Q3 2024 Earnings Summary
- Confidence in sustained growth due to elevated risk environment and supportive macro conditions, leading to opportunities in areas such as geopolitical risk, cyber events, and extreme weather impacts.
- Strategic investments and acquisitions, notably the McGriff Insurance Services deal, enhance capabilities and expand reach in faster-growing segments like the middle market, expected to be accretive to earnings and contribute to sustained growth.
- Resilience and growth in key segments, with Risk and Insurance Services achieving 15 consecutive quarters of 6% or higher underlying growth, and Oliver Wyman's business being 8% larger than the same period last year despite current market softness.
- Slowing Growth in Oliver Wyman Segment: The Oliver Wyman business experienced a significant slowdown, with underlying revenue growth of only 1% in the third quarter, down from 12% growth in the same quarter last year. Management acknowledged that they are "at a low point in the cycle" and expect the tough market conditions to continue, particularly with regional softness in the Americas and Europe due to economic factors and corporate buying habits.
- Decelerating Growth in Risk and Insurance Services (RIS): The RIS segment's underlying revenue growth has decelerated from double-digit levels last year to 6% in the current quarter. Analysts questioned the company's confidence in maintaining mid-single-digit growth and whether it might decelerate further, raising concerns about future growth prospects.
- Pressure from Rising Casualty Insurance Rates: There are "real troubling signs in the U.S. liability market," with the excess casualty book experiencing rate increases of 21% in North America. While the company is working to mitigate these challenges, higher rates could pose difficulties for clients and potentially impact Marsh McLennan's business if clients reduce coverage or if placement becomes more challenging.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Underlying Revenue Growth | Q3 2024 (YoY) | Mid single-digit or better | 5.8% YoY growth (5,697Vs. 5,382) | Met |
Margin Expansion | Q3 2024 (YoY) | Expected margin expansion | EBIT margin increased to ~19.4% (1,108/ 5,697) vs. ~18.5% (996/ 5,382) | Met |
Adjusted EPS Growth | Q3 2024 (YoY) | Strong growth expected | 1.51Vs. 1.47(≈2.7% growth) | Missed |
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McGriff Deal Assumptions
Q: What are revenue growth and margin assumptions for McGriff?
A: John Doyle stated they are excited to welcome McGriff, which will extend their reach into the middle market with excellent specialty capabilities. They do not disclose margins or growth details for MMA transactions, but he mentioned that the deal will be modestly accretive in year one and more so after that, expecting a good return on investment over time. -
Free Cash Flow Decline
Q: Why is free cash flow not growing with revenue?
A: Mark McGivney explained that free cash flow is volatile quarter-to-quarter and best viewed over long periods. Year-to-date free cash flow is down due to higher variable compensation payouts in the first quarter because of strong results last year, and increased receivables due to growth. Despite this, they have an outlook for continued strong earnings growth, and expect free cash flow growth to remain strong. -
Fiduciary Income Outlook
Q: What is the guidance for fiduciary income next year?
A: Mark McGivney noted they expect fiduciary income to be about $30 million lower in Q4 compared to Q3 due to rate cuts and seasonal drops in fiduciary balances. Looking into 2025, it will depend on future rate actions. With roughly $11.5 billion in balances, they suggest using this for sensitivity analysis on fiduciary income. -
Pricing Impact on Growth
Q: Does the negative pricing index affect Marsh's organic growth?
A: John Doyle explained that markets are stable, and the -1% pricing was welcome relief for clients. About half of Marsh's business is sensitive to P&C pricing through commission. While pricing has an impact, it's not a direct line to revenue as clients' buying habits change. The index is skewed to large accounts; middle market pricing is more stable, up low to mid-single digits. -
Oliver Wyman Weakness
Q: What's causing regional weakness at Oliver Wyman?
A: Nicholas Studer mentioned they are at a low point in the cycle, with softness in the Americas and Europe linked to the economy and corporate buying habits amid uncertainty. Despite this, they saw strong growth in Asia and the Pacific region, and in sectors like communications, media and technology, and insurance and asset management. -
Reinsurers and Tort Inflation
Q: How are reinsurers reacting to tort inflation?
A: Dean Klisura stated that reinsurers express concern about the U.S. casualty reinsurance market, particularly excess casualty. At 1/1 renewals, they expect current conditions to prevail, with downward pressure on ceding commissions averaging 100 basis points, and rate increases on excess of loss contracts between 5% to 25%. Despite challenges, deals are getting done, and adequate capacity is expected. -
Shift to Non-Admitted Markets
Q: Is business flow to non-admitted markets impacting Marsh?
A: John Doyle stated they are not losing share due to growth in the E&S market. They prefer admitted solutions but access non-admitted markets when appropriate. Their strategy is to access as much of the market directly as possible, including E&S insurers. The E&S premium they place is mostly done directly, and they will continue to use wholesale brokers for niche expertise. -
Brokerage Commission Rates
Q: Have commission and fee rates changed recently?
A: John Doyle explained that over time, average commission rates at Marsh have remained fairly stable. While there is some movement across product lines, average acquisition expense has been pretty constant. He does not view the past few years as a hard market but rather a catch-up period for insurers. -
RIS Growth Confidence
Q: Can you maintain mid-single-digit RIS growth?
A: John Doyle expressed confidence in maintaining growth, citing an elevated risk environment with geopolitical risks, weather severity, cyber events, and loss cost inflation creating opportunities. They are focused on building capabilities organically and inorganically, with the McGriff acquisition being the latest example, and are reshaping the mix of their business. -
U.S./Canada Growth Dynamics
Q: What are the growth dynamics in U.S./Canada, any IPO/SPAC improvement?
A: John Doyle noted they had a terrific quarter with widespread growth. Interest rates coming down have led to new opportunities in IPOs and M&A activity. Martin South added that the U.S. performed well with 6% growth, seeing double-digit growth in capital markets and M&A products, construction, aviation, and strong growth in benefits business.