威達信集團 (MMC) 2018 Q1 法說會逐字稿

Welcome to Marsh & McLennan Companies Conference Call. Today's call is being recorded.

First quarter 2018 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 risks 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 also 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 this over to Dan Glaser, President and CEO of Marsh & McLennan. Please go ahead.

Thanks, Mindy. Good morning, and thank you for joining us to discuss our first quarter results reported earlier today.

I am 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 I review our results, I'd like to make some comments on the current environment. We are living in an age of disruption, but it is also an age of possibility. At Marsh & McLennan, we are well positioned to make a difference for our clients as they navigate in the increasingly dynamic and complex world. Companies are facing challenges that cut across many dimensions: the global economy, geopolitical threats, environmental concerns, severe weather, cultural change and technology amongst others. All of these are significant. But the changes due to advances in technology seem to test us in different ways on a daily basis. With digital advances amplifying both the risks and the opportunities for business and society at large.

Artificial intelligence, machine learning, robotics and cloud-based platforms are creating significant potential for our clients. At the same time, this has given rise to growing risks as well as human challenges around how the workforce of the future needs to adapt to this changing environment. These newer challenges are emerging alongside many of the existing concerns for society, such as demographic shifts; retirement savings, the affordability of health care and the insurance protection gap.

Marsh & McLennan's expertise spans all of these areas and it is relevant and enduring. We provide our clients with valued content, expert advice and strategic solutions in the areas of risk, strategy and people. For example, both Marsh and Guy Carpenter are doing valuable work to improve risk modeling and better address protection gaps in the areas of flood and cyber.

Mercer is engaged in meaningful work that directly addresses timely issues around the future of work, health care affordability and access, as well as helping people achieve financial security for life.

Mercer works with clients to ensure, to the extent possible, that technology enhances rather than replaces a company's greatest asset, their people.

Oliver Wyman is continuing to expand its digital technology and analytics team, which is developing digital strategies in creating new business models for clients to address major challenges through advanced analytics.

The DTA team is currently engaged in multiple projects creating the entire digital ecosystems for companies across industries. We have a broad and unique set of capabilities that differentiates us from other professional services firms.

The drive for exemplary performance is embedded in our company's culture. We are focused on our clients' needs and the solutions to help them achieve their goals. Our colleagues have consistently delivered for clients and shareholders. We recognize the critical balance of delivering for today, while investing for tomorrow. While our capabilities, resources and global reach are significant, we constantly strive to get better, investing for the future and increasing operating efficiency. These efforts enhance our ability to help our clients navigate their changing risks and capitalize on growth opportunities.

As I look across our businesses, over the last decade, they each have undergone changes to position for the long term, while at the same time, consistently delivering strong results.

As I noted, (technical difficulty) the macro picture seems to have stabilized and there is more confidence among CEOs around the next couple of years than there has been in the recent past. However, this optimism has not yet translated into significant changes to GDP forecast versus a year ago. While U.S. GDP is up slightly, with some likely benefit from tax reform, growth in other areas of the global economy, such as the U.K. and Europe, remain roughly unchanged, impacting overall global economic growth, which is still relatively low.

We are also in a fast-changing and volatile world. The recent debate around global trade underscores how quickly the economic and risk landscape can change. While volatility and uncertainty present challenges, they also present opportunities. As we have proven, over the past decade, our businesses are well positioned to deliver in a variety of market conditions.

Let me spend a moment on current P&C pricing trends. The Marsh global insurance rate composite saw an increase of 1%, in line with the level experienced in the fourth quarter.

Global property lines continued to show the longest degree of rate increases. Casualty rates are down about 2%, while professional lines pricing increased 2% in the quarter.

Turning to reinsurance, Guy Carpenter's global property catastrophe rate online index increased 6% for the January 1, 2018 renewals. More recently, the pricing data coming out of the April 1 renewals, which are primarily focused on Japan, was closer to flat. Although, several carriers have been vocal in their expectations for rate increases, current market conditions do not seem to support any material pricing momentum from current levels absent other changes.

On balance, while not providing much tailwind, the headwinds we've faced on the macro front have at least abated for now providing us the backdrop for a good year.

Now let me turn to our first quarter performance. MMC had a good start to the year. We generated consolidated underlying revenue growth of 4%, with underlying revenue growth across all 4 of our businesses.

Consolidated revenue was $4 billion, up 14%, or 10% excluding the impact of ASC 606, the new revenue recognition standard.

Adjusted operating income grew 24% to $918 million. Excluding the impact of the new revenue standard, adjusted operating income grew 10% and the adjusted operating margin expanded 10 basis points in the quarter.

Adjusted earnings per share grew 28%. Excluding the impact of the new revenue standard, adjusted earnings per share increased 14%. In Risk and Insurance Services, first quarter revenue was $2.3 billion, an increase of 18%, or 9% excluding the impact of the new revenue standard. Underlying revenue growth was 3% in the quarter, driven by strong growth in Guy Carpenter, up 7%. Marsh had underlying growth of 2% against the challenging comparison of 5% in the prior year period.

Adjusted operating income of $723 million increased 30%. Excluding the impact of the new revenue standard, adjusted operating income grew 11% and adjusted operating margin expanded 50 basis points in the quarter.

In Consulting, first quarter revenue was $1.7 billion, up 9%, or 10% excluding the impact of the new revenue standard. Underlying revenue was 5% for the quarter with strong underlying contributions from both Mercer up 5%, and Oliver Wyman, up 6%.

Adjusted operating income of $248 million rose 8%. Excluding the impact of the new revenue standard, adjusted operating income grew 10% and adjusted operating margin expanded 10 basis points in the quarter.

In summary, we are pleased with our strong start to the year. For the full year, we continue to expect underlying revenue growth in the 3% to 5% range, margin expansion and strong growth in adjusted EPS.

With that, let me turn it over to Mark.

Thank you, Dan, and good morning.

In the first quarter, we delivered strong results with underlying revenue growth across all of our businesses.

Overall revenue was up 14%, or 10% excluding the impact of new revenue standard, ASC 606. On an underlying basis, which is directly comparable to the prior year, revenue grew 4%.

Operating income in the quarter increased 21%, while adjusted operating income was up 24%. Excluding the impact of the new revenue standard, adjusted operating income increased 10% and the adjusted margin increased 10 basis points.

GAAP EPS rose 23% to $1.34. Adjusted EPS increased 28% to $1.38. Excluding a $0.15 per share benefit from adopting the new revenue standard, adjusted EPS grew 14%.

Before I review our results, I want to briefly mention some changes to our press release schedule.

As we mentioned last quarter, we adopted the new revenue standard using a modified retrospective approach. Comparisons to 2017 will be presented by eliminating the impact of the new revenue standard from our 2018 results and comparing on that basis to 2017. This approach carries through our press release schedule and is consistent with footnote disclosure you will see in our 10-Q as required by the new standard. We believe this is the best way to assess our year-over-year performance for 2018.

We've also reflected the required change in the presentation of pension expense on our income statement and have restated 2017 to be consistent with the new presentation.

Finally, we've added supplemental information on operating cash flow to Page 12 of our schedule.

Turning to results.

In Risk and Insurance Services, first quarter revenue was $2.3 billion with underlying growth of 3%.

Adjusted operating income increased 30% to $723 million. Excluding the impact of the new revenue standard, adjusted operating income grew 11% and adjusted margin expansion was 50 basis points.

At Marsh, revenue in the quarter was $1.7 billion with underlying growth of 2% against the tough comparison of 5% growth in the first quarter of last year.

In U.S. and Canada, underlying growth was 3%. In the International division, underlying revenue was flat with Latin America up 6%, Asia-Pacific up 4% and EMEA down 2%.

Guy Carpenter's revenue was $637 million in the quarter. Underlying growth was 7%, with roughly equal contributions from new business and rate increases driving the growth. This is the fifth sequential quarter of 4% or higher underlying growth for Guy Carpenter.

In the Consulting segment, revenue in the quarter was $1.7 billion with underlying growth of 5%. Adjusted operating income increased 8% to $248 million. Excluding the impact of the new revenue standard, adjusted operating income growth was 10% and adjusted margin expansion was 10 basis points.

First quarter saw a continuation of the strong underlying revenue growth Consulting experienced in the fourth quarter. The Consulting segment has averaged 4% quarterly underlying growth since the first quarter of 2010.

Mercer's revenue was $1.2 billion in the quarter with underlying growth of 5%. Underlying growth was strong across all 3 businesses. Wealth was up 3% in the quarter. Within Wealth, Investment management & Related Services increased 15%, while Defined Benefit Consulting & Administration was down 4%.

Our delegated asset management business continues to show strong growth with assets under delegated management growing to $242 billion in the quarter. Asset growth was almost entirely driven by new funding. Health increased 7% in the quarter and benefited from solid retention in our core business, as well as higher enrolled lives in Mercer Marketplace 365 and strong growth from Thompson's online benefits.

Career grew 4% with strong growth in International and continued momentum in Workday implementation.

Oliver Wyman's revenue was $497 million in the quarter with underlying growth of 6%. Results were strong across most parts of the business, including financial services, consumer, industrial, public sector and actuarial.

Adjusted corporate expense was $53 million in the quarter and included the onetime tax reform-related award to U.S. colleagues earning $55,000 or less. We expect corporate expense will be approximately $45 million per quarter for the remainder of the year.

We are pleased with our strong start to the year. We delivered 10% adjusted operating income growth, 14% adjusted EPS growth, excluding the impact of the new revenue standard. Revenue recognition is creating increased seasonality, but beyond the impact of this accounting change, our own planning this year calls for more variability across quarters than you would typically see in our results. Given this, we thought it would be helpful to discuss our view of the quarters for the balance of the year.

While we continue to expect strong operating income growth with margin expansion for the full year 2018, we believe consolidated margin, excluding the impact of the new revenue standard, will be down slightly in the second and third quarters and up significantly in the fourth quarter. This is due to some tough expense comparisons in the next 2 quarters that will have a larger impact on RIS in the second quarter and Consulting in the third quarter. Another factor impacting margin is foreign exchange. While FX had a de minimis impact on operating margins in the first quarter, we estimate it will be a headwind to margins for the remainder of this year based on current exchange rates.

Looking through the quarterly variability, we expect full year 2018 will be strong with double-digit EPS growth.

Turning to investment income. On an adjusted basis, we had $7 million of investment income in the quarter mainly from our private equity investments. However, as you will see in our GAAP income statement, we are showing no investment income in the quarter, as these gains were offset by mark-to-market adjustments required by the recent change in accounting for certain equity investments. We do not view the volatility caused by these adjustments as reflective of our underlying business performance and will, therefore, be showing them as a noteworthy item.

On an adjusted basis, we continue to expect the contribution from investment income in the remaining quarters of 2018 will be immaterial.

Our effective adjusted tax rate in the first quarter was 23.5%, essentially the same as last year's first quarter, as the benefits of a lower U.S. tax rate were offset by a reduced discrete tax benefit from share-based compensation.

In the first quarter of 2017, we recognized an $0.08 per share benefit from last year's required change in accounting for share-based compensation. While in this year's first quarter, we had about a $0.04 per share benefit.

We expect that most of the tax impact from equity awards will be recognized in the first quarter of each year, which is when most of our equity awards [vest]. Excluding discrete items, our effective tax rate was 26%, in line with our 2018 guidance of 25% to 26%.

As we said last quarter, the U.S. tax reform legislation is new and is there a possibility that there will be further guidance from the U.S. Treasury and others on the interpretation or application of the new rules. This can result in adjustments to our estimates as we move through the year.

Total debt at the end of the first quarter was $6.3 billion compared with $5.5 billion at the end of 2017. In March, we issued $600 million of 30-year senior notes at a rate of 4.2%.

With this new debt, we expect the second quarter interest expense will be about $67 million. The term structure of our debt portfolio provides us flexibility with modest near-term repayment obligation. Our next scheduled debt repayment will be in October of 2018 when we have $250 million of notes maturing.

In the first quarter, we repurchased 3 million shares of our stock for $250 million. This quarter marks the 24th consecutive quarter we have bought back our stock and since announcing our commitment to reduce our annual share count in March 2014, shares outstanding have declined by 41 million or 7%.

Our cash position at the end of the first quarter was $1.2 billion. Uses of cash in the first quarter included $250 million for share repurchases, $189 million for dividends and $109 million for acquisitions.

For the full year 2018, we continue to expect to deploy at least as much capital as the $2.5 billion we deployed in 2017 across dividends, acquisitions and share repurchases. We expect to deliver on our annual capital return commitments to reduce our share count and increase our dividends per share by double digits.

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

Thank you, Mark. Operator, we're ready to take the questions.

(Operator Instructions) And we'll go to Elyse Greenspan with Wells Fargo.

My first question, when looking at your International business within Marsh, obviously, a tough comp there this quarter which you guys highlighted. And just when you think your 3% to 5% organic growth outlook for the full year and you benefit from some easier comps in the next 3 quarters, do you see the growth improving, kind of, sequentially as we go throughout the year? Or how do you envision just the growth internationally? And maybe if you could just also comment about what you see within EMEA as well?

Thanks, Elyse. I'll start with it and I'll hand over to John. If you go back 5, 6 and 7 years ago, consistently, International outperformed the U.S. International has still been a tremendous performer for us on the top line. The difference is that the U.S./Canada division largely recovered and now it is kind of neck and neck and sometimes actually outperforms on the top line from our International division. I'm not sure we're going to get into how we think about future quarters and what can happen because the world is so dynamic, but John, you want to add some to Elyse's question?

Sure. Maybe I'll talk about growth overall and then drill down a bit on International. Overall, we grew 6% in the quarter when you include the impact of M&A, as Mark and Dan both mentioned, the underlying growth rate for Marsh was 2% in the quarter. Although, I expect stronger growth for Marsh, and we did have a strong start to the year in 2017. The U.S. did have a solid start to the year, pretty much across the board. We also had a strong growth in Canada during the first quarter. In the International divisions, results were mixed around the world. In the U.K., had a challenging start to the year. Economy there and London market challenges persisted for us and brought down the overall growth rate of EMEA and our International operation. Continental Europe, on the other hand, had a solid start to the year, as you know, the first quarter there is quite important to the full year results on the continent. And Asia-Pac and Latin America continued to perform well in the quarter. You may have also noted that we've recently announced some changes to our international leadership team. Chris Lay, who is a Marsh veteran, will assume the leadership of our U.K. and Ireland operations subject to regulatory approval. Chris most recently had been leading our operations in Canada, where we've had a nice turnaround of various leadership over the course of last couple of years. Sarah Robson is going to step in and assume the leader of our operations in Canada for Chris. Then we also added Christos Adamantiadis to the team. He is going to join us next week and lead our operations in the Middle East and Africa, which has also been a soft spot for us over the course of the last year or so. Christos was most recently the CEO of the Oman Insurance Company, and prior to that, he was a long-time vet in AIG's international insurance operations. So I'm excited about those changes. They strengthen our leadership team as we look forward.

Thanks, John. Elyse, anything else?

Yes, in terms of consulting, I know trying not to get fixated on 1 quarter, but margin expansion was about 10 basis points, if we exclude the impact of rev rec. You guys printed a pretty strong 5% organic. So just -- I would have expected -- maybe the margin expansion would've been a little bit higher this quarter. So can you just comment anything beneath the numbers? And I guess, some quarterly variability you pointed out in the back 3 quarters. But just how you see the margin expansion for that business just on an overall basis going forward?

Sure, sure. And as you know, we've expanded margins in Consulting quite considerably over a number of years. As we said before, margin expansion for us is an outcome of our discipline to grow revenue in excess of expense over long periods of time. It's not going to happen every quarter. And in the first quarter, as you mentioned, Consulting was good on growth but light on margin expansion. And we would take the trade-off of near-term margin impact to position us for future growth, much as we've been doing over the last couple of years. And we do that all while we deliver strong operating income growth. So in Mercer, last year, we highlighted investments in areas such as Thompson's and Mercer Marketplace 365. These are growth areas, but they still represent some margin headwind as the scale continues to build in those businesses. In OW, we have been making investments in people and digital capabilities. We've also had a couple of small acquisitions that have a moderate negative impact on margin, but in our belief, they improve our capabilities over the longer term. So I just want to emphasize that we will continue to invest for growth and some of those actions, periodically, will have an impact on margin. Our focus is on growing operating earnings. Consulting grew NOI by 10% in the quarter and they've averaged 10% NOI growth over the last 5 years. And so that's where our primary focus is as opposed to margin.

We'll go next to Kai Pan with Morgan Stanley.

So your 3% to 4% -- like 4% overall organic growth right in the middle of the fairway of your full year guidance. But there are some bright spots, I want to touch upon. And can you provide more detail about Guy Carpenter, like pretty strong 7% growth? As well in Mercer, health seems like increased a lot, like 7%. Can you provide more detail on this?

Yes, absolutely. So first, we're pleased with the top line in the first quarter. I mean, clearly, we like Marsh growing more, but bear in mind that they grew 5% in the first quarter last year. But the other 3 of our operating businesses all grew better in the first quarter of '18 than in '17. Guy Carpenter 7% versus a 4%, Mercer 5% versus a 3% and OW 6% versus a 4%. So to us, it's a good top line start to the year. But Peter, why don't we -- why don't we talk about Guy Carpenter first.

Yes, Dan. We're very pleased with Guy Carpenter's performance in the first quarter. As you said, it's 7% underlying growth in Q1 over a strong comparable of 4% in Q1 2017. The Q1 growth benefited from a combination of continued strong new business growth as well as from the overall rate environment. And we continue to have strong pipelines with new business opportunities throughout the year.

Thanks, Peter. Julio?

Thank you. Mercer had a solid performance across all lines of business and geographies. It was good to see that our underlying growth came in at 5%, consistent results in our faster growth businesses around wealth. I know that you wanted to mention health, but let me just over a little bit about some of the other things that happened as well this quarter. We had some good growth in Wealth as expected in our investment management business, up 15%. And as Mark mentioned earlier, our assets under delegated management we have now are around $242 billion. In career, we also had strong client demand for our surveys and our Workday implementation offerings. In health, which was specific to your question, we had solid increases in client retention, higher bookings and higher in world lives in Mercer Marketplace 365. Our Thompson's online dialing technology applying to our health level benefits consultancy business also had some really good results in the quarter. And we expect that these investments that we made will continue to help us with growth. But as always, there's seasonality in that growth and a little bit of the commissions that we had in the quarter may have been a little bit forwarded into the quarter from other quarters. So you might see a leveling off of that growth rate as these quarters continue.

Okay. Thanks. Anything else?

,

Yes, my follow-up question is on the expense side. Their report about their streamlining operations in Marsh and also you're looking at overall operating model. So just wondered, if there are any opportunity for further margin expansion there?

There's opportunity for margin expansion in both of our segments. And I think we'll capture that over a number of years. We're always seeking ways to improve our speed and become more efficient as an organization. And we tend to invest as we go and improve as we go. But periodically, there'll be opportunities to make some structural improvements. Now John and his team have been digging in to make Marsh more agile. It's not a huge change. And it's not going to be a tremendously large cost for a company the size of Marsh. So I don't think we're going to talk much about it. But John, can you add a little to it?

Sure, sure, Dan. We have recently begun an effort to simplify our organizational structure. The result of that will be fewer layers of management and our leaders on average will increase their spans of control. We're going to have greater consistency across our regional operations around how we're structured as well, with more focus on the 3 client segments that we serve. Those 3 segments being our large risk management clients, the middle market, or as we described them at a corporate account and then the small commercial and consumer segments. We need more focus on those segments, looking forward. We're also moving some decision making closer to the client as part of this process. All of this will enable us to move more quickly, be more agile, as Dan mentioned, which we think is very important to our clients in this environment. And we expect an improved client experience as a result of that. We look forward to updating you on our effort with greater detail next quarter.

We'll go next to Sarah DeWitt with JPMorgan.

I just wanted to follow up on your comments on P&C insurance pricing. We've now heard Chubb and Travelers say on their earnings call that pricing has accelerated. And they saw an acceleration month-by-month during the quarter.

I just want to get your thoughts, do you agree with that assessment? And what's your outlook going forward?

Well, we're talking about relatively low numbers. And I'll hand off to John to give you some more depth. But these are very low single digits in both directions. And so from that standpoint, it's not -- it doesn't seem to be that there is a significant amount of momentum. And there is some structural reasons why carriers have higher levels of growth rate than what we would show. But John, you want to get into that a little bit?

Sure. Sarah, overall, I would characterize the market as stable. We saw rate change -- an increase in rates just under 1% in the quarter, which is actually slightly less than what we observed in the fourth quarter. In the fourth quarter, we did observe a month-to-month uptick in pricing. We did not see that in the first quarter on our portfolio. Casualty pricing was down nearly 2% in the first quarter, really driven by work comp, where prices are under some pressure. Property was up just under 3%, and -- and the fourth quarter rates were up nearly 4%. Of course, in cat-exposed property with HIM losses are -- those accounts are experiencing more significant increases. FINPRO pricing, financial lines pricing, was up almost 2% in the quarter, which was up a bunch -- or up compared to relatively flat results in the fourth quarter. In our regional view, U.S., Asia, Europe, Lat, all fairly flat or even down slightly. Australia pricing is probably the one exception where prices are up in the high singles to even low double digit by product. So markets remain competitive, which, as we discussed in October, is what we expected. As Dan said, the numbers from insurers are -- can be a bit different. I'd point out and I mentioned this last quarter as well, I think insurers typically don't include new business in their rate. It's a renewal pricing change, obviously, some of our businesses -- some of our business changes hands and that typically is happening at a cheaper price. I would also say not every insurer is the same, right? And then the outcome for each insurer isn't the same. Insurers that have a lead position, for example, on important lines of business are typically able to drive greater rate change than maybe some following markets that are more capacity players in certain product lines. So -- but again, overall, things remain fairly competitive.

Thanks, John. Sarah, I just want to reemphasize. So what John was saying about the structural differences between how a broker looks at rates versus how a carrier, let's say, a carrier loses 20% of their business to its competition. Well a lot of that is because the competitor is offering lower terms, right? Well they are not counting that 20% of lost business in the ongoing rate change that they are seeing in their portfolio and so in some ways, they're only looking at the good guys. Whereas, when we're looking at it, we're seeing both business as it trades hands at lower prices between carriers. So that may be one reason for the difference. But next question? You have a follow-up?

Yes, if I could have one follow-up. Just on the U.K. market review. I guess, we -- it seems like we heard a little less complaining from the insurance companies about the brokers lately. And just want to see if there was any developments on that front?

Yes, I mean -- first of all it's still in ongoing review. So we're not going to comment in any great depth. As we've said before, insurance companies and brokers have a love-hate relationship, and we've been complaining to each other pretty equally over the last 50 years. So I don't think much has changed. The softer the market, the higher levels of complaints about brokers, and the harder the market, the more brokers are complaining about carriers and lack of supply. So ultimately, I think this is kind of business as usual in terms of activity between brokers and insurance companies.

We'll go next to Arash Soleimani with KBW.

Just to start, I just wanted to ask with MMA, are you seeing any change in the competitive landscape there post tax reform?

I'll take it and I'll hand off to John if there's any follow-up. But, no, we're not seeing any change. But bear in mind, we're not -- we don't view ourselves as a competitor to P/E. So the changes in tax reform that have maybe a more significant impact on P/E returns really don't impact us. Our primarily competitor is whether an agency is staying private or not. We generally don't participate in auctions and we virtually never compete against P/E for one of the companies in the MMA space. But John, do you have anything to add to that?

We've earned a reputation of being a good buyer that leads to some really terrific conversation. So we remain quite active in the market. Obviously, we're looking for high-quality assets that are good cultural fit and they're growth-orientated. I mean, it's typically in the middle market or the SME segment, not exclusively. But we're quite active in conversations, not just in the United States but all around the world.

Any other question, Arash?

Yes, just one other quick one. You mentioned the Japan renewals. The April 1 being flat. Looking ahead to June 1, do you see -- because you have a lot of loss-impacted business renewing there, do you see some maybe upward momentum in rates there? Or do you think we could see further rate erosion?

That's primarily a reinsurance question. So I'll hand it over to Peter.

Yes. Arash, obviously, we don't have enough data points yet to determine what's going to happen in Florida. But if I use 1/1 as a guide, I think that you'll see very much of a customized approach, where those accounts that have sustained loss will probably have -- drive towards rate increases and those who that don't, I'd imagine, with the abundance of capital that's in the market, prices will remain flat.

We'll go to Paul Newsome with Sandler and O'Neill.

A little bit of a follow-up on M&A. I just want to ask sort of more broadly about any updated thoughts on acquisitions for Marsh? Not just in the agency business, but broadly and just trying to figure out, in our own models, just what kind of revenue impact that might have perspectively?

Sure. As we've said before, we don't have a budget around acquisitions. Although, we are active, we have lots of conversation. As John was saying, we are definitely viewed as not only a top-tier company, a blue-chip company, but also a fair acquirer. We do what we say. And we don't like renegotiate after the closing. We actually follow through with the team and we believe, the -- fundamentally, the chemistry and the quality of people on the other side are the most important factors. The economics, we can figure out if there is a meeting of the minds between both parties. And so our philosophy is that we have no budget or timetable. Quality is the #1 thing that we focus on. We prefer companies growing faster and that are trading below our multiple and where we have really good chemistry. And actually we seek acquisitions that will improve MMC: broader, deeper, better in terms of capabilities or segmentation. And I am happy to say both in the RIS segment, particularly Marsh, and in the Consulting segment, we see a number of opportunities. It's a rich pipeline but that doesn't mean we'll be closing a lot of deals. We also are a meticulous acquirer. We dig in deeply and we really want to understand the business. And so we don't do many deals. But the ones that we do work. And as you've seen over the last number of years, I think, since January 1, 2009, we've done more than 130 transactions. And so from that standpoint, we're an active acquirer. When we look right now at where we are, the last couple of years we've been spending about a $1 billion a year in terms of value -- of transaction value. That's as good a guess as any, but there will be some years where it might only be a couple of hundred million dollars, because for one reason or another, it doesn't come together. So we favor share and we favor acquisitions over share repurchase, but we favor share repurchase over building significant amounts of additional cash on our balance sheet. So from that standpoint, I would look at us as being -- we will commit that capital, it will either be via acquisition or share repurchase in most circumstances.

If we're watching the share repurchase amount quarter-to-quarter, is that an indication directly of how you see the pipeline for acquisitions?

No, not really. But Mark, do you have anything to add to that?

Yes. Paul, over the last couple of quarters, you've seen little bit of uptick, but I wouldn't read anything into that. I mean, as Dan said, the -- ultimately where we land in that balance between repurchase and acquisition, we're more driven by M&A. As you noted -- probably noticed in the first quarter, we're off to a light start. We did do 5 transactions but they were relatively small. But our pipeline is good. And so our hope would be, as we move through the year, M&A activity will pick up. But as Dan said, we repurchased a substantial amount of stock over the last couple of years, and we have that minimum commitment that I referenced. But our expectation is that we would do more than that, with the ultimate mix really being determined by the level of M&A activity.

We'll go next to [Mike Zarinsky] with Crédit Suisse.

Dan, one of the -- in the prepared remarks, you talked about a number of kind of corporate concerns and you didn't mention cybersecurity. I know that cyber insurance gets a lot of air time. And we know there's probably not as much broken capacity today as it will be down the road. So I was curious about the fast-growing cybersecurity consulting side of the equation. Is that an area Marsh is able to assist clients and capitalize on?

Absolutely. I mean, at the end, we start with risk, right? Insurance whether it's regular P&C insurance or more specifically cyber insurance is an outcome and is a partial solution. But we really help clients evaluate risk on a broader basis. And cyber is no different than that. So it's about identification and mitigation, avoidance and also risk management in cyber and [menace] about what kind of risk transfer makes sense. And so I would say all 4 of our operating companies is involved in cyber on one basis or another. In regard to the retail clientele of corporations, obviously, we've got significant capability on the consulting side within Marsh but also transactional capability. But don't forget about Oliver Wyman. Oliver Wyman has significant evaluation capability within cyber. And those are growing businesses for us overall.

I'd like to point out that we believe that there will be spurred growth over the next several years as -- in the EU as a result of GDPR, which -- we think it will be a big driver because there's mandatory breach notification and cyber insurance is some element of mitigants around the risk. And so we do believe they'll pick up levels because to date if we look back over the last several years, let's say the last few years, 90% of the cyber premium in the world has been United States. It is not 90% of the cyber attacks and so from that standpoint -- the other point that I would just want to make because it's some issues that we were tackling when we were all at Davos is that the threat is not only to data. I mean, the vectors of attack are changing. And we see the possibility of physical assets as well as bodily injury and loss of life. So this is not just a property issue, this -- and a business interruption issue, this is also potentially a casualty issue as well. But do you have a follow-up question, Mike?

Yes, one follow-up. The investment management and related growth picked up again. And I was just curious, is there a tie-in to the appreciation of the capital markets, because the markets, as you guys know, didn't increase in 1Q, but organic did increase? So just, kind of, maybe some color on what's going on there.

Sure. Thanks. Julio, do you want to take that?

Demand for our investment management delegated solutions business continues to be strong. The trajectory is strong. We're continuing to fund the assets that we have sold to our -- on behalf of our clients on a fund-to-fund basis. We have double-digit growth. We now have over $240 billion, as I mentioned, assets under delegated management. We're really proud of the work that we're doing both in our investment consultancy and our DB actuaries, but the DB business helps us. It helps us form that continuum for our clients as they think about how they match assets and liabilities. So we continue to see success there. Most of our success in the first quarter was actually new funding that came from client wins that we had over the months prior to. As you know, we don't want to sit here and depend on market performance, we can't control that. So what we do depend on is strong pipelines, strong conversions, great value proposition and ultimately good results.

We'll go next to Yaron Kinar with Goldman Sachs.

Just want to follow up on pricing. You'd mentioned that there are some structural differences between how you calculate pricing and the way that the carriers do? I guess, one thing I want to get a better understanding of was when you look at pricing, do you try to adjust for changing terms and conditions, whether it's changing deductibles, attachment points, exclusions, et cetera? And do carriers do that as well by -- to the best of your understanding?

It's a good question. And I remember my days of a carrier. And that's one of the -- those [loosey] areas that certain carriers do a lot of adjusting based upon terms and conditions or detectable change. And that's where some gaming may take place here and there where deductible goes from a $100,000 to $500,000 and somebody gives a 15% credit as a result and somebody else might give no credit, because it's a capacity type of exposure. So -- but John, do you want to take that?

We do attempt to adjust for certain changes in terms and conditions. So deductible or attachment point certainly being one of them. We do adjust for that. Where we can see direct correlation between certain exposure elements to pricing, we'll do that as well. But as Dan noted, it could account for some of the differences as well. We don't know the increased limit factors, for example, that an insurer would use, as opposed to kind of how we see it. So I'm sure that could account for some of the difference as well.

I think, the thing to really focus on is nobody is saying this is a hard market. There's no carrier out there saying that and there's certainly no broker saying that. I mean, this is still a market that has abundant capacity, that has many, many capital providers and where the supply of capital exceeds the demand for that capital, that will always put some level of downward pressure on terms. Now losses are the great equalizer. So let's look over into the future, we'll see where the market is depending on the level of loesses borne by the market. And that will the principal determinant. Do you have a follow-up question, Yaron?

Yes, I do. And maybe just to close on -- just for a second. So it's not necessarily that the carriers are seeing a different set of data than you and some of your broker peers are when you see rates may be flat to slightly down and they're still talking about momentum and it may just be interpretation of that data that's driving that, right?

Yes, but it's also, people are generally looking at their own data. Not purchased data and not market data. And so different portfolios have different characteristics. And different brokers skew to even larger accounts or midsize accounts or smaller accounts, and the carriers have different levels of specializations and lines of business. So that's where you're getting these differences.

Okay. And then the second question I had, I think is a quick one. On the FX headwind that you highlighted, is that mostly due to the U.K. business where you're generating dollar revenues against pound expenses? Or are there other drivers there?

Mark, why don't you talk about FX in the quarter, but also give some element of FX for the year as well.

Yes, I will broaden in a bit but the direct answer to your question, you hit on it, it's really the effect of the pound for the balance of the year. The first quarter, given Marsh's renewal book, the euro was really what drove the results. And so we saw the lift in revenue, but as I said, no impact on margin. Because of this natural hedge that we tend to have because of U.S. dollar placements in London that you mentioned and significance of the pound for the balance of the year, will have really no impact on earnings but still see -- expect to see a lift in revenue and therefore, you get that headwind on margin.

We will go next to Brian Meredith with UBS.

Just quickly following up on that, was there an impact on earnings in the quarter from FX? I know you said de minimis on margins?

Yes, it would be in line because there was no margin impact you'd expect, it would be in line with the -- what saw in revenue.

To what you saw in revenue. Great. And then my second question, just curious, on the organic revenue growth at Guy Carpenter, was there any of that growth that would, call it, onetime in nature, like capital market transactions? I know there was a lot of cat bond issuance in the quarter?

Well, as John and Julio and my ex-boss used to say, it's only onetime if you don't do it again. So cat bonds have -- yes cat bonds are individual, but we are in the cat bond business and the ILS business, so we would expect to see activity quarter-after-quarter in that. But Peter, you want to take that?

Yes. I mean, we did 2 cat bonds in the quarter, Brian, and last year, we did 11, the year before that, we did 9. It's been pretty consistent -- our involvement in the alternative capital space and particularly in the ILS market.

We'll go next to Ryan Tunis with Autonomous Research.

I just wanted to drill down a little bit more on the Consulting side. Looking at the OpEx line, I know you mentioned that expenses has some been somewhat elevated, but it looks like the past couple of quarters, it has been running, call it, $50 million to $70 million higher than the level that it kind of had been averaging. I guess, I'm just trying to understand how long should we expect that magnitude of investment to persist?

Yes, I think there's a couple of things: One, if you look at the seasonality question that Mark was alluding to in his script, I mean, some of that plays out over the last couple of years. I wouldn't say that there is significantly higher level of investment in Consulting than there has been in the past. We tend to try to marry up revenue growth with expense growth. And so what you'll see, if you go quarter by quarter over the last several years, is in quarters where we have higher revenue growth, you see higher expense growth. And so it's not surprising the in a quarter where we have good top line in both Oliver Wyman and Mercer, we have some expense lift associated with it, partly because a lot of our variable comp is driven by the top line in terms of how we fund the variable comp. We're looking at top line and bottom line effects on that. But in terms of underneath your question a little bit, and I want to talk a little bit about the seasonality that we alluded to for the second and third quarter, if you look at the expense growth for -- well, first, if you go back to this year -- this time last year, the first quarter of 2017, we stated in our scripts that we expected some weakness in the top line, as we looked forward over the second and third quarter at that point in time. And so therefore, we started taking expense actions to run the place pretty tight. Our anticipation of a shorter top line and if you look at Marsh as an example, expense growth in the second quarter of last year was a 1% level and in the third quarter, Mercer was minus 2%. And so in some ways, in our second and third quarter in 2018, we're going to get back to a normal expense pattern. And so therefore, you're going to see some expense lift just on the basis of the comparisons versus the year before.

Okay. That's helpful. Just one more, I guess, on -- I mean, just thinking about EMEA organic, you've done a couple decent-sized acquisitions, I think, in the U.K. Bluefin, Jelf, and I think we've crossed over to a point where those are now in the organic number. I'm just curious, one way or another, are those deals having, kind of, directionally the same impact on organic as what we're seeing for the entire segment? Or is there a different story going on in terms of what you're seeing in the U.K. on those deals that you've completed?

Well, both Jelf and Bluefin and the combination of Jelf and Bluefin are performing as we expected on organic. Now to be fair, we want to see more organic from Jelf and Bluefin in the future. But those acquisitions are not the cause of the weakness in the U.K. or in EMEA. I think it's more of a phenomena of the economy in the U.K. as well as the competitiveness and aggressiveness in the London market in specialty and in wholesale. And so we're seeing some deep down drafts on some business in those areas.

We'll go next to Adam Klauber with William Blair.

Did the economy help the U.S. brokerage business more this year than last year?

Yes, it's one of those things when we're talking about generally low levels of GDP growth in the U.S., it is mildly better. I think exposure units will be a benefit to our growth as we go forward. But you have to look at the mix of business, the competitive environment between brokers. But it is fair to say, exposure units as shown in values and shipments and payrolls are trending mildly up from where they've been. But there's not any dramatic change, economic benefit or lift in '18 versus '17. It's kind of business as usual. Just one thing, John...

The only thing I would add is that our clients are also trying to grind out earnings growth in a low growth world as well, and so they are structuring their programs accordingly, right? So we're working with them to try to match their costs.

Okay. Then, also in Europe, are you seeing any difference? Or is it pretty flat from an economic standpoint?

No, I think it's fairly flat there as well.

Operator, I think we're coming to the end of the call, if we have one more question, we would take it. Otherwise I would -- so where are we, Mindy?

I will turn it back to Dan Glaser for any additional or closing remarks.

Okay. Thank you very much. Well, thank you to everybody for joining us on the call today. I'd like to thank our clients for their support and our colleagues for their hard work and dedication in serving them. Have a good day.

This concludes today's call. Thank you for your participation. You may now disconnect.