Marsh & McLennan Companies, Inc.

Welcome to the Marcia McLennan Company's conference call. Today's call is being recorded. First quarter 2019 financial results and supplemental information were issued earlier this morning. They are available on the company's website at www.mmc.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risk and uncertainties, and a variety of factors may cause actual results to differ materially. for those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earning release for this quarter and to our most recent SEC filings, including our most recent form 10K, all of which are available on the MMC website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation that measures the most closely comparable GAAP measures, please refer to the schedule in today's earnings. I'll now turn over to Dan Glaser, President and CEO of Marsh & McLennan Companies. Please go ahead.

Thank you, Clina. 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 Furlan of Mercer, and Scott McDonald of Oliver Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. Our first quarter represents a great start to the year. Before I get into the results, I would like to say how delighted we are to have completed the JLT acquisition earlier this month. There is tremendous energy and optimism around the benefits this combination brings to clients, colleagues, and shareholders. We welcomed over 10,000 talented colleagues into the organization, providing us with more capabilities to serve clients, and this is the real power in this combination. The need for specialist advice has never been greater as clients deal with the increasing size, complexity, and range of business challenges. Simply put, we are stronger together. We are the leading global professional services firm in the areas of risk, strategy, and people. On a combined basis, we place over $100 billion of P&C insurance and reinsurance premiums globally. Our reach extends to more than 130 countries. We are number one in insurance brokerage, including specialty lines, the number one health and benefits broker. We are neck and neck in reinsurance. We are number one HR consulting firm. and we have leading specialist industry capabilities in management consulting. Size and scale are increasingly important, but size isn't everything. Quality and capability are what really matter to clients, and on that score, we are second to none. Creating what is Marshall McLennan today was no small undertaking. It took decades of steady execution and courageous decisions. I am deeply grateful to the prior leaders of Marshall McLennan for their significant contributions to our current success. We will continue to build and improve the reach and capabilities of MMC. With regard to JLT, we worked tirelessly to obtain all regulatory and shareholder approvals so that we could close the deal on April 1st. At the beginning of March, we announced the agreement to divest JLT's aerospace business, and during the first quarter, We secured 6.5 billion in debt financing at favorable rates, including our first-ever Euro bond issuance. With the benefit of the in-house expertise of Oliver Wyman, we moved quickly to establish transition teams to plan the integration. We made several leadership announcements across the organization and named JLT executives to nearly all of our executive committees. We selected leaders without regard to which organization they came from. JLT brings us an influx of talent with complementary capabilities, giving us more depth in almost every part of the organization. We are co-locating our colleagues to enhance opportunities for collaboration. We are working hard to keep our organization focused and are encouraged by the strong finish of 2018 at both JLT and Marshall McLennan, and our strong start to 2019. Growth requires hard work and execution, and I have every confidence we will be stronger and better positioned than either firm was before. To be clear, we are not promising perfection. There will be bumps, and we could see an impact on growth during the integration process. That's fine. We will sort it out and press forward as we work to build something special. In addition to JLT, we will continue to execute our broader growth strategies. We will not let up on innovating, pressing into new growth areas, and investing. For example, we continue to expand in middle market commercial insurance through Marshall McLennan Agency. When we first announced the JLT acquisition, we committed to continue to provide MMA financial flexibility to pursue further acquisitions. we have stayed true to this plan. Since the start of the year, MMA acquired Bouchard Insurance and Lovett & Touche, both top 100 U.S. insurance brokers. The combination of strong organic growth and adding high-quality agencies through acquisitions has resulted in MMA's annualized revenues exceeding $1.5 billion, and we still see significant runways. There is meaningful growth potential in the small commercial segment across our businesses where we are focused on digital initiatives. We see opportunities to help simplify the client experience and add value at every turn in this large and fragmented market. Major challenges facing society also present opportunities to grow and help our clients. In many markets, actual losses from cyber, floods, and other natural perils far exceed insurance coverage. Filling this gap is a growth opportunity for us that also serves a greater good. Retirement security is a major challenge for society, as much of the world is falling short of what today's aging population will need. Mercer is a leader in this space where actuarial investment and fintech specialties meet. In health, the need for advice in the face of healthcare complexities is significant, and we are well-positioned given the strength of our capabilities across Marsh, Mercer, and Oliver Wyman. Let me spend a moment on current P&C insurance pricing trends. Overall, pricing is modestly higher. The Marsh Global Insurance Market Index saw an increase of 3 percent in the first quarter, up from 2 percent in the fourth quarter of 2018, and 1 percent in the first quarter of 2018. global property lines continue to see price increases. Casualty price declines have slowed, while professional lines pricing increased approximately 6% in the quarter. Turning to reinsurance, Guy Carpenter's global property catastrophe rate online index increased 1% for the January 1st, 2019 renewals. More recently, the pricing data coming out of the April 1st renewals, which are primarily focused on Japan, were up for loss-impacted programs. We are starting to see upward rate pressure in the market in certain pockets and geographies, although capital remains abundant. Now let me turn to our first quarter financial performance. Marshall McLennan had a strong start to the year. We generated consolidated underlying revenue growth across both risk and insurance services and consulting. Consolidated revenue was $4.1 billion, up 2% or 4% on an underlying basis. Adjusted operating income grew 11% to $1 billion, and the adjusted operating margin expanded 210 basis points in the quarter. Adjusted earnings per share grew 10% to $1.52. In risk and insurance services, first quarter revenue was $2.4 billion, an increase of 3%. Underlying revenue growth was 5% in the quarter, the fourth consecutive quarter of underlying growth of 5% or more in RIS. Marsh had another strong quarter with underlying growth of 5%. Guy Carpenter's underlying growth was impressive at 6%, given the tough comparable of 7% growth in first quarter 2018. Adjusted operating income increased 7%, to $775 million, and the adjusted operating margin expanded 110 basis points versus a year ago. In consulting, first quarter revenue was $1.7 billion, in line with a year ago. Underlying revenue was up 2% for the quarter, driven by strong underlying growth at Oliver Wyman of 7%, partially offset by Mercer, which was flat. Nevertheless, we had strong growth in consulting adjusted operating income of 18% and saw 270 basis points of adjusted margin expansion. Martine took over as CEO of Mercer March 1st. While Mercer's underlying growth was soft in the quarter, Martine has a firm grasp on the business, and we are confident in Mercer's long-term growth outlook. Based on the slow start, full-year underlying revenue growth in Mercer could be muted. However, full-year earnings growth will benefit from Mercer's recent restructuring initiatives. In summary, we are pleased with our strong start to the year. For 2019, we expect underlying revenue growth in the 3% to 5% range, margin expansion, and solid growth in adjusted EPS, although with respect to underlying revenue, we are mindful of potential impact from the integration of JLT. With that, let me turn it over to Mark for a more detailed review of our results. Thank you, Dan.

Good morning. Our first quarter represented a strong start to the year. Overall revenue was up 2%, 4% on an underlying basis. Operating income in the quarter increased 3%, while adjusted operating income was up 11% to a record $1 billion. Our adjusted operating margin increased 210 basis points to 26.2%. and included strong margin expansion in both RIS and consulting. GAAP EPS rose 4 percent to $1.40, and adjusted EPS increased 10 percent to $1.52. Looking at risk and insurance services, first quarter revenue was $2.4 billion, up 3 percent compared with a year ago, or 5 percent on an underlying basis. This is a continuation of the strong growth we generated in the fourth quarter. Adjusted operating income increased 7% to $775 million, and our adjusted operating margin expanded 110 basis points to 33.6%. At March, revenue in the quarter was $1.7 billion, with underlying growth of 5%. Growth in the quarter was broad-based and helped by strong new business. The U.S. and Canada division continued its trend of strong growth with 5% underlying revenue, And international underlying growth was also 5%, with EMEA up 3%, Asia Pacific up 8%, and Latin America up 11%. Guy Carpenter's revenue was $663 million, up 6% on an underlying basis, driven by strong growth in the U.S., Asia Pacific, and Latin America. Guy Carpenter's strong first quarter performance built on the outstanding results delivered in 2018. In the consulting segment, revenue in the quarter was $1.7 billion, which is flat versus a year ago and up 2% on an underlying basis, reflecting strong growth at Oliver Wyman, offset by softness at Mercer. Adjusted operating income grew 18% to $291 million, and the adjusted operating margin expanded 270 basis points to 18%. Mercer's revenue in the quarter was $1.2 billion with flat underlying revenue growth due in part to a tough year-over-year comparison to the 5% underlying growth we reported in the first quarter of last year. Results this quarter reflected growth in health and career offset by a decline in wealth. Wealth underlying revenue fell 3% in the quarter, reflecting a mid-single-digit decline in defined benefits partially offset by continued growth in investment management. Our assets under delegated management continue to grow and we're approximately $265 billion at the end of the quarter. In early 2017, we established the wealth business by bringing together our retirement and investments businesses. This change aligned more closely with how we serve clients and was designed to simplify the organization and reduce layers. At this point, Given the evolution of these businesses, we will now report wealth as one combined business. Health underlying revenue increased 3% in the quarter, despite a tough comparison of 7% growth in the first quarter of last year, and career grew 2%. Mercer incurred $11 million of charges in the quarter related to its ongoing restructuring program, which we expect to be completed by the end of the second quarter. The benefits of the program contributed to the strong earnings growth and margin expansion in consulting. As Dan mentioned, we expect this program will benefit full-year earnings in consulting, although we will see moderation in margin expansion from the level in the first quarter as we move through the balance of the year. Oliver Wyman had a great start to the year, with first quarter revenue of $518 million, representing growth of 7% on an underlying basis. Results were strong across most of the portfolio. As you know, we closed our acquisition of JLT on April 1st. Due to strict rules regarding sharing of competitively sensitive information prior to closing, we are in the process of reviewing the details of JLT's 2019 budget, converting the results to U.S. GAAP by quarter, and developing a firmer perspective on some of our modeling assumptions. As a result, we expect to update the elements of our previous guidance on our next call. We continue to expect the JLT acquisition to be modestly dilutive to adjusted GAAP EPS in year one, break-even in year two, and accretive in year three. In order to help the investment community better assess the combined business, before our next earnings call, we plan to provide JLT's 2018 results by quarter under U.S. GAAP. In addition, we will file the SEC-required pro forma disclosures showing 2018 pro forma earnings for the combined company. As contemplated in our financing plans, we raised a total of 6.5 billion of senior notes across eight tranches of debt at various maturities. In addition to 5.25 billion of U.S. debt, we also completed our first Euro bond offering in March, raising an additional 1.1 billion euros. We began incurring interest expense and generating interest income on proceeds from this debt as of January 15th, and our GAAP income statement includes $47 million of interest expense and $25 million of interest income as a result. As we indicated on our last call, both of these items were excluded from adjusted earnings in the first quarter. Following the close of the transaction, we now expect second quarter interest expense will be about $140 million. We also incurred seven million of interest expense in the quarter representing the amortization of fees related to our bridge facility. This seven million is included in interest expense in our GAAP income statement. In the first quarter, we recorded a net gain of 29 million relating to the hedge instruments we put in place as part of the transaction. All of these costs associated with the JLT acquisition have been treated as noteworthy items. With the transaction now completed, our hedge position and our bridge facility have been settled and closed. Turning to investment income, on a GAAP basis, investment income was $5 million, or $1 million on an adjusted basis, in the quarter. For 2019, we continue to expect only modest investment income on an adjusted basis. Foreign exchange was a $0.03 per share headwind to EPS in the quarter. Assuming exchange rates remain at current levels, we expect FX to be a one to two cent headwind to adjusted EPS in each of the second and third quarters. Our effective adjusted tax rate in the first quarter was 22.6% compared to 23.5% in the first quarter last year. Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation, similar to a year ago. We expect that most of the tax benefit from equity awards will be recognized in the first quarter of each year, which is when most of our equity awards best. Excluding discrete items, our effective adjusted tax rate was approximately 26%. Based on the current environment, it's reasonable to assume a tax rate between 25% and 26% for 2019, excluding discrete items and any impact from JLT. In the first quarter, we implemented the new lease accounting standard. This resulted in minimal impact to operating income, but did result in an increase in liabilities on our balance sheet of $1.9 billion, which is largely offset by a corresponding increase in assets. In the first quarter, we did not repurchase any stock in line with our guidance that we would not repurchase stock ahead of the close of the JLT acquisition. However, we continue to anticipate repurchasing enough stock in 2019 satisfy our commitment to reduce our share count each year. Total debt at the end of the first quarter was $13 billion, or $12.3 billion excluding commercial paper. This compares with $5.8 billion at the end of 2018. Total debt includes the $6.5 billion of debt issued in the first quarter to fund the acquisition of JLT. At closing, JLT had $1 billion of debt outstanding, $450 million of which was repaid shortly after closing, leaving $550 million of JLT debt that is still outstanding. We will likely refinance this debt over the course of the next several months. Post-closing, our total debt, excluding commercial paper, stood at $12.8 billion. Our next debt maturity is in September 2019, when $300 million of senior notes will mature. At this point, our expectation is that we will retire the September notes with cash on hand in line with our Plan D leveraging over the next couple of years. Our cash position at the end of the first quarter was $1.1 billion. Note that the cash proceeds from our debt issuance in the quarter were held in escrow as reflected on our balance sheet as opposed to on the cash line. Uses of cash in the first quarter included $210 million for dividends and $288 million for acquisitions. While deleveraging will be a priority over the next couple of years, we've provided for the flexibility to continue to pursue selective acquisitions, and MMA will be the primary focus given the significant success of this strategy over the last decade. For the full year 2019, we continue to expect to deliver on our annual capital return commitments to reduce our share count and increase our dividends per share by double digits. As noted on our last call, Starting this quarter, we have changed our calculation of adjusted operating margins to exclude transaction amortization so investors can get a better sense of core margin performance following the JLT acquisition. This change has no meaningful impact on the increase in margin in Q1 compared with a year ago. Our press release includes supplemental information that recasts our margins in 2017 and 2018 by quarter to exclude transaction amortization. Overall, we're pleased with our strong start to the year. And with that, I'm happy to turn it back to Dan. Thanks, Mark.