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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Marsh & McLennan Companies' Conference Call. Today's call is being recorded. Second quarter 2008 financial results and supplemental information were issued earlier this morning. They're 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 on 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 the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. During the Q&A session, please limit your questions to one and one follow up.
I'll now turn this over to Dan Glaser, President and CEO of Marsh & McLennan Companies. Please go ahead.
Thank you, Irene. Good morning, and thank you for joining us to discuss our second quarter results reported earlier today. I'm Dan Glaser, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses, John Doyle of Marsh; Peter Hearn of Guy Carpenter; Julio Portalatin of Mercer; and Scott McDonald of Oliver Wyman. Also with us this morning is Dan Farrell of Investor Relations.
We balance investing for the long-term with delivering strong performance in the short-term. Doing this requires ongoing investment, disciplined execution and thoughtful capital allocation. Our performance will continue to reflect the compounding benefits of numerous strategic actions bearing fruit over time. Each of our businesses has a strong foundation for growth as the world continues to see accelerating change and complexity.
From a macro perspective, there continues to be significant under-penetration of insurance globally, including sizable protection gaps in areas such as natural catastrophe and cyber risk. The world needs solutions in areas such as digital transformation, complexity of the health sector, retirement needs of an aging population, and the workforce of the future. We are uniquely positioned to serve clients with global capabilities around risk, strategy and people.
Before discussing our results, I would like to update you on several moves we've made since last quarter, which highlight how we continue to invest for long-term revenue and earnings growth. I will also provide a brief update on the Competition and Markets Authority review of the UK investment consulting industry.
In the second quarter, Mercer announced the expansion of their investment capability by acquiring a license in India. India is a market that is seeing ongoing pension reform, which we believe will drive increased third-party investment advisory services. Mercer also continues to add to its geographic region capabilities through strategic M&A. In the quarter, we completed two acquisitions in the career line of business, which adds roughly $16 million of annualized revenue.
In late June, Marsh announced an agreement to acquire Houston-based Wortham Insurance, the 33rd largest agency in the U.S. with more than $130 million of revenue and 530 colleagues. This business offers a wide range of property, casualty and employee benefits products and services. Wortham, founded in 1915, is a premier broker with a culture and business mix that fits nicely with Marsh's existing retail business in Texas. The combined business will operate as Marsh Wortham and will be led by Richard Blades, the Chairman of Wortham.
During the quarter, we also completed three acquisitions in Marsh & McLennan Agency adding $15 million of annual revenue. Marsh & McLennan Agency has annualized revenue of approximately $1.3 billion. As we have said previously, this is a faster underlying growth business within Marsh. With the success of building out our national presence over the last decade, we continue to see opportunity for smaller fold-in transactions in addition to the other mid-sized M&A we have executed in the past.
Also in the second quarter, our UK commercial and consumer business completed an acquisition in Scotland adding approximately $15 million of revenue. We continue to see strong growth runway in the middle and small commercial areas. Further aligning with this market opportunity, in the second quarter, we announced the rebranding of our MGA business, the Schinnerer Group, to Victor. The rebranding includes Victor O. Schinnerer in the U.S. as well as our brands in Canada, the UK, Europe and Bermuda.
The ICAT and Dovetail insurance platforms will be part of the Victor global business but will retain their current names. Combining our extensive underwriting, analytical, capital and tech capabilities across geographies will allow for greater innovation and client service. These changes further support our strategic efforts at the consumer and smaller end of the commercial marketplace where digital capabilities will have an increasingly important role in the business.
The middle and small commercial marketplace is vast and highly fragmented, and we view this area as an opportunity to leverage Marsh's scale, expertise and capabilities. Last quarter, we discussed how Marsh was implementing changes with the goal of simplifying the organization through reduced management layers and more common structures across regions and businesses. These changes align with Marsh's segmentation strategy allowing a more targeted value proposition in large-risk management, middle-market corporate, and small commercial and consumer segments.
The actions being taken will likely result in total restructuring charges of $80 million to $100 million with $55 million taken this quarter. These charges are classified as noteworthy, and therefore excluded from our adjusted results. This simplification initiative will result in increased efficiencies and additional capacity for reinvestment in people and technology to drive future growth and innovation.
Now, let me update you on the review conducted by the UK Competition and Markets Authority of the investment consulting marketplace. In a provisional report issued last week, the CMA did not recommend any structural changes. The CMA did recommend certain industry-wide remedies involving mandatory tendering, enhanced fee disclosure, and common standards for reporting performance.
The report describes the marketplace that is not highly concentrated and states there is no evidence of conflicts of interests that give rise to a competition problem. We welcome the clarity that last week's provisional decision brings, and we look forward to continuing to work with the CMA, which plans to issue its final report in March 2019.
Now, let me discuss our results for the second quarter and first half of 2018. Results were mixed in the quarter with strength in RIS offset by weaker-than-expected result in Consulting, specifically in Mercer's Defined Benefit Consulting business and Oliver Wyman's financial services practice. For the quarter, consolidated revenue was $3.7 billion, up 7%, or 6% excluding the impact of the new revenue recognition standard.
Underlying revenue growth in the quarter was 3%. Adjusted operating income grew 4% to $754 million. Excluding the impact of the new revenue standard, adjusted operating income grew 2%, and the adjusted operating margin declined 70 basis points. Adjusted earnings per share grew 10%. Excluding the impact of the new revenue standard, adjusted earnings per share increased 8%. For the six months, consolidated revenue grew 11% or 8% excluding the impact of the new revenue standard. Underlying revenue growth was 4%, and adjusted EPS increased 11% excluding the impact of the new revenue standard.
In Risk and Insurance Services, second quarter revenue was $2.1 billion, an increase of 9%, or 8% excluding the impact of the new revenue standard. Underlying revenue growth was a strong 5% in both Marsh and Guy Carpenter in the quarter. Marsh U.S./Canada underlying growth of 8% was the highest quarter of growth since we began reporting the U.S./Canada division in 2008.
International underlying growth was 2% in the quarter with Asia-Pacific up 6% and Latin America up 3%. We also saw a return to growth in EMEA, which was up 1%. Adjusted operating income of $532 million increased 9%. Excluding the impact of the new revenue standard, adjusted operating income grew 6% with the adjusted operating margin declining 50 basis points in the quarter.
As we discussed last quarter, RIS margins were impacted by a tough comparison on the expense side. For the six months, revenue was $4.4 billion, an increase of 14% or 9% excluding the impact of the new revenue standard. Underlying revenue growth was 4% for the first half of the year. We are pleased with the first half performance in RIS.
In the second quarter, Consulting revenue was $1.7 billion, up 4% both including and excluding the impact of the new revenue standard. Underlying revenue growth was 1% for the quarter with 2% growth in Mercer partially offset by a 2% decline in Oliver Wyman. Adjusted operating income was $267 million, decline 5%. Adjusted operating margin declined 140 basis point.
In the quarter, we saw a further decline in Mercer's Defined Benefit Consulting business, mainly due to softness in project-related work in the U.S. and UK and lower new business wins in the UK versus last year. DB Consulting is a solid margin business within Consulting, and the decline in the quarter did have a meaningful impact on earnings and margin. As we've said previously, the DB market is not a growth area. We may have periods of positive growth, but DB is on a mid to longer-term declining trend.
DB is an important part of our overall wealth business. The DB business provides a sizable pool of assets which helps drive growth in investments and defined contribution. While underlying growth in Defined Benefit Consulting was down 6% in the quarter, the investments business grew 12% producing 1% growth in wealth overall. When we look at the first six months on an underlying revenue basis, Mercer is up 3% with health up 4%, career up 6%, and overall wealth up 2%.
Oliver Wyman's underlying revenue declined 2% in the quarter. Despite solid growth across most lines of business, we saw a decline in our U.S. financial services practice. This is primarily due to reduced volume of regulatory-related work for financial institutions. Based on our outlook today, we expect Oliver Wyman's underlying revenue growth for the second half of the year to be essentially flat with some variability among the quarters.
In the aggregate, our results for the first half of 2018 met our expectations. For the full year, we expect underlying revenue growth in the 3% to 5% range, margin expansion and strong adjusted EPS growth.
With that, let me turn it over to Mark.
Thank you, Dan, and good morning. In the second quarter, we delivered 3% underlying revenue growth highlighted by strong underlying growth of 5% in both Marsh and Guy Carpenter. Overall revenue was up 7%, or 6% excluding the impact of the new revenue standard, ASC 606. For the first six months of the year, underlying revenue growth was a solid 4%.
Operating income in the quarter was $691 million, while adjusted operating income increased 4% to $754 million. Excluding the impact of the new revenue standard, adjusted operating income increased 2%. Overall, our adjusted operating margin declined by 70 basis points excluding the impact of the new revenue standard.
GAAP EPS rose 8% to $1.04. Adjusted EPS increased 10% to $1.10. Excluding a $0.02 per share benefit from adopting the new revenue standard, adjusted EPS grew 8%. For the first six months of 2018, our GAAP EPS has risen 16% while our adjusted EPS has increased 19% to $2.47. Excluding a $0.16 per share benefit from adopting the new revenue standard, year-to-date adjusted EPS is up 11%. We continue to believe the new revenue standard will be neutral to earnings for the full year.
In Risk and Insurance Services, second quarter revenue was $2.1 billion with underlying growth of 5%. Adjusted operating income increased 9% to $532 million. Excluding the impact of the new revenue standard, adjusted operating income grew 6%, and adjusted margin declined by 50 basis points.
For the first six months of the year, revenue was $4.4 billion with underlying growth of 4%. Adjusted operating income for the first half of the year was up 20%. Excluding the impact of the new revenue standard, adjusted operating income increased 9% with adjusted operating margin flat year-over-year at 26.7%.
At Marsh, revenue in the quarter was $1.7 billion with strong underlying growth of 5%. For the first six months, revenue at Marsh was $3.4 billion with underlying growth of 3%. U.S. and Canada underlying growth was 6% while international was up 1%.
Guy Carpenter's revenue was $332 million in the quarter with underlying growth of 5%. This is the sixth quarter in a row of 4% or higher underlying growth for Guy Carpenter. For the first six months of the year, revenue was $1 billion with 6% underlying revenue growth. Strong year-to-date growth is benefiting from solid new business and strong retention in all major business lines.
In the Consulting segment, revenue in the quarter was $1.7 billion with underlying growth of 1%. Operating income increased 1% to $267 million and adjusted operating income decreased 5%. Excluding the impact of the new revenue standard, the adjusted margin declined by 140 basis points.
As Dan mentioned, earnings and margins were impacted by softness in Mercer's DB Consulting business and Oliver Wyman's financial services practice in the U.S. Consulting's underlying revenue growth for the first six months of 2018 was 3% with consolidated revenue of $3.3 billion. Adjusted operating income for the first half of the year was up 1%. Excluding the impact of the new revenue standard, adjusted operating income increased 2%.
Mercer's revenue was $1.2 billion in the quarter with underlying growth of 2%. Wealth grew 1% on an underlying basis. Within wealth, Investment Management & Related Services increased 12%, while Defined Benefit Consulting & Administration declined 6%.
Our delegated asset management business continues to show strong growth with assets under delegated management of $242 billion at quarter-end. Health increased 1% on an underlying basis in the quarter. Recall though last quarter's 7% growth benefited from favorable timing that came at the expense of the second quarter. For the first six months, health's underlying growth was a solid 4%.
Career underlying growth continues to be strong and was 7% in the quarter. For the first six months of the year, revenue at Mercer was $2.3 billion with 3% underlying revenue growth. Oliver Wyman's revenue was $492 million in the quarter with an underlying decline of 2% primarily due to a reduction in regulatory project works in U.S. financial services. For the first six months of the year, revenue was $1 billion with 2% underlying revenue growth.
Adjusted corporate expense was $45 million in the quarter. As we noted last quarter, we expect the consolidated margin will be down in the third quarter due to a tough expense comparison in Consulting and up in the fourth quarter. We continue to expect margin expansion and strong EPS growth for the full-year 2018.
Turning to investment income, on an adjusted basis, we had $2 million of investment income in the quarter and we continue to expect the contribution from investment income in the remaining quarters of 2018 will be immaterial. On a GAAP basis, investment income was $28 million in the quarter and this includes mark-to-market adjustments required by the recent change in accounting for certain equity investments.
In this quarter, we saw meaningful benefit from these mark-to-market adjustments while last quarter they were negative. Because we do not view the volatility caused by these adjustments as reflective of our underlying performance, we have excluded them from our adjusted results and shown them as a noteworthy item.
Foreign exchange in the quarter was an immaterial positive to overall NOI. Assuming exchange rates remain at current level, we expect FX to be a slight headwind to NOI for the remainder of the year. Our effective adjusted tax rate in the second quarter was 25.2% compared with 28.6% in the second quarter last year. Our adjusted tax rate included a net benefit of $6 million from discrete items. Excluding discrete items, our effective adjusted tax rate was approximately 26%.
Accounting for equity awards had no impact on the second quarter following a $0.04 per share benefit in the first quarter. And we do not expect any material benefit for the remainder of the year. This is substantially lower than the $0.15 benefit we saw in 2017.
Through the first half of the year, our adjusted tax rate was 24.3% compared with 25.9% last year. For the remainder of the year, we expect our effective tax rate, excluding discrete items, will be at the high end of our guidance range of 25% to 26%. This is consistent with the underlying effective tax rate we have seen through the first six months of the year.
As we said last quarter, the U.S. tax reform legislation is new and there is 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 could result in adjustments to our estimates as we move through the year.
Total debt at the end of the second quarter was $6.3 billion, essentially unchanged from the end of March. Our next scheduled debt repayment would be in October 2018, when we have $250 million of notes maturing.
In the second quarter, we repurchased 3.1 million shares of our stock for $250 million. Through six months, the company has repurchased 6.1 million shares for $500 million. This quarter marks the 25th consecutive quarter we have repurchased shares. And since announcing the commitment to reduce our annual share count in March 2014, shares outstanding have declined by 44 million or 8%.
Our cash position at the end of the second quarter was $1 billion. Uses of cash in the second quarter totaled $592 million and included $250 million for share repurchases, $194 million for dividends, and $148 million for acquisitions. For the first six months, uses of cash totaled $1.1 billion and included $500 million for share repurchases, $383 million for dividends, and $257 million for acquisition.
In May, our board of directors approved an increase in our quarterly cash dividend from $0.375 to $0.415 per share, an increase of 11%. 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 are delivering on our annual capital return commitments to reduce our share count and increase our dividends per share by double-digits.
With that, I'm happy to turn it back to Dan.
Thank you, Mark. Operator, we're ready to begin the Q&A.
Thank you. And our first question comes from Ryan Tunis, Autonomous Research. Please go ahead.
Yeah. Thanks. Good morning. I guess just thinking about on the Consulting side, it sounds like you're a little bit surprised with what happened with Oliver Wyman. Does that change in any way, I guess, your four-year margin outlook? Are we still right to think though that Oliver Wyman doesn't have quite as much of an impact one way or another on margins? From quarter-to-quarter, I think, that used to be the at least guidance you gave.
Yeah. Hi, Ryan. That's true. What we've said in the past is that Oliver Wyman should actually outgrow the aggregate of the other three operating companies over time but with more volatility and that it's more revenue related than earnings related, although it does have an impact on earnings. In good times, we get more earnings; and in rougher times, we don't. It's important to note that Oliver Lyman's five-year CAGR on an underlying basis is 6%. And so it is our strongest grower over the last five years, but there will be periods of volatility.
And it's important to isolate – not only for Oliver Wyman, but for Mercer as well. Both Oliver Wyman broadly and Mercer broadly actually are doing very well year-to-date. They have specific issues in businesses, FS in the United States for Oliver Wyman and the DBA business in the U.S. and UK for Mercer. I'm not trying to understate the importance of us dealing with those issues over time, but fundamentally the broad spectrum of what each of our Consulting businesses engage in are doing quite well.
So, I guess, thinking about the full year outlook, it's still for margin expansion. It sounded like you were a little bit – these are my words, but it sounded like you're a little bit more negative about the DB administration, maybe you were – the Oliver Wyman issue. Should we read that to think that there's probably some other areas that you now feel a little bit better about from an organic revenue growth standpoint headed in the back half of the year, and if so, what areas would those be?
I mean, I think there's plenty of things in Consulting to feel good about. As I was just saying before, the breadth of what we do in Consulting is doing quite well. In fact, I mean, I don't want to make excuses about businesses that are underperforming and we have to find ways of getting value from the DBA business and FS in the United States. Both are actually high quality, strong business with good professional colleagues, and they deliver us quality returns over time.
The DB is different because, as we've mentioned before, DB is not a growth business. There is not new business in DB emanating from new DB plans or new DB formation. New business in DB is essentially project work on existing plans. And so that's going to be a declining business over time. Did it decline a bit faster in the first quarter or the first and second quarter than our expectation? First quarter was around our expectation. Second quarter was a little steeper, but that doesn't necessarily make it a trend. We'll just have to see how that goes over time.
But when I look at the overall business, there's a lot for us to be excited about and that's why we clearly are saying that we're on track for another solid year. I mean, if I look through six months of this year on an overall company basis, we've grown 4% underlying. It's better than the 3% underlying that we did last year on an overall company basis. And we've done 11% adjusted EPS growth. So we are absolutely on track to deliver a good year with margin expansion for the overall company and with strong adjusted EPS growth. Next question, please?
Next question is from Kai Pan in Morgan Stanley.
Thank you and good morning. My first question just follow-up on the DBA discussion. We have seen weak organic growth in the segment for about like, let's say, two years now. So, do you think it's a structural issue or it's a competitive issue for you guys? And do you think that when we will possibly reaching a bottom in that?
Yeah. No, it is absolutely a structural issue. This is not a cyclical issue. Defined benefit pension plans, I doubt anybody on this call has one that's open. So, these are frozen plans that are essentially in a long-term, 25-30, 35-40 year runoff basis. And so these are declining businesses but of high quality which adds value to other businesses. So, clearly, a benefit in our investment business, which, as you saw, grew 12% this quarter, is its linkage with our DBA business.
But the only thing on a market competitiveness would be more along the lines of what's the mix of business and maybe the large accounts sector and certain types operates with more stability than the upper-middle market. That is to be determined over time, but the reality of the DB business is that it's on a long-term declining trend.
Okay. I do wish I had one open one. My follow-up question is on the Marsh simplification initiatives. So, could you tell us a little bit more about what exactly you're doing? And the $80 million to $100 million like restructuring cost, how much savings we expect from it and how much will be reinvested, and how much will flow through the bottom line?
Sure. Sure. I'll now hand off to John in a second, but there are certainly going to be some efficiencies that are derived from the restructuring activity. And some of that cost savings is going to be flowing to the bottom line. We're not going to give a specific number at this stage as to what's going to flow into the bottom line. I mean, fundamentally, the world is changing pretty fast. We want to get out in front of it in areas like digitalization, et cetera. So, part of our strategy is to free up some capital so we can accelerate investment in some of these critical areas. We have a strategy of investing as we go. But that doesn't mean from time to time we don't want to drop more money in because we see more opportunity. But, John, do you want to give us a little bit more on that?
Sure, Dan. So, Kai, we continue to execute on our effort to simplify our structure. Dan mentioned earlier we'll have fewer layers or leaders will have increased spans of control. That's part of the effort. We're going to have greater consistency in how we're organized around the world. There will be increased focus on the three client segments we serves: our large risk management clients, the middle market or corporate accounts as we call it and the small commercial and consumer segment.
We expect to be simpler, more agile, and we're pushing decision-making authority closer to the client. And as Dan said, the effort is also about enabling us to accelerate some investments in support of our strategy. The areas of investment are our digital capabilities, data and analytics, strengthening our middle market or corporate accounts value proposition. We're going to be adding some talent in key growth areas. And we also expect to continue to invest in our MGA operation.
Great. Thank you so much.
Thanks, Kai. Next question, please?
It's from Elyse Greenspan in Wells Fargo.
Hi. Good morning. My first question, you guys posted pretty impressive 8% organic growth in the U.S. and Canada this quarter. I was just wondering if we could get some additional color on what drove that broken out by the U.S. as well as Canada. How significant was MMA contribution to growth, if you could also update us on the size of MMA today? And did the contingence that you accept on a portion of your business – was that a driver of the growth as well? Just any color so we could understand the pretty impressive number.
Elyse, that was a great, single, multipart question. So I hope we – if we don't cover them all, then circle back, and let us know what we've missed. But I'm going to hand off to John in a second. But obviously we're pleased with Marsh's overall growth in the quarter, and Guy Carpenter as well. So, RIS had a strong quarter, and obviously the 8%, we're pleased with as well. John will give you a little bit more color. I don't really want to, quarter-by-quarter, get into sub details of each of the segments within U.S./Canada, but we'll give you something certainly for this quarter. So, John?
Sure, Dan. So, Elyse, we were pleased with the quarter, as Dan mentioned. The growth in the U.S. and Canada was pretty strong across the board. Marsh in the U.S. had double-digit new business growth. Cyber, transaction risk, construction activity, all contributed favorably to that. Our West Coast operation had a particularly strong quarter as well. In Canada, we had an excellent quarter of growth.
MMA, we had pretty consistent growth really around the country. We had a particularly strong growth quarter in benefits at MMA. So, that contributed favorably to the overall results. Contingence at MMA are not a – it's not a huge part or huge driver of our overall activity. We saw a little bit of an increase in contingent revenue in second quarter.
And then the other part that I would say in the U.S. that contributed nicely to the result was our MGA operations. Dan mentioned that we organized and rebranded our MGA operations under the new name of Victor led by Chris Schaper with a particularly strong quarter in the U.S. as well. So, overall, it was a good quarter.
On the international side, the results were improved over the first quarter and over the second quarter a year ago but still were more mixed. Real strong growth in Asia. Latin American and Pacific had solid quarters. We had good growth in Continental Europe and in Africa. But the UK and the Middle East remain some pressure points. Last quarter, I mentioned we have new leadership in both the Middle East and in the UK and I'm excited about – it's obviously early days but I'm excited about some of the changes they're making to improve the results.
But we'll still see some pressure in the UK, particularly over the course of the rest of the year. So, it was a good quarter. As Mark mentioned, through six months, our underlying growth was 3%. Cautiously optimistic about the second half, particularly in the U.S, but again we'll see some headwinds from the UK in the second half as well. And I think MMA annualized run rate right now is around $1.3 billion.
Thanks, John.
I think I got all of them.
Elyse, you have a quick follow-up?
Yeah. My second question on margins. Last quarter, you guys had said that you expected the deterioration in the Q2 to be driven by RIS and then in the Q3 you had tougher expense comps. I'm just trying to tie that together. It does seem like Consulting margins deteriorated a bit more than you would have thought this quarter. So, is, I guess, that still the case? And for your full-year margin improvement, is that going to be driven more by RIS which seems to be running stronger? Are you still expecting margin improvement in both segments for the year?
Sure. Let me take that part first. I mean, we haven't given up on the year by any measure in either segment on a margin basis, but certainly margin expansion for the year will be driven by RIS because of its stronger top line performance and some of the dynamics within the business. Now, we see continued opportunity for operating leverage in the future in both segments. Whether it occurs this year or not, we'll just see as time goes on. As we've said before, we focus more on earnings growth. And over the long-term, earnings growth will be more of a function of what we do on the top line than anything else.
And so what Mark said last quarter, just to revisit that because seasonality is a little different for us this year, was that last year was a little odd for us. We had anticipated some softer top lines. We really pulled some expense levers. And so in the second quarter of last year, RIS had 0% expense growth. And so we expected RIS's margins to be under pressure for this second quarter. The strong growth that they had really came through to absorb a lot of that as well. That actually was a bit of a hurt to RIS as well on the margin side in the second quarter.
So, what we've said about the third quarter is Mercer's expense growth in the third quarter of last year was a minus 2%. So, they've got a tough expense comparison for the year. But what we're really focused on in Consulting is top line and getting better growth activity on the revenue side. And as I was saying to Ryan earlier, it's important to look underneath the hood at the full Consulting business because Mercer actually is having a very solid year year-to-date when you take out the DBA business and look at that in an isolated way as being a declining business that we have to get out in front of and manage in a different way. But if you exclude that, they're up 6% or 7% year-to-date in the other segment.
And in a similar fashion, Oliver Wyman is up something like 8% year-to-date when you look at the – taking out the FS business in the United States. Now, we would never take out our DBA business or our FS business in the United States. These are two important solid businesses, but it's important to isolate them every once in a while just so you can see exactly what's going on more broadly within these divisions. Next question, please?
Next question from Larry Greenberg in Janney Montgomery Scott.
Thank you and good morning. Yeah. You just kind of touched on some of what I was going to ask about on Oliver Wyman. But can you frame for us how big the U.S. financial services business is for them on a relative scale? And then are we going back to a more normal environment in terms of regulatory-related work versus a heightened environment a year ago? Can you just give us some color on the environmental factors?
Sure. Thanks for the question, Larry, and I'll hand off to Scott in a second, but, I mean, obviously our FS business is a big business because if all the other pieces of Oliver Wyman are doing quite well, and they were negative overall, it shows the size of that business. And all you have to do is read the newspaper, and you realize many financial institutions have sort of gotten out from under the continued high scrutiny regulatory activity that's been the case over the last several years. And so yes, we may be going to a more normalized environment with other growth opportunities with financial institutions but perhaps that's changing. But, Scott, do you want to add some to that?
Sure. Larry, I'll give you a little more color. I mean, the FS business has always been a great business for us. It's less than 40% of the overall business now, and the U.S. regulatory business is only a part of that. Overall, it's probably less than 10% of the overall Oliver Wyman business. And in Q2, what we saw the end of was really this large wave of stress testing, and recovery, and resolution planning programs that the banks have gone through. And we knew that was coming and we've been actively working to transition to other areas.
Those include a number of strategic areas around growth, business evolution, culture organization, technology, digital, advanced analytics, customer experience, as well as a number of replacement risk and regulatory focus, things like cyber risk, liquidity risk, financial crimes and combat. And we're pretty optimistic about that transition. We've done that many times over the last 30 years, but it's going to take us a few quarters. And as we go through that process, I think, there will be some volatility in the results.
But once we finish that, I think, we'll be back on track. We're still targeting. We're still very confident in generating mid- to high-single-digit growth for the business as a whole. So, I think there has been a structural change there but that's nothing new for us, and many times in the past we've replaced that with other business.
Thanks. Larry, any other follow-up?
Thank you. Yeah. Just quickly. Dan, I interpreted what you said on the Wortham acquisition as that is not part of MMA Agency. Is that correct or am I wrong on that?
That is correct. I mean, we felt – when the team – we've been having discussions with Wortham for quite a while. We've gotten to know them very well over many years. And, culturally, they align more with Marsh than they do with Marsh & McLennan Agency. They skew a little bit higher. Although they do have some middle-market business, they skew into the upper-middle market in the large accounts space. They're very good in specialty areas like energy. They work on some big accounts. It's more of a team dynamic organizational relationships, that sort of thing. And so, we felt it was a better cultural fit. And, as you know from our acquisitions in the past, cultural fit and culture and that kind of chemistry between teams is one of the areas that we really look at and highlight and focus on. And we just felt they were a better fit for Marsh than MMA.
Great. Thank you.
Sure. Next question, please?
Next question from Meyer Shields in KBW.
Thanks. So, Dan, one quick question on the Consulting side. Just with regard to the responsiveness of expenses to the revenue shortfall, can you talk about how that compare to your expectations?
I mean, it's a fair question overall in terms of when you look at the expense base of the company because clearly Consulting – we, for many years, have been able to, in most quarters, grow revenue at a faster pace than expenses. That is a philosophy of our company. Clearly, it won't happen in every quarter, and obviously in this quarter, Consulting is upside down. It's tough when you have 1% growth overall not to be upside down, right, and 1% is kind of an anomaly for us in Consulting.
But we look at our expenses very carefully. I mean, one of the things to consider what I think is a bright spot within the company is the notion that in a people business, comp and benefits is always our biggest driver of costs. It's always the largest portion of cost of goods sold. And so, if we look at our comp and benefits ratio as a percentage of revenue, they're basically flat across the company, which means we're doing a good job managing our comp and ben regardless of the revenue over the course of the last few quarters. And so that to me is a positive.
If you look at Consulting's operating expenses, there's a lot going on, so let me unpack it a little bit because obviously you'll see some growth in their operating expenses. Both M&A and FX are fasters and both contributed to an uptick in expenses in the quarter. Another big driver was sub-adviser fees in our investment business. I mean one of the things you have to recognize is our AUDM is up more than 25% year-to-date.
And so the fees we pay sub-advisers which run through our operating expenses are up materially or meaningfully. Legal fees are also up due to work that we're doing on our M&A pipeline, also some of the CMA stuff that we've done. So, my view is the challenge for Consulting in the quarter was more about revenue than about expenses. We have proven over time that we know how to run a business on the expense side and we will continue to do so.
Okay. No. That's helpful. I really appreciate it. Second question, you touched on insurance under-penetration earlier in your prepared remarks. Can you drill down a little bit in terms of how you see the industry responding whether it's affordability or other issues to what is clearly some under-penetration?
Yeah. Sure. I'll hand off to John and if Peter has anything to say about it as well. But, certainly, you can just look around the world and see indebted governments who are providing post loss catastrophe protection using taxpayer money that they may not have, right? One of the biggest buyers, not just the developed world, one of the biggest markets of under-penetration for as an example flood insurance is the United States. But, John, why don't we start with you and then we can go to Peter if Peter's got something to add. So, John?
Sure. I mean, we see opportunities to develop product and distribution capabilities in small commercial segments of even mature economies as you pointed out, Dan, here in the United States. So, our acquisition of ICAT last summer was an important part of really trying to drive more nat cat type coverages into the small business environment. Torrent, of course, is another example of a business that we have that's got a great flood expertise and now administering the NFIP program as well.
You talked about Victor, as well Dan earlier. Victor is largely phased off as is Dovetail with the small commercial market, and we see smaller businesses maybe bought packages around the world but now are facing cyber risks, for example, renewal risks. And so, that's an important and growing part of our business. So, it's often been talked about in emerging economies and emerging governments. But as you say even within more mature markets around the world, we see an opportunity to expand product density into some of these customer segments.
Thanks. Peter, do you have anything to add?
Yeah. Meyer, if I just look at our public sector business, which we broadly define as state, federal, local, provincial, sovereign entities that are de-risking the taxpayer, as a standalone business, it'd be the sixth biggest business within Guy Carpenter. So, we're seeing strong growth in that area as there's more and more pressure on governments to de-risk the taxpayer. And we've seen it certainly in the United States. We're starting to see it in Europe as well.
So, Meyer, the age of risk has just begun. We know what we know and that's underpenetrated. There's been a lot of risk that we don't know that are yet to come, and we will be involved. So, next question, please?
Next question from Yaron Kinar in Goldman Sachs.
Good morning, everybody. I want to go back a second to the DBA business. Just to maybe set my expectations. I think you're talking about a stable decline, and yet you're also saying that 1Q 2018 was probably more in line with your expectations. Even if I compare 1Q 2018's revenue decline to 2017 and 2016, it seems like the decline has accelerated. So, I just want to better understand what stable decline means from your perspective. And on top of that, are the revenues that you're replacing this lost DBA revenue with – are you able to achieve similar margins on the replaced revenues in other businesses within Consulting?
Sure. Sure. So, I'll take that a little bit, and then I'll hand off for Julio for more color. I'll say a few things. First, on the margin point, DBA is a large established business with high margins, right? So, some of the growth industries that Mercer has invested in, over time, we anticipate will have similar margins at some point in the future, but they do not do so at this moment in time.
The other thing I want to say about DBA and defined benefit in general is if you look broadly the topic of retirement security is fundamental. The best retirement security products have not even been invented yet. So, it's not – completely think that this is just a downward trend forever, that there won't be other things that get developed to help solve the challenge that's a major issue globally for an aging population. And so there will be other types of approaches, and Mercer will be very involved in those kind of other approaches.
But, Julio, why don't you talk a little bit about how new business is created, and the types of things that happen, and therefore sometimes if you have more project work, maybe the overall revenue suffers a year or two later, but...
Right. So, let me, if I can – thank you for that, Dan, but I'd like to just talk a little bit about the panoramic view of growth in general. So, Dan mentioned a little bit of it before. We're pretty encouraged by some of the investments we've made to drive growth, and some of them you all are very aware of whether it's in talents (50:43) online or in software associated to that, Mercer Marketplace 365, digital implementation practice, which is doing well, workforce analytics and delegated investment solutions, which we talk a lot about already.
Now, the dynamics of the DB business, we've been managing quite well for a long period of time. We got great people, great consultants doing great work for our clients. That success includes creating great value for our clients, de-risking, providing advice, glide path, vendor's eye (51:12) to investment consultancy and delegated solutions. Now with that, that means that some of that work results in less programs over time, less DB programs over time due to DB plan termination and less project work that's associated with those programs. So when things happen that allow for de-risking work to take place, naturally DB programs start terminating.
So, on the flip side though, it still results in some really good growth as a feeder to our investment business and other businesses. So while new business opportunities can ebb and flow, we have positioned ourselves to take advantage of opportunities that could be presented by regulatory changes, interest rate fluctuations that hopefully increase funding levels and can generate demand for de-risking over time.
Yaron, any other follow-up?
Yeah. Just I guess to clarify before, the follow-up. So, it sounds like maybe there's just some project that's ebb and flow that's affecting the first half results or maybe causing a little more pressure than usual.
That's correct.
Yeah. Okay. And then, the second question I had real quick one on the simplification initiative in RIS. Are there any cost saves that came in the second quarter?
John?
Cost saves in the second quarter, no.
No?
No. So, much of the effort as we began to execute on and separate some talent came very late in the quarter.
Okay. And then...
No impact on the bottom line.
And also you said simplification in RIS. It's actually a Marsh simplification as opposed to RIS.
Okay.
Next question, please?
Next question from Dave Styblo in Jefferies.
Hi, there. Good morning. Hey, Dan, when we were on the road on last time, you spoke about sort of a framework for long-term EPS growth and something if you're growing organic growth around 3%, that that's reasonable to think about a 10% EPS grower. And then as you scale that up to 4% or 5% over time, EPS growth obviously looks better than that.
I'm just curious, with the strong results in U.S./Canada and that looks like EMEA is bouncing back a little bit, can you talk about some areas that gives you more confidence about being able to eventually push organic growth higher? I think UK was one of the pressure points. Can you just give us an update there since U.S./Canada seems to be doing quite well right now?
Sure. So, a few things. I think the point that I've made before is that our long-term adjusted EPS growth over time will be more determined by the top line than margin expansion in the future. I mean, when you look back, you go back a decade ago or so, it was about margins, right? And we had to improve our margins and we did that as a firm and a lot of our adjusted EPS growth was driven off of margin. This has been the aftermath of a financial crisis. And so it has been a long, slow growth GDP environment globally. A little bit better now, but it's certainly not buoyant. And as we've said before, GDP is one of the determinants because it's a big determinant of exposure units. GDP, payrolls, et cetera.
So, it's a bit better in the U.S., but the rest of the world, as an example, is not materially better than it was over the last couple of years. And so when I think about adjusted EPS growth over time, yeah, I think around a number like 3%. You're not going to be driving for mid-teens types of adjusted EPS growth. In fact, it would be counterproductive in your business to do so. And so that's essentially trying to deliver strong results whatever those turn out to be. And as we start growing 4%, 5%, 6%, that's when we can start pushing into the 12%, 13%, 14% type of adjusted EPS growth. And these are all the long stretches of time, not any one quarter, not any one year, but that's our view.
I certainly believe that the company's capability of growing is better than 3% and we've been sort of in this 3% or 4% range for a while. Now, we need some other things in the world to cooperate, but ultimately we have been shifting our mix of business. We have been favoring acquisitions that are growing faster than we are. We are looking at all kinds of opportunities, for example, in RIS in the mid corporate and the small commercial place. So we have a multitude of different approaches to drive better revenue growth. And with better revenue growth, we'll have better adjusted EPS growth.
Helpful. Okay. And then for my follow-up, I hate to come back to it but the DBCA business for the softness. I guess the biggest question investors want to get their arms around is could this get worse as you move into the second half and beyond? Can you – I think two of the reasons you talked about was just soft project work and then less new wins. Maybe on the back part of that, is it less new wins just because there's less going around or are you not winning as much as you historically have?
And then looking back, you did start to give us a segment breakdown I think going back to 2016 where growth was flat that year. It was down 2% last year. Are you guys able to give us what the organic growth profile looked like maybe going back into 2015, 2014 and 2013 just to understand has it been this low before and does it just tend to bounce around from time to time?
Yeah. I think you need to really focus on defined benefit in terms of what it actually is. At the end, defined benefit is with regard to pension plans. And if you look back into history, the further you go back in history, the more that there would be new formation of DB plans, active DB plans. That has – as you know, we've become a defined contribution world. There is not many new DB plans available.
There's other activity in that area. I mean, if you look at the development within Mercer of the investment business, the investment business is far stronger than it was five years ago and certainly 10 years ago, but it has gone from strength to strength. One of the values or feeders of assets into our investment business comes out of our defined benefit engagements. But you can't think of this business in a way that says, okay, that this is going to be a growth trajectory on defined benefit consulting. That's just not a reality. And that we've been talking about that essentially for more than a decade frankly.
And so this is a long – I mean, people are living longer, healthier lives than any time in human history. And so many DB plans that thought they were going to run off over 30 years may run off over 50 years. So, this is going to be a big business for us for a long period of time, but it's not necessarily going to be a growth business. When growth happens, it's based upon project work as Julio was saying before.
So, I think we've dealt with DB enough. And you guys can go through a bit of research about defined benefit plans. As I was mentioning before, we are actually quite pleased with Mercer's overall performance. And even with DB underperformance or growth issues they're 3% year-to-date within Mercer. And in terms of how we feel about the next couple of quarters, we don't expect the Consulting division to be a 1% grower from here on out. We expect that it will go better than that.
Sure. Okay.
So, next question please?
Thanks.
Next question from Mike Zaremski, Credit Suisse.
Hey. Thanks for fitting me in. Regarding the disclaimer on the tax rate could potentially change based on guidance, I appreciate that's a complicated bill but I was hoping maybe you could shed light on whether we should be thinking the long-term tax rate is biased higher or lower. And I guess related, there's been a number of companies – the multinational companies talk about the BEAT tax impact in outer years, and kind of curious if we should be thinking about that as well.
Sure. Thanks. Mark, you want to take that?
Yeah. I think our estimate of the higher end of that 25% to 26% range for this year contemplates everything that we know at this point. And we've actually had six months to work through the particulars of the bill and see our geographic list of earnings and things like that. So we feel like we've got good visibility for this year. In terms of longer-term, there's so many factors that can influence our rate – tax law changes aside, that really our guidance does go year-to-year.
So, I won't give you – I don't have a really good perspective on longer-term at this point. And in terms of the language, it is still very new and it is a very complicated bill. And there is the possibility that, as I said, the U.S. Treasury or others could come out with different interpretations of a very complicated bill that for global companies like us involves a lot of decisions. But as we sit here today, we feel good about the rate that we're projecting for the rest of the year.
Things like BEAT – it has no impact on us this year. The targets of those types of provisions, like earnings stripping type behaviors, really was not part of our technology. And so, at this point, we think we'll be able to deal with any of the provisions that have potential to impact this year's factored into the rate guidance that I gave.
Okay. Got it. That's helpful. And one quick follow up. Dan, you mentioned, in terms of the restructuring charges, in terms of being able to accelerate investment. You mentioned increasingly going digital, and I guess it just kind of remind me of this insurtech word, which seems to be – get a huge buzz these days. From my top-down perspective, I'm honestly not sure if most of the headlines are noise, or if they're adding real value. Maybe if you can talk from Marsh's vantage point, if you can offer color on whether insurtech is something that you think is – you guys are investing and looking at, or will be a material impact over the coming years?
Sure. We could probably spend an hour on that one. So, I'll try, in our next call, to address it a little bit more, but just very quickly. Yes, absolutely. We're very engaged with insurtech activity. We want to improve our peripheral vision. We are working in all kinds of different ways in order to do that. Yes, we periodically see something that we want to either have a partnership with or even make a small investment into. The insurance industry remains inefficient in some parts of the value chain and whether you're looking at policy issuance, claims process, et cetera. And so, there's a lot of interesting things going on in the insurtech space that may bring value to our clients. And so, yeah, we are absolutely engaged in that.
Thank you.
Thank you. And I just like to hand back over to the speaker today, Dan Glaser.
Okay. Thank you very much. And let me just finish by saying I feel really good about the business and where we are. We are on track to deliver another strong year of financial performance. We've grown 4% underlying year-to-date. Our adjusted EPS is up 11% year-to-date, and so we've got a lot to play for in the second half. I'd like to thank all of you for joining us on the call this morning. And 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.
Thank you. And this will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.