Marsh & McLennan Companies, Inc.
Q4 2008 Earnings Call Transcript

Published: 11 Feb 2009

[Operator:]

Good day everyone and welcome to MMC's Conference Call. Today's call is being recorded. Fourth Quarter and Full-Year 2008 financial results and supplemental information were issued earlier this morning. They are available on MMC's website at www.mmc.com. Before we begin, I would like to remind you that remarks made today may include statements relating to future events or results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to inherent risks and uncertainties. In particular, references during this conference call to anticipated or expected results of operations for 2009 or subsequent periods are forward-looking statements and MMC's actual results may be affected by a variety of factors. Please refer to MMC's most recent SEC filing as well as the company's earnings release, which are available on the MMC website for additional information on factors that could actual... that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. I'll now turn the call over to Mr. Brian Duperreault, President and CEO of MMC.

[Brian Duperreault:]

Good morning and thank you for joining us, to discuss our year-end results reported earlier today. I am Brian Duperreault, President and CEO of MMC. Joining me and presenting on the call today is Vanessa Wittman, our CFO. I would also like to welcome our operating company's CEOs to today's call, Dan Glaser of Marsh; Peter Zaffino of Guy Carpenter; Michele Burns of Mercer; John Drzik of Oliver Wyman; and Ben Allen of Kroll. Also with us is Mike Bischoff our Head of Investor Relations. After I make some brief remarks, Vanessa will present our financial results and then we will take your questions. I am pleased to report we had a strong fourth quarter. Adjusted EPS of $0.37 represented an increase of more than 50% over the $0.24 we reported in the fourth quarter of last year. This was achieved despite several factors, including significantly lower interest rates that reduced corporate and fiduciary interest income. The impact of foreign exchange on Mercer's operating income, which is greater than it has been historically in an economic climate that weighed heavily on our consulting businesses. In the quarter, we saw a very strong improvement, primarily in Risk and Insurance Services segment. As a result adjusted operating income was $279 million, an increase of 30% from the fourth quarter of last year. For the full year, adjusted operating income was $1.2 billion, an increase of 24% from the $1 billion reported in 2007. Adjusted EPS grew 9% to $1.45 from $1.33. We achieved these results even though we experienced a significant year-over-year decline in investment income, reducing EPS by $0.23. Now a few words about each of our businesses

[Vanessa A. Wittman:]

Thanks very much Brian and good morning everyone. This morning I'd like to cover several topics

[Brian Duperreault:]

Thanks Vanessa. I think it's time to begin the question-and-answer period. Just to remind you, that we have our operating company's CEOs here too to help. And with that operator, let's begin the Q&A.

[Operator:]

Yes sir. (Operator Instructions). We'll go first to Keith Walsh with Citi.

[Keith Walsh:]

Hey, good morning everybody. First question for Dan, as you finishing your... you finished your first year there obviously you've gotten a lot out in costs already. Where are you relative to where you thought you'd be a year ago and what are the opportunities on the cost side? And then just another piece to that, when you're talking about the retention, how that improved so significantly I guess over the last year as well as the last quarters? Is that partially driven by maybe the AIG situation out in the market, customers just stand put? Thanks.

[Daniel Glaser:]

Okay, let me handle the question in a couple of parts, Keith. First of all, obviously I am very pleased with the quarter and very pleased with the year. Our... a lot of our margin expansion this year obviously is focused on expense reductions and our work on expenses is not done, and I would expect further expense reductions to contribute to earnings growth in 2009. But, as I've said from the beginning, this is not just a expense-reduction story. Ultimately, we will need to grow the business and grow the business better than we're presently growing the business, in order to reach the level of returns that I believe the firm is capable of. But, I think that in 2008, we laid the foundation for future growth through several actions. We reorganized the U.S. business, streamlining the structure, driving greater accountability for results. We are driving globally better sales discipline. We've improved client service, which is I think the predominant reason why you are seeing some improvement in revenue retention. And I believe it will also help us win more business in the future. We also have just really begun receiving compensation from carriers in recognition of the value and efficiency that our distribution and placement capabilities provide to them. And we formed the Marsh & McLennan agency. So, we've done a lot of things other than expense reduction. And so I feel we're well-positioned for 2009. Then moving onto the client retention situation, I don't think there is any impact in the marketplace on client retention based upon the current turbulence. I do think that it may help us in terms of gaining new clients, because in turbulent markets, there is always a fight to quality, and I think Marsh will do well in that milieu.

[Keith Walsh:]

And then just to...

[Brian Duperreault:]

Thank you. Keith?

[Keith Walsh:]

Yeah?

[Brian Duperreault:]

Did you want to say something else?

[Keith Walsh:]

Yeah, I was going to just follow-up with the question. But, sorry, go ahead.

[Brian Duperreault:]

I'm sorry, you can do that. I'll let you do that.

[Keith Walsh:]

And then, Dan just a follow-up of my second question would be, when I think about the hub strategy, if you can expand a little bit on some of those payments. I heard recently in the news, AIG has signed on to this. So, have you gotten the full slate of underwriters paying, and is there something that's going to materially impact the bottom line in margins in '09? Thanks.

[Daniel Glaser:]

Sure. Overall, our enhanced commission strategy and our commission strategies in general are global. So, they're not only linked to the U.S. and not only linked to our hub strategy. Essentially, our commission initiatives are in three parts

[Brian Duperreault:]

Okay. Why don't we go to the next question?

[Operator:]

Yes, sir. (Operator Instructions). We'll go next to Larry Greenberg with Langen McAlenney.

[Larry Greenberg:]

Thank you, and good morning. I was wondering if Peter could perhaps talk a little bit about what Carpenter is looking at, going into '09. And I am particularly curious, whether... there were clearly some major missteps going into '08. And as we go into '09, is the company in a position to recover from some of those missteps and I guess, I am thinking about kind of a leveraged step up in revenue. Or, are we really just talking about growth off of what was a depressed and to some extent, a missed 2008 year?

[Peter Zaffino:]

Larry, thank you. We believe we made a lot of significant changes in 2008 to position us for a positive growth for 2009, beyond rate. Vanessa mentioned that our new business has been up in the third and fourth quarter. That is also true for January. When we went through the restructuring earlier this year, we put together a very strong sales group that just focuses on top-line growth. In addition to that, we have identified areas where we think we're under-weighed relative to our market position that is in the international arena. So, it's the UK, Europe, to a lesser extent Japan and we feel we can grow in the specialty areas, marine and energy, retro as well as aviation. So our focus is going to be pushing growth beyond rate. Clearly the headwinds we had in 2008, we don't believe we'll have those in 2009 as rates will start to move upward slightly. But we're going to grow through new business beyond rate.

[Brian Duperreault:]

Larry, are you there?

[Larry Greenberg:]

Yeah, just a follow-up; does some of that missed opportunity in '08 comeback to you simply because you guys have your act together right now?

[Peter Zaffino:]

I'd like to think so. In 2008 we...where we lost some business was in the U.S., which is our strongest geographic area for performance on revenue and profitability. So it was an anomaly. We feel like the new business has moved us in a very positive direction in the U.S. and don't believe you'll see that type of our experience for Guy Carp in 2009.

[Larry Greenberg:]

Great. Thanks very much.

[Brian Duperreault:]

You are welcome, Larry. Next question please.

[Operator:]

We'll go next to Meyer Shields with Stifel Nicolaus.

[Meyer Shields:]

Thanks. Good morning.

[Brian Duperreault:]

Good morning.

[Meyer Shields:]

I think it's a question for Dan or Brian. If you look at the brokerage mix of new and renewal business, is it more new business now than I guess long-term target or what?

[Brian Duperreault:]

Dan?

[Daniel Glaser:]

Yes, well I mean our new business this year was in total greater than our new business last year. And as I said last year, we've now grown $900 million of new business which would be a top-ten global insurance broker. So we grow the top-ten global insurance broker and we'll hopefully do that every year. So new business was very strong, it was higher this year than last year.

[Meyer Shields:]

But, what I am trying to get at is, I am assuming that it's more expensive to get new business in which case the new business growth which is what you want, you're still going to have some sort of negative impact on margins?

[Daniel Glaser:]

Well, actually in my view, it's the opposite, because I am not growing infrastructure with new accounts. So my marginal benefit of a new piece of business is higher than an existing piece of business.

[Meyer Shields:]

Okay. That's helpful. And I am sorry --

[Brian Duperreault:]

Go ahead please.

[Meyer Shields:]

Yeah, with regard to retirement consulting is that sort of... is that a negative or net positive, as we... as many clients have to figure out what to do with their pensions?

[Brian Duperreault:]

Well I think that's a good one for Michele. Michele?

[M. Burns:]

Yeah that's, in our view it's a net positive. We believe that what you would expect first of all legislative activity that we've already seen in the United States and are having conversations around the world. As well as the general need for clients to analyze their pension plans, that over time it is a net positive. We do think that the strength our retirement business is more reflected by our full-year performance in 2008 at around 5%, and we expect to continue to grow retirement in the low-single digits going into 2009.

[Meyer Shields:]

Okay, fantastic. Thanks so much.

[Brian Duperreault:]

Okay. Thank you. Next question please?

[Operator:]

We'll take our last question from (Inaudible).

[Unidentified Analyst:]

If I can go back to the margin question; I think Brian I may have asked the last quarter that is there any particular reason why Marsh's margins would be below the other global brokers. And I believe as you've said it's a matter of both of the expense initiatives as well as the top line. So is it just sizing the expense structure and getting the top line going again. At some point do you think that gap will close meaningfully over a couple of years?

[Brian Duperreault:]

Well Terry (ph) thanks for the question. It is mix a business issue and it's an operational question. I mean clearly Marsh was not performing well. So it didn't maximize its profitability with its business and had to fix that with expense controls and getting its processes right, et cetera. Dan's doing that. I think you heard from Dan, he is not... he doesn't fell he is finished with that process, that continues. Now as that changes just one piece of it, but there is also getting new revenue. It's a top line as well as an expense solution. He outlined things he is doing there. When you look at our margin against others, even with the progress we have made and it's considerable as I pointed out, almost 500 on those segments. We don't think we're near it and there is a mix of business issue too that has to come into play. The reinsurance has to be a bigger part of what we do particularly the international piece. The Marsh & McLennan agencies initiative is significant because that is a very high margin business. It's an area that we should excel in but we historically been bad at it. And so that's the whole segment of the market that should produce great business for us and will. But it's going to take a little while to get that. So when you put it all together, there's no reason why our margins segment-to-segment, geography-to-geography because the international courses are higher margin business than the U.S; so then segment-to-segment, geography-to-geography, we should match and preferably exceed our competitors. And so, that's our, that's our goal, talking about what we are look at in '09, even with the headwinds and interest rates and all of those things, we think we can get the whole segment to 16%, in '09. Its 13.3 now, that still isn't where we need to be, but it takes a while. But progress... I mean the thing, I think, one thing I can point to is when we had the call last year this time, it was all potential. And I think you've seen progress, I think the team, I think the people working in both Marsh and Guy Carpenter are world class and we are going to get there.

[Unidentified Analyst:]

16% again is sort of goal-end target for the current year.

[Brian Duperreault:]

Yeah that's '09.

[Unidentified Analyst:]

Right. Okay thank you so much.

[Brian Duperreault:]

You are welcome Terry (ph). Okay. Well, listen thank you all for joining us today. We appreciate it and we look forward to talking to you again. Thank you.

[Operator:]

That does conclude today's teleconference. We thank you for your participation and wish you a wonderful afternoon.