Marsh & McLennan Companies, Inc.

Welcome to Marsh McLennan's earnings conference call. Today's call is being recorded. First quarter 2023 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. 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 Marsh McLennan website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. If you have a question, please press star 1-1 on your touchtone phone. If you wish to be removed from the queue, please press star 1-1 again. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press star 1-1 on your touchtone phone. I'll now turn this over to John Doyle, President and CEO of Marsh McLennan.

Good morning, and thank you for joining us to discuss our first quarter results reported earlier today. I'm John Doyle, President and CEO of Marsh McLennan. Joining me on the call is Mark McGivney, our CFO, and the CEOs of our businesses, Martin South of Marsh, Dean Klausur of Guy Carpenter, Martin Furlan of Mercer, and Nick Studer of Oliver Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations. Marsh McLennan had a strong start to 2023. Our first quarter results were excellent and we are well positioned for another good year. Top line momentum continued as we generated 9% underlying revenue growth on top of 10% growth in the first quarter of last year. We had strong growth across most businesses, segments, and geographies with underlying growth at Marsh, Guy Carpenter, and Mercer accelerating compared to the fourth quarter. Adjusted operating income grew 13% versus a year ago, reflecting our strong growth. Our adjusted operating margin expanded by 150 basis points compared to the first quarter of 2022. And adjusted EPS growth was strong at 10%, building on 16% in the first quarter of 2022. In addition to delivering terrific results, we continued to execute on acquisitions. On April 1, we completed the merger of BT Super with Mercer Super Trust creating one of Australia's most competitive super funds with approximately 850,000 members and 63 billion of assets under management. I'm pleased with our performance, especially when viewed in the context of the volatile macroeconomic environment. The global economy has been contending with high inflation, aggressive tightening of monetary policy by central banks, some recent bank failures, and the effects of geopolitical instability. We have a track record of resilience across economic cycles, and there are factors that support continued growth in our business. Although the outlook for real GDP growth continues to be under pressure, inflation remains elevated, driving higher insured values and lost costs. P&C insurance and reinsurance rates continue to increase, has carriers priced to account for the rising frequency and severity of catastrophe losses, social inflation, and higher reinsurance costs. Healthcare costs are trending higher, and employers expect further increases in the years ahead. Labor markets remain tight in most major economies, with 3.5% unemployment and nearly 10 million unfilled jobs in the U.S. And short-term interest rates are at the highest level since the financial crisis, lifting fiduciary income. Change and uncertainty create complexity as well as opportunity for clients. Marsh McLennan's leadership and capabilities in risk strategy and people help them navigate shifting landscapes. Turning to insurance and reinsurance market conditions, primary insurance rate increases persisted with the Marsh Global Insurance Market Index up 4% overall in line with the fourth quarter. Property rate increases accelerated to 10%, and casualty pricing was up in the low single-digit range. Workers' compensation was flat, and financial and professional liability insurance rates were down mid-single digits. Cyber insurance saw the highest increase in our index, although the rate of increase continued to moderate. In reinsurance, market conditions remained challenging from January 1 through April 1. Risk appetite for property catastrophe reinsurance remains constrained. Reinsurers continue to push for structural changes and tighten terms and conditions. Limited new capital has entered the market to support property catastrophe risks. At April renewals, U.S. property CAT reinsurance rates saw increases of 40% to 60% on average for non-loss-affected accounts, with higher increases for loss-affected business. U.S. casualty reinsurance rate increases were more modest. In Japan, property cap rates were up 15 to 25%. The impact of rate increases on seeded premiums was mitigated by higher retentions. We continue to help our clients manage through these challenging market conditions. Now, I'd like to take a moment to provide an update on our recent strategic initiatives and highlight some of the steps we've taken. As we discussed last quarter, our leadership team is focused on delivering the full capabilities of Marsh McLennan to our clients, continuously improving the client and colleague experience, efficiently managing to lead U.S. and Canada. Since then, we have also named additional Marsh McLennan region and country leaders. These leaders are driving greater client impact through enhanced collaboration while at the same time maintaining the strength of the value propositions of each of our businesses. This deliberate focus on collaboration is already yielding benefits. Let me share some examples. Guy Carpenter Securities and Mercer Investments successfully arranged an insurance-linked securities transaction for a major insurer to transfer earthquake risk. This type of win, the first of its kind in the insurer's market, was possible because of the combined strength of Guy Carpenter's leadership in earthquake parametric structuring and Mercer's deep local investment and regulatory expertise. Marsh and Guy Carpenter brought the best of our capabilities to a complex clean energy opportunity. Together, we facilitated a project to bring clean hydropower to New York City from Canada and advanced New York State's goal of obtaining 70% of electricity statewide from renewable sources by 2030. Mercer Career, an economist from Oliver Wyman, delivered an executive compensation solution for a joint venture between two major medical device manufacturers. Mercer designed a new equity compensation rewards program for the joint venture, while Oliver Wyman provided the modeling work for the rewards. As we drive deeper collaboration, we are also finding new ways to operate, reduce complexity, and organize for impact. As we noted in January, we took actions to align our workforce and skill sets with evolving needs, rationalize technology, and reduce our real estate footprint. We see opportunities for savings beyond the actions we have already taken. Mark will provide further details. But overall, we now expect roughly $300 million of savings by 2024, with total costs to achieve these savings of $375 to $400 million. Our leadership appointments, go-to-market collaboration, and restructuring actions are an opportunity to accelerate impact for clients, reinvest in our capabilities, and to be more efficient and connected. Before I turn to our results, I want to comment on ESG. Our recently released ESG report highlights the many ways in which Marsh McLennan is meeting these challenges and helping clients better manage their strategies. We have a track record of ESG engagement, and it's an area where we continue to see an opportunity to support our colleagues, clients, and communities. Sometimes this work takes place at the macro or community level, like Guy Carpenter's work helping communities build resilience in the face of natural disasters, through community-based catastrophe insurance, but more often it takes place in our work with clients, such as helping clients navigate an evolving climate landscape or our efforts to help organizations address gender and racial pay equity and ensure fairness in rewards. We are proud of the work we do in this area and consider it a privilege to help clients progress their ESG strategies. Now let me turn to our first quarter financial performance. We generated adjusted EPS of $2.53, which is up 10% from a year ago, or 12%, excluding the impact of foreign exchange. On an underlying basis, revenue grew 9%. Underlying revenue grew 11% in RIS and 5% in consulting. Marsh was up 9%, Guy Carpenter grew 10%, Mercer grew 7%, and Oliver Wyman was flat, after growing revenue nearly 40% over the last two years. Overall, the first quarter saw adjusted operating income growth of 13% and our adjusted operating margin expanded 150 basis points year over year. Turning to our outlook, we're well positioned for 2023 and continue to expect mid-single digit or better underlying revenue growth, another year of margin expansion, and strong growth in adjusted EPS. Our outlook contemplates that current macro conditions persist, but as we discussed earlier, there's uncertainty regarding the economic backdrop, which could turn out to be different than our assumptions. In summary, the first quarter was a great start to the year for Marsh McLennan. Our business delivered strong performance, and we continue to execute well on our strategic initiatives. I'm proud of the focus and determination of our colleagues and the value that they deliver to our clients and shareholders. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, John, and good morning. Our first quarter results were outstanding and reflected continued momentum and underlying growth, strong margin expansion, and double-digit growth in adjusted EPS. Our consolidated revenue increased 7% in the first quarter to $5.9 billion, with underlying growth of 9%. Operating income was $1.7 billion, and adjusted operating income increased 13% to $1.8 billion. Our adjusted operating margin increased 150 basis points to 31.2%. GAAP EPS was $2.47, and adjusted EPS was $2.53, up 10% over last year. Looking at risk and insurance services, First quarter revenue was $3.9 billion, up 10% compared with a year ago, or 11% on an underlying basis. This result marks the eighth consecutive quarter of 8% or higher underlying growth in RIS, continues the best stretch of growth in nearly two decades. Adjusted operating income increased 17% to $1.4 billion, and our adjusted operating margin expanded 210 basis points to 38.6%. At March, revenue in the quarter was $2.7 billion, up 8% from the first quarter of last year or 9% on an underlying basis. This comes on top of 11% growth in the first quarter of last year and reflects acceleration from the fourth quarter. Growth in the first quarter reflected excellent retention and strong new business. In U.S. and Canada, underlying growth was 7% for the quarter, a solid result given the continued headwind from lower M&A and capital markets activity. In international, underlying growth was strong at 10% and comes on top of 11% growth in the first quarter of 2022. Asia Pacific was up 11%, EMEA was up 10%, and Latin America grew 10%. Guy Carpenter's revenue was $1.1 billion, up 7% or 10% on an underlying basis, driven by strong growth across all regions and global specialties and reflecting the tighter reinsurance market conditions. In the consulting segment, first quarter revenue was $2 billion, up 1% from a year ago or 5% on an underlying basis. Consulting operating income was $411 million, And adjusted operating income was $406 million, up 1%, reflecting continued foreign exchange headwinds in the softer quarter at Oliver Wyman. Our adjusted operating margin in consulting was 20.3% in the first quarter, a decrease of 30 basis points. Mercer's revenue was $1.3 billion in the quarter, up 7% on an underlying basis. Career revenue increased 12%, the eighth straight quarter of double-digit growth, and reflected continued demand in rewards, talent strategy, and workforce transformation. Health underlying growth was 12% and reflected strength in employer and government segments and momentum across all regions. Wealth grew 2% on an underlying basis, driven by continued strength in defined benefits consulting, partly offset by a decline in investment management due to continued capital market headwinds. Our assets under management were $354 billion at the end of the first quarter, up 3% sequentially, but down 9% from the first quarter of last year due to market declines and foreign exchange that more than offset positive net flows. Oliver Wyman's revenue in the first quarter was $687 million, which was flat on an underlying basis. As John noted, this follows a nearly 40% increase in Oliver Wyman's revenue over the past two years. Recent sales activity has been encouraging, however, suggesting we could see a return to modest growth in Oliver Wyman in the second quarter. Foreign exchange was a 4-cent headwind in the first quarter. Assuming exchange rates remain at current levels, we expect FX to be a 2-cent headwind in the second quarter, and mostly neutral in the second half. I want to provide an update on the restructuring program we discussed last quarter. Based on our plans today, we expect total charges related to this program of between $375 and $400 million. To date, we have incurred nearly $250 million of charges and currently expect to incur most of the remaining costs in 2023. We expect to achieve total savings of approximately $300 million by 2024, with $160 to $180 million realized in 2023 and the balance in 2024. Our other net benefit credit was $58 million in the quarter. For the full year 2023, we continue to expect our other net benefit credit will be about $235 million. Investment income was $2 million in the first quarter on a GAAP basis or $4 million on an adjusted basis. This compares to $17 million of investment income in the first quarter of 2022 on an adjusted basis. Interest expense in the first quarter was $136 million, up from $110 million in the first quarter of 2022. This reflects an increase in long-term debt and higher interest rates on commercial paper which we use for efficient working capital management. Based on our current forecast, we expect approximately $150 million of interest expense in the second quarter and approximately $575 million for the full year. Our effective adjusted tax rate in the first quarter was 25%, compared with 23.1% in the first quarter of 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%. When we give forward guidance around our tax rate, we do not project discrete items, which can be shoot in March. Our next scheduled debt maturity is October 2023, when $250 million of senior nodes mature. Our cash position at the end of the first quarter was $1 billion. Uses of cash in the quarter totaled $876 million, including $296 million for dividends, $280 million for acquisitions, and $300 million for share repurchases. We continue to expect to deploy approximately $4 billion of capital in 2023 across dividends, acquisitions, and share repurchases. The ultimate level of share repurchase will depend on how the M&A pipeline develops. While there continues to be uncertainty in the outlook for the global economy, we feel good about the momentum in our business, and there are factors in the macro environment that remain supportive of growth. I would also note that while our current outlook contemplates margin expansion in the second quarter, We expect it will be more modest than in the other quarters, reflecting the talent investments we continued to make last year, timing of annual raises, and the continued rebound in expenses such as T&E relative to last year. Overall, our strong start leaves us well positioned for another good year in 2023. Based on our outlook today, for the full year, we continue to expect mid-single-digit or better underlying growth, margin expansion, and strong growth in adjusted EPS. And with that, I'm happy to turn it back to John.