Marsh & McLennan Companies, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Marsh & McLennan Companies, Inc. is a global professional services firm, organizing its business into two segments: Risk and Insurance Services and Consulting. The firm provides its services to clients worldwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

MMC’s business is deeply rooted in its ability to deliver and integrate expert knowledge and data to its clients. This specialization, while creating some degree of stickiness, isn’t as insurmountable as a structural moat.

Business Overview and Moat Assessment

Marsh & McLennan Companies, Inc. (MMC) operates across two primary segments:

Risk and Insurance Services: This segment encompasses Marsh, the world’s leading insurance broker, as well as Guy Carpenter, which provides reinsurance and capital advisory services to other insurers. The brokerage businesses act as intermediaries, connecting insurance buyers and sellers, which are frequently larger companies requiring coverage in specialized areas. This can include a range of solutions, from creating employee benefits packages and offering solutions to highly complex areas of commercial and cyber risk.

This segment derives its moat from high switching costs and specialized service expertise. Clients often rely heavily on the data and expertise they gain to help make more informed decisions for highly complex and highly scrutinized areas of their business. Also given the size and complexity of the coverage, clients have incentives to stay with the brokers they know. It’s not necessarily the lowest-cost service, but it is one which reduces risk for its clients. It also has a good global scale, which gives it an advantage.

Consulting: This segment comprises Mercer and Oliver Wyman Group. Mercer focuses on providing human resources, health, and wealth advice and services, while Oliver Wyman Group offers strategy and economic analysis, and specialized financial services, often to private equity clients. The consulting segment is engaged by both public and private entities alike. This segment’s expertise is often highly specialized as well.

While the consulting segment leverages intellectual capital and high switching costs, its moat is less defined than the risk and insurance services business. This is primarily because consulting is generally more project-based than continuous, recurring services.

Moat Rating:

I’ve given MMC a moat rating of 3 out of 5.

Justification: The company’s moat stems from several key areas. The company has a highly valuable distribution channel in its insurance business. They have a lot of customers that they serve who have high switching costs given how deeply embedded the firm is into their client’s businesses. The same is true on the consulting side. This moat can persist as long as the services and the expertise they offer remain hard to replicate or replicate quickly. This provides some level of pricing power. However, competitors can start or grow in all the areas they operate in so they are not exactly near-monopolies. Thus it is a narrow, but strong moat.

Risks to the Moat and Business Resilience:

Increased competition in insurance brokerage: There’s always a risk of smaller brokers growing in scale and providing equivalent levels of expertise at lower costs. This would put pressure on premium rates and decrease profitability.
Increased reliance on new technology: If companies get good at using new tools to analyze their needs, they will need brokers to a lesser extent.
Downturn in the market: In a market downturn, companies and governments cut back spending. This can impact both their Risk and Insurance business as well as consulting. The risk is especially important in their Consulting part of the business as projects are usually cut back very quickly.
Management turnover: Clients rely on the expertise of the management, and a turnover in personnel could potentially threaten client relationships. The company needs to ensure it has a strong team that remains consistent.
Regulation and Geopolitical Risk: A significant portion of their business is exposed to risk of regulatory changes. The regulations on the insurance and investment industries are constantly changing. They also operate in many countries, where regulations may change and influence their business. Geopolitical risks and uncertainties in Europe, Middle East and Africa (EMEA), and Russia and Ukraine can also have a negative impact.

While some of the risks may be detrimental, it is unlikely that it will permanently impede on their operations. They have a solid business model and have generally been good at executing, which should lead to resilience.

Detailed Financial Overview:

Looking at MMC’s latest financial reports and earnings call transcripts, I’ve found the following:

Revenues:

The company has two revenue segments: Risk and Insurance Services, and Consulting. In 2023, Insurance services contributed approximately 67% of the revenues and consulting 33%.
Insurance revenue is predominantly commission based (that is, they get a cut of each deal done). Consulting is predominantly fee based, with some projects based on a fixed fee.
Revenues are quite diversified across geographies, with all segments seeing similar revenue distribution across the globe.

There has been a general trend of revenue growth for the company, albeit there are fluctuations with each segment depending on external factors and their internal operations.
The company’s insurance business has been relatively resistant to downturns. The consulting division’s revenue has been more volatile and tied to more macro forces.

Profitability:

They have good profitability overall. Risk and Insurance Services has margins in the high 20s to low 30s. Consulting has around the high teens. Overall they have a good weighted average operating profit margin of around 20% at the company level.
Both their businesses are relatively high margin. The consulting segment is more sensitive to expenses as its primary input is human capital.
The firm’s operating income grew 12% in the most recent quarter, exceeding expectations.

Balance Sheet:

The company maintains a healthy balance sheet, with the most prominent things being its goodwill and intangibles as well as investment assets. The debt to equity ratio can be up to 70%, and that can make it a bit risky.

They are quite good at generating cash and has good liquidity, meaning they should be able to navigate future down turns and acquire new businesses.
They have a large amount of debt. But the weighted average cost of debt is very low, so the company is generating a profit on their debts by investing in assets with higher yields.

Recent Concerns, Controversies, and Management’s Responses:

There is an increasing focus from investors regarding the company’s growth strategy. The company wants to aggressively target growth in its existing business and through M&A.
The recent earnings call saw a lot of questions regarding organic growth, and how much is a result of acquisitions. Management claims it’s still strong in all the segments, and that it’s doing its best to grow profitably.
Management seems very confident on the underlying economics of the company, which it believes remains very strong. The main worry is how they perform through downturns.
A continued focus on cost savings and maintaining margins as more revenue comes from the insurance sector.
The company has been actively hiring in cybersecurity and artificial intelligence in the past quarter. They are also trying to leverage these fields to develop new processes and products for the company and their clients.

Understandability:

I’m rating MMC’s understandability at 3 out of 5.

Justification: MMC’s operations are complex. Its business involves multiple different sectors which requires deeper knowledge. While the basic business of insurance and investment is straightforward, a detailed analysis requires more knowledge. The company is also global with many geographic and structural intricacies. This brings down the understandability to a 3.

Balance Sheet Health:

I am giving the balance sheet a rating of 4 out of 5.

Justification: The company’s balance sheet is reasonably healthy but has a high amount of goodwill and intangibles which can pose a risk. It also has a high amount of debt. This is not inherently bad and is part of their business model. However, it does show that it can increase risk in downturns, given their exposure to debt and economic conditions. At the same time the company has good liquidity and a proven record of profitability and cash flow, which gives it a decent cushion. These result in a score of 4.

## The Essays of Warren Buffett (No ticker) | Moat: N/A | Understandability: 5 / 5 | Balance Sheet Health: N/A This is a compilation of essays by Warren Buffett, Chairman and CEO of Berkshire Hathaway, which cover various business and investing principles, particularly in the context of a corporate setting.

This book has nothing to do with any specific financial operations of a corporation, but rather a view into an investment philosophy that can assist others.

Book Overview and Moat Assessment

This book is a collection of essays and letters by Warren Buffett, where he discusses his investment approach and thinking. He advocates a long-term perspective, focusing on understanding businesses rather than chasing market trends. He values companies with durable competitive advantages, which he calls “moats.”
This is not a company but rather an investment philosophy. So a traditional moat rating does not apply here.
There are no financials, nor do any traditional risks apply to the content. There are also no explicit market trends to observe or management to discuss the book.
The text is written to help investors and business managers alike.

Understandability:

I’m rating the understandability of the book at 5 out of 5.

Justification: The concepts are written clearly, in plain English, and with many real-life examples. This makes it very easy to understand and apply in daily life. Anyone with a high-school degree should be able to understand the concepts presented in this book.

Balance Sheet Health:

A balance sheet rating for this book is not applicable since it is a compilation of ideas and not a company.

Common Stocks and Uncommon Profits by Philip Fisher | Moat: N/A | Understandability: 5 / 5 | Balance Sheet Health: N/A This book details the investment philosophy of Philip Fisher, with a major emphasis on how to select growth stocks by examining a company’s fundamentals and management practices.

This is not a company but rather a classic investment book. Thus, traditional moat or financial metrics do not apply here.

Book Overview and Moat Assessment

This book is one of the most influential books of all time, and details how investors can find stocks that can generate large growth. He focuses on “scuttlebutt”, that is, digging deeper into a company by understanding its business, industry, suppliers, and management.
This is not a company, and as such a moat rating is not applicable.
The main emphasis is to do lots of research into a company before investing.
The book explains what is most important to find a great growth investment.
There are no financials, nor do any traditional risks apply to the content. There are also no explicit market trends to observe or management to discuss the book.

Understandability:

I’m rating the understandability of the book at 5 out of 5.

Justification: The book is written in an easy and simple way. Any person should be able to understand the text. There are some complex themes, but the book does a good job at making them understandable by using clear and easy examples.

Balance Sheet Health:

A balance sheet rating for this book is not applicable since it is a compilation of ideas and not a company.

## The Intelligent Investor by Benjamin Graham | Moat: N/A | Understandability: 3 / 5 | Balance Sheet Health: N/A

This is a comprehensive guide on value investing by Benjamin Graham, emphasizing the importance of understanding financials, a focus on long-term value creation, and the idea of a “margin of safety”.

This is not a company but rather one of the most important books on value investing. As such, the concepts do not apply to any kind of traditional moat or financial analysis.

Book Overview and Moat Assessment

This book lays out the investment philosophy of Benjamin Graham, the father of value investing. He explains what it takes to make prudent investment decisions, avoiding speculation and focusing on value. He emphasizes a margin of safety- buying securities below their intrinsic value to protect capital and ensure gains.
This is not a company, so a traditional moat rating does not apply.
The book is more focused on the mindset required to do well in the markets, rather than a specific trading strategy.
The book stresses understanding the market, the company, and one’s own emotions to avoid the pitfalls of speculative investments.
There are no financials, nor do any traditional risks apply to the content. There are also no explicit market trends to observe or management to discuss the book.

Understandability:

I’m rating the understandability of the book at 3 out of 5.

Justification: The core concepts are not complex, but the text at times can be difficult to read and understand due to the age of the book. It references a lot of financial instruments and concepts that might need prior research. The book uses many examples, but also a good level of understanding is needed before properly applying the concepts presented here.

Balance Sheet Health:

A balance sheet rating for this book is not applicable since it is a compilation of ideas and not a company.

## The Little Book That Builds Wealth by Pat Dorsey | Moat: N/A | Understandability: 4 / 5 | Balance Sheet Health: N/A

This is a book on how to identify companies with economic moats and how to use that to find great long-term investments.

This is not a company, but rather a modern take on investment philosophy. It uses the concept of ‘moats’ to illustrate different ways to find companies with sustainable competitive advantages.

Book Overview and Moat Assessment

This book expands on the concept of economic moats popularized by Warren Buffett and demonstrates how to use it to create a portfolio of wonderful businesses.
It’s not a company, so no traditional moat rating can be assigned.
The author explains in detail what moat means and its importance in choosing investments, and that the best businesses are the ones who can maintain superior returns on invested capital for years.
There are no financials, nor do any traditional risks apply to the content. There are also no explicit market trends to observe or management to discuss the book.

Understandability:

I’m rating the understandability of the book at 4 out of 5.

Justification: The concepts are simple and easy to understand, and the author presents them in a manner that is easy to follow. At times certain concepts might require more attention. The writing is great and has many examples. That makes it quite easy for any investor to understand the content.

Balance Sheet Health:

A balance sheet rating for this book is not applicable since it is a compilation of ideas and not a company.