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U.S. dollar strength limits Marsh & McLennan quarterly revenue


A strong U.S. dollar is the reason Marsh & McLennan Cos. Inc. said its third-quarter revenue declined less than 1% while its net income increased 8.7%.

Net income for the New York-based insurance brokerage was $323 million compared with $297 million in the prior-year quarter, the company said Tuesday. Marsh & McLennan said its operating income rose to $461 million from $445 million in the third quarter of 2014.

Consolidated revenue in the third quarter of 2015 was $3.12 billion, a decline of 1% from the third quarter of 2014, reflecting the continuing impact of the strong U.S. dollar, it said in its release.

“Our results are being impacted significantly by the strength of the U.S. dollar against major currencies, especially the euro,” Marsh & McLennan Chief Financial Officer Michael Bischoff said during the company’s third-quarter earnings conference call Tuesday. “In the second half of the year, the dollar continued to strengthen against the Canadian and Australian dollar and the currencies of most emerging markets.”

Mr. Bischoff said the brokerage had increased its estimate on the negative impact foreign exchange would have on its earnings to 18 cents per share from its estimate of 15 cents at the beginning of the year.

“The FX headwind is going to continue to get a little worse, but in general it was a decent quarter,” Charles Sebaski, New York-based vice-president of equity research nonlife insurance at BMO Capital Markets, said in an interview in about the results.

For the first nine months of the year, Marsh & McLennan reported operating income of $1.83 billion, up from $1.77 billion, with net income of $1.22 billion, up from $1.17 billion a year earlier. Revenue year to date was $9.6 billion, a decline of 2% over 2014.

Marsh & McLennan President and CEO Dan Glaser said he was confident the overall company would remain in the 3-5% underlying revenue growth range because of factors such as the company’s vast geographical footprint and continued client demand for advice and services.

Questions during the conference call repeatedly turned to the company’s private health insurance exchange, Mercer Marketplace, which now has 700,000 covered employees or retirees, translating to 1.5 million in total lives covered, a 43% increase from 2014, Mr. Glaser said during the call. However, the marketplace is still not expected to contribute to 2016 earnings.

“The most important thing to us now is creating a platform and a framework for us to handle a lot of lives as we grow on a rapid, but pretty consistent basis for many years to come,” he said. “In early stages, you have to look at this as a startup organization in some ways and from that perspective, it’s not going to be meaningful to earnings, at least on a MMC basis, for quite a while.”

In 2014, 75% of lives covered in the marketplace were fully insured, but that shifted to 60% fully insured versus 40% self-insured this year. The expected 2016 split is 57% self-insured versus 43% fully insured, according to company officials.

“It certainly seems to be that the growth (in Mercer Marketplace) is coming from self-insured versus fully insured on a relative basis,” BMO’s Mr. Sebaski said. “Not sure how that plays into future profitability.”

Responding to questions, Mr. Bischoff said Marsh & McLennan’s decision to split its pension plan effective Sept. 1 into active employers and inactive employees, which account for about 70% of the total, leaves the company’s options open.

“This structure better positions MMC to take advantage of de-risking opportunities in the future, such as voluntary lump sum offers and annuity purchases,” Mr Bischoff said.

“Obviously, like a lot of companies, it seems like they are trying to clamp down on legacy exposures,” Mr. Sebaski said. “I can’t imagine they would have done this without some intention of making a change.”

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