Marsh & McLennan Companies, Inc.

Welcome to the Marcia McLennan Company's conference call. Today's call is being recorded. First quarter 2020 financial results and supplemental information were issued earlier this morning. They're available on the company's website at www.mmc.com. Please note the remarks made today may include forward-looking statements, including certain expectations related to COVID-19 and other matters. 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... 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 most closely comparable GAAP measures. Please refer to the schedule to today's earnings release. I'll now turn this over to Dan Glaser, President and CFO of Marsh & McLennan Companies. Please go ahead.

Thank you very much, and good morning. 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 Ferland of Mercer, and Scott McDonald of Oliver Wyman. Also with us this morning is Sarah DeWitt, head of investor relations. I am pleased to report that our first quarter results were excellent, despite seeing early signs of COVID-19-related headwinds. Before I get into our results, I want to start by addressing the current crisis. We are living through deeply troubling times that are unprecedented in our lifetimes. This is first and foremost a human tragedy where the health and livelihood of virtually everyone around the world is threatened, and the ultimate economic impact is still very much unknown. We do know that the next several months, and possibly longer, will be difficult. Uncertainty is at an all-time high. There is poor visibility, business outlooks have been severely damaged, and confidence is down. Even though it is hard to imagine at present, we will see the other side of this crisis. In the aftermath, there will be a prolonged adjustment. I don't think any of us expect a quick return to life as we knew it. However, recent data shows that our response to the crisis is helping to flatten the curve, and we can already see some parts of the world take early steps toward recovery. MMC's businesses are working at multiple levels to get the global economy working again. Underpinning our work is our interaction with government and clients, including banks, insurance companies, and all facets of the global economic infrastructure. Navigating the current period is challenging for all enterprises, yet Marshall McLennan has proven to be resilient, strong, and unique. We will learn and improve as an organization during this difficult period. Marshall McLennan has never been flatter, faster, or more connected than we are today. And I expect some of how we are adapting through this period will benefit us over the longer term. I want to share some insight about how we are operating in the crisis. The safety and well-being of our colleagues is our first priority. We move quickly to suspend travel, implement work from home, and put in place flexible work policies. We have a world-class executive team, which I am incredibly proud to lead. I also want to thank our colleagues who have rallied in their support of each other and our clients. Over the last decade, we've invested significantly in the infrastructure of our business across the world. We are a globally integrated firm in terms of systems and processes, and this has proven invaluable in our response to this crisis. Within days, we were able to pivot to close to 100% work from home with over 70,000 concurrent remote connections across the world and virtually no disruption in our business and our ability to serve clients. In fact, we have a number of recent new business wins where nobody met in person. We entered this crisis in a position of strength and are focused on delivering reasonable financial performance in the short term while supporting our colleagues and positioning the firm for the mid to long term. We have made several decisions reflecting this approach. In mid-March, we committed that while we are in the thick of this crisis, our colleagues' jobs are secure. We also set up a $5 million support fund for colleagues in need, as well as committed to matching charitable gift contributions. Our decision to put colleagues' interests first is guided by our values and aspirations as a company. This doesn't mean we are being complacent on cost reductions during this period. It is simply the right thing to do. It also speaks to our confidence in the strength of our business, which will rebound as the global economy improves. We have moved fast to cut non-essential expenses and reduce capital expenditures, and we will obviously see meaningful decreases in T&As. We are taking prudent and necessary actions to manage expenses, but at the same time, we are still focused on positioning for the long term. As an example, in early April, we closed another terrific acquisition in MMA, Assurance Holdings, which will operate as the Midwest Regional Headquarters for MMA. So far in 2020, we announced three MMA acquisitions, and in just 10 years, MMA has grown into a leading mid-sized business platform in the U.S. approaching two billion in revenue with 7,200 colleagues and 160 offices. I am inspired by the hard work, dedication, and focus of our colleagues in this unprecedented time. It is their efforts that demonstrate the true strength and character of Marshall McLennan. The environment will remain challenging and the duration is unknown, but Marshall McLennan enters this period in a position of strength and we will emerge on our front foot. This month marks the one-year anniversary of our combination with JLT, and I am pleased to say the major elements of integration, including integration of colleagues, culture, and financial systems, are behind us, and we are well along the way on technology. Our strong first quarter results are evidence that the initial period of choppiness from the acquisition is over, and we emerge as a stronger, more diverse company with more capabilities and geographic depth. We are a unified firm globally. We are working as one enterprise, smarter, more connected, and more creative than we were a year ago. During these challenging times, we continue to innovate for positive change for our clients, focusing on shaping the industries in which we operate. In health and benefits, Mercer Marsh Benefits created a COVID-19 product, which is now supporting over 500,000 employees in Italy. The team then developed similar products to support people in more than 30 countries, with all regions working together, exchanging findings, and truly operating as one team around the world. Our benefits technology, Darwin, has also proven very valuable to clients, helping them rapidly inventory their pandemic coverage, address gaps, and deploy creative solutions to their employees, such as access to virtual physical and mental well-being services and telemedicine. We've also been advocating for the development of public-private partnerships around the world to address pandemic risk. Marsh and Guy Carpenter are bringing policyholders, insurers, and the government together to develop public-private partnerships to accelerate economic recovery and assure a more resilient global economy in the future. Mercer is helping clients assess updated pension costs and funding-level projections and investment portfolio options. We've been advocating for short-term pension funding relief to help businesses address near-term cash challenges and protect jobs. In Oliver Wyman, we are helping clients with their crisis response, navigating the impact on demand and supply, as well as working through financial and liquidity challenges. We have developed a proprietary tool called the Pandemic Navigator that helps companies predict future COVID-19 developments informed by different suppression tactics, and ultimately estimate overall and company-specific economic impact. The tool covers more than 40 countries and all U.S. states and will help our clients plan for when and how to conduct business after the crisis has subsided. Many of our clients around the world are already actively using the tool and accessing our experts, including more than 100 healthcare organizations several government and public sector entities, over a dozen major financial services companies, and corporations across sectors. In summary, I am proud of how our company is responding to this crisis. Let me spend a moment on current P&C insurance market conditions. P&C insurance pricing continues to increase. The March Global Insurance Market Index increased 14%, versus 11% in the fourth quarter and 8% in the third quarter. Global property insurance was up 15%, and global financial and professional lines were up 26%, while global casualty rates are up 5% on average. Keep in mind, however, our index skews to large-count business, where we typically earn fees. Small and middle market insurance pricing increased more modestly in the mid-single-digit range. Given the losses from the pandemic, pricing trends globally are likely to continue. The range of insured loss outcomes from the pandemic is wide and evolving. The loss is unique because it is ongoing. It will take a long time for it to be fully understood. It affects nearly every country, and it also led to a simultaneous asset shock. What we do know is there will be significant losses in lines such as event cancellations, travel, B&O, workers' compensation, credit lines, and political risk. The potential for other losses, this interruption or otherwise, makes the overall loss difficult to estimate at this time. The determination of coverage for the virus will be policy by policy, but we think legislating retroactive coverage is a step too far and would challenge the very notion of insurance. The decline in exposure units due to the economic fallout from COVID-19 will put downward pressure on premiums, although it will vary greatly by industry and by line of business. In some cases, carriers are offering or considering proactive premium adjustments, although to date this has been limited in commercial lines. In some markets, regulators are looking to mandate refunds. Turning to reinsurance, the April 1st renewals are largely focused on Japan. Following a couple of years that were the worst for Japanese typhoon activity experienced in recent times, Japanese insurers paid significant increases to secure renewal of their capacity excess of lost covers. The rates in other lost tree lines were stable. The upcoming June 1st renewals are largely focused on southeast U.S. wind exposure. Many renewal placements are expected to face upward rate pressure from continued loss creep from 2017 and 2018 hurricane events. In addition, reinsurers will be assessing the impact from COVID-19-related issues. Overall, the global P&C insurance market is complex. Pandemic issues continue to evolve, and this is before we enter the U.S. hurricane season. It is in times like these where our expertise and capabilities are even more critical. Now let me turn to our first quarter financial performance. We delivered excellent results in the quarter with underlying revenue growth across both risk and insurance services and consulting. Total revenue was $4.7 billion, up 14%, or 5% on an underlying basis. Underlying growth was strong in both segments with RIS up 5% and consulting up 3%. Adjusted operating income increased 15% versus a year ago to $1.2 billion. The adjusted operating margin increased 80 basis points to 27%. Adjusted earnings per share increased 8% versus a year ago to $1.64, reflecting strong underlying growth and margin expansion. Even though COVID-19 will impact our results for the remainder of the year, Our strong first quarter performance is evidence that we enter this period in a position of strength and able to manage through a difficult environment. Moving on to an update of our expectations for 2020. The current situation is still evolving and it is uncertain how deep and prolonged the downturn will be. Our outlook is based on a sharp global economic pullback starting in the second quarter with the global lockdown lifting in the third quarter, but recessionary conditions persisting through the year. For the full year 2020, we currently expect a modest decline in underlying revenue. We are being vigilant and disciplined regarding discretionary expenses. We have strong control over our cost base and have levers at our disposal to manage in the near term. For the full year, if underlying revenue finds modestly, we could see adjusted EPS in a similar range or slightly better. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, Dan, and good morning. Our first quarter results were excellent, and although the current crisis will impact our performance this year, we faced it well positioned and strong. Dan covered the high-level results for the quarter, so I will provide some additional details on our results and then turn to updated views on our outlook and capital management. Looking at risk insurance services, first quarter revenue was $2.9 billion, up 20% compared to a year ago, or 5% on an underlying basis. Adjusted operating income increased 20% to $932 million, and our adjusted operating margin expanded 90 basis points to 34.5%. At March, revenue in the quarter was $2.1 billion, with underlying growth of 5%. Growth in the quarter was broad-based and driven by strong new business and renewals. The U.S. and Canada division delivered another quarter of strong growth, with underlying revenue of 5%. The U.S. and Canada has achieved 5% or higher underlying growth in seven of the last eight quarters. In international, underlying growth was solid at 4%. EMEA was up 4%, representing the highest underlying growth in that region in 12 quarters, led by strength in continental Europe and the Middle East. Asia Pacific was up 6% on top of 8% in the first quarter of 2019. This result is impressive considering the virus impacted Asia in the first quarter. And Latin America grew 3% on an underlying basis. Guy Carpenter's revenue was $827 million, up 25%, or 7% on an underlying basis, driven by strong growth in EMEA, North America, and Asia Pacific. Guy Carpenter has now achieved 5% or higher underlying growth in nine of the last 10 quarters. In the consulting segment, revenue in the quarter was $1.8 billion, up 5% compared with a year ago, or 3% on an underlying basis. Adjusted operating income was $289 million, and the adjusted operating margin contracted by 80 basis points to 17.2%. As we mentioned on our last call, we expected the first quarter margin to decline in consulting due to some quarterly volatility and the inclusion of JLP's employee benefits business, whose margins have historically been relatively low in the first quarter. At Mercer, revenue in quarter was $1.3 billion, with strong underlying growth of 5%, continuing the trend of sequential improvement in growth from the first quarter of 2019. Wealth increased 3% on an underlying basis, reflecting low single-digit growth in defined benefits and mid-single-digit growth in investment management. Our assets under delegated management were approximately $267 billion at the end of the first quarter, up 1% year over year, but down 12% sequentially due to the decline in equity markets. Health grew 8% on an underlying basis, the strongest growth since the fourth quarter of 2015, reflecting solid performance across the portfolio. And career grew 2% on an underlying basis. At Oliver Wyman, revenue in the quarter was $511 million, which was flat on an underlying basis. After a good start to the year, we saw the beginning of virus-related impact at Oliver Wyman in March. Adjusted corporate expense was $54 million in the quarter. Our other net benefit credit was $64 million in the quarter, and for 2020, we anticipate this item will be modestly lower than in 2019. Based on current expectations, we would assume roughly $256 million for 2020 versus $271 million in 2019. Barn Exchange was a slight headwind to EPS in the quarter. Assuming exchange rates remain at current levels, we expect FX to be approximately a $0.06 per share headwind for the remainder of the year. Our effective adjusted tax rate in the first quarter was 23.2%, compared to 22.6% 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. Excluding discrete items, our effective adjusted tax rate was approximately 25.5%. Based on the current environment, it is reasonable to assume a tax rate between 25 and 26% for 2020. April 1st marked the one year anniversary of our acquisition of JLT, and we are on plan or ahead of schedule on all of our key milestones, including cost savings and restructuring actions. We incurred $80 million of JLT integration and restructuring costs in the first quarter, bringing the total to date to $415 million. We remain on track to achieve our guidance of at least $350 million of JLT savings by the end of 2021. We still expect to incur 625 million of cash costs and 75 million of non-cash costs to achieve these savings. While it remains our expectation that a significant amount of our actions will be taken in 2020, the current crisis could impact timing as we navigate through the near term. As a result, we could see some shift in our expectations for integration costs and savings between 2020 and 2021 But our current view is this impact will be relatively modest. Our outlook for 2020 has obviously changed in light of the current crisis. We want to share how we think our performance could develop, but have to emphasize that we have less visibility into how our results could unfold over the next few quarters than at any time we can remember. Our view is based on our outlook today, and it goes without saying that conditions could turn out materially different than our assumptions, which would affect our projections. As Dan mentioned, our outlook is based on a sharp economic pullback starting in the second quarter, with the global lockdown lifting in the third quarter, but recessionary conditions persisting through the year. Based on these forecasts and our internal analysis, Our current view is that we could see a modest decline in underlying revenue for the full year, with the deepest declines in the second and third quarters. At March, we still see the potential for modest underlying revenue growth for the year, although the second and third quarters will be challenging. We believe Guy Carpenter will see mid-single-digit underlying growth for the year, with a stronger first half in a weaker second half. We currently expect Mercer could see underlying revenue decline for the remainder of the year and be down modestly for the full year. Oliver Wyman will see a meaningful pullback in underlying revenue in the second and third quarters that could be greater than the peak decline we saw in the financial crisis. We would note, however, that once the financial crisis subsided and the global economy stabilized, both Mercer and Oliver Wyman experienced a strong rebound in underlying growth. Contemplating this outlook on the top line, we moved quickly to manage our expense base and significantly cut back on every discretionary expense across the firm. Our earnings will benefit from these actions as well as the continued contribution from JLP synergies. Based on this, if our revenue is in the range that we've discussed, we could see adjusted EPS for the year in the same range or slightly better. Turning to capital management and liquidity, in addition to our existing $1.8 billion credit facility, of which $800 million was unused at the end of the quarter, we recently secured additional borrowing capacity in the form of a new $1 billion line of credit. This was a prudent step to increase our access to short-term funding, given the uncertainty of the current environment. On our fourth quarter call, we provided an outlook for capital management, and that outlook has clearly changed in light of the current environment. While we intend to maintain our dividend, it is unlikely we will grow the dividend double digits this year. On the fourth quarter call, we indicated that we did not expect any share repurchases in the first half of 2020. At this point, we do not expect to repurchase shares this year. We remain focused on deleveraging, although the pace of debt paydown will ultimately depend on our cash flow generation in the current environment. Total debt at the end of the first quarter was $13.6 billion, compared with $12 billion at the end of 2019. This increase in debt is primarily due to short-term borrowings to fund seasonal cash needs, which are highest in the first quarter. We were also holding additional cash at quarter end to fund the purchase of assurance holdings and MMA acquisition that closed on April 1st. Our next scheduled debt maturities are in December 2020 when 700 million of senior notes will mature and in January 2021 when a 500 million term loan comes due. During the first quarter, we repaid 500 million of debt that matured. Interest expense in the first quarter was $127 million. Based on our current forecast, we expect approximately $140 million of interest expense in the second quarter. Our cash position at the end of the first quarter was $1.5 billion. Uses of cash in the quarter totaled $476 million and included $232 million for dividends and $244 million for acquisitions. Overall, we are pleased with our excellent first quarter results. We are a resilient company, and we entered this crisis from a position of strength. And with that, I'm happy to turn it back to Dan. Thank you, Mark.