Nov 20 -
Summary analysis -- Marsh & McLennan Cos. ------------------------- 20-Nov-2012
CREDIT RATING: Country: United States
Local currency BBB/Stable/A-2 State/Province: New York
Primary SIC: Insurance agents,
Mult. CUSIP6: 571748
Mult. CUSIP6: 57174V
Mult. CUSIP6: 57174W
Mult. CUSIP6: 57174Y
Credit Rating History:
Local currency Foreign currency
12-Oct-2012 BBB/A-2 --/--
05-Dec-2007 BBB-/A-3 --/--
Standard & Poor’s Ratings Services’ counterparty credit rating on Marsh & McLennan Cos. (MMC) reflects the company’s strong competitive position in its risk and insurance services and consulting segments, significant improvements in operating performance, and good liquidity. Somewhat offsetting these strengths is its moderately leveraged financial profile, susceptibility to operating performance volatility from exposure to global macroeconomic conditions, and a history of poor results including significant restructuring, goodwill, and legal/regulatory settlement charges.
MMC’s strong competitive position--led by subsidiaries Marsh and Guy Carpenter in the risk and insurance services segment and Mercer and Oliver Wyman Group in the consulting segment--is a key positive rating factor. The firm’s competitive strength is supported by its dominant position as the world’s largest insurance broker (according to Business Insurance magazine, based on 2011 brokerage revenues), a well-established and diversified global platform, and extensive and sophisticated product and servicing capabilities.
MMC’s operating results have displayed material improvement in recent years. Reported pretax operating income showed a significant positive trend at $1 billion for the nine months ended Sept. 30, 2012 (a 14% growth rate from the year-ago period), $1.6 billion in 2011, and $939 million in 2010. Its adjusted EBITDA margin has been improved steadily each year, reaching 21% for the first half of 2012. MMC’s favorable performance trend results from a number of factors including no material charges since the Alaska litigation settlement in second-quarter 2010, improved operational efficiency and expense management, and favorable top-line growth trends that have boosted bottom-line results.
In our view, MMC’s liquidity position is good based on its $2.0 billion cash balance position as of June 30, 2012, and healthy operating cash flows of $1.7 billion for full-year 2011. Further supporting liquidity, MMC has access to a $1.0 billion multicurrency five-year unsecured revolving credit facility that it entered into in October 2011 (replacing its previous $1.0 billion credit facility). MMC’s next debt maturity--$250 million in senior notes--is due in February 2013. We believe the group has significant liquidity to pay down the notes with internal funds if management wished to do so.
MMC’s capital structure reflects a moderately levered financial profile, with total obligations (including pension deficit and net present value of operating leases) of $6 billion and Standard & Poor’s adjusted total obligations-to-adjusted EBITDA ratio of 2.2x as of Sept. 30, 2012. MMC’s balance sheet is characterized by a high proportion of intangible assets and a lack of tangible capital, resulting in limited asset protection--we view this as a rating weakness.
While earnings at MMC have improved, the firm remains susceptible to operating performance volatility stemming from its inherent exposure to global macroeconomic conditions and the cyclical nature of insurance pricing. We believe the current macroeconomic and insurance pricing environment has begun to show signs of stabilization and may even serve as a benefit to the firm overall. Nonetheless, given the derived demand and cyclicality inherent in MMC’s business, we also believe that uncertainty and potential volatility remains, particularly in certain regions (such as Europe) or lines of coverage that have demonstrated continued weakness.
MMC went through an extended period of poor operating results beginning in 2004 when it lost its ability to receive contingent commissions related to its Marsh business. After profits declined sharply as a result of the loss of contingent commissions, management made significant changes to the segment’s business model and extensively restructured its business units to streamline operations. But these improvements moved more slowly than we expected due to continued restructuring charges, legal settlements, goodwill write-offs, and lower-than-expected performance in a number of its business units. Accordingly, MMC’s 2005-2009 five-year average adjusted EBITDA margin of 15.7% was significantly lower than peers.
The stable outlook reflects our view of MMC’s ability to maintain its strong competitive positioning and favorable operating trends in both its brokerage and consulting markets. We expect low- to mid-single-digit organic growth for full-year 2012 and 2013 due to a continuation of favorable new business and retention trends, helped by rate improvement in certain segments. We also expect the company to maintain EBITDA margins at above 20%, aided by our belief that MMC will no longer report any further material restructuring or legal settlement charges in the next couple of years. We expect the ratio of adjusted total obligations to adjusted EBITDA will remain below 3x and EBITDA fixed-charge coverage above 5x.
We would consider lowering the rating over the next 12-24 months if MMC does not meet our performance expectations, particularly if leverage rises above 3x or coverage falls below 5x. Any increase in legal or regulatory risk, unsuccessful execution of strategic initiatives, or liquidity erosion would also likely lead to a rating downgrade. While another rating upgrade is unlikely in the next 12-24 months, our view could be positively influenced by consistent improvement in MMC’s operating and financial profile, favorable organic growth and margins relative to peers and the market cycle, and stability of strategy and staff.