Marsh & McLennan Companies, Inc.

Welcome to Marsh and MacLennan's company's conference call. Today's conference is being recorded. Fourth 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 a reconciliation of those measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. I will now turn the conference over to Dan Glazer, President and CEO of Marsh & McLennan's Companies.

Thanks, Holly. Good morning, and thank you for joining us to discuss our fourth quarter results reported earlier today. I'm Dan Glazer, 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 Lyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. 2019 was a remarkable year for Marshall McLennan. We completed the acquisition of JLP, the largest deal in our history, while delivering strong financial results and managing the global integration. MMC is well positioned. Our talent, capabilities, expertise, and leadership have never been stronger. The addition of world-class talent at JLP complements our best-in-class teams at Marshall & Plenty. And while we still have work to do, we feel good about how the cultures are coming together. Nearly all our teams are now sitting together, and more and more we are in the market working as one. We finished the year with revenue of $16.7 billion, up 11%. This represents our highest annual top-line growth in 20 years, and it's a step change for us. On a one-way basis, we now have over $17 billion of annual revenue. We had an excellent year and are pleased that in the midst of the integration, we generated underlying growth of 4%, the 10th year in a row where our underlying growth was in the 3% to 5% range, 14% adjusted NOI growth, 110 basis points with adjusted margin expansion, and 7% adjusted EPS growth, consistent with our guidance of modest dilution in the first year of the deal. We met our capital management objectives to reduce our share count and increase our dividend by double digits. And we are running ahead of schedule on acquisition-related cost savings. We now expect run rate savings of at least $350 million. and we will continue to drive for additional operating efficiencies. Overall, I am pleased with our performance in 2019. We consistently challenge ourselves to balance delivering for today while positioning for sustained growth in the future, even in an exceptional year like 2019. We continue to invest in Marshall McCartan Agency, our fast-growing U.S. middle market brokerage business, completing five acquisitions in 2019, resulting in current run rate revenue of $1.7 billion, and we have a robust pipeline for 2020. We made additional investments in digital technology and analytics. We see further opportunities to leverage technology to expand in small commercial, as well as streamline and automate our business. We also see increasing opportunity to leverage the collective strength expertise, and relationships across our businesses to deliver enhanced value to clients and drive growth. Lastly, 2019 saw the seamless transition of leadership and Mercer, with Martine taking over as CEO. Martine moved quickly to install new leadership in key areas, energize the workforce, and implement changes that streamline the operating model, create more efficiency, and enable better execution. As we conclude 2019, we emerged a stronger firm than we started out the year, with record revenue, record-adjusted operating income, and record-adjusted earnings per share. As we look to the future, there is significant uncertainty in the world given current global issues like geopolitical risk, negative interest rates, trade friction, extreme weather and climate change, pandemic risk, and cyber risk. We come to the fore in these dynamic times by providing trusted support to our clients in the areas of risk, strategy, and people. Marsha McLennan provided thought leadership on key global issues at the World Economic Forum in Davos. This marks the 15th consecutive year we produced the annual global risk report together with the World Economic Forum. The report ranks the top global risks, and this year, climate and weather-related risks created the greatest concern. Climate change is the most prominent issue discussed at Davos, and there is growing recognition of the urgency of both mitigation and adaptation. We are engaged with our clients across all of our businesses on helping them assess the impact of a changing climate. Mercer and Oliver Wyman led sessions on gender equality, longevity, responsible investment, and AI readiness. Despite all the uncertainty in the world, I am optimistic. Business leaders continue to push for growth and investment despite near-term risks and fears about the longer-term implications of climate change. The perspectives and insights we provide on these topics are a reminder of the uniqueness of MMC and the value we bring to 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 11% in the fourth quarter, compared with 8% in the third quarter, 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 13% and 18% respectively. Casualty rates are up 3% on average, up slightly versus the third quarter. Commercial auto and excess casualty continue to see rates rising, while workers' comp continues to see rates decline. Note that the March 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, the Guy Carpenter Global Property Capacity Rate Online Index rose by 5% at the January 1 renewals. Total dedicated reinsurance capital increased by approximately 2% at year end. Although renewal outcomes vary widely across individual programs, capacity is tightened in some stressed classes like commercial auto, D&O, medical professional, and general liability. The retrocessional market continues to see meaningful increases in rates at January 1st, driven in part by trapped capital, a lack of new alternative capital entrance, and continued redemptions from third-party investors. The overall global P&C insurance market is challenging, and we continue to work hard to deliver the best solutions for our clients. It is in times like these where our expertise and capabilities shine. Turning to the fourth quarter, we are pleased with our results. Our overall revenue growth in the quarter was 15%. Underlying revenue grew 3% with growth in both segments. Marsh grew 3% in the quarter on an underlying basis, which is solid but slower than the prior quarter as expected due to a peak headwind on new business and a tough comparison to the fourth quarter of 2018. Guy Carpenter finished the year strong with 10% underlying revenue growth in the quarter. Mercer delivered 4% underlying revenue growth in the quarter, the strongest growth since the first quarter of 2018. And Oliver Wyman declined by 2%, as we expected. The overall fourth quarter saw strong adjusted operating margin expansion of 100 basis points, and adjusted operating income growth of 17 percent. As we consistently say, it is important not to overemphasize a single quarter and rather look at performance over longer periods of time. Looking at the full year, we are pleased with our results. We generated strong overall revenue growth of 11 percent for the full year, with 4 percent underlying growth. We demonstrated top-line strength across our businesses while achieving the initial benefits of the integration. On an underlying basis, March delivered solid growth of 4% for the second consecutive year. Guy Carpenter had a strong year with 5% growth. Mercer had 2% growth, and Oliver Wyman grew 6% for the year, despite the pullback in the fourth quarter. Our adjusted NOI grew 14% with overall margin expansion of 110 basis points for the year, marking the 12th consecutive year we have reported margin expansion. Adjusted EPS grew 7% or 8% on a constant currency basis, consistent with our guidance of modest adjusted EPS dilution in the first year of the JLT acquisition. In sum, 2019 was an example of strong overall execution on multiple levels. As we look to 2020 and beyond, our future is bright. The addition of JLT enhances our competitive positions. We are increasingly bringing our collective strength to clients, and we expect to see benefits from our investments in digital and technology. In 2020, we expect underlying revenue growth in the 3% to 5% range, margin expansion, and strong adjusted EPS growth. With that, let me turn it over to Mark for a more detailed review of our results. Thank you, Danny. Good morning. We are pleased with our fourth quarter results. capped a strong year in 2019. Solidated revenue increased 15% from quarter to $4.3 billion, reflecting underlying growth of 3% and a continued contribution from JLP. Operating income was $592 million, while adjusted operating income rose 17% to $856 million. Our adjusted operating margin increased 100 basis points to 21.9%. Gap EPS rose to $0.76, and adjusted EPS increased 9% to $1.19. Looking at risk and insurance services, fourth quarter revenue grew 24% to $2.4 billion and was up 3% on an underlying basis. A good result considering the tough comparison Marsh faced to its strong fourth quarter in 2018 and the fact that Q4 was JLP's seasonally largest quarter. Adjusted operating income increased 31% to $550 million, and the adjusted margin expanded 200 basis points to 25.7%. For the year, revenue was $9.6 billion, an increase of 17%, with solid underlying growth of 4%. Adjusted operating income for the year was up an impressive 17%, and our adjusted operating margin in RIS increased 60 basis points to 26.3%. In March, revenue in the quarter rose 23% to $2.2 billion, increasing 3% on an underlying basis. In the U.S.-Canada division, underlying growth was 4% for the quarter and 5% for the full year. This marks the seventh consecutive quarter of 4% or higher underlying growth for U.S.-Canada. In the quarter, the international division had underlying growth of 1%, with Asia Pacific up 7%, Latin America up 2%, and EMEA down 1%. For the full year, revenue at March was $8 billion, an increase of 17%, or 4%, on an underlying basis. Guy Carpenter's revenue was $152 million, an increase of 10% on an underlying basis for the quarter, representing an outstanding finish to a strong year. The growth in the quarter benefited from strong results in North America, as well as growth in retrocessional and an active quarter for GC security. For the year, revenue was $1.5 billion, an increase of 15% or 5% on an underlying basis. In the consulting segment, fourth quarter revenue increased 4% to $1.9 billion, with underlying growth of 2%. Consulting's adjusted operating income was flat year-over-year at $359 million, and the adjusted operating margin of 19.7% declined 60 basis points versus a year ago. But looking at the full year, margin expansion was solid. For the year, revenue was $7.1 billion, an increase of 5%, with underlying growth of 3%. Adjusted operating income for the year was up 9% to $1.3 billion, and our adjusted operating margin increased 90 basis points to 18.6%. Mergers revenue increased 8% in the quarter to $1.3 billion, with underlying growth of 4%. Wealth increased 2% on an underlying basis, with investment management up high single digits and defined benefit down low single digits. Our overall assets under management continued to grow, and at year-end exceeded $305 billion, up 5% sequentially and 26% year-over-year. Health revenue grew 6% on an underlying basis in the fourth quarter, reflecting strong growth in both international and the U.S. Career grew 4% on an underlying basis, with strong growth in survey products and digital implementation. For the year, revenue at Mercer was $5 billion, an increase of 6% or 2% on an underlying basis. Oliver Wyman's revenue in the fourth quarter was $559 million, a decline of 2% on an underlying basis. As we said on our last call, we expected a pullback in the fourth quarter. For the full year, Oliver Wyman produced strong underlying revenue growth of 6%. We made great progress in 2019 on the JLC integration and are on plan or ahead of schedule on key milestones. We continue to expect the transaction will be modestly diluted to adjusted EPS in the first year, neutral in year two, and accretive in year three. We are ahead of schedule on cost savings and restructuring actions. We now estimate run rate savings of at least 350 million. We expect to incur approximately 625 million of cash costs to generate those savings. In addition, there will be approximately $75 million of non-cash charges, mostly property-related costs as we consolidate our real estate footprint. We achieved approximately $125 million in savings through year-end 2019 and expect to achieve the balance by the end of 2021. We also incurred $335 million of JLC integration and restructuring costs in 2019 to achieve these savings. is our expectation that the bulk of the remaining costs will be incurred in 2020 with a more modest amount extending into 2021. This update reflects the plans we have today, and as we continue to get deeper into the integration, there is a possibility for more savings opportunities to emerge. As we look to the first quarter of 2020, keep in mind that this is the last quarter where our year-over-year comparisons are impacted by JLT. Remember, in RIS, the first quarter is seasonally small for JLT. In addition, JLT's employee benefits margins are relatively low in the first quarter, and we expect this, along with some quarterly volatility, will result in a decline in first quarter consulting margins. However, for the full year, as Dan mentioned, we expect strong earnings growth, consolidated adjusted operating margin expansion. Turning back to the fourth quarter, adjusted corporate expense was $53 million in the quarter. Fourth quarter, we recorded $264 million of noteworthy items, the majority of which are related to the JLP acquisition. Included in this total are $143 million of JLP integration costs, the largest category of which is severance, $17 million of JLP acquisition-related costs, $56 million of other restructuring costs, and $42 million of earn-out true-ups relating to prior acquisitions. As we typically do on our fourth quarter calls, it will give a brief update on the global retirement plan. Cash contributions to our global defined benefit plans were $122 million in 2019, up slightly from the $112 million in 2018. We expect cash contributions in 2020 will be roughly $160 million. For 2020, we anticipate our other net benefit credit will be slightly lower than in 2019. Based on current expectations, we would assume roughly $264 million for this item in 2020. Investment income was $2 million in the fourth quarter for both GAAP and adjusted results. For the full year 2019, our GAAP investment income was $22 million, and adjusted investment income was approximately $12 million. For 2020, we expect only modest investment income on adjusted data. Foreign exchange is a slight headwind to adjusted EPS in the quarter and has a $0.05 per share negative impact for the full year 2019. Assuming exchange rates remain at current levels, we expect FX to be a slight headwind to adjusted EPS for 2020. Our effective adjusted tax rate in the fourth quarter was 23.4% compared with 23.6% in the fourth quarter last year. For the full year 2019, Our adjusted tax rate was 24.1%. Excluding discrete items, our adjusted tax rate for the full year was approximately 26%. When we give forward guidance around our tax rate, we do not reject discrete items, which can be positive or negative. Based on the current environment, it is reasonable to assume a tax rate between 25% and 26% for 2020. The fourth quarter, we repurchased 1.8 million shares of our stock for $185 million. For the full year 2019, we repurchased 4.8 million shares for $485 million. Total debt at the end of 2019 was $12 billion, compared with $12.6 billion at the end of the third quarter. Next debt maturity is in March 2020, when 500 million of senior nodes will mature. During the fourth quarter, we incurred $130 million of interest expense. We expect approximately the same amount in the first quarter of 2020. As we look to 2020, the framework for capital management we discussed in the early stages of JLT is still on track. This year, we currently expect to deploy approximately $2.6 to $2.9 billion of capital across three broad categories. debt reduction, dividends in line with our objective of double-digit increases annually, and a combination of acquisitions and share repurchases. Directionally, we currently expect the amount of capital deployed to be roughly equivalent across these three categories. This plan allows us to maintain our dividend growth objective and meet the commitments for deleveraging we laid out when we announced JLT. It also provides flexibility for M&A. We've consistently stated that we favor attractive acquisitions over sharing purchases, as we view high-quality acquisitions as the better value creator for shareholders and the company over the long term. Our track record is good, as evidenced by our return on invested capital of nearly 20% over the last three years. Given our deleveraging plan and our acquisition pipeline, we currently do not expect any sharing purchases in the first half of 2020. Ultimately, share repurchases later in the year would depend on how the M&A pipeline develops. Our fee leveraging should be largely complete by the end of this year, and we expect to have substantial flexibility in terms of capital deployment in 2021 and beyond. Our cash position at the end of the fourth quarter was $1.2 billion. Uses of cash in the fourth quarter totaled $444 million and included $24 million for acquisitions, $235 million for dividends, and $185 million for sharing purchases. For the full year 2019, uses of cash totaled $7.5 billion and included $6.1 billion for acquisitions, $890 million for dividends, and $485 million for sharing purchases. In summary, we are proud of what we accomplished in 2019. We are very much on track with the objectives we set We announced the JLT acquisition, and as we look forward to 2020, our outlook is for another year of strong fulfillment. With that, I'm happy to turn it back to Dan. Thanks, Mark. Operator, we are ready to begin Q&A.

Thank you. If you would like to pose a question, please press star 1 on your telephone keypad. Please ensure that your mute function is switched off to allow your signal to reach our equipment, and you may remove yourself from the queue at any time by pressing star 2. In the interest of addressing questions from as many participants as possible, we would ask that participants limit themselves to one question and one follow-up question. We will take our first question today from Elise Greenspan of Wells Fargo. Please go ahead.