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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 the Marsh & McLennan Companies Conference Call. Today's call is being recorded. Second quarter 2020 financial results and supplemental information were issued earlier this morning. They are available on the company's Web site at www.mmc.com. Please note that remarks made today may include forward-looking statements, including certain expectations related to COVID-19 and other matters.
Forward-looking statements are subject to risks and uncertainties and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our Earnings Release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the MMC Web site.
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 this over to Dan Glaser, President and CEO of Marsh & McLennan Companies.
Thank you, operator. 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.
I am pleased with our second quarter results which demonstrates Marsh & McLennan's strength and resiliency as we navigate the current global health crisis and economic recession. The world is experiencing too dramatic and uncertain, unforeseen events at the same time. First, the global pandemic and second, the global economic crisis driven by an unprecedented simultaneous lockdown in almost every part of the world.
In addition, society reached the breaking point on racial inequalities which has persisted for far too long. In the face of this extraordinary combination of events, Marsh & McLennan colleagues rose to the occasion and continued to serve our clients with excellence and distinction.
I want to thank our 76,000 colleagues globally and our leadership team for their dedication and outstanding execution in these challenging times. While the impact to our business from the economic downturn and health crisis so far has been manageable, we live in troubled times and the conditions in many parts of the world remain extremely difficult and uncertain.
The world may have avoided the worst case health and economic scenarios, but this downturn may be longer than many initially expected, when ways of viruses resurgence in certain geographies. While in most parts of the world we are through the initial phase of peak fear and uncertainty around health outcomes. We are now in a period of dealing with the economic fallout and living with the continuing health implications. These economic and health uncertainties could last a year or longer, challenging companies well into 2021.
Regardless of the shape of the recovery, we have proven our businesses resilience, we have strong control over our expense space and the need for our advice and solutions is now more critical than ever. Our management team has made a number of tough calls and I believe the right ones as we navigated through these first months of the crisis. We continue to take actions that balance the short-term with a focus on positioning for the long-term. These include maintain jobs in the thick of the pandemic, as well as proceeding with our annual salary increases, avoiding a hiring freeze and continuing to make strategic hires in the face of industry dislocation.
And moving forward with several acquisitions so far this year in MMA as we continue to pursue inorganic growth. We've cut back significantly on discretionary expenses and have set a high bar for what is deemed essential spending, which is driven costs down while we preserve jobs and salaries.
We also enhanced our liquidity by establishing a new credit facility and issuing additional long-term debt. Looking beyond the current crisis, I believe we will emerge as a stronger firm. Our organization has never been flatter, faster and better connected than it is today.
I want to pause and comment on racial inequality. The racial inequality in our society is a pervasive issue that recently came to a breaking point with the tragic death of George Floyd. Systemic racism has caused inequities, injustice, healthcare, education, careers, wealth, creation and freedom. The recent events have been shocking to me and all too familiar to others. Our executive committee has been fully engaged, listening to our black colleagues and others, speaking up alongside them and implementing concrete actions to make a difference. We are determined to seize this moment to create a more diverse and inclusive company.
In these dynamic times, we are pressing to develop new solutions to address rising and evolving risk globally. Our businesses are collaborating more than ever to bring the power of our firm to clients. For example, [Washington Carpenter] [ph] leading the industry to create a new market for pandemic insurance. We initiated a dialogue in Congress in late March to create a public private partnership for pandemic risk, which would facilitate future economic recovery and enhance resiliency among companies going forward. We are also developing public private pandemic solutions in multiple countries.
And I was wondering we developed a leading disease progression model, Pandemic Navigator, which is being used by governments and companies to predict virus spreads and guide decisions. Both Oliver Wyman and Mercer are advising clients across a number of industries utilizing Pandemic Navigator to make returns to office plans, understand future demands recovery patterns, manage supply chains for cash credit losses and assess early warning signals.
Mercer and Marshall's consulting have also joined forces to work with employers on their new normal strategies. Helping clients use this time as an opportunity to adapt, reinvent and become more resilient.
In summary, I am proud of how our company continues to innovate while responding to the immediate pressures caused by the crisis.
Let me spend a moment on current P&C insurance market conditions. P&C insurance pricing continues to accelerate. The Marsh Global Insurance Market Index increased 19% year-over-year versus 14% in the first quarter and 11% in the fourth quarter of 2019.
Global property insurance was up 19% and global financial and professional lives were up 37%, while global casualty rates are up 7% on average. Keep in mind, our index used a large account business where we typically earned fees. However, U.S. small and middle market insurance pricing is up meaningfully as well, although not to the same magnitude as large complex accounts.
Overall, underwriters continue to push for higher levels of rate increases as a result of social inflation pressures, persistently low yields and a number of large underwriting losses including COVID-19. This is before the peak of the hurricane season. While capital remains adequate, the risk appetite of insurers is reduced as they are increasingly cautious in uncertain environment.
Turning to reinsurance, the mid-year renewals which are largely focused on southeast U.S. wind exposure saw a meaningful rate increases. Florida peak zone property catastrophe reinsurance programs were up 25% to 35%. These are some of the highest rate increases seen since 2012. Non-Florida mid-year renewals would typically applies to 15%.
Reinsurers are being cautious regarding the amount of capital they are currently willing to expose in an environment of great uncertainty. Overall, global P&C insurance and reinsurance markets remain challenging with accelerating price increases and narrowing terms and conditions. It is in times like these where our experienced advice and solutions are even more critical.
Now, let me turn to our second quarter financial performance. We delivered excellent adjusted EPS growth of 12%, despite the global impact of COVID-19. Our strong EPS growth in the quarter reflects great execution on the part of our colleagues, the immediate benefit of expense management actions and the delayed impact of the COVID-19 crisis on our revenue.
Total revenue was 4.2 billion down 4% or down 2% on an underlying basis, underlying revenue grew 2% in our RIS and declined 6% in consulting. In risk and insurance services second quarter revenue was 2.6 billion, an increase of 1%. Underlying revenue growth was up 2% in the quarter reflecting strong 9% growth at Guy Carpenter and 1% in Marsh, excluding a reduction in revenue we booked in the quarter related to estimated exposure declines, underlying revenue in both RIS and Marsh was up 3% in the quarter, which is a strong result in the face of the economic downturn. RIS adjusted operating income increased 19% to 752 million and the adjusted operating margin expanded 430 basis points versus a year ago.
In consulting, second quarter revenue was 1.6 billion, underlying revenue declined by 6% for the quarter. Oliver Wyman and Mercer's career business saw the greatest impact on the lockdown as expected. Consulting adjusted operating income declined by 13% and the adjusted margin declined by 70 basis points versus a year ago.
Overall adjusted operating income increased 10% versus a year ago to 984 million. Our adjusted operating margin increased 270 basis points to 25.5%. Adjusted earnings per share increased 12% versus a year ago to $1.32 cents reflecting expense tightening and strong execution. Even though COVID-19 will impact our results for the remainder of the year, our strong second quarter performance is evidence that our business is resilient and that we are able to manage through challenging environments.
While our year-to-date results are strong, the economic outlook is weak and uncertainty is still very high. For the full year 2020, we continue to expect a modest decline in underlying revenue. However, given our strong second quarter performance, we now expect to generate modest growth and adjusted for the full year, despite the decline in underlying revenue.
With that, let me turn it over to Mark for a more detailed review of our results.
Thank you, Dan, and good morning.
We're pleased with our second quarter results, despite a modest decline in revenues driven by the current crisis; we delivered strong earnings and continue to enhance our balance sheet and liquidity position.
Overall, revenue declined 4% in the second quarter to 4.2 billion or down 2% on an underlying basis. Operating income in the quarter was 885 million, an increase of 30% over last year.
Adjusted operating income increased 10% to 984 million and our adjusted margin increased 270 basis points to 25.5%. GAAP EPS was $1.12 in the quarter and adjusted EPS increased 12% to $1.32.
For the first six months of 2020, underlying revenue growth was 2%, our adjusted operating income grew 13% to 2.2 billion, our adjusted margin increased 190 basis points and our adjusted EPS increased 10% to $2.96.
Before I go deeper into our results, I want to discuss a $36 million reduction to previously recorded revenue we booked in the quarter. This adjustment reflects the estimated impact of the economic downturn on exposure units. It primarily impacted Marsh, but there was also a reduction in Mercer in health.
A significant portion of brokerage revenue is recognized at policy inception including in some cases where ultimate revenue is uncertain. In these cases, premiums and commissions are recorded based on estimates of ultimate exposure. These estimates are typically not updated until the end of the policy term as variability in most cases is models. However, due to the impact of COVID-19 and the economic downturn, exposures in many lines of business will likely be lower than originally anticipated, requiring that we update our estimates sooner. It is important to note that this charge is included in underlying growth and adjusted earnings.
Returning to results in risk and insurance services, second quarter revenue was 2.6 billion with underlying growth of 2% or 3% excluding the revenue adjustment. A decline in fiduciary interest income was also a 70 basis point drag on underlying revenue.
Operating income increased 34% to 696 million. Adjusted operating income increased 19% to 762 million and the adjusted margin expanded 430 basis points to 32.1%. For the first six months of the year revenue was 5.5 billion with underlying growth of 4%. Adjusted operating income for the first half of the year increased 20% to 1.7 billion, with a margin of 33.4% up 280 basis points from the same period a year ago.
In Marsh revenue in the quarter was 2.2 billion, an increase of 1% on an underlying basis, or 3%, excluding the impact of the revenue adjustment, a strong result in the current environment.
In U.S. and Canada, underlying growth was 3% in the quarter, in the international division underlying growth was flat with EMEA down 3%, Asia Pacific up 4% and Latin America up 4%.
For the first six months of the year Marsh's revenue was 4.2 billion with underlying growth of 3%. U.S. and Canada underlying growth was 4% and international was up 2%.
Guy Carpenter had another great quarter revenue was 433 million reflecting underlying growth of 9%. Growth was driven by solid retention, strong demand driving new business and a tailwind from the current pricing environment. For the first six months of the year, Guy Carpenter generated 1.3 billion of revenue and 8% underlying growth.
In the consulting segment, underlying revenue declined 6% in the quarter reflecting the impact of the current crisis, operating income decreased 8% to 255 million. Adjusted operating income decreased 13% to 265 million and the adjusted margin decreased 78 basis points to 17.3%.
Consulting generated revenue of 3.4 billion for the first six months of 2020 representing an underlying decline of 1%. Adjusted operating income for the first half of the year was down 7% to 554 million.
Mercer's revenue was 1.1 billion in the quarter down 3% on an underlying basis. Wealth underlying revenue declined 2% reflecting modest growth and defined benefits offset by a decline in investment management solutions.
Our assets under management were approximately 306 billion at the end of the second quarter up 8% year-over-year. Health increased 1% on an underlying basis in the quarter or 2%, excluding the impact of the revenue adjustments.
In career underlying revenue declined 16%, careers where we have more discretionary projects business which drove the revenue decline. The first six months of the year revenue at Mercer was 2.4 billion with 1% underlying growth.
Oliver Wyman's revenue was 467 million in the quarter a decline of 13% on an underlying basis, which was better than we expected coming into the quarter.
For the first six months of the year revenue with Oliver Wyman was 978 million a decline of 7% on an underlying basis. Adjusted corporate expense was 43 million in the quarter. Based on our current outlook, we expect approximately 96 million in total for the second half of the year.
[Indiscernible] investment income on an adjusted basis, we had an investment loss of 7 million in the quarter. On a GAAP basis, we reported an investment loss of 31 million primarily driven by the sale of a portion of our equity ownership in Alexander Forbes.
Foreign exchange was neutral to EPS in the quarter assuming exchange rates remain at current levels, we would expect FX to have a minimal impact on EPS for the remainder of the year.
Our adjusted effective tax rate in the second quarter was 25%, compared with 25.9% in the second quarter last year. Excluding discrete items, our effective adjusted tax rate was approximately 25.5%. Through the first half of the year, our adjusted effective tax rate was 24% compared with 24.1% last year. Based on the current environment and continue to expect a tax rate between 25% and 26% for 2020, excluding discrete items.
The most challenging parts of the JLT integration are now well behind us as demonstrated by our strong first half results. We are on plan or ahead of schedule on all of our key milestones, including cost savings and restructuring actions. We incurred 57 million of JLT integration and restructuring costs in the second quarter, bringing the total to-date to 472 million.
In total, we still expect to incur approximately 625 million of cash costs and 75 million of non-cash cost to generate at least 350 million of savings. We expect the majority of these costs will be incurred in the savings achieved by the end of 2020.
I want to take a minute and provide an update to our outlook for this year. Our revised view contemplates recessionary conditions persisting through at least the remainder of 2020. But it goes without saying that uncertainty remains very high and conditions could turn out materially different than our assumptions, which would affect our projections.
For the full year 2020, as Dan mentioned, we now expect to generate modest EPS growth, despite our outlook for a modest decline in underlying revenue. We currently expect adjusted EPS to decline in the back half of the year reflecting the full impact of the pandemic on revenue as well as some rebound in spending in certain areas. At Marsh, we still see the potential for modest underlying revenue growth for the year although the back half will be challenging.
For the full year 2020, we continue to expect mid-single digit growth at Guy Carpenter. Underlying revenue growth for the second half of the year will likely be more muted, but these are seasonally small quarters for Guy Carpenter. Also keep in mind that Guy Carpenter faces a difficult year-over-year comparison in the third quarter, which as we mentioned last year, benefited from a $17 million true up of a multi-year contract. We continue to expect Mercer's underlying revenue will decline for the remainder of the year and be down modestly for the full year. Finally, revenue weakness in Oliver Wyman could persist through the back half of the year.
Turning to the balance sheet, we ended the quarter with 1.7 billion of cash, a sequential reduction in outstanding debt in the entirety of our combined 2.8 billion of credit facilities available. Since the onset of the pandemic, we have taken prudent steps to enhance our financial resources and flexibility.
In April, we secured a new $1 billion line of credit and in May issued 750 million of 10 years senior notes at a coupon of 2.25%. We remain committed to deleveraging and expect to reduce debt this year, although the ultimate amount will depend on our cash generation in the current environment.
Total debt at the end of the second quarter was 13.2 billion down from 13.6 billion at the end of the first quarter, representing a reduction of 439 million. Our next scheduled debt maturity is in December 2020, when 700 million of senior notes mature. We also have a $500 million term loan due in January 2021. Interest expense in the second quarter was 132 million. Based on our current forecast, we expect approximately 131 million of interest expense in the third quarter. Although uncertainty in our outlook remains high, we feel comfortable that we have the resources and flexibility to manage through the crisis from a liquidity perspective.
In line with our commentary on the first quarter call, we did not repurchase any shares in the second quarter. Given the ongoing uncertainty of the current environment, we do not plan to repurchase shares for the remainder of 2020. Earlier this month, we announced an increase to our quarterly dividend to $0.465 per share. This increase represents the 11th consecutive year of dividend increases at Marsh & McLennan.
Uses of cash in the second quarter totaled 684 million and included 450 million for acquisitions and 234 million for dividends. For the first six months, uses of cash totaled 1.2 billion and included 694 million for acquisitions and 466 million for dividends.
Overall, we are pleased with our performance in the first half of 2020. We've shown resiliency, the level of commitment and execution throughout the organization has been outstanding. And while the crisis is far from over, we believe we are positioned to continue to navigate it well.
With that, I'm happy to turn it back to Dan.
Thanks, Mark. Operator, we are ready to begin the Q&A.
Certainly. [Operator Instructions] And our first question comes from the line of Phil Stefano with Deutsche Bank.
Dan, in your opening remarks, you talked about the immediate benefit of expense action with the delayed impact of revenue from COVID. And it feels like in the second quarter results, it was most clearly seen on the margin in brokerage. Something you could dig a little more into that and maybe help us understand what drove the expansion in the second quarter and then as we think about the next couple quarters, or even year or two, do the hard decisions, can they be dialed back? How do you think about managing the expenses versus maybe what your revenue expectations are at this point?
Sure, sure. So it's a good question. I'd start by saying let's look at the overall macro environment a bit. I mean, it may not feel like it, but so far the world has avoided the worst case health and economic scenarios. I mean, we're still in the early days, the economic downturn may last longer, since there were likely be waves of virus resurgence. So, when we were doing all of our scenario planning and stress testing, very early stages of the health elements of the crisis, you could imagine a lot of -- very forward scenarios, right? And it's certainly not a rosy picture from here. But some of the worst case scenarios appear to have been avoided. And so we pulled back our expenses very quickly. We're a company that believes in distributed leadership, we put a lot of authority out in the field with our leaders in countries and in specialty divisions, et cetera. But there are times where you need to pull that authority back and I have to say the executive committee and I move very quickly to essentially control the expense base of the company set a very high bar for what essential expenses were, and then, pull back heavily on other items. Not only the things that naturally fall away like T&E, but over time camps, contractors slowing down hiring, not a hiring freeze, but slowing down the pace of our hiring and focusing it on revenue producing type of positions.
I'm very proud of the notion that that we and the team decided that not only to preserve jobs in the thick of the pandemic, but also we did not cut salaries. Now you may notice that our overall confidence then absolute number is down a bit. And that's because the broad category of [comp] [ph] also includes some things like over time and sales plans and some contractors and some of our variable plans et cetera.
I feel pretty good about, how quickly we were able to dial back expenses. And there is a bit of a lag in terms of how revenue headwind actually turns off. Clearly, we had some good pipeline, you looked at our first quarter results, 5% underlying growth overall. So we had nice momentum and some of that momentum carried into the early parts of the second quarter and that goes away. And so we'll have a little bit more revenue pressure. And also because the worst case scenarios are unlikely to occur on either health or economy, type of macro factors we will ease up dramatically but will ease up a bit, will become a little bit more open to the other levels of investment that we could make. And so when we look at the second half of the year, there's still a great deal of uncertainty. We think that delivering reasonable financial results in the context of the crisis, while continuing to invest in future growth is the right position for us to be in.
I understand. My follow up would be based on the actions you've seen and how the world has unfolded at least as far as I appreciate, it's early days. Last quarter, we're talking about maybe the sustainability of some of these things. Do you have any thoughts you can put around the actions you took it were hard at first, but maybe feel like the benefit could be something that -- once COVID is comfortably in the rear view?
Yes. I mean, there are certainly certain things I mean, we've been able to demonstrate that we can do placement activity and manage client deliverables on a remote basis now, it's not ideal in all circumstances, but it is pretty ideal in some circumstances. So I'm not sure we'll go running back to hopping on an airplane to go to Singapore for a $100,000 opportunity. Maybe it will be a little bit more cautious about the T&E type of spending some while ago come back, it may not return to previous levels for a long time, and maybe never. Flexible work arrangement is another item we won't see a benefit to our real estate, footprints or our real estate costs for a while because of social distancing type of requirements. But over time, could we envision more of a hybrid type of operation where colleagues come to the office and also work from home sometimes during the week and so we can go to much more of an agile workplace in many, many locations. Yes, it's probably likely.
I also think that there'll be more digital. I mean, it's important to know while we slowed down our CapEx a little bit in the second quarter, actually through six months CapEx is higher than it was last year and it's because we're continuing to invest in our business. And I think that those items are things that would persist.
I also I can't underestimate or the notion of how this crisis has brought the firm together. Crisis can bring out the worst in you or the best in you. And I tell you, Marsh & McLennan has risen and we have never been more collaborative and connected than we are today.
And our next question comes from the line of Mike Zaremski with Credit Suisse.
First question, maybe focusing more on the consulting segment [since S4] [ph], I think investors are asking the most questions about. Dan, you said you guys have fortunately, I think maybe we all fortunately have avoided the worst case scenarios so far. Does that hold true for kind of what you all were thinking might happen to organic revenues in the overall consulting segment? Clearly they were down but maybe not down as much as at least the consensus expected and maybe you can kind of give us some updates on what you're seeing and hearing in the consulting segments relative to your thoughts last quarter?
Sure. I mean, we were pleased with consultings overall performance on organic growth. We clearly expected decline in revenue and pressure, particularly in the project related businesses. Oliver Wyman is almost purely a project business and some parts of Mercer, like the career business is very project oriented and projects tend to be discretionary in the eyes of clients. And so, I think overall a minus 6% is a good result in the circumstances within our consulting business. And both of our main businesses and consulting Mercer and OW have done a nice job protecting shareholders by really focusing on discretionary expenses within our own shop and pulling that back.
I mean, every crisis is different in a lot of ways this crisis is more concerning than the global financial crisis. But when you look at the global financial crisis, Mercer was down, 4% in 2009; Oliver Wyman was actually down a bit in 2008 and more significantly in 2009 and had six quarters in a row of contraction. And so we're resilient firm, we can operate as an overall firm on that basis.
And the bounce back in 2010, for Mercer and Oliver Wyman was quite good. And we would expect something similar. If there is a lack of discretionary projects on companies, it doesn't mean that they don't need those projects and that they don't want to focus on their future growth and their future ways to be more efficient and we're a go to company for them across people issues and strategy issues. And so we feel good about the consulting business. It could have been worse. And when we looked at it, I think we're in decent shape.
I don't know what the second half brings. At the end, we've indicated that we think Mercer will be modestly down for the year. They had a very nice first quarter, but overall for the year, we expect them to be modestly down. And Oliver Wyman, as I said many times before, has a little bit more volatility to quarterly results than any of our other businesses. But we're well positioned and we feel pretty good about where we ended up on the bottom line in both of those areas of the company.
Okay, understood. That's helpful. Lastly, the dollars moved a lot. I'm not sure, Mark, could you talk about FX and whether you should be thinking about it having an impact going forward?
Well, thanks, Mike. Mark, you want to take that?
Sure. Yes. The FX was not much of a story for EPS in the second quarter as we looked at the back half of the year we don't expect much impact, if rates stay where they are much impact for the balance of the year to EPS.
And our next question comes from the line of Jimmy Bhullar with JPMorgan.
I had a question on the reinsurances, that's Guy Carpenter. I think you imply the slowdown in growth in the second half in your comments. How much of that is just comps getting more difficult versus maybe exposures declining? And what's the interplay with pricing getting better, if they are possible like, are you being overly conservative or are you actually being some headwinds to growth given comps and exposures?
Sure. I mean, at the end we're not trying to be overly conservative, but we also always want to be realistic and transparent with our investor base. And so a lot of this is Carpenter, the third and fourth quarter are much smaller and so therefore the hard account or two could swing things in different directions. And as we pointed out in our remarks, there was a one off last year that we acknowledged last year $17 million a tall hill to overcome. But, Peter, you want to talk a little bit about either where you see exposure rates and whether this is overly conservative or not?
Thank you, Dan. Jimmy, I would just reiterate what Dan says, Q3 and Q4 are historically small quarters and they're subject to volatility with the movement of business from one quarter to the next or timing. From a new business standpoint, our new business growth has been strong for the past three years and we anticipate the same thing in Q3 and Q4. But again, we have tough comparables from Q3 and Q4 of last year, but we've seen no diminution in revenue bases in buying habits. And we've done over several hundred stress tests on client balance sheets to anticipate what the rest of the year could look like from catastrophic events or an adverse situation with regard to COVID-19.
So we're winning new mandates on a regular basis. I feel good about where we are for the year and as both Mark and Dan said, they're small volatile quarters and subject to change, but there's been no overarching issue that we've seen with exposure basis in revenue.
Okay. And there's been some concern among investors about E&O exposure or negligence related lawsuits against brokers. Do you have anything that you can sort of what are your views on -- what your exposure might be and any sort of quantification of what your retention would be if you were to see something because I'm assuming you've got insurance on that as well. So --
Yes. I mean, we haven't publicly disclosed the details of our E&O insurance program, so I'm not going to do it here. Our goal and our principal focus as a broker is to advocate forcefully for policyholders. We do that by obtaining flood coverages and in the event, they have a claim, we do our best to a system with recoveries and we've got very strong risk management practices, high level of professional standards, E&O training of thousands of colleagues. So at the end, it's not something that we spend a lot of time on. Obviously, there's some coverage disputes that are occurring between clients who may believe that they have some coverage within some of their policies related to COVID. And some of those clients, may end up suing everybody but that really hasn't occurred yet. And I'm not overly concerned with it. I think we have good systems and control.
Frankly, just like it would be impossible today and why public private partnerships are being talked about broad scale of pandemic insurance is not insurable. It goes into the trillions of dollars of potential exposure and so on. On that basis, it's not like that every client could have gotten full scale broad pandemic protection because there's not a market for it, it had to be targeted, limited in certain industries, certain clients and very expensive.
Your next question comes from the line of Yaron Kinar with Goldman Sachs.
First question on free cash flows, seem like they were very strong, this quarter was curious, what drove that? I think one of your competitors have talked about CARES Act, pushing tax payments back a little bit, but any color you can offer on that. And how to think about cash flows maybe for the rest of the year too?
Sure, sure. Mark, you want to take that?
Yes. Cash generation in the quarter was strong as you said, we're obviously pleased with that. Here a number of factors contributed, the most important of which was just the strong earnings growth. So we had solid earnings growth. So that was a big factor in driving free cash flow and then there's a number of other factors, so less spending on JLT related items. If you compare it with last year, we got nicked a little bit more by FX than we did this year. And then, in any given quarter there can be fluctuation in some of the balance sheet accounts and working capital that can affect cash flows and we had good results on that front. And so whether it's the quarter year-to-date, our cash generation was strong. For the remainder of the year, it really is going to be about how our earnings trend.
Okay. And then with regards to exposure or the impact of exposure declines, I just want to make sure I was thinking about it correctly. So in consulting fee, the impact tends to be more immediate. And then, RIS, it takes -- there's a bit more of a lag, is that a fair summation?
Most of the exposures of clients were actually in Marsh. So I'll hand off to john and he can describe a little bit the types of areas where you would see exposure and decline. It's more mild and consulting and generally around the health business if you're looking at employment as an example, as a proxy for the lives covered under plan, if employment is down and then the anticipated amount of premium would be down because there is a lot of slide.
John, you want to talk about exposure units within the large world because that's where most of the adjustment took place.
Sure. As Mark talked about earlier on the call, a number of different products are adjustable and exposed to the unit driven. So, some of the industry groups, marine, aviation, energy, for example, we accept make an adjustment to accrue for [indiscernible] unit over the course of the policy period. Product lines that are more impacted, commercial auto of course, were calm, transaction risk, those kinds of things. So, obviously, overall, our growth historically is correlated the economic growth and construction flows down, other investment flows down there is a bit of a lag effect. And then, so, that impacts our ability to write new business but we also attempted to make an adjustment prior period for adjustable policies.
Our next question comes from the line of Elyse Greenspan with Wells Fargo.
My first question is on the full year EPS side. So you guys took that off for modest growth, whereas before, right, it was kind of maybe slightly negative to just about positive depending on what happened to organic for the full year. But if I think about that you guys printed just under 10% EPS growth in the first half of the year, which implies about a mid-single digit decline in the back half, which probably would have been -- where we would have been in your [prior guy] [ph] just for the second half of the year. So I guess I'm trying to package all of the comments together on -- your outlets does seem like it's better although still cautious for the second half of the year. So I think that would come together in that EPS guide, or is it something to do with timing of JLT expenses that were more pronounced in the second quarter? Just trying to understand why that EPS outlook for the second half of the year, isn't perhaps stronger than what you thought it was three months ago?
Sure. It's a fair question. And so let me address it this way. Leading the business and as our business leaders within the company do every day, is as much art as it is science. We can make the margin go up at any point in time, by drawing back expenses, by being very tough on rehiring by just pulling it off horns a great deal. The art is figuring out what should we deliver today while we're investing for the future, while we're going to position the company to emerge stronger. And so from that standpoint, the way we look at that, is yes, our second quarter performance was really terrific. But the reality is, we pulled the expense levers hard. And we felt the immediate benefit of that lower spending and the revenue came in a bit higher since there's a lag in the full revenue headwind since all the activity that's pre-COVID in terms of projects still benefited us in the second quarter.
So you've got to think the revenue headwind will be a bit stiffer in the second half of the year. And because our worst case scenarios are not going we do not anticipate though the macro environment to go into the worst case scenarios will ease off a little bit on some of these transactions. And the combination of that will be that we've got EPS pressure in the back half of the year. And our focus is okay, what is the reasonable result to deliver to shareholders in a year in which we expect modest revenue decline of the overall firm. And you can look, we expect modest improvement overall in RIS and pressuring consultants. I think you can kind of cottoned on to the idea that RIS will have better margin outlook, than what the consulting division will have and we're not going to artificially do things in consulting to drive margin when the top-line is under that kind of pressure.
Thanks. And then, my second question is specific to Marsh. I know, you guys have pointed out last quarter that there would be a lag on that the third quarter would be worse than the second quarter. It sounds like from your comments if that still holds, I guess. My question is more thinking further out than that, if there isn't a spike in cases and no COVID kind of is maintained what think it will be today? Do you think within your business, the Q4 should represent a bounce from the third quarter? And this is just specifically to Marsh.
Okay. So I'll hand off to John in a second. Obviously, we are thrilled with the positioning of Marsh. And when we look at the future for Marsh, we couldn't be in a better position in terms of our risk and advisory businesses, our placement capabilities and our water capabilities. And I couldn't be happier with the combination with JLT. And just as a reminder, that's all about growth, growth and talent, growth in capability, growth in scale, revenues, earnings and within one year, we came together as one single formidable team, textbook integration that happens throughout the company and really kudos to my leadership team for pulling it off. We made people and structural decisions very quickly, we worked through this structure and in fact, we are ahead of schedule on total amount and timing when it comes to cost savings.
Overall, well planned, well led, well executed. John, you want to talk a little bit about how you see Marsh back half of the year and as you look out to 2021, 2022 and 2023, in terms of this year to your flavor?
Sure, Dan. As we talked about the second half, it's likely to be a bit more challenging given the economic consequences of the pandemic. I don't want to get into the third quarter versus the fourth quarter. I mean, obviously, things are quite fluid with pandemic and it's hard to predict the economic consequences. We've talked about many times, uncertain environment, we've operated in, having said that, as Dan pointed out, I think we're extraordinarily well positioned. Our team is highly focused on our clients and getting the best outcome. It is very, very difficult environment. They've been there for one another, obviously, I'm a stress [indiscernible]. And so, I couldn't be more pleased with how that comes together. And there are some silver linings, of course, while overall a human tragedy, what we've all been living through the cultural integration has gone on exceedingly well. So I'm confident in our ability to perform, well on a relative basis and when things improve, we'll continue to see improved performance in the business.
Our next question comes from the line of Meyer Shields with KBW.
One quick accounting question to start. Mark pointed out in the press releases as $36 million revenue adjustment for exposure units. Does that all fall to the bottom line? Are there offsetting reductions to expenses?
Mark.
It all falls to the bottom-line, Meyer. I mean, it could be in our overall earnings and bonus formulas a little bit of impact to the extent, earnings grow or shrink for a year, but that specific adjustment, it is directed to revenue and bottom-line.
Okay. So, I think that is a good news. Broader question, and I think this is for Dan. Back, I don't know last time we had had like, rate increases that were this powerful. Marsh was obviously very heavily fee focused, but the general takeaway was that it was able to negotiate higher fees because of the incremental work that more or less matched the revenue increases that would have come on a commission basis. And I'm wondering, given the recessionary conditions. How does that play out in the current environment?
Well, I mean Marsh over a long period of time has become a much larger middle market firm, particularly in the U.S. and the U.K. And with that, there gets to be a little bit more element of commission versus fee. And I think the last time we spoke to you was, think around about two-thirds on a commission basis and a third on a fee basis. It's not easy out there and buy, whether it was negotiating with a client or negotiating with an insurance company. And so there's negotiations that take place account by account as the level of work and what the proper level of remuneration is for the intermediary. And so it's not a direct line that revenue or premium is up and so therefore, immediately, we pop on the same basis there. This is all about account by account discussion and negotiation and trying to determine the value that we provide in the market, one as an advisor to clients but also sometimes as a distributor for insurance companies.
And our next question comes from the line of Paul Newsome with Piper Sandler.
Just one question. Getting some questions from investors about just the enormous amount of change we're having with your competitors and merging with Marsh and [it can't be] [ph] Aon and Willis. And it seems like there's a private equity firm every day popping up as a competitor. What's happening with the hunt for talent, is it gotten easier or harder given all the changes, we've seen in the market?
Yes. No, it's a really good point because actually we're in the talent business that's what it is, it's a piece of business. Do we have a smarter, more creative, harder working more dedicated to client service colleagues than what our competitors do? And I'll start by saying very broadly that competition is good. Competition refreshes, competition puts you out on your front foot and keeps you very active and innovative. And clearly there's some PE that's in the market largely on the middle market part of the business. You And you scared me a little bit with your comment about the get together Aon and Marsh, and I thought you were breaking news there for a second.
But I'm not going to comment in depth on anything to do with Aon and Willis. We do think that that will have lots of opportunities. I mean, I like our strategic positioning. I wouldn't trade places with any of our competitors. And on a personal comment, as somebody who's had almost 40 years in this business, I don't think the Aon Willis combination is good for clients or good for the market. But I do think it's good for Marsh & McLennan. I mean, come on, the big three becomes the big two, how could that not be a benefit to us?
Our next question comes from the line of Michael Phillips with Morgan Stanley.
I just one for me as well. Dan, just love to hear your thoughts on how the pandemic is influenced valuations in the M&A space for brokers.
First of all, the M&A space for brokers, where you have seen most of the activity is in the upper middle market and below. And as Paul was just alluding to, there's a lot of PE in that space and then the Mac may be a little bit different for them because the leverage levels are a bit higher. And the ability to borrow money at low interest rates, or at least probably even more [indiscernible] than it was a year or two ago. And so that's going to remain an active market. I don't think you're going to see much change in multiples right now, multiples are high, probably too high, in our opinion in some areas, but the multiples are high. So it really is, well structured the deal. With all the uncertainty out there, you probably look at more of an earn out component than what you would otherwise see a year or two ago.
And you also have to be really focused on but what's the EBITDA most of the businesses which are for sale so to speak are private companies and so it all gets [indiscernible]. And I think actually the EBITDA calculation on a pro forma basis is more important to be reviewed and scrutinized and to get comfortable with the multiple itself. You want to know what will that business do in your hands and so, we're still active. We don't generally compete with PE in that space because we're generally having a more limited discussions with companies in the brokerage space, particularly in the U.S. with Marsh & McLennan agency, but we're committed to that part of the market. We think it's a great business and we will continue to be a buyer.
Our next question comes from the line of Josh Shanker with Bank of America.
Maybe Mark could give us a little detail on numbers. But can we talk a little about T&E? And you said you're going to be starting to do T&E again, at least in some, can put the numbers behind this. How much was suppressed in the second quarter? And how much do you --
Yes, Josh. We never give absolute numbers on T&E because once you do it forever. I mean, T&E, it's not an immaterial number. But obviously, you're not talking double digits of spending and travelling and entertainment, but you have to think there's two things one, in the second quarter, you got to think T&E was off big time. Like me talking about mid 90s type of percentage points, nobody was travelling or entertaining. So that's a huge downdraft. And I may have misspoke in terms of when I talked about T&E, I don't expect T&E to bounce back in any way in the second half of the year. So, there won't be much put it this way travel or entertainment for the balance of the year, what I was trying to get across was over time, even looking into 2021 and 2022. I'm not sure T&E ever at the same level it was pre-COVID. I don't know if people will really travel as much because I don't think it's necessary as what the perception was before.
So I do think over the long-term T&E may be one of those areas where we have an expense benefit and that is lasting where we will -- where T&E will obviously go up from near zero, but it won't go back to the level that it had been pre-COVID.
So with that in mind, when I try and think about expenses in the back half of the year, I expect them still to be materially down from the second half of '19. But I know you're not giving guidance but modest EPS increase for the full year sort of implies a material down turn EPS in the back half of the year, with expenses down, I mean, I know you're not going for explicit guidance, but it seems like [indiscernible] expenses still persisting the back half of the year. I'm not sure why we should expect a year-over-year decline in earnings, even if revenues fall off a bit.
Well, I mean, at the end, we're a revenue based company. You looked at our second quarter where our margins were RIS margins were up 430 basis points, with modest levels of revenue increase that obviously is not sustainable, which means we basically shut down large swathes of the expenses of this organization, because of the great uncertainty as to what was going to happen on the top-line. We now have more clarity around what's going to happen on the top-line. And we do believe the top-line across the firm will feel a bit more pressure than the second quarter. It doesn't mean, we're going to fall off a cliff. But it does mean that some of the benefits we have in the second quarter at the momentum than we had from the fourth and the first, a base and then we're just faced with the now of revenue pressure and we want to release a little bit of some of the expense pullback drawback that we have.
And as I was saying before, Josh, this is an art rather than a science. We could cut our expenses significantly from here and deliver margin improvement in the back half of the year, even if our top-line is negative, but it would not be good for the company in any type of midterm or long-term perspective. So we're not going to do that. We're going to continue to invest in this organization, the dislocation that exists in the market, the ability to strategically recruit, the movements of digitization, our technology, modernization, all of that work continues, and we're going to continue.
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 thank you to all of you joining us on the call this morning. In closing, I want to thank our 76,000 colleagues for their hard work and dedication as well as their support of each other, clients and local communities. I am impressed and humbled by their response during these challenging times. I also want to thank our clients for their continued support. Thank you all very much and I look forward to speaking with you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.