Marsh & McLennan Profit Up in Q2; CEO Sees Aon-Willis Merger ‘Good’ for MMC

July 30, 2020

The pending acquisition by insurance broker Aon of rival Willis Towers Watson is “not good for the market or for clients but is good for Marsh & McLennan,” commented Daniel Glaser, president and chief executive officer of Marsh & McLennan Companies (MMC) and parent of Marsh, the largest insurance broker.

“We think it will give us opportunities,” he said when asked about competition for professional talent in today’s market on a call with analysts.

“The big three becomes the big two. How could that not be a benefit to us?”

Glaser said he was speaking “personally” as someone who has been in the business for 40 years.

Aon and Willis are the second and third largest insurance brokers by revenue. If the deal is approved, the combined company, named Aon, will have more than $20 billion in revenue.

MMC itself has spent the last year handling its own acquisition of JLT with its 10,000 employees, a process Glaser praised as a “textbook integration” that was “well-planned, well-led and well-executed.” The deal closed last April.

“We couldn’t be in a better position” in terms of capabilities and its combining with JLT, he said.

Expense Strategy

Glaser said he is proud of how MMC pulled back on expenses such as travel, overtime and contractors and slowed down hiring at the start of the pandemic while preserving jobs and salaries. “We feel good about how we were able to dial back expenses,” he commented.

He said that despite the slowdown Marsh continues to take actions that balance the short-term with 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,” he added.

Rival broker Aon, meanwhile, announced on April 27 that it would temporarily cut the pay by 50% of the company’s named executive officers, while 70% of its global workforce had their salaries reduced by 20%. Approximately 30% of Aon employees saw no pay cuts. Aon later said it would end the salary cuts starting July 1 and repay colleagues for the lower pay.

Glaser also praised how MMC employees have been handling the pandemic and related economic recession.

“In the midst of the pandemic, we delivered another strong quarter reflecting outstanding execution and the resilience of our business,” he said.

“I am humbled by our colleagues’ exceptional support of our clients and one another during these tumultuous times,” he added.

Quarter Results

The call with analysts was about the second quarter during which MMC’s profit increased as revenues dipped. The bottom line totaled $572 million, or $1.12 per share, compared with $332 million, or $0.65 per share, in last year’s second quarter. MMC’s consolidated revenue in the second quarter of 2020 was $4.2 billion, a decrease of 4%, compared with the second quarter of 2019.

In the second quarter, the company said it recognized a $36 million reduction to previously recorded revenue, the vast majority in its insurance broker Marsh, to reflect the estimated impact of the economic crisis on exposure units. The company said this reduction is included in underlying revenue growth and adjusted earnings for the second quarter.

Operating income was $885 million, an increase of 30% from the prior year.

Risk & Insurance Services revenue was $2.6 billion in the second quarter, an increase of 1%. Operating income rose 34% to $696 million, and adjusted operating income was $762 million, an increase of 19% from the prior year period.

Within Risk & Insurance Services, insurance broker Marsh’s revenue in the second quarter was $2.2 billion, an increase of 1%. Reinsurance intermediary Guy Carpenter’s revenue in the second quarter was $433 million, an increase of 9% on an underlying basis.

Consulting revenue from Mercer ($1.1 billion, down 3%) and Oliver Wyman ($467 million, down 13%) in the second quarter was $1.6 billion overall, a decrease of 10%. Operating income decreased 8% to $255 million.

Uncertainty Ahead

Glaser said he does not think the worst case scenarios for the pandemic have happened but there remains much uncertainty ahead.

“The world may have avoided the worst case health and economic scenarios, but this downturn may be longer than many initially expected,” he commented.

“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.”

MMC executives agreed they think the second half of the year is likely to be more challenging than the first half and revenues could be down.

Market Conditions

Regarding current P/C insurance market conditions, Glaser noted that pricing continues to accelerate. Marsh’s own 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 are up 7% on average. He noted that the index skews toward large account business but said U.S. small and middle market insurance pricing “meaningfully” as well.

“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 uncertain environment,” he added.

For the full year 2020, Marsh expects a modest decline in underlying revenue. However, given the strong second quarter performance, Glaser said it could still generate modest growth even if there is a decline in revenue.

Glaser said the pandemic has taught employees that while it’s not always ideal, they can do many placements and conduct other business on a remote basis. “I’m not sure we’ll go running back to hopping on an airplane to go to Singapore for a $100,000 opportunity,” he quipped.

Thus travel and entertainment expenses may be down for some time and, he suggested, they may never return to pre-pandemic levels.

Similarly, he said he could see the firm’s real estate footprint eventually changing to reflect more flextime and more of a “hybrid” of remote and office-based work in the future.

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