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Marsh & McLennan sees mixed results in wake of JLT buy

Mixed financial results

Marsh & McLennan Cos. Inc. reported higher revenue but lower profit in the second quarter of the year, fulfilling projections of near-term growth challenges, particularly in its reinsurance segment, following completion of its $5.6 billion acquisition of Jardine Lloyd Thompson Group PLC.

The New York-based brokerage’s consolidated revenue in the second quarter of 2019 was $4.35 billion, a 16.5% increase over the same period last year, while underlying revenue grew 4% compared with a year ago, the company said in its second-quarter earnings report Tuesday. Underlying revenue growth is calculated as if Marsh & McLennan and JLT were a combined company a year ago, but excludes the impact of currency and other acquisitions, dispositions and transfers among businesses, according to the statement.

Net income in the second quarter of 2019 was $332 million compared with $531 million in the same quarter last year, according to the company’s earnings statement.

“JLT has made us stronger in several specialty areas and has deepened our footprint in the faster-growing geographies of Asia-Pacific and Latin America, and JLT has enhanced our scale,” Dan Glaser, president and CEO of Marsh & McLennan, said in a conference call Tuesday morning.

Marsh & McLennan officials had warned of near-term growth challenges during the company’s first-quarter conference call. Organic growth has lingered in the 3% to 5% range annually over last decade, but “we have aspirations to grow more than that, clearly,” Mr. Glaser said.

Risk and insurance services revenue rose 23% to $2.57 billion in the second quarter of the year. Marsh LLC’s revenue in the first quarter was $2.16 billion, a 23% increase. Revenue for the Guy Carpenter & Co. LLC reinsurance brokerage unit rose 18% to $392 million in the quarter, but was down 3% on an underlying basis, according to the earnings report.

“The decline in Guy Carpenter’s underlying revenue growth is a combination of timing and a decline in our new business pipeline,” Mr. Glaser said. “Not surprising for an acquisition of this size, JLT’s new business slowed considerably during the period between deal announcement and closing. This impacted Marsh and Guy Carpenter, but was felt more acutely in reinsurance. Although it will take time to rebuild the new business pipeline, we are confident in the long-term growth outlook for our combined business.”

Guy Carpenter recently won a request for proposal by a top 10 U.S. insurer by leveraging a terrorism model created by JLT combined with the analytical capabilities of Guy Carpenter — one of several examples of the joint collaboration helping the company expand existing relationships and win new business, he said.

“Guy Carpenter has been a terrific performer on multi levels for us for many years,” Mr. Glaser said. “In fact, this negative quarter is only their second negative quarter in the last decade.”

“This is correctable," he continued. “It’s not going to take years, but then again it’s not going to take weeks. There will be a period of time that we work it through and we’ll get the pipeline going again, so it’s not something that we’re overly concerned with.”

Consulting revenues, meanwhile, rose 9% to $1.8 billion as Oliver Wyman Group’s revenue rose 10% to $540 million while Mercer’s revenue increased 9% to $1.26 billion.

JLT integration and restructuring costs totaled $98 million in the second quarter of 2019, including costs incurred for staff reductions, consulting costs related to the JLT transaction and the loss on the sale of JLT’s aerospace business, while acquisition-related costs totaled $82 million, according to the earnings statement.

JLT announced in March it would sell its aerospace practice to Arthur J. Gallagher & Co. to address a potential overlap and smooth the path for its acquisition by Marsh & McLennan.

“At the end, the aerospace business that we sold would have had a very negligible impact on margin in this quarter,” Mr. Glaser said. “The reality of that business is that it’s a very big fourth-quarter business, but it’s much smaller throughout other parts of the year.”

Company officials were asked about employee departures in the wake of the acquisition. Brokerage Price Forbes Ltd. announced last week it hired a team of former JLT executives to staff a new division focused on growing its professional liability business in Canada, North America and internationally.

“Specifically on talent retention, sure, there are some people who have left that we would preferred that they stayed with the organization,” Mr. Glaser said. “However, you’ve got to put that in context. The overall level of JLT voluntary turnover in the second quarter of 2019 is very consistent with the overall level of voluntary turnover within JLT in the second quarter of 2018. It’s running a little bit higher in the U.K. and it’s actually running lower than last year in the rest of the world. So in the context of talent retention, broadly we’re quite satisfied.”

Property/casualty pricing is firming in specific lines of business and geographies, particularly for complex risks or those with catastrophe exposures, Mr. Glaser said. The Marsh Global Insurance Market Index saw an increase of nearly 6% in the second quarter compared with 3% in the first quarter and 2% in the fourth quarter of 2018, he said.

Property lines are seeing average renewal price increases of 8%, with an increase of 10% in the United States, while casualty prices rose for the first time since 2013 and saw average renewal rate increases of 1% in the second quarter, Mr. Glaser said. Financial and professional lines saw average renewal rate increases of 10% in the quarter, with the U.S. rising 7% and the U.K. and Asia-Pacific up double digits, he said.

For reinsurance, at midyear renewals, which focus primarily on the United States and hurricane-exposed programs, multiple factors came together to result in double-digit property catastrophe rate increases in Florida on average for the first time in more than a decade, Mr. Glaser said.

“This is driven by loss creep from the 2017 and 2018 loss events, reduced capital inflows and evolving views of risk,” he said. “Ultimately, we can’t predict the mid- to long-term outlook for pricing, but the current conditions are firmer almost across the board.”

In the first half of 2019, Marsh & McLennan Agency LLC closed the acquisition of Clearwater, Florida-based Bouchard Insurance Inc. in February and announced the acquisition of Phoenix-based Lovitt & Touché Inc. in April as part of the company’s ongoing efforts to expand its middle-market business.

“MMA is our priority in the near term as we integrate JLT,” John Doyle, president and CEO of Marsh LLC, said during the conference call. “There’s a good pipeline. We’ve earned a favorable reputation for honoring our commitments. That gives us a real good shot, and in many cases a first look, at some really high-quality firms that are in the market.”

Consolidated revenue was $8.42 billion for the first six months of 2019, an increase of 8.7%, or 4% on an underlying basis, according to the earnings statement.

Net income for the first six months of 2019 was $1.05 billion compared with $1.22 billion in the same period last year, according to the earnings statement.




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