Marsh & McLennan Companies, Inc.

Welcome to the Marcia McLennan Company's conference call. Today's call is being recorded. Third 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 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 the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. I'll now turn this over to Dan Glazer, President and CEO of Marcia McLennan Companies. Please go ahead.

Thank you. Good morning and thank you for joining us to discuss our third quarter results reported earlier today. I'm Dan Glazer, President and CEO of Marcia McLennan. Joining me on the call today is Mark McGivney, our CFO. and the CEOs of our businesses, John Doyle of Marsh, Martine Furlan of Mercer, and Scott McDonald of Oliver Wyman. Unfortunately, Peter Hearn of Guy Carpenter is sick with the flu and cannot join us today. Also with us this morning is Sarah DeWitt, Head of Investor Relations. We are pleased with our third quarter and year-to-date results. We produced excellent top-line growth in the quarter with underlying revenue growth across both segments and our adjusted EPS growth is tracking well with our expectations. We are generating strong results while continuing to make progress on the JLT integration, and overall, the combination is progressing nicely. Our clients are beginning to see the power of our combined firm, and we are demonstrating that we are better positioned to help them with their greatest challenges through our enhanced talent, capabilities, and geographic footprint. We are meeting our expectations in terms of our financial targets, revenue growth, and colleague retention, and our businesses are coming together. Co-locating our teams is a critical part of our integration because it enables the cultures to coalesce as well as results in increased collaboration. To date, we moved over 8,000 colleagues, and by the end of 2019, nearly all colleagues will be sitting side by side in their respective areas of operation globally. We have also undertaken significant work to integrate our platforms. We now have nearly all of the JLP colleagues on our HR system and have integrated financial reporting as well as our email environments. This was possible because of investments we have made over the years to harmonize our systems and strengthen our infrastructure. Our progress to date makes me confident we will comfortably exceed our $250 million savings target over three years. As we have said from the beginning, our combination with JLT is about growth and the benefits this acquisition brings to clients, colleagues, and shareholders. More and more, we are working as one team for our clients. For example, Colleagues from several Marsh JLT specialty practices across multiple countries came together to provide a customized solution for a company managing a complex hydroelectric project. Through global collaboration and our augmented capabilities, we handled all of the project's insurance requirements. In Guy Carpenter, our cyber insurance team won an RFP for a large US regional carrier by demonstrating the strength of the combined organization. In Indonesia, a large manufacturer had been engaging carriers directly for their EH&B services, resulting in a sub-optimized outcome for the client. Mercer Marsh Benefits, which includes former JLT colleagues, reviewed the existing benefits and recommended critical changes to drive a better outcome. This resulted in new business for MMB, lower premium costs for the clients, and a more optimized solution for our clients' employees. We also continue to capitalize on opportunities to serve clients across our businesses. For example, we recently leveraged our collective strengths to create a compelling global value proposition for an Asia Pacific transportation company who is upgrading their infrastructure to a sustainable modern transportation network. We won the mandate by leveraging Marsh JLT's specialties construction and marine expertise, Oliver Wyman's transportation and public sector expertise, and Guy Carpenter's risk transfer and alternative capital capabilities. During the process, we also introduced MMB, who was appointed to manage the employee benefit portfolio. Overall, I am proud of our company's progress, impressed by the hard work of our colleagues, and grateful for the ongoing support of our clients. Let me spend a moment on current P&C insurance pricing trends. Pricing is firming across a wide range of geographies and lines. The Marsh Global Insurance Market Index saw an increase of nearly 8% in the third quarter, compared with 6% in the second quarter and 3% in the first. Global property insurance and financial and professional lines saw the highest average renewal rate increases at 10% and 14% respectively. Casualty rates are up 1% on average, but mixed byline with excess casualty rates rising and workers calmed down. Note that the Marsh Index skews to larger risks, which are seeing higher increases, although middle market and small commercial insurance rates are up in certain geographies. Turning to reinsurance, in the property catastrophe market, we have seen reinsurance rates increase throughout 2019 as a function of loss activity, geography, and exposure increases. Overall, we are focused on driving the best outcome for our clients. In markets like these, our capabilities and expertise shine through and become even more critical. Now, let me turn to our third quarter financial performance. We delivered excellent results in the quarter with underlying revenue growth across both risk and insurance services and consulting. We were executing well, both delivering for clients while working through the integration of JLT. Total revenue was $4 billion, up 13% or 5% on an underlying basis. Adjusted operating income increased 10% versus a year ago to $585 million, and the adjusted operating margin increased 10 basis points to 16.9%. Adjusted earnings per share fell 1% versus a year ago to 77 cents, reflecting seasonality at JLT. Year-to-date, adjusted EPS increased 6% to $3.47. In risk and insurance services, third quarter revenue was $2.2 billion, an increase of 18%. Underlying revenue growth was strong at 6% in the quarter. This reflects 5% growth in Marsh and 11% at Guy Carpenter, which was helped by a true-up of a multi-year contract, which Mark will discuss in more detail. RIS adjusted operating income increased 11% to $313 million. The adjusted operating margin was 17.4%, reflecting JLT seasonality. In consulting, third quarter revenue was $1.8 billion, up 8% compared with a year ago. Underlying revenue was up 4% for the quarter, driven by underlying growth of 7% in Oliver Wyman and 3% in Mercer. Consulting adjusted operating income grew 9%, and the adjusted margin expanded 50 basis points versus a year ago. In summary, we are pleased with our third quarter results and our progress integrating 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, Danny.

Good morning. We had an excellent quarter. Overall revenue moved 13% to $4 billion, reflecting the meaningful step forward JLT represents for our firm. We generated strong underlying revenue growth of 5%, with 6% in RIS and 4% in consulting. Remember that underlying revenue growth in our communications and disclosures includes JLT. Operating income in the quarter was $467 million, while adjusted operating income increased 10% to $585 million. Overall, our adjusted operating margin increased 10 basis points in the quarter to 16.9%, good results given the seasonality of JLT. Adjusted EPS increased to 59 cents in the quarter, and adjusted EPS was 77 cents. For the first nine months of 2019, total revenue growth was 10%, with underlying growth of 4%. Our adjusted operating income grew 13%. Our adjusted operating margin increased 110 basis points to 22%. and our adjusted EPS increased 6% to $3.47. Overall, our year-to-date performance leaves us well-positioned for a solid first year with JLT. In risk and insurance services, third quarter revenue grew 18% to $2.2 billion, with underlying growth of 6%. RIS has now produced 5% or higher underlying growth in five of the last six quarters. Adjusted operating income increased 11% to $313 million, and the adjusted margin decreased 30 basis points to 17.4%. For the first nine months of the year, revenue was $7.2 billion, with total revenue growth of 14% and underlying growth of 4%. Adjusted operating income for the first nine months of the year was up 12% to $1.7 billion, At March, revenue in the quarter was $1.9 billion, with underlying growth of 5%, representing another strong quarter of growth. U.S. and Canada grew 6% on an underlying basis in the quarter. This marks the sixth consecutive quarter that U.S. and Canada delivered 5% or higher underlying growth. The international underlying growth was 3%, with Asia Pacific up 7%, EMEA up 2%, and Latin America down 1%. First nine months, revenue at Marsh was $5.8 billion, with underlying growth of 4%. U.S. and Canada was up 5%, while international was up 3%. Guy Carpenter's revenue was $273 million in the quarter, with underlying growth of 11%. Strength in the quarter was due to solid operating performance and a true-up of a multi-year contract. Excluding the multi-year contract adjustment, underlying growth was mid-single digits in the quarter. The first nine months of the year, Guy Carpenter's revenue was $1.3 billion with 4% underlying growth. In the consulting segment, revenue in the quarter was up 8% to $1.8 billion with underlying growth of 4%. Adjusted operating income increased 9% to $320 million, and the adjusted margin increased 50 basis points to 18.7%. Consulting's underlying revenue growth for the first nine months of 2019 was 4% with consolidated revenue of $5.3 billion. Adjusted operating income for the first nine months of the year was up 13% to $916 million. Mercer's revenue was $1.3 billion in the quarter with underlying growth of 3%. Health grew 7% in the quarter, the best underlying growth since the first quarter of 2018. Career underlying growth was solid at 5%, and 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 $290 billion. For the first nine months of the year, revenue at Mercer was $3.7 billion with 2% underlying growth. Oliver Wyman's revenue was $505 million in the quarter, with strong underlying growth of 7%. This was the fifth straight quarter of 7% or higher underlying growth at Oliver Wyman. Growth was solid across most regions, with our financial services and health and life sciences practices showing particular strength. First nine months of the year, revenue was $1.6 billion, with 9% underlying growth. Turning to corporate, adjusted corporate expense was $48 million in the quarter. Based on our current outlook, we expect approximately $50 million in the fourth quarter. Turning to the JLT integration, this is our second full quarter post-closing, and I couldn't be happier with the progress we've made to date. Dan said the integration is going well from an operational perspective, and we are on track with our financial targets. We continue to expect the transaction will be modestly dilutive to adjusted EPS in the first year, break even in year two, and be accretive in year three. We are ahead of schedule on cost savings and associated restructuring charges. We expect to exceed the $250 million of run rate savings and $375 million of cost to achieve those savings. We currently plan to provide an update on our outlook for cost savings on our fourth quarter earnings call. During the quarter, we incurred $133 million of interest expense. We expect around $130 million of interest expense in the fourth quarter. In the third quarter, we recorded $84 million of amortization, which includes the JLT-related amount as well as amortization from other transactions. Our overall view of amortization related to the JLT transaction is now $163 million annually. As a result, we expect total deal-related amortization in the fourth quarter will be about $93 million. In aggregate, the financial impact of the JLT transaction is tracking well with our initial expectations. As we look to the fourth quarter, there are a few things to keep in mind. Marsh faces a tough underlying revenue comparison to a year ago and a continued impact on new business in JLT's seasonally strongest quarter. As a result, We expect March's underlying growth to moderate in the fourth quarter, but still be solid for the year. In addition, Oliver Wyman tends to be our most volatile business quarter-to-quarter, as we've discussed in the past, and our current outlook calls for a pullback in the fourth quarter. Overall, however, Oliver Wyman is on track for a strong year. In terms of the fourth quarter adjusted operating margin, we expect strong margin expansion that is moderately higher than the pace year-to-date. It reflects expense savings and a seasonally strong quarter at JLT, partially offset by the sale of JLT's aerospace business, which generated nearly all of its earnings in the fourth quarter. Turning back to the third quarter, we reported $118 million of noteworthy items, mostly related to the JLT acquisition. Included in this total are $77 million of JLT integration costs, the largest category of which is severance, $21 million of JLT acquisition-related costs, and $12 million of other restructuring costs, mainly related to Mercer's program. Turning to investment income, on an adjusted basis, we have $3 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 gap basis, investment income was $7 million in the quarter. Foreign exchange was a slight benefit to adjusted EPS in the quarter. Assuming exchange rates remain at current levels, we expect FX to be a $0.02 per share headwind in the fourth quarter. Our adjusted effective tax rate in the third quarter was 25%, compared with 25.3% in the third quarter last year. Through the first nine months of the year, our adjusted effective tax rate was 24.3%, compared with 24.5% 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 third quarter was $12.6 billion, or $12.2 billion, excluding commercial paper. In September, we repaid $300 million of senior notes that matured, consistent with our deleveraging plans. Our next scheduled debt maturity is in March 2020, when 500 million of senior notes will mature. In the third quarter, we repurchased 2.1 million shares of our stock for 200 million. For nine months, we have repurchased 3.1 million shares for 300 million. We continue to expect to repurchase enough shares in 2019 to reduce our share count. Our cash position at the end of the third quarter was 1.2 billion. Uses of cash in the third quarter totaled $486 million and included $53 million for acquisitions, $233 million for dividends, and $200 million for share repurchases. For the first nine months, uses of cash totaled $7.1 billion and included $6.1 billion for acquisitions, $655 million for dividends, and $300 million for share repurchases. Overall, we're on track to deliver a solid year With that, I'm happy to turn it back to Dan.