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Morningstar | Marsh's strategy of diversified operations has been validated by peers' move in the same direction.

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. Its individual consulting operations are lumpier, but rarely move in tandem. As such, we think Marsh & McLennan’s future will largely resemble its past, with moderate growth and attractive profitability.Coming into 2018, Marsh & McLennan will likely see 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 has 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 appear to be up modestly, but the increases are 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. As a result, we expect pricing to be only a minor tailwind for Marsh & McLennan in the near term.Marsh & McLennan has made notable strides in improving its profitability in recent years, mostly by culling low-margin business on the consulting side. This improvement is especially notable given the relatively dearth of organic top line improvement over the same period. However, given the business model is employee-driven to a large extent and compensation is by far the largest expense item, we think there are some limitations on long-term margins. Excluding amortization expense, Marsh & McLennan’s margins are now roughly on par with its closest peer Aon, suggesting that any further gains are likely to be modest.