Marsh & McLennan Companies Inc. (MMC) reported its first quarter adjusted operating earnings of 56 cents per share, in line with the Zacks Consensus Estimate of 56 cents but a nickel higher than 51 cents reported in the year-ago quarter. Adjusted operating earnings, which exclude one-time items in both the periods, increased 8% year over year to $473 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, higher investment income, partially offset by higher operating and tax expenses.
On a reported basis, Marsh & McLennan witnessed net income of $325.0 million or 56 cents per share in the reported quarter, modestly up from $248 million or 51 cents per share in prior-year quarter.
Consolidated revenues were $2.88 billion, up 9.4% year over year and 5% on an underlying basis. This also marginally exceeded the Zacks Consensus Estimate of $2.821 billion.
Investment income of $19 million jumped from $8 million in the year-ago quarter. However, total expenses increased 9.1% year over year to $2.41 billion. Particularly, tax expenses were $128 million against $103 million in the year-ago quarter.
Segment Results
Revenues for the Risk and Insurance Services segment were $1.6 billion, up 10% year over year and 4% on an underlying basis. However, operating income was significantly higher by 10% year over year reaching $383 million, reflecting improved performance at Marsh and Guy Carpenter.
Marsh's revenues were $1.3 billion, up 10% year over year and 4% on an underlying basis. Guy Carpenter's revenues during the reported quarter were $340 million, up 8% year over year and 7% on an underlying basis. Both Marsh and Guy Carpenter drove the top line on strong new businesses and growth across geography in the quarter.
The Consulting segment's revenues increased 9% year over year to $1.3 billion. The segment increased 6% on an underlying basis. Besides, adjusted operating income increased 13% year over year to $131 million.
Mercer's revenues increased 9% year over year to $922 million and 5% on an underlying basis. Mercer's consulting operations had revenues of $635 million, up 5% on an underlying basis. Outsourcing revenues were flat year over year at $176 million, whereas investment consulting and management revenues increased 13% year over year to $111 million.
Oliver Wyman’s revenues increased 11% to $339 million in the reported quarter and increased 9% on an underlying basis.
Financial Update
Marsh & McLennan exited the reported quarter with cash and cash equivalents of $1.3 billion from $1.1 billion in the year-ago quarter. Long-term debt declined to $2.77 billion from $3.6 billion in the year-ago period. As of March 31, 2011, Marsh & McLennan had total assets of $15.07 billion and total shareholders’ equity of $6.69 billion.
In January 2011, MMA acquired RJF Agencies, one of the largest independent insurance agencies in the upper Midwest. Further, Mercer completed the acquisition of Hammond Associates as decided in November 2010. The acquisition of Hammond will significantly strengthen Mercer's US investment consulting position in endowments and foundations.
Dividend Update
On March 16, the board of Marsh & McLennan declared a regular quarterly dividend of 21 cents per share on its common stock, which is payable on May 16, 2011 to the shareholders of record as on April 8, 2011.
On February 15, Marsh & McLennan paid a quarterly dividend of 21 cents per share on its common stock, to the shareholders of record as on January 28, 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).
While 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; 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.
Currently, Marsh & McLennan carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.
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