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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 2019 financial results and supplemental information were issued earlier this morning. They are available on the company’s website at www.mmc.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially for 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 the most closely comparable GAAP measures, please refer to the schedule in today’s earnings release.
I’ll now turn over to Dan Glaser, President and CEO of Marsh & McLennan Companies. Please go ahead.
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.
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.
We are pleased with our second quarter results, which include JLT for the first time. Since we closed the acquisition on April 1, we are often running with our leadership in place and our teams in formation, working together to serve clients with greater expertise, capabilities and content.
We have more conviction than ever that the acquisition better positions us to help our clients with their greatest challenges. JLTs impressive talent has added to our thought leadership and ability to innovate. We’ve added about 10,000 colleagues to the organization, resulting in the broadest and deepest talent base in the industry. JLT has made us stronger in several specialty areas and has deepened our footprint in the faster growing geographies of Asia Pacific and Latin America, and JLT has enhanced ours scale.
In the second quarter we grew total revenue by 16%, and RIS revenue by 23% compared to a year ago, despite a meaningful FX drag. This is a huge leap forward for our firm.
Scale is becoming increasingly important and this combination extends our position, as the leading firm in the areas of risk, strategy and people. However as I said last quarter, size and scale aren’t everything; quality, capability and responsiveness of what really mattered to clients, and on max score we deliver world class service one client at a time.
We’ve been hard at work on this integration since the day we announced the transaction, and post-closing we shifted aggressively from planning to execution. Mark will update you on some of our guidance items, but broadly speaking, things are tracking well with our expectations.
We moved quickly to integrate our financial reporting and from the first month after closing, began viewing our results on a combined basis throughout the firm. We are beginning to realize efficiencies and are meeting our milestones in terms of cost savings.
We are acting swiftly to integrate our teams and shared facilities around the world. We’ve already moved and co-located 5,000 of our colleagues in several cities, including London, Hong Kong, Sydney and Johannesburg. By the end of 2019, we will have nearly all colleagues around the world sitting side-by-side in their respective areas of operation. This involves a movement of 10,000 colleagues in 80 offices.
Integrating our teams in this way is significant, because it enables our colleagues to come together for clients and coalesce into a single team. We have spent a lot of time understanding the respective cultures of JLT and MMC and are focused on bringing them together in a shared, more powerful firm.
Our complementary strengths offer revenue growth potential, which we believe should enhance our long term growth profile. While these are early days and we’re not yet operating as a single team in all markets or lines of business, I still wouldn’t want to compete against them.
We have already seen several examples where joint collaboration and the best content and solutions helped us to expand existing relationships and win new business. For example, our Marsh colleagues in Europe won business by presenting our combined capabilities to a client with a complex set of risks that required a combination of multinational expertise, specialty coverage, risk consulting and captive support.
In the U.S. Marsh successfully retained and expanded the business of a large financial institution. By leveraging Marsh’s existing relationships and Marsh JLT specialty analytics, expertise and innovative solutions, the team added coverage’s for cyber and other specialty lines.
In Australia where we have an $800 million business with nearly 4,000 colleagues, clients and prospects are reacting positively to the expanded capabilities of the combined organization. We retained two important risk clients by demonstrating the depth of talent and the benefits of the new value proposition, and we were able to extend our position to include Mercer.
Guy Carpenter recently won an RFP for a top 10 U.S. insurer by leveraging a terror model developed by JLT Re, combined with the analytical capabilities of Guy Carpenter. Mercer Marsh benefits enhanced by the addition of JLT partnered on Britain’s Healthiest Workplace Launch taking the largest survey of its kind in the U.K. to clients. We also see potential in the medium term to improve reliability and efficiency by leveraging JLTs shared services operations in India. JLT adds 1,700 colleagues in India for Marsh & McLennan.
In summary, we were off to a good start. The value creation that will be generated by the combined company is significant and we are excited about our future together.
Let me spend a moment on current P&C insurance pricing trends. Pricing is firming in specific lines and geographies, especially for complex risk or those with CAT exposure. The Marsh global insurance market index saw an increase of nearly 6% in the second quarter, compared with 3% in the first quarter and 2% in the fourth quarter of 2018.
Property lines are seeing an average renewal price increase of 8%, with US up 10%. Casualty prices increased for the first time since 2013 and saw average renewal rate increases of 1% in the second quarter.
Financial and professional lines saw average renewal rate increases of 10% in the quarter, with the U.S. up 7% and U.K. and Asia Pacific up double digits. Note that the Marsh index skews to larger risks and we generally see less movement in the middle market.
Turning to reinsurance, at the mid-year 2019 renewals which primarily focuses on U.S. hurricane exposed programs, multiple factors came together to result in double digit property catastrophe rate increases in Florida on average for the first time in over a decade. This was driven by loss creep from the 2017 and 2018 loss events, reduced capital inflows and involving views of risk. Ultimately we can’t predict the mid to long term outlook for pricing, but the current conditions are firmer almost across the board.
Now let me turn to our second quarter financial performance. We delivered solid combined results in the quarter, with underlying revenue growth across both risk and insurance services and consulting. We are executing well, both delivering for clients while working through the integration of JLT.
Consolidated revenue was $4.3 billion, up 16% or 4% on an underlying basis. Adjusted operating income grew 19% to $894 million and the adjusted operating margin expanded 150 basis points in the quarter. Adjusted earnings per share grew 7% to $1.18.
In risk and insurance services, second quarter revenue was $2.6 billion, an increase of 23%. Underlying revenue growth was 3% in the quarter, reflecting 4% growth in Marsh, despite a tough comparison to a year ago, partially offset by a decline at Guy Carpenter.
The declining in Guy Carpenter’s underlying revenue growth is a combination of timing and a decline in our new business pipeline. Not surprising for an acquisition of this size, JLTs new business slowed considerably during the period between deal announcement and closing. This impacted Marsh and Guy Carpenter, but was felt more acutely in reinsurance.
Although it will take time to rebuild the new business pipeline, we are confident in the long term growth outlook for our combined business. RIS adjusted operating income increased 21% to $641 million and the adjusted operating margin expanded 80 basis points versus a year ago.
In consulting, second quarter revenue was $1.8 billion up 9% compared with a year ago. Underlying revenue was up 5% for the quarter, driven by strong underlying growth at Oliver Wyman of 13%, while Mercer generated 2% underlying revenue growth. Consulting adjusted operating income grew 14% and the adjusted margin expanded 130 basis points versus a year ago.
In summary, we are pleased with our second quarter results and our progress integrating the JLT acquisition. At a high level, we are tracking success in this period across three primary dimensions: growth, achievement of cost savings and retention of key talent and across each of these categories we are satisfied with our performance to-date.
For 2019 we expect a solid first year as a combined company, underlying revenue growth in the 3% to 5% range, margin expansion and solid growth in adjusted EPS.
With that, let me turn it over to Mark for a more detailed review of our results.
Thank you, Dan, and good morning. Our second quarter results represent a solid first quarter following the close of the JLT acquisition. Overall revenue grew 16% to $4.3 billion due to the addition of JLT beginning on April 1 and solid underlying growth of 4%. Note that underlying revenue growth in all of our communications and disclosers includes JLT.
Operating income in the quarter was $680 million, while adjusted operating income increased 19% to $894 million. Overall our adjusted operating margin increased 150 basis points in the quarter with significant margin expansion in both segments. GAAP EPS was $0.65 in the quarter; adjusted EPS increased 7% to $1.18.
For the first six months of 2019, underlying revenue growth was 4%, our adjusted operating income grew 14% and our adjusted EPS increased 9% to $2.70. Overall, our adjusted margin increased 160 basis points to 24.4% for the first half of 2019.
In Risk and Insurance Services, second quarter revenue grew 23% to $2.6 billion with underlying growth of 3%. Operating income increased 10% to $517 million. Adjusted operating income increased 21% to $641 million and the adjusted margin increased 80 basis points to 27.8%. For the first six months of the year revenue was $5 billion, underlying growth of 4%. Adjusted operating income for the first half of the year was up 13%.
At March, revenue in the quarter was $2.2 billion with underlying growth of 4%, representing a solid first quarter with JLT, especially considering the tough comparison to a strong second quarter last year. U.S. and Canada continued its trend of strong growth with 5% underlying revenue growth in the quarter. This marks the fifth consecutive quarter that U.S. and Canada has delivered 5% or higher underlying growth.
In international, underlying growth was 2% with Asia Pacific up 7%, Latin America up 4% and EMEA flat. For the first six months revenue in Marsh was $3.9 billion with underlying growth of 4%. U.S. and Canada was up 5%, while international grew 3%. Guy Carpenter’s revenue was $392 million in the quarter with an underlying declined of 3%.
As Dan mentioned, the softness in the quarter was due to some quarterly variability, as well as a decrease in new business. For the first six months of the year revenue was $1.1 billion with 2% underlying grow. We are confident in Guy Carpenter’s long term growth outlook, but expect current trends will impact revenue growth for the balance of 2019.
Guy Carpenter is executing its integration and cost savings plans, which will help them deliver solid earnings growth in 2019.
In the consulting segment revenue in the quarter was up 9% to $1.8 billion, underlying growth of 5%. Operating income increased 4% to $278 million. Adjusted operating income increased 14% to $305 million and the adjusted margin increased 130 basis points to 18%.
Consulting’s underlying revenue growth for the first six months of 2019 was 4%, with consolidated revenue of $3.5 billion. Adjusted operating income for the first half of the year was up 16% to $596 million.
Mercer’s revenue was $1.3 billion in the quarter, with underlying growth of 2%. Wealth underlying growth was flat with mid-single digit growth in investment management offset by a low single digit decline in our defined benefit business.
Our delegated asset management business continues to show strong growth, with assets under management increasing to $283 billion, benefiting from continued inflows, market appreciation and assets from JLT.
Health increased 4% on an underlying basis in the quarter and Career underlying growth was strong at 6%. For the first six months of the year, revenue at Mercer was $2.4 billion with 1% underlying growth.
Oliver Wyman’s revenue was $540 million in the quarter with impressive underlying growth of 13%. Growth was broad based by practice and geography. For the first six month of the year revenue was $1.1 billion with 10% underlying growth.
Turning to corporate expenses, adjusted corporate expense was $52 million in the quarter. Based on our current outlook, we expect approximately $50 million per quarter for the remainder of this year.
We are just over 100 days post the closing of JLT and are moving forward rapidly with the integration. We continue to expect the transaction will be modestly diluted to adjusted EPS in the first year, break even in year two and to be accretive in year three.
At this point we expect at least $250 million of run rate cost savings and $375 million or more of costs associated with achieving these savings. Of the $250 million of cost savings, we expect to realize roughly $75 million in 2019, $175 million at 2020 and the full $250 million in year three. In terms of the $375 million of costs to achieve these savings, we expect to incur roughly half in 2019 with the remainder incurred evenly over the next two years.
During the second quarter we incurred $141 million of interest expense, and continue to expect around $140 million in the third quarter, consistent with our previous guidance.
As disclosed in our supplemental materials released on June 6, we now expect annual deal related amortization from the JLT transaction to be $180 million pretax. In the second quarter, we recorded $100 million of amortization, which includes the JLT related amortization, as well as amortization from other transactions.
Approximately $80 million of the $100 million was recorded in RIS and $20 million in consulting. We currently expect the third quarter amortization will be roughly consistent with the level in the second quarter.
In aggregate, the financial impact of the JLT transaction is tracking well with our initial expectations. In the second quarter we reported $280 million of noteworthy item, mostly related to the JLT acquisition. Included in the total, are $98 million of integration costs, the largest category of which is severance; $150 million of charges associated with the closing and the refinancing of JLT debt, and $26 million of other restructuring costs mainly related to Mercer.
Turning to investment income, on an adjusted basis we had $6 million of investment income in the quarter, and we continue to expect the contribution from investment income for the balance of 2019 will be immaterial.
On a GAAP basis investment income was $8 million [ph] in the quarter. Foreign exchange was at roughly $0.02 per share headwind to adjusted EPS in the quarter. Assuming exchange rates remain at current levels, we expect $0.01 per share of FX headwinds in each of the third and fourth quarters.
Our adjusted effective tax rate in the second quarter was 25.9% compared with 25.2% in the second quarter last year. Through the first half of the year, our adjusted effective tax rate was 24.1% compared with 24.3% last year. Based on the current environment, we continue to expect the tax rate between 25% and 26% for 2019, excluding discreet items.
Total debt at the end of the second quarter was $13.1 billion or $12.6 billion excluding commercial paper. During the quarter we refinanced the remaining $550 million of senior notes assumed from JLT, using mix of cash and additional $300 million one year term loan.
Our next debt maturity is in September 2019 when $300 million of senior notes will mature. At this point our expectation is that we will retire these notes with cash-on-hand, in line with our planed deleveraging over the next couple of years.
In the second quarter we repurchased 1 million shares of our stock for $100 million. We continue to expect to repurchase enough shares in 2019 to reduce our shift.
Our cash position at the end of the second quarter was $1.3 billion. Uses of cash in the second quarter totaled $6.1 billion and included $5.8 billion for acquisition, $212 million for dividend and $100 million for sharing repurchase.
For the first six months uses of cash totaled $6.6 billion and included $6.1 billion for acquisitions, $422 million for dividends and $100 million for share repurchase. In May our Board of Directors approved an increase in our quarterly cash dividend of $41.05 to $45.05 per share an increase of 10%.
Overall we expect 2019 to be a solid first year with JLT. We are on track to achieve good underlying revenue growth, meet our integration savings targets and deliver margin expansion and solid growth in adjusted EPS. As you think ahead to the remainder of 2019, keep in mind that JLT has heightened seasonality, as shown in the supplemental quarterly materials we released on June 6. Their first and third quarters were seasonally smaller, while their second and fourth quarters were seasonally stronger.
With that, I’m happy to turn it back to Dam.
Thanks Mark. Operator, we are happy to go to the Q&A.
Thank you. [Operator Instructions]. We will now take our first question from Mike Phillips from Morgan Stanley. Please go ahead.
Good morning. Thank you and congrats on your first quarter with the acquisition under your belt. My first question, lots of moving parts obviously with JLT. I guess could you comment on the impact of the margins in the quarter from the aviation business that you sold?
Yeah, I mean at the end, the aerospace business that we sold would have had a very negligible impact on the margin in this quarter. The reality of that business is that’s a very big fourth quarter business, but it’s a much smaller throughout other parts of the year.
Okay, great, thanks. I guess secondly, you are still talking of kind of the long term organic growth of in the 3% to 5% range. How do we think about the impacts on your margins and how the margins can expand if you stay below 5% in that?
So a couple of things. One, when we think long term what we said before is we have been growing in the 3% to 5% range annually for the last decade and so until we are able to break out of that range, you know you are what your results say you are and we’ve been performing in that 3% to 5% range. That’s not to say we view our long term growth possibilities as somehow parameter based or bucketed within that range you know. We have aspirations to grow more than that clearly.
Now, we have proven over a long period of time that we are able to grow margins within 3% to 5%, even when we are performing at 3% growth. I mean our key to expansion is the way we run the business, where revenue growth almost always exceeds expense growth and we’ve done that consistently. And so you know over a period of 12 years we are now in the 12th consecutive year of margin expansion. So I feel comfortable that this leadership team will be able to continue to grow margins by growing our revenue faster than growing our expense into the future.
Next question please.
We’ll now take the next question from Elyse Greenspan from Wells Fargo. Please go ahead.
Hi thanks. Good morning. My first question is on the margin within RIS in the quarter. You know pretty – a lot stronger than what I had expected. So if you could just help us understand, now I know you guys gave us some financials for JLT last year and based off of that, I would have thought that that would have been a drag on your margins, because they run lower than historical RIS.
Could you just give us a sense of what drove that? Was it you know how much phase came through in the quarter? Was it employees that potentially left after the deal closed. I’m just trying to tie together you know the moving parts that drove pretty strong margin improvement within RIS?
Yeah, sure. As we said earlier, we expected margins to expand this year for the company and we set that going into the year and that is our expectation, so this was not a big surprise to us.
I would caution everybody as we’ve done in the past, not to look at margins in any one quarter, but look over a length of time, either on a you know annual basis, rolling 12 months, etcetera, because there are puts and takes in every quarter that impact margins.
You know when we talk about – we’re not going to detail individual cost savings and what’s dropping to the bottom line, although you know it’s fair to say that a lot of our cost saves in the $250 million or the at least $250 million will drop, because you know as you sited JLT ran their business at a lower margin than Marsh & McLennan did and our view is that we will bring the combined business to the margins of Marsh & McLennan and expand from that point in time, and that’s why you are seeing some expansion now.
Okay thanks. And then my second question, you know reinsurance, Guy Carpenter declined in the quarter, you know I think both of you guys in your prepared remarks reference a lower new business pipeline or lower new business growth. If you can just expand on that, also could you give us a sense of the retention that you are seeing within both Legacy, JLT and Marsh & McLennan, just so we can get a sense of you know kind of the drag. I know you referenced you might see for the balance of, you know the balance of this year?
Yes, so I’ll take that and then I’ll hand over to Peter to give us a little bit more. You know I’d start by saying Guy Carpenter has been a terrific performer on multi-levels for us in many years, and in fact this negative quarter is only their second negative quarter in the last decade. You know and you cited, new business was the primary feature and so it’s quite common in acquisitions.
We even see it in much smaller acquisitions within Marsh & McLennan agency, where post acquisition there is a little bit of a low for a period of time and so its natural. And certainly from deal announcement through to closing there was a period where the pipeline was beginning to weekend. This is correctable, it’s not going to take years, but then again it’s not going to take weeks and so there’ll be a period of time that we work it through and we’ll get the pipeline going again. So it’s not something that we are overly concerned with.
And I would say the new business both for Marsh and for Guy Carpenter is vitally important. You know if you are a primary broker as an example and if you’re not growing your base by 10% or 20% of new business every year, you’re going to go backwards. And so you know it gives you the magnitude of the hill that we climbed successfully in my view with our RAS overall. But Peter, want to add some more color to that.
I think you’re absolute right, Dan. I mean, you know at least the reinsurance business typically has a long duration sales cycle and when you put any uncertainty or doubt into a buyer’s mind it’s going to impact the business pipeline, and that’s what we’ve seen from the legacy JLT business, and you know quite frankly what we’re doing is we are you know bringing the legacy JLT and Guy Carpenter sales processes together.
We’ve had a very successful disciplined global sales model in Guy Carpenter, which has created you know significant results for us over the past 2.5 years and as Dan said, it’s not going to happen overnight, but in the short period of time we will ingratiate the JLT business into our business pipeline and grow it successful.
The other thing I would just add is Carpenter did a really nice job in the quarter in delivering bottom line you know and that's going to be the focus over the next couple of years. There was quite a spread between respective margins in the businesses and now our first order of business is to achieve Carpenter style margins on the combined reinsurance business. So it's a bit more for Carpenter unlike some of the other businesses. It's a bit more of a bottom line earnings focus as opposed to topline. We want both, but I'm just giving you a little bit more of the focus.
Next question please.
The next question comes from Brian [Inaudible]. Please go ahead.
Hey thanks. I guess just following up here on Guy Carpenter, I guess I would have expected some of the revenue disruption to come from the revenue overlap you potentially had between those two businesses and it sounds like you’ve only really alluded to issues relating to new business. I was hoping Dan maybe you can give us some idea of you know, how many dis-synergies there? How much of that negative three might be stemming from that versus you know what you said on the new business side?
Yeah, no it’s a good. Certainly we've seen some revenue breakage, particularly in our I.S., but the magnitude of the revenue headwind for us was new business involved Marsh and Guy Carpenter. It’s just this fell more acutely in this particular quarter in Guy Carpenter.
Now we modeled a lot of revenue breakage in the deals, so you know things are tracking along with our expectation and so from that standpoint it'll be an issue that will work through over the next couple of years, but ultimately we feel we will be able to in most circumstance overcome that headwind.
Got it, and yeah, I mean as you said we can only see it in other places other than Guy Carpenter but there’s certainly also some overlap in London. If you broke out London separately, would we see something similar to the story plan on Guy Carpenter on the retail side?
I mean London is where we have the most levels of overlap. I mean on the insurance side it’s the capital of the insurance world you know, and so from that basis you would expect to see more overlap in London than you would see in other parts of the world.
Next question please.
The next question comes from Larry Greenberg from Janney Montgomery Scott. Please go ahead.
Thank you and good morning. Dan, just you talked about pricing in the environment in property casualty. I mean without the JLT combination, do you think you would be characterizing the environment for underlying growth above you know that 3% to 5% historical range that you've been using.
I'm going to hand it off to John and Peter a little bit, to give a little bit more pricing commentary in general. But you know the 3% to 5% is sort of where we've been for a while pre-JLT and post JLT we’re saying the same thing. So I wouldn't view it as impactful on that and you know you could imagine you know from our standpoint we’re focused as a combined company. There is no us and them.
We’re one organization, one set of expectations, one set of numbers as we move forward and I'm actually very proud of the organization, in being able to pull together that from the date it closed, from the first month looking at a single set of numbers, not trying to be well JLT would have been this and Marsh would have been that. It’s just one set of numbers, but John, you want to talk about the pricing environment a little bit more?
Sure. You know as Dan noted in his prepared comments, the market moved a bit in the quarter. Most regions and products saw increases in rate changes compared to the first quarter.
As I said on the last call, market’s more challenging for some clients than it’s been you know quite some time. Dan shared the high level data. You know what I would say is our index skews a bit to large accountant and larger accounts with complex risks are the accounts that are moving the most; you know pricing, lead umbrella, property CAT, you know all high single digit range globally. The U.S. and Australia and the U.K. wholesale market are the geographies with the highest level of increases.
But I would say that you know the SME markets, the upper middle market, you know pricing is much more muted on average in effect. It’s in the low single digit range or even flat to down in some products and in some markets.
So you know we’re seeing signs of lost cost inflation and exposure shifts in certain classes; DNO, EPLI, cyber, commercial order you are seeing an increase in frequency and severity. There's some very, very big losses in the market, so. You know the industry remains very well capitalized, but some are reducing their risk appetite and moving attachment points and moving pricing. So you know that’s what we see at March here.
You know I think as DAN said in his comments, it's very specific to lines of business and geographies in some areas of the world. Take Florida, we saw significant increases at 61 on Japanese with the exposed metric, the exposed business, there were increases, but they were all responsive based on exposure and loss. They weren’t like it as we've seen in previous cycles.
I think the other thing it's important to note to is that insurance and reinsurance pricing are sort of moving in synchronicity. It is in the top down reinsurance pricing being forced on the primary business, primary rates rising as reinsurance rights respond to the underlying growth of premiums as well.
Thanks. Anything else Larry?
Yeah Dan. I think one thing that you know investors will be struggling with and trying to tackle is just how long these headwinds, particularly at Guy Carp are going to persist? And I know it's impossible to say with precision, but would you venture some sort of time frame for you know when some sort of inflection may arise where you know that was yesterday's conversation and now we're having a new conversation about growth.
Yeah, as you say, it is near on impossible to take something like that. What I can say is that there's no finer leadership team of this combined organization and that you know execution capability has been proven over a long period of time.
As I mentioned before, this will not take years, but then again it won't take weeks either. This will be a period of time that we come together as one firm. I mentioned in my prepared remarks that we are not operating as a single team in every geography and every line of business. That is a process you know, this is real life you know and so I would say that even given that headwind that we’ll have to absorb and overcome over the coming months, I would not trade strategic positioning with any other firm in our competitive space.
We have a mountain of talent and we will be able to deliver you know very interesting solutions to clients in the future years, so the best is certainly yet to come for this organization.
Next question please.
Your next question comes from Meyer Shields from KBW. Please go ahead.
Great, thanks. Dan I was hoping you could elaborate a little bit on your comments of Guy Carpenter; you being more bottom line focused. I guess specifically what I'm trying to understand is that if the new business pipeline is down and we accept the premise and new business is typically more expensive to originally obtain, then are there some expenses that would come back as the new business pipeline rebuilds?
Yeah, I think your basic premise there Meyer is not right. It's probably right in a lot of industries, but the reality is new business can be even more profitable. The marginal profitability is the mix account in our industry is quite high, because we're putting new revenue on existing infrastructure. We don't necessarily have to go out, hire new people, do more technology, etcetera. We can add revenue onto the existing expense base and so new business is profitable.
Okay, that’s actually very positive, thanks. And second, this is sort of unrelated to JLT, but I was hoping you could update us on the M&A environment.
Well, thank you for remembering we've got other parts of the company. John, you want to talk a little bit about what's going on Marsh & McLennan Agency.
Sure. M&A had a strong quarter and remains quite active in the M&A market and in fact you know MMA is our priority in the near term as we integrate JLT. There is a good pipeline. You know we've earned a favorable reputation, we are broadening our commitments and you know it gives us a really good shot, in many cases the first look you know at some really high quality firms that are in the market.
You know we closed on Bouchard in Florida in the middle of the first quarter. We closed on Lovitt & Touche in Arizona, based in Arizona on April 1. You know both were top 100 firms in the United States, high quality businesses with really, really terrific leadership so, and we have a good strong pipeline you know as we look for as well, so we're excited about the prospects there.
Thanks John. Next question please.
Your next question comes from Yaron Kinar from Goldman Sachs. Please go ahead.
Thank you. Good morning everybody. I guess getting back on the Guy Carpenter wagon, I think you had already mentioned some timing issues there. Can you maybe talk about what drove that timing issues and if you expect revenues to come back in the third quarter?
I’ll start, but ultimately I would say that the new business pipeline was larger than the timing issue, although timing did have an impact, but Peter you want to talk about that?
Yeah, I mean you know this is an inherently volatile business and buying decisions from one quarter the next can have an impact as we’ve seen. You know it probably was a function more of the market as it was buying decisions, because as the market is transitioning its taking longer and longer to price business and therefore renewals that should have happened in the second quarter are now leaning over into the third quarter.
Okay and then as I think about the third quarter here, you know we only have one year of data for our JLT here on a quarterly basis. It seems like JLT’s margins were a little weak a year ago. Is that a good run rate to use as we think of forward estimates or is there something in particular that drove margins down last year?
Mark, you want to take that?
Yaron, I think if you refer back to the supplemental materials that we passed out and its why in my commentary I highlighted the seasonality. I would use 2018 as a decent baseball, and I don’t think there was anything unusual in JLTs results quarter-to-quarter. And the third quarter was seasonally weak estimates. If you look back to that statement, they actually had negative NOI in the third quarter just because of the different revenue.
Nest question please.
The next question comes from Paul Newsome from Sandler O’Neill. Please go ahead.
Good morning, congrats on the quarter. Just more of a follow-up here. The lag that we are seeing from that you talked about a lot, Guy Carpenter, but also seeing in Marsh, is that going to mainly come through the EMEA segment that seemed to be the segment that was a little bit slow and I guess should we essentially just think of your comments on Guy Carpenter as having – expecting similar behavior there?
Yeah, I mean if you look at the JLT organization, you know it’s almost 50% in the U.K. So rather than, you know really broad EMEA, of course the U.K. has been our EMEA, but it’s pretty focused on the U.K. more than any other factors as being; that’s where most of the yield overlaps occur, that’s were a lot of the flow goes into the London market replacement. But overall when we look at the geographies, it’s business as usual in places like Asia Pacific and we’re just you know continuing very rapidly to integrate the teams and work with clients and prospects.
And so you know, I want to make it clear that any of the revenue headwind that we have faced was completely anticipated and if you go back to when we first made the deal announcement in the last quarter we spoke about, there’ll be a period of choppiness you know and delivering a 4% level of growth for the company, you know in that period of choppiness I view as being, very acceptable to us.
And in fact you know the 4% growth from Marsh & McLennan in the second quarter is the first time we actually hit 4% growth in the last five years. I mean the last time was second quarter of 2014 and so there has been a period of time, so we feel we are doing pretty well in the circumstances.
I wouldn’t disagree. Is the lag effect that you talked about in Guy Carpenter, the balance of the year similar in for the Marsh impact?
You know it’s hard to say, but I would say, the way to look at this is that the new business impact in terms of pipeline applies to both Marsh and Guy Carpenter. It was felt more acutely by Guy Carpenter partly because the size, relative sizes in quarters.
You know the other thing that you have to know, the revenue breakage is likely to take longer due to materialize. Even though we’re seeing some revenue breakage now, there’ll be other revenue breakage in the future, particularly in areas like third party business as an example or clients that have a view of having multiple brokers and they had relied on JLT and Marsh or JLT and Guy Carpenter in the past.
You know they’d want to go find another broker if they want to have two brokers if they view that as part of their approach to the market. And so, you know think of it more along the lines of the new business lag will be regenerated based upon the efforts of Marsh and Guy Carpenter to recreate business pipelines, get people working together and that is very solvable and the revenue breakages is a short term to midterm phenomenon that will be a bit of a headwinds for us over the next couple of years, but we believe and even in those circumstances we will be able to grow our business in the 3% to 5% range organically as a company and deliver margin expansion.
Next question please.
The next question comes from Mike Zaremski from Credit Suisse. Please go ahead.
Hey, good morning. In John’s remarks about the P&C market, you described it as more challenging for some clients and it’s been for a long time and you guys made the point that it’s more a large account focused. I’m curious how was that impacting Marsh’s financials? I believe the large accounts faces more fee weighted rather than commission weighted. So how should we think about those dynamics?
John, you want to give us some more detail.
Sure, you know I think as the market, you know the overall market pricing dynamic has had some positive impact on the revenue growth of the company. But, as you know, most of the price increases are happening in this segment of market where we are paid largely on fees. So you know some of the business that migrates, the London market, so you know we get some wholesale left in that marketplace.
You know I think the improved growth trajectory of Marsh over the last couple of years is also come, you know as our retention has improved and our fee business has improved as well. So we’re getting a little bit less from the market for sure, but I think we’re getting better as well.
Thanks. Okay question, I guess a follow-up.
Yeah, one follow-up on cyber. Could you comment if whether you’d help us understand the size or maybe the growth dynamics going on with your cyber consulting business. We all know that cyber is growing a lot on the insurance side and I’m curious if there’s also growth coming from perhaps a cyber-consulting business that you have? Thanks.
Yeah, sure. So let me speak broadly for a second. As you mentioned cyber is a significant growth areas, viewed as one of the primary risk for almost all companies today regardless of where you’re located anywhere in the world and regardless of your size. You know everyone concerned with cyber, and certainly within our risk and insurance services business it’s one of our fastest growing practices and has been over the last several years and that to me is the road without end in terms of, you know there will be as the IoT and globalization continues and the technological advances and the pace of technological advance just continues to accelerate, we will see more and more risk exposure and risk awareness around that level of connectivity, and certainly Marsh and Guy Carpenter will be very helpful.
Turning to your question on consultants, I’ll hand over to Scott McDonald, first at Oliver Wyman to address it, but Scott.
Yeah Mike, the business as you suspected I think is growing pretty rapidly on the consulting side as well. And there our advisory element of it, governance elements, technology pieces and that’s being thought I’d say by the boards, by the C-suites and by others on the management team.
So it’s a very rapidly growing space, has been rapidly growing for the last few years, although it’s still relatively small for us; one of our fastest growing businesses.
Thanks. Next question please.
The next question comes from Brian Meredith from UBS. Please go ahead.
Yeah, thanks. Just sticking with Oliver Wyman, I’m just curious the comps get little bit tougher second half of the year. Should we be expecting the same type of growth continuing in Oliver Wyman or should – big projects something happen in the quarter.
Brian, from your lips to God’s ears. I mean at the end – as we said many times before you know Oliver Wyman over like the last five years has been our fastest growing operating company on a CAGR basis, but it also has the most volatility.
And so I think you have to look at a longer term period of time in order to evaluate their growth, in mid to high single digit is where they tend to grow over long stretches of time, but Scott you wanted to price me to the up-side or the...
Yeah, Dan covered most of it, but Brian I really appreciate the question as well. I was wondering what we had to deliver at Oliver Wyman, any other question. I like getting one. I mean we had a really good quarter which we are happy with. The interesting thing is that that strong right across the portfolio across almost all the industrial segment and across all of the regions, perhaps with the exception of Europe which has been slower.
The economy still feels okay out there. I mean employment is good, but there is some slowing growth now in pocket in the world. There is some slowing business temperament and while we see our clients still interested in doing things around growth, technology, managing disruption, they continue to get more nervous.
So we don’t see anything on the horizon that gets immediately tougher. But if you look at the results over the last few years, you know as Dan highlighted, we do fall up and down depending on where we put big projects and programs into the quarters. And I think this is pop-up so I wouldn’t expect it to continue at that level and the comp from last year is high.
Thanks, so just a quick one on JLT. In the expense saves guidance that you guys have provided, have you contemplated any type of retention, you know bonuses to try to keep producers from JLT or the combined organization, was there any impact to the quarter at all from retention bonuses?
Sure. So yeah, we clearly put into place a retention program for the combined company. You know at it includes people who are critical to our future, whether they work for JLT or whether they work from Marsh & McLennan. Obviously those were a little bit weighted towards JLT, because we wanted to you know have people give it a real chance.
The program as you would expect is a multiyear program, and so it’s really more like a three year cliff-based retention program and we – it is in our deal model, we put a significant amount of – there is no significant impact in any quarter, you know since it’s over a three year period. And I would just say you know, that program is not viewed in our way as part of the cost saving program; that is more a securing the organization, securing future growth.
You know yeah, I do want to say that because I know that a couple of you have had mentioned in the past that you’ve been reading about some level of staff departures from JLT etcetera and – as I said in my script, we’re evaluating the acquisition across three dimensions, really broadly on growth. So growth in power and capabilities, revenues, earnings, etcetera, expense savings clearly and also talent retention and we are satisfied across all three. Specifically on talent retention, sure there’s some people who have left who we would have preferred that they stayed with the organization.
However you got to put that in context, the overall level of JLT voluntary turnover in the second quarter of 2019 is very consistent with the overall level of voluntary turnover within JLT in the second quarter of 2018 you know and so it’s running a little bit higher in the U.K. and it’s actually running lower than last year in the rest of the world. So in the context of talent retention, broadly we are quite satisfied.
Next question please.
The next question comes from David Styblo from Jefferies. Please go ahead.
Hi, good morning, thanks for the questions. I just wanted to circle back at a broader view of the just the JLT financial impact that you guys compare. How things have progressed since you initially provided the EPS accretion solution over the three year time frame. The supplement that you provided, not too long ago give us an insight about the amortization being a little bit better and then the aerospace sale with the bad guy, but still seems like that was not good.
I’m wondering if you could share any other details about moving parts that have been positive or negative, just because as we clean those financials it seems line net-net things are a little bit better than originally expected from a pro forma standpoint.
Yeah, let me headed over to Mark in a second, but you know there’s always going to be some puts and takes as you did into a business and you create a unique new company in combination. And so there are several things that have met with our expectations along with our original planning and a few which we are doing a bit better with. But Mark you want to add more to that?
Dave, I think what Dan said is right. It actually is – I t’s pretty remarkable if you go back to what we talked about last September and see how closely things are tracking in the aggregate. As I said earlier, at a high level we’re tracking very closely to the initial expectations.
There’s been a lot of puts and takes. So you know you pick up something in one category give it back in another, but when it comes to the amount of debt we issued, the interest cost that we paid on that debt, the cost savings, the amount of revenue headwind that we are facing, all of these are tracking really well and that’s why we’ve been able to stick with, this guidance that we are still in this category of modern solution this year, breaking in by year two and accretive in year three and also that we are seeing the margin expansion that we said we would this year. So everything’s tracking really well.
And I’m particularly psyched about, you know when you look at RIS in particular up 23% in the quarter, in the company of 16% that’s a step change in growth for the overall company. And yes, we are focused on underlying growth and our ability to drive underlying growth, but every once in a while you get an opportunity to really change the trajectory of a firm and that’s not about underlying. So this is about total growth for the firm where we are very pleased. Do you have a follow-up?
I do, I don’t want to beat a dead horse on reinsurance, but on the other side, Canada, U.S. organic growth was a solid 5%, especially against the tougher comp of 8% a year ago. I guess trying to reconcile comments of just disruption from the deal and so forth. Curious what you are seeing in that business that’s holding up so well, to the extent that the market pricing dynamics have any impact and sustainability of that trajectory going forward?
Thanks, John you want to take that?
Mark mentioned in his prepared comments, we’ve had a good run in the U.S. results. They have been consistently at the high end of our revenue range. You know I mentioned earlier, MMA had good strong growth, on both P&C and EHB [ph] so I was quite pleased with that. I mentioned the pricing dynamic, you know a very, very modest price increases in the MMA portfolio, so not a big driver of the outcome, but it helps a bit.
Marsh U.S. also has very, very strong new business after you know really an outstanding new business quarter in the second quarter of 2018, so I was quite pleased there.
Our MGA operation in U.S. Victor had a nice quarter, and our captive management business also had a strong quarter in the United States. So overall I was quite pleased with the results in the U.S.
I would now like to turn the call back over to Dan Glaser, President and CEO of Marsh & McLennan Companies for any closing remarks.
Thank you, operator and thanks to everybody for joining us on the call this morning. I wanted to express my gratitude to our 76,000 colleagues for the commitment and hard work that they’ve shown, as well as to our clients for their support.
We had two core priorities in the second quarter; first to provide world class service to our clients and second, to begin the successful integration of JLT and I’m delighted with the progress that we’ve made on both fronts.
I’ve seen firsthand how hard our colleagues have been working and the dedication they’ve shown to our company. We are building something special here and it is the trust and confidence of all of our clients that makes that possible.
Thank you all very much and I look forward to speaking with you next quarter.
That will conclude today’s call. Thank you for your patience. You may now disconnect.