business came from new clients. So we're seeing continued growth based on the model that we've built. Yes, there are a number of new challenger brokers out there, and we have to be mindful — all of our competitors are worthy adversaries. But we believe we have a very compelling proposition that over a long period of time has produced sustained growth and opportunity for us on a continuing basis.

Okay, fantastic. Thank you.

Alright, thanks Meyer. Next question please.

Our next question comes from Brian Meredith with UBS. Your line is open.

Yeah, thanks. Two quick ones here. First one, Dan, I'm wondering if you could break down at Marsh? Just generally speaking, what the impact in organic revenue growth was from rate versus exposure growth versus market share gains, just generally speaking?

If you can speak up just a little bit more? I got the question, but it was a little faint. I'll hand over to John, but I'll just start by saying how thrilled we all are with our 150th year anniversary at the company. We could grow the GAAP top line by 20%. In Marsh in particular we saw the best growth in a couple of decades. This is a phenomenal overall performance. John, you want to break down the growth a bit?

Sure. Brian, thanks for the question. As Dan and Mark both mentioned, we certainly benefited from the economic rebound and relatively soft prior year comparisons. Pricing environment — Dan talked about it a little bit earlier — about 50% of our revenue is sensitive to PNC pricing. While rate increases have come down modestly compared to the fourth quarter of last year and the first quarter of this year, they held where we're sensitive to pricing where we get commission, but it's from a number of different areas. I also want to emphasize that we executed really well in the quarter. Our team is as strong as it's ever been. They're highly engaged, focused on delivering for our clients. The market remains challenging; rates aren't nearly what they were before, but they are quite difficult. There's been a bit of catch up in some markets and a fair amount of new business. In our results, whether it's in transaction risk, in cyber or in construction, there are examples of where that is the case. We're very pleased with the results in the quarter.

Anything else, Brian?

Great. That's great. Thanks. And then the second question is, Dan can you talk a little bit about the M&A environment here, kind of what it looks like right now and also have the issues that Aon and Willis have run into with some regulatory approvals, has that at all changed your kind of strategic view of M&A right now?

No. It has had no impact. Our philosophy in M&A is we like buying firms that are high quality with a leadership team that generally remains in place, recurring revenue streams, high cash generation, low capital requirements, and a history of success that sets it up for us. It's really getting to know each other over a long stretch of time and deciding that the combination will be better for clients and people than being separate. Pipeline remains strong for us across our businesses. In fact last year was the highest acquired revenue within Marsh & McLennan, which has been more than a decade-long strategy in terms of building an agency. So we feel very good about that. Obviously, there's a lot of capital in the world, so multiples are higher than we would like and we need to be selective and careful in evaluating pro forma results, because most of the companies we've looked at are private. Our strategy has been more of a string-of-pearls approach, not one mega acquisition, but building the company's capabilities. JLT was an anomaly in some ways, perhaps our biggest acquisition in history, and that acquisition worked because we had been cultivating a broad relationship for a long period of time and believed the combination would be better for clients. You're seeing the benefits of that — growth has been better because of our combination with JLT, particularly in our specialty operation. So that's where we are. Our thoughts on M&A have not changed.

Great. Thank you.

Next question please.

Our next question comes from Ryan Tunis with Autonomous Research. Your line is open.

Hey, thanks. Good morning. I guess, just thinking about consulting, a couple of things. First of all, with Oliver Wyman, the 28% organic, just any color on how you're thinking about that, any visibility on the back half of the year? And within Mercer, it sounds like there has been some focus on the call about comps becoming more difficult — is it obvious that the comps get that much more challenging there? Maybe Martine could give us some perspective on how business developed in the three months of the quarter and where we're at now looking at the back half?

I'm glad Ryan that you asked about consulting. It is a big part of our business and a big part of our performance, and I'll hand it off to Nick first and then Martine. A couple comments: Oliver Wyman will tend to be our fastest grower over long stretches of time, but with more volatility. Look back to the second quarter of last year at minus 13. We love the results but they can be volatile. Mercer on the other hand is in terrific growth businesses — health, wealth, career — and Martine does great work. If you go back to the end of 2019, you saw steady growth in sequential quarters, then we got the pandemic as expected in some ways, and Mercer held up well with a minus 3 last year. Mercer is now back to a terrific result in the second quarter. Nick, start, and then Martine.

Thank you very much. Yes, as Dan said, we're thrilled with the performance. As to where it's coming from, it's an incredibly broad base. The growth in the quarter was highest in the regions and sectors which had been most adversely affected by the pandemic and therefore showed the strongest rebound on the comparisons. The Americas, particularly the U.S., have seen a very sharp rebound in client demand as economic conditions and business confidence have risen materially. For example, the transportation sector, which suffered greatly during the pandemic, is springing back very strongly. Growth outside the Americas in Europe and Asia Pacific was also quite robust, and across major industry groups — financial services, consumer, industrial, healthcare — all performed well at similar rates. We do think the outsized growth in Q2 was somewhat of an outlier, but business confidence remains high as global economic conditions improve, and we see a decent outlook for the business for the rest of the year.

Thanks Nick. Martine?

Thanks for asking the question. Similar to Oliver Wyman, the growth in the quarter really came across the business and across regions. It's worth noting that through the pandemic we have said that certain discretionary projects would be more affected, and those have come back. Times have restarted projects and there's a lot of demand. We’ve been helping clients with their post-pandemic workforce: there is a war for talent and demand for rewards, skills assessment, engagement and transformation as companies accelerate their moves to digital and newer technology. That is sustaining our consulting business. We see strong sales and good momentum for the rest of the year. I want to spend a moment on our wealth business: 4% growth in the quarter is something we have not seen since Q4 2017. Our OCIO business — the part of our business where we implement asset management for clients — did particularly well as clients seek stronger governance, deep manager research, and help with ESG. Lastly on wealth, this is the year where the defined benefit card of our portfolio, which is in structural decline, is now smaller than our investment management solutions. We see that providing tailwinds beyond 2021.

Thanks Nick, thanks Martine.

Thanks. Got it. And then a follow-up for Dan and maybe John Doyle as well: can you give us an update on the strategic importance of using wholesale brokers on the PNC side and maybe how that's evolved over time?

It's an interesting question. Wholesale brokers in many ways are specialists in different areas with strong skills, and that's exactly what wholesale should be. I think specialty placement might be a better description today. John, do you want to talk about the use of wholesalers?

Sure. It's largely focused on specialty capabilities. We use wholesalers when we need to access certain markets or specialty insurance where they have distribution access to certain markets and carriers. For the most part that happens in the United States; there's almost no utilization for us in some other geographies. We have preferred relationships with a couple of specialty wholesalers and focus our efforts on making sure we're delivering the same quality outcome for our clients as we would using our own teams.

Next question please.

Our next question comes from Paul Newsome with Piper Sandler. Your line is open.

Good morning, and congrats on the quarter. My question is about the potential persistency of some of these market share gains. I'm thinking back to the JLT acquisition and there seemed to be a little drag on organic growth for about a year as things moved through the system and integration happened. Do you think there's a read-through to what's happening for you today — that when you hire these new people it takes kind of a year for the full revenue impact and so that's how we should think about the benefit of the flight to quality? Kind of a year-by-year effect?

I would start by saying we're an awfully big company, and we make decisions to add talent, capability and broader capabilities to build skill and content, rather than just buying a producer for an immediate revenue uplift. The basic premise is true: when you hire senior people you generally expense them first and some revenue might come later as they get involved with the firm more broadly. Unlike some firms, we're not just focused on buying someone's book of business; it's a culture-building approach focused on capabilities.

Market share is hard to measure. If personal insurance premiums grow about 10% this year as a proxy for the market then yes, there are market movements. I mentioned earlier we're picking up new business in construction primarily. Our win rates are up when I look at success in RFPs, and the number of offensive vs. defensive RFPs is considerably better than historical levels. All of that speaks to the quality of the team. At the same time, we're investing in talent that's going to drive future growth, so we have good momentum and we're excited about what that means for us.

Anything else, Paul?

Yeah, just a little bit more on market share. It looks like it came everywhere in terms of gains across your businesses, is that a fair sense? Or were there some particular benefits in certain businesses?

This is the broadest business growth we've seen since I've been at the company. It's occurring in many different spots. I would attribute it to our fundamental growth markets, risk strategy and people — companies need to focus on those things whether they are large accounts, middle market, small segment, or government. We have competitive advantages that start with the quality of our people and our culture, then large capabilities enhanced further by acquisitions like JLT, and our global footprint. Few competitors can match those advantages. We continue to acquire best-in-class businesses with a focus on quality and a history of success, particularly in middle market brokerage. We have opportunities in cyber and climate, digital, small commercial, and rising risk awareness in general. The pandemic may have brought clients and our teams closer together in some ways, and we're leveraging our combined strengths like never before. All of those factors are contributing to wins in the market, and that's going to continue.

Thank you. That's great.

Next question.

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

Okay. Well, that's a first. I appreciate everyone joining us on the call this morning. I want to thank our 70,000 colleagues for their commitment, hard work, and dedication to Marsh & McLennan, and I look forward to speaking with you next quarter. Thank you very much.

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