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Morningstar | Marsh & McLennan Is Making a Big Bet With JLT

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 some exposure to the insurance pricing cycle. We think Marsh & McLennan’s future will largely resemble its past, with moderate growth and attractive profitability.In 2018, Marsh & McLennan saw a modest headwind turn into a modest tailwind. Because Marsh & McLennan generally takes a percentage of premium amounts as commission, it is exposed to the direction of the insurance pricing cycle. Reinsurance pricing had been very weak in recent years, and primary pricing had started to follow suit. However, the outsize level of catastrophe losses in the back half of 2017 provided a prompt to industry pricing. Prices moved up modestly, but the increases were lower than the industry has seen in the past after large catastrophe losses. In our view, the industry remains well-capitalized and competitive, which could put a bit of a lid on price increases. But with another flurry of catastrophe losses in 2018, this tailwind could persist into 2019.In September, Marsh & McLennan announced it will acquire Jardine Lloyd Thompson Group plc, 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 the company completed a multi-billion-dollar deal. However, we think the deal makes strategic sense and the valuation looks reasonable, assuming Marsh & McLennan can achieve the expected cost synergies. Jardine’s brokerage business increases Marsh & McLennan’s specialty exposure as well as bulking out its presence in the U.K., Australia, and emerging markets. Management pointed to accelerating growth as a key consideration behind the deal. We like that Marsh & McLennan is focused on expanding its brokerage operations, which we view as the heart of its narrow moat, and the company doesn’t look to be expanding outside of its circle of competence to achieve this growth.