MMC Marsh and McLennan Companies Inc

Marsh & McLennan Companies Inc. (MMC) reported its first quarter operating earnings of 63 cents per share, which surpassed the Zacks Consensus Estimate of 61 cents and the year-ago quarter’s earnings of 56 cents. Operating net income, which excludes one-time items in both the periods, climbed 11.0% year over year to $354 million.

On a reported basis, Marsh & McLennan recorded net income of $347 million or 63 cents per share in the reported quarter, up decently from $325 million or 58 cents per share in the prior-year quarter.

With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of modest top-line growth across its businesses, and that also drove the operating margin. Even the limited expense growth supported the bottom line.

Consolidated revenues were $3.05 billion, up 5.8% on both a year-over-year and an underlying basis, and slivered past the Zacks Consensus Estimate of $3.04 billion.

Total expenses increased 4.6% year over year to $2.52 billion as compensation and benefits grew 4.4% to $1.8 billion, while other expenses rose 5.4% to $728 million. Even tax expenses escalated to $153 million against $128 million in the year-ago quarter. Nevertheless, adjusted operating margin edged up to 17.4% from 16.4% in the year-ago period.

Segment Results

Revenues for the Risk and Insurance Services segment were $1.7 billion, up 7% on both year over year and underlying basis. Moreover, operating income rose by 9% year over year reaching $417 million, reflecting improved performance at Marsh and Guy Carpenter.

Marsh's revenues were $1.4 billion, up 8% year-over-year and 7% on an underlying basis, driven by strong new businesses and growth across geographies in the quarter. Underlying revenue for international operations grew 7%, reflecting 18% growth in Latin America, 10% in Asia Pacific and 5% in EMEA. Underlying revenue improved by 6% in the U.S.-Canada region.

Guy Carpenter's revenues during the reported quarter were $357 million, up 5% year over year and 7% on an underlying basis.

The Consulting segment's revenues moved up 4% on both year-over-year and underlying basis to $1.4 billion. Besides, adjusted operating income surged 24% year over year to $162 million.

Mercer's revenues stood at $957 million, up 4% on both year-over-year and underlying basis. Mercer's retirement operations generated revenues of $278 million, flat on an underlying basis.

Additionally, Health & Benefits grew 6% to $253 million, and Talent, Rewards & Communications climbed 5% to $125 million, whereas Outsourcing revenues improved 4% to $177 million and revenue from Investments increased 7% to $124 million.

Oliver Wyman’s revenues ascended 5% year over year and 6% on an underlying basis to $356 million in the reported quarter.

Financial Update

During the reported quarter, Marsh & McLennan’s total investment income, including mark-to-market gains in private equity investments, inched up to $20 million against $19 million in 2011.

Marsh & McLennan exited the reported quarter with cash and cash equivalents of $1.4 billion, down from $2.1 billion in 2011. Long-term debt marginally declined to $2.66 billion from $2.67 billion at the end of 2011.

As of March 31, 2012, Marsh & McLennan had total assets depreciated to $15.01 billion, while total shareholders’ equity increased to $6.27 billion from 2011-end. No shares were repurchased during the reported quarter.

Notes Update

On March 7, 2012, Marsh & McLennan announced the pricing of senior unsecured notes worth $250 million, the net proceeds of which were used to redeem the 6.25% senior outstanding notes worth $250 million, which were due in March 2012.

Accordingly, the latest long-term fixed rate notes were issued at a price of $99.904 and dated to mature on April 1, 2017.  These five-year fixed rate notes are projected to have a spread of 148 basis points (bps) over the U.S. Treasuries, bearing a coupon rate of 2.3% and yield rate of 2.32%. Interest on the notes will be payable semi-annually, in equal installments, commencing on October 1, 2012.

Besides, the notes carry a rating of “Baa2,” “BBB” and “BBB-” from Moody’s Investor Service of Moody’s Corp. (MCO), Fitch Ratings and Standards & Poor’s (S&P), respectively. The ratings agencies believe that the latest issue to refinance existing notes will not have any material effect on the credit profile, thereby maintaining its financial leverage of 2.7x recorded at the end of 2011.

Dividend Update

On March 14, 2012, the board of Marsh & McLennan announced a quarterly dividend of 22 cents per share on its common stock, payable on May 15, 2012 to the shareholders of record as on April 10, 2012.

Previously, on February 15, 2012, Marsh & McLennan paid a quarterly dividend of 22 cents per share on its common stock to the shareholders of record as on January 30, 2012.

Our Take

The steady growth momentum over the past few quarters reflects Marsh & McLennan’s ability to sustain fundamental growth through new business generation and client retention, which is crucial amid the company’s antitrust litigation charges coupled with a soft pricing environment.

Along with healthy financial leverage and a sound balance sheet, the company’s coverage ratios, debt-to-EBITDA of 1.5x and EBITDA-to-interest of 10.0x in 2011 showcase modest improvement in its financial position and scope for enhancing operating leverage. However, sluggish macro-economic factors could act as a dampener in the near term.

Overall, as a leading global broker, Marsh & McLennan has a history of outperforming its peers due to its size, diverse product offerings, global presence and technical expertise. Despite sluggish organic growth, the company is still a dominant player in its industry, near the leading Aon Corp. (AON).

 
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