Insurance broker Marsh & McLennan Companies Inc. (MMC) carries lower financial leverage than peer Aon plc, resulting in a one-notch rating advantage for MMC, according to Moody’s Investors Service in its report, “Why Marsh & McLennan Is Rated Higher than Aon.”
Moody’s upgraded the senior debt rating of MMC to Baa1 (stable) from Baa2 (positive), and affirmed the senior debt rating of Aon at Baa2 (outlook to stable from positive) in April 2014, citing MMC’s reduced financial leverage and increased interest coverage ratio.
“Aon and MMC are global leaders in insurance brokerage and consulting, with extensive product offerings and networks that set them apart from competitors,” said Bruce Ballentine, a Moody’s Senior Credit Officer. “But MMC’s lower leverage and better interest coverage are the keys to the rating differential.”
While both firms generate strong and steady cash flow, Aon has paid out a higher portion of earnings to shareholders through dividends and share buybacks in recent years. MMC’s record of somewhat lower payments to shareholders is more favorable from a credit perspective, said Ballentine.
MMC has reduced its debt-to-EBITDA ratio to 2.2x for the 12 months through March 2014 from 3.1x in 2011, reflecting profitable growth and a recent decline in debt and equivalents. Aon has kept its leverage ratio at or above 3x during this period, reflecting fairly stable EBITDA and a higher level of debt and equivalents than at MMC, according to Moody’s.
The two firms have similar profit margins, and Moody’s expects them to sustain or improve margins in the year ahead based on continued organic growth and savings from restructuring programs that they have largely completed.