威達信集團 (MMC) 2017 Q2 法說會逐字稿

Welcome to the Marsh & McLennan Companies' Conference Call.

Today's call is being recorded.

Second quarter 2017 financial results and supplemental information were issued earlier this morning.

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

Please note that remarks made today may include forward-looking statements.

Forward-looking statements are subject to risk and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements.

For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the MMC website.

During the call today, we may discuss certain non-GAAP financial measures.

For a reconciliation of these measures to most closely comparable GAAP measures, please refer to the schedule in today's earnings release.

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

Thank you very much.

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 Marsh & McLennan Companies.

Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses: John Doyle of Marsh; Peter Hearn of Guy Carpenter; Julio Portalatin 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 Peter Zaffino for his many contributions to both Marsh and Guy Carpenter over his 15-plus years with the company.

We wish Peter 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 are both opportunistic and strategic when we acquire talent.

Last year, we added John Doyle and Peter Hearn to our organization, two experienced and highly regarded industry executives.

I have worked with John for almost 20 years, and I can tell you that his transition into the Marsh CEO role will be seamless.

Over the past year, he been a key part of setting strategy as President of Marsh, as well as being a member of the MMC Executive Committee.

John 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, John 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 Peter Hearn, the CEO of Guy Carpenter, join 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 careers, John and Peter 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, Julio 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 a sense of urgency and passion.

We continue to invest in technology, digital and data and analytics to drive innovation and foster growth.

In this regard, we have 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 organizations transition to a digital future while ensuring their workforce thrives.

As part of this initiative, Mercer announced that Rohit Mehrotra will be taking a new role as CEO of Mercer Digital.

Rohit came to MMC when we bought his 5th start-up, 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 4 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 $1.00.

And on a consolidated basis, the adjusted operating margin improved 70 basis points.

For the 6 months, underlying revenue growth was 3%, and the consolidated adjusted margin expanded 70 basis points.

EPS for the 6-month period grew 13% on a GAAP basis and 14% on an adjusted basis.

Looking at Risk and Insurance Services.

Second quarter revenue was $1.9 billion, with underlying growth of 2%.

Adjusted operating income increased 9% to $535 million, with the margin expanding 110 basis points to 27.9%, the highest second quarter margin in 30 years.

For the 6-month period, underlying revenue grew 3%, similar to the full year growth rates 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 Mark.

Thank you, Dan, and good morning.

In the second quarter, we delivered solid results driven by underlying revenue growth across all four of our operating companies.

Overall revenue was up 4% or 3% on an underlying basis.

Operating income in the quarter increased 5%, while adjusted operating income was up 7% to $788 million.

Our adjusted operating margin increased 70 basis points to 22.5%.

GAAP EPS rose 7% to $0.96, and adjusted EPS increased 10% to $1.00.

Looking at Risk and 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%.

For the first 6 months of the year, revenue was $3.9 billion, with underlying growth of 3%.

Adjusted operating income for the first half of the year increased 10% to $1.1 billion, with a margin of 29.1%, also up 110 basis points.

At Marsh, revenue in the quarter was $1.6 billion, an increase of 4%, with acquisition activity over the last 12 months continuing to contribute to overall growth.

As we expected, underlying revenue growth of 2% in the second quarter was tempered, following the strong underlying growth of 5% in the first quarter.

As we've said in the past, we think it is more appropriate to look at underlying revenue trends over a longer period of time.

For the first 6 months as well as the trailing 12 months, Marsh's underlying growth was 3%.

The International division underlying growth was 1% in the second quarter.

In EMEA, revenue was flat.

Asia Pacific rose 3%.

And Latin America grew 4%.

For the first six months, International underlying revenue growth was 3%.

In U.S. and Canada, underlying growth was 2% in the quarter and was 3% for the first six months.

Guy Carpenter's revenue was $293 million, an increase of 3%, or 4% on an underlying basis, representing another strong quarter for Guy Carpenter.

It was better than what we had expected.

Strength in underlying revenue growth in the quarter was broad based, reflecting growth in North America, Latin America and Asia Pacific as well as increased demand for retrocessional reinsurance.

Underlying revenue growth for the first 6 months was also 4%, while underlying growth over the trailing 12 months was 3%.

In the Consulting segment, revenue of $1.6 billion was up 3%, or 4% on an underlying basis.

Adjusted operating income increased 3% to $298 million, while the margin held constant at 18.7%.

Similar to the first quarter, active M&A in Mercer at the end of last year and foreign exchange were headwinds to Consulting earnings growth.

However, underlying results remain strong, and we continue to expect solid operating earnings improvement and margin expansion in Consulting for the full year 2017.

Mercer's revenue increased 3% in the quarter to $1.1 billion and was up 3% on an underlying basis.

Within wealth, investment management and related services increased 11%, while defined benefit, consulting and administration declined 3%.

Overall, wealth grew 1% in the quarter.

Assets under delegated management at quarter-end were $191 billion, increasing 8% over the first quarter and 30% year-over-year.

Health increased 3%, with solid growth in North America and in Latin America.

Career underlying growth was 5%, with strong growth in surveys and our consulting around Workday implementations.

Oliver Wyman's revenue increased 5% in the quarter to $483 million.

Underlying growth was 7%, representing another solid performance led by strong growth in the United States, Asia and the Middle East.

Investment income was $5 million compared with $1 million in the second quarter of last year.

We expect the contribution from investment income will be de minimis for the remainder of 2017.

Foreign exchange in the quarter was a slight headwind to NOI, with a negative impact in Consulting, partially offset by a small positive in RIS.

Assuming exchange rates remain at current levels, we expect minimal impact to NOI from FX for the remainder of the year.

Our adjusted tax rate in the second quarter was 28.6% compared with 29.1% in the second quarter of last year.

Through the first half of the year, our adjusted tax rate was 25.9% compared with 28.8% last year.

The year-to-date tax rate in 2017 includes the impact of the required change in accounting for equity awards, which had a significant impact on our rate in the first quarter.

We continue to expect a 29% tax rate for the remainder of 2017, excluding any impact from discrete items.

Total debt at the end of the second quarter was $5.6 billion compared with $5.9 billion at the end of the first quarter, reflecting the repayment of $250 million of senior notes on April 1. The term structure of our debt portfolio provides us flexibility, with modest near-term repayment obligations.

Our next scheduled debt repayment is not until the fourth quarter of 2018 when we have $250 million of notes maturing.

In the second quarter, we repurchased 2.7 million shares of our stock for $200 million.

Through 6 months, the company has repurchased 5.4 million shares for $400 million.

The second quarter marks the 21st consecutive quarter we have bought back our stock.

Since announcing our commitment to reduce our annual share count at Investor Day in March 2014, shares outstanding have declined by 36 million or 7%.

Our cash position at the end of the second quarter was $966 million, with approximately $118 million in the United States.

Uses of cash in the second quarter totaled $442 million and included $200 million for share repurchases, $176 million for dividends and $66 million for acquisitions.

For the first 6 months, uses of cash totaled $1.3 billion and included $400 million for share repurchases, $351 million for dividends and $523 million for acquisition.

In May, our Board of Directors approved an increase in our quarterly cash dividend from $0.34 to $0.375 per share.

For the full year 2017, we expect to deploy capital in line with the level in 2016 across dividends, acquisitions and share repurchases.

The first half of 2017 represents a strong start to the year, with 3% underlying revenue growth, 70 basis point of adjusted operating margin expansion and 14% adjusted EPS growth.

As Dan said, for the full year we continue to expect underlying revenue growth in the 3% to 5% range, margin expansion in both segments and strong growth in adjusted EPS.

With that, I'm happy to turn it back to Dan.

Thanks, Mark.

Operator, we're ready to go to Q&A.

(Operator Instructions) We're going to go to Kai Pan with Morgan Stanley.

First, congratulations to John for the new position.

I'm wondering, John, if you could talk more about your strategic focus at Marsh and how do you tie that with the current market condition in term P&C pricing?

Thanks, Kai.

It's Dan.

I'll just start a little bit by saying how thrilled I am that John's 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.

And I'm sure John will put his own mark on the organization, and I'm looking forward to seeing the further developments as we go forward.

But John, you want to add a little bit of flavor to that?

Sure.

Good morning, Kai, and thank you.

I guess I'd start by saying that I've spent a lot of time with Dan and Peter to make sure that we were aligned on strategy before I joined the team.

I would also note that I was quite involved in the plan that we presented to the MMC Board of Directors last fall.

So I wouldn't anticipate any major changes to the strategy.

I do want us to operate in a more simple and agile way, so I'll take a look at our org structure, and I want to do it at the highest professional standards.

Thanks, John.

So basically, some structural changes, some simplification and some emphasis on the client experience and client initiatives around retention.

You have anything else, Kai?

Yes.

And just follow up on that.

If you talk about the current market condition because some said that the pricing's stabilizing, and some said it become increasingly more competitive.

How do you see that from your perspective?

And is that a headwind or tailwind to your business?

And seems like there's a little slowing down in organic growth in brokerage segments for this quarter.

But if you look at it like a first half, probably still in your range.

I just wondering is the pricing -- will pricing continue to be putting some pressure on the organic growth in brokerage?

Well, I think the pricing has put pressure on organic growth in -- across the businesses for a number of years now.

I wouldn't look at the second quarter as being the start of a new trend driven by price or premium reductions.

As you were just saying yourself, yes, 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 premiums, John?

So there was no meaningful change in pricing in the second quarter as compared to the first quarter of the year.

Overall, rates declined a bit more than 2%.

U.K. rates under a bit more pressure, where the decline was in the 4% range.

We did observe some modest increases in some classes of business and in some territories, commercial auto, for example.

Australia saw some modest increases in the quarter.

So we did observe that.

But we expect the market to remain competitive overall.

Thanks, John.

Next question please.

Will go to Elyse Greenspan with Wells Fargo.

My first question.

So it seems like there was a bit of an organic revenue shift from the second to the first quarter, which is why you guys kind of are gearing us towards the half year 1 numbers.

I'm just interested, is this something that we should think about when thinking about the second half of the year?

And I guess this kind of impacted both your U.S. and international business?

Just anymore color that you can just kind of give just in terms of the timing shift throughout the different businesses?

And if you could also just let us know how the growth within MMA was in the quarter and for the first half year?

Okay, so a couple of things.

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 would 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 break out 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.

Okay.

And then, my second question.

You guys saw 110 basis points of margin expansion in RIS Q2 and the first half of the year.

I know last quarter you guys had said maybe margins would be a bit tempered just -- the Q2 was pretty strong in that regard.

Can you just comment on, without giving exact numbers, just your forward outlook on the margin view there and just initiatives that you're working on within both Marsh and Guy Carpenter to continue to be able to manage your expense base and improve your margins there?

Sure.

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 maybe at a pace that's not quite as steep as it was last year, but it's still going down.

And so when I think about margins, one way to look at it is we would've liked to grow Marsh more in the second quarter than we did, and we operated expense controls throughout the year in recognizing that we are in this kind of lower-growth environment.

And so that's one of the reasons why the margin may have popped a little bit more than what we originally expected because we would've thought that we could've 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 tends to be multi-quarter, right, even multi-year.

And so that's why the margin may move around a little bit.

We'll go to our next question with Larry Greenberg with Janney.

Dan, just wondering if you can talk about -- I don't know, it was mentioned in one of the publications this quarter that you're starting kind of an alternative capital-backed facility for retail property, casualty.

I think the name of it was Alternus.

Can you just give us some color on that?

Okay, yes, I'll do a little, and then I'll hand off to John to give you little bit more.

But basically, it's not property and casualty.

It is property.

And basically, the way to look at it is there's 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 cat.

And so that was an inhibitor of greater levels of participation.

And Marsh very creatively thought 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 market's 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's 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 Alternus is doing, et cetera, but John, you want to add something to that?

Yes, as you mentioned, that we announced it in April, so it's still relatively early, but the takeup rate so far has been positive.

The feedback we've gotten from our clients has been positive as well.

It's a more efficient solution for our large-property clients.

So we think it's a great way where Marsh can bring better value to our clients than we have before.

Anything else, Larry?

Great.

Yes, any update on the FSA (sic) [FCA] investigation?

And I guess, does it mean anything that the PRA is now looking at facilities?

Well, a couple of things.

No, there's no update in terms of the FCA.

That investigation is ongoing, and we're cooperating fully.

Our -- we imagine it will take quite a while for them to -- work through their analysis and come to some sort of determinations.

But that's really all that I'll say on that at the 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, with the investigation that's going on in the aviation sector.

And we'll go next to Ryan Tunis with Credit Suisse.

Just a question for Dan on thinking about the relationship between margins and in organic growth.

So the emphasis, I hear you, is on the stability of organic within Marsh, how it's been 3% pretty much year-to-date.

It's been like that in '15, '16.

And if we would've gone back to '15 when it was at 3%, we talked about the headwinds, we might not have thought it was going to stay at 3%.

But I think if we knew it was going to be at 3%, we probably wouldn't have thought you would have expanded margins by 2 to 3 points.

So I guess, what I'm wondering is has kind of the fundamental equation changed about what gets you margin expansion?

Is it still -- do you still need well in excess of 3% over time?

Or I guess another way to ask it is, under what conditions would margins not expand going forward given what you've been able to deliver with just 3% organic growth?

No, 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, I'd just remind everyone we're in the -- 2017 is our 10th year of margin expansion.

And this -- it 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.

And 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 will 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 it -- 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.

Now 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.

Anything else Ryan?

We'll go next to Dave Styblo with Jefferies.

Dan, I'd like to come back to the sort of the lead-in that you came up with in terms of the technology and digital investments and hires that you made.

And I'm just curious to hear a little more about the genesis of that.

I'm sure it's been incubating in your minds for quite some time.

But are these strategic initiatives something that you've been hearing clients ask for?

And so it's a little bit response from that.

Or is it something that you just think can help out with better retention and new wins?

Or maybe it's some sort of combination of both or other factors?

It 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'm not -- 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 3 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 strategies.

So you look at Thompson's or PayScale equity investment or Torrent or Dovetail, they're one way or the other all digital plays.

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 that -- this is going to be an ongoing process, but I just wanted to highlight that for us the battle has been joined.

Okay, that's really helpful.

Maybe just a little bit more on some of the results for the quarter.

On reinsurance, you guys had another really strong quarter again, impressive at 4%.

And I just was trying to get a better sense on the macro conditions right now.

Are you guys continuing to see the pricing environment declines become less of a headwind?

Let me start there.

And then kind of more forward looking, there's -- in kind of canvassing this, it looks like there were a few reinsurance contract losses that I believe mostly start the second half, a couple in Florida with People's Trust and Capitol Preferred and then also with Argo.

I think all 3 of those went to the same competitor.

So that being the case, are you guys starting to see any sort of irrational competitor pricing behavior?

Or are there other reasons you can point to for that?

Or again, I'm sure there's always pluses and minuses in every quarter.

And is this just sort of a sample?

Or is this something that seems to be a little bit more pointed this quarter rather than in prior quarters?

Sure, sure.

So I'll start, and then I'll hand off to Peter.

One, I could say that we're really as an organization very pleased with Guy Carpenter.

And that's not a short-term phenomenon.

Guy Carpenter has grown underlying revenue 25 of 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 Peter to the mix, top-tier reinsurance executive, seasoned, smell of the market on him.

And so I expect that Guy Carpenter will continue to perform super well relative to its peer group over a long stretch of time.

But Peter, with that lead-up, what could you possibly say?

I think I smell pretty good.

David, a couple of things.

With regard to pricing, there still remains modest headwinds.

We're seeing some flattening pricing on the casualty side.

On the property side and the life side and action side, there's still fairly aggressive pricing, both in the traditional and in the alternative capital markets.

With regard to the loss of business, we have an incredibly high retention ratio within Guy Carpenter.

Having said that, it is incumbent upon us to build a very strong, robust and disciplined production platform in the event that we do in fact lose business that we can replace it quickly, and we do that.

We'll go to Jay Gelb with Barclays.

With regard to consulting, the expectation that earnings growth would improve in the back half because of less of a drag from client merger activity, is double-digit operating growth in the back half a reasonable expectation?

Yes, well, 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 margin.

And so that'll sort itself out as growth begins to come in.

And so it's really -- it's not it -- I mean, at the end, we think that there's been pretty consistent, strong levels of growth both in 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 5 years they're up 680 basis points.

And so given the first half of the year, I don't think you're going to have a dramatic increase in margins consistent with 680 basis points over a 5-year period.

But having said that, we do expect to see margin expansion in the back half.

That's helpful, Dan.

And then, with regard to RIS, it would seem that earnings growth -- the earnings growth rate would probably need to be higher in the back half than it was in the first half for RIS to achieve your full-year EPS growth goal.

Am I on track for that as well?

I mean, overall, we do -- we expect the company, particularly building momentum through the back half of the year, with usually a stronger fourth than third.

But we don't really have an annual goal with regard to adjusted EPS or margin expansion.

We expect it to be a good, solid year.

I mean, when I -- when we started the year, I was asked a question about 2017 versus 2016 and the macro environment.

And I pretty much said I thought 2017 looked 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's decent but fluctuates with the geopolitical cycle.

So we remain in the grind-it-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, it was really 9%.

And so I think in -- we feel comfortable with that kind of level -- at the level of growth that we were 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.

We'll go to our next question with Josh Shanker with Deutsche Bank.

In the new presentation of segmenting, you've added more disclosure on Consulting segment.

And the defined benefit segment, obviously, was an outlier with negative 3% growth.

Can we talk about whether that's a lumpy business in general, whether you're exiting low-margin businesses?

How should we think about that?

And can you go a little bit into detail of what's in that defined benefit and administration consulting practice?

Sure, I'll hand over to Julio 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 new defined benefit formation with companies and start-ups, et cetera?

No.

I mean basically companies today in almost every market, not exclusively but certainly in the United States and 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 of extracting value from our defined benefit practice, which and -- but Julio, do you want to give us some more on that?

Yes, thanks, Dan.

DVA, which is the sub-segment that you're referring to is comprised primarily of our advisory and administrative services around defined benefit plans.

And as Dan mentioned and everyone is very well aware, defined benefit plans are on the decrease for many years.

And while the number of plans have contracted over that time period, we have continued to maintain growth by capturing discretionary spend from advising clients through their derisking journey.

We've continued to expect that clients, from time to time, will make decisions to derisk further; and we'll get some benefit from that because we are certainly leading in that space when you compare us to others in the industry.

But quarter-to-quarter variances are going to happen, as we always know.

And depending about what our out-of-scope project demand looks like, such as buyouts, cash-outs or regulatory changes, they will vacillate.

And that will continue to be the case.

I do want to point to just one additional factor though is that we did do a restructuring that brought the wealth business together that has the defined now in a continuum that's very important to our clients that can lead to investment consultancy opportunities as well as investment management opportunities.

And you saw that a little bit displayed already in that quarter when we saw an 11% increase in our investment management.

Do you have anything else, Josh?

And I'm not trying to get guidance, but just to parse your words, would it be wrong for me to think of this over the long term as a subzero organic growth business?

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 it in a category of low levels of negative growth or low levels of positive growth quarter-by-quarter but on a declining trend.

We'll go next to Jay Cohen with Bank of America Merrill Lynch.

Yes, most of my questions have been addressed.

Just one last quick one.

Latin America, the growth in the quarter was the slowest we're in a long time.

I'm wondering what's happening in that market.

Was there anything unusual in the quarter?

There were a couple of unusual things.

But John, you want to talk about that?

Look, I think, Jay, the growth was acceptable given the volatility in the region.

So we saw some ups and downs by country.

We had strong results in Mexico and, I think, solid results in Brazil, especially given the environment there.

New business wasn't as strong, I think in part due to some of the volatility.

And we had some pretty strong prior year comps as well so -- weather impacted a bit of some project starts, and that had an impact on new business, but broadly speaking, it's a decent result through six months given the overall environment.

So focus more on the six month number as the message has been?

Yes, that's right.

I mean, Latin America is still a critical market for us.

And we -- when we look over a multiyear basis, it's our -- it's been our fastest-growing region.

We don't break out geographies, but Consulting had a decent quarter in Latin America.

So there's nothing fundamentally wrong.

There's obviously -- there's 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.

We'll go next to Arash Soleimani with KBW.

Quick question.

On -- we hear a lot on the cyber market.

There are estimates out there where premiums could go from $3 billion to $30 billion by 2020.

I'm just wondering if, broadly, you're seeing your clients' appetites increase such that a gross level of that magnitude seems feasible.

Well, we -- I don't think we're going to comment on the growth level whether it's going to go up 10x in the next 10 years.

I think all you guys have had the experience of the exchanges to think about before we start hitting 10x growth on any part of any of our Consulting or Risk businesses.

Clearly, cyber is here to stay.

And around the world, attacks 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 transfer, but you also get some comparative considerations as capital providers seeking to protect 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 John, do you want to talk about our cyber practice a bit and what we're seeing?

Sure.

Cyber risk is clearly on top mind of our clients and has been for a number of years here in the United States I think, given some of the regulatory changes that Dan mentioned.

It's increasingly on top mind for our clients outside of U.S. So we've been adding staff and expertise and developing partnerships with firms that, again, go beyond insurance procurement and help them manage the risk more broadly.

So it's a pretty fast-growing part of our business, a healthy growth rate, of more scale certainly here in the U.S. and relatively small subscale outside of the United States.

But we expect that to change.

Yes, one think I was looking at recently, and it's -- 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 dollars of limit that have 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.

Just also one other question, maybe for Peter.

I know Florida has been a weak spot in terms of rates on the reinsurance side.

I'm just wondering has the assignment of benefits crisis been factored into pricing conversations at all?

And do you see reinsurers getting any more pricing power from the assignment of benefits crisis?

Or is it not really a factor?

It's not really a factor because it's an attritional loss.

It's not a catastrophic loss.

And most of the reinsurance in Florida is catastrophic based and not risk and attritional based.

We'll go to Sarah DeWitt with JPMorgan.

Most of my questions have been answered, but just maybe to follow up a bit on the topic of commercial insurance prices.

You had mentioned the pace of commercial P&C insurance price declines has slowed a bit.

Do you see any signs that, that could turn positive in the next few years?

Well, I mean, rates are geared against losses and competitive environment.

There's 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.

So there's not naive underwriting like you may have seen in the 1980s or 1990s.

And so there's probably a tighter range of outcomes.

But certainly -- but it really depends on loss activity.

If the loss activity comes in, it'll put pressure on rates.

We are seeing on the reinsurance side some slowing down of or harder-to-place lines of business.

Certainly not anything approaching a hard market in any way, shape or form on reinsurance.

And usually you see reinsurance tighten before primary tightens.

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 U.K. market and the London market in particular has the deepest downdraft in the 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, Sarah?

And we'll go to Brian Meredith with UBS.

Yes, two questions here for you.

First one, just on the reinsurance side.

I've seen a big increase in issues of cat bonds this year.

How much of a tailwind has GC securities been to Guy Carpenter this year?

And could that be an issue potentially as we look at next year on comps?

Peter, you want to take that?

So basically to rephrase it, it's like is -- are -- is cat bond volumes fueling your 4%.

Brian, it helps, but it hasn't been a major contributor.

It's been pretty consistent in the amount of issuances that we've been involved with over the past 3 years.

Gotcha.

So you haven't seen growth like the rest of the cat bond market has?

The cat bond markets are pretty substantially this year?

Well, there have been 25 cat bonds.

We've placed eight, which is pretty consistent with what we've seen over the past three years.

Okay, great.

And then, Dan, my next question for you, and I imagine your regulators are pretty busy over in the U.K. There's been a lot of press also on the consulting side with respect to investment consultants and the FCA report.

How much is that from a revenue perspective for you guys?

And any color you can add in that situation?

Sure.

Well, just a little bit.

One, it's a -- an overall review of the marketplace and the dynamics of the marketplace.

And it started out broadly on asset management, including investment consultants, and now it's narrowed a little bit to investment consultants and the level of concentration that there are with the largest investment consultants and what that pertains to and the potential conflicts that could arise from that.

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 Julio, you want to talk a little bit about our business?

Yes, I mean, our business has been a flagship business in that part of the world.

And we anticipate that it will continue to be.

We have great expertise in the space.

And of course, we are cooperating fully with the FCA because we share their goals.

Their goals are to ensure that we have a competitive marketplace, that there's transparency, that we afford any -- avoid any conflicts and that we overall maintain high standards.

And that's kind of our goals, and that's how we operate in that market and will continue to operate in that market in years to come.

And so now, the FCA is in a determination stage, and we'll see how it goes.

But wherever it goes, we'll continue to cooperate, of course, with them and hopefully give them the opportunity to also take some of our best practices and apply it to the rest of the industry.

Thanks, Julio.

So I think we have time, operator, for one more question.

Okay, and we'll go to Adam Klauber with William Blair.

The acquisitions, you did a decent amount toward the end of the year.

What does the pipeline look like right now?

The acquisition pipeline is good.

I mean, we are -- we look at a lot of different things, not from a detailed due diligence basis but where we've got good peripheral vision.

We're alive in the marketplace, so we have a good look across both RIS and consulting.

And I would say when we look at our pipeline, it 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.

Certainly, 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 of 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 got 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 seeing something right up the alley of our strong suit where we'd get some synergy and some decent earnings growth out of it through some expense saves.

But our overall acquisition strategy is geared toward faster-growing businesses.

And the P&C side, would you ever go back in the wholesale business?

Well, I don't know if there's 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've preferred that we didn't exit that kind of specialty placement business, yes, the answer would be I would prefer that we would -- would've been still in that business.

But would we go back in?

It's a different kind of question.

I mean, I think they've done a very nice job.

There's some good companies out there.

But we're an awfully big company, and we wouldn't want to do something in a really minor way on a structural basis like that.

But fundamentally, we look at the wholesale business -- the 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.

That concludes today's question-and-answer session.

Mr. Glaser, I'd like to turn the conference back to you for any additional or closing remarks.

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 and our colleagues for their hard work and dedication in serving them.

Thank you very much.

This concludes today's call.

Thank you for your participation.

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