Marsh & McLennan Companies, Inc.

Welcome to Marsh McLennan's earnings conference call. Today's call is being recorded. Third quarter 2024 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. The 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 discuss certain non-GAAP financial measures. For a reconciliation of those measures, to the most recently- Comparable gap measures, please refer to the schedule in today's earnings release. If you have a question, please press star 11 on your touchtone phone. If you wish to be removed from the queue, please press star 11 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 11 on your touchtone phone. I'll now turn the call over to John Doyle, President and CEO of Marsh McLennan.

Good morning, and thank you for joining us to discuss our third quarter results reported earlier today. I'm John Doyle, President and CEO of Marsh McLennan. On the call with me is Mark McGivney, our CFO, and the CEOs of our businesses, Martin South of Marsh, Dean Klusur of Guy Carpenter, Pat Tomlinson of Mercer, and Nick Studer of Oliver Wyman. Also with us this morning for our last quarter as Head of Investor Relations is Sarah DeWitt, We'd like to congratulate Sarah on her new role as Chief Financial Officer of Marsh. Before I get into our results, I'd like to take a moment to comment on Hurricanes Helene and Milton, which have devastated communities in Florida and the Southeast United States. These events are first and foremost the human tragedy, and our thoughts are with all of those impacted by the storms. Our primary concern has been the well-being of our colleagues and their families, as well as our clients. and we are actively working to assist in their recovery. While the ultimate insured loss won't be known for some time, the impact of these storms will be significant. And given their wide paths of destruction and close timing, they will put enormous pressure on resources available for recovery. Both hurricanes also highlight the meaningful disparity between economic loss and insured loss. According to some estimates, Helene may have the largest multiple of economic to insured loss of any U.S. storm. This protection gap imposes a meaningful burden on the economy, makes near-term recovery more challenging, and undercuts resilience. In addition, rising frequency and severity of extreme weather events, higher property values, and increased development in cap-prone areas are driving the need for greater protections. We and the insurance industry help communities, businesses, and governments build resilience to manage these perils. But as these storms highlight, there is opportunity to do more through risk mitigation, event preparedness, and alternative solutions such as community-based parametric products. Turning to our results, the third quarter marked another milestone for Marsh McLennan. We continue to perform well across our business, and we were thrilled to announce the acquisition of McGriff Insurance Services. In the quarter, we generated 5% underlying revenue growth, following 10% in the third quarter of last year, reflecting solid execution in RIS and consulting. We grew our adjusted operating income 12%. Our adjusted operating margin expanded 110 basis points. Adjusted EPS grew 4%. or 11%, excluding a discrete tax benefit in the third quarter of last year. And we completed $300 million of share repurchases in the quarter. Turning to McGriff, it is a leading provider of insurance broking and risk management services in the U.S. with approximately $1.3 billion in revenue. I have long admired McGriff. They have excellent leadership, talented colleagues, and a track record of strong growth. Their deep specialty and industry capabilities will strengthen the value proposition and expand the reach of Marsh McLennan Agency in the vast and growing middle market segment. McGriff's client focus, culture of collaboration, and commitment to excellence and integrity mirror our own. Together, McGriff and MMA will create new opportunities for colleagues to be their best, and helping them deliver even greater value to clients. The $7.75 billion transaction will be funded by cash on hand and debt financing. We expect to close by year end, subject to regulatory approval. We would also expect the transaction to be modestly accretive to adjusted EPS, excluding amortization in year one, and become more meaningfully accretive in year two and beyond. We have a terrific track record of acquiring and integrating businesses, and we are excited to welcome McGriff's over 3,500 colleagues to the company when the deal closes. McGriff has added to what is already an active year for M&A across our business. We are on track record for the largest M&A year in Marsh McLennan's history, with nearly $10 billion of capital committed to acquisitions year-to-date, including McGriff, Vanguard's US OCIO business, Cardano, Horton, and FBBI. These acquisitions highlight our strategy to deploy capital to faster-growing segments of our business. As we have said before, we consistently focus on delivering in the near term while investing for sustained growth over the long term. Shifting to the macro environment, the overall backdrop remains supportive of growth despite what continues to be a complex and volatile landscape. Central banks have begun a cycle of easing, and consensus views of the likelihood of near-term recession for most major economies are well below where they were coming into the year. We continue to see economic growth across most of our major markets. Inflation remains elevated but declining. Labor markets remain healthy, and the cost of risk in health care continue to rise. That said, uncertainty remains with rising geopolitical tensions and continuing conflicts in Ukraine and the Middle East. Clients across the world continue to assess the implications of technology advances and AI, the ever-persistent threat from cyber attacks, supply chain risk, and the impact of increasing frequency and severity of extreme weather events on their businesses. Our talent, expertise, and solutions help clients manage challenges and accelerate opportunities to thrive. So, we remain positive in our outlook for growth. We are well-positioned and have a track record of performing across economic cycles due to the enduring value we bring to clients and the resilience of our business. Turning to insurance and reinsurance market conditions, The Marsh Global Insurance Market Index was down 1% overall in the third quarter versus flat in the second quarter. Rates in the U.S. and Latin America were up low single digits. Europe was flat. And in the U.K., Asia, and Pacific, rates were down mid-single digits. Global property rates were down 2% versus flat in the second quarter. However, global casualty rates increased 6%. with U.S. excess casualty up approximately 20% in the quarter. Workers' compensation decreased low single digits. Global financial and professional liability rates were down 7%, while cyber decreased 6%. In reinsurance, demand continued to rise, and capacity remained adequate in the quarter. While it is too early to know the ultimate insured losses from Hurricanes Helene and Milton, we expect there to be an impact on 2025 property insurance and reinsurance pricing. Cap bonds, which posted record volume in the first half, remain likely to have elevated issuance activity through year-end, driven by a heavy maturity schedule. And capacity for casualty programs is expected to be adequate, despite concerns over the pace of lost cost inflation. As always, we are helping clients navigate these dynamic market conditions. Now, let me turn to our third quarter financial performance. We generated adjusted EPS of $1.63, which is up 4% from a year ago, or 11%, excluding a 10-cent discrete tax benefit in the third quarter of last year. On an underlying basis, revenue grew 5%. Underlying revenue grew 6% in RIS and 4% in consulting. Marsh was up 7%, Guy Carpenter 7%, Mercer 5%, and Oliver Wyman grew 1%. Overall in the third quarter, adjusted operating income grew 12%, and our adjusted operating margin expanded 110 basis points year over year. For the nine months, consolidated revenue grew 7% on an underlying basis. Adjusted operating income grew 12%, and our adjusted operating margin expanded 110 basis points. Adjusted EPS was $6.93, up 10% from a year ago. Turning to our outlook, we are well-positioned for another great year in 2024. We continue to expect mid-single-digit or better underlying revenue growth, another year of margin expansion, and strong growth in adjusted EPS. Our outlook assumes current macro conditions persist. However, the environment remains uncertain and the economic backdrop could be materially different than our assumptions. Overall, I'm pleased with our third quarter performance, which demonstrates execution of our strategy and continued momentum across our business. I'm grateful to our colleagues for their focus and determination and the value they deliver to our clients, shareholders, and communities. With that, Let me turn it over to Mark for a more detailed review of our results.

Thank you, John, and good morning. Our momentum continued in the third quarter with solid underlying revenue growth, significant margin expansion, and 4% growth in adjusted EPS, or 11%, excluding a large discrete tax benefit last year. Our consolidated revenue increased 6% to $5.7 billion, with underlying growth of 5%. Operating income was $1.1 billion, and adjusted operating income was $1.2 billion, up 12%. Our adjusted operating margin increased 110 basis points to 22.4%. Gap EPS was $1.51. Adjusted EPS was $1.63. For the first nine months, underlying revenue growth was 7%. Adjusted operating income grew 12% to $4.9 billion. Our adjusted operating margin increased 110 basis points to 28%, and adjusted EPS increased 10% to $6.93. Looking at risk and insurance services, third quarter revenue was $3.5 billion, up 8% from a year ago or 6% on an underlying basis. This result marks the 15th consecutive quarter of 6% or higher underlying growth in RIS, and continues the best stretch of growth in two decades. Note that fiduciary income was $138 million in the quarter. In looking ahead to the fourth quarter, we expect to see this amount decline by approximately $30 million, reflecting recent rate cuts and a seasonal drop in fiduciary assets. Operating income in RIS increased 15% to $733 million. Adjusted operating income increased 16% to $775 million, and our adjusted operating margin expanded 130 basis points to 24.7%. For the first nine months, revenue in RIS was $11.7 billion, with underlying growth of 8%. Adjusted operating income increased 12% to $3.7 billion, and the margin increased 100 basis points to 33.6%. At March, revenue in the quarter was $2.9 billion, up 9% from a year ago, or 7% on an underlying basis. This comes on top of 8% growth in the third quarter of last year. Growth in the third quarter was broad-based and reflected solid retention and new business growth. In U.S. and Canada, underlying growth was 6% for the quarter, led by strong growth in MMA and in Victor, our MGA business. In international, underlying growth was 7% and comes on top of 10% in the third quarter of last year. Latin America was up 8%, EMBA was up 7%, and Asia Pacific was up 5%. First nine months of the year, Marsha's revenue was $9.2 billion with underlying growth of 7%. U.S. and Canada grew 7%, and international was up 7%. Guy Carpenter's revenue was $381 million in the quarter, up 6% or 7% on an underlying basis, driven by strong growth in international, including global specialties. For the first nine months of the year, Guy Carpenter generated $2.2 billion of revenue and 8% underlying growth. In the consulting segment, third quarter revenue was $2.3 billion, up 3% from a year ago or 4% on an underlying basis. Consulting operating income was $462 million, and adjusted operating income was $478 million, up 7%. Our adjusted operating margin in consulting was 21.7% in the third quarter, an increase of 90 basis points. The first nine months, consulting revenue was $6.7 billion, with underlying growth of 5%. Adjusted operating income increased 7% to $1.3 billion, and our adjusted operating margin increased 60 basis points to 20.7%. Mercer's revenue was $1.5 billion in the quarter, up 5% on an underlying basis. This was Mercer's 14th consecutive quarter of 5% or higher underlying growth. Health underlying growth remained strong at 8% and reflected growth across all regions. Career grew 5%, where we saw strong growth in rewards and talent strategy. Wealth grew 4%, driven by continued demand in defined benefits consulting and growth in investment management. Our assets under management at the end of the third quarter rose to $548 billion, up significantly from the third quarter of last year and up 11% sequentially. Year-over-year growth was driven by the impact of capital markets, our transaction with Vanguard, and positive net flows. For the first nine months of the year, revenue at Mercer was $4.3 billion with 6% underlying growth. Oliver Wyman's revenue in the quarter was $810 million, up 1% on an underlying basis. This reflects a tough comparison to 12% growth in the third quarter of last year and softness in certain geographies. We currently see this trend extending into the fourth quarter. The first nine months of the year, revenue at Oliver Wyman was $2.4 billion, an increase of 5% on an underlying basis. Foreign exchange had very little impact on earnings in the third quarter. Assuming exchange rates remain at current levels, we also expect minimal FX impact in the fourth quarter. Total noteworthy items in the quarter were $78 million. These included 54 million of restructuring costs, mostly related to the program we began in the fourth quarter of 2022, as well as some transaction-related charges. Our other net benefit credit was 68 million in the quarter. For the full year 2024, we expect our other net benefit credit will be about 270 million. Interest expense in the third quarter was 154 million, up from 145 million in the third quarter of 2023. reflecting higher levels of debt and higher interest rates. Based on our current forecast, we expect approximately $151 million of interest expense in the fourth quarter, excluding any amounts related to the McGriff transaction. Our adjusted effective tax rate in the third quarter was 26.7% compared with 20.5% in the third quarter of last year. Our tax rate last year included the release of evaluation allowance on foreign deferred tax assets. Excluding discrete items, our adjusted effective tax rate was approximately 26.5%. When we give forward guidance around our tax rate, we do not project discrete items which can be positive or negative. Based on the current environment, we expect an adjusted effective tax rate of approximately 26.5% for 2024. Turning to our McGriff transaction, McGriff is a terrific company with excellent leadership, a culture similar to MMA's, a diversified business mix, presence in faster-growing U.S. markets, and a strong track record of performance. We will be paying $7.75 billion in cash consideration, funded by a combination of cash on hand and new debt, and we expect to close by year-end, subject to regulatory approval. As part of the transaction, we expect to assume a deferred tax asset valued at approximately $500 million. As we've noted in the past, we maintain considerable balance sheet flexibility to position us for this type of opportunity. We've secured a committed bridge loan facility for the full amount of the purchase price and currently plan to replace these commitments with permanent financing in the fourth quarter as we get closer to closing. Based on our outlook today, we expect to raise $7.25 billion in new debt to fund the transaction. We value our high-quality ratings, and we were pleased that all three rating agencies recently affirmed our current ratings with no changes in outlook. The financial and capital management plan contemplated in the transaction is not only consistent with maintaining our current ratings, but we also expect to have meaningful flexibility for capital deployment next year. Although initially our leverage ratios will increase, the substantial cash flow we expect to generate, as well as increased debt capacity through earnings growth, will enable us to bring our leverage ratios back in line with levels necessary to maintain a strong ratings profile. As a result, while we intend to pause share repurchases in the fourth quarter, as we think about capital management into next year, we expect we will maintain our balanced approach that includes increasing our dividend and reducing our share count each year, as well as continuing to fund high-quality acquisitions. We will obviously have more guidance around our outlook for capital deployment in 2025 on our fourth quarter earnings call early next year. As John noted, we expect the transaction will be modestly accretive to adjusted EPS, excluding amortization in year one, becoming more meaningfully accretive in year two and beyond. This transaction is a great reflection of several elements of our capital management strategy, maintaining flexibility to take advantage of opportunities, a bias to reinvest capital for growth, and delivering in the near term while challenging ourselves to invest to sustain growth into the future. Earnings capital management in our balance sheet. We ended the quarter with total debt of $12.8 billion. Our next scheduled debt maturity is in the first quarter of 2025 when $500 million of senior notes mature. We currently expect to deploy approximately $4.2 billion of capital in 2024 across dividends, acquisitions, and share repurchases, excluding the McGriff transaction. Our cash position at the end of the third quarter was $1.8 billion. Uses of cash in the quarter totaled $1.1 billion. It included $404 million for dividends, $435 million for acquisitions, and $300 million for share repurchases. For the first nine months, uses of cash totaled $3.3 billion and included $1.1 billion for dividends, $1.3 billion for acquisitions, and $900 million for share repurchases. I want to spend a minute on our plans to change how we report adjusted EPS. Starting next year, we will exclude the impact of acquisition-related amortization from adjusted EPS. We will also exclude the other net benefit credit, another non-cash item. These changes will improve the comparability of our results and give investors a better sense of our core earnings power. It will also conform our adjusted EPS reporting with how we report adjusted operating margins. While there continues to be uncertainty in the outlook for the global economy, we feel good about the momentum in our business, and the current environment remains supportive of growth. Overall, we are well positioned for another great year in 2024. 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 ETFs. With that, I'm happy to turn it back to John. Thank you, Mark.