Marsh & McLennan Companies Inc. (MMC) reported its second quarter operating earnings of 50 cents per share, a couple higher than the Zacks Consensus Estimate of 48 cents but significantly higher than loss of 6 cents per share reported in the year-ago quarter.
Adjusted operating earnings, which exclude one-time items in both the periods, spiked to $286 million from an operating loss of $29 million.
With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of top line growth in all lines of businesses and reduced operating expenses that also drove the operating margin. These were partially offset by investment loss, higher compensation and benefits along with tax expenses.
On a reported basis, Marsh & McLennan witnessed net income of $282.0 million or 50 cents per share in the reported quarter, modestly up from $236 million or 43 cents per share in the prior year quarter.
Consolidated revenues were $2.93 billion, up 12.4% year over year and 5% on an underlying basis. This also marginally exceeded the Zacks Consensus Estimate of $2.81 billion. However, the company incurred an investment loss of $6 million in contrast to an income of $18 million in the year-ago quarter.
Conversely, total expenses decreased 7.3% year over year to $2.46 billion although compensation and benefits increased 7.1% to $1.73 billion. Even tax expenses were $129 million against tax credit of $60 million in the year-ago quarter. Adjusted operating margin jumped to 16.1% from 15.8% in the year-ago period.
Segment Results
Revenues for the Risk and Insurance Services segment were $1.62 billion, up 11% year over year and 5% on an underlying basis. However, operating income was significantly higher by 38% year over year reaching $356 million, reflecting improved performance at Marsh and Guy Carpenter.
Marsh's revenues were $1.4 billion, up 12% year over year and 5% on an underlying basis, driven by strong new businesses and growth across geography in the quarter. Underlying revenue for international operations grew 6%, reflecting 18% growth in Latin America, 6% in Asia-Pacific and 4% in EMEA. Besides, underlying revenue grew 3% in the US-Canada region.
Guy Carpenter's revenues during the reported quarter were $257 million, up 6% year over year and 5% on an underlying basis.
The Consulting segment's revenues increased 13% year over year to $1.3 billion. The segment increased 5% on an underlying basis. Besides, adjusted operating income increased 21% year over year to $154 million.
Mercer's revenues increased 13% year over year to $945 million and 4% on an underlying basis. Mercer's consulting operations had revenues of $639 million, up 3% on an underlying basis. Outsourcing revenues rose 2% year over year at $188 million, whereas, investment consulting and management revenues increased 13% year over year to $118 million.
Oliver Wyman’s revenues increased 14% to $374 million in the reported quarter and increased 8% on an underlying basis.
Financial Update
Marsh & McLennan exited the reported quarter with cash and cash equivalents of $1.7 billion from $1.5 billion in the year-ago quarter. Long-term debt declined to $2.77 billion from $3.03 billion at the end of 2010.
As of June 30, 2011, Marsh & McLennan had total assets increased to $15.45 billion and total shareholders’ equity grew to $6.78 billion from 2010 end. During the reported quarter, Marsh & McLennan repurchased 7.8 million shares of its common stock for $235 million.
Additionally, last month, the company successfully completed a tender offer that resulted in the retirement of about $600 million of the senior notes that were scheduled to mature in 2014 and 2015. Costs of $73 million relating to prepayment of this debt will be recognized in the third quarter of 2011. In July this year, Marsh & McLennan also issued $500 million of 4.80% senior notes due 2021.
Dividend Update
On May 16, 2011, the board of Marsh & McLennan paid a quarterly dividend of $0.21 per share on its common stock to the shareholders of record as on April 8, 2011.
Our Take
The recent acquisitions are crucial for new business generation and client retention, which has been facing substantial declines due to 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 due to 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).
The Guy Carpenter brand, holding a quarter of the market share, has been improving through cross-selling opportunities, new business production and high retention rates. Besides, Mercer’s investment consulting and management wing continues to generate robust growth, contributing to the fundamental strength of the company. We believe a stable economy and improvement in the insurance cycle should help boost both the insurance brokerage and consulting business.
Nevertheless, management aims togenerate long-term growth by maintaining low capital requirements, generate high levels of cash and reduce the company’s risk profile. Moreover, the company continues to deploy capital through dividend payments and share buyback program, thereby injecting confidence among the investors. These factors bode well for growth through 2011.
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