MMC Marsh and McLennan Companies Inc

Marsh & McLennan Cos. Inc. (MMC) reported its third-quarter 2012 operating earnings of 39 cents per share, a penny higher than the Zacks Consensus Estimate. However, the results were noticeably higher than the year-ago quarter’s earnings of 24 cents per share. Operating net income, which excludes one-time items in both the periods, surged 61.2% year over year to $216 million.

On a reported basis, Marsh & McLennan recorded net income of $240 million or 43 cents per share in the reported quarter, drastically up from $127 million or 23 cents per share in the prior-year quarter. The upside was primarily based on $72 million or 9 cents a share of expense related to the early extinguishment of debt in the year-ago quarter.

With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of modest underlying revenue growth and new business development across its businesses, which also drove the operating margin. The lower-than-expected expense growth also supported the bottom line, partially offset by high tax expense.

Consolidated revenues were $2.85 billion, climbing 1.4% year over year and 3% on an underlying basis. However, it lagged the Zacks Consensus Estimate of $2.91 billion.

Further, total expenses inched down 1.2% year over year to $2.47 billion as compensation and benefits grew 0.4% to $1.76 billion, while other expenses dipped 4.8% to $707 million. Additionally, tax expenses escalated to $90 million against $65 million in the year-ago quarter. Nevertheless, adjusted operating margin improved to 12.6% from 11.4% in the year-ago period.

Segment Results

Revenues for the Risk and Insurance Services segment were $1.5 billion, up 2% year over year and 4% on an underlying basis. Moreover, adjusted operating income jumped 13% year over year reaching $213 million, reflecting improved performance at Marsh and Guy Carpenter.

Marsh's revenues came in at $1.3 billion, up 4% year-over-year and 6% on an underlying basis, driven by strong new businesses and growth across geography in the quarter. Underlying revenue grew in international operations reflecting 7% growth in Asia Pacific and 5% in both EMEA and Latin America. Moreover, underlying revenue improved by 3% in the U.S.-Canada region.

Guy Carpenter's revenues during the reported quarter were $249 million, up 1% on an underlying basis.

The Consulting segment's revenues moved up 1% year over year and 3% on an underlying basis to $1.3 billion. Additionally, adjusted operating income grew 15% year over year to $192 million.

Mercer's revenues stood at $995 million, up 3% on an underlying basis. Mercer's retirement operations generated revenues of $252 million, flat on a year-over-year basis.Additionally, Health & Benefits’ revenue grew 7% to $256 million, whereas revenues from Talent, Rewards & Communications and Outsourcing edged up 1% and 2% year over year, respectively, to $179 million each. Revenue from Investments increased 10% to $129 million.

Oliver Wyman’s revenues hiked 3% on an underlying basis to $351 million in the reported quarter.

Financial Update

During the reported quarter, Marsh & McLennan’s total investment loss, including mark-to-market gains in private equity investments, grew to $4 million against nil earnings in the year-ago quarter. Meanwhile, capital expenditure escalated 58.7% year over year to $100 million.

Marsh & McLennan exited the reported quarter with cash and cash equivalents of more than $2.0 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 September 30, 2012, Marsh & McLennan’s total assets appreciated to $15.74 billion, while total shareholders’ equity increased to $6.58 billion from 2011-end.

Additionally, the company bought back 2.3 million shares for $80 million during the reported quarter, while $373 million worth of stock remains available for repurchases under the current authorization.

Dividend Update

On September 19, 2012, the board of Marsh & McLennan announced a quarterly common stock dividend of 23 cents a share, which is payable on November 15, 2012 to the shareholders of record as on October 11, 2012.

On May 17, 2012, the board of Marsh & McLennan announced a 5% hike in its quarterly common stock dividend to 23 cents per share from the prior 22 cents. The increased dividend was paid on August 15, 2012 to the shareholders of record as on July 11, 2012.

Our Take

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

Overall, as a leading global broker, Marsh & McLennan has a history of outperforming its peers based on its size, diverse product offering, global presence and technical expertise. Despite sluggish organic growth, the company is still a dominant player in its industry, quite next to the leading Aon Corp. (AON).  Currently, Marsh & McLennan carries a Zacks Rank #3, which translates into a short-term Hold rating and long-term Neutral recommendation.

 
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