We View Marsh McLennan as Something of a Tollbooth Business

Senior Equity Analyst

Brett Horn

Revenue segments as reported by the company.

Risk and Insurance Services

Consulting

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We view Marsh McLennan as something of a tollbooth business. Its leading position in the brokerage industry would be difficult to displace, and its sticky customer relationships allow it to benefit from a relatively stable level of insurance transactions, although it does have exposure to the insurance pricing cycle. We think Marsh McLennan’s long-term future will largely resemble its past, with moderate growth and attractive profitability, although the coronavirus and a hard insurance market have created some recent ups and downs.

In 2018, Marsh McLennan saw a modest headwind turn into a tailwind. Because Marsh & McLennan generally takes a percentage of premiums as commission, it is exposed to the direction of the insurance pricing cycle. In 2019, pricing momentum picked up, and this positive trend accelerated in 2020 as the coronavirus appeared to have acted as an additional spur to pricing. Pricing increases haven't been this strong in almost 20 years. This has boosted growth recently and helped offset the negative impacts the coronavirus had on the more discretionary areas of the business. Discretionary services bounced back as the pandemic receded, and Marsh McLennan has seen unusually strong growth over the past couple of years. However, we expect results to normalize going forward.

Over the long run, Marsh McLennan remains tied to a mature insurance industry, and some of its consulting operations are centered on low-growth areas. As such, we think it is inevitable for growth to moderate over time. In the 10 years prior to the pandemic, organic growth was in a range of 3%-5% annually every year, and we think this figure is more reflective of potential long-term growth.

In 2019, Marsh McLennan acquired Jardine Lloyd Thompson in a deal valued at $5.6 billion. Historically, the company has been content with small bolt-on acquisitions, and it has been over a decade since it completed a multi-billion-dollar deal. We like that Marsh McLennan is focused on expanding its brokerage operations, which we view as the heart of its narrow moat, and doesn’t look to be expanding outside its area of competence to achieve growth.

Business Strategy & Outlook

Marsh McLennan's strong customer relationships and global footprint place a narrow moat around its business, in our view. 

Marsh McLennan’s insurance brokerage segment represents about 60% of revenue. The company acts as an advisor and insurance and reinsurance broker, helping clients manage their risk by negotiating and placing their insurance risk with insurance carriers through a global distribution network. Insurance brokers such as Marsh McLennan are uniquely positioned to serve a necessary risk-management function. Brokers can search the insurance market more efficiently and effectively than individual buyers, helping clients compare insurers' skills, financial strengths, and reputation. During the matching process, brokers also help insurers solve problems related to asymmetric information, such as adverse selection and moral hazard. The complexity of these services creates switching costs, as we believe the value of changing providers is not clear to customers and there is perceived value for the client in continuing to work with a broker that has experience in managing their risk. The company’s global presence limits potential competition at the top end of the corporate market, as it allows Marsh & McLennan to effectively serve multinational customers that smaller brokers cannot. Among the larger brokers, we believe Marsh McLennan's customer mix skews most heavily to large, multinational customers. Additionally, the scale and breadth of its operations allows the company to build out a wider set of data and experience, which we believe improves the value of its services even at the middle-market level.

While the consulting side of Marsh McLennan’s business is more widespread and competes in a number of different areas, we believe that this segment is moaty as well. However, the competitive advantage on this side might not be quite as strong, as services on this side are generally not as necessary and client options are wider. Despite significant improvement in recent years, operating margins in this segment are still about 6 percentage points lower than the brokerage segment. Still, we believe that this level allows for excess returns, and that the consulting business benefits as well from relatively sticky customer relationships. The company has maintained a diversified and balanced operation for some time, and we’ve seen its closest peers move to a mix more in line with Marsh McLennan in recent years, validating its strategy. 

Overall, we believe Marsh McLennan is a relatively stable business that benefits from minimal capital requirements and enduring relationships. Returns on invested capital have averaged 17% over the past five years and are magnitudes higher if goodwill is excluded.

Narrow

Economic Moat

Marsh & McLennan

Marsh & McLennan Cos., Inc. is a professional services firm, which offers clients advice and solutions in risk, strategy and people. It operates through the following business segments: Risk & Insurance Services and Consulting. The Risk and Insurance Services segment includes risk management activities, as well as insurance and reinsurance broking and services. The company conducts business in this segment through Marsh and Guy Carpenter. The Consulting segment includes health, wealth & career services & products, specialized management, economic and brand consulting services. The firm conducts business in this segment through Mercer and Oliver Wyman Group. Marsh & McLennan Cos was founded by Henry W. Marsh and Donald R. McLennan in 1871 and is headquartered in New York, NY.

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Marsh & McLennan Cos., Inc. is a professional services firm, which engages in offering clients advice and solutions in risk, strategy, and people. It operates through the Risk and Insurance Services, and Consulting segments. The Risk and Insurance Services segment is involved in risk management activities, as well as insurance and reinsurance broking and services. The Consulting segment offers health, wealth, and career solutions and products, and specialized management, strategic, economic, and brand consulting services. The company was founded by Henry W. Marsh and Donald R. McLennan in 1871 and is headquartered in New York, NY.

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