Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Third quarter 2017 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 risk and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the MMC website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to 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, [Leanne]. Good morning, and thank you for joining us to discuss our third quarter results reported earlier today. I'm Dan Glaser, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Mark McGivney, our CFO, and the CEOs of our businesses, John Doyle of Marsh, Peter Hearn of Guy Carpenter, Julio Portalatin of Mercer, and Scott McDonald of Oliver Wyman. Also with us this morning is Dan Farrell of Investor Relations. Since the beginning of the third quarter, we have seen a heightened level of natural and man-made catastrophe losses, including major hurricanes and typhoons, earthquakes, wildfires, senseless acts of violence, and disclosures of large-scale cyber events.
Before we get into our third quarter results, I want to take a moment to discuss how we've been supporting our clients and colleagues, the potential market impact of these events, and the critical role that our industry plays in society. While the insurance industry has the capital strength and structural resilience to absorb these losses, the human toll has been sobering, with significant injury and loss of life across these events. Many other individuals have been impacted through loss of homes, basic services, and business interruption. The natural catastrophes of this quarter directly impacted roughly 4,000 of our colleagues across over 50 of our offices. While we are very fortunate that all of our colleagues in these affected areas are safe and accounted for, there were some who tragically lost family members, and our deepest sympathies go out to them.
Catastrophes that occur in a different geographic region can seem remote and distant unless we are directly impacted as individuals. This is not the case at Marsh & McLennan. We understand the devastation and the stress that severe losses put on people and organizations. We are on the ground helping our clients recover as soon as possible. This includes working closely with insurance companies to process claims swiftly. In these difficult times, the industry pulls together to support our mutual clients. We are reminded that our industry is a noble one. While the market impact of the recent catastrophe losses has yet to be fully determined, it is important to recognize the industry had record levels of capital and capacity leading into these events.
Although the losses are significant, the impact may prove to be more of an earnings event for the industry than a capital event requiring a reloading of capital. However, after several years of relatively benign activity, the series of recent losses are a stark reminder of the potential loss exposures, which may cause some reevaluation of coverage, limits, and risk tolerances. While there could be some movement in pricing in catastrophe-exposed areas and certain lines of coverage, the degree and sustainability of any changes remains uncertain. From our vantage point, too much is unknown about how losses will ultimately develop, how capital will react, or how client buying patterns will change. Ultimately, these forces will play out, and the market will find its equilibrium. Right now, it is just too early to tell. Insurance is about more than just protection.
Industry research shows that well-insured catastrophe events end up having a shorter-term impact on economic growth. In contrast, events with less insurance coverage result in a more prolonged, and in some cases permanent, impact to economic growth of an affected region. Recent losses serve as a reminder of how the world is still relatively underinsured in many areas. For instance, U.S. risks such as flood, cyber, and earthquake, to name a few, still have low insurance penetration relative to exposure and together account for just 2% of total U.S. premiums. Many factors contribute to global underinsurance or what is often referred to in the industry as the protection gap. They include cost and affordability, understanding and acknowledgement of risks, and a lack of sufficient incentives to mitigate risk and improve insurability.
It will take the combined effort of carriers, brokers, and governments working together to address underinsurance in the world and better access industry risk-taking capacity. Nations and regions that have proactively addressed this protection gap are better positioned to respond and rebuild from natural catastrophes. In specific regard to flood, recent events further highlight the need for greater insurance protection and the importance for the private marketplace to play a greater role. There have been over 100,000 National Flood Insurance Program, or NFIP claims related to Harvey and Irma. However, many of those affected lack appropriate flood coverage and will now face these life-changing events without adequate insurance support, making the economic impact of these events meaningfully larger.
A recent article looking at FEMA data stated only about 17% of homeowners affected by Hurricane Harvey have flood insurance policies, and across the U.S., only 12% of homeowners buy flood insurance, according to the Insurance Information Institute. The industry should work to encourage the private market to take on more of the underinsured or uninsured flood risk. The insurance industry can improve the understanding of risk, promote loss prevention modifications, and bring more coverage into the private market, obviously at appropriate pricing. At Marsh, Guy Carpenter, and Oliver Wyman, we are utilizing data and analytics to enhance modeling and increase private market participation in flood. Earlier this year, Guy Carpenter helped place $1 billion of private reinsurance coverage for the NFIP. In December of this year, Marsh's flood platform, Torrent Technologies, is scheduled to come online as the direct service provider to the NFIP.
We believe there will be opportunities for the private market to take on increased roles, and we look forward to working with government and carrier partners in these ongoing efforts. This quarter, Marsh's The Schinnerer Group announced the acquisition of International Catastrophe Insurance Managers, or ICAT, a managing general agent providing property catastrophe insurance to small businesses and homeowners across the U.S. ICAT's focus on property catastrophe complements The Schinnerer Group's existing services and solutions for small and middle-market commercial and residential clients. ICAT's claims and third-party administration capabilities will also provide enhanced services to our clients. The need for greater insurance protection is not limited to natural catastrophes. Recent headlines related to cyber events underscore the greater need for protection in this area, and we have seen continued strong growth in demand for cyber cat programs from large global firms and cyber coverage more broadly.
The vast majority of cyber premiums relate to U.S. companies. The European General Data Protection Regulation, or GDPR, will go into effect in May of 2018, likely resulting in expanding demand for coverage in the EU, where premium volume is low compared to the U.S. Before turning to our results, I would like to give a brief update on the U.K. Financial Conduct Authority's investigation into the aviation insurance and reinsurance sector. In early October, we received a notice from the competition authorities in Brussels that the European Commission has commenced a civil investigation of a number of insurance brokers, including Marsh, regarding the aviation insurance and reinsurance broking sector. In light of the actions taken by the European Commission, the FCA informed us at the same time that it has discontinued its aviation investigation under U.K. competition law.
We are cooperating with the European Commission and taking the matter seriously. As this investigation is at an early stage, we do not intend to comment further at this time. Now to our results. Overall, we produced consolidated top-line growth of 7% and underlying revenue growth of 3%. Operating income was up 4%, while adjusted operating income increased 11%. EPS was $0.76, and adjusted EPS rose 14% to $0.79. On a consolidated basis, our adjusted margin improved 70 basis points. Through the first nine months, reported revenue growth was 5%, underlying revenue growth was 3%, and the consolidated adjusted margin expanded 70 basis points. EPS for the nine-month period grew 11% on a GAAP basis and 13% on an adjusted basis. Looking at Risk and Insurance Services, third-quarter revenue was $1.8 billion, with reported growth of 8% and underlying revenue growth of 3%.
Adjusted operating income increased 12% to $337 million, with the margin expanding 60 basis points to 19.1%. For the nine-month period, RIS has grown revenue by 6% on a reported basis, while underlying revenue grew 3%, similar to the full-year growth rates in 2015 and 2016. Adjusted operating income of $1.5 billion rose 10%, and the adjusted margin also improved 90 basis points to 26%. In the consulting segment, third-quarter revenue was $1.6 billion, increasing 5% on a reported basis and 2% on an underlying basis. Adjusted operating income increased 7% in the quarter to $330 million. The margin of 20.8% was up 40 basis points versus the prior year. For the nine-month period, consulting has grown revenue by 4% on a reported basis, while underlying revenue grew 3%. Adjusted operating income of $873 million rose 5%, and the adjusted margin increased 10 basis points to 18.6%.
In summary, we are pleased with the results for the first nine months of the year. For the full year 2017, we continue to expect underlying revenue growth in the 3%-5% range, margin expansion across both operating segments, and strong growth in adjusted EPS. With that, let me turn it over to Mark.
Thank you, Dan, and good morning. Our third quarter results were solid. Consolidated revenue increased 7%, with 3% on an underlying basis. Operating income in the quarter increased 4%, while adjusted operating income was up 11% to $624 million. Our adjusted operating margin increased 70 basis points to 18.7%. GAAP EPS rose 4% to $0.76, and adjusted EPS increased 14% to $0.79. Looking at Risk and Insurance Services, third quarter revenue was $1.8 billion, reflecting growth of 8%, 3% on an underlying basis. Adjusted operating income increased 12% to $337 million, with our margin expanding 60 basis points to 19.1%. For the first nine months of the year, revenue was $5.7 billion with growth of 6%, or 3% on an underlying basis. Adjusted operating income for the first nine months of the year increased 10% to $1.5 billion, with a margin of 26%, up 90 basis points.
At Marsh, revenue in the quarter was $1.5 billion, an increase of 9%, with a strong contribution from acquisition activity. On an underlying basis, Marsh's revenue increased 3% in the third quarter. In U.S. and Canada, underlying revenue growth was 3% in both the third quarter and the first nine months. In the international division, underlying growth was 2% in the quarter. Latin America was up 9%, Asia Pacific grew 7%, and EMEA was down 2%. For the first nine months, international underlying revenue growth was 3%, with 7% growth in both Latin America and Asia Pacific and 1% growth in EMEA. Guy Carpenter's revenue was $270 million, an increase of 4% on an underlying basis, driven by strong growth in the U.S. Underlying revenue growth for the first nine months was also 4%.
In the Consulting segment, revenue of $1.6 billion was up 5%, or 2% on an underlying basis. Adjusted operating income increased 7% to $330 million, and the adjusted operating margin increased 40 basis points to 20.8%. As we discussed on our second quarter call, foreign exchange and acquisitions had a dampening effect on first half earnings and margins in Consulting. As we expected, these headwinds lessened in the third quarter, and we continue to expect margin expansion and solid earnings growth in Consulting for the full year 2017. Mercer's revenue increased 4% in the quarter to $1.1 billion, also reflecting strong contribution from acquisitions. On an underlying basis, growth was flat. Overall, wealth declined 1% on an underlying basis in the quarter. Within wealth, investment management and related services increased 10%, while defined benefit consulting and administration declined 5%, largely due to lower project-based revenue.
Assets under delegated management at quarter end were $213 billion, increasing 12% from the end of the second quarter. Health revenue was flat on an underlying basis in the third quarter, primarily due to softness in the U.S. Career grew 2%, with continued strong growth in our survey business and our Workday Solutions, partly offset by a slowdown in project-based consulting. Oliver Wyman's revenue increased 8% in the quarter to $438 million. Underlying revenue growth was 7%, led by strong growth in the Middle East and Asia. Moving to investment income, we had a loss of $2 million in the third quarter, compared with less than $1 million of income in the third quarter of last year. The impact of foreign exchange on adjusted operating income in the quarter was a slight positive.
Assuming exchange rates remain at current levels, we expect a modest positive impact in the fourth quarter, which would bring us to a slight positive for the full year. Our adjusted tax rate in the third quarter was 26.6%, compared with 28.7% in the third quarter of last year, reflecting discrete items, including the impact of the required change in accounting for equity awards. Through the first nine months, our adjusted tax rate was 26.1%, compared with 28.8% last year. We continue to expect a 29% tax rate for the remainder of 2017, excluding any impact from discrete items. Total debt at the end of the third quarter was $5.5 billion, compared with $5.6 billion at the end of the second quarter, mainly reflecting lower short-term debt at quarter end. The term structure of our debt portfolio provides us flexibility with modest near-term repayment obligations.
Our next scheduled debt repayment is not until the fourth quarter of 2018, when we have $200 million. Through nine months, we've repurchased 8 million shares for $600 million. The third quarter marks the 22nd consecutive quarter we have bought back our stock, and since March 2014, when we announced our commitment to reduce our annual share count, shares outstanding have declined by 38 million, or 7%. Our cash position at the end of the third quarter was approximately $1.1 billion, with $154 million in the U.S. Uses of cash in the third quarter totaled $703 million, including $200 million for share repurchases, $194 million for dividends, and $309 million for acquisitions. For the first nine months, uses of cash totaled approximately $2 billion and included $600 million for share repurchases, $545 million for dividends, and $832 million for acquisitions.
For the full year 2017, we continue to expect to deploy capital in line with the level in 2016 across dividends, acquisitions, and share repurchases. Year to date, we've produced 3% underlying revenue growth, 70 basis points of adjusted operating margin expansion, and 13% adjusted EPS growth. As Dan said, for the full year, we continue to expect underlying growth in the 3%-5% range, margin expansion in both segments, and strong growth in adjusted EPS. With that, I'm happy to turn it back to Dan.
Thanks, Mark. Leanne, we're ready to go to Q&A.
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question. Again, it is *1 to ask a question. We'll take our first question from Ryan Tunis with Credit Suisse.
Hey, thanks. Good morning. I guess just following up on Dan's comments in his prepared remarks, it sounded like, I think you said this may just be an earnings event for the industry. That might not have as great of an impact on price. I guess one question is there a view at Marsh about, I guess, what the ultimate loss might be from all of these cats? Because one of the debates going around is it $120 billion or is it more of like a $50 billion or $60 billion event, do you kind of infer from some of the pre-announcements?
Okay. Thanks, Ryan. Well, there's a couple of things. Let me just start, then I think I'll hand over to Peter rather than John to give you a view as to the overall market and level of losses. I can say it's going to take some time to determine the aggregate level of loss per claim and how it is ultimately distributed amongst insurance companies and also other capital providers. What's clear so far is that the announced losses thus far are far short of the estimates provided by the modeling firms. That's not that different from some other catastrophes that have occurred in the past. It's just too early to tell what the ultimate losses will be. Having said that, catastrophe losses tend to get larger over time rather than smaller. Peter, do you have more to add to that?
Yeah, Dan, I think, Ryan, if we look at to your question, what's been reported to date is about $30 billion. If you add FEMA into it, you add another $20 billion on top of that for unreported to date, there's a delta between that and what the modeled loss of $100 billion that's been thrown around. These are long-duration, complex losses, and they take a long time to settle out. We tend to get a number set in our minds. As Dan said, property losses have a tail on them, not as long as casualty losses, but they have a tail on them, and these will develop. Over time, I would imagine that delta will reduce.
Anything else, Ryan?
Yeah. Just on the 4% organic in Guy Carpenter. I guess thinking about what the normalized growth is there. Is there any way you can quantify how you think that might have been augmented this quarter from, I guess, any treaty purchasing or anything like that might have happened associated with the storms? Thanks.
Well, a couple of things. I'll hand off to Peter in a second. Bear in mind, over a long stretch of time, Guy Carpenter has been a good grower for us, and in fact, has grown underlying revenue 26 of the past 27 quarters, and we've got three consecutive quarters at 4%. It's hard to talk about what normal is. At the end, it's a very segmented, specialized business which will have its ups and downs, but certainly, for us, the last three quarters have been at four. Peter?
Thank you, Dan. Ryan, revenue from reinsurance covers as a result of Hurricane Harvey, Hurricane Irma, and Hurricane Maria didn't have a meaningful impact on our Q3 results.
Thanks, Peter. Next question, please.
Our next question comes from Elyse Greenspan with Wells Fargo.
Hi. Good morning. My first question, I just was hoping maybe to get a little bit more color on the pricing environment to Dan, to some of your comments that kicked off the call. I guess, maybe this is both a primary and a reinsurance question, but how is the dialogue following the storm going with both insurance carriers as well as your clients? As we think about some insurance companies have pointed to rates going outside of just areas impacted by losses in the reinsurance market. If we think about the commercial lines market more broadly, some saying maybe this will have the potential to increase rates outside of just property-related coverages. How's the dialogue going even away from just whether this is a 50 to $100 billion event, but how is conversations going in and around the level of rate that might come next year?
Thanks, Elyse. It's a good question. I'll take it to begin with on an overview standpoint, I think it's good to hear from both John and Peter to get their views of what's happening in their respective areas. I think you have to start by saying the insurance market itself is large, global, and well-capitalized, there are many insurers and other capital providers, the market is competitive. Certain markets, it's true, have been hit pretty hard by this series of events, they're going to want rate increases. That doesn't mean they're going to get the rate increases they want. That's where the competitiveness of the market comes in, this is going to play out over time.
Our job is to be on the client side of the table and to get the most comprehensive level of coverage that they are seeking at competitive terms. John, you want to talk about what you're seeing at Marsh so far?
Sure, Dan. Good morning, Elyse. Why don't I start with what we saw in the third quarter, I can share a little bit of data on what we've seen over the course of the last few weeks. In the third quarter, rates were down 1.6%, which compares to a decline of 2.2% in the second quarter. Things have been trending a little bit closer to zero over the course of the last several quarters. What I would say, by major product, it's a pretty tight range when you look at it on a global basis. The U.K. and continental Europe have continued to remain as the most competitive markets on a price change basis. Australia pricing for the second quarter in a row has been up. Looking ahead, insurers have certainly been communicating to us their need for increased rates given the recent cat events.
Some are suggesting that the rate need for them is across the board. Others have been communicating needs more focused on cat property. As Dan said, it's really too early to tell. What I can share is quotes over the last few weeks in property have ranged from -5 to +20, and there's been no measurable impact so far on other lines at this point. I would say, in my experience, it would be unusual for these events to drive pricing in long-tail lines. Just maybe for a second, talking about the impact of some of these price changes on Marsh, it'd be mixed. On the one hand, we could see some modest uplift on pricing from commissionable premium. We'll see a little bit of more work in our claims operation as well. It could have some impact on our contingent revenue, primarily at MMA, of course.
We don't know what buyer behavior will be like. We're operating in a low-growth world where our clients are very cost-focused at the moment, and we'll see whether or not, particularly our larger clients choose to retain more risk over time. We'll have places like markets like Puerto Rico, which will likely face some challenges. I also want to note, Elyse, that we've been expanding our capabilities in property cat, really trying to be responsive to this growing risk for our clients. Dan mentioned the acquisition of ICAT in the third quarter. We also acquired Torrent. Dan spoke a bit about that. We've created Alterna, the first-ever retail alternative capital facility in the second quarter. We're well-positioned to help our clients navigate the market as we go forward.
Thanks, John. Peter, you want to add to that?
Sure. Thanks, Dan. In the conversations, Elyse, that we've had with reinsurers, as is always the case, we ask them to take a client-specific, very measured approach based on their experience, individual client's experience, exposure in their trading relationship with their reinsurers. As Dan prefaced, it's early. It's too early to tell any leading indicators as to where prices are going. That's the approach that we take, a very balanced and fair approach based on individual company experience, exposure, and their trading relationships.
Any other question, Elyse?
Yeah, thank you. That was very thorough. I appreciate the color. In terms of the margins within RIS, the margin improvement did slow in the third quarter. I know you guys pointed in your opening commentary to the year-to-date improvement. Was there anything that crept up in the third quarter that caused the slowdown in margins, or we should more just look to the year-to-date level?
You should always look to the year to date or rolling 12 months or even over multiple years. We're in the 10th year consecutive margin expansion, it's a great story considering we're not overly focused on it here at the executive table. The other thing to think about with regard to RIS, the third quarter is our lowest revenue quarter. If you've got some movement expense, it would have a larger term impact. There's nothing underlying that to point to anything that we're concerned with regard to RIS margins.
Much.
Sure. Next question, please.
Our next question comes from Kai Pan with Morgan Stanley.
Good morning, and thank you. Just following up Elyse's question on pace of margin expansion. I hope you can talk a bit more about underlying drivers in terms of do you see any pressure on the wages and any investment you need to make into the business and any cost-saving opportunities within the organization? I know you have talked in the past that margin expansion is a by-product of your driving organic growth, but just want to understand a bit better.
Sure. What we've said in the past is that margin expansion is an outcome of running a business to where almost always you expect to have revenue growth exceeding expense growth. Maybe not every quarter, but certainly every year. When we look back in our history, 35 of the past 38 quarters, we have had revenue growth that exceeds expense growth. It's just a core part of the way we operate the business. When you think about things like wage pressure, it's something that we look at carefully. The reality is that we have converted over the last number of years more of our compensation to variable than it has been in the past. We still have a large fixed component, but the bonus pool is driven by earnings and some measure of top-line growth, and that drives overall accruals within our bonus pool.
As you can see, our earnings have gone up multiple years in a row, which gives us a little bit more flexibility when we look at compensation in general, because the variable component has risen over a number of years. In terms of wage growth, it's interesting because the global economy and here in the U.S., we haven't really seen that operate. There is that economic theory about a tightening labor market ultimately playing through in wages. I think with advances in technology, and other factors that improve efficiency, that is not playing out right now. There is not any built-up demand for wage inflation within the company, and it's something that we watch country by country very carefully. Do you have any other question, Kai?
Yes. A follow-up just on pricing again, is that how you position your broker colleagues in the potentially changing marketplace? I just wonder if you can draw any comparison in the past, if there is big changes in the marketplace, how would that impact your customer retention as well as the new business?
Yeah. A couple of things. One, it is interesting to note in every market that is potentially hardening, and I use the word potential here. If you look around this table, you have got people who have seen hard markets and soft markets. Most of our careers have been in soft or softening market environments. Hard markets tend to be pretty swift. Ultimately on the underwriting side and on the broking side, we have a lot of people working for us who have never experienced an underwriter asking for a rate increase. You could have been in this business for a decade and maybe not have ever heard those words. It will play itself out.
My history in the business is people convert very quickly, and it is all comparative in terms of how, in achieving and broking the right individual arrangement for a client, I think brokers can change very quickly and adapt to changing market conditions. What it has meant to Marsh & McLennan Companies in the past has generally been higher levels, moderately higher levels of client retention and new business because of a flight to quality. We have got the broadest specialized placement capabilities in the world. In times of stress, our phone rings more than in times that are easy. Next question, please.
Our next question comes from Jay Gelb with Barclays.
Thank you. Could you update us on enrollment for 2018 in the private health exchange?
Sure. Let me just talk a little bit about the marketplace in general, because as we've said before, we like our capabilities and we like our positioning, and we expect Marketplace 365 to be a contributor to Mercer's U.S. health and benefits business going forward. It's important to understand it's still in the build phase for us, and it's one solution, just one part of an overall toolkit that we use in giving Mercer capabilities and health to clients. I'm not sure if we're going to go into much detail on it. By the way, for us, it's not really an exchange anymore. It's really a platform that is a year-round benefits platform. Julio, you want to add some more to that?
Thank you, Dan, and thank you, Jay, for the question, and good morning. We like to think of our Mercer Marketplace 365 benefits offering as an all year-round platform, as Dan mentioned. It offers year-round benefits like wellness, along with the enrolling capability of health, as well as voluntary benefits, life insurance, dental, and other important coverages. MM365 continues to be a relatively small part of our overall broad health portfolio. Our focus continues to be in finding the right solution to bend the cost curve on health for our clients. There obviously are times when that is a good fit, meaning Mercer Marketplace 365 is a good fit. We continue to have confidence that we have a platform that really resonates with our clients, and it makes sense for some of them to take advantage of it.
Mercer Marketplace 365 had a good sales activity year this year, and it will be helpful as we pivot to 2018 growth.
Yes, I would agree with you, Julio. I think that this is one of those things, Jay, that in the past we said that this part of the business was getting too much attention, and that we thought some of the estimates that had been put out on the industry. We couldn't understand where the numbers were coming from. Ultimately, giving things like specific enrollment data, number of lives, and that sort of thing on a relatively small part of a subset of our business just doesn't seem to make sense. Let's just take it, as Julio said, they had a strong selling season year, which will benefit us in the future, and we'll leave it at that. Do you have another question, Jay?
That's fine. Sure, yeah. Just a separate question on Guy Carpenter.
If we look at an environment where it's likely to have some pricing improvement, maybe some increased demand for property-related reinsurance covers, how much of a benefit could that be for Guy Carpenter, either top line and earnings, if you look at past cycles like 2011, 2005?
The one thing before I hand off to Peter, we've built our business to prosper in times that are generally broad market, relative level of softness in the market, every once in a while, there's a burst of activity in terms of tightening. It certainly, some of them are so brief, it's hard to refer to them as cycles, per se. We don't look at our business as really operating under the basis of cycles. It's mainly, almost always downward. Every once in a while, there's a little spurt of something. The other thing is, both in Marsh and in Guy Carpenter, there's always a series of puts and takes in terms of how companies respond. I'll hand over to Peter, but I would imagine if the market is too tough, many well-capitalized insurers would just make different decisions, right?
Peter, you want to add to that?
I think that's right, Dan. This is a business of puts and takes. More importantly, Jay, as I said in the last call, we're building Guy Carpenter to deliver consistent growth irrespective of market conditions. That means we're focused on building strong pipelines for new business and exercising continued discipline around our client service and retention. We're not building a business that's dependent on rate environment.
Thanks. Next question, please.
We'll take our next question from Jay Cohen with Bank of America Merrill Lynch.
Yes, thanks. Just one question. On the consulting side, on the health practice, you said there was some, I guess, weakness or softness in the U.S. Can you talk about what is driving that?
A couple things. You mentioned health practice, and I want to address that a little bit because I know some of our competitors actually have things that they view as a line of business. It's important to note, health business is a big business for us, and we do it in three different places. Clearly, Mercer is a cornerstone of our health business. Oliver Wyman has a large health practice as well that's focused on different kinds of transformations. It doesn't overlap at all with Mercer's activity. Of course, both Marsh & McLennan Agency have big positions in the employee health and benefits market. It aggregates to a pretty big number, and we have different ways of looking at it. Specifically, I think you were referring to Mercer in this case.
Julio, why don't you talk about the Mercer health business a little bit?
Thank you, Dan, Jay, thanks for the question as well. Good morning. Mercer overall has a pretty diversified and well-balanced and geographically spread portfolio, as you know. Over the past several quarters and several years, Mercer has delivered some pretty acceptable results in the growth area. On a quarterly basis, as you can imagine, things ebbs and flows and puts and takes. This is why we like to speak about our growth over longer periods of time versus a particular quarter. In any event, let's take health, as you mentioned, as an example. Our health business has pockets of good growth and some challenging areas. As an example, our admin business, which as you know, is part of our health results, continues to grow, but go through a profitability improvement exercise, which at times when contracts come up for renewal, obviously we take some pricing action.
Sometimes they renew, sometimes they don't. We're very focused on improving profitability. This makes it kind of a drag in some quarters on overall health growth. On the other hand, our commission brokerage book, particularly in the U.S., remains strong with increases in client retention, as an example. Uncertainty in the U.S., in particular, has delayed some decisions, while others are starting to show some movement. All that said, we continue to invest in expanding our health business, especially around acquisitions like Thomsons Online Benefits, our global proposition for health, a great platform that really is a competitive advantage for us and will pay off in the long run. Of course, our investments organically in Mercer Marketplace 365.
Thanks, Julio. Jay, do you have something else?
No, that's it. Thanks a lot, guys.
Okay. Thank you. Next question, please.
We'll take our next question from Larry Greenberg with Janney.
Hi, thank you. Just a quickie. I think earlier in the year, you had indicated that some of the acquisitions you had done late last year were putting some pressure on margins in the first half of this year, and you just needed some better scale to have those margins move up more in line with where you are. Could you just talk about that and whether there's still a bit of a drag from some of those deals that you did?
Yeah, I'll take that, Larry, then I'll hand off to Mark to give you a little bit more. I think there's a few things. Mercer, in particular, acquired some companies at the very tail end of last year that were more leaning toward higher growth technology-based organizations. They would, by their very definition, have a little bit more dilution to them in the early stages, but we would expect their higher levels of growth to make up for that over time and make them good acquisitions. It's a little bit different than some of the other businesses that we've acquired. Mark, can you add to that?
Yeah. Larry, the comments we made were specific to the consulting business. If you remember back to the first couple of quarters, we did talk about how the underlying performance of the business was good. It was just being masked by these acquisitions. You start to see as these headwinds lessen in the back half of the year, us doing well. We have had, if you just look at the headline GAAP growth numbers, acquisitions is contributing quite a bit, which is a good story. The thing to keep in mind, and we've talked about this, acquisitions are a headwind in the near term because we wear the purchase accounting through our results. We've seen pretty substantial growth in intangible amortization while we're delivering this solid NOI growth.
As you see in the back half of the year, some of the headwinds we talked about diminish.
I'm glad that Mark mentioned the GAAP revenue growth, because I think it's important to look at, particularly look at Marsh. 9% growth for an awfully big, high-quality company in a given quarter, that's going to benefit us enormously in coming years. Sure, it's not an underlying, and we want to see better underlying growth. Ultimately, we were happy with that number. Do you have another question, Larry?
No, I'm good. Thank you.
Thank you.
Next question, please.
We'll take our next question from Arash Soleimani with KBW.
Thanks. Just to start off, I had a quick question. You mentioned closing the protection gap in flood, and I was just curious to get your thoughts on how meaningful of a wake-up call you think the third quarter events could serve towards starting to bridge that gap.
It's a great question. It's a U.S. question, and it's also a global question. The protection gap is meaningful. If you look over decades of time, more catastrophe risk, and in particular flood, has been transferred to taxpayers in post-event type of situations than actually insurance companies through risk transfer. The value that the private market brings, it's not pure risk transfer. Private markets with their capital at risk offer risk modification recommendations and other advices which tend to reduce level of losses over time. That just doesn't happen when it's a government entity that is funding on a post-loss basis through taxpayer dollars. We hope it's a wake-up call. We're just not sure about it. You look at the situation where, okay, pre this series of loss events, U.S. policyholder surplus was at around $725 billion, which was an all-time record.
At the same time, premium to surplus ratios were lower than they've been in the last 25 years. We have this capital that at the right price is available to apply against risk. On the other hand, you have situations like flood in the United States, which we view as the principal risk facing our clients. There's just this mismatch. We spend a lot of time talking about it. We'll see where it goes over time. We do think there needs to be more collective energy between the entire industry. Lone voices don't seem to carry much weight in any capital. Any other questions?
Yeah, just one other quick question. I was just curious if you had any thoughts on the potential for there to be a loss adjustment expense surprise, so to speak, with the cats in the third quarter. I know ICAT has a claims operation. I think Boulder Claims maybe that has some insight it provides. Just curious to get your thoughts on the loss number increasing on the LAE side.
LAE tends to be more of a percentage of overall losses as opposed to anything else. I think that there may be some stretching of adjustment expenses only because you look at a series of catastrophes and the strain that puts on organizations like loss adjustment firms, contractors, et cetera. The costs tend to rise as the number of them available for the next job decreases. Certainly, the number of claims has been close to unprecedented in a very short period of time. That in and of itself puts some strain on getting the right people to do the adjustment. I would say the industry itself steps up pretty well in the event of catastrophes. There's not much quibbling that's going on. It's more just getting the information and cutting the check.
From that standpoint, I wouldn't expect a long drawn-out process on property claims. Now on business interruption claims, that's a little bit different. Maybe that becomes more of an area, but that would be sort of typical of what expense adjustments are and loss adjustments are on a post catastrophe on BI claims. We wouldn't see much in that area. Next question, please.
We'll take our next question from Dave Styblo with Jefferies.
Hi there. Good morning. Thanks for the questions. I just want to come back to the Mercer numbers in the third quarter here. I know you guys certainly always point to looking at a trailing base year to date. In that regard, I guess the flat growth here, it's been about the slowest in third quarter that we've seen in quite some time, and some of it sounds like it's a slowdown in project-based work. I'm curious if there were any other factors that caused it to be flat this quarter. I know you had mentioned your colleagues were affected to some extent. Was that a factor in slowing down productivity?
Just generally, three of the four businesses were slower year-over-year. As you look forward, do you guys have visibility on some of those businesses rebounding, coming back on up at this point?
Sure. No, it's a good question, obviously it's something that we dig into regularly. I'd say a couple of things to start, then I'll hand over to Julio. I think Mr. Hearn over there liked his comparator to last year because he was a zero in third quarter of 2016 and a 4% this time, Julio may have been willing to trade on that one because Mercer was 3% in the third quarter of 2016. I think that has some factor. One of the reasons why these are our client businesses that have long kind of relationships to them. So looking quarter by quarter is really not the right way to look at the business.
The way I look at the business is that on a year-to-date basis, Marsh & McLennan Companies is at a three, which is exactly where we were on a year-to-date basis as a consolidated company last year. If you'll recall, going into this year, we sort of said our expectation was that 2017 would look a lot like 2016. I think that has played itself out, including the kind of margin expansion that we've seen, 70 basis points year to date, same as last year to date. When I look at the individual operating companies, I got three operating companies up from last year, and I got one operating company down on a year-to-date basis. That is just, if I look at Marsh is a three versus a two. Carpenter's a four versus a two.
OW is a six versus a three, Mercer's a two versus a three. In the overall mix, that's not an unusual year from us. We'll have a different opco in that mix each time, ultimately, we rarely have all four opcos off at the same time, and there's usually some variability. Julio?
Yes.
Do you want to add a little briefly to that?
Yes. Thank you for the question. As I mentioned earlier, on any given quarter, we can have some ebbs and flows and puts and takes in the business. As an example, let me talk a little bit about wealth. Mercer has continued to grow earnings and new offerings in our wealth business. We also continue to make acquisitions, not just in wealth, but in other areas like Thomsons Online Benefits, Sirota, Pillar, Workday Solutions, which we think will serve us well on growth well into the future. On the wealth area, you've heard me speak about the continued double-digit growth success that we're having in our investment management delegated solutions. In fact, we surpassed $230 billion of assets under delegated management, which further solidifies our industry position.
In the wealth business, you also have the DB consulting actuarial business, so you'll have some offset in the total growth trajectory because that is a business which we all know is under pressure, and it is mostly to do with the decreasing DB programs. In addition to that, impact of less project work around cash outs and buyouts, at least impacted this quarter. Things like that, again, will be ebbs and flows, puts and takes. When everything is said and done, Mercer has done a pretty good job of being able to get growth, both organically and inorganic investments pointing to growth, and we expect that to continue into the future.
Since we're on the consulting segment, I just want to take a moment because Oliver Wyman, while volatile, having more volatility than the other opcos, has been able to outgrow the other opcos over a longer stretch of time and had a decent quarter on the top line this quarter at 7%. Scott, you want to talk a little bit about growth in OW?
Sure. Thanks, Dan. We had what I'd describe as a good quarter with strong growth across most areas of the portfolio. It was particularly strong in the public sector, our actuarial business, and in our health business. I think we could grow even faster than this. What held us back in the third quarter from stronger growth is Europe still remains a little sluggish in its overall demand for consulting. Our branding business was a little weak given the upheaval in global branding, and we're still managing our transition in our big financial services business from regulatory to more strategic work. In all three of those areas, we feel some momentum. If anything, market demand is picking up as global growth seems to be picking up, at least modestly.
Our medium-term targets to have growth in the mid to high single digits are fully intact.
Thanks, Scott.
That's great color on that.
David? Yeah, anything else, David?
I did. I don't want to beat the rates, the price hardening to death here as you guys are talking about how uncertain it is at this point. I'm wondering maybe as a history lesson, it seems like 2005 is the most common parallel. I'm wondering if you guys could just talk a little bit about the parallels or differences that you can draw from the natural disasters that impacted your business back then, how they might be different or similar to the ones that are affecting it now. I'm just trying to think of things we might not be considering, such as the supply of capital is a lot more robust, but are there other factors that you would point us to say, "Hey, this is what you should be thinking about as you frame the impact of the industry.
I think there's just too many moving parts here, David. In fact, in your last comment in terms of the number of capital providers or the supply of capital, you think about where the market was in 2005 versus where it is in 2017. It's a completely different situation. The number of insurance companies that write more than $1 billion of premium, as an example, in the U.S. The level of improvement on data and analytics, it really means that any emergence, frankly, after things like KRW of alternative capital and the growth in alternative capital and other ways of companies dealing with risk transfer off of primary markets into the reinsurance market. I mean, there are many, many moving parts there. I would say that certain insurance companies have been hit pretty hard.
Policyholders surplus getting whacked in the double digits, those insurance companies are going to be seeking rate. They are going to be seeking rate probably everywhere that they issue a policy. The question becomes, well, what will other insurance companies do? Will they use this opportunity as a way to slot in somewhere beneath the incumbent as a way to grow their share in this time because they may not have been hurt as badly? This is a global market. If you look at the top 20 insurance companies, many of them are global, but it's also a local market and a regional market.
As John was saying earlier, the idea that in some country in Latin America or Asia, the casualty pricing will go up as a result of loss activity in the U.S. when there's so many regional and local champions to take the account if rates go up too high in those areas. That puts a lot of competitive pressure on where the terms and conditions will ultimately outline. We'd love to give you more, but this is where a marketplace operates, and the losses are still being developed. As we were saying earlier, the modeled numbers are far higher than what the aggregate reported numbers are. Either the modelers are incorrect right now, or the actual reported numbers are too low and will rise over time, which will put more pressure on rating levels. We'll just have to see how it plays out. Next question, please.
We'll take our next question from Paul Newsome with Sandler O'Neill.
Good morning. Just a couple of little simple questions, I think. I wanted to ask you about the discrete tax items and sort of the sustainability of those discrete items over time.
Sure. Mark? Yeah, sure. Paul, as we've been dealing with all year, there is this required accounting change related to stock-based compensation which had a big impact on our first quarter, which we quantified, and less impact on subsequent. We did have a few discrete items that affected our adjusted tax rate, but that tax accounting change was the largest, and it is unpredictable just based on option exercise activity and when stock vests. That will be something going forward, is that accounting change is permanent, if you will, and we will have option exercises and equity-based compensation that vests. The amount of that item is going to be a little bit volatile. Depends on our stock price and when people actually take the action. That was the largest discrete item in the quarter.
That makes a lot of sense. My second question, just if there's any update on your thoughts about the revenue accounting change prospectively and how we should be thinking about that when we're thinking about our earnings estimates for 2018.
Yeah. It's still too early to give you precise. I'll give you a little bit of color. It is a, as you can appreciate, beyond our industry, every company dealing with this pretty comprehensive change to revenue recognition. It is going to have a meaningful impact on the timing of not only our revenue recognition, but the earnings pattern as well. I'll give you a little bit, but it won't be until later in the year where we can give you a specific. There will be an impact on the timing of revenue in RIS for us, more so than consulting. Most of the action we expect will be across the quarters within our year. Most of our contracts are fairly short term in nature.
In Guy Carpenter, for instance, there will be an acceleration of revenue in a quota share business in some of our treaty business. In Marsh, we will have some acceleration in some fee-based business in a couple of other areas. Again, most of the action among quarters or cross quarters within a year as opposed to across years. Both of our segments, there is also the element of this, which I am sure you appreciate, that involves deferral of expenses. That will affect both of our segments. In most of the impact there, again, we would expect across quarters within the year as opposed to across there. There will be certain elements or categories of expense that will have amortization periods that will span a year. It is comprehensive. As I said, as we get through the last part of the year, we will have more specificity for you.
Our goal through all of this, as I said, it will be a meaningful change. Our goal will be to try to provide as much transparency as possible so you can baseline our results as accurately as you can and at least get a sense of underlying performance.
You think-
Go ahead.
I'm just wondering if this is something we'll be talking about in December right before we get into the earnings announcements or if it'll come earlier than that, just from a mechanical perspective and setting expectations for quarters.
Yeah, I think at this point, Paul, it's still uncertain. I mean, certainly between now and our Q4 earnings call, we likely will not say anything. Okay. Well, I'd like to draw the call to a close and thank everybody on the call this morning for joining us today. I'd like to thank our clients for their support and our colleagues for their hard work and dedication in serving them. Have a good day, everyone. Thank you.
That does conclude today's conference. Thank you for your participation. You may now disconnect.