Marsh & McLennan Companies, Inc.

Welcome to Marsh & McLennan Company's conference call. Today's call is being recorded. Second quarter 2020 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, including certain expectations related to COVID-19 and other matters. Forward-looking statements are subject to risks 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 gap measures, please refer to the schedule in today's earnings. Release. I'll now turn this over to Dan Glazer, President and CEO of Marsh & McLennan Companies.

Thank you, Operator. Good morning, and thank you for joining us to discuss our second 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 Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. I am pleased with our second quarter results, which demonstrate Marsha McLennan's strength and resiliency as we navigate the current global health crisis and economic recession. The world is experiencing two dramatic and unforeseen events at the same time. First, the global pandemic. And second, the global economic crisis driven by an unprecedented simultaneous lockdown in almost every part of the world. In addition, society reached a breaking point on racial inequalities which have persisted for far too long. In the face of this extraordinary combination of events, Marshall McLennan colleagues rose to the occasion and continued to serve our clients with excellence and distinction. I want to thank our 76,000 colleagues globally and our leadership team for their dedication and outstanding execution in these challenging times. While the impact to our business from the economic downturn and health crisis so far has been manageable, we live in troubled times, and the conditions in many parts of the world remain extremely difficult and uncertain. The world may have avoided the worst-case health and economic scenarios, but the downturn may be longer than many initially expected with waves of virus resurgence in certain geographies. While in most parts of the world we are through the initial phase of peak fear and uncertainty around health outcomes, we are now in a period of dealing with the economic fallout and living with the continuing health implications. These economic and health uncertainties could last a year or longer, challenging companies well into 2021. Regardless of the shape of the recovery, we have proven our businesses resilient. We have strong control over our expense base, and the need for our advice and solutions is now more critical than ever. Our management team has made a number of tough calls, and I believe the right ones, as we navigated through these first months of the crisis. We continue to take actions that balance the short term with a focus on positioning for the long term. These include maintaining jobs in the thick of the pandemic, as well as proceeding with our annual salary increases, avoiding a hiring freeze and continuing to make strategic hires in the face of industry dislocation, and moving forward with several acquisitions so far this year in MMA as we continue to pursue inorganic growth. We have cut back significantly on discretionary expenses and have set a high bar for what is deemed essential spending. which has driven costs down while we preserve jobs and salaries. We also enhanced our liquidity by establishing a new credit facility and issuing additional long-term debt. Looking beyond the current crisis, I believe we will emerge as a stronger firm. Our organization has never been flatter, faster, and better connected than it is today. I want to pause and comment on racial inequalities. The racial inequality in our society is a pervasive issue that recently came to a breaking point with the tragic death of George Floyd. Systemic racism has caused inequities in justice, health care, education, careers, wealth creation, and freedom. The recent events have been shocking to many and all too familiar to others. Our executive committee has been fully engaged, listening to our black colleagues and others, speaking up alongside them, and implementing concrete actions to make a difference. We are determined to seize this moment to create a more diverse and inclusive company. In these dynamic times, we are pressing to develop new solutions to address rising and evolving risks globally. Our businesses are collaborating more than ever to bring the power of our firm to clients. For example, Marsh and Guy Carpenter are leading the industry to create a new market for pandemic insurance. We initiated a dialogue in Congress in late March to create a public-private partnership for pandemic risk, which would facilitate future economic recovery and enhance resiliency among companies going forward. We are also developing public-private pandemic solutions in multiple countries. At Oliver Wyman, we developed a leading disease progression model, Pandemic Navigator, which is being used by governments and companies to predict virus spread and guide decisions. Both Oliver Wyman and Mercer are advising clients across a number of industries utilizing Pandemic Navigator to make return to office plans, understand future demand recovery patterns, manage supply chains, forecast credit losses, and assess early warning signals. Mercer and Marshalls Consulting have also joined forces to work with employers on their new normal strategies, helping clients use this time as an opportunity to adapt, reinvent, and become more resilient. In summary, I am proud of how our company continues to innovate while responding to the immediate pressures caused by the crisis. Let me spend a moment on current P&T insurance market conditions. P&T insurance pricing continues to accelerate. The March global insurance market index increased 19% year over year versus 14% in the first quarter and 11% in the fourth quarter of 2019. Global property insurance was up 19% and global financial and professional lines were up 37% while global casualty rates were up 7% on average. Keep in mind, our index skews to large account business where we typically earn fees. However, U.S. small and middle market insurance pricing is up meaningfully as well, although not to the same magnitude as large complex accounts. Overall, underwriters continue to push for higher levels of rate increases as a result of social inflation pressures, persistently low yields, and a number of large underwriting losses, including COVID-19. This is before the peak of the hurricane season. While capital remains adequate, the risk appetite of insurers is reduced as they are increasingly cautious in an uncertain environment. Turning to reinsurance, the mid-year renewals, which are largely focused on southeast U.S. wind exposure, saw meaningful rate increases. Florida peak zone property catastrophe reinsurance programs were up 25 to 35%. These are some of the highest rate increases seen since 2012. Non-Florida mid-year renewals were typically up 5% to 15%. Reinsurers are being cautious regarding the amount of capital they are currently willing to expose in an environment of great uncertainty. Overall, global P&T insurance and reinsurance markets remain challenging with accelerating price increases and narrowing terms and conditions. It is in times like these where our experience, advice, and solutions are even more critical. Now let me turn to our second quarter financial performance. We delivered excellent adjusted EPS growth of 12% despite the global impact of COVID-19. Our strong EPS growth in the quarter reflects great execution on the part of our colleagues, the immediate benefit of expense management actions, and the delayed impact of the COVID-19 crisis on our revenue. Total revenue was $4.2 billion, down 4% or down 2% on an underlying basis. Underlying revenue grew 2% in RIS and declined 6% in consulting. In risk and insurance services, second quarter revenue was $2.6 billion, an increase of 1%. Underlying revenue growth was up 2% in the quarter, reflecting strong 9% growth at Guy Carpenter and 1% at Marsh. Excluding a reduction in revenue we booked in the quarter related to estimated exposure declines, underlying revenue at both RIS and Marsh was up 3% in the quarter, which is a strong result in the face of the economic downturn. RIS adjusted operating income increased 19% to $762 million, and the adjusted operating margin expanded 430 basis points versus a year ago. In consulting, second quarter revenue was $1.6 billion. Underlying revenue declined by 6% for the quarter. Our alignment in Mercer's career business felt the greatest impact from the lockdown as expected. Consulting adjusted operating income declined by 13%, and the adjusted margin declined by 70 basis points versus a year ago. Overall, adjusted operating income increased 10% versus a year ago to $984 million. Our adjusted operating margin increased 270 basis points to 25.5%. Adjusted earnings per share increased 12% versus a year ago to $1.32, reflecting expense tightening and strong execution. Even though COVID-19 will impact our results for the remainder of the year, Our strong second quarter performance is evidence that our business is resilient and that we are able to manage through challenging environments. While our year-to-date results are strong, the economic outlook is weak and uncertainty is still very high. For the full year 2020, we continue to expect a modest decline in underlying revenue. However, given our strong second quarter performance, we now expect to generate modest growth in adjusted EPS for the full year despite the decline in underlying revenue. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, Danny. Good morning. We're pleased with our second quarter results. Despite a modest decline in revenue driven by the current crisis, we delivered strong earnings and continued to enhance our balance sheet and liquidity positions. Overall revenue declined 4 percent in the second quarter to 4.2 billion, or down 2 percent on an underlying basis. Operating income in the quarter was 885 million, an increase of 30 percent over last year. Adjusted operating income increased 10 percent to 984 million, and our adjusted margin increased 270 basis points to 25.5 percent. GAAP EPS was $1.12 in the quarter, and adjusted EPS increased 12% to $1.32. For the first six months of 2020, underlying revenue growth was 2%. Our adjusted operating income grew 13% to $2.2 billion. Our adjusted margin increased 190 basis points, and our adjusted EPS increased 10% to $2.96. Before I go deeper into our results, I want to discuss a $36 million reduction to previously recorded revenue we booked in the quarter. This adjustment reflects the estimated impact of the economic downturn on exposure units. It primarily impacted Marsh, but there was also a reduction in Mercer in Health. A significant portion of brokerage revenue is recognized at policy inception, including in some cases where ultimate revenue is uncertain. In these cases, premiums and commissions are recorded based on estimates of ultimate exposure. These estimates are typically not updated until the end of the policy term, as variability in most cases is modest. However, due to the impact of COVID-19 and the economic downturn, exposures in many lines of business will likely be lower than originally anticipated, requiring that we update our estimates sooner. It is important to note that this charge is included in underlying growth and in adjusted earnings. Returning to results in risk and insurance services, second quarter revenue was $2.6 billion, with underlying growth of 2%, or 3%, excluding the revenue adjustment. A decline in fiduciary interest income was also a 70 basis point drag on underlying revenue. Operating income increased 34% to $696 million. Adjusted operating income increased 19% to $762 million, and the adjusted margin expanded 430 basis points to 32.1%. For the first six months of the year, revenue was $5.5 billion, with underlying growth of 4%. Adjusted operating income for the first half of the year increased 20% to $1.7 billion, with a margin of 33.4%, up 280 basis points from the same period a year ago. At March, revenue in the quarter was $2.2 billion, an increase of 1% on an underlying basis, or 3%, excluding the impact of the revenue adjustment, a strong result in the current environment. In U.S. and Canada, underlying growth was 3% in the quarter. In the international division, underlying growth was flat, with EMEA down 3%, Asia Pacific up 4%, and Latin America up 4%. For the first six months of the year, Marsh's revenue was $4.2 billion, with underlying growth of 3%. U.S. and Canada underlying growth was 4%, and international was up 2%. Guy Carpenter had another great quarter. Revenue was $433 million, reflecting underlying growth of 9%. Growth was driven by solid retention, strong demand driving new business, and a tailwind from the current pricing environment. For the first six months of the year, Guy Carpenter generated $1.3 billion of revenue and 8% underlying growth. In the consulting segment, underlying revenue declined 6% in the quarter, reflecting the impact of the current crisis. Operating income decreased 8% to $255 million. Adjusted operating income decreased 13% to $265 million. and the adjusted margin decreased 70 basis points to 17.3%. Consulting generated revenue of $3.4 billion for the first six months of 2020, representing an underlying decline of 1%. Adjusted operating income for the first half of the year was down 7% to $554 million. Mercer's revenue was $1.1 billion in the quarter, down 3% on an underlying basis. Wealth underlying revenue declined 2%, reflecting modest growth in defined benefits offset by a decline in investment management solutions. Our assets under management were approximately $306 billion at the end of the second quarter, up 8% year over year. Health increased 1% on an underlying basis in the quarter, or 2%, excluding the impact of the revenue adjustment. In career, underlying revenue declined 16%. Career is where we have more discretionary project business, which drove the revenue decline. For the first six months of the year, revenue at Mercer was $2.4 billion, with 1% underlying growth. Oliver Wyman's revenue was $467 million in the quarter, a decline of 13% on an underlying basis, which was better than we expected coming into the quarter. For the first six months of the year, revenue at Oliver Wyman was $978 million, a decline of 7% on an underlying basis. Adjusted corporate expense was $43 million in the quarter. Based on our current outlook, we expect approximately $96 million in total for the second half of the year. Turning to investment income, on an adjusted basis, we had an investment loss of $7 million in the quarter. On a GAAP basis, we reported an investment loss of $31 million, primarily driven by the sale of a portion of our equity ownership in Alexander Ford's. Foreign exchange was neutral to EPS in the quarter. Assuming exchange rates remain at current levels, we would expect FX to have a minimal impact on EPS for the remainder of the year. Our adjusted effective tax rate in the second quarter was 25%, compared with 25.9% in the second quarter last year. Excluding discrete items, our effective adjusted tax rate was approximately 25.5%. Through the first half of the year, our adjusted effective tax rate was 24%, compared with 24.1% last year. Based on the current environment, we continue to expect a tax rate between 25% and 26% for 2020, excluding discrete items. The most challenging parts of the JLT integration are now well behind us as demonstrated by our strong first half results. We are on plan or ahead of schedule on all of our key milestones, including cost savings and restructuring actions. We incurred $57 million of JLT integration and restructuring costs in the second quarter, bringing the total to date to $472 million. In total, we still expect to incur approximately $625 million of cash costs and $75 million of non-cash costs to generate at least $350 million of savings. We expect the majority of these costs will be incurred in the savings achieved by the end of 2020. I want to take a minute and provide an update to our outlook for this year. Our revised view contemplates recessionary conditions persisting through at least the remainder of 2020. But it goes without saying that uncertainty remains very high and conditions could turn out materially different than our assumptions, which would affect our projections. For the full year 2020, as Dan mentioned, we now expect to generate modest EPS growth, despite our outlook for a modest decline in underlying revenue. We currently expect adjusted EPS to decline in the back half of the year, reflecting the full impact of the pandemic on revenue, as well as some rebound in spending in certain areas. At Marsh, we still see the potential for modest underlying revenue growth for the year, although the back half will be challenging. For the full year 2020, we continue to expect mid-single-digit growth at Guy Carpenter. Underlying revenue growth for the second half of the year will likely be more muted, but these are seasonally small quarters for Guy Carpenter. Also keep in mind that Guy Carpenter faces a difficult year-over-year comparison in the third quarter, which as we mentioned last year, benefited from a $17 million true-up of a multi-year contract. We continue to expect Mercer's underlying revenue will decline for the remainder of the year and be down modestly for the full year. Finally, revenue weakness in Oliver Wyman could persist through the back half of the year. Turning to the balance sheet, we ended the quarter with $1.7 billion of cash a sequential reduction in outstanding debt, and the entirety of our combined $2.8 billion of credit facilities available. Since the onset of the pandemic, we have taken prudent steps to enhance our financial resources and flexibility. In April, we secured a new $1 billion line of credit, and in May, issued $750 million of 10-year senior notes at a coupon of 2.25%. We remain committed to deleveraging and expect to reduce debt this year, although the ultimate amount will depend on our cash generation in the current environment. Total debt at the end of the second quarter was $13.2 billion, down from $13.6 billion at the end of the first quarter, representing a reduction of $439 million. Our next scheduled debt maturity is in December 2020, when 700 million of senior notes mature. We also have a $500 million term loan due in January 2021. Interest expense in the second quarter was 132 million. Based on our current forecast, we expect approximately 131 million of interest expense in the third quarter. Although uncertainty in our outlook remains high, we feel comfortable that we have the resources and flexibility to manage through the crisis from a liquidity perspective. In line with our commentary on the first quarter call, we did not repurchase any shares in the second quarter. Given the ongoing uncertainty of the current environment, we do not plan to repurchase shares for the remainder of 2020. Earlier this month, we announced an increase to our quarterly dividend to 46.5 cents per share. This increase represents the 11th consecutive year of dividend increases at Marsh & McLennan. Uses of cash in the second quarter totaled $684 million and included $450 million for acquisitions, and $234 million for dividends. For the first six months, uses of cash totaled $1.2 billion and included $694 million for acquisitions and $466 million for dividends. Overall, we are pleased with our performance in the first half of 2020. We have shown resiliency. The level of commitment and execution throughout the organization has been outstanding. And while the crisis is far from over, we believe we are positioned to continue to navigate it well. And with that, I'm happy to turn it back to Dan.