MMC
#Thank you, very much
Good morning, and thank you for joining us to discuss our second quarter results reported earlier today
I'm Dan <UNK>, President and CEO of Marsh & McLennan Companies
Joining me on the call today is our <UNK> <UNK>, our CFO; and the CEOs of our businesses <UNK> <UNK> of Marsh; <UNK> <UNK> of Guy Carpenter; <UNK> <UNK> of Mercer; and Scott McDonald of Oliver Wyman
Also with us this morning is Dan Farrell of Investor Relations
Before we begin, I would like to thank <UNK> Zaffino for his many contributions to both Marsh and Guy Carpenter over his 15 plus years with the company
We wish <UNK> continued success and look forward to working with him as he moves on to the next phase of his career
Marsh & McLennan has a deep bench of leadership talent
We are constantly looking to invest and add capabilities to our organization
Talent is a key area of focus in this regard, and we were both opportunistic and strategic when we acquired talent
Last year, we added <UNK> <UNK> and <UNK> <UNK> to our organization, two experienced and highly regarded industry executes
I've worked with <UNK> for almost 20 years, and I can tell you that his transition into the Marsh's CEO role will be seamless
Over the past year, he's been a key part of setting strategy as President of Marsh, as well as being a member of the MMC Executive Committee
<UNK> has more than 30 years of insurance industry experience and provides a thoughtful perspective on the future of our industry and potential growth opportunities
He has a proven track record of strong leadership, success in building client relationships, and inspiring colleagues
Since he joined Marsh, <UNK> has been heavily focused on client service and retention, and these will continue to be key areas of emphasis going forward
I'm also happy to have <UNK> <UNK>, the CEO of Guy Carpenter, joined the MMC Executive Committee
Over the past year, his leadership has had a meaningful impact on Guy Carpenter's already strong record of performance
Throughout their carriers, <UNK> and <UNK> have built strong relationships across the insurance value chain
While both have led successful large organizations, I believe their enthusiasm for improving the client experience sets them apart, and will benefit overall growth going forward
In addition, <UNK> and Scott continue to demonstrate tremendous leadership and have delivered impressive results at Mercer and Oliver Wyman
With these operating company heads, combined with the rest of our Executive Committee, I believe, we have the strongest leadership team in the industry
That said, the performance of our company goes well beyond senior management
Our success is driven by strong teams throughout the firm executing and making decisions where they matter most, close to our clients
While we invest for the future, we continue to emphasize the basics, delivering for clients every day, adding value and pursuing new opportunities with the sense of urgency and passion
We continue to invest in technology, digital, data and analytics to drive innovation and faster growth
In this regard, we've had several important announcements since last quarter, Mercer recently launched Mercer Digital an integrated business across health, wealth and career to better leverage the digital capabilities that have been built in the organization
Our data and technology combined with specialized Consulting expertise positions Mercer Digital to help organization's transition to a digital future while ensuring their work force thrives
As part of this initiative, Mercer announced Rohit Mehrotra will be taking a new role as CEO of Mercer Digital
Rohit came to MMC when we bought his fifth startup CPSG, that acquisition has performed well for us and we are pleased that he is taking a broader role in Mercer
Earlier this month, Mercer also announced an equity investment in PayScale a cloud based provider of compensation management software and real time salary data
Together, we will collaborate on new innovative compensation and workforce data products and solutions
Another important announcement was Marsh's hire of Sastry Durvasula as Chief Digital Officer and Chief Data and Analytics Officer
Sastry brings an in-depth knowledge of digital technologies and will oversee the strategic design, development and delivery of digital capabilities, data and analytics and client-facing technology
We also continue to broaden our participation in the technology and innovation landscape
For example, we recently added to our relationship with the private equity firm, Aquiline Capital Partners, by participating as one of the anchor investors in a new fund focused on early stage technology companies in insurance, as well as asset management, retirement and benefits
We will continue to invest capital to shift our mix of business to faster growing segments and geographies
These are just examples of some of the numerous partnerships, investments and strategic initiatives underway across our organization to position ourselves to thrive and shape the future
We talk about balance in many aspects of our strategy and philosophy
And the events of this quarter highlight another dimension of balance in how we operate MMC
While we continue to innovate and position for future long term growth, we remain focused on delivering today
This requires rigorous attention to the fundamentals and maintaining focus on the client
Technology advancements, increasing complexity and the pace of change in the world, represent significant challenges for our clients to address in the areas of risk, strategy and people
We are uniquely positioned to support them and help them succeed
Now let's turn to some highlights of our results
Our second quarter performance was solid and in line with our expectations
We produced consolidated underlying revenue growth of 3% with growth across all four operating companies
Operating income was up 5%, while adjusted operating income increased 7%
EPS was $0.96, up 7% and adjusted EPS rose 10% to $1. And on a consolidated basis, the adjusted operating margin improved 70 basis points
For the six months, underlying revenue growth was 3% and the consolidated adjusted margin expanded 70 basis points
EPS for the six month period grew 13% on a GAAP basis and 14% on an adjusted basis
Looking at Risk & Insurance Services, second quarter revenue was $1.9 billion with underlying growth of 2%
Adjusted operating income increased 9% to $535 million, with our margin expanding 110 basis points to 27.9%, the highest second quarter margin in 30 years
For the six month period, underlying revenue grew 3%, similar to the full year growth rate in 2015 and 2016. Adjusted operating income of $1.1 billion rose 10% and the adjusted margin also improved 110 basis points to 29.1%
In the Consulting segment, second quarter revenue was $1.6 billion, up 4% on an underlying basis
Adjusted operating income increased 3% in the quarter to $298 million
The margin of 18.7% was flat with the prior year
Similar to the first quarter, recent M&A activity impacted earnings
We anticipate improvement as the year progresses and expect Consulting to deliver solid earnings growth and margin expansion for 2017. In summary, we are pleased with the results for the first half of the year
For the full year 2017, we continue to expect underlying revenue growth within the 3% to 5% range that we have operated in for the past seven years, margin expansion in both operating segments and strong growth in adjusted EPS
With that, let me turn it over to <UNK>
Thanks, <UNK>
Operator, we're ready to go to Q&A
Question-and-Answer Session
Thanks, <UNK>
It's Dan, I'll just start a little bit by saying how thrilled I am that <UNK> is part of the team
And as you know, over the last several years, Marsh is doing well, so it's not crying out for massive amounts of change
But having said that, every business can be improved of – and I'm sure <UNK> will put his own mark on the organization and I'm looking forward to seeing the further developments as we go forward
But <UNK>, do you want to add a little bit of flavor to that?
So, basically some structural changes, some simplification and some emphasis on the client experience and client initiatives around retention
You have anything else, <UNK>?
Well, I think that pricing has put pressure on organic growth across the businesses for number of years now
I wouldn't look at the second quarter as being the start of the new trend driven by price or premium reductions
As you were just saying yourself, yeah, looking at the first half of the year, Marsh was at a 3%, which is consistent with where they were last year and the year before and so that's probably a more appropriate way to look at that
But what do you see in rates and premium, Scott?
Thanks, Scott
Next question please
Okay
I wouldn't overemphasize shifts of business, I mean clearly some things move around quarter-by-quarter, I wouldn't take too much into it
As we've said a couple of times and as we've done over the last few years, the back half of the year, particularly the fourth quarter usually is a bit stronger for us on an overall business basis, so I will look at it that way
We're happy with our first half results in general, not only on a growth basis, but also we're getting growth from acquisitions, some of which we're giving up in FX, but there is growth in acquisitions which is going to benefit us in future years
We like the fact that our adjusted operating income was reasonably well up given the growth rate and as well as EPS, margin expansion hit our expectations
So overall, we're happy with the first six months and we're looking forward to the next six months
In terms of MMA, we don't breakout MMA other than to say they had a nice quarter and the basic thing that we said all the way starting back in 2009 was that we expected MMA to be able to outgrow Marsh and all I'll say is that, yes, they have been doing that and they did it in the second quarter as well
And generally, I mean when I look at the RIS segment, we're in a pretty modest GDP world with basic rate levels in the P&C sector in almost all geographies and in almost all lines of business going down
Now going down may be at pace, it's not quite as steep as it was last year, but it's still going down
And so when I speak about margins, one way to look at it is, we would have liked to grow Marsh more in the second quarter than we did and operate expense controls throughout the year and recognizing that we are in this kind of lower growth environment and so that's the one of the reasons why the margin may have passed a little bit more than what we originally expected because we would have thought that we could have grown a little bit more than 2%, and we're pretty comfortable that 2% is not the new reality, but that we will have quarters, every once in a while, that look like that
Just like we'll have some quarters every once in a while like last quarter where Marsh grew 5%
It didn't make 5% the new world, 2% is not necessarily the new world either
And so, our expense controls tend to be multi-quarter, right, even a multi-year, and so there is – that's why the margin may move around a little bit
Yeah, I'll do a little and then I'll hand off to <UNK> to give you a little bit more
But basically it's not property and casualty, it is property
And basically the way to look at it is, there is a major insurance company Allianz that had always wanted to participate in a more significant way in United States property, but they were – they felt they had enough cash
And so that was an inhibitor of greater levels of participations
And Marsh very creatively sought through, well, how can we marry up their appetite with alternative capital, and sought alternative capital using a high degree of Marsh data and Marsh analytics to create more of a portfolio look to the property portfolio that Marsh has
And that was a combination between Allianz and Nephila, which at the end result means that they're willing to write virtually every property account of Marsh and they're willing to write that at a guaranteed discount to the client of 7.5% off of any other markets pricing for the balance of the placement
And so it's clearly a win for the client, it's a win for the market because that certainly bringing a market like Allianz to the forefront with alternative capital backing is a big positive and it's another example of Marsh innovation
Now I haven't checked in lately as to how often this is doing et cetera
But, <UNK>, do you want to add something to that?
Anything else, <UNK>?
Well, a couple of things
No, there's no update in terms of the FCA that that investigation is ongoing and we're cooperating fully
We imagine it will take quite a while for them to work through their analysis and come to some sort of determinations, but it's really all that I'll say on that at that time
Now in terms of the FCA review of the wholesale market, they do that on a periodic basis
And I don't see any connectivity between the FCA review which may entail a review of facilities as well as – with the investigation that's going on in the aviation sector
It's a good question, and it's something that we wrestle with as a leadership team
I mean, at the end, clearly, we are finding ways to operate the business in a more efficient manner and improve our productivity over time
And we've done that for a number of years
I mean, just to remind everyone, we're in the – 2017 is our 10th year of margin expansion
And this hasn't been a little bit of expansion
This has been significant consistent levels of expansion over time
We are in a more for less business
Our job is to deliver more value to our clients every year at fundamentally better levels of efficiency within our own organization
So that search for a smarter way, that search for additional operational efficiency, that never ends
And when I look into the future, whether it's robotics, whether it's deep learning, AI, et cetera, I think there'll be all kinds of avenues for us to become a more efficient organization as we go forward
So, I don't think the margin story is different
Now, do I think the margin will expand typically more when we have a better top line than 3%? Yes
Do I think that 13% adjusted EPS growth over the long term will be far easier to achieve with a better top line? Yes
So, we are doing everything possible to position the company through mix of business, through acquisition strategy, through organic investment on an ongoing basis to spur growth into the future regardless of market conditions, because our anticipation is the market's going to be similar to where it is today
And so, and anything to the upside, I think, would be a benefit to us
In terms of margins, in general, I can tell you, when we're around the leadership table, margin doesn't come up
Earnings growth comes up, revenue growth comes up, acquisitions come up, but actually, we think that margin expansion is not a strategy per se, it's an outcome of how we run the business properly
And really, one of the core philosophies of the company is that revenue growth should exceed expense growth almost every quarter and certainly every year
And so, when we look at it on that basis, it's just a natural outcome
<UNK> - Credit Suisse Securities (USA) LLC Thank you very much for the answer
And maybe, it's a great question and no, it's not a client response, although it is definitely the clients at the table in our discussions and thinking through it as to how we can improve the client experience
A factor of me being in the business for more than 35 years is I've seen other changes
As an example, I remember when companies thought that email was a proprietary value, or I remember when people were asked about well what is their Internet strategy, or actually in the beginning, what was your world wide web strategy, okay
So, ultimately the way I look at it is, all companies that expect to be successful in the future will be digital on some basis or another
And so, I don't believe that this is necessarily a next year thing
I think we're positioning the company to be successful long into the future
When we consider digital, we really look across three dimensions
It's not just about growth, it's about growth, operational efficiency and clearly people who work for our organization
And so, in terms of growth, it's really about the client experience and the robustness of our offerings and some of our acquisition strategy
So, you look at Thomsons or PayScale Equity Investment or Torrent or Dovetail
They're one way or the other all digital players
If you look at Mercer 365, it's a technology play, it's a user experience play
In terms of efficiency, we are beginning to experiment
Now I would emphasize experiment
You're not going to see early term results for bots or robotics, automation, machine learning, that kind of stuff
Although there are parts of our business where we will increasingly look to utilize that kind of capability and see how we can become more efficient
And in terms of people, I mean, Sastry and Rohit are just two examples
There's many others of how we're adding new skills to the organization and we're hiring more data scientists, more developers and this is going to be an ongoing process
But I just wanted to highlight that for us, the battle has been joined
So I'll start and then I'll hand off to <UNK>
One, I could say that that we're really as an organization very pleased with Guy Carpenter and that's not a short-term phenomena
Guy Carpenter has grown underlying revenue 25 over the last 26 quarters, best-in-class growth by far
And ultimately has built some share and wins a lot more than it loses
And so from that standpoint, we're proud of the organization
And we're very excited about adding somebody like <UNK> to the mix, top tier, reinsurance executive, seasoned, smell of the market on them and so I expect if that Guy Carpenter will continue to perform super well relative to its peer group over a long stretch of time of <UNK>
With that lead up what could you possibly say?
Thank you
Thank you
Next question, operator
Yeah, a couple of things, one, it's not the acquisitions of clients that is impacting their top or bottom line, it's really acquisitions that Mercer made really in December that has created a short-term hiccup to earnings and an impact on margins
And so, that will sought itself out as growth begins to come in
And so, it's really – it's not – I mean, at the end, we think that there's been pretty consistent strong levels of growth both in our Oliver Wyman and Mercer
And when we look at the back half of the year, we really don't give margin expectations or operating income expectations
We do believe we'll have solid earnings growth in Consulting for the year and we will have margin expansion for the year
Now, what that is, I mean, at the end, when I look at Consulting's margins, I mean, in the last five years, they're up 680 basis points
And so given the first half of the year, I don't think you can have a dramatic increase in margins consistent with 680 basis points over a five year period
But having said that, we do expect to see margin expansion in the back half
I mean, overall, we do – we expect the company, particularly, building momentum through the back half of the year with usually a stronger fourth and third, but we don't really have an annual goal with regard to adjusted EPS or margin expansion
We expect this to be a good solid year
I mean, when I – when we started the year, I was asked the question about 2017 versus 2016 in the macro environment and I pretty much said I thought 2017 look a lot like 2016 and still believe that is kind of the case
We're still in that kind of environment
Generally slow growth around the world at least modest level of growth, some P&C headwinds, low interest rates, business confidence that descent but fluctuates with the geopolitical cycle
So we're in – we remain in the grinded out years and we expect to have good performance in that
But we don't expect it to be one of these knock your lights out kind of thing, I mean I know that we've grown I think 14% adjusted EPS through the first six months
But really if you back out the accounting benefit of – on the compensation change is really 9%
And so I think in – we feel comfortable with that kind of level, at the level of growth that we're performing in the first half
We're expecting a little bit better in the second half and we're happy that we're now in it
Yeah, I'll hand over to <UNK> in a second
But the Defined Benefit business, it's a terrific business, but it's not a growth business
If you think about is there a new Defined Benefit formation with companies and startups, et cetera, no
I mean basically companies today in almost every market not exclusively but certainly in the United States and in other major markets, lean heavily in the favor of Defined Contribution over Defined Benefit
And Mercer has done a really wonderful job over a number of years extracting value from our Defined Benefit practice
And – but <UNK>, you want to give us some more on that?
Do you have anything else, Josh?
Well, okay, define the long term
I mean clearly Defined Benefit and pension plans have a long way to run, right
These are 25 to 50 year programs as people live longer as how they operate
So, it is not a quickly declining business, and we've had many times where we have grown, but largely the growth tends to be project related work as opposed to growth in the basic business
So I would put in a category of low levels of negative growth or low levels of positive growth quarter-by-quarter but on a declining trend
Okay
Next question, please
There were a couple of unusual things, but <UNK>, you want to talk about that?
That's right
I mean the Latin America is still critical market for us, when we look over a multiyear basis, it's been our fastest growing region
We don't break out geographies, but Consulting had a decent quarter in Latin America, so there is nothing fundamentally wrong
There is a – obviously there is a number of issues that individual countries are working through, but we like our positioning in Latin America, we would expect that it would return to better growth patterns in the future
Good morning
I don't think we're going to comment on the growth level, whether it's going to go up 10 times in the next 10 years, I think all you guys have had the experience of the exchanges to think about before we start hitting 10 times growth on any part of any of our Consulting or Risk businesses
Clearly cyber is here to stay, and around the world, tax are becoming more advanced, and therefore defenses have to be more advanced, and insurance is a good – is basically for a lot of companies, it's a package of yes, you get some risk transferred, but you also get some comparative considerations as capital providers seeking to project their capital are able to advise on best practices and some of the things that they're seeing with otherwise competing markets
And so, from that standpoint, there is a risk management quality to the insurance offering that is very beneficial to clients
And as you see around the world higher levels of disclosure requirements on breaches, I think you'll end up seeing insurance being one of the mitigants to that, but <UNK>, do you want to talk about our cyber practice a bit and what we're seeing?
Yeah, one thing I was looking at recently and which I find interesting anyway, because you hear a lot about the insurance market, and many companies just sort of dipping their toe into cyber and concerns about accumulation risk and cyber hurricane et cetera
So let's take your $3 billion premium level, and say what's a typical rate online for cyber, it typically is less than 1%
So if you just run the math on that, there are something like $300 billion of limit that has been provided against that $3 billion of premium and in that context there is no dipping the toe in the water
There are many markets in cyber in a significant way and it's probably the growth opportunity in property and casualty
Next question please
I mean rates are geared against losses in competitive environment
There is lots of capital providers, lots of insurance companies, so there will always be some downward pressure
There's better management teams, better data and analytics and so there is not naïve underwriting like you may have seen in the 1980s or 1990s
And so there is probably a tighter range of outcomes, but it really depends on loss activity
If the loss activity comes in, it will put pressure on rates
We are seeing on the reinsurance side some slowing down, or harder to place lines of business and certainly not anything approaching a hard market in any way, shape or form on reinsurance
And usually you see reinsurance tighten before primary tightens
And so we've got a way to go here before we see that
I mean when we look at the last let's say year, maybe even two years, the UK market and the London market in particular has the deepest downdrafts in rating levels and so that is the most competitive market in the world from a price reduction standpoint
And so it's a tough place to do business these days
Anything else, <UNK>?
<UNK>, you want to take that? So basically to rephrase it, it's like, is cat bonds volume fueling 4%
Sure
Well, just a little bit
One, it's an overall review of a marketplace and the dynamics of a marketplace
Then it's started out broadly on asset management including investment consultants and now it's narrowed a little bit to investment consultants in the level of concentration that there are with the largest investment consultants and what that pertains to and the potential conflicts that that could arise from that
And so, we're very much cooperating with the review, and it's obviously an important business to us, both investment consulting and investment management on a delegated basis
But, <UNK>, you want to talk a little bit about our business?
Thanks, <UNK>
So I think we have time, operator, for one more question
The acquisition pipeline is good
I mean we are – we look at a lot of different things, not from a detailed due diligence basis
So we've got good peripheral vision, we're live in the marketplace, so we'd have a good look across both RIS and Consulting
And I would say when we look at our pipeline, looks pretty good
We over the last three years, have spent about $1 billion in transaction value per year
It's too early to say, it's only through the first six months we've had a pretty active first six months of the year and where we look at our pipeline
And a lot these things take a long time in terms of gestation period
But so when I look at the pipeline now, this year looks pretty good and it even looks pretty good next year
We've I'm sure certain things that we're looking on right now, would take a little bit longer time
Our focus is generally on faster growing businesses and businesses that can improve our capabilities
Wouldn't mind every once in a while seems something right up the alley of our strong suit where we get some synergy and some decent earnings growth out of it through some expense saves, but our overall acquisition strategy is geared towards faster growing businesses
Well, I don't know if there is a wholesale business anymore
I mean, clearly there is specialty placement businesses that have done quite well and they're good businesses
If you ask me if I would have preferred that we didn't exit that kind of specialty placement business
Yeah, the answer would be, I would prefer that we would have been still in that business, but when we go back in, it's a different kind of question
I mean I think they've done a very nice job, there is some good companies out there, but we're an awfully big company and we would have wanted to do something in a real minor way on an a structural basis like that
But fundamentally, we look at the wholesale business, so called wholesale business and we think they've done a nice job building out their specialties and their capabilities over a long period of time
Okay
Thank you very much, Mindy
And I'd like to just thank everybody for joining us on the call this morning, and I'd especially like to thank our clients for their continued support in our colleagues for their hard work and dedication in serving them
