MMC
#Thank you, Elaine
Good morning, and thank you for joining us to discuss our third quarter results reported earlier today
I'm Dan <UNK>, President and CEO of Marsh & McLennan Companies
Joining me on the call today is <UNK> <UNK>, our CFO; and the CEOs of our businesses <UNK> <UNK> of Marsh; <UNK> <UNK> of Guy Carpenter; <UNK> <UNK> of Mercer; and <UNK> <UNK> of Oliver Wyman
Also with us this morning is Dan Farrell of Investor Relations
Since the beginning of the third quarter we have seen a heightened level of natural and man-made catastrophe losses, including major hurricanes and typhoons, earthquakes, wildfires, senseless acts of violence and disclosures of large scale cyber events
Before we get into our third quarter results, I want to take a moment to discuss how we have been supporting our clients and colleagues, the potential market impact of these events, and the critical role that our industry plays in society
While the insurance industry has the capital strength and structural resilience to absorb these losses, the human toll has been [sobering] with significant injury and loss of life across these events
Many other individuals have been impacted through loss of homes, basic services and business interruption
The natural catastrophes of this quarter directly impacted roughly 4000 of our colleagues across over 50 of our offices
While we are very fortunate that all of our colleagues in these affected areas are safe and accounted for, there were some who tragically lost family members and our deepest sympathies go out to them
Catastrophes that occur in a different geographic region can seem remote and distance unless we are directly impacted as individuals
This is not the case at Marsh & McLennan
We understand the devastation and the stress that severe losses put on people and organizations
We are on the ground helping our clients recover as soon as possible
This includes working closely with insurance companies to process claims swiftly
In these difficult times the industry pulls together to support our mutual clients
We are reminded that our industry is a noble one
While the market impact of the recent catastrophe losses is yet to be fully determined, it is important to recognize the industry had record levels of capital and capacity leading into these events
Although the losses are significant, the impact may prove to be more of an earnings event for the industry than a capital event requiring a reloading of capital
However after several years of relatively benign activity the series of recent losses are a stark reminder of the potential loss exposures, which may cause some re-evaluation of coverage, limits and risk tolerances
While there could be some movement in pricing in catastrophe exposed areas and certain lines of coverage, the degree and sustainability of any changes remains uncertain
From our vantage point too much is unknown about how losses will ultimately develop, how capital will react or how client buying patterns will change
Ultimately these forces will play out and the market will find its equilibrium
Right now it is just too early to tell
Insurance is about more than just protection
Industry research shows that well-insured catastrophe events end up having a shorter term impact on economic growth
In contrast, events with less insurance coverage result in a more prolonged and in some cases permanent impact to economic growth of an affected region
Recent losses serve as a reminder of how the world is still relatively underinsured in many areas
For instance, U.S
risk such as flood, cyber and earthquake to name a few still have low insurance penetration relative to exposure and together account for just 2% of total U.S
premiums
Many factors contribute to global underinsurance or what is often referred to in the industry as the protection gap
They include cost and affordability, understanding and acknowledgement of risks and a lack of sufficient incentives to mitigate risk and improve insurability
It will take the combined effort of carriers, brokers and governments working together to address underinsurance in the world and better access industry risk-taking capacity
Nations and regions that have proactively addressed this protection gap are better positioned to respond and rebuild from natural catastrophes
In specific regard to flood, recent events further highlight the need for greater insurance protection and the importance for the private marketplace to play a greater role
There have been over 100,000 national flood insurance programs or NFIP claims related to Harvey and Irma
However, many of those affected lack appropriate flood coverage, and will now face these life-changing events without adequate insurance support, making the economic impact of these events meaningfully larger
A recent article looking at FEMA data stated only about 17% of homeowners affected by Harvey have flood insurance policy
And across the U.S
only 12% of homeowners buy flood insurance according to the insurance information institute
The industry should work to encourage the private market to take on more of the underinsured or uninsured flood risk
The insurance industry can improve the understanding of risk, promote loss prevention modifications and bring more coverage into the private market obviously at appropriate pricing
At Marsh, Guy Carpenter, and Oliver Wyman we are utilizing data and analytics to enhance modeling and increase private market participation in floods
Earlier this year, Guy Carpenter helped place $1 billion of private reinsurance coverage for the NFIP
And in December of this year, Marsh’s flood platform, Torrent Technologies, is scheduled to come online as the direct service provider to the NFIP
We believe there will be opportunities for the private market to take on increased roles and we look forward to working with government and carrier partners in these ongoing efforts
Also this quarter, Marsh’s Schinnerer Group announced the acquisition of International Catastrophe Insurance Managers or ICAT, a managing general agent providing property catastrophe insurance to small businesses and homeowners across the U.S
ICAT’s focus on property catastrophe complements Schinnerer’s existing services and solutions for small and middle market commercial and residential clients
ICAT’s claims and third-party administration capabilities will also provide enhanced services to our clients
The need for greater insurance protection is not limited to natural catastrophes, recent headlines related to cyber events underscore the greater need for protection in this area and we have seen continued strong growth in demand for cyber CAT programs from large global firms and cyber coverage more broadly
The vast majority of cyber premiums relate to U.S
The European General Data Protection Regulation or GDPR will go into effect in May of 2018, likely resulting in expanding demand for coverage in the EU where premium volume is low compared to the U.S
Before turning to our results, I would like to give a brief update on the UK Financial Conduct Authority’s investigation into the aviation insurance and reinsurance sector
In early October, we received a notice from the competition authorities in Brussels that the European commission has commenced a civil investigation of a number of insurance brokers including Marsh regarding the aviation insurance and reinsurance broking sector
In light of the actions taken by the European commission, the FCA informed us at the same time that it has discontinued its aviation investigation under UK competition law
We are cooperating with the European commission and taking the matter seriously
As this investigation is at an early stage we do not intend to comment further at this time
Now to our results
Overall we produced consolidated top line growth of 7% and underlying revenue growth of 3%
Operating income was up 4% while adjusted operating income increased 11%
EPS was $0.76, and adjusted EPS rose 14% to $0.79. And on a consolidated basis, our adjusted margin improved 70 basis points
Through the first nine months, reported revenue growth was 5%, underlying revenue growth was 3%, and the consolidated adjusted margin expanded 70 basis points
EPS for the nine-month period grew 11% on a gap basis, and 13% on an adjusted basis
Looking at risk and insurance services, third-quarter revenue was $1.8 billion with reported growth of 8% and underlying revenue growth of 3%
Adjusted operating income increased 12% to $337 million with the margin expanding 60 basis point to 19.1%
For the nine-month period, RIS has grown revenue by 6% on a reported basis, while underlying revenue grew 3% similar to the full-year growth rates in 2015 and 2016. Adjusted operating income of $1.5 billion rose 10% and the adjusted margin also improved 90 basis points to 26%
In the consulting segment third quarter revenue was $1.6 billion, increasing 5% on a reported basis and 2% on an underlying basis
Adjusted operating income increased 7% in the quarter to $330 million
The margin of 20.8% was up 40 basis points versus the prior year
For the nine-month period, consulting has grown revenue by 4% on a reported basis, while underlying revenue grew 3%
Adjusted operating income of $873 million rose 5%, and the adjusted margin increased10 basis points to 18.6%
In summary, we are pleased with the results for the first nine months of the year
For the full year 2017 we continue to expect underlying revenue growth in the 3% to 5% range, margin expansion across both operating segments and strong growth and adjusted EPS
With that, let me turn it over to <UNK>
Thanks, <UNK>
Okay Elaine, we're ready to go to Q&A
Question-and-Answer Session
Thanks <UNK>
There is a couple of things
Let me just start, and then I think I will hand over to <UNK> rather than <UNK> to give you a view as to the overall market and level of losses, and I can say it is going to take some time to determine the aggregate level of loss per claim and how it is ultimately distributed amongst insurance companies and also other capital providers
What is clear so far is that the announced losses thus far are far short of the estimates provided by the modeling firms
I mean that – and that is not that different from some other catastrophes that have occurred in the past
It is just too early to tell what the ultimate losses will be
Having said that, catastrophe losses tend to get larger over time rather than smaller, but <UNK> do you have more to add to that?
I will hand it off to <UNK> in a second, but bear in mind over a long stretch of time, Guy Carpenter has been a good grower for us, and in fact, has grown underlying revenue 26 of the past 27 quarters, and we have got three consecutive quarters at 4%
It is hard to talk about what normal is, I mean, at the end it is a very segmented, specialized business, which will have its ups and downs, but certainly for us the last three quarters have been at 4%
But <UNK>?
Next question please
Thanks <UNK>, it's a good question
I'll take it to begin with on in overview standpoint and then I think it's good to hear from both <UNK> and <UNK> to get there their views of what's happening in their respective areas
But I think we have to start by saying insurance market itself is a large global and well capitalized
And there are many insurers and other capital providers, so the market is competitive
Certain markets it's true have been hit pretty hard by these series of events and they're going to one rate increases
That doesn’t mean they're going to get the rate increases they want
I mean, that's where the competitiveness of the market comes in and this is going to play out overtime
Our job is to be on the client side of the table and to get the most comprehensive level of coverage that they're seeking at competitive terms
And so, <UNK> you want to talk about what you're seeing at Marsh so far?
Thanks, <UNK>
<UNK>, you want to add to that?
Any other question, <UNK>?
You should always look to the year-to-date or rolling 12 months or even over multiple years
I mean I were in the 10th year consecutive margin expansion and so they it's a great story considering we're not overly focused on it here at the executive table
But the other things to think about with regard to RIS, the third quarter is our lowest revenue quarters
So, if you've got a some movement expansive would have a larger term impact
But there's nothing underlying that to point to anything that we're concerned with regard to RIS margins
Sure, next question please?
Yes, a couple of things
1) It's interesting to note in every market, that is potentially hardening and I use the word potential year
If you look around the table, you got people who have seen hard markets and soft markets
Most of our careers have been in softer softening market environments, hard markets tend to be pretty swift
But ultimately on the underwriting side and on the booking side, we have a lot of people working for us who never experience a underwriter asking for a rate increase
You could have been in this business for decades and maybe not have ever heard those words
So, it will play itself out
My history in the business is people convert very quickly and it's all comparative in terms of how in achieving and broking the right individual arrange for a client
I think brokers can change very quickly and adaptive to changing market conditions
What it has meant to Marsh & McLennan in the past is generally been a higher levels, a moderately higher levels of prior retention in new business because of a slight equality
We got the broadest specialized placement capabilities in the world
And so, in times of stress, our phone rings more than in times that are easy
Next question, please?
Sure
Well, let me just talk a little bit about the marketplace in general because as we said before we liked our capabilities and we like our positioning and we expect Mercer marketplace 365 to be a contributor to Marsh's U.S
health and benefits business going forward
But it's important to understand it's still in the build stage for us and its one solution just one part of an overall tool kit that we use in giving Marsh capabilities in health to clients
And so, I'm not sure if we're going to go into much detail on it
And by the way for us it’s not really an exchange anymore
It's really a platform that is a year around benefits platform
But <UNK>, you want to add some more to that?
So, I feel that would agree with you
I think this is one of the things <UNK>, that in the past we said that this part of the business was getting too much attention and we thought some of the estimates that have been put out on the industry where we couldn't understand where the numbers were coming from
But ultimately giving things that's specific enrolment data number of lives, that sort of thing on a relatively small part of the subset of our business
This doesn't seem to make sense
So, let's just take it as <UNK> said they had a strong selling seasoned year which will benefit us in the future and I will leave it at that
You have another question, <UNK>?
I mean, we one thing before I hand of to <UNK>
We built our business to prosper in times that are generally broad market relative level of softness in the market and then every once in a while there is a burst of activity in terms of heightening
But it certainly some of them are still brief, it's hard to refer to them as cycles, per se
And so, that we don’t look at our businesses as really operating under the basis of cycles
It's mainly almost all the way downward and then every once in a while there is a little spurt of something
And so, the other thing is both in Marsh and in Guy Carpenter, there is always a series of puts and takes in terms of how a company's responding and then I'll hand over to <UNK>
But I would imagine if the market is too tough, many well capitalized insurance, we just make different decisions, right? And so <UNK> you want to answer that?
Thanks
Next question, please?
So, a couple of things
You mentioned how practice and I would just ---+ I want to just add a little bit because I know some of our competitors actually have things that they view as they line up business
It's important to know we do a health business had made big business for us than we do it in three different places
I mean, clearly Mercer is a cornerstone of our health business
But all of the winding either a large health practice is well that's focused on different kinds of transformation
It doesn't overlap at all with Mercer's activity
And of course both Marsh and Marsh & McLennan agency have big positions in the employee health and benefits markets
So, it aggregates to a pretty big number and we have different ways of looking at it
But specifically I think you were referring to Mercer in this case
So, <UNK> why don’t you talk about the Mercer health business a little bit?
Thanks <UNK>
JD, do you have something up?
Okay, thank you
I'll take that Larry and then I will hand over to <UNK> to give you a little bit more but, there was a few things Mercer in particular acquired some companies at the very tail-end of last year that were more leaning toward higher growth technology based organizations so by their very definition have a little bit more dilution to them in the early stages but we respect their higher levels of growth to make up for that over time and make them good acquisitions and so it's a little bit different than some of the other businesses that we've acquired but <UNK> can add to that?
I'm glad that <UNK> mentioned the GAP revenue growth because I think it's important to look like and look at, the people who look at Marsh the 9% growth for an awfully big, high quality company in a given quarter that's going to benefit us enormously in coming years, sure it's not an underlying and we want to see better underlying growth but ultimately we were happy with that number
Do we have another question, Larry?
Next question please
It's a great question
It’s a U.S
question and it’s also a global question, the protection gap is meaningful if you look over decades of time, more catastrophe risk and in particular flood has been transferred to taxpayers in post event type of situation then actually insurance company through these transfer, the value that the private market bring, it’s enough sure was transferred private markets with their capital risk and offer risk modification recommendations and other invitees which tend to reduce level of losses over time and it is something happens when it's a government entity that is funding on a post lost basis through taxpayer dollars and so we hope it's a wakeup call but we're not ---+ we're just not sure about it
If you look at the situation where okay pre the series of loss events, U.S
policyholder surplus was at around $725 billion which was an all time record and at the same time premium to surplus ratios were lower than they've been in the last 25 years
So we have this capital that at the right prices available to apply against risk and then on the other hand you have situations like flood in the United States which we view as the principal risk facing our clients and there's just a mismatch
So we spent a lot of time talking about it and we will see where it goes over the time but we do think there needs to be more collective energy between the entire industry, long voices so I don't think to carry much weight in any capital
No it's a good question and obviously something that we began to regulate, I would say a couple of things to start and then I will hand over to <UNK>, I think [indiscernible] heard over there like a comparator to last year because there was a zero in third quarter ’16 and 4% this time and <UNK> may have been willing to trade on that one could Mercer was 3% in the third of 2016, so I think that has some factor there and one of the reasons why I mean these are our clients businesses that have long kind of relationships to them and so looking quarter by quarter is really not the right way to look at the business, the way I look at the business is that on a year to date basis, Marsh & McLennan Companies has had a three which is exactly where we were on a year to date basis at the consolidated company last year
And if you recall going into this year, we sort of said our expectation was that 2017 would look a lot like 2016 and I think that has played itself out including the kind of margin expansion that we've seen in 70 BIPS [ph] year to date same as last year, year to date and when I look at the individual operating companies, I've got three operating companies up from last year and one operating company down on a year to date basis and so that that is just if I look at Marsh is at three versus a two, [indiscernible] four versus two, OW is at six versus three and Mercer is two versus a three, in the overall mix that is not an unusual year from us, we will have a different outcome on that mix each time but ultimately we rarely have all four up goes up at the same time and then there is usually some variability but <UNK> get, do you want add a little briefly to that?
Yes, anything else, <UNK>? <UNK> <UNK> I did, I don’t want to beat the rates the rates earning to depth here as you guys are talking about how uncertain it is at this point
But I'm wondering maybe as a history lesson, it seems like 2005 is the most common parallel
I'm wondering if you guys could just talk a little bit about the parallels or differences that you can draw from a national disaster that impacted your business back then
How they might be different or similar to the one that are affecting it now
And I'm just trying to think of things we might not be considering such as supply of capital is a lot more robust
But are there other factors that you would point us to say "Hey, this is what you should be thinking about as you frame the impact of the industry
I think there's just too many moving parts here, <UNK>
In fact, in your last comments in terms of the number of capital providers or the supplied capital, you think about where the market was in 2005 versus where it is in 2017. It's a completely different situation
The number of insurance companies that right more than a billion dollars of premium as an example in the United States
The level of improvement on data and analytics, it really means that any emergent, frankly after things like KRW of alternative capital in the growth in alternative capital and other ways of companies dealing with risk transfer off of primary markets into the reinsurance market
I mean, there are many moving parts there
I would say that certain insurance companies have been hit pretty hard
Policy holders' surplus getting wacked in the double digits and those insurance companies are going to be seeking rate
And they are going to be seeking rate probably everywhere that they issue a policy
And so, then the question becomes well what will other insurance companies do
Will they use this opportunity as a way to slot in somewhere beneath the incumbent as a way to grow their share in this time because they may not have been heard as badly
Now, this is a global market
If you look at the top 20 insurance companies, many of them are global but it's also a local market and a regional market
So, as <UNK> was saying earlier, the idea that in some country in Latin America or Asia, the casualty pricing will go up as a result of loss activity in the United States when there is so many regional and local champions to take the account if rates go up too high in those areas
That puts a lot of competitive pressure aware the terms of conditions will ultimately outlines that
We love to give you more but this is where our market place operates
And the losses are still being developed as we were saying earlier, the model numbers are far higher than what the aggregate reported numbers are
So, either the modelers are incorrect right now or the actual reported numbers are too low and will rise over time which will put more pressure on rating levels
We'll just have to see how it plays out
Next question please?
Sure, so <UNK>?
