威達信集團 (MMC) 2014 Q2 法說會逐字稿

Welcome to Marsh & McLennan Companies conference call.

Today's call is being recorded.

Second-quarter 2014 financial results and supplemental information were issued earlier this morning.

They are available on the Company's website at www.mmc.com.

Before we begin, I would like to remind you the remarks made today may includes 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, and a variety of factors may cause actual results to differ materially from those contemplated by the forward-looking statements.

Please refer to the Company's most recent SEC filings, 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.

I'll now turn this over to Dan Glaser, President and CEO of Marsh & McLennan Companies.

Thank you, Jamie.

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

I'm Dan Glaser, President and CEO of MMC.

Joining me on the call today is Mike Bischoff, our CFO.

I'd also like to welcome our operating companies' CEOs, Peter Zaffino, Alex Moczarski, Julio Portalatin, and Scott McDonald.

Also with us this morning is Keith Walsh.

MMC continued to deliver excellent financial results in the second quarter.

We produced strong revenue growth, meaningful margin improvement, and double-digit growth in operating income.

We also returned capital to shareholders through increased share repurchase and announced a 12% increase in our quarterly dividend.

MMC's revenue growth was 7%, with all operating companies contributing.

This level of growth was achieved both organically and through our strategy of executing on quality acquisitions.

Revenue grew 5% on an underlying basis.

This growth exceeded the increase in underlying operating expenses, as it has for 15 consecutive quarters, driving our consolidated adjusted margin up 60 basis points to 19.8%, our highest second quarter in a decade.

Adjusted operating income rose 11%.

This is the fourth straight year that we increased second-quarter earnings by double-digits.

Looking at our Risk and Insurance Services segment, revenue increased 6% to $1.8 billion, or 4% on an underlying basis.

Adjusted operating income increased 5% to $454 million.

The second-quarter margin declined slightly to 25.4%, but more importantly, during the first half of the year, the margin increased 20 basis points to 26.3%.

For the full year, Risk and Insurance Services remains on track to produce solid underlying revenue growth and meaningful earnings growth, as well as deliver slight margin improvement driven by Marsh.

Marsh's revenue increased 7% to $1.5 billion, or 4% on an underlying basis.

All major geographic regions contributed to the strong underlying growth in the quarter.

The International division increased 5%, as revenue continued to expand throughout Marsh's vast geographic footprint.

Latin America, with superb growth of 16%, reported its seventh consecutive quarter of double-digit growth.

Asia-Pacific also continued to generate strong growth, rising 9%.

EMEA grew 1% in the quarter.

In the US/Canada division, underlying growth was 3%.

Marsh's revenue growth is driven by strong new business growth in Canada, Africa, Asia-Pacific, and Latin America, as well as high client retention across the organization.

Marsh continues to identify opportunities to enhance global growth through acquisitions.

Marsh & McLennan Agency added the largest independent insurance agency in North Carolina.

Also in the quarter, we closed two other acquisitions in Marsh & McLennan Agency and reached an agreement to acquire a majority stake in Marsh's longstanding correspondent broker in Panama.

Guy Carpenter delivered 2% underlying revenue growth in the second quarter, despite ongoing rate reductions in many lines.

New business wins and penetration beyond our larger clients drove higher revenue in the quarter.

While the US, Guy Carpenter's largest geography, was essentially flat, revenue growth was driven by international operations, reflecting increases in UK Treaty, Asia-Pacific, Latin America, and continental Europe.

In the Consulting segment, revenue increased 8% to $1.5 billion, or 6% on an underlying basis.

Adjusted operating income reached $247 million, an increase of 20% from the prior year.

And the segment's margin increased 160 basis points to 16.2%, the best in over 20 years.

Mercer's revenue increased 3% to $1.1 billion, or 2% on an underlying basis.

This increase was spread across all major regions, with particular strength from the US and Mercer's growth markets.

When viewed by line of business, growth was driven by investments, which increased 6%, and by health, up 4%.

In June, Mercer announced that it would acquire a 34% stake in South Africa-based Alexander Forbes, a leader in the retirement, investments, and employee benefits space in South Africa and broader sub-Saharan Africa.

The Alexander Forbes initial public offering was completed last week.

This investment is consistent with our strategy of seeking quality businesses with a strong operational and cultural fit that provide geographic expansion opportunities in fast-growing markets.

We have a close relationship with the Alexander Forbes management team.

You might recall we purchased its risk and insurance broking operation two and a half years ago.

Oliver Wyman's revenue in the second quarter reached a record $449 million, reflecting outstanding underlying growth of 17%.

The results reflect substantial growth in Oliver Wyman's largest practice, financial services, and strong growth from consumer and Lippincott.

We are very pleased with Oliver Wyman's first-half underlying revenue growth of 14%.

In the second half of the year, we expect Oliver Wyman's revenue growth to moderate.

In summary, our excellent second-quarter and year-to-date results are consistent with our 2014 business plan, and we remain well positioned to deliver on the long-term goals we committed to at Investor Day: growth in revenue, long-term EPS growth of 13%, increasing cash flows, and return of capital to shareholders through reducing share count, and double-digit dividend growth.

With that, let me turn it over to Mike.

Thank you, Dan.

And good morning, everyone.

In the second quarter, revenue increased 7% to $3.3 billion, or 5% on an underlying basis.

Adjusted operating income grew 11% to $656 million, the highest level of second-quarter profitability in our history.

The consolidated adjusted margin rose from 19.2% to 19.8%.

GAAP EPS increased 12% to $0.77, and adjusted EPS increased 10% to $0.79.

As we highlighted on last quarter's call, we anticipated that this quarter would be impacted by a meaningful reduction in investment income, and within the Risk and Insurance Services segment, the impact of planned expense growth and the negative effects of foreign exchange.

The adverse FX impact was slightly less than the $0.02 we had projected, since several major currencies strengthened against the US dollar.

In the third quarter we expect foreign exchange to impact Risk and Insurance Services by the same magnitude as this quarter.

Investment income.

We had an investment loss of $2 million this quarter, compared with investment income of $23 million in the prior year, a reduction of $0.03 per share on a year-over-year basis.

For modeling purposes, we'd like you to note that any investment income from Trident III that may occur in the last half of this year will most likely be offset by corporate initiatives.

As you may recall, income from Trident III only represents our general partner carried interest, and the timing of this we do not control.

In the second quarter, MMC issued $600 million of 3.5% 10-year senior notes.

This allowed us to fund the July debt maturity of $320 million.

By refinancing at attractive interest rates, the average cost of our debt has declined 60 basis points over the past year.

Taxes.

Our effective tax rate was 27.6% in the second quarter.

As you know, the tax rate can fluctuate from quarter to quarter, reflecting our geographic mix of earnings, tax settlements, completion of open tax years, and the impact of changes in international and/or state tax rates.

For example, in the second quarter we completed the federal tax audit with the IRS for the 2012 tax year.

Since we expect our tax rate to be approximately 30% for the remainder of this year, the effective tax rate for the full year should be around 29.5%.

Our 34%-interest investment in Alexander Forbes will cost $312 million.

This investment will occur in two tranches with approximately 15% completed last week and the remaining 19% subject to normal regulatory approvals, which should occur during the third quarter.

Consistent with the guidance we offered at Investor Day, CapEx for this year is trending at about $400 million with $202 million spent year to date.

Approximately two-thirds of this spend relates to technology and systems, and about one-third is for real estate.

These investments are enhancing growth, improving efficiency, expanding client and colleague capabilities, and reducing real estate costs as we consolidate office locations when leases expire.

We follow a balanced capital management philosophy: reinvestment in each of our businesses for growth, and return to capital to shareholders through dividends and share repurchase.

Cash was $2 billion at the end of the second quarter, consisting of $1.66 billion held internationally and $340 million in the United States.

Cash utilized in the second quarter included $138 million for dividends, $72 million for three acquisitions, and $250 million to repurchase 5 million shares of our stock.

This marks the ninth consecutive quarter of share buybacks.

For the first six months of this year, we have deployed over $1 billion for dividends, acquisitions, and share repurchase.

As we communicated at Investor Day, we plan to grow both organically and through quality acquisitions.

We will consistently return excess capital to shareholders, both through double-digit growth in dividends and meaningful share repurchase.

We are committed to reducing our share count year after year.

Overall, looking at both our financial and operating performance, a very strong first half of the year.

Looking forward, we expect adjusted EPS growth in the second half of the year to exceed the 10% growth we reported in the first six months.

We are on target to deliver strong EPS growth for the full year.

With that, I am happy to turn it back to Dan.

Thank you, Mike.

Jamie, we are ready to begin Q&A.

(Operator instructions)

Elyse Greenspan with Wells Fargo.

I was hoping that we could spend more time talking about what you are seeing at Guy Carpenter.

The growth did stand out in the quarter, especially in light of the market commentary that we are hearing in terms of prices down double-digits.

If you could comment on what you saw price-wise during the recent June and July renewals?

And also your expectations for the balance of the year, if you expect that you can kind of sustain that 2% growth level, or what we might see in the back half of the year?

Okay.

So thank you Elyse, and good morning to you.

It is Dan here.

I'll just kick off some commentary on the market in general.

I think it's important to know that everyone I have sitting around this table is a seasoned hand in the Risk and Insurance Services space.

From that perspective, we operate over many, many years in all kinds of markets.

Usually the risk in insurance services market, for one reason or another is usually soft or softening.

We are quite used to the idea that the market is competitive and that there is downward pressure on rates.

So Guy Carpenter has done a good job anticipating the future, really starting many quarters ago.

So Alex, you want to dig in a little deeper?

Sure.

Thank you very much.

Echoing what Dan has said, it is now five and a half years where we haven't gone backwards in any quarter.

22 quarters without having going backwards, which I think is testament to the strength of the management and the people that we have within the Company, and our relationships with our clients.

As we said at Investor Day, we have continued to look at bringing new products, new services into our portfolio.

And we've also executed on segmentation, which we talked about.

So, and we are widening our net.

We have many more smaller clients than we had before.

We have invested in people, we have actually increased our headcount probably 140 people over the last year or so.

Many of those are what we call strategic hires that relate to bringing in new business, others are based on bringing in new services around our strategic advisory.

Others relate to acquisitions that we've made in what we consider to be growth areas like accident and health and agriculture.

Then finally, we have been able to bring in some very good people who look after the increased client base that we have because we have many more clients.

So yes, rates have been coming down.

It is interesting because some companies have found that the contingent capital is very interesting.

They are actually changing their strategy around buying reinsurance.

Others are using some of their budget now to buy casualty reinsurance.

It is not a tale of woe.

It is around execution, it is around client relationships, it is around leaning forward, it is around investing.

And I think we'll be able to show modest growth, mild growth for the rest of the year.

Thank you Alex.

So Elyse, just to summarize that.

It won't be a banner top-line year for Guy Carpenter, but we do expect to see growth over the entire year.

Okay, thank you.

Then one other.

In terms of RIS, just looking at the overall margins.

You guys did say about modest margin improvement for the full year.

I think you used the word slight in your prepared remarks.

Yes.

Has that changed from where we were sitting last quarter?

I know you guys pointed to some negative impacts from foreign exchange as well as the expense growth in the second quarter, but when you are looking at the back half of the year, has your expectations changed or is that similar to where we were sitting a few months ago?

It is very similar to where we were a few months ago.

Nothing has really changed on that front.

Let me just address RIS margins in general.

Our view is we will continue to expand margins over time while we invest for future growth.

The level of margin improvement's going to move around and vary a bit, based upon where the top line is and the pace of our investments, which can be lumpy from time to time.

This year in particular we expect good revenue and good earnings growth in RIS, but slight margin expansion for the year.

I would just add on our foreign exchange modeling, obviously, currencies can move dramatically across the dollar.

But from the beginning of the year when we essentially gave guidance and then we updated that guidance in the first quarter earnings call, it really did not change.

And as I just indicated, our current modeling, despite marked movements in the euro and the pound, still indicates that the second and third quarters will feel the most negative impact for RIS.

And in fact, every quarter RIS most likely will feel foreign exchange negative impacts.

So, our view on the impact of foreign exchange has not changed.

I would also point out that the -- just seasonally, the third quarter is the smallest for RIS.

So foreign exchange may impact it slightly more in the third quarter vis-a-vis the second.

Just to reiterate what Dan said, no our view has not changed at all.

Next question, please.

Next question from Jay Gelb with Barclays.

Dan, if I recall correctly, last quarter and the Investor Day, you have reiterated that you have more of a focus on profit growth in Risk and Insurance Services than margin expansion?

I just want to see if that is still the case.

That is absolutely right.

To be frank, I don't spend five minutes worrying about our margins or our ability to expand margins in the future.

When I look at our raw, absolute margins in RIS, even though they were down 20 bps, they were up 170 bps in the second quarter of 2013 and they are up 20 bps through six months this year.

And when I look at the absolute amount, 25.4% through six months, in my mind it is very competitive in the marketplace.

It is really about how do we take this terrific business and grow it faster, both on the top line and on earnings, while maintaining and improving our margins over time?

All right, that is helpful.

Then on Guy Carpenter, unlike one of your major competitors that saw a pullback in organic growth, in reinsurance brokerage, Guy Carpenter actually accelerated versus the first quarter.

It would be helpful to get some color on that, maybe from Alex.

Was that account wins?

Was that some other factor that helped drive growth to a better level?

We have very good new business.

That is again, that's part of two things.

Really a segmentation strategy, it is focusing to get the right products, the right type of clients.

And going into areas where we, perhaps we had some business but we didn't realize how strong it was.

We created a segment around it and we focused people on it.

That's been very effective.

Our retention has been good as far as clients.

We haven't lost -- I could name maybe one that we have lost in the last quarter.

All in all, good retention, good new business, and selling new product.

I think it is important to reiterate, Jay, what Alex had said earlier as well.

That even though this is a slow growth environment for Guy Carpenter, we believe Guy Carpenter is absolutely one of the jewels in our crown.

And we are continuing to invest.

Guy Carpenter over the last several years has been our fastest grower.

They are competitive in the market, they have got a great leadership team, and in many ways they have become the employer of choice.

So from our basis, we are continuing grow the top line.

The numbers -- the head count, the numbers that Alex had referred to earlier in the call when he was talking about more than 100 different hires, that represents 6% or so of Guy Carpenter's headcount.

So you can see, and for the last 12 months, we have made a bet on Guy Carpenter and the reinsurance business in general.

Thank you.

Next question, please.

Michael Nannizzi with Goldman Sachs.

One question.

You mentioned revenue growth outpacing expense growth overall.

Can we talk, drill down maybe a bit into the risk segment where it looks like maybe that hasn't been the case here recently?

I know you mentioned some expense initiatives.

Would love to sort of understand those, and just sort of get an idea of what's happening to natural margins, excluding these types of initiatives, and if those are still on pace to deliver the same type of performance that you have sort of talked about across the whole book?

Thanks.

Sure.

I mean in the RIS segment, and I look over the last really five years or even slightly longer, virtually in every quarter, revenue growth for RIS exceeds expense growth.

That is a discipline of the Company, it's a philosophy of the entire firm, and it is how we operate the business.

So it is not that we intend for that to reverse.

Sure, there may be the odd quarter here or there where we get upside down, but believe me, we won't stay upside down.

I look on the expense side for the whole Company, including RIS, we have been operating in a managed expense environment all the way through the financial crisis and its aftermath.

If you look at the last eight quarters, our expense growth this quarter at 3% is actually the highest expense growth we have had in the last eight quarters, but certainly 3% is not a worrying trend to us from that standpoint.

And we expect RIS to continue to invest as they see necessary in order to generate future growth.

Okay.

And then on the Consulting side, would it be possible to understand what sort of happened to Mercer margins year over year and what happened to Oliver Wyman?

Should we make the assumption that in each of those sub-segments that margins were flat?

It is just a larger share of the total pie that Oliver Wyman earned this year?

I mean, I would look at a couple of things on this basis.

First of all, the margins are far from flat in our Consulting segment.

I mean, the overall segment was up 160 basis points in the quarter, and that is on top of 120 basis points in the second quarter of last year.

The 16.2% margin in the quarter, is the highest quarter that we have had in our reckoning in history, but certainly over the last 20 years.

So tThere has been tremendous margin expansion in the Consulting segment, not only last year but we've got growth upon growth this year.

And both Oliver Wyman, we don't break out our margins by operating company because it is a Consulting segment, but I can say Oliver Wyman and Mercer have both contributed to the margin expansion within Consulting.

Great.

And then lastly, on the tax rate, it looks like it declined a bit year over year.

Maybe some thoughts on that?

Generally, how do you think about taxes relative to your peers?

Is that something that you want to address, or that you feel like you are comfortable where you are?

Thanks.

Mike, you want to take that?

Yes, I'd be more than happy to.

Mike, you are absolutely correct.

Tax is a fairly complex topic.

With regard to our peers, I won't comment too much on that.

Obviously we have peers that we're competing against that have a tax rate higher than we do.

We have peers that have a tax rate lower than we do.

So we really do focus on what we can do and how we can manage it.

I would say one thing is different than when we reported in the second quarter of last year.

In the second quarter of last year we had given guidance to the investment community that our tax rate would be about 30% for the entire year, and over the course of the first six months the tax rate was trending slightly lower than that.

We still said that it should be about 30% for the entire year.

It's different this year.

It's different this year in that we did have some discrete Items.

I did mention the larger one, which is that we completed the open year of 2012 with regard to our federal return with the IRS.

So our tax rate for the first half of the year was below the 30%.

As you could hear in my prepared remarks, we don't think we'll give any of that back.

So we are hopeful that our tax rate over the last six months would be 30%.

So our effective tax rate will be 29.5% for the year.

That is the lowest that we've seen in many years.

So we are encouraged by that.

Great.

Thank you.

Thanks Mike.

Next question, please.

Kai Pan with Morgan Stanley.

Good morning.

Thank you for taking my call.

The first question is on buybacks.

Looks like you, on your Investor Day you said you are going to have a capital management plan for this year, $2.1 billion, including $800 million of acquisitions, $600 million, dividends about, that leaves $700 million for buybacks.

You did $400 million, just in the first half.

Wonder, does that math indicate that in the second half you are going to slow down?

And also related to your cash balance in the US, $340 million, will that be the limiting factor, how much you can -- how quickly you can buy back your shares?

Excuse me, this is Mike Bischoff.

I want to get the math correct.

We did $350 million of share repurchase in the first six months.

We did $100 million in the first quarter and $250 million in the second quarter.

I'm sorry.

My math is bad.

So basically you are looking for about the same pace, then, in the second half?

Yes.

I mean, and the thing is, what we outlined on Investor Day in terms of $2.1 billion and sort of the, let's say the hold we had with regard to our expectations around acquisitions, leaving $1.3 billion or so available for dividends and share repurchase.

That is as good a number as any for you to use right now.

It's certainly in our expectation won't be less than that amount.

Just to add clarity to that so there is no ambiguity.

We were fairly clear on Investor Day.

We were indicating that return of capital to shareholders would be about $1.3 billion.

That would be comprised of dividends and share repurchase.

Tracking through the first six months, dividends were $275 million and shares, as I mentioned, were $350 million.

You are absolutely right that Dan at Investor Day indicated we had kind of allocated in our own thinking about $800 million for acquisitions over the course of the year.

Nice to report that our pipeline has been very robust.

Our acquisitions through the first six months were $439 million.

With the investment that you just heard us describe in Alexander Forbes, that is another $312 million.

So we are roughly $750 million already against that $800 million that Dan articulated at Investor Day.

So in every category we are not only tracking, but feel very good with regard to what we articulated at Investor Day.

Thanks Kai, because it really is a good question.

Like we said at Investor Day, even if we go over our placeholder of $800 million, we don't expect that that would impact the $1.3 billion that we are thinking about in terms of share repurchase and dividend.

Great.

Secondly, can you give updates on the private health exchange and what the pipeline looks like, and especially going into the second half, probably the peak of enrollment season?

Sure.

Julio, you want to take that?

Thanks, Dan.

And thanks, Kai, for the question.

Last time we updated the numbers at Investor Day we said we had about 300,000 lives or so spread across about 80 clients.

And we had -- that included both the active and the retiree space.

Our sales process continues very aggressively.

Our pipeline is very, very strong.

The selling season is at its height.

We continue to have clients who are choosing the platform, and they will sign up as of the first of the year 2015, and then throughout the year as well because as you know, we have a lot of middle markets clients that have different enrollment dates.

It is great to be able to pace that throughout the year.

As we said in the last call, we plan on updating sales activity and lives as we get through the third quarter and early fourth quarter.

It's going to be, I think, a very good outcome for us.

Like I said, activity even stronger, very, very pleased.

We think it is best to give that update toward the end of the year when the full picture is well-known and the sales season is complete.

But I got to tell you, the level of dialogue we are having with our clients and prospects around exchanges is very high and we are very pleased with how it is going.

And stay tuned for the announcements, I guess, later on.

Thanks Kai.

Next question, please.

Larry Greenberg with Janney Capital.

Good morning.

Just to nitpick a little bit more on margins, you mentioned FX about the same in 3Q as 2Q.

When we think about expense comparisons in the third and fourth quarters, is there any unevenness to those quarters in comparison with a year ago?

No.

I think what Mike was alluding to is, particularly in RIS, the third quarter is our smallest revenue quarter.

And so expenses, some of which are straight-line throughout the year, tend to look a little bit higher.

We always have our lowest margins in the third quarter, and that's been the case for many, many years.

But there is nothing that is anticipated which is changing the trajectory.

As Mike mentioned earlier, we are expecting a better second half of the year from an earnings growth standpoint.

All right, good.

Thanks.

That is helpful.

Can you just elaborate a little bit more on the acquisitions that you have made, including Alexander Forbes, and just what that brings to you guys, either strategically or geographically?

Okay.

So I'll take that to start with, Larry, and then I'll hand off to Peter in the first instance to talk about some of Marsh's acquisitions at Marsh & McLennan Agency because that's really been a focus for us over the last number of years in terms of acquisition strategic and philosophy.

And then we'll hand over to Julio who will specifically talk about Alexander Forbes and how thrilled we are to be the anchor investor on their recent IPO.

Let me just say, just to begin with, and reiterating some of the thoughts we had on Investor Day, acquisitions have really been a core part of our strategy and philosophy over many years.

We develop relationships over a long period of time, and frankly when we do acquisitions, more times than not it is both sides thinking hey, we'll be better together than we are apart, so why don't we get together?

Our focus is certainly on the four pillars that we always outline to you, but also talent, quality, cultural fit, economics.

And we generally prefer companies that are growing faster than we are, or trading below our multiple, or where we see the business and we believe we can improve the business and improve its margins.

Peter, you want to talk a little about MMA?

Sure, Dan.

Thanks.

MMA, it's a very consistent story.

Continues to drive organic growth.

We have done 39 acquisitions since 2009, and our annualized revenue is closing in at around $650 million.

We did three acquisitions in the second quarter.

Dan mentioned in his opening comments--one in North Carolina, the largest independent agent, Senn Dunn, which has a real balanced property and casualty, employee benefits portfolio mix, and it is really becoming a core differentiator for us in the United States.

If I could add one thing before handing it over to Julio, is that the Alexander Forbes insurance acquisition has proven to be incredibly valuable for Marsh, giving us a footprint in sub-Saharan Africa.

It's been a strong contributor in connecting our multinational clients.

So that has been a real differentiation for Marsh.

And it is contributing to organic growth in the EMEA region.

So we have really been quite active in Marsh, not only in MMA, but also Africa, Panama, Peru, Dominican Republic.

Julio, you want to talk about Alexander Forbes?

Thanks, Dan and Peter.

For quite some time now we have been articulating a strategy to want to become much more significant in the growth market economies around the world.

This is obviously a further step in that direction.

Through this investment, we gain great exposure to a great management team, great clients and a fantastic footprint in a geography that is going to be growing certainly over the next decade.

Mercer will have a role on Alexander Forbe's board of directors.

We will contribute strategic expertise and a global perspective.

We will be supportive to African clients who want to become global outside of Africa.

As well as our clients will have the benefit of a great structure inside of South Africa and sub-Saharan Africa when they're expanding into Africa.

We believe that the transaction offers just some real significant value to both the client base of both sides of the transaction, and also the employees and opportunities for the future.

We are really pleased with this transaction and couldn't be more excited about it.

We are looking forward to maximizing its value as time goes on.

Thanks Julio.

Does that cover it, Larry?

Yes.

That is helpful, thanks.

Okay.

Thanks a lot.

Next question, operator.

Dan Farrell with Sterne Agee.

Hi.

Thank you, and good morning.

Just a question on your international cash.

Does your 30% tax rate for the balance of the year include any plans for movement of international cash over to the US holding company?

Mike?

Very good question.

I think we generally indicated that we have about $1.4 billion of international cash going into the year dedicated on a permanently invested basis.

And you can see with regard to Alexander Forbes, that is one way we plan to utilize international cash.

With regard to the US, yes we do have repatriation strategies.

We look at it over multiple years.

As you know, the main driver of need for cash in the US is for share repurchase and dividends, in addition to funding the acquisitions in the US, predominantly MMA.

Then specifically to your question, which is does the 30% tax rate guidance for the last six months and 29.5% for the entire year, include the repatriation of funds that we need from our international operations into the US for these purposes that I just mentioned?

And the answer is yes it does.

Okay.

Thank you.

Then also just to question some of the investments that you are making in the business.

Your capital expenditure has been running higher than a lot of your peers.

I was wondering if you could maybe expand a little bit on some of the things that you are doing, and are these investments targeted towards more operational efficiency, growth efforts?

Maybe some color around them would be helpful.

Thank you.

If you say operational efficiencies, growth, and reducing risk, you would have had the trifecta.

So well done, Dan.

The main drivers are those three areas.

So initiatives to improve growth, to drive efficiency, and improve risk.

Mike, you want to add color to that?

Once again, I won't mention our rate of CapEx compared to competitors, because they may have their own needs.

With regard to us, our CapEx spending did increase fairly significantly from the levels of 2009, 2010 in building up to where it was in 2013 and 2014, tracking at about $400 million.

And like I said, about two-thirds of that is in technology for, really IT upgrades.

There is finance transformation.

We have new fiduciary revenue and billings systems, not only in the US, but introducing that in the UK.

We have data centers and client analytics.

And so we really have been spending over the last several years to make MMC even stronger and more efficient with expanded client and colleague capabilities.

The other roughly 30% is, as I mentioned, reducing our global real estate footprint, more efficiency, co-locations, cost savings, and also putting in the smart office concepts for our colleagues.

Very good.

Thanks.

Thank you.

And next question, operator?

Next to Josh Shanker with Deutsche Bank.

Good morning, everyone.

Given the growth at Oliver Wyman, has the business become seasonal in terms of revenues?

And does that have any impact on exacerbating seasonality in Consulting margins?

No.

It is an interesting question.

I would approach it in a couple of different ways, and then I'll hand off to Scott to give a little bit more flavor to it.

First, if you look at our overall business between Risk and Insurance Services and Consulting, it is reasonably well balanced.

So from that standpoint, you don't see large seasonal shifts as we go throughout the year on the Consulting side.

As we mentioned earlier, on the RIS side, you tend to see a seasonal dip in revenue in the third quarter, and the other three quarters for RIS are reasonably similar to each other.

You also have to bear in mind that when we look at the RIS segment, Guy Carpenter is much smaller than Marsh, and when you look at the Consulting segment, Oliver Wyman is much smaller than Mercer.

Even though Oliver Wyman may be growing much faster for a period of time, its impact on the overall numbers for, particularly on earnings for the Consulting segment is muted just because of its size relative to Mercer.

But Scott, you want to talk about potential seasonality?

Sure.

I don't think, Josh, the seasonality has changed.

In management consulting, typically we see slower months in July and August, and then in December and January as there's lower client activity.

That's been that way for many years and hasn't changed.

Specifically, the growth we are seeing now, I think, is driven-- not by seasonality, but by three things.

The first is, we had a pretty weak 2013 and so our comparison to that is excellent.

It will get harder through the second half of the year as our second half of the year was better last year.

The economic environment has been supportive of corporate confidence, and they have been spending money on consulting.

So that has been helpful for us.

And we have made a lot of changes at Oliver Wyman over the last 18 months or two years around organization and approach to market.

I think we have made it a better firm and we are being more successful in the market, and that should continue.

I'd expect we'll still see strong continued growth.

The seasonality won't be different in the past, but the current growth rates in the high teens are unsustainable, we think.

So when you say moderating growth, I know you don't give specific guidance, but maybe I'm looking for a little bit -- does moderate mean high single digits, or does that mean in line with the rest of Consulting?

I would say, and it is Dan here, speaking for Scott.

I would say moderating growth means to the mid to high single digits.

I appreciate the color.

Thank you.

At least in my business plans, and hopefully in Scott's.

Okay.

Next question, please.

Meyer Shields with KBW.

Thank you.

Good morning, all.

Going back to Guy Carpenter.

Is there any dislocation in the reinsurance brokerage arena where maybe more clients than you would have expected are open to the idea of switching brokers?

I'll take that to start with and then hand over to Alex.

I mean, the client retention levels in reinsurance broking in general, and certainly Guy Carpenter specifically, are extremely high and would be the envy of all of our other opcos.

So the switching that you might see more often on the retail side in either consumer businesses, retail businesses, is not prevalent on the reinsurance side.

So when companies switch, it is usually a multi-year relationship development, and Guy Carpenter's showing its innovative skills in creating a relationship of trust, and then a movement happens.

It is not a price-based or point-in-time type of shift.

But Alex, you have something else to add to that?

I would say, to echo again what you have said, I may just say that there have been changes in the brokerage structure within the marketplace, okay, and that's brought some changes.

The other reason why we might get -- lose a piece of business, but actually we haven't been losing, but win a piece of business is because of the change in management in one of the insurance companies or change in ownership.

There's been some of that going on.

So, but I don't see any major change or shift in the landscape that you might be questioning.

So we have seen no secular dislocation, Meyer.

Any other questions?

Yes, just one quick one.

Once you have acquired the 34% stake in Alexander Forbes, where does that impact the income statement?

Is that investment income?

Mike you want to take that?

No, actually it'll be the equity method of accounting.

It will be the earnings of Alexander Forbes and then our proportional share, which will be 34%, when we complete the tranche in this quarter.

And then it will be tax-effected.

Then it will be added to the revenue each quarter for Mercer.

Okay, great.

Thanks very much.

Next question, operator?

Vinay Misquith with Evercore.

Hi.

Good morning.

The first question is on the Risk and Insurance segment.

I believe you said margin expansion would be modest this year, and in large part due to the foreign exchange.

Just curious, on a more normalized basis how much of margin expansion do you expect in that segment?

Yes.

I'm not setting a margin target for the RIS segment over time.

I would say that we expect our revenues in RIS to generally be exceeding our expenses in RIS as we march forward.

I would also say that the margin levels in RIS are very competitive in the market, and they may actually be market-leading at this stage.

So our view is to focus our attention, as we mentioned at Investor Day, in growing top-line revenue and also growing our earnings in this high margin business as opposed to overly focusing on margins.

Margin expansion will be an outcome rather than a driver of our activity.

Any other question?

Yes.

Just in the Consulting segment, you have shown very strong margins first half of this year.

Should we see a small slowdown in the pace of margin improvement in the second half?

The Consulting margins have been rocketing forward over the last two and a half years.

And really that's down to the leadership team and everyone getting behind the idea of running the business more like an overall advisory and transactional firm and less like a pure consulting firm.

We have made tremendous strides in running the business from that standpoint.

When we look forward over not only the back half of the year but in the future, we believe both of our segments have the ability to grow their margins.

So that is a focus of the Company, a little bit more so these days in Consulting than in RIS.

But overall I would say for both segments the primary interest of ours is growing organic revenue, followed by growing earnings, and margin expansion is an outcome of us growing our revenue at a faster pace than growing our expenses.

Sure.

Fair enough.

Thank you.

Okay.

Thanks.

Next question, operator?

Charles Sebaski with BMO Capital Markets.

Good morning.

Thank you.

Good morning.

Was curious about growth at Marsh.

Wondering if we could get any color on contribution to organic growth from Marsh Agency?

I know the comment about $650 million in revenue, but as that sort of earns in and becomes organic over time, can we get some thought on how that is helping versus the traditional Marsh business?

Sure.

I'll start by saying if you look at the RIS segment in total, we have had 17 consecutive quarters of 3% organic growth or better.

We are quite pleased with our growth in this tough market environment of our RIS segment.

Marsh specifically has had 4% growth three quarters in a row.

So Peter and his team are doing a phenomenal job in developing organic growth in a very big company.

So Peter, you want to give us more color?

Sure.

Thanks, Dan.

If I start with MMA.

We look at some of the peer companies outside of the organization for middle market business and they are performing at or above what we'd expect on organic growth.

I mean, the US and Canada division has multiple businesses in it, and therefore it is a big contributor, but we also have the core US business for brokerage, we have Canada, we have an MGA, a private client, we have a program business, we have a technology business in STARS, and they all contribute, perhaps not all in the same quarter.

But MMA has been a really steady contributor.

We have been investing for organic growth, as we outlined at Investor Day.

And as we continue to expand our footprint, we feel we have more balance for that growth.

Okay.

I guess on another segment, saw some commentary that there has been a change in UK pensions, and curious if this is a UK-specific or Company-wide, and what the potential effect on expenses are on making a pension change away from a defined benefit?

So a couple of things.

One, the UK plans both have assets and liabilities above GBP4 billion, which makes them the largest within MMC.

Our goal in the UK, and you're right that we recently made a change.

Actually it's effective, I believe, August 1. We recently decided upon a change in consultation with our colleagues in the UK to move from a defined benefit plan, to close it and freeze it, and move to a DC plan.

And our goal in the UK was not to achieve cost savings.

So let me just tell you that right off the bat.

Our objective was to create a DC plan which is highly competitive in the market, consistent and fair to all colleagues, and which reduces risk over time for MMC.

We believe we have achieved that.

Now, in terms of other plans, we periodically review our plans to assess market competitiveness, consistency across MMC, risk, cost, all of those things.

Right now we have no current plans to amend any of our other DB plans at this point in time.

And there isn't, In terms of when you say reducing the risk, I'm assuming the volatility, but that doesn't equate into a cost save?

I realize that is not the plan of it.

It is to limit volatility.

That volatility would seem that there would be a volatility up, right?

That in the long term, maybe not in the next quarter or two, but the next couple of years, should be some inherent cost savings, no?

Any savings on large DB plans are driven more by interest rate movements and discount rate movements, little bit of asset returns, that sort of thing as opposed to whether you are a DB or DC.

The cost to the company for providing the benefit is actually quite similar.

And we did have benefits in terms of mitigating, essentially closing the DB plan and freezing it.

We did receive a curtailment gain, which we cycled back largely to the colleague base in the UK in terms of mitigating the impact on some of our colleagues.

So there is really no material financial impact, based upon that change.

Excellent.

I appreciate the comments.

Okay.

Next question, please?

Brian Meredith with UBS.

Just a couple of quick ones here.

The first one, Mike, just a clarification on your comment with respect to the Trident III.

Did you say that it is going to be offset largely any income by additional corporate initiatives?

That's correct.

So we should expect just kind of breakeven for investment gains for the remainder of the year?

I think for modeling purposes, Brian, that makes a lot of sense.

Okay.

One other quick one for you, Mike.

I noticed you guys raised $600 million paying down $320 million.

You are going to have a little more debt on the balance sheet.

Is there any conscious initiative to maybe increase leverage here a little bit going forward?

I think in general, and I'll start off and then hand to Mike to add a little bit more color.

I think our objective over time, and we talked a little bit about this at Investor Day, is to over time reduce cash on the balance sheet, to the extent that is practical.

Over time to raise our level of debt as well, still as a conservatively run company but overall our ability to handle more debt is certainly prevalent, and interest rates are pretty low, and we have a balanced approach.

I think you are going to see both of those factors as we move forward over the next several quarters and a couple of years.

Mike you want to add to that?

No Dan, I think that is well said.

It is the balance.

We are improving and have improved our credit metrics, but we can continue to improve our credit metrics even with steadily, well not steadily but beginning to expand the overall debt on our balance sheet.

That is obviously only one issue of leverage.

It has to do with pension obligations, present value of our operating leases, and we have worked very diligently on those areas as well.

So as Dan said, it's a balance.

Operator, I think we are coming to the end of the hour.

So we have time for one more question.

Cliff Gallant with Nomura.

Thank you.

Appreciate getting in.

I was hoping you could talk a little bit more about some of the comments you made earlier about the underwriting environment and the cycle, particularly on the insurance side.

I believe a few quarters ago there was a comment made on your call that reinsurance pricing weakness was -- historically has always led to a weakness on the primary side.

I'm curious as to what degree do you think things are different this time?

Are things meeting your expectations, has there been more or less discipline among the insurance companies?

Thank you.

It's Dan here.

We don't think things will be different this time.

We think fundamentally that as reinsurance prices reduce, it gives more flexibility for primary carriers to adjust their strategies and figure out other ways to grow their business, and some of that may be giving up some of the gains that they have obtained on their own reinsurance programs.

Peter, you want to talk about what's happening in the retail business?

Sure.

I think when we talk about reinsurance has been primarily driven by property cat and property declines.

When we look at our overall portfolio, we are in so many different countries across the world that they all tend to have different dynamics based on mix of business, based on geographical footprint.

But if I was to comment and see what is happening on pricing on the primary side, we have seen more reductions, nothing dramatic, but a modest reduction continuing in the second quarter.

If I look at some of the regions, Latin America probably had pricing falling off the most.

But it is still low to mid single digits.

Line of business was really driven by property.

Having said that, we are cautiously optimistic that we are seeing more exposure increase on the overall book of business.

So looking at total insured values, payroll in the US, sales across the world has been a modest offset to some of the modest price declines.

Thanks Peter.

I think that about does it for the call.

I would like to thank you all for joining us on the call this morning.

I would also like to thank our clients for their support and our colleagues for their hard work and dedication in serving them.

Have a good day.

Again, that does conclude today's conference.

We do thank everyone for your participation.