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Marsh's Moat Based on Scale Advantages, Sticky Client Base

The ACA creates opportunities for insurance brokers, with firms like Marsh positioned to benefit the most.

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Despite ongoing excess capacity issues in the reinsurance market, which continues to weigh on pricing, narrow-moat  Marsh & McLennan (MMC) posted solid third-quarter results that included modest margin expansion. Operating income at the insurance broker rose 7% year over year to $404 million, with net income increasing to $253 million (or $0.45 per share) from $241 million (or $0.44 per share) in the year-ago period. All of this was driven by a 3% increase in revenue, which reached $1.2 billion during the third quarter. While revenue growth for the first nine months remained largely in line with our projections, we believe an increase in intrinsic value for Marsh is warranted, given the growth potential that exists in its health-care consulting operations.

Demand for health-care consulting services continued to play out during the quarter as clients prepared for the rollout of the private health-care exchanges under the Affordable Care Act. Marsh continues to see a decent pipeline of clients showing interest in its consulting services. In our view, the challenges that companies face under ACA create opportunities for the insurance brokers, with companies like Marsh, which has the expertise and network available to provide client-specific solutions, seeing the biggest benefit. Although the stock trades above our fair value estimate, we continue to believe that Marsh's overall fundamentals remain attractive, with the company well positioned for additional growth.

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Vincent Lui does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.