Today's Viewpoint: A MarshBerry Publication

MMC Announces 2Q20 Earnings

Highlights from the MMC earnings release and analyst call

Marsh & McLennan Companies, Inc. (MMC) reported 2Q20 earnings this morning above analysts’ expectations on stronger margins. Management commentary highlights from this call with investors are below:

  • MMC organic revenue declined 2% in 2Q20, though adjusted operating earnings were up 10% largely due to realization of cost savings measures (in particular travel & entertainment which MMC noted was down 90%+ in 2Q). The company took a $36M charge related to anticipated reductions in policy revenue from lower exposure units within commercial auto, workers’ comp and other lines in its MMA (mid-market retail) and Mercer (employee benefits) divisions.
  • MMC expects the second half of this year to be more difficult for its retail division as the economic consequences of the pandemic are realized, particularly in this business where there is more of a lag than some of its project or consulting based divisions where discretionary spending was more quickly put on hold by its clients. The company noted it had strong momentum heading into 2Q and as a result there may be more pressure on revenues in the back half of the year without that tailwind.
  • Management illustrated the accelerating pricing environment through its own proprietary global pricing index, which was up 19% year over year in 2Q20 compared to up 14% year over year in 1Q20. Large, complex accounts are seeing the most significant price increase, but small/mid-sized accounts are up as well. MMC attributes this rising price environment to reduced underwriting appetite as a result of low yields, losses (pandemic and other) and general uncertainty from carriers and reinsurers.
  • MMC commented that as a result of stronger than expected results to date, it believes its Earnings Per Share performance for the year will be “modestly” up on “modestly” declining revenues. The uncertainty of the outlook could drive results above or below this projection, but the underlying assumption is continued recessionary conditions through the back half of the year, with MMC indicating that the downturn may last longer than initially expected though its severity does not appear to be as bad as initially thought possible.
  • MMC indicated that it has seen a similar shift in merger & acquisition valuations to greater emphasis on earnout consideration and focus on EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) which have also been noted by its competitors. In general, MMC doesn’t see itself competing often with Private Equity buyers but did note that it is in fewer conversations for acquisitions in its middle market retail business, although it is committed long term to acquisition in this area.
  • The company raised $1.75B of capital in the quarter, from a new $1B line of credit and $750M of 10-year notes, though overall it is committed to reducing debt and deleveraging throughout the year, dependent upon its ultimate cash flow generation.
  • Longer term, MMC discussed the semi-permanent changes in its business practices as a result of COVID. The company noted that in some cases, it may not return to its previous in person sales activities and it sees a potential future where its office footprint is reduced as a result of a more flexible work from home environment.

Overall, MMC was optimistic that “worse case” scenarios seem to be off the table and it noted it may ramp up some previously deferred investment spending as a result, although the recovery may be longer than initially predicted in a possible “V” shaped recovery.

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This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.

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