威達信集團 (MMC) 2020 Q1 法說會逐字稿

Welcome to the Marsh & McLennan Companies conference call. Today's call is being recorded. First quarter 2020 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, including certain expectations related to COVID-19 and other matters. 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 to today's earnings release.

I'll now turn this over to Dan Glaser, President and CFO (sic) [CEO] of Marsh & McLennan Companies. Please go ahead.

Thank you very much, and good morning. Thank you for joining us to discuss our first quarter results reported earlier today. I'm Dan Glaser, President and CEO of Marsh & McLennan. 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; Martine Ferland of Mercer; and Scott McDonald of Oliver Wyman. Also with us this morning is Sarah Dewitt, Head of Investor Relations.

I am pleased to report that our first quarter results were excellent, despite seeing early signs of COVID-19-related headwinds. Before I get into our results, I want to start by addressing the current crisis. We are living through 12 deeply troubling times that are unprecedented in our lifetimes. This is first and foremost a human tragedy, where the health and livelihood of virtually everyone around the world is threatened, and the ultimate economic impact is still very much unknown. We do know that the next several months, and possibly longer, will be difficult.

Uncertainty is at an all-time high. There is poor visibility, business outlook have been severely damaged and confidence is down. Even though it is hard to imagine at present, we will see the other side of this crisis. In the aftermath, there will be a prolonged adjustment. I don't think any of us expect a quick return to life as we knew it.

However, recent data shows that our response to the crisis is helping to flatten the curve, and we can already see some parts of the world to take early steps toward recovery.

MMC businesses are working at multiple levels to get the global economy working again. Underpinning our work is our interaction with governments and clients, including banks, insurance companies in all facets of the global economic infrastructure. Navigating the current period is challenging for all enterprises, yet Marsh & McLennan has proven to be resilient, strong and unique. We will learn and improve as an organization during this difficult period. Marsh & McLennan has never been flatter, faster or more connected than we are today, and I expect some of how we are adapting through this period will benefit us over the longer term.

I want to share some insight about how we are operating in the crisis. The safety and well-being of our colleagues is our first priority. We moved quickly to suspend travel, implement work from home and put in place flexible work policies. We have a world-class executive team, which I am incredibly proud to lead. I also want to thank our colleagues, who have rallied in their support of each other, and our clients.

Over the last decade, we've invested significantly in the infrastructure of our business across the world. We are a globally integrated firm in terms of systems and processes, and this has proven invaluable in our response to this crisis.

Within days, we were able to pivot to close to 100% work from home, with over 70,000 concurrent remote connections across the world, and virtually no disruption in our business and our ability to serve clients. In fact, we have a number of recent new business wins where nobody met in person. We entered this crisis in a position of strength, and are focused on delivering reasonable financial performance in the short term, while supporting our colleagues and positioning the firm for the mid- to long term. We have made several decisions reflecting this approach.

In mid-March, we committed that while we are in the thick of this crisis, our colleagues' jobs are secure. We also set up a $5 million support fund for colleagues in need as well as committed to matching charitable gift contributions. Our decision to put colleagues' interest first is guided by our values and aspirations as a company. This doesn't mean we are being complacent on cost reductions during this period, it is simply the right thing to do. It also speaks to our confidence in the strength of our business, which will rebound as the global economy improves.

We have moved fast to cut nonessential expenses and reduce capital expenditures, and we will, obviously, see meaningful decreases in P&E. We are taking prudent and necessary actions to manage expenses, but at the same time, we are still focused on positioning for the long term. As an example, in early April, we closed another terrific acquisition in MMA Assurance Holdings, which will operate at the Midwest regional headquarters for MMA. So far in 2020, we announced 3 MMA acquisitions. And in just 10 years, MMA has grown into a leading midsized business platform in the U.S., approaching $2 billion in revenue, with 7,200 colleagues and 160 offices.

I am inspired by the hard work, dedication and focus of our colleagues in this unprecedented time. It is their efforts that demonstrate the true strength and character of Marsh & McLennan. The environment will remain challenging, and the duration is unknown, but Marsh & McLennan enters this period in a position of strength, and we will emerge on our front foot.

This month marks the 1 year anniversary of our combination with JLT, and I am pleased to say the major elements of inspiration, including integration of colleagues, culture and financial systems are behind us, and we are well along the way on technology. Our strong first quarter results are evidence that the initial period of choppiness from the acquisition is over, and we emerged as a stronger, more diverse company with more capabilities and geographic depth. We are a unified firm globally. We are working as one enterprise, smarter, more connected and more creative than we were a year ago.

During these challenging times, we continue to innovate for positive change for our clients, focusing on shaping the industries in which we operate. In health and benefits, Mercer Marsh Benefits created a COVID-19 product, which is now supporting over 500,000 employees in Italy. The team then developed similar products that support people in more than 30 countries, with all regions working together, exchanging findings and truly operating as one team around the world.

Our benefit technology, Darwin, has also proven very valuable to clients, helping them rapidly inventory their pandemic coverage, address gaps and deploy creative solutions to their employees, such as access to virtual, physical and mental well-being services and telemedicine.

We've also been advocating for the development of public-private partnerships around the world to address pandemic risk. Marsh & Guy Carpenter are bringing policyholders, insurers and the government together to develop public-private partnerships to accelerate economic recovery, and assure a more resilient global economy in the future.

Mercer is helping clients assess updated pension costs and funding-level projections and investment portfolio options. We have been advocating for short-term pension funding relief to help businesses address near-term cash challenges and protect jobs.

In Oliver Wyman, we are helping clients with their crisis response, navigating the impact on demand and supply as well as working through financial and liquidity challenges. We have developed a proprietary tool, called the Pandemic Navigator, that helps companies predict future COVID-19 development, informed by different suppression tactics, and ultimately estimate overall and company-specific economic impact. The tool covers more than 40 countries, and all U.S. states that will help our clients plan for when and how to conduct business after the crisis has subsided.

Many of our clients around the world are already actively using the tool and accessing our experts, including more than 100 healthcare organizations, several governments and public sector entities over a dozen major financial services companies and corporations across sectors.

In summary, I am proud of how our company is responding to this crisis. Let me spend a moment on current P&C insurance market conditions. P&C insurance pricing continues to increase. The March global insurance market index increased 14% versus 11% in the fourth quarter and 8% in the third quarter. Global property insurance was up 15%, and global financial and professional lines were up 26%, while global casualty rates are up 5% on average.

Keep in mind, however, our index use a large-account business where we typically earn fees. Small and middle market insurance pricing increased more modestly in the mid-single-digit range. Given the losses from the pandemic, pricing trends globally are likely to continue.

The range of insured loss outcomes from the pandemic is wide and evolving. The loss is unique because it is ongoing. It will take a long time for it to be fully understood. It affects nearly every country, and it also led to a simultaneous asset stock. What we do know is there will be significant losses in lines such as event cancellations, travel, D&O, workers' compensation, credit lines and political risk.

The potential for other losses, business interruption or otherwise, makes the overall loss difficult to estimate at this time. The determination of coverage for the virus will be policy-by-policy. So we think legislating retroactive coverage is a step too far and will challenge the very notion of insurance. The decline in exposure units, due to the economic fallout of COVID-19, will put downward pressure on premiums, although it will vary greatly by industry and by line of business.

In some cases, carriers are offering or considering proactive premium adjustments. Although to date, it has been limited in commercial lines. In some markets, regulators are looking to mandate refunds.

Turning to reinsurance. The April 1 renewals are largely focused on Japan. Following a couple of years that were the worst for Japanese typhoon activity experienced in recent times, Japanese insurers paid significant increases to secure renewal of their capacity excess of loss covers. The rates and other loss-free lines were stable.

The upcoming June 1 renewals are largely focused on southeast U.S. wind exposure. Many renewal placements are expected to face upward rate pressure from continued loss created from 2017 and 2018 hurricane events.

In addition, reinsurers will be assessing the impact from COVID-19-related issues. Overall, the global P&C insurance market is complex. Pandemic issues continue to evolve and this is before we enter the U.S. hurricane season. It is in times like these where our expertise and capabilities are even more critical.

Now let me turn to our first quarter financial performance. We delivered excellent results in the quarter, with underlying revenue growth across both risk and insurance services and consulting. Total revenue was $4.7 billion, up 14%, or 5% on an underlying basis. Underlying growth was strong in both segments, with RIS up 5% and Consulting up 3%. Adjusted operating income increased 15% versus a year ago to $1.2 billion. The adjusted operating margin increased 80 basis points to 27%. Adjusted earnings per share increased 8% versus a year ago to $1.64, reflecting strong underlying growth and margin expansion.

Even though COVID-19 will impact our results for the remainder of the year, our strong first quarter performance is evidence that we entered this period in a position of strength and able to manage through a difficult environment.

Moving to -- on to an update of our expectations for 2020. The current situation is still evolving, and it is uncertain how deep and prolonged the downturn will be. Our outlook is based on a sharp global economic pullback starting in the second quarter, with the global lockdown lifting in the third quarter with recessionary conditions persisting through the year. For the full year 2020, we currently expect a modest decline in underlying revenue.

We are being vigilant and disciplined regarding discretionary expenses. We have strong control over our cost base, and have levers at our disposal to manage in the near term. For the full year, if underlying revenue declines modestly, we could see adjusted EPS in a similar range or slightly better.

With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, Dan, and good morning. Our first quarter results were excellent. And although the current crisis will impact our performance this year, we faced it well positioned and strong. Dan covered the high-level results for the quarter, so I will provide some additional details on our results, and then turn to updated views on our outlook and capital management.

Looking at Risk & Insurance Services. First quarter revenue was $2.9 billion, up 20% compared with a year ago, or 5% on an underlying basis. Adjusted operating income increased 20% to $932 million, and our adjusted operating margin expanded 90 basis points to 34.5%.

At March, revenue in the quarter was $2.1 billion, with underlying growth of 5%. Growth in the quarter was broad-based and driven by strong new business and renewals. The U.S. and Canada division delivered another quarter of strong growth, with underlying revenue up 5%. U.S. and Canada has achieved 5% or higher underlying growth in 7 of the last 8 quarters.

In international, underlying growth was solid at 4%. EMEA was up 4%, representing the highest underlying growth in that region in 12 quarters, led by strength in Continental Europe and the Middle East. Asia Pacific was up 6%, on top of 8% in the first quarter of 2019. This result is impressive considering the virus impacted Asia in the first quarter. And Latin America grew 3% on an underlying basis.

Guy Carpenter's revenue was $827 million, up 25%, or 7% on an underlying basis, driven by strong growth in EMEA, North America and Asia Pacific. Guy Carpenter has now achieved 5% or higher underlying growth in 9 of the last 10 quarters.

In the Consulting segment, revenue in the quarter was $1.8 billion, up 5% compared with a year ago, or 3% on an underlying basis. Adjusted operating income was $289 million, and the adjusted operating margin contracted by 80 basis points to 17.2%.

As we mentioned on our last call, we expected the first quarter margin to decline in Consulting due to some quarterly volatility and the inclusion of JLT's employee benefits business, whose margins have historically been relatively low in the first quarter.

At Mercer, revenue in the quarter was $1.3 billion, with strong underlying growth of 5%, continuing the trend of sequential improvement in growth from the first quarter of 2019. Wealth increased 3% on an underlying basis, reflecting low single-digit growth in defined benefit and mid-single-digit growth in investment management. Our assets under delegated management were approximately $267 billion at the end of the first quarter, up 1% year-over-year, but down 12% sequentially due to the decline in equity markets. Health grew 8% on an underlying basis, the strongest growth since the fourth quarter of 2015, reflecting solid performance across the portfolio, and Career grew 2% on an underlying basis.

At Oliver Wyman, revenue in the quarter was $511 million, which was flat on an underlying basis. After a good start to the year, we saw the beginning of virus-related impact at Oliver Wyman in March.

Adjusted corporate expense was $54 million in the quarter. Our other net benefit credit was $64 million in the quarter, and for 2020, we anticipate this item will be modestly lower than in 2019. Based on current expectations, we would assume roughly $256 million for this -- for 2020 versus $271 million in 2019.

Foreign exchange was a slight headwind to EPS in the quarter. Assuming exchange rates remain at current levels, we expect FX to be approximately a $0.06 per share headwind for the remainder of the year.

Our effective adjusted tax rate in the first quarter was 23.2% compared with 22.6% in the first quarter of last year. Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation similar to a year ago. Excluding discrete items, our effective adjusted tax rate was approximately 25.5%.

Based on the current environment, it is reasonable to assume a tax rate between 25% and 26% for 2020. April 1 marked the 1 year anniversary of our acquisition of JLT, and we are on plan or ahead of schedule on all of our key milestones, including cost savings and restructuring actions.

We incurred $80 million of JLT integration and restructuring cost in the first quarter, bringing the total to date to $415 million. We remain on track to achieve our guidance of at least $350 million of JLT savings by the end of 2021. We still expect to incur $625 million of cash costs and $75 million of noncash costs to achieve these savings.

While it remains our expectation that a significant amount of our actions will be taken in 2020, the current crisis could impact timing as we navigate through the near term. As a result, we could see some shift in our expectations for integration cost and savings between 2020 and 2021, but our current view is this impact will be relatively modest.

Our outlook for 2020 has obviously changed in light of the current crisis. We want to share how we think our performance could develop, but have to emphasize that we have less visibility into how our results could unfold over the next few quarters than at any time we can remember. Our view is based on our outlook today, and it goes without saying that conditions could turn out materially different than our assumptions, which would affect our projections. As Dan mentioned, our outlook is based on a sharp economic pullback starting in the second quarter with the global lockdown lifting in the third quarter, but recessionary conditions persisting through the year.

Based on these forecasts and our internal analysis, our current view is that we could see a modest decline in underlying revenue for the full year, with the deepest declines in the second and third quarters. At March, we still see the potential for modest underlying revenue growth for the year, although the second and third quarters will be challenging.

We believe Guy Carpenter will see mid-single-digit underlying growth for the year, with a stronger first half and a weaker second half. We currently expect Mercer could see underlying revenue decline for the remainder of the year and be down modestly for the full year.

Oliver Wyman, we will see a meaningful pullback in underlying revenue in the second and third quarters that could be greater than the peak decline we saw in the financial crisis. We would note, however, that once the financial crisis subsided, and the global economy stabilized, both Mercer and Oliver Wyman experienced a strong rebound in underlying growth.

Contemplating this outlook on the top line, we moved quickly to manage our expense base and significantly cut back on every discretionary expense across the firm. Our earnings will benefit from these actions as well as the continued contribution from JLT synergies. Based on this, if our revenue is in the range that we've discussed, we could see adjusted EPS for the year in the same range or slightly better.

Turning to capital management and liquidity. In addition to our existing $1.8 billion credit facility, of which $800 million was unused at the end of the quarter, we recently secured additional borrowing capacity in the form of a new $1 billion line of credit. This was a prudent step to increase our access to short-term funding, given the uncertainty of the current environment.

On our fourth quarter call, we provided an outlook for capital management, and that outlook has clearly changed in light of the current environment. While we intend to maintain our dividend, it is unlikely we will grow the dividend double digits this year.

On the fourth quarter call, we indicated that we did not expect any share repurchases in the first half of 2020. At this point, we do not expect to repurchase shares this year.

We've remained focused on deleveraging, although the pace of debt paydown will ultimately depend on our cash flow generation in the current environment. Total debt at the end of the first quarter was $13.6 billion compared with $12 billion at the end of 2019. This increase in debt is primarily due to short-term borrowings to fund seasonal cash needs, which are highest in the first quarter. We were also holding additional cash at quarter end to fund the purchase of Assurance Holdings and MMA acquisition that closed on April 1.

Our next scheduled debt maturity during December 2020 when $700 million of senior notes will mature, and in January 2021, when a $500 million term loan comes due.

During the first quarter, we repaid $500 million of debt that matured. Interest expense in the first quarter was $127 million. Based on our current forecast, we expect approximately $140 million of interest expense in the second quarter.

Our cash position at the end of the first quarter was $1.5 billion. Uses of cash in quarter totaled $476 million and included $232 million for dividends and $244 million for acquisitions.

Overall, we are pleased with our excellent first quarter results. We are a resilient company and we entered this crisis from a position of strength.

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

Thank you, Mark. And operator, we're happy to take questions.

(Operator Instructions) We will now take the first question from Mike Zaremski from Credit Suisse.

Thank you for the prepared remarks and the update on the guidance. My first question is regarding your outlook. And other -- I guess, if revenues took -- potentially decline by single digits, and earnings could very well then potentially also fall by single digits, I think that's a pretty good outlook relative to past recessions, or maybe I'm wrong.

Maybe you can kind of talk through, are the dynamics different from -- for Marsh & McLennan this time around versus the past recession? Are there -- are you -- is the business less cyclical? Are there more kind of levers in terms of cost reduction efforts that you can pull this time around versus the recession a decade or plus ago?

Thanks, Mike. Never thought I'd missed you guys. So it's good to have some people on the telephone. I'm getting tired of looking at the same face of my team every morning. So but every crisis is different, Mike. It all has its own unique attributes. And while there are parallels to draw, you can't get really focused on -- it was like this last time, so it will be like this, this time.

I think the important thing is MMC is really defensive and resilient. We're not immune to these kind of crises. But for us, the impact is going to manifest itself as reduced demand for consulting series -- services and lower premium growth due to the exposure decline and the exposure decline may be more significant than they were in the global financial crisis. But on the other hand, at that point in time, rates were generally going down, and now rates are generally going up.

If the recovery is faster than we outlined in our scripted remarks, then we'll do better than our guidance. And if the downturn is deeper and more prolonged, we'll do worse. But the impact on us, we believe, is manageable.

And when I think about resilience, I have to think about things like clients are going to continue to buy insurance. They're going to continue to renew their health and benefits programs. They're going to do their annual actuarial work. And so that kind of thing, the level of recurring revenue, recurring engagements that we have will continue.

We mentioned that Oliver Wyman is expected to see this -- the most significant negative revenue impact. But keep in mind, the cost structure -- I've mentioned many times before, the cost structure in Oliver Wyman is more variable than in the rest of the company. And so it helps us mitigate the earnings impact because of the variable cost nature of OW.

Now if you mentioned the financial crisis, and just to go back in time, RIS, in the -- in 2008, was 0. They were flat. And in 2009 was a minus 1. And the Consulting division actually grew in 2008, and was down 7% in 2009. And OW, back in the last crisis, contracted for 6 quarters consecutively, and then had a pretty strong rebound after that. And clearly, when we look at OW now, it's a completely different firm, and certainly has been our best grower over that elongated period.

But Mike, do you have a follow up?

Yes, that's helpful. My follow-up is, Dan, and you talked about the extreme uncertainty regarding COVID-19-related losses, and I guess revenue impacts for the entire industry. Curious, what are you guys seeing and your teammates seeing in April regarding commercial P&C pricing?

Is it actually moving higher despite the economic pressures due to the uncertainty? And maybe if there's any distinctions between M&A -- MMA kind of small, medium-sized businesses versus the largest clients? That would be great, too.

Sure. And I'll hand off to John and also to Peter to give some deeper commentary. But I'll just start by saying, we're an intermediary. We're insurance brokers. And on the Marsh side of the house, we do everything we can to negotiate broad coverage terms at high-quality, best price available sort of thing. And that's what we'll continue to do. That's our job.

And so to us, we're not trying to strike a balance between insurance companies and our clients, we're an advocate for our clients. And these are tough times for a lot of our clients. And so we're working hard to obtain the best terms possible, because nobody wants to be paying premium increases at a time when cash is king. And so we're really focused on doing our best. And we expect, in this kind of environment, there's a bit of a flight to quality. There's also higher levels of client retention anticipated, and probably softer new business as we go forward as we work through.

But John, do you want to talk about the overall environment for COVID losses? And how you're seeing the market today?

Right. So we're going to be plugging John in, in a second. But what? Peter Hearn, let me go to you and talk a little bit about the reinsurance side.

Yes, Dan. The reinsurance market pricing was already increasing prior to COVID-19. It continues to increase. And so we're looking at this as a continuation of a market that was already in transition, principally in the United States, more than in Europe, but I would imagine at the advent of COVID-19 that there'll be a reevaluation of risk throughout reinsurers' entire portfolio.

So at April 1, we saw increases in Japanese risk, principally based on several years of typhoon loss. In Florida, no doubt there will be a reevaluation of risk-based on the loss creep from events in 2017 and 2018, which Dan mentioned in his opening comments. But I would say, in general, the reinsurance market has acted responsibly in their pricing to our clients based on exposure, based on loss experience and based on their overall relationship with them.

Okay. Thanks, Peter. One of the things that we mentioned in our script is that we're entering the U.S. hurricane season. And so this market is fragile. And the one thing that all companies want, but in particular, insurance companies speak to some level of certainty with regard to what loss has happened, and how it's going to impact them. And -- because in a lot of ways, premium levels, at least on the ratings side, are determined by past losses is probably the primary determinant of what's going to happen to rates in the future, is what happened to losses in the past.

And COVID is really unique because it is a slow-developing catastrophe. So we all know it's going to be big, but it's in real-time right now. I mean, the loss is ongoing, and it's global. And so on that standpoint, clearly, we -- we're going to be battling with insurers on rate levels because, in many areas, they're going to be seeking higher rate levels.

The next question comes from Jimmy Bhullar from JPMorgan.

So first, I just had a question on your exposure to potential sort of the debate that's going on, on the business interruption. How do you sort of think about your exposure to E&O claims? Their client might think that they're covered for something. And in fact, they're not. I know you had like a $0.5 billion settlement in the last -- about 10 years ago. But can you give us any details on your own liability coverage and redemption or the mix?

Thanks, Jimmy. I mean, the Alaska situation is completely different from this one. And so really, it doesn't apply. But our role and principle focus as a broker is to advocate forcibly for policyholders, and doing our best to obtain broad coverage. And in the event of a claim, assisting them with recoveries. And so from that standpoint, that's what we do. We're on the client side of the table trying to develop outcomes. And as we mentioned in the script, this is going to be a case-by-case sort of basis. This is a different wording out there. Some language is much clearer than others. And so therefore, there will be different impacts as we go through advocating for clients.

In terms of our own risk management practices, over the last few years, we've streamlined our professional standards. We've conducted E&O trainings for thousands of colleagues, and we've instituted widespread limits of liability. So E&O is a large risk exposure to us. We are in the business of giving advice. But on that -- but I think we're entering this crisis with consistency and controls in terms of how we render that advice.

Okay. And then -- Yes. On -- and this is a different topic, and you discussed this in your comments as well. But as you -- based -- and obviously, the virus is an evolving situation. But based on your views right now, 2Q is probably going to be weak, third quarter should be weak as well. Do you expect your -- trough in your results to be in the third quarter? Or is it more likely in 2Q, when you think you're going to slowly be emerging out of it in the third quarter?

No. I think that the impact, generally, in insurance, you have delayed impact geared up with renewal dates and that sort of thing. It's not an immediate type of impact. So I think we're going to feel headwinds in parts of our business, significant headwinds, both in the second and in the third quarter. And I can't really peg which one is likely to be more significant.

When I look at the overall company and, as we described before, RIS could do reasonably okay in the circumstances this year. Mercer, we're thinking is going to be negative, most likely for the balance of the year. But overall, we think it's probably a modest decline for the year, and there'll be proper pullbacks on OW. In fact, at the end, we're very much focused, not only in managing this crisis to the best we can, but also emerging from this crisis stronger than we otherwise would be. And so we're not fighting every inch for the second and third quarter, we're fighting for the next 3 years. And we're making sure that we're doing the right things now to ensure that we're positioned well.

The next question comes from Elyse Greenspan from Wells Fargo.

My first question, going back to the outlook as well. So you guys pointed to a modest decline in underlying revenue in your outlook and said that EPS could decline by a similar amount. So that would imply that your margins would be fairly stable-ish or hold up pretty well for the year.

I just want to confirm: a, that I'm thinking about that right; and then b, Dan, going back to some of your other comments, you guys imply a sharper declines within consulting, so is it right to think that you would see more of a margin impact within consulting? And maybe the RIS margins could hold up better during the downturn?

Yes, you're spot on, Elyse. And I'll just say, in general, we're not really focused on margin. We're focused more on issues around revenue and earnings, and margin will be an outcome of what happens on the top line, to a large extent. But you're right on in thinking that based upon what we've said about RIS, it's likely that RIS's margins hold up and may even improve a bit. And on the other hand, it's likely that Consulting's margin, based upon what we said is going to occur with their revenue outlook, are going to reduce. And overall, company-wide, I can't make a call right now in terms of that.

I do know I love a streak, and we've had 12 years in a row of margin expansion. And so we won't give that one up so easily.

Okay. And then my second question, you pointed to business in the second and the third quarter. And it sounds like, just in response to previous questions, that there is a bit of a lag on the broker side. So it sounds like maybe third quarter will be weaker than the second? Further on Consulting on some of the weakness that you called out within Oliver Wyman and within Mercer, is that more immediate in nature? And so should we think about Consulting kind of flowing over in the next couple of quarters kind of in line as to where both might be to the same degree?

Yes. I think the way to look at it is what's recurring revenue? And what's more project-related? And that has more of an impact as to whether something falls in Consulting or something falls on the RIS side.

On the RIS side, there's a significant amount of recurring revenue. But parts of Mercer have a lot of recurring revenue as well. And so both of those recurring revenue pieces probably have a longer time horizon or a lag effect, and so you will see an impact over the second and the third quarter as those businesses adjust.

Areas which have nonrecurring revenue, it could be some project-related consulting in Career within Mercer. It could be most of Oliver Wyman is project related. Those will be faster declines, more immediate declines. And so you would see, right in the second quarter, those parts of the business coming off.

The next question comes from Greg Peters from Raymond James.

My first question, we've seen a number of companies in the insurance industry announce no-layoff pledges. One of your peers has announced salary cuts, and there seems to be a level of social responsibility that is becoming increasingly more important. So I'm curious about how you would think that might impact things around cost-saving initiatives and synergies, both currently and the future M&A?

Well, thanks, Greg. I mean, it's a really important question, and it's multifaceted. So let me talk about it a little bit from our perspective. I mean, I -- we did talk about, both Mark and I, that our visibility into our outlook is uncertain. So making decisions with so much uncertainty about outlook, it's been easy. But those decisions are best done with clear eyes and the collective judgment of a seasoned team.

So we've spent a lot of time serving the horizon. And in our view, as I was just mentioning, we're in a resilient business. RIS should hold up pretty well. Some parts of Consulting are going to see a meaningful pullback, but we expect them to come back strong as the economy recovers. And so we've got many different levers on the expense side at our disposal.

We want to preserve flexibility and optionality for as long as we can. And we want to make decisions based on data, scenario planning, stretch testing. And we've got all kinds of capability within the firm in order to do that, and we recognized that there are different levers for different challenges. When we think about expense cuts in our bonus pool, it's primarily giving us levers to protect earnings. And by the way, just as an aside, our bonus pool in 2019 was the largest in our history. So from that standpoint, bonus pool, expense cuts are going to protect earnings as we go forward.

To us, salary reductions and things like dividend cuts are levers to protect liquidity. It's kind of like survival-mode stuff. And we would -- we took some other actions. We've secured additional assets and liquidity early in the crisis. We believe that, that's going to help us manage through most scenarios for the slowdowns in collections impact our cash flow.

And as we saw in the financial crisis, there was a slowdown in the collections cycle, but it was temporary. So solving that issue by reducing pay is an awfully blunt instrument, and it can have lasting implications. Starting with the notion of battering trust with your colleague base by challenging them when they're in this difficult period. And the snap back that all recurring cost, once pay is lifted back again, it's just a couple of things that make it really problematic.

Also, you can't just implement that kind of thing easily. There's consultation rules in most countries. And so doing some sort of broad-based pay reduction programs are very difficult, and the impact oftentimes will fall most heavily and unfairly on the U.S. population.

And so based upon our outlook today, levers like pay cuts or dividend cuts are not necessary. We track daily cash activity, so we can get early warning signs, and we can react quickly if those levers become warranted. But I can't emphasize enough that we are managing this period very closely. We have never been more connected as an organization.

The leadership team and I meet every day, and we are watching new business, expenses, exposure, pricing, cash flows obsessively as a leadership team. And we are calm, and we are clear-eyed in this crisis.

Our intention is that in terms of levers, to avoid being late in pulling a lever, but also avoid doing something now that is harmful and later proves to be unnecessary.

Do you have any follow-ups, Greg?

Yes, I do. I want to pivot to the balance sheet. First, it's 2 parts. I'm just curious in the light of all these give back and delayed programs and premiums. If you could address the net receivable balance on your balance sheet? And if you have any concerns on that?

And then in the debt component, I know you spoke in the opening comments about how you took down the $2 billion of revolver and then you paid off $500 million. But the long-term debt piece increased from $10.741 billion at the end of the year to $11.231 billion. And I don't understand why the long-term debt would have increased when you paid down $500 million?

Sure. Sure. Let me hand over to Mark, who will walk you through, not only our approach on account receivables, but what we're looking like on the debt side. So Mark?

Sure. There's a lot in that question, so I'll try to hit all those points. First, just to hit a little bit on liquidity in the collection side, and how we feel we're positioned, Dan hit on a little bit of this. I mean, you go into a period like this, and you pulled back and focused on the basis, and liquidity and flexibility are definitely on that list. And so very early in the crisis, we jumped on this from both a financial perspective and an operational perspective.

So I mentioned earlier, in addition to our $1.8 billion credit facility, we went on almost immediately and secured an extra $1 billion short-term line of credit, just as additional firepower going into this period of uncertainty. And remember, we have $1.5 billion of cash on our balance sheet. Some of that was to pay for the insurance acquisition, but we typically run about $1.1 billion on average at any given point in time. And so we've got substantial liquidity available to us as we enter this period.

In terms of collections and visibility, we've operationalized around this like, as I said, this heightened visibility on the potential for a slowdown in collections, but in a financial crisis, there was one, and so it's something we could anticipate.

And Dan mentioned earlier, we've invested a lot in globally consistent systems and platforms, and the finance area is one of those. So having a common accounting platform and financial reporting platform gives us very good visibility into accounts receivable balances, aging, trends, and all of our businesses are taking in -- taking advantage of that.

The other thing we're doing is we have pretty good visibility in our major countries, and just daily catch deposit and cash flow activity. And so this is something that you can anticipate and prepare for. And whether it's financially in terms of flexibility or operationally to try to mitigate any impact as best we can, we feel well prepared.

Just a couple of things on what you said. We still have $800 million of capacity in our existing short-term credit facility, not even the $1.1 billion. So not all of what you see in short-term debt there is revolver borrowing.

And that we typically -- the increase we saw in short-term debt in the first quarter is what we typically see every first quarter. First quarter is when we pay out our bonus payments, and we fund that through short-term financing. As I also mentioned, we're holding on to a little bit of extra cash for the Assurance acquisition.

And then just the increase in long-term debt. That was just a move we made early in the year just to term out a little bit of the short-term financing we had. And a lot of flexibility we're building into and have built into our term structure just relating to the debt we raised as part of financing JLT.

So overall, we have pretty substantial access to short-term liquidity, and we feel like we're pretty well mobilized around any risks associated with a delay in the collection cycle.

The next question comes from Suneet Kamath from Citi.

My first question is around the environment. I mean, typically, when we would see 2 large competitors merging, I would have thought that could have created some opportunities for the folks that are not distracted by a large deal. Just wanted to get your thoughts on that? Or is that something we shouldn't expect, given all the uncertainty related to the COVID-19 pandemic?

Well, I'm not going to comment on the potential merger between AON and Willis, I'll leave it to them to comment on it. We like our strategic positioning. We would not change positions with any of our competitors. We believe that we're set up very well. We're in the right countries. We've got the highest-quality colleague base.

We've got a client list that would be the envy of any company in the world. And so we think that we'll be able to grow substantially in the future, based upon the fact that we're the leading provider of services around risk, strategy and people. And so we like the way we're set up.

I do know we've learned an awful lot about integration activities over the course of the last decade. We have done a number of acquisitions. And of course, JLT was the largest acquisition in our history. And we had a terrific year, a remarkable year in 2019, even though we were doing a lot of integration work. And that is down to the quality of the executive team and the matching of culture that existed.

They -- were the cultures were not identical, that's to be sure. But they're both high-quality, they're both positive, they're both client-focused. And so on that basis, I really think that our first quarter demonstrates tick that box. JLT was a successful acquisition for Marsh & McLennan and was a successful integration. We had 5% underlying revenue growth for the firm.

But more specifically, at the places that really overlap the most with JLT is that Marsh at 5%, Guy Carpenter at 7%, and Mercer was 5%, but it was 8% underlying in health. And so the quality of what we've been able to deliver. I mean, our adjusted operating income at almost $1.2 billion, is a first quarter record for us. And so we're thrilled. We were set up for a wonderful year in 2020. And okay. So now like the rest of the world, we're dealing with the crisis. But it doesn't take away from the fact that we are a stronger, more capable, more creative, more connected firm than we've ever been before.

Got it. Makes sense. And then a quick one for Mark. I think you had mentioned both the debt maturity in early 2021 as well as some term debt. So just the thoughts on retiring those debt securities?

Mark, please?

Yes, sure. The short answer is we would expect to pay those off through operating cash flows. Notwithstanding the crisis and -- okay, that the -- that's changed our outlook, the second and third and fourth quarters for us is generally where we generate pretty substantial cash flow. So we still anticipate that, at this point, based on what we see, we're going to have good cash generation through operations for the balance of the year.

The next question comes from Phil Stefano from Deutsche Bank.

Yes. Dan, you talked about the expense levels that you have at your disposal, to dial them back and trying to do so in a prudent fashion, just given the outlook for where you think your -- things are going. I -- it is not too far, but make sure they're far enough to have a positive impact.

I guess, when we think about these expense levers, where is the expense leverage you can pull more quickly than others? And have you thought about the extent to which maybe some expense levers don't come back because if they're so easy to dial down this quickly, do we really need them as we think about business moving forward?

Yes. I mean, it's a great question, because I think there are certain things that are occurring, which may actually last longer and maybe be permanent as we go forward. I mean, things like flexible work arrangement may put downward pressure on our real estate costs over time, not in the short term, but over time, as an organization.

We have proven to ourselves and to our client base that we can work from home. We can work remotely and do it effectively. And so there's an awful -- I mean, I absolutely believe that more agile environment, more digital, are going to be a part of our future, and that would be a real positive.

Now in terms of expense levers, there's several that you can pull. I mean, I'd start from the idea that we have a very significant bonus pool. As I mentioned before, the last 2019, our bonus pool was the largest level in the aggregate in our history as a company. And it's all geared to net operating income. So we are -- our team, deep within the organization, is very aligned with shareholders and very aligned with the net operating income of the firm.

And so it will be geared if the NOI is dropping or the bonus pool is not lifted. And that's a wonderful lever because it's variable. It's variable for a reason. And we've -- the other thing I would say is, we're a people business and you -- while you may have less attrition in a recessionary environment, you still have attrition. And we saw it in other recessions. And we do not have a hiring freeze. In fact, we're hiring people every day. Well, we'll control our hiring and we'll make sure that our executive team is very involved in making the decisions that we want to make, but we'll manage our attrition that way and have some more control over that.

Clearly, some significant pullbacks in the use of temps or contractors, and things like T&E have fallen away, a lot of marketing is spent, but things like conferences, meetings, events, over time, are all things that we have as levers, which have largely already been pulled to some extent, and you can already go deeper there. But we're comfortable in what -- in how we're set up.

I mean, at the end, we said that we think that our overall revenue might be down modestly as a company for the year. And if so, then our overall EPS would be down modestly as well, but it might be slightly better than what our revenue would show.

Any other follow-up?

And that's the reason to my follow-up and it's a quick one, but when you talk about the EPS being down modestly, if not slightly, but the correct base for that is the $4.66 of 2019 adjusted EPS. Is that correct?

That's correct.

I'd now like to turn the call back over to Dan Glaser, President and CFO (sic) [CEO] of Marsh & McLennan Companies for any closing remarks.

Yes, hi. Thank you, operator. And I like to thank everyone for joining us on this -- us on the call this morning. In closing, I want to applaud the tireless dedication of our 76,000 colleagues worldwide, and the important role they have played supporting their colleagues, clients and local communities.

Times like these test the true character of an organization and the strength of individuals. And what I have seen from MMC these past few months has been nothing short of amazing. So thank you all, and have a good day.

That will conclude today's call. Thank you for your participation. You may now disconnect.