Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Second quarter 2016 financial results and supplemental information were issued earlier this morning. They are available on the company's website at www.mmc.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release from 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, Jamie. Good morning, and thank you for joining us to discuss our second quarter results reported earlier today. I'm Dan Glaser, President and CEO of Marsh & McLennan Companies. Joining me on the call today is our CFO, Mark McGivney, Peter Zaffino, the Chairman of Risk and Insurance Services, Julio Portalatin, CEO of Mercer, Scott McDonald, CEO of Oliver Wyman, and Keith Walsh of Investor Relations. Before moving on to our results, I thought I would spend a few minutes on Brexit, adding to my comments from our last earnings call. The U.K. vote to exit the EU created immediate uncertainty and volatility in capital markets throughout the world. However, over the last month, we have seen a recovery from the initial surprise of the event.
Although it is too soon to predict the ultimate effects of the U.K.'s decision, it will have implications for some of our clients. In any circumstance, Brexit will likely lead to a multi-year period of uncertainty. MMC's top priority remains supporting our clients and colleagues in the U.K. and throughout Europe. Our clients will need advice around key issues such as changes in regulatory perspectives on capital requirements, cross-border implications for employee benefit programs, work visa arrangements, and the need to restructure U.K. operations in light of negotiations on passporting and the free movement of people. We are uniquely positioned to guide our clients through these challenges. At the same time, we are also addressing how Brexit could affect our own operations. One key question is the potential impact on the London insurance market.
London is the global center of insurance. In our view, will likely remain so in a post-Brexit world. While underwriters will adapt over time, our geographic footprint in every EU country offers us the ability to serve clients regardless of where they are located or do business. Beyond the U.K., we have 110 offices spread throughout the remaining 27 EU member countries. Fundamentally, we operate through subsidiaries rather than branches across the EU. We view capital as fungible. We are able to place risk anywhere in the world, helping our clients avoid Brexit-related disruption around pricing, terms and conditions, and access to capacity in the market. In the short term, the uncertainty in the U.K. will likely cause some clients to defer projects and investments, which can impact our revenue growth in the U.K. and continental Europe.
We believe as time passes and the political way forward becomes clearer, clients will need our help determining the best way for them to proceed strategically and structurally. Marsh & Guy Carpenter will help clients reassess their risk and insurance needs as they try to protect against stress on capital and credit positions. We will also help clients monitor economic and political risks and the associated business consequences. Clients will seek Mercer's assistance with mobility and workforce planning as they consider their future organizational structures and locations. Mercer will also help with employee rewards and executive compensation design. There may be a need for investment and asset allocation strategic advice. Oliver Wyman will play a key role helping clients with corporate strategy as they consider their competitive positioning throughout Europe and potential need to restructure their U.K. operations.
I also want to comment on the current state of the P&C insurance industry. The market remains favorable for clients as pricing continues to decline in an orderly manner in most circumstances. Our Marsh Global Rate Index continues to show mid-single-digit decreases across major products and geographies, with the steepest declines in the U.K. and U.S. property. On the reinsurance side, we are beginning to see some moderation in rate declines, especially in U.S. pricing. Recent headlines have focused on cat pre-announcements among underwriters. While insured natural catastrophe losses climbed over 40% in the first half of 2016, they are in line with what we have seen over the past decade. Capital remains abundant across major global markets, with surplus exceeding $1 trillion. Low interest rates are also squeezing profits for insurance carriers as new money yields are lower than previous years.
Reserve releases appear to be slowing after a decade of favorable developments. Altogether, this translates into returns likely below the cost of capital net of reserve releases for a large portion of the P&C industry. We would expect this to ultimately stabilize pricing, though it may take some time. To be clear, we don't anticipate industry pricing dynamics changing anytime soon. As history has shown us, some insurers will continue to write business at lower returns in declining rate environments. In fact, will actually write more new business when rates are falling than when rates are rising. This is a topic we touched upon on our last earnings call. While there is ample capacity to place comprehensive programs at competitive prices, we believe there is an opportunity for the industry to provide greater value to clients.
Success in our industry is increasingly based on delivering what matters to clients, service, breadth of products, coverage innovation, contract certainty, claims performance, responsiveness, and yes, competitive pricing. Even in this tough market environment, underwriters continue to offer new products and services that meet the growing risk needs of our clients. This bodes well for our industry to grow and enhance the value we deliver. On the healthcare side, we've seen recent news about proposed health insurer consolidation in the U.S. There is continued uncertainty regarding outcomes, especially in light of the recently filed DOJ lawsuits to block two possible mergers. Mercer will continue to be a trusted advisor regardless of the outcome of these proposed mergers. We will help our clients navigate all the options to design and implement benefit programs that are high quality and cost-effective for employees and their families.
Let me turn to our results. MMC produced solid operating performance in the second quarter, with underlying revenue growth across all four of our operating companies, margin expansion, and 14% growth in adjusted earnings per share. MMC's revenue of $3.4 billion was the largest quarter in our history. Consolidated underlying revenue growth was 3%, with excellent growth and profitability. Operating income rose 16%, or 14% on an adjusted basis. For the six-month period, underlying revenue growth was 4%, with margin expansion in both segments and 8% growth in adjusted earnings per share. Looking at Risk and Insurance Services, second quarter revenue increased 6%, with both Marsh & Guy Carpenter contributing. Underlying revenue growth was 2%. Adjusted operating income increased double digits, with the margin expanding 140 basis points to 26.8%, our highest second quarter margin since 1988.
I'm excited about the addition of top-flight leadership talent into RIS, reporting to Peter Zaffino. There are no finer P&C executives than John Doyle, the President of Marsh, and Peter Hearn, the President and CEO of Guy Carpenter. I am certain that John and Peter will have a positive impact on MMC. I would like to give a special acknowledgment to Alex Moczarski and thank him for his leadership of Guy Carpenter over the past five years. We all look forward to working with Alex in his role as Chairman, MMC International. The consulting segment also delivered a strong quarter, with revenue increasing 4%. On an underlying basis, revenue grew 5%, with both Mercer and Oliver Wyman producing solid underlying revenue growth. Adjusted operating income increased double digits, and the adjusted operating margin expanded 230 basis points to 18.7%, the segment's highest second quarter margin in over 30 years.
In summary, we are pleased with our second quarter results. We are a trusted advisor, helping our clients address the issues of the day relating to risk, strategy, and people. Demand for our advice and services increases in a world filled with uncertainty. We have a leadership team that has proven its ability to grow revenue, expand margins, and improve earnings each year over multiple years. We have the financial strength and resources to manage through periods of stress and capitalize on opportunities. Notwithstanding the headlines and the noise in the market, we expect to deliver another year of excellent financial performance in 2016.
For the full year, we continue to expect underlying revenue growth within the 3%-5% range that we have operated in for the past 6 years, meaningful margin expansion in both segments, and strong EPS growth at a level approaching our long-term target of 13%. All this while continuing to invest in our future and return capital to shareholders through dividends and substantial share repurchase. With that, let me turn it over to Mark to review our second quarter results in more detail.
Thank you, Dan. Good morning, everyone. In the second quarter, MMC delivered strong results driven by underlying revenue growth in each of our operating companies while continuing to actively manage expenses. Overall revenue was up 5%, and underlying revenue increased 3%. Adjusted operating income increased by double digits, and our overall margin expanded by 190 basis points. GAAP EPS rose 17% to $0.90, and adjusted EPS increased 14% to $0.91. Looking at Risk and Insurance Services, second quarter revenue was $1.8 billion, with underlying growth of 2%. Adjusted operating income increased 11% to $493 million, with the margin expanding 140 basis points to 26.8%. At Marsh, revenue in the quarter was $1.6 billion, an increase of 6%. The top line was bolstered by quality acquisitions such as Jelf in the U.K. and continued activity in Marsh McLennan Agency. On an underlying basis, revenue rose 2%.
Underlying growth was 4% in the International division. EMEA increased a solid 3% with growth across all regions. Asia Pacific was up 2%. Latin America had strong growth of 11%. In the U.S./Canada division, underlying revenue was flat. We continue to see pressure in Canada and in parts of the U.S., largely driven by commodity-related headwinds. Guy Carpenter's revenue was $285 million, an increase of 3% on both a reported and underlying basis. Another good performance. Growth was highlighted by strong new business across Asia Pacific, EMEA, and global specialties. Guy Carpenter has produced positive underlying revenue growth in 28 of the past 30 quarters. In the consulting segment, revenue rose 4% to $1.5 billion or 5% on an underlying basis. Adjusted operating income increased 18% to $288 million, and the adjusted operating margin expanded 230 basis points to 18.7%.
Mercer's revenue increased 3% to $1.1 billion, reflecting underlying growth of 4%. Solid growth in the quarter reflects the benefits of a diversified portfolio. Investments and talent both rose 6%, health increased 5%. Retirement was up 2%. All major geographic regions contributed, led by growth markets. Oliver Wyman continued to perform well. Revenue was $460 million, reflecting solid growth of 5% on both a reported and underlying basis. Growth was well distributed, with particular strength in Europe and other international markets. In the third quarter, we expect to see a decline in underlying revenue from Oliver Wyman. This is driven by comparisons to very strong growth in the financial services practice last year, as well as global growth concerns exacerbated by Brexit uncertainty.
As Dan said, we continue to expect that for 2016, we will generate underlying revenue growth in the 3%-5% range, increased operating margins in both segments, and strong growth in earnings per share. I'd like to make few comments about our global retirement plan. We normally discuss the outlook for retirement plan expense after we have completed the annual year-end measurement process. However, given the declines in global interest rates, we want to share some thoughts that might be helpful to investors. We monitor our retirement programs on an ongoing basis. Previously, we discussed several changes that have reduced the sensitivity of our retirement expense to interest rates. As we have said many times, we view retirement expense as just one component of overall expense, which we actively manage.
We have been effective at mitigating retirement plan volatility and limiting the impact to shareholders over the past couple of years. Based on where we stand today, we expect to do so in 2017. Moving to investment income, we recognized $1 million in the second quarter, a decrease from $3 million a year ago. For 2016, we expect to generate only modest investment income compared with $38 million we reported in 2015. On our last earnings call, we estimated the impact from foreign exchange would be de minimis for the remainder of 2016. As expected, the effect of foreign exchange on adjusted EPS was negligible in the second quarter, and our outlook for the rest of the year has not changed. There has been recent volatility in the British pound. Weakening of the pound has minimal overall impact to MMC.
This is because RIS has a natural hedge created by U.S. dollar placements in London. While the impact of a weakening pound to MMC in total is not significant, there would be a benefit to RIS offset by an adverse impact to consulting. Our tax rate fluctuates from quarter to quarter, reflecting the geographic mix of earnings, tax settlements, completion of open tax years, and other items. Our adjusted tax rate in the second quarter was 29.1%, compared with 27.4% in the same quarter last year. Through the first half of the year, our adjusted tax rate was 28.8%, compared with 28.5% in last year's first half. Based on the current landscape, it is reasonable to assume a tax rate of 29% for the remainder of 2016.
Corporate debt at June 30th was $4.8 billion, which declined from $5 billion at the end of the first quarter due to a reduction in commercial paper outstanding. The term structure of our debt portfolio provides us flexibility with modest near-term repayment obligations. Our next debt maturity is $250 million of senior notes due next April. In the second quarter, we repurchased 3.5 million shares of our stock for $225 million. Through six months, we used $425 million to buy back seven million shares. The second quarter marks the 17th consecutive quarter we have bought back our stock, and we have reduced shares outstanding nine quarters in a row. Since announcing our commitment to reduce our annual share count at Investor Day in March 2014, shares outstanding have declined by 30 million or 5%.
Our cash position at the end of the second quarter was $974 million, with approximately $170 million in the U.S. Uses of cash in the second quarter included $225 million for share repurchases, $165 million for dividends, and $47 million for acquisitions. For the first six months, uses of cash included $425 million for share repurchases, $326 million for dividends, and $168 million for acquisitions. For the full year 2016, we continue to expect to deploy roughly $2.3 billion of capital through dividends, share repurchases, acquisitions, and investments. We also expect to deliver on our annual capital return commitments to reduce our share count and increase our dividends per share by double digits. With that, I'm happy to turn it back to Dan.
Thanks, Mark. Jamie, we're ready to turn to the Q&A.
Thank you, sir. If you would like to ask a question at this time, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off or pick up your handset to allow your signal to reach our equipment. If you do find that your question has already been asked and answered, you may press star two to remove yourself from the queue. Again, that is star one for questions. We'll take our first question from Sarah DeWitt with J.P. Morgan.
Hi, good morning.
Morning.
On the brokerage organic growth, I think you said last quarter the 2% was tempered by the profile of the book that renewed that quarter. This quarter, I was a little surprised that it didn't rebound. Was there anything that was tempering it again?
Well, before I hand over to Peter, I would just say that in general, when you look at the size of Marsh, it's in every country which has an insurance profile, many different segments, many different moving parts within the business. It really gets a very broad array of areas in which it can grow. Wherever there's growth, we're on the ground to capture it. I think the reality is, as you've seen from a lot of the insurance company reporting, it's a pretty tough market out there. The P&C rating levels are under a fair amount of pressure. There's a significant amount of competition amongst brokers, et cetera, which is having an impact. I do think you have to look at it on a mixed basis. International did quite well. U.S.-Canada was under a bit more pressure.
Peter, you want to give us some more color on this?
Sure, Dan. Just to pick up on what you just said. International, I think we had a terrific quarter. Strong organic growth in all major geographies. Some of the highlights were Latin America. We had 11% underlying organic growth, but also over 15% new business growth. We had some real strong performances in Asia. In EMEA, having 3% growth in the second quarter was terrific, and it was led by strong new business in continental Europe. If we go and shift into the U.S. and Canada, again, each quarter is really quite different. Overall, we're not pleased with 0% growth in the quarter, but it is just one quarter. The fundamentals of the business are sound. What are some of the fundamentals we look at? Certainly the renewal book. When we look at client retention, it was at historic highs. We've done really well. Strong new business.
The challenge is we had a really tough comparable year-over-year on new business in the U.S. and Canada division. It was a record in the second quarter of 2015. We had a lot more non-recurring new business than we have had historically. We matched that new business in this particular quarter, but it was hard to grow year-over-year, and that non-recurring business did have an impact of not having the renewal line grow as much as we've seen in the past. The division continues to be challenged by Canada, which is particularly exposed to commodity prices. We've talked about this in the past. Project work, which does mute a little bit of the new business. Despite the CATs that we saw in Canada in the quarter, insurance pricing is still a headwind.
Then just one last comment on another variable, Dan mentioned it in his opening comments, is that while the rate decreases are orderly, they sequentially have increased a little bit on the property side in the U.S., and that had a little bit of an impact as well. Again, I look at client retention, new business, and the underlying performance of the fundamentals, and I think U.S. and Canada will do well as it has historically when we look at the full year.
Yeah. The other thing I would just say, Sarah, would be, this was not a surprise to Peter and the Marsh team, as you see by the expanded margin within RIS. This was planned for in terms of what we saw six months ago as the likely outcome on the top line. Any other questions?
Okay, great. Yeah, then just following up on the RIS margin. Could you just elaborate on what's driving that strong growth given the 2% organic?
What we've said about margins in the past is you really shouldn't look at any individual quarter, that certainly on a year-to-date basis, when we get further along in the year or on a rolling four quarters basis is the best way to look at margins. The reality is, in both RIS and consulting, we have had significant efficiency gains over multiple periods of time. When we look at the expansion of the margins, it's been pretty consistent over multiple years. I was just looking the other day in the second quarter over a five-year period, the margin for RIS is up almost 500 basis points, and for consulting, about 600 basis points. There has been a consistent level of significant margin expansion. We expect 2016 to be a good year for margin expansion despite the slow growth environment within RIS.
Great. Thanks for the answer.
Sure. Next question, please.
We'll take our next question from Larry Greenberg with Janney.
Hi, good morning. I guess this one's for Peter, too. It seems like there's more activity for major quota shares going on. I'm just curious if that impression is correct. If so, what's driving it? Is it nothing more than the softness in the reinsurance markets and accommodations being made there?
A couple of things, then I'll hand off to Peter, Larry. The one thing you have to know is that organizations like Marsh and others are always searching for ways of delivering increased value to clients. That value is both in the advisory side, which probably has had even more increased value to clients over the last several years than any other area. It also touches the transactional side as well. Clearly, whether it's quota shares or specific types of facilities, there have been some level of increase in that over the last few years, and whether that is a permanent feature of the landscape or a factor of the current market conditions, time will tell. Peter, do you have something to add to that?
Yeah. I think, Dan, to add to what you said, our strategy with respect to any facilities, our quota shares is always to lead with client value, put together dedicated capacity where we think there's a need in the market. The most recent example for us is that we launched a terrorism facility, which is led by five very strong lead markets. We're able to put together $250 million of capacity for anywhere in the world from those leads. We have another $250 of following capacity. To be able to have $500 million of capacity for value for clients anywhere in the world really does generate value. To do that on a syndicated individual basis would be near on impossible for all of our clients across the world. We're always focused on client value and bringing capacity to the market where there's need.
Anything else, Larry?
It seemed like a relatively quiet quarter on the acquisition front, but can you give us the breakdown of the $47 million between RIS and consulting?
Yeah, Mark, you want to-
Larry, a lot of the activity in the second quarter was actually subsequent payouts on acquisitions, so deferred payments. There were just a couple of very minor acquisitions, and most of the activity was subsequent payments on, and largely MMA acquisitions.
You're very right to identify that acquisitions through the first half of the year are not at the pace of what they were last year. I'll just remind everybody that we don't have any budget with regard to acquisitions. We look at a lot of things. We cultivate a lot of relationships. We have a lot of conversations. We don't do very much at all, even over the past years. We've had a string of pearl strategy, and we're continuing on that basis. Acquisitions, by their very nature, are going to be lumpy. In some years, we're going to have lots of them, and some years we won't have that much. I can tell you the back half of last year was more active than the first half of last year. I don't know whether that's going to be the case this year or not.
Our pipelines are actually pretty good. We're a disciplined acquirer. What I can say is that if acquisitions are lighter than normal in any given year, we're not seeking to build cash on our balance sheet. We would use those funds in other ways of creating value, whether that's organic investment through strategic recruitment, whether that is increased share repurchase. Those are essentially avenues that we would take to make sure we're putting our cash to work.
Appreciate those thoughts. Thanks.
Sure. Next question, please.
We'll go next to Quentin McMillan with KBW.
Hi, good morning. Thanks very much, guys. Just to touch to the other side of the equation, Julio, the margin expansion in the quarter was really pretty phenomenal. Could you just help us qualitatively, maybe give an example of what programs you're working on to drive such high margin expansion? Obviously Dan's commentary in the press release indicated that you're expecting meaningful margin expansion to continue. Again, just anything that can help us sort of qualitatively understand what you guys are working on that's helping to drive that and into the future.
Before I hand over to Julio, I just want to remind you that the margins are for the segment, not for individual operating companies. The consulting segment's margins have expanded pretty dramatically, as I mentioned before, about 700 basis points over the last 5 years, and there's a lot of factors to do with that. As we've said in other calls in the past, the better the top-line performance, the better the opportunities for margin expansion, certainly over time, over any kind of stretch of time. Both Julio and Scott have done a number of things over the years to make sure that we're positioned well to expand margins into the future. Julio, you want to comment in more detail?
Sure. Thank you, and thanks for the question. As we've talked about in the past, Mercer is a pretty broad business and gives us a lot of different opportunities to align margin expansion and ensure that our top line and our expense growth has a lot of air between them over sustainable periods of time. You see things that we make conscious decisions, like disinvesting in things that don't give us the margin expansion or sustainability of profit contribution into the future. One of the more primary recent examples of that is when we decided to disinvest in our DC record-keeping business and strike up a strategic relationship with a partner that we can continue to have as part of a bundled solution into the future. We continue to make active decisions like that.
Our continued efficiency in our consultancy and administration businesses is really fostered around a discipline around higher utilization, a use of offshoring as another example of what we do to continue to drive efficiency and air between expenses and revenue. The evolving mix of our business. There's no question that as you look at the improvement in operating leverage, you see businesses that have that operating leverage being more significant part of our mix, and that's going to have a sustainable impact over the long run. Our continuous portfolio review is also a part of our discipline now, and we accelerate those things that give us margin accretiveness, and we decelerate those things that don't.
It's really a lot about being very disciplined around ensuring that we're building a business that can have strength both on the top line and the bottom line as we continue to grow. I just also want to mention that importantly, our overall focus is still to increase and grow earnings. We're confident that with the actions that we've taken and the actions that we continue to take, that we'll be successful in doing just that.
Thanks, Julio. I just want to caution everybody not to overly focus on one quarter when it comes to margins. At the end of the day, look over longer stretches of time. The consulting segment is up about 60 basis points on a year-to-date basis. We expect that to improve over the course of the year. We certainly don't look at the 230 basis points margin expansion in a quarter as being some sort of new run rate for the consulting division. Next question, please.
Understood. Thanks very much for the color.
Okay.
One other quick question. Peter, just you mentioned the historically high retention that you had in the quarter, also talked about non-recurring business. I know those are two separate things, can you kind of help us to understand maybe how much of the book is business that you guys view as sort of non-recurring and/or what is the typical type of non-recurring business versus the rest of the book?
Okay, I'll just take that a little bit and then hand over to Peter. The one thing to bear in mind when we talk about client retention is it's retaining the client. It doesn't necessarily mean that the income for that client is exactly what it was the year before. Peter, I don't think we want to go into detail about recurring revenues and that sort of thing.
No, I'll just give one example. Construction or surety, there can be some project work. There could be some work within the private equity space that we have a very good business within the U.S. If there's more activity on new business in one particular quarter, that is a non-recurring piece of business. We want to be very active in the construction business and private equity and make sure that we're capturing all the new business opportunities. That's not the same as winning a property deal that will go into client retention, then renewal retention the following year. That was a little bit more color on my comments from earlier.
Thanks.
Great. That's helpful. Thanks very much.
Thank you. Next question, please.
We'll go next to Michael Nannizzi with Goldman Sachs.
Thanks so much. I just want to talk a little bit more about U.S. and Canada. Obviously, the organic was flat, but when I look back further, revenue in that geography is up like 30% in the last four years, which is, I think, better than any other subset in your business over that period. I'm guessing, obviously MMC Agency is a big chunk of that. I'm just trying to think about margins. Normally, we think about margins relative to organic growth. But here, given the trajectory of margins in the segment, I'm guessing margins have expanded in the U.S. and Canada as well over that period. How should we think about the trajectory for the U.S., Canada business? How much more important are acquisitions here, relative to organic, when we think about top line, when we think about bottom line?
Well, there's a couple of things. One, yes, you're right when you're looking at the overall revenue growth in U.S. and Canada, that is inclusive of acquisitions. In fact, Marsh had a strong quarter on overall growth. That really varies based upon the acquisitions which were done in the prior year. Clearly one of the core strategic initiatives of the company since 2009 has been the development of Marsh McLennan Agency. You can see through the contingent payments that we've made over the last several years, that many parts of the Agency are performing better than what our expectations were when we acquired different agents. So yes, where you have an active acquisition strategy, then clearly the combination of active acquisition performance, and efficiencies gained through acquisitions combined with organic would have an impact on margins.
I think it's important, we talk about margins often, we all recognize around this table that margins are an important feature. Margin expansion is an important feature of us delivering on our long-term CAGR of EPS of 13%. Having said that, I do want to reiterate to everybody that margins are about the last thing we talk about at an executive team level. We spend a lot of time on financial performance, organic growth strategies, acquisition strategies, people issues, risk issues. We believe that margin expansion is an outcome of running our business properly, not a goal in and of itself. I just want to level set with that. Peter, I don't know if you have anything else to add to that.
The only thing I would add is that the acquisition strategy is important to us, that is not in lieu of growing each of our businesses organically. We focus on what investments we need to make in each of the components of our U.S. and Canada business in terms of how they can grow irrespective of acquisitions. We have an active acquisition strategy where we have a very strong pipeline and believe that will supplement the organic growth in the U.S. and Canada division.
Thanks.
So I-
Yeah.
Got it. Thanks. I guess, in thinking about that, the U.S., Canada then, is acquisition growth maybe not a driver, but is it an ingredient to margin expansion if you don't have consistent organic growth? Is it a tailwind to margin expansion?
Well, certainly, acquisitions done well and quality acquisitions that have higher growth than what your expectations were will create more value. Overall, I got to tell you, Marsh & McLennan Agency has been a headwind to margin expansion for the segment. When you look at the amortization that we have added over a number of years, the net operating income margins of MMA now are lower than the margins for the greater segment. From that perspective, over time, that will become more of a tailwind as the amortization schedule falls off. Fundamentally, MMA has not been a help to Peter and his team on margins.
Peter and his team have proven, because even if you look over the last number of years, forgetting about the 2% growth within Marsh the last couple of quarters, Marsh over a number of years has averaged about 3%, which is really at the lower end of organic or underlying growth, where we would expect to have any reasonable amounts of margin expansion. Knowing where we're going to be, looking out into the future, where we're likely to be and planning for it, allows us to manage our expenses very carefully to where in virtually every quarter, our revenue growth exceeds our expense growth. When it doesn't, it's purposeful. We know it, we plan for it, and we decide to do it. We're not beholden to the fact it always has to happen that way.
In fact, Peter and I talk all the time that for the right opportunities, organic or recruitment-wise, we will always go into the tank expense-wise to build a better business. That is part of what we're willing to do. We're seeking those opportunities. They don't avail themselves all that often. The net effect of running the business on a consistent basis where revenue growth exceeds expense growth means we'll always have margin expansion.
Got it. Great. If I could sneak in a quick one just on the consulting segment. I think, Mark, you mentioned about Oliver Wyman impact from Brexit in the U.K. Any impact on Mercer that we should think about or offsetting impact just to sort of keep in line with your outlook for mid-single-digit organic growth, and margin expansion? Thanks.
Okay. Let me hand off to Scott a little bit just to give you a little bit more flavor on Oliver Wyman, which obviously over the last several years has been our fastest growing operating company. We've said many times in the past it will be our most volatile operating company as well because of the nature of its business. After Scott, we'll hand over to Julio and just talk a little bit about Brexit and what he's seeing right now within Mercer. Scott?
Sure. Let me give you some context before I go straight to the third quarter. Oliver Wyman is a strong business, and we're very confident that over time, we can grow it at mid to high single digits as we've indicated consistently. However, quarter to quarter, there'll be a fair bit of volatility, and the reason for that is that the majority of our revenues are non-recurring, and we need to generate them as new business every year.
In any one quarter, we can have very strong growth like you've seen in the first quarter of this year or through 2014, we can also have some downside volatility. In addition to that, we've had a few very strong years in Oliver Wyman, setting up some pretty tough comparables for us. In the third quarter, we will see a decline that comes primarily from our financial services business, which has grown even faster than Oliver Wyman overall. Beyond financial services, we're feeling only a modest slowdown at this point across the portfolio, driven by the slower economic growth expectations, exacerbated a little bit by Brexit. We still see very little to suggest this is any structural weakness, the business still feels very sound. We're expecting the dip to be short-term, although it may take a quarter or two to work out.
Thanks, Scott. Julio, you want to talk a little bit about Brexit and what you're seeing at Mercer?
Yeah, sure. I think there's a lot of continued uncertainty, of course, around Brexit and the short as well as long-term implications of such. In the early days, as you can imagine, there's a significant amount of discussions that have taken place with our primary clients around things like workforce planning, what's going to happen if migrant issues are resolved one way or the other, what potentially could happen in terms of the investment strategy going forward for pensions, all of that we are actively involved in. Throughout those discussions, you can imagine there's a bit of a slowdown in terms of that discretionary spend until the path is clearer and until we have an opportunity to propose some strategy on how to go forward. Let me clarify that increased uncertainty and market volatility will likely create some opportunities for us.
As clients are going to look for advice, of course, to manage in that uncertain world and through the issues. In the longer term, we look to develop these solutions to continue to meet these emerging needs. As I said, examples would be the potential changes in the flow of capital investments as well as in regulations with regard to workforce benefits and pension coverage.
Thanks, Julio. Next question, please.
Thank you.
We'll go next to Kai Pan with Morgan Stanley.
Thank you. Good morning. Just one follow-up with Mark on the pension expenses. Given if interest rates stay at current levels, what's the magnitude of the potential impact relative to 2015, the $125 million? Would you be able to fully offset that as you did in 2015?
Mark, you want to take that?
Yeah, Kai, just a couple of things. First, on the sensitivity, as we said in our 10-K, roughly 50 basis points of discount rate change will have a $35 million or so impact on earnings. The reason we included the comments on pension is just because it is so topical, and we've gotten a lot of questions from investors, and it's hard to pick up a newspaper without reading something about it, given the low interest rate environment. We just wanted to share how we're thinking about it right now and wanted to highlight what I just talked about, that we are less sensitive today to interest rate volatility than we were. If you go back a couple of years ago, we closed our largest defined benefit plan in the U.K. We closed our Irish plan, and we made the changes that we talked about to our U.S. plans.
We have less sensitivity. That's a factor. Remember, what really matters is the interest rate environment at the end of the year. Although we've seen a drop in rates here in the first half of the year, just in the U.S. in the last couple of weeks, rates have come back a little bit, and asset values have actually come back off their post-Brexit lows. How we're looking at this, we're at the very beginning of our planning process, and as I said a few minutes ago, pension expense is just one element of an overall expense base that we manage very actively, and we manage to deliver great results. Given where we are in the year, we can see this coming. We can plan under a number of scenarios.
Based on where we see things today, we expect we'll be able to limit the impact of pension volatility on earnings, just as we have for the last couple of years.
Thanks, Mark. Anything else, Kai?
Yes. Another question for Julio, probably on the health care exchange. Any update on that in terms of the client's interest as well as your product design and heading into the renewal season end of the year?
Thanks, Kai. Julio, you want to just take that one?
Yeah. As I've said, Kai, in past calls, employers continue to look for solutions for long-term health trend reduction. Our exchange is certainly one of those that we discuss actively. We're really focused on that and continue to be extending the platform beyond enrollment experience so it's a full-year platform for employees to consult with. As mentioned in recent past, we've seen a lot of interest and a lot of discussions. I would say that we're experiencing a softer conversion to sales than what we had originally anticipated for this selling season. We'll see how it comes out completely at the end. Certainly a little bit slower than we expected.
Thanks, Julio. We're going to have to move on, Kai. Next question, please.
We'll take our next question from Elyse Greenspan with Wells Fargo.
Hi, good morning.
Hi, Elyse.
Just going back to the commentary on the U.S. and Canada organic growth. I was particularly interested just how the MMA book performed in the quarter. I know over the past couple of quarters, you guys kind of highlighted it as performing better than the rest of your business. Was that still the case in the second quarter? Did you also, I guess, see a slowdown within the growth within MMA in the Q2 as well?
Okay. We're not going to break out MMA in any kind of formal way. We have said in the past that our expectation was that it would grow faster than overall Marsh, and that we were comfortable that it was exceeding our expectations on that score. It did so again in the second quarter.
Okay, great. Just in terms of the margins that you saw in both of the segments, I know pension was a hit last year and a little bit of a benefit this year. Is there a way that we should be thinking about the impact that pension had on the Q2 margins, just in terms of how we think of the level of margin improvement for the balance of the year in both of the segments? Would you just say it didn't have as much of an impact as that we shouldn't really be backing that out?
I would look at it this way: that one, just to reiterate, look over longer periods, so year-to-date and rolling four quarters are more accurate ways of looking at margin expansion. Even though we don't unpack pension, it's fair to say pension was a benefit. We would've had significant margin expansion in both segments, even without contemplating the pension credit that we had. I would just look over longer periods as to where the likely run rate of expansion is.
Okay. Thank you. One last quick one. I noticed the level of capital expenditures slowed down in both quarters of this year. Any comments on that front?
No. I'll hand off to Mark in a second, projects can be lumpy as well. From that standpoint, our capital expenditure over the last several years has been bounded in kind of a $300 million-$400 million annual kind of spend. We're probably still in that area. Some projects are complicated, and we always prioritize. The best projects are the ones that are done well. That creates a little bit of a gating mechanism, which has an impact. Mark, do you have anything else to add?
Yeah. The only thing I would add, Elyse, I wouldn't read too much into the slow start this year. It's more just timing of starting some big projects, mainly on the technology side. We had $325 million of CapEx last year, probably a little bit less than that, but I'd still expect up in the high 2s, $300 million range for the year.
Okay. Thank you very much.
Thanks, Elyse. Next question, please.
We'll go next to Dave Styblo with Jefferies.
Good morning. Thanks for the questions, and also appreciate the color on Brexit and the P&C market early on. Kind of continuing the conversation of M&A and so forth. You guys still obviously have a conservative balance sheet with that EBITDA. I think maybe it's around 1.6 right now. My sense is you like to maintain that just to be able to seize on opportunities as they arise. Can you give us maybe a little bit more color on if you're seeing increased opportunities, especially in light of the volatility in Brexit that might be surfacing now that wouldn't have been there, say, three, six months ago? Is it still going to continue to be the string of pearl strategy that you've been executing in the past?
It's a good question. Although we certainly wouldn't pre-announce anything on a quarterly call.
I was hoping might.
Yeah. I don't know if you would or not. Ultimately, what you're saying could very well happen. There could be opportunities in parts of the world based upon uncertainty, whether it's caused by Brexit or other factors. Clearly, macro factors have a role to play in M&A, and in continuing M&A. It's too early in looking at Brexit to see whether there's truly any new opportunities that are going to result from Brexit. Suffice to say that your basic premise of we're relatively comfortable at our level of leverage now, and that our level of leverage preserves the capability for us to capitalize on opportunities if they may appear sometime in the future is accurate. We think we live in a pretty uncertain, volatile world.
In uncertain volatile worlds, in difficult conditions, they may be the best opportunities that you ever see, and we certainly want to preserve the ability to capitalize if they so appear. Next question, Dave.
Okay. Yep. We'll stay tuned on that. Just coming back to U.S., Canada, I want to look forward a little bit more instead of what's happened. The tougher comps that happened in the 2Q of last year for the non-recurring. Can you maybe speak to a little bit more of what happened in the second half of last year, if there was any particularly tough comps that we should just be aware of as we think about the rest of the year? What might change in Canada? How tough is the drag in Canada right now in regards to the commodity situation? Is this sort of a structurally tough area until things turn around, or do you see some light at the end of the tunnel where things are starting to improve?
Peter, you want to take that?
Yeah. Again, if we spoke about the U.S. and Canada division, going into each of its components would take a lot of time. We don't break them out. There's a lot of businesses. We have an MGA, we have a technology business, we have Canada, we have the core of Marsh. There's a lot of businesses, MMA, that comprise of the division. Not going to really comment too much on the next couple of quarters. Don't think that we will be in the same situation that we are in the second quarter. Again, each one is different, and the prior year comparables are different. Each component of the U.S. and Canada division has a bigger percentage of its participation depending on which quarter.
Again, I just wouldn't over-read into what happened in the second quarter as a trend or that you're going to hear a similar story as we get to sort of the back half of the year.
Thanks, Peter. Next question, please.
Thanks.
Thanks, David.
We'll go next to Jay Gelb with Barclays.
My questions have been answered. Thank you.
Thanks, Jay. Next question, please.
We'll go next to Ryan Tunis with Credit Suisse.
Hey, thanks. I just had a quick one. Just as it applies to Brexit, was there anything evident in the organic growth results this quarter, I guess, just in anticipation of that vote, either clients deferring decisions or accelerating them that may have, in some way, contributed to organic growth in either segment?
I wouldn't think so. At the end, I don't think we have that level of granularity to know what's in a client's mind. I do believe that it's fair to say Brexit or otherwise, that many of our clients believe that we are living in an age of risk and uncertainty, and that risk and uncertainty creates a dampening enthusiasm for projects and for investment. So that has had an impact over the last number of years, I think, on not only our growth levels, but on GDP worldwide. There was no negative or positive spike that we could actually see as a result of early-stage thoughts about Brexit.
Okay, thanks for sticking me in.
Okay, thanks. Next question.
We'll go next to Charles Sebaski with BMO Capital Markets.
Morning. Thank you. Dan, you made an interesting comment on your prepared remarks that RIS margins are as high as they've been since 1988, a hard market year and high interest rates, and shows the operational efficiency gains made over that [TN] time. I'm curious, looking forward on not a quarter, not a year, what are the biggest levers for you guys to achieve opportunity or efficiency gains in your business on par with that, outside of just the pricing environment?
No, thanks, Charles. I'll just say, it's always funny comparing ourselves back into time. We are such a different company than when we were back in 1988 that I'm loathe to create those comparisons, even though we write them into our script. I would say we're better than at any time in our history, because when I look back in 1988, if you look at total RIS, it was $1.3 billion of revenue. We are multiple times larger and more diverse geographically, line of business, quality, et cetera. This is the new world. I don't set margin targets. Peter doesn't as well. We don't believe in them. We believe that there's something about the human brain that looks at a target as something to reach and then draw back from.
I would not put any hurdle out there as to what this business could do and how it could perform. I do know that I'm quite confident that the leading factor in how we will do over time is organic growth. If we have good levels of organic growth, we will have good levels of margin expansion, period. If we don't have that organic growth, all of our annual and multi-year search for efficiency, obviously that never ends. We have found different ways of running this business through structure, through de-layering, through technology, through better levels of client connectivity to create more ability for us to service clients on an efficient basis. That creates a margin benefit to us go forward. Do you have any other question, Charles?
That is it. Thank you very much.
All right. Thank you. Okay. I think we have time for one more question.
We'll go next to Joshua Shanker with Deutsche Bank.
Yeah. Thank you for putting me at the end, everyone. I get a question a lot from investors that I don't have a good answer for, and I don't know how important it is to you. The question is, what is the risk of disintermediation for the insurance brokerage industry over the long run, and how are you addressing it?
Yeah. Well, it's a question that I'm used to because when I was joining the business in 1982, I was reading articles about brokerage disintermediation that had been written in 1978 and considering should I actually join an industry that looks like it's going to go the way of the dodo bird. The reality is in an increasingly complex world, the need for advice rises. These were once transactional businesses. Now they are principally advisory businesses with transactional capability. Big difference. I would say the broad level risk of disintermediation is quite low. That's not saying that there's not ways of creating distribution that we as a company have to be very focused on, whether it's digital, whether it's online, whether it's worksite. There's different ways of getting to our client base, and we have to be very open to the idea.
Clearly in some parts of segments, I feel you'll have multi-channels, right? Whether you look at motor or homeowners or maybe even small commercial, you'll end up having multi-channels, which means brokers, there'll be direct, there'll be affinity, there'll be many different avenues for clients to be satisfied. The key is, what's the client's experience? Who provides the best level of comprehensive client experience and a little bit less about what's the capital behind it. It's more about experience. I would just end with the thought as well, because I recently took a trip into a country which was always a very much a non-broker market, which is beginning to turn more and more to a brokered market.
The reality is that more parts of the world have become brokered because the terms and conditions and the pricing are better in markets in which brokers are active than in where brokers are not active. I feel pretty comfortable that we're positioned well, but not secure in our position in the market. We have to always find ways of doing things better, or else, yes, we will get disintermediated, perhaps by another intermediary, but we always have to stay on our toes and do things better. I think that's it, operator, where we can end the call because I know we're beyond our hour. I just want to thank everybody for joining us this morning, specifically thank our clients for their support and the faith they put in us and our colleagues for their hard work and dedication in serving our clients. Thank you very much.
Again, that does conclude today's conference. We do thank everyone for your participation. Please have a great day.