The Long and Short
Playing defense with Marsh & McLennan
Dan Bruzzo, CFA | September 8, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
With the debt of insurance brokers now trading close to the levels of strong property and casualty (P&C) and life insurance underwriters, the relative stability of the brokers looks like better relative value. The largest and most stable broker, Marsh & McLennan (MMC), looks like a strong choice for a highly defensive credit, particularly relative to traditional underwriters. The additional spread available in MMC’s smaller competitors is often attractive, including the second largest broker, AON. But the two names currently trade in such a tight band that it appears better to add MMC exposure as a defensive play.
Fresh off a recent rating upgrade, MMC issued a 2-part, $1.6 billion debt launch in the most recent week. The issuer priced $600 million in 10-year notes at a level of 115 bp over the Treasury benchmark versus initial price talk of 145 bp. MMC also priced $1 billion in 30-year notes at a level of 135 bp versus initial price talk of 170 bp. The latter came with almost no concession to secondary MMC bonds, and one could argue that the new long-dated notes were even at a negative concession when taking into account the dollar price discount to existing maturities. The lack of new issue supply in financial 30-year paper and a lack of active sellers in long-dated secondary paper has created extraordinary demand among investors. The 10-year notes are now indicated at a bid/ask level of 116 bp / 114 bp and the 30-year notes are indicated at a bid/ask level of 131 bp /129 bp, both in-line with secondaries.
Exhibit 1. IG Insurance Brokers Peer Group – MMC New Issues trading in-line with secondaries
On September 1, Moody’s finally upgraded the senior unsecured rating of MMC to A3 from Baa1, giving the insurance broker an ‘A’ rating category from all three major rating agencies. Moody’s also affirmed the commercial paper rating at Prime-2, which is important as MMC has utilized the commercial paper (CP) program as a source of potential liquidity in the past and could do so again if necessary. The rating agency stated that the upgrade reflected the company’s global market leading position, operating diversity and solid franchises. However, Moody’s was quick to note the upgrade came despite a sizable remaining debt burden and integration risk associated with frequent acquisitions. Nevertheless, MMC has made significant progress in deleveraging its balance sheet over the past several years since the last sizable acquisition that was funded with a significant debt component in 2019 (JLT Group).
MMC has done a commendable job keeping nominal leverage in the 2.25 to 2.75x range over the better part of the past three years, after having reduced debt from the $4+ billion acquisition of JLT Group in 2019. Management has been able to do so while balancing the resumption of share repurchases and a still highly active acquisition strategy over that period. The company kept leverage low despite paying out the most in share repurchases in company history in 2022 ($2 billion) and is expected to deploy as much as $4 billion in the current year in combined repurchases and dividends. Furthermore, MMC and its insurance broker peers can make up to dozens of acquisitions on an annual basis, constantly building out their franchises in both traditional brokerage as well as the services and consulting segments.
While industry consolidation remains a constant consideration for insurance brokers, it does appear that the threat of transformational debt-funded mergers, particularly among the largest operators, are a less likely risk that investors need to be concerned with. In 2021, the DOJ blocked the merger of the second and third largest peers, AON and WTW, that appears to have significantly cooled large-scale M&A appetite in the sector.
Insurance brokerage credits offer stability relative to traditional property and casualty names, as ongoing underwriting risk and rate volatility impact the broader industry. Traditional P&C insurance underwriters struggled throughout 2022 amidst one of the top 5 highest years of global catastrophe costs and are still facing similar headwinds in the current year. The market is therefore poised for significant upward pricing pressure in the remainder of 2023 and beyond, which should continue to benefit the profitability of the global insurance brokers. Furthermore, ongoing rate volatility creates investment portfolio risk that is much more present among insurance underwriters and has a more limited impact on the brokerage group.
In addition to being the largest and best-positioned insurance broker globally, MMC also benefits from a strong (and still improving) liquidity profile relative to upcoming maturities. In addition to a sizable balance of cash and short-term investments on the balance sheet, MMC has the entirety of its $2.8 billion revolving credit facility available to it through 2026, as well as access to the CP market and over $3 billion in LTM trailing free cash flow. Management has been periodically terming out its upcoming maturities with 10- and 30-year debt launches over the past several years, and with this latest launch appears well poised to fund its upcoming maturity schedule. There is just $250 million maturing in the current year, with another $1.6 billion coming due next year – the exact amount priced in this week’s debt launch.