Recently, we saw Buffett revealed Berkshire Hathaway’s latest portfolio. And there were 3 new companies that were added during the Q3 and Q4 of 2020. Multi-billion dollar stakes in both Verizon and Chevron, as well as a nearly $500 million investment in Marsh and McLennan stock.
Well, we have covered Verizon and Chevron in another article, check it out here!
In fact, Marsh and McLennan may be a more interesting company. It is a typical Warren Buffett investment in terms of buying great companies at reasonable prices.
So, how can a company be great if you don’t even know its existence? And what kind of returns can you expect if you enter now? Let’s find out!
Marsh and McLennan Business Overview
I think lesser people take note or are interested in researching this company. Because, first of all, it’s a smaller stake compared to Verizon and Chevron.
Secondly, I think the businesses that Marsh and McLennan are in will be less relatable to us, than the wireless services or oil and gas that affect our daily lives, as in the case for Verizon and Chevron.
But that does not discount the fact that Marsh and McLennan can be a great business.
The company’s businesses come from corporate customers. They provide advice and solutions to clients in the areas of risk, strategy and people worldwide. But this is very broad, it doesn’t really tell us much about its business.
Source: Marsh and McLennan Companies Q4 2020 Presentation / Best-in-Class Leadership
If you dig into their financial reporting, you will see that they segregate their operations into 2 main segments:
- Risk and Insurance Services
And they operate these 2 segments under two main brands each.
Marsh and Guy Carpenter under its Risk and Insurance Services business.
Mercer and Oliver Wyman under its Consulting business.
We will go into more details later.
Source: Marsh and McLennan Companies Q4 2020 Presentation / The Global Leader in Advisory on Risk, Strategy and People
But first, here you can see the kind of reach that the company has in general.
For the full year of 2020, it generated more than $17 billion in revenue, serving clients in more than 130 countries. And the company employs 76,000 people all over the world.
As for the rest of the figures, you will get a clearer idea when we run through the individual segments.
Source: Marsh and McLennan Companies Q4 2020 Presentation / History of Strong Growth
And looking at its past performance, overall, the company exhibits a very strong and stable business nature. Ir recorded a year-on-year growth in revenue and operating income, even during 2020, when Covid-19 hits most businesses very badly.
Why is this so? Let’s take a look.
Source: Marsh and McLennan Companies Q4 2020 Presentation / Segment Revenues
Again, Marsh and McLennan have operations all over the world. The bulk of its business is in the United states, followed by U.K, Europe, Middle East and African region, as well as Asia Pacific. With a smaller presence in Canada and Latin America.
Take note that its Risk & Insurance Services arm contributes about 60% of the group’s revenue. Whereas their Consulting business contributes the remaining 40%.
Marsh and McLennan Stock: Marsh Overview
Source: Marsh and McLennan Companies Q4 2020 Presentation / Marsh Business Breakdown
Let’s take a look at the Marsh company first.
Well, it has a lot of expertise and services within Marsh itself. But the general theme will be their risk analysis and advisory services, as well as its insurance services. The latter involves designing insurance programs and brokerage for its clients.
Increasingly, the company is adopting data and technology to assist in these functions.
You see these insurance are not those typical ones that you and I buy.
Source: Marsh.com / Industries & Services
These are insurance at the corporate level. They can be specific to industries. Whether it is Aviation, Energy or Healthcare, they require deep expertise to consult their clients effectively.
So these insurance services are bigger in scale and of a more complex nature. A lot of times, they have to be customized to meet clients’ needs.
And because of that, there’s a lot of synergy within the business as well.
For example, not only is the company designing and brokering insurance to protect different forms of risk, whether they are associated to cyber risks or professional liabilities or any other forms of risks, very likely the clients will require consulting services to help assess and quantify these risks first before a solution can be provided.
Marsh Competitive Advantages
Source: Craft.co / Marsh & McLennan Companies Competitors
Therefore, once the deal is sealed, it will probably be very difficult for Marsh’s corporate clients to switch to working with other competing companies to consult, change or upgrade their insurance plans.
Although Marsh is not the insurance company themselves, once their clients have relationships with Marsh, it will be easier for them to continue the relationship for future add-ons, given the records and trust already established.
Secondly, there will be a lot of inertia to change, given the time and investments made in structuring a risk and insurance plan.
This is what we call a high switching cost. It can form a very strong barrier to entry for competitors to come in once a client comes on board. Because, who wants to go through the whole process again of redesigning an insurance plan at such a level.
Therefore, this economic moat is one key reason why I think Buffett likes the company.
This is proven from its 2020 financial result as well. Given the pandemic crisis, you can see the company not only did not see a drop in its revenue. In fact, it registered a year-on-year growth of 3%.
And 90% of its clients are Fortune 500 companies. The $60 billion in annual global premiums placed in 2020 is hard to compete away.
Overall, this is definitely a great business that Marsh is in. This segment generated $8.6 billion, nearly half of the group’s revenue for 2020.
Marsh and McLennan Stock: Guy Carpenter Overview
Source: Marsh and McLennan Companies Q4 2020 Presentation / Guy Carpenter Business Breakdown
Next, let’s take a look at Guy Carpenter. Again it is involved in Risk and Insurance Services with corporate customers. So, now you understand the power of such business already, we will not go into more details.
But i want to highlight here the difference is Guy Carpenter works on. It is in the reinsurance business rather than insurance itself.
Source: Slideshare / Understanding the accounts of a non-life insurance company
For the benefit of everyone, reinsurance basically means insuring the insurers. In another word, the insurers transfer some of their risk to a reinsurance company through some form of agreement, to reduce the likelihood of paying a large obligation that may result from an insurance claim.
And just for your information, Buffett had a lot history with insurance and reinsurance companies. So, he probably knows a lot about the business.
Of course, Guy Carpenter also has other functions in terms of capital solutions and business growth consulting.
But, given its smaller revenue base of $1.7 billion compared to Marsh, we will not dwell too much into this.
However, notice again Guy Carpenter’s ability to grow its revenue in 2020 as well by a good 6%. This signifies a strong and stable business nature, compared to other businesses that were badly hit by the pandemic.
Marsh and McLennan Stock: Mercer Overview
Source: Marsh and McLennan Companies Q4 2020 Presentation / Mercer Business Breakdown
Next, let’s go to the Consulting business.
Take a look at Mercer first. The company has a whole range of consulting services, which are segregated into Health, Wealth and Career.
It will probably take a few articles just to talk about all the different consulting services it provides.
Source: Marsh and McLennan Companies Q4 2020 Presentation / Brand Recognition
The thing that sets the company’s consulting businesses apart is the company’s brand recognition in the respective areas of consulting. Whether it is the insurance or consulting business.
These are intangible assets that provide the company the edge when corporate clients decide who they want to work with to help them find solutions to their problems.
Especially for its consulting in the Wealth segment, which involves dedicated plans and solutions for pension and investment funds. Here we saw a total of $357 billion of assets under management.
These corporate clients are unlikely to move their financial resources regularly, once they have assessed who to entrust their funds with.
Overall, we still see a pretty resilient business in Mercer’s business in 2020. It registered only a 1% drop in its revenue for the whole year.
Marsh and McLennan Stock: Oliver Wyman Overview
Source: Marsh and McLennan Companies Q4 2020 Presentation / Oliver Wyman Business Breakdown
Similarly, for Oliver Wyman, which deals mainly in management consulting, from risk management to strategy consulting. The company was able to deliver a resilient topline in 2020 as well, albeit a 4% year-on-year fall in revenue.
Why Buffett Invested In Marsh and McLennan Stock
Source: Marsh and McLennan Companies Q4 2020 Presentation / Historical Revenue
So from all these businesses, you can see now why Marsh and McLennan companies have been able sustain its revenue and operating income growth steadily over the years.
Source: Marsh and McLennan Companies Q4 2020 Presentation / Capital Strategy
Not only that, the company has been able to increase its dividend payout and consistently repurchase shares from the open market, thereby increasing shareholder returns over time. And if you have been following Buffett, you will know that he likes companies which puts shareholder value as priority.
Source: Marsh and McLennan Companies Q4 2020 Presentation / Historical EPS
By having a consistent share repurchase program and also actual growth in operating income, Marsh and McLennan is able to register steady growth in their earnings per share (EPS). The company recorded a compounded annual growth rate in EPS of about 8% for the past 10 years.
And I think this is what caught Buffett’s attention.
So, the question is moving forward, will there still be more room for further growth?
Future Growth Prospects
Source: Marsh and McLennan Companies Q4 2020 Presentation / Market Potential
Well, according to the company’s research, there’s still a lot of potential for its insurance and consulting businesses.
For instance, Cyber risk will be an increasingly hot issue with digitization of businesses and the general reliance on online transactions. Hence, global Cyber premiums is expected to grow at a compounded annual growth rate of around 24% through 2025, to a $18 billion market.
Also, technology will continue to disrupt every aspect of businesses, resulting in a growing digital & tech consulting market. The market is currently worth about $14 billion.
Other gaps in the retirement savings and healthcare market, as well as opportunities in the natural catastrophe insurance, present huge potential for Marsh and McLennan companies to venture into.
Source: Marsh and McLennan Companies Q4 2020 Presentation / Sustained Growth
And with the company’s capabilities and track record in growing its risk and insurance operations, as well as its consulting businesses, we believe that it will be able to grow at least in tandem with the expanding markets in the respective areas discussed.
Source: Yahoo Finance / Marsh & McLennan Companies, Inc 1 Year Share Price Chart
To wrap it up, we saw that Buffett scooped up most of Marsh & McLennan companies’ shares in Q3 2020. And then another about 26% more in Q4 2020. We can say that his average cost should be around $110 to $115.
And it is still currently hovering at around that price range.
So based on these research, we think Buffett feels that Marsh and McLennan is a great company, with strong business economics. But, it is not a particularly undervalued or attractive deal at the point of acquiring their shares. Hence, just a $500 million stake to own part of this business, rather than a multi-billion dollar buy-in to the company.
Who knows if the market corrects he may buy more again.
So, if Marsh and McLennan can sustain its steady but incremental growth, following its 8% compounded annual growth rate in its earnings for the next 10 years, this stock could potentially 2X in 10 years time.
Source: Yahoo Finance / Marsh & McLennan Companies, Inc Summary
Again, I want to stress that this is not a particularly growth stock that will explode. But, a great company that you can consider adding to your portfolio. And perhaps accumulate more when short-term pessimism beats down its share price.
And in the meantime, collect some dividends yielding about 1.5% every year.
So, I’m definitely adding Marsh and McLennan stock to my watchlist.
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