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Marsh & McLennan Cos. Inc. announced higher revenues in the third quarter of 2018 as it works through the approval process and integration planning for its $5.6 billion acquisition of London-based Jardine Lloyd Thompson Group.
The New York-based brokerage’s consolidated revenue in the third quarter of 2018 rose 4.9% to $3.5 billion compared with the third quarter of 2017, while net income declined 29.7% to $279 million compared with the same period last year, according to the company’s earnings release on Thursday.
Consolidated revenue rose 8.7% to $11.2 billion over the first nine months of 2018, while net income rose 2% to $1.5 billion, according to the earnings release.
The JLT transaction, announced on Sept. 18, is expected to close in spring of 2019, subject to receipt of required antitrust and regulatory approvals and the approval of JLT shareholders, according to the earnings release. The entire MMC leadership team spent last week in London and conducted a “fairly high level” town hall discussion with about 1,500 people about the industry and the business, Dan Glaser, president and CEO, said during the company’s earnings conference call on Thursday.
“Of course, we’re not reaching out as Marsh & McLennan to any JLT clients,” he said. “We’ve obviously been contacted by some of our clients. We view (that) on an overall basis, clients make decisions based upon capabilities, not based upon individuals, not based upon what badge the company is carrying. It is the capabilities of the firm so that gives me a lot of comfort in thinking that the capabilities of the combined firm will be stronger than how we operate as individual companies.”
“We’re confident this will work out for both firms and certainly for our clients, our colleagues and our shareholders,” he said, adding that he was “quite comfortable that this will turn out to be somewhere between a very good and spectacular acquisition for Marsh & McLennan.”
To protect against pound sterling exchange rate volatility between announcement and closing of the JLT acquisition, MMC entered into a deal contingent forward foreign exchange contract, leading to a $100 million charge reflecting the fair value of the hedging instrument at the end of the quarter, Mark McGivney, MMC chief financial officer, said during the call.
“The amount of this item will change as we progress to closing as well as due to exchange rate volatility,” he said. “Despite the volatility we will see from fair value accounting under GAAP, the full cost of this hedge was contemplated in our estimate of overall transaction costs.”
The company has projected $250 million in cost savings per year and company officials were asked whether the cost of retention packages was included in that calculation.
“I never believe you can buy peoples’ loyalty,” Mr. Glaser said. “When they’re highly skilled, they have choices. We want them to choose the combined company. We have to create the environment as a combined leadership team that essentially fuses the culture and preserves and celebrates those parts of JLT’s culture which are different from Marsh & McLennan and makes them so unique and special. I think that’s the single most important factor. Having said that, within our deal model, we’re certainly going to develop some level of appropriate retention mechanism for a select group of very key individuals. But it would not be widely applied.”
MMC officials were “pleased” that both S&P Global and Moody’s Investors Service affirmed its current rating “albeit with a change in outlook that was expected,” Mr. McGivney said. In September, Fitch Ratings Inc. said it may downgrade MMC’s A ratings following its JLT acquisition.
This year “has been another active year for acquisitions,” he said. “As a result, we expect to deploy $2.6 billion of capital in 2018 across dividends, acquisitions and share repurchase.”
In the third quarter, MMC also recorded a $81 million charge to reflect an other than temporary decline in the carrying value of its equity investment in South African-based Alexander Forbes, according to the earnings release.
Revenue for the company’s risk and insurance services division increased 5.7% to $1.9 billion in the third quarter of 2018, with Marsh's revenue contributing more than $1.6 billion and Guy Carpenter & Co. LLC contributing $215 million, according to the earnings report.
Marsh incurred restructuring charges of $29 million in the third quarter and $87 million through the first nine months of the year, Mr. McGivney said.
“We now expect ultimate charges to be toward the high end of our $80 (million) to $100 million range, he said.
The company will be reinvesting some of the savings from its restructuring initiative in digitalization and data analytics, Mr. Glaser said.
“As we build capabilities in those areas, we’re not getting much revenue in those areas now, but we are certainly picking up the expense,” he said. “But ultimately we believe revenue will come from that. We have to take some risks. We have to innovate. Some of that costs money and we want to free up some money to do that without overly impacting our expense rates and that’s one of the reasons we’re dropping some of the restructuring into reinvestment as opposed to all to the bottom line.”
In the third quarter, a $46 million gain was recognized on the sale of a Marsh risk management software and services business, Mr. McGivney said.
In the third quarter, a $46 million gain was recognized on the sale of a Marsh risk management software and services business, Mr. McGivney said. The business, Marsh ClearSight LLC, was sold to Atlanta-based Riskonnect in July.
Marsh & McLennan Cos. Inc. on Thursday reported higher revenue and profit in the second quarter of 2018, with operations in the United States leading the growth for its core insurance and reinsurance brokerage business.