威達信集團 (MMC) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the MMC's conference call.

Today's call is being recorded.

Second-quarter 2009 financial results and supplemental information were issued earlier this morning, and they are available on the MMC's website at www.mmc.com.

Before we begin, I would like to remind you that remarks made today may include statements relating to future events or results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to inherent risks and uncertainties.

In particular, references during this call to anticipated or expected results of operations for 2009 or subsequent periods are forward-looking statements.

And MMC's actual results may be affected by a variety of factors.

Please refer to MMC's most recent SEC filings, as well as the Company's earnings release, which are available on the MMC website, for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

At this time, I will now turn the conference over to Brian Duperreault, President and CEO of MMC.

Please go ahead, sir.

Thank you.

Good morning and thanks for joining us to discuss our second-quarter results reported earlier today.

I am Brian Duperreault, President and CEO of MMC.

Joining me in presenting on the call today is Vanessa Wittman, our CFO.

I would also like to welcome our operating company CEOs to today's call -- Dan Glaser of Marsh; Peter Zaffino of Guy Carpenter; Michele Burns of Mercer; John Drzik of Oliver Wyman; and Ben Allen of Kroll.

Also with us is Mike Bischoff, our Head of Investor Relations.

First, I will make some brief comments on each of our businesses and then turn it over to Vanessa to provide additional information regarding our financial results.

Then, we would be more than happy to take your questions.

Overall, we had a great quarter, in light of the difficult economic environment.

Most notably, we saw another significant improvement in profitability in the Risk & Insurance Services segment.

This has been a continuing trend since the first quarter of 2008.

The main driver for the segment's increase in profitability is continued improvement at Marsh.

In the current quarter, Marsh's underlying revenue was flat, which we consider a reasonable outcome in this environment.

In certain countries where the economic slowdown was not as severe, we saw double-digit revenue growth.

In other markets, revenue was flat or slightly down due to the economic climate.

Overall, we were pleased with the revenue levels we saw in the second quarter.

That, coupled with expense discipline, led to a marked improvement in Marsh's profitability.

And this was achieved despite the continuing soft insurance marketplace.

Not only is Marsh more profitable today, but it is a stronger company.

As we have discussed in previous quarters, Dan and his team have reengineered the Marsh business over the past 18 months, streamlining the organizational structure while keeping a sharp eye on expenses.

Today's Marsh is better organized, with stronger management both at the senior leadership level, as well as in the field.

In the second quarter, Marsh continued to produce substantial amounts of new business.

In the US, new placement hubs are leading to improved transactional capabilities.

And by segmenting clients, Marsh is now delivering improved service more efficiently.

Marsh is also balancing expense management with the opportunity to bring in talent at appropriate levels and for new initiatives such as the Marsh & McLennan Agency.

While reducing staff levels since the start of 2008, Marsh also hired about 150 client-facing Managing Directors and Senior Vice Presidents.

This redeployment of resources is another element of Marsh's reengingeering.

Going forward, continued operational improvements and initiatives have positioned Marsh for further profitability growth and expansion.

Guy Carpenter also had an excellent quarter.

Underlying revenue increased 11%, fueled by increased new business.

We have seen strong new business at Carpenter each of the last four quarters.

As a result of the strong revenue growth and cost reduction, Carpenter saw a significant increase in profitability.

During the quarter, Carpenter made significant hires to its executive and sales teams.

These new colleagues bring a wealth of skills to the firm in the areas of analytics, business development and international experience.

Finally, we are extremely pleased with the acquisition and integration of Collins, which further strengthens Carpenter's specialty capabilities and diversifies its position in North America.

The improved margin for the Risk & Insurance Services segment over the past year is a clear indicator of the significant improvement in profitability.

Over the trailing four quarters, adjusted operating margin for the segment increased to 16.6% from 10.3% a year ago.

On our last earnings call, we indicated our adjusted operating margin target for this year was 17%.

Now, recognizing Marsh and Carpenter's excellent performance in the quarter, combined with our outlook for the remainder of the year, we are raising our target margin for the Risk & Insurance Services segment to 18% for 2009.

Obviously, this is a marked improvement from our margin of 13.3% in 2008 and represents a 300 basis point margin expansion for the second half of the year.

Turning to our Consulting segment, recessionary conditions continue to affect both Mercer and Oliver Wyman, but to varying degrees.

Mercer delivered a respectable performance in the current environment, with strong expense control offset by a modest revenue decline.

Profitability was negatively impacted by foreign exchange, as well as an increase in professional liability costs.

Given the deteriorating economy at the end of last year, Mercer's management team started 2009 knowing the road ahead would be a difficult one.

Accordingly, they increased expense reductions to protect profitability.

They calibrated their operations to the environment and implemented increasingly aggressive expense reduction initiatives in each of the last three quarters.

For the first six months, Mercer has held its ground on revenue in its two largest practices, Retirement and Health & Benefits.

Revenue was flat and up 1% in these areas, respectively.

The investment businesses, also grew 4% during the first half.

For Oliver Wyman, the operating environment continues to be the most challenging one they have faced in years.

The softness in demand has varied by industry group.

Financial services, Oliver Wyman's largest practice, saw a double-digit decline in revenue in the second half of 2008 due to the financial crisis.

In the first half of this year, the year-over-year decline moderated to middle single digits.

Conversely, demand for our Manufacturing, Transportation & Energy Group held up well through 2008, but is down over the last two quarters.

Where appropriate and necessary, John and his team have reduced consultant capacity and discretionary expenses since the beginning of the year.

As a result, Oliver Wyman's profitability in the second quarter significantly improved compared with the first quarter.

Therefore, we feel the first quarter represented the bottom of the cycle for Oliver Wyman's profitability.

And finally, Kroll.

A year ago, we determined that there were several businesses that did not fit into Kroll's long-term business strategy.

Late last year, we divested the Corporate Advisory and Restructuring business, and in May of this year we sold Kroll's Government Services business.

This simplifies Kroll's business, in keeping with the strategy we announced a year ago.

In closing, let me say that I'm pleased and encouraged by the progress that this senior leadership team has made at MMC.

In 2008, we focused on correcting several internal issues.

These took considerable time and effort to repair and are now largely behind us.

In 2009, we are contending with a challenging external operating environment that has tested us for nearly a year.

Throughout MMC, we have made the changes necessary to deal with the recession and, on the whole, we are not only weathering the storm, but in many areas performing well.

We have implemented initiatives in each of our businesses that have increased efficiencies and leave us well positioned for future growth.

And we are excited about MMC's long-term prospects.

With that, I will turn it over to Vanessa.

Thank you, Brian, and good morning, everyone.

In the second quarter, we continued to face significant economic headwinds, including declines in short-term interest rates, continued investment losses and the impact of foreign exchange.

Before I move to our operating results, let me cover the Kroll goodwill impairment.

In the second quarter, the sale of Kroll's Government Services business triggered a valuation review of Kroll.

This review resulted in a non-cash charge of $315 million or $0.60 per share.

We will be completing the step two phase of the assessment in the third quarter, which is also when we routinely evaluate the goodwill of all of MMC's operations.

There is no tax benefit relating to this charge, nor any impact on MMC's cash flows or tangible equity.

Nor is there any consequence to outstanding debt covenants.

Now let's turn to MMC's results on an adjusted basis, which we believe are more indicative of our core operating performance this quarter.

In the second quarter, MMC's adjusted EPS was $0.33.

This compares with $0.39 last year.

Kroll Government Services, which is now reflected as a discontinued operation, is excluded from adjusted earnings in both periods.

Before turning to the operating segments, I will touch on corporate interest expense and investment income.

Not only did we overcome the impact of lower interest rates on fiduciary interest income, net corporate interest expense reduced EPS by $0.02.

Separately, investment losses reduced EPS by an additional $0.02.

This was due to declines in our private equity portfolio, which are recorded on a one-quarter lag.

Looking ahead to the third quarter, we anticipate investment income of about $20 million, compared with a loss of $23 million in the third quarter of 2008.

Now I would like to move to a segment review.

As I discuss the financial performance of our operating companies, all my references will be to underlying revenue, underlying expenses and adjusted operating income.

Excluding fiduciary interest income, revenue for Risk & Insurance Services increased 2% to $1.3 billion.

More importantly, despite a $23 million reduction in fiduciary interest income, operating income rose from $207 million to $271 million, an increase of 31%.

Both Marsh and Guy Carpenter had strong percentage growth in operating income, resulting in a 560 basis point margin improvement for the segment from the second quarter of last year.

Now that we are lapping expense reduction initiatives from last year, our year-over-year improvement in margins is moderating.

As you heard from Brian, we still expect to see a fairly significant improvement in margin in the second half of the year on a year-over-year basis.

Therefore, we have raised our margin target for the Risk & Insurance Services segment to 18% for 2009.

This represents a 470 basis point improvement from 2008.

This also will more than double the operating margin within a two-year period.

Looking at Marsh's second-quarter results, revenue was flat, a slight improvement from the first quarter.

The client revenue retention rate rose 100 basis points on a sequential basis, reflecting a marked improvement in the US and Canada.

Revenue retention was unchanged year over year.

Reduced general insurance activity as a result of the global economic downturn and a continuing soft market for commercial property casualty insurance reduced the level of new business in the second quarter on a year-over-year basis, but was consistent with what we saw in the first quarter.

Revenue for international operations, which accounted for 48% of Marsh's second-quarter revenue, was flat, as a 1% decline in EMEA was offset by growth of 9% in Latin America and 1% in Asia-Pacific.

Revenue in the US and Canada was flat, a solid improvement from the first quarter.

Ongoing across-the-board expense reduction initiatives drove Marsh's operating expenses down 6% in the second quarter.

Guy Carpenter's revenue growth was 11%, marking the first time in more than five years that Carpenter has achieved double-digit revenue growth in consecutive quarters.

As it has over the past year, Carpenter produced strong new business in the quarter, a testament to the approach taken by Peter and his team to reshape operations since the spring of last year.

And I am pleased to say Carpenter's retention rate returned to the historically high level we enjoyed prior to 2008.

At the same time, effective expense controls have remained in place, resulting in expenses being held flat in the quarter.

As a result, Guy Carpenter achieved excellent growth in profitability for the fourth consecutive quarter.

Turning to our Consulting segment, let's start with our third headwind, foreign exchange.

Foreign exchange negatively impacted the Consulting segment by $26 million or $0.03 in the quarter, with over $19 million at Mercer.

We expect foreign exchange to negatively impact Mercer for one more quarter.

Turning to Mercer, in the first six months of 2009, revenue at Mercer's two largest practices held up well, even in the most difficult operating environment in many years.

Retirement revenue declined 2% in the second quarter, but was flat year to date.

Health & Benefits also declined 2% in the quarter, but increased 1% year to date.

Outsourcing declined 5% in the second quarter and 8% for the first six months.

This was primarily due to the sharp year-over-year declines in the securities markets, which affected revenue tied to assets under administration.

Investment consulting and management grew 2% in the quarter and 4% for the six months.

Michele and her team continue to do an excellent job of dealing with very difficult market conditions.

On a year-over-year basis, second-quarter operating expenses decreased 3%.

And, excluding the $30 million increase in professional liability costs, Mercer's expenses would have declined 6%.

At Oliver Wyman, second-quarter revenue of $311 million decreased 19%, similar to the first quarter.

Oliver Wyman implemented significant staff reductions in the first six months of the year.

As we described last quarter, Oliver Wyman's severance costs, which are capacity related, are included in operating results, not restructuring.

In the second quarter, even including $8 million of severance costs, operating expenses decreased 17% on a year-over-year basis.

Now let me move to Risk Consulting & Technology.

In May, we completed the sale of our US government security clearance screening business, Kroll Government Services.

MMC's prior results have been restated to reflect Kroll Government Services as discontinued operations.

Information for the past five quarters is included in the supplemental schedules in our press release.

To varying degrees, Kroll continued to feel the effects of the recession in each of its businesses.

Revenue was $161 million, a decrease of 24% from the second quarter 2008.

Excluding the goodwill impairment, expenses were down 14% compared with 7% in the first quarter, reflecting management's continuing efforts to deal with these extremely harsh conditions.

Now looking at MMC's capital structure.

Our balance sheet remains strong.

We made a discretionary pension contribution in the second quarter to our UK defined benefit plan of about $70 million, a similar amount to the January contribution.

These contributions are in addition to the scheduled contributions we make to the plan throughout the year.

We do not currently anticipate additional discretionary contributions this year.

In June, we repaid our $400 million senior debt maturity with proceeds from the March debt issuance.

Our next bond maturity is in September 2010 for $550 million.

MMC has no outstanding commercial paper or bank loans.

Our $1.2 billion revolving credit facility remains undrawn.

Net debt decreased $278 million from the end of the first quarter to $2.3 billion at June 30.

And we ended the second quarter with $1.3 billion of cash.

With that, let me turn it back to Brian.

Thanks, Vanessa.

We're ready to begin our Q&A session.

Just a reminder, we have our operating company CEOs here, and Vanessa, to help answer any questions that you have.

So, operator, we're ready to begin.

(Operator Instructions).

Keith Walsh.

First question, I guess for Dan, with the significant improvement we have seen, especially year to date in the margins, has there been any change?

And I think you partially answered this with the margin guidance for the year, but any change in the seasonality that we will see with the margin throughout the year in Risk & Insurance Services?

No, there is no change in the seasonality.

If you look back to last year over the four quarters, and you look at the first, second and fourth and then compare the third, the average revenue for the three quarters that I mentioned, the first, second and fourth, is $1.16 billion, and it was $1.04 billion in the third.

So there was a $120 million difference in revenue in the third quarter.

If you just look at the dates of key renewal dates, there is only one key renewal date in the third quarter, and that is July 1.

So while we look at most of our expenses as being straight-lined across the year, so our expenses are very stable, our revenue does dip in the third quarter.

Okay, very helpful.

And then, just for Brian, a follow-up, Brian or Dan.

Just on contingent commissions, I am sure you've seen the Illinois Attorney General allowing Arthur Gallagher to accept them back.

Is this essentially -- I know the NYAG is your regulator here, but is this essentially a nonevent, or is it inevitable, do you think, that the NYAG moves in that direction?

Thanks.

I think we expected the question.

I would say the first part of this, and I think Dan might want to comment, too, but I think in general, the commissioner I think has been quite clear -- superintendent in New York has been quite clear about his feelings on it.

And we are encouraged by that.

But I know Dan wanted to say something else.

Sure.

Keith, you know we have been consistently and publicly advocating for a level playing field and transparency where all brokers are subject to the same set of rules.

And the two-tiered market that has existed for the last five years is not sound public policy, in our view.

We look at the recent actions by the Attorney General in Illinois, and we think it is an important step to fixing a broken system.

We also commended New York.

New York has been working over the past year to draft a balanced producer compensation regulation.

We believe our settlement agreement should be sunsetted, and we look forward to competing on the same terms as other intermediaries at some point in the future.

Great, thank you.

Larry Greenberg.

Two questions.

One, can you discuss how potential healthcare reform could impact your businesses?

And then secondly, would you say that you're a beneficiary of some of the consolidation that has taken place in the reinsurance brokerage sector?

Those are two different operating company questions.

So, Michele, why don't you do the healthcare, and then we will have Peter talk about reinsurance.

Obviously, in our business, first of all, generally change in any of our businesses signals some good times, if you will, for Mercer.

Those changes result in clients having to react and respond.

We're watching the healthcare legislation in this country, obviously, very, very closely.

And over the longer term, certain aspects of that legislation that is being bandied about could have some negative impact on our business, but it would be a very long-term issue.

And in the short to mid-term, all the energy that is going into healthcare reform and the most likely outcomes from the legislation would likely fuel our business for some time to come.

So we are quite comfortable with where we sit with regard to that and watch it with great interest.

Michele, what would be the negative issues?

For example, if we were to go completely to a socialized medicine system, where there was one big payor, it would significantly change how we think about it.

We would still have a business in the United States, very much akin to how it is conducted in several of the countries in Europe.

But it would be a significant change and one that it is not exactly what the Congress is considering now, at any rate.

Okay, Larry.

Let me have Peter talk about the reinsurance consolidation.

The consolidation we think will have benefits for Guy Carpenter in the future.

If we look at our current quarter, we had excellent retention from clients, measured by number of clients or revenue, and saw about a 20% increase in new business.

The new business came predominantly from current clients, and that was really driven by the value that we have brought to our clients and focused around capital, but believe that Guy Carpenter is very well positioned as a very strong choice as we look to future quarters and next year.

Just a follow-up, the trend, you mentioned 150 new senior hires.

Can you give us some sense on how that has developed maybe Q1, Q2?

Yes, those were in Marsh, and I think Dan can give you that.

I'm sorry.

That's not a Q1 and Q2 thing; that is really starting from really the second quarter of 2008.

Of those more than 150 managing directors and SVPs, more than 80% are in client-facing roles.

Peter, we did mention that you brought some people on.

You might give us some color to that, too.

Sure.

We added, as Brian said in his opening remarks, we added three senior executives that will each position us for future growth, in particular Henry Keeling in our international business.

We believe that that is the strongest opportunity for Guy Carpenter going forward.

And we're going to invest a lot of the resources that we put into the organization and focus growth in the international space.

We're very excited.

We have over 30 strategic hires that we've put on board since the beginning of the year, all really playing an important role in our growth strategy.

So we're very excited about the future.

Brian Meredith.

UBS.

A couple of questions.

The first one, Brian, can you talk a little bit about what your plans are to do with all this cash that you are accumulating?

Historically you've typically got a lot of cash that you actually accumulate in the second half of the year also.

I will start with that, Brian.

Yes, well, thanks.

It is interesting, but given the economic conditions, you almost can't have too much cash, you know?

We were very, very focused on liquidity issues.

And I mentioned that we are interested in growing, too.

We've spent a lot of time in the last 18 months and the last six months trying to get our Company in good order to go from defense to offense.

And I think we are in a position to do that.

So it is a nice position to be in, and we will see what happens to that cash.

Great.

And then two other just quick ones here.

Private equity, I guess going forward, should we expect that to at least stabilize here going forward?

The private equity piece, Vanessa?

As you know, Brian, we report on a one-quarter lag.

So we can give you visibility into next quarter.

And really, given the volatility, we would be reluctant to comment beyond that.

But we are indeed hoping for stabilization over future quarters.

Okay.

And then last quick question for Michele, so I hit everybody here, or most everybody.

In the quarter, was there any impact from a slowdown in maybe client buying because of what is going on with healthcare reform and just uncertainty as far as what is going on?

No.

I would say that the opposite was true, that we had in terms of our high-end business much more volume, analyzing the prospective legislation as well as, quite frankly, us being a vehicle to interpret moves that are made.

We hosted several webcasts, for example, and we actually broke a couple of servers with the volume of clients that were calling into our webcast.

And that is a serious comment, Brian.

So, no, at this stage, the volatility in the industry, if you will, as opposed to economic volatility has caused opportunity for us in a high-end business.

Terrific.

Thank you.

Meyer Shields.

Stifel Nicolaus.

As I understand it, the margin guidance you gave last quarter did not include Collins.

I'm assuming the 18% does?

The 18% does.

And I think, by default, the one before did, too.

So I'm not sure that we said it wasn't in, but anyway, let's say the 18% definitely includes Collins.

Okay, that's fine.

When we look at -- I guess I want to play off of Larry's question.

Within reinsurance, because of the consolidation, I guess there would be a couple of impacts.

One would be the temporary uncertainty or unusual movements that typically follow that sort of thing, and the second would be improved pricing capabilities because there are now only three global reinsurance brokers.

Is there any way of ballparking the different impacts of those two phenomena?

Do you want me to do it, Peter, or do you -- Peter says please do it, yes.

I think pricing, it is a competitive market.

And I don't think that, frankly, the pricing is going to be affected by that.

We get paid because of the services we provide.

And I think these are very sophisticated buyers.

They know the insurance business well.

And you've got to earn every penny you make.

So I would put that aside.

I think there are fewer competitors; there are fewer choices.

Companies want to have balance.

So I think those are things that will affect it.

We are subject to market conditions, and those have been slightly positive this year, but not overwhelmingly so.

So I think that probably has much more to do with the future revenue, and I think expansion.

So for us -- and you heard what Peter said -- we are a very global company in general.

But in Guy Carpenter, we have been less so, very, very strong in the US and less outside the US.

If you look at the trends in insurance, the activity is predominantly outside the US.

And so for us, it is almost like a green field.

So we are very positive about Henry's entrance and our ability to add around him people who have a market presence, and that is where we expect to grow.

One point, I think, Brian, that you had brought up, which is key, the consolidation is going to force the reinsurance intermediary offering to be more complex.

And we're talking more about capital today.

We're getting in and giving more advisory services.

So what the offering is today compared to what it was a couple of years ago is much broader.

And the general rate and structure is starting to level off.

It had a neutral impact on our portfolio in the second quarter, and even though we saw some property cat increases, there's plenty of headwinds still with subject premium bases, and also some of the casualty lines have not moved in a positive direction.

So it has really been driven for us through new business.

Matt Heimermann.

JPMorgan.

I guess, Brian or Dan, on the whole contingent commission issue, I guess the one thing I'm struggling with in thinking about this, if in fact superintendent New York AG do sunset the agreements you're subject to, is the whole issue of RIMS's stance against contingent commissions as well as just I think what are probably higher transparency standards for you in disclosing total payments from brokers and underwriters?

And so I guess can you talk about, if this does go away from a practical standpoint, what it really means in terms of incremental compensation or recapture of compensation from the past?

Sure.

Let me address it this way.

Our focus is on achieving a level playing field.

I will say that from our perspective, the issue of contingent compensation is a bit of a red herring.

The real issue is carrier revenue streams, transparency in disclosure practices, and internal systems and controls, which are designed to manage conflicts of interest.

There are several carrier revenue streams today that brokers, including Marsh, are permitted to accept -- basic commission, supplementals, enhanced, fee for services, work transfer and more.

So, really, I would approach it this way.

All carrier revenue streams represent a potential conflict of interest.

Therefore, for us, the real issues are transparency, what disclosure practices each company has and what the internal controls are to manage potential conflicts.

I don't want to speak for RIMS, but I think RIMS's principal issue -- well, they have been consistently against contingent commission for quite some time.

But I think they would be vehemently against the notion of contingent commission which is not paired with full and transparent disclosure.

I guess and then just following up on that, let's say that there was full disclosure and contingents were allowed.

Is that something we should expect to suddenly be a tailwind for you from a revenue perspective?

Or if you get full and complete transparent, are clients necessarily going to be willing to pay bigger sticker?

I don't want to speculate specifically about contingent commissions right now.

But I have talked in previous quarters about our enhanced commission initiatives, which are fully disclosed and they are not variable, so they are fixed and they are not influenced by volume or profit.

So I think enhanced commission for Marsh is really the staple of where we look at enhancing our carrier revenue stream, based upon the value that we provide to carriers.

We have been very successful over the past several quarters in getting more and more carriers to accept the notion of our value creation and developing agreements.

In fact, we have more than 30 agreements today on the enhanced commission front.

We do disclose enhanced commissions to our clients, and we require the client to agree to the level of enhanced commission before we sign off.

And frankly, I have been more than satisfied with our level of client acceptance.

That's helpful.

Thank you for that.

And then just maybe a big picture, and I don't know if this is Michele or Brian, but I think it was your comment, Brian, that you think you're at the bottom of the earnings cycle within the Consulting segment.

And I guess the question I have is, is that a function of your visibility with respect to expenses, or do you actually feel like from a revenue perspective you're seeing some signs within the organization that actually the worst of the revenue declines, we have seen them at this point?

There's obviously different parts to the Consulting.

When I started the comments, I made particular note of the expenses, because we had to adjust our expenses to our revenues.

So significantly, this year, our ability to hold margins at reasonable levels has to do with that.

So, going forward, when I mentioned Oliver Wyman's situation, it was that we got to that point.

And I mentioned that we had -- it's a little bit of a mixed bag.

So we had financial services dragging us down, but now coming back, and would have shifted as the economy has shifted to difficulties more in the manufacturing sector.

So I think for us, we see maybe a little bit -- a stability overall in the revenues in Oliver Wyman.

And that, coupled with the improvement in the expense posture, leads me to believe that that is why we are at the bottom for them.

Michele's is a slightly different situation, but her revenues weren't as severely affected as they were at Oliver Wyman.

We mentioned the fact we were up in a couple of her segments.

And the big business, Retirement, Health & Benefits, actually over the year flat and slightly up 1% over six months.

And I think the six months are representative of that.

So that is why we are feeling a little bit more optimistic with respect to both of those pieces of the Consulting business.

That's helpful.

Just one numbers question.

Was there any other severance reported in the Consulting segment this quarter besides the $8 million?

And I guess is that something that, by the time we are through third quarter, that that severance impact will pretty much work its way out unless there's new announcements?

Vanessa?

I will take it in two pieces.

There was a portion, there was some severance that ran through Mercer's P&L, about $4 million.

And as to future quarters, I think it is really going to depend on how the revenue is coming in.

All of the business units will continue to look hard at expenses matching that revenue.

Okay.

Thank you.

Thomas Mitchell.

Miller Tabak.

First of all, I just wanted to double-check if there has been any reclassification of expenses away from insurance brokerage and to the parent company over the last three or four quarters.

I just want to double-check that first.

Tom, no.

They did it on their own, Tom.

All real margin improvement.

And then --

Real margin improvement.

I guess the second factor is, other brokers are talking about the fact that, even though you are very large, but they're talking about the fact that there seems to be an opportune time to approach -- it is probably wrong to call them the mom-and-pops, but to approach smaller agencies and other brokers, particularly in the United States, with a kind of value proposal to join your team.

And I am wondering if you are seeing any uptick in the ease and ability with which you may be able to approach tuck-under acquisitions?

We have an initiative we call Marsh & McLennan Agency, very much in that space you are talking to.

And Dan might give us an update on that.

No, absolutely.

Well, the US market in particular is very fragmented in the mom-and-pop and above into small and middle-market space.

And we formed the Marsh & McLennan Agency and hired Dave Eslick, the former CEO of USI, to lead our initiative in that area.

And we're talking to a lot of people, and actually very pleased with what our pipeline looks like.

But we are not compelled to do anything, but we are having a lot of interesting conversations with quality firms, led by quality individuals.

The one thing that I would -- create any misperception that an acquisition in that space or a series of acquisitions would be us tucking them into Marsh.

I'm very comfortable with running separate businesses, and the Marsh & McLennan Agency will be run as a separate business within the Marsh, Inc.

family, obviously, but this will not be an integration of these agencies into Marsh in the US.

Okay, Tom?

That is very good.

Thank you very much.

Meyer Shields.

Two really quick questions.

One, Vanessa, what was the overall impact of foreign exchange to adjusted operating EPS?

About $0.03.

It was largely in the Consulting.

It was actually all of the $0.03 was in the Consulting business.

Risk & Insurance Services were neutral to FX in the period.

And just sort of delving into reinsurance again, I think Peter talked a little bit about how the client demands are more complex.

Traditionally, reinsurance has been higher margins.

Has this more complex consulting changed that at all?

Peter?

I'm sorry, I didn't hear it.

Well, the question is, now we have a more complex offering.

Reinsurance is a high-margin business.

Does the complexity change that level of margin?

I don't think it will impact the margin.

What it is going to do is require companies to have scale.

It is going to require companies to make investments, to be able to have that broader product offering.

And that's going to be focusing around key strategies of our clients, but focusing around capital, because we have seen retentions are moving up, and some recent surveys said that trend will continue.

Of insurance companies asked, over 80% said they see the retentions continue to go up.

So helping manage that volatility through value-added services, which are modeling and working closely with them on their capital structure, is going to be critical.

So you need scale and you need to make investments in your organization in order to be able to pull that off.

Are you expecting more consolidation among your competitors because of that?

I don't expect much more consolidation.

There is really three large reinsurance brokers, and then there's several other brokers that have boutique offerings.

It wouldn't surprise me if one or two, perhaps, were acquired, but I don't see anything in the foreseeable future that would be strategic in terms of acquisitions.

Okay, great.

Thanks so much.

Keith Walsh.

Brian, just for you, two quick follow-ups just on M&A here.

Would you consider buying something outside of brokerage?

And then I've got a follow-up.

Buying something outside of brokerage?

Like in consulting, would you redeploy --

The answer is yes.

And in fact, we have been acquiring.

We haven't really done anything in the last three months, but since I arrived, there's been several acquisitions.

And we think it is a worthy place to put our money.

And then I guess just my last question, then, with your stock at one-time revenue which is the lowest it's been at in 30 years, your margins are clearly on the path to being fixed.

Wouldn't the best return on your investment, instead of buying something in a soft market on the consulting side, be from buying back your stock right here?

Buying back your stock -- well, I guess my opinions on stock buybacks have been well documented.

And, look, it is a question of what is the best value for the funds we have.

And my preference is to find business that grows our business, that is strategic in value, that returns over a long period of time.

And so that is my priority.

Now, if you can't find those, and there are circumstances that might prevent that, you would have to consider stock buyback.

But it is a question of priority.

And I think that's the right priority.

It is my priority.

Okay, Keith?

Yes, thank you.

There are no further questions at this time.

I will turn it back to our speakers for any additional or closing remarks.

Well, I thank everybody for participating, and I thank my colleagues for doing a great job, and look forward to talking to you next quarter.

Thank you.

Bye.

Thank you.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation.