Marsh expects broking revenue to rise in 2020 despite crisis

Marsh & McLennan Cos. Inc. could see higher brokerage revenue in 2020, but it expects a “modest decline” in overall revenue for the year due to the economic fallout from the coronavirus pandemic, the firm’s top executives said on Thursday during a first-quarter earnings call with analysts.

On the call, Dan Glaser, Marsh & McLennan’s president and CEO, also said the company would look to avoid the “blunt instrument” of pay cuts during the pandemic. Earlier in the week, rival Aon PLC announced a 20% reduction in salary for most staff. Meanwhile, insurance rates are likely to keep hardening during the crisis, and pandemic-related claims are likely to be significant, Mr. Glaser said.\

Marsh & McLennan reported revenue of $4.65 billion for the first quarter, a 14.2% increase over the same period last year. Excluding the effect of the April 2019 purchase of Jardine Lloyd Thompson Group PLC, other deals and foreign exchange changes, underlying or organic revenue grew 5% in the first quarter, according to the company’s earnings statement.

Marsh LLC, the company’s insurance broking unit, reported $2.06 billion in revenue for the first quarter, up 5% on an underlying basis compared with same period last year. Reinsurance brokerage Guy Carpenter LLC reported first-quarter revenue of $827 million, up 7% on an underlying basis. Marsh & McLennan reported a profit of $754 million for the quarter, up 5.3% from the 2019 first quarter.

The firm’s outlook for the full year is for a “modest decline in underlying revenue,” based on expectations of a sharp economic pullback in the second quarter, the global lockdown lifting in the third quarter, and recessionary conditions persisting throughout the year, Mr. Glaser said.

Emphasizing that conditions could be “materially different” as the crisis evolves, Mark McGivney, Marsh & McLennan’s chief financial officer, said Marsh still has the potential for “modest” underlying revenue growth and Guy Carpenter will see “mid-single-digit underlying growth for the year with a stronger first half and a weaker second half.” Mercer LLC, the company’s benefits consulting unit, will likely see a modest decline in revenue, and its management consulting unit Oliver Wyman LLC “will see a meaningful pullback in underlying revenue in the second and third quarters that could be greater than the peak decline we saw in the financial crisis,” he said. 

In light of the crisis, Marsh & McLennan recently secured a new $1 billion line of credit, which is in addition to $800 million remaining under an existing borrowing facility. The company intends to maintain its dividend but will not make any share buybacks in 2020, Mr. McGivney said. Insurance prices, which have been rising since last year in many lines, will likely continue to rise in response to increased claims from the COVID-19 pandemic, Mr. Glaser said.

“The range of insured loss outcomes from the pandemic is wide and evolving,” he said. “There will be significant losses in lines such as event cancellation, travel, D&O, workers compensation, credit lines and political risk. The potential for other losses, business interruption or otherwise, makes the overall loss difficult to estimate at this time.”

Reinsurance rates are also expected to continue rising, he said. During the June 1 reinsurance renewals for the southeastern United States, “many renewal placements are expected to face upward rate pressure,” he said. The crisis will likely lead to lower premium growth due to exposure decline, Mr. Glaser said.

The experience of operating remotely during the crisis could lead to lower long-term real estate costs for Marsh & McLennan, Mr. Glaser said. “We’ve proven to ourselves and to our client base that we can work from home, we can work remotely and do it effectively,” he said.

Source: Business Insurance