Marsh & McLennan Companies, Inc.

Welcome to the Marshall McLennan Company's conference call. Today's call is being recorded. Third quarter 2020 financial results and supplemental information were issued earlier this morning. They are available on the company's website at 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 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 Marshall McLennan Companies.

Thank you, Shannon. 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 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 Furlong 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 third quarter and year-to-date results, which demonstrate the continued strong execution and resilience of Marshall McLennan in these challenging times. The economic impact of the pandemic continues to unfold. Governments swiftly provided necessary stimulus earlier this year, and society is adapting as healthcare professionals continue to drive better health outcomes. Nevertheless, the consequences are likely to be with us for some time. This is not a sprint or even a 10K. It is a marathon. Oliver Wyman's pandemic navigator model and experts currently predict that even in the more optimistic scenarios where a vaccine or therapeutics are developed and available, we are still unlikely to return to more normal conditions before the end of 2021. At Marshall McLennan, we are prepared for the long haul. The company has been resilient amidst the challenges of 2020. We are experiencing one of the worst recessions in history, and our performance to date is nothing short of outstanding in the circumstances. Times like these validate our purpose to make a difference in moments that matter. We've done just that by helping clients with issues of the day, including healthcare solutions, risk management, cyber, climate, enhanced resilience, digital transformation, diversity strategies, among others. Our focus on risk, strategy, and people is more critical than ever, and our colleagues have demonstrated incredible dedication and agility. Supporting our colleagues is always a major priority and is even more critical during the pandemic. Just last week, we received the results of our most recent colleague engagement survey. Our support has been validated by the results, which showed record engagement scores. Looking at our execution during this period, it's been impressive. At Marsh, our year-to-date underlying growth is 3%. Guy Carpenter is having a strong year with 6% underlying growth for the first nine months. Consulting has experienced more of an adverse impact, yet we are pleased the effects are not as severe as we saw during the financial crisis. The expense discipline across the firm has allowed us to achieve strong margin expansion and 9% adjusted EPS growth year-to-date. Our solid earnings growth, coupled with a firm-wide focus on working capital, is driving significant free cash flow, enabling us to increase our dividend, complete acquisitions, and remain largely on track with our deleveraging plans. We achieved all this while at the same time continuing to position the company for the long term. We are pursuing strategic hires and see an opportunity to benefit from industry consolidation. We continue to build out MMA through acquisition, with 2020 seeing the most revenue acquired and capital deployed since we launched the business in 2009. And the pipeline is solid. In addition, Opportunities to benefit from new areas of growth, increase our penetration of existing markets, as well as achieve higher levels of efficiency. With the heavy lifting from the JLD integration well behind us, we are connected, unified, and focused on growth in all dimensions. We are executing well, and I see opportunity to emerge from this period even stronger. The crisis proved our workforce is agile, and there is opportunity over the long term to operate with greater flexibility, increase the use of technology, reduce travel, and shrink our real estate footprint. This will not only drive savings for shareholders, but increase colleague satisfaction and enhance our ability to bring the best of Marshall McLennan to every client situation. In some ways, the crisis acted as a natural accelerant for collaboration and cross-business activity. We are increasingly bringing together our businesses to help clients. For example, COVID-19 increased the cyber risk profile of nearly every firm, and our businesses are working hand-in-hand to deliver holistic cyber advisory and insurance solutions to aid in mitigation, response, and remediation. We are also bringing the businesses together to help clients address climate risk. Marsh Risk Consulting, Oliver Wyman, and Guy Carpenter came together recently to help a major international bank analyze and create a mitigation strategy on climate risk. Mercer, Oliver Wyman, and Marsh Risk Consulting continue to come together to assist clients with return to office initiatives in the face of the global pandemic. By leveraging their combined data, we are providing clients with operational support, predictive models for reopening, financial planning, communication strategies, and overall benefit reviews. Underpinning these initiatives is the proprietary data and analytics from Oliver Wyman's Pandemic Navigator model, which was recently recognized as one of the most accurate predictive models of COVID-19 cases and fatalities and is utilized by the CDC. These are just some of the examples of the collaboration and innovation that support our continued growth potential. Let me spend a moment on current P&C insurance market conditions. The third quarter marks the 12th consecutive quarter of rate increases in the commercial P&C insurance marketplace. The March global insurance market index increased 20% year-over-year, versus 19% in the second quarter and 14% in the first quarter. Global property insurance was up 21%, and global financial and professional lines were up 40%, while global casualty rates were up 6% on average, and workers' compensation pricing remained negative in the period. Keep in mind, our index skews to large account business. However, U.S. small and middle market insurance pricing continues to accelerate as well, although the magnitude of price increases is less than for large complex accounts. Pricing continues to react to multiple external headwinds impacting insurer profitability, and this is only exacerbated by COVID-19 losses, which continue to evolve. COVID-19 will be a long and complicated loss, and the interpretation of various policyholder wordings will be determined in the courts over time. In reinsurance, price increases evidenced at the 4-1 Japan renewals and 6-1 Florida renewals continued into the 10-1 renewals. These were larger increases than at January 1, but primarily driven by lost impacted business. Guy Carpenter's US Radar Line Index was up 12% year over year in July, reflecting reduced alternative capital inflows, constrained retrocessional capacity, and traditional reinsurers exercising caution regarding the amount of capital they are willing to expose in the face of wind, wildfire, and developing COVID-19 losses. We are currently near the tail end of one of the most active hurricane seasons in US history, with a record level of named storms making landfall. While numerous, aggregate losses were thankfully not as severe as they could have been. The P&C insurance and reinsurance markets overall are showing a heightened degree of scrutiny and risk selection with continued push for higher pricing. As the advocate for the client, we remain steadfast in our goal to deliver the highest quality coverage at the best possible terms. And these challenging market conditions highlight the value of the advice and services that Marshall McLennan delivers. Now let me turn to our third quarter financial performance. We delivered adjusted EPS growth of 6% despite the global impact of COVID-19. Our EPS growth in the quarter reflects great execution on the part of our colleagues and continued expense disciplines. Total revenue was unchanged versus a year ago at $4 billion and down 1% on an underlying basis. Underlying revenue grew 2% in RIS and declined 4% in consulting. In risk and insurance services, third quarter revenue was $2.3 billion, an increase of 4%. Underlying revenue growth was up 2% in the quarter, reflecting solid growth of 3% in Marsh and flat at Guy Carpenter, which overcame a previously disclosed $17 million one-time benefit in the year-ago period. RIS adjusted operating income increased 24% to $388 million, and the adjusted operating margin expanded 280 basis points versus a year ago. In consulting, third quarter revenue was $1.7 billion. Underlying revenue declined by 4% for the quarter. Oliver Wyman and Mercer's career business continue to feel the greatest impact from recessionary conditions. Consulting adjusted operating income declined by 5%, and the adjusted margin expanded 20 basis points versus a year ago. Overall adjusted operating income increased 9% versus a year ago to 638 million. Our adjusted operating margin increased 150 basis points to 18.4%. Adjusted earnings per share increased 6% versus a year ago to 82 cents per share. Even though the impact from COVID-19 may be far from over, our strong third quarter and year-to-date performance is evident that we are executing well in this challenging environment. Given our excellent third quarter performance, our full year outlook has improved. For the full year 2020, we now expect underlying revenue to be roughly flat, with growth in RIS offset by a decline in consulting. In addition, we expect to generate mid-single digit growth in adjusted EPS for the full year. 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 third quarter and year-to-date results, which demonstrate the resilience of our business as well as how well we are executing through the crisis. Despite a modest decline in underlying revenue in the quarter, we generated solid earnings growth, strong free cash flows, and margin expansion in both segments. Overall revenue was flat in the third quarter and declined 1% on an underlying basis. Operating income in the quarter was 540 million, an increase of 15% over last year. Adjusted operating income increased 9% to 638 million, and our adjusted margin increased 150 basis points to 18.4%. GAAP EPS increased to 62 cents in the quarter, and adjusted EPS increased 6% to 82 cents. For the first nine months of 2020, total revenue growth was 3%, with underlying growth of 1%. Our adjusted operating income grew 12%. Our adjusted operating margin increased 180 basis points to 23.8%, and our adjusted EPS increased 9% to $3.77. In risk and insurance services, third quarter revenue grew 4% to $2.3 billion with underlying growth of 2%. A decline in fiduciary interest income driven by lower interest rates served as a 100 basis point drag on underlying growth in the third quarter and a 60 basis point drag for the nine months. Operating income increased 52% to $333 million. Adjusted operating income increased 24% to $388 million, and the adjusted margin increased 280 basis points to 20.2%. For the first nine months of the year, RIS revenue was $7.8 billion, representing growth of 8% and underlying growth of 3%. Adjusted operating income for the first nine months of the year was up 20% to $2.1 billion. At March, revenue in the quarter was $2 billion, with underlying growth of 3%, representing another solid quarter of growth considering the macroeconomic headwinds. U.S. and Canada grew 5% on an underlying basis in the quarter, led by strong growth in MMA. This marks the 13th consecutive quarter that U.S. and Canada has delivered 3% or higher underlying growth. In international, underlying growth was 2%. with Asia Pacific up 4%, Latin America up 2%, and EMEA flat. For the first nine months, revenue at Marsh was $6.2 billion, with underlying growth of 3%. U.S. and Canada was up 4%, while international was up 2%. Guy Carpenter continues to have a great year. Guy Carpenter's revenue was $274 million in the quarter, which was flat on both a reported and underlying basis. As we disclosed previously, Guy Carpenter's growth in the third quarter of last year benefited from the true-up of a multi-year contract. Excluding this item, underlying growth was 6 percent in the quarter and reflects continued solid results across the portfolio. For the first nine months of the year, Guy Carpenter's revenue was $1.5 billion, with 6% underlying growth. In consulting, third quarter revenue was $1.7 billion. Underlying revenue was down 4% in the quarter, reflecting the impact of the current crisis. Adjusted operating income decreased 5% to $306 million, while the adjusted margin increased 20 basis points to 18.9%. For the first nine months of the year, consulting's revenue was $5.1 billion, down 2% on an underlying basis, and adjusted operating income declined 6% to $860 million. Mercer's revenue was $1.2 billion in the quarter, down 3% on an underlying basis. Wealth underlying revenue decreased 3% led by a decline in DB. Within wealth, however, we continue to see growth in the outsourced CIO business, And at the end of the quarter, our assets under management were approximately $321 billion. This 5% sequential increase was driven by strong new funding and market gains. Health underlying growth was flat in the quarter, and career underlying revenue was down 11%. Career is where we have more discretionary project business, which is seeing the most impact from the crisis. For the first nine months of the year, revenue at Mercer was $3.6 billion, down 1% on an underlying basis. Oliver Wyman's revenue was $480 million in the quarter, a decline of 6% on an underlying basis. This marks an improvement from the pace of decline in the second quarter and reflects stronger sales and continued solid delivery of projects. For the first nine months of the year, revenue at Oliver Wyman was $1.5 billion, a decline of 6% on an underlying basis. Turning to corporate, adjusted corporate expense was $56 million in the quarter. Based on our current outlook, we expect approximately $58 million in the fourth quarter. We had $2 million of investment income on an adjusted basis in the quarter. and we continue to expect the contribution from investment income for the balance of 2020 will be immaterial. On a GAAP basis, investment income was a loss of $14 million in the quarter, primarily reflecting a change in the market value of our remaining investment in Alexander Ford. Foreign exchange was a two-cent headwind to adjusted EPS in the quarter. Assuming exchange rates remain at current levels, we expect FX to be a slight benefit in the fourth quarter. Our adjusted effective tax rate in the third quarter was 26.5% compared with 25% in the third quarter last year. Excluding discrete items, our adjusted effective tax rate was approximately 25.5%. Through the first nine months of the year, our adjusted effective tax rates was 24.6% compared with 24.3% last year, and we expect the full year rate to be between 25% and 26%, due in part to an expected impact from discrete items in the fourth quarter. Turning to the JLT integration, I'm happy to report that the bulk of integration activity is largely behind us, and we have achieved the vast majority of the targeted savings, which is well ahead of schedule. We incurred $44 million of JLC integration and restructuring costs in the third quarter, bringing the total to date to $516 million. The remaining work to be done consists primarily of ongoing technology application migrations and the further consolidation of real estate, which will continue through 2021. I want to take a minute and provide an update to our outlook for 2020. Our 2020 outlook assumes recessionary conditions persist for the rest of the year. Despite this headwind, we expect RIS to generate underlying revenue growth for the full year, offset by a decline in consulting. At Marsh, we see underlying growth in the low single digits for Q4 and the full year, a solid result in the face of the pandemic. At Guy Carpenter, we continue to expect mid-single digit underlying growth for the full year. Guy Carpenter's fourth quarter could be impacted by difficult comparisons to last year, although Q4 is a seasonally small quarter. We continue to expect Mercer's underlying revenue will decline in the fourth quarter and be down modestly for the full year. Finally, revenue weakness in Oliver Wyman will persist through the fourth quarter. As we learn to live with the virus, we are progressively moving to a more normal course for business decisions. We expect fourth quarter adjusted earnings will be impacted by a sequential uptick in expenses due to a general loosening of spending restrictions, strategic hiring, and costs associated with employee-related activity that would have taken place over the course of the year but was delayed due to the pandemic. Despite this, we are raising our adjusted EPS outlook for the year to mid-single-digit growth. In addition, based on this outlook, we expect our overall margin will increase, which would mark our 13th consecutive year of reported margin expansion. We ended the quarter with $2.4 billion of cash, saw a sequential reduction in outstanding debt, and have the entirety of our combined $2.8 billion of credit facilities available. We remain committed to deleveraging, and we continue to expect to reduce overall debt this year. Total debt at the end of the third quarter was $12.7 billion, down from $13.2 billion at the end of the second quarter, reflecting the repayment of a $500 million one-year term loan ahead of its scheduled maturity. Our next scheduled debt maturity is in December, when $700 million of senior notes mature. Interest expense in the third quarter was 128 million. Based on our current forecast, we expect approximately 127 million of interest expense in the fourth quarter. While uncertainty remains high in the current environment, we feel the actions we have taken to secure additional flexibility, along with our strong performance to date, positions us well to continue to navigate the crisis from a liquidity perspective. In line with our prior commentary, we did not repurchase any shares in the third quarter and do not plan to repurchase shares for the remainder of 2020. Uses of cash in the third quarter totaled $295 million and included $59 million for acquisitions and $236 million for dividends. For the first nine months, uses of cash totaled $1.5 billion and included $753 million for acquisitions and $702 million for dividends. Overall, we are pleased with our third quarter and year-to-date results. We are on track to deliver a solid year despite the ongoing global pandemic. Our results reflect the strength and resilience of our company and our colleagues, and we remain focused on striking the right balance between delivering solid results today while continuing to invest for growth in the future. And with that, I'm happy to turn it back to Dan.