Marsh & McLennan Companies, Inc.

Welcome to the Marsh & McLennan Companies Conference Call. Today's call is being recorded. Second quarter 2019 financial results and supplemental information were issued earlier this morning. They're 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 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 MMC website. During the call today, we may also discuss certain non-GAAP financial measures. For reconciliation of these measures to more closely comparable GAAP measures, please refer to the schedule on today's earnings release. I'll now turn over to Dan Glaser, President and CEO of Marshall McLennan Companies. Please go ahead.

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 Marshall 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. We are pleased with our second quarter results, which include JLT for the first time. Since we closed the acquisition on April 1st, we are off and running with our leadership in place and our teams in formation, working together to serve clients with greater expertise, capabilities, and content. We have more conviction than ever that the acquisition better positions us to help our clients with their greatest challenges. JLT's impressive talent has added to our thought leadership and ability to innovate. We've added about 10,000 colleagues to the organization, resulting in the broadest and deepest talent base in the industry. JLT has made us stronger in several specialty areas and has deepened our footprint in the faster growing geographies of Asia Pacific and Latin America. And JLT has enhanced our scale. In the second quarter, we grew total revenue by 16 percent, and RIS revenue by 23 percent compared to a year ago, despite a meaningful FX drag. This is a huge leap forward for our firm. Scale is becoming increasingly important, and this combination extends our position as the leading firm in the areas of risk strategy and people. However, as I said last quarter, size and scale aren't everything. Quality, capability, and responsiveness are what really matter to clients, and on that score, we deliver world-class service one client at a time. We have been hard at work on this integration since the day we announced the transaction, and post-closing, we shifted aggressively from planning to execution. Mark will update you on some of our guidance items but broadly speaking, things are tracking well with our expectations. We moved quickly to integrate our financial reporting, and from the first month after closing, began viewing our results on a combined basis throughout the firm. We are beginning to realize efficiencies and are meeting our milestones in terms of cost savings. We are acting swiftly to integrate our teams in shared facilities around the world. We have already moved and co-located 5,000 of our colleagues in several cities, including London, Hong Kong, Sydney, and Johannesburg. By the end of 2019, we will have nearly all colleagues around the world sitting side by side in their respective areas of operation. This involves the movement of 10,000 colleagues in 80 offices. Integrating our teams in this way is significant because it enables our colleagues to come together for clients and coalesce into a single team. We've spent a lot of time understanding the respective cultures of JLT and MMC and are focused on bringing them together in a shared, more powerful firm. Our complementary strengths offer revenue growth potential, which we believe should enhance our long-term growth profile. While these are early days and we are not yet operating as a single team in all markets or lines of business, I still wouldn't want to compete against us. We have already seen several examples where joint collaboration and the best content and solutions helped us to expand existing relationships and win new business. For example, our Marsh colleagues in Europe won business by presenting our combined capabilities to a client with a complex set of risks that required a combination of multinational expertise, specialty coverage, risk consulting, and captive support. In the US, Marsh successfully retained and expanded the business of a large financial institution. By leveraging Marsh's existing relationship and Marsh JLT's specialty analytics, expertise, and innovative solutions, the team added coverages for cyber and other specialty lines. In Australia, where we have an $800 million business with nearly 4,000 colleagues, clients and prospects are reacting positively to the expanded capabilities of the combined organization. We retained two important risk clients by demonstrating the depth of talent and the benefits of the new value proposition, and we were able to extend our position to include Mercer. Guy Carpenter recently won an RFP for a top 10 U.S. insurer by leveraging a terror model developed by JLT Reed combined with the analytical capabilities of Guy Carpenter. Mercer Marsh Benefits, enhanced by the addition of JLT, partnered on Britain's healthiest workplace launch, taking the largest survey of its kind in the UK to clients. We also see potential in the medium term to improve reliability and efficiency by leveraging JLT's shared services operations in India. JLT adds 1,700 colleagues in India to Marsha McLennan. In summary, we are off to a good start. The value creation that will be generated by the combined company is significant, and we are excited about our future together. Let me spend a moment on current P&C insurance pricing trends. Pricing is firming in specific lines and geographies, especially for complex risks or those with cat exposure. The Marsh Global Insurance Market Index saw an increase of nearly 6% in the second quarter, compared with 3% in the first quarter and 2% in the fourth quarter of 2018. Property lines are seeing average renewal price increases of 8%, with U.S. up 10%. Casualty prices increased for the first time since 2013 and saw average renewal rate increases of 1% in the second quarter. Financial and professional lines saw average renewal rate increases of 10% in the quarter, with the U.S. up 7%, and U.K. and Asia Pacific up double digits. Note that the Marsh Index skews to larger risks, and we generally see less movement in the middle market. Turning to reinsurance, at the mid-year 2019 renewals, which primarily focuses on U.S. hurricane-exposed programs, Multiple factors came together to result in double-digit property catastrophe rate increases in Florida on average for the first time in over a decade. This was driven by loss creep from the 2017 and 2018 loss events, reduced capital inflows, and evolving views of risk. Ultimately, we can't predict the mid- to long-term outlook for pricing, but the current conditions are firmer almost across the board. Now let me turn to our second quarter financial performance. We delivered solid combined results in the quarter with underlying revenue growth across both risk and insurance services and consulting. We are executing well, both delivering for clients while working through the integration of JLT. Consolidated revenue was 4.3 billion, up 16%, or 4% on an underlying basis. Adjusted operating income grew 19% to $894 million, and the adjusted operating margin expanded 150 basis points in the quarter. Adjusted earnings per share grew 7% to $1.18. In risk and insurance services, second quarter revenue was $2.6 billion, an increase of 23%. Underlying revenue growth was 3% in the quarter, reflecting 4% growth at Marsh, despite a tough comparison to a year ago, partially offset by a decline at Guy Carpenter. The decline in Guy Carpenter's underlying revenue growth is a combination of timing and a decline in our new business pipeline. Not surprising for an acquisition of this size, JLT's new business slowed considerably during the period between deal announcement and closing. This impacted Marsh and Guy Carpenter, but was felt more acutely in reinsurance. Although it will take time to rebuild the new business pipeline, we are confident in the long-term growth outlook for our combined business. RIS adjusted operating income increased 21% to 641 million, and the adjusted operating margin expanded 80 basis points versus a year ago. In consulting, second quarter revenue was 1.8 billion, up 9% compared with a year ago. Underlying revenue was up 5% for the quarter, driven by strong underlying growth at Oliver Wyman of 13%, while Mercer generated 2% underlying revenue growth. Consulting adjusted operating income grew 14%, and the adjusted margin expanded 130 basis points versus a year ago. In summary, we are pleased with our second quarter results and our progress integrating the JLT acquisition. At a high level, we are tracking success in this period across three primary dimensions, growth, achievement of cost savings, and retention of key talent. And across each of these categories, we are satisfied with our performance to date. For 2019, we expect a solid first year as a combined company, underlying revenue growth in the 3% to 5% range, margin expansion, and solid growth in adjusted EPS. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, Dan, and good morning. Our second quarter results represent a solid first quarter following the close of the JLT acquisition. Overall revenue grew 16% to $4.3 billion due to the addition of JLT beginning on April 1st and solid underlying growth of 4%. Note that underlying revenue growth in all of our communications and disclosures includes JLT. Operating income in the quarter was 680 million, while adjusted operating income increased 19% to 894 million. Overall, our adjusted operating margin increased 150 basis points in the quarter, with significant margin expansion in both segments. GAAP EPS was 65 cents in the quarter. Adjusted EPS increased 7% to $1.18. For the first six months of 2019, underlying revenue growth was 4%, our adjusted operating income grew 14%, and our adjusted EPS increased 9% to $2.70. Overall, our adjusted margin increased 160 basis points to 24.4% for the first half of 2019. In risk and insurance services, second quarter revenue grew 23% to 2.6 billion with underlying growth of 3%. Operating income increased 10% to $517 million. Adjusted operating income increased 21% to $641 million, and the adjusted margin increased 80 basis points to 27.8%. For the first six months of the year, revenue was $5 billion, with underlying growth of 4%. Adjusted operating income for the first half of the year was up 13%. At March, revenue in the quarter was $2.2 billion with underlying growth of 4%, representing a solid first quarter with JLT, especially considering the tough comparison to a strong second quarter last year. U.S. and Canada continued its trend of strong growth with 5% underlying revenue growth in the quarter. This marks the fifth consecutive quarter that U.S. and Canada has delivered 5% or higher underlying growth. In international, underlying growth was 2%, with Asia Pacific up 7%, Latin America up 4%, and EMEA flat. For the first six months, revenue at Marsh was $3.9 billion, with underlying growth of 4%. U.S. and Canada was up 5%, while international grew 3%. Guy Carpenter's revenue was $392 million in the quarter, with an underlying decline of 3%. As Dan mentioned, the softness in the quarter was due to some quarterly variability, as well as a decrease in new business. For the first six months of the year, revenue was $1.1 billion, with 2% underlying growth. We are confident in Guy Carpenter's long-term growth outlook, but expect current trends will impact revenue growth for the balance of 2019. Guy Carpenter is executing an integration and cost savings plan, which will help them deliver solid earnings growth in 2019. In the consulting segment, revenue in the quarter was up 9% to $1.8 billion, underlying growth of 5%. Operating income increased 4% to $278 million. Adjusted operating income increased 14% to $305 million, and the adjusted margin increased 130 basis points to 18%. Consulting's underlying revenue growth for the first six months of 2019 was 4%, with consolidated revenue of $3.5 billion. Adjusted operating income for the first half of the year was up 16% to $596 million. Mercer's revenue was $1.3 billion in the quarter, with underlying growth of 2%. Wealth underlying growth was flat, with mid-single-digit growth in investment management offset by a low single-digit decline in our defined benefit business. Our delegated asset management business continues to show strong growth, with assets under management increasing to $283 billion, benefiting from continued inflows, market appreciation, and assets from JLT. Health increased 4% on an underlying basis in the quarter, and career underlying growth was strong at 6%. For the first six months of the year, revenue at Mercer was $2.4 billion, with 1% underlying growth. Oliver Wyman's revenue was $540 million in the quarter with impressive underlying growth, 13%. Growth was broad-based by practice and geography. For the first six months of the year, revenue was $1.1 billion with 10% underlying growth. Turning to corporate expenses, adjusted corporate expense was $52 million in the quarter. Based on our current outlook, we expect approximately 50 million per quarter for the remainder of this year. We're just over 100 days post the closing of JLT and are moving forward rapidly with the integration. We continue to expect the transaction will be modestly diluted to adjusted EPS in the first year, break even in year two, and be accretive in year three. At this point, we expect at least 250 million of run rate cost savings and $375 million or more of costs associated with achieving these savings. Of the $250 million of cost savings, we expect to realize roughly $75 million in 2019, $175 million in 2020, and the full $250 million in year three. In terms of the $375 million of cost to achieve these savings, we expect to incur roughly half in 2019, with the remainder incurred evenly over the next two years. During the second quarter, we incurred $141 million of interest expense and continue to expect around $140 million in the third quarter, consistent with our previous guidance. As disclosed in our supplemental materials released on June 6th, we now expect annual deal-related amortization from the JLT transaction to be $180 million pre-tax. In the second quarter, we recorded $100 million of amortization which includes the JLT-related amortization as well as amortization from other transactions. Approximately 80 million of the 100 was recorded in RIS and 20 million in consulting. We currently expect the third quarter amortization will be roughly consistent with the level in the second quarter. In aggregate, the financial impact of the JLT transaction is tracking well with our initial expectations. In the second quarter, we reported 280 million of noteworthy items, mostly related to the JLT acquisition. Included in this total are 98 million of integration costs, the largest category of which is severance, 150 million of charges associated with the closing and the refinancing of JLT debt, and 26 million of other restructuring costs, mainly related to Mercer. Turning to investment income, On an adjusted basis, we had $6 million of investment income in the quarter, and we continue to expect the contribution from investment income for the balance of 2019 will be immaterial. On a GAAP basis, investment income was $8 million in the quarter. Foreign exchange was a roughly $0.02 per share headwind to adjusted EPS in the quarter. Assuming exchange rates remain at current levels, we expect $0.01 per share of FX headwind in each of the third and fourth quarters. Our adjusted effective tax rate in the second quarter was 25.9%, compared with 25.2% in the second quarter last year. Through the first half of the year, our adjusted effective tax rate was 24.1%, compared with 24.3% last year. Based on the current environment, we continue to expect a tax rate between 25% and 26% for 2019, excluding discrete items. Total debt at the end of the second quarter was $13.1 billion, or $12.6 billion, excluding commercial paper. During the quarter, we refinanced the remaining $550 million of senior notes assumed from JLT using a mix of cash and an additional $300 million one-year term loan. Our next step maturity is in September 2019 when 300 million of senior notes will mature. At this point, our expectation is that we will retire these notes with cash on hand in line with our Plan D leveraging over the next couple of years. In the second quarter, we repurchased 1 million shares of our stock for 100 million. We continue to expect to repurchase enough shares in 2019 to reduce our share count. Our cash position at the end of the second quarter was $1.3 billion. Uses of cash in the second quarter totaled $6.1 billion and included $5.8 billion for acquisitions, $212 million for dividends, and $100 million for share repurchases. For the first six months, uses of cash totaled $6.6 billion and included $6.1 billion for acquisitions, $422 million for dividends, and $100 million for share repurchases. In May, our Board of Directors approved an increase in our quarterly cash dividend from $0.41 to $0.45 per share, an increase of 10%. Overall, we expect 2019 to be a solid first year with JLT. We are on track to achieve good underlying revenue growth, meet our integration savings targets, and deliver margin expansion and solid growth in adjusted EPS. As you think ahead to the remainder of 2019, keep in mind that JLT had heightened seasonality, as shown in the supplemental quarterly materials we released on June 6th. Their first and third quarters were seasonally smallest, while their second and fourth quarters were seasonally stronger. With that, I'm happy to turn it back to Dan.