Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Third quarter 2015 financial results and supplemental information were issued earlier this morning. They are available on the company's website at www.mmc.com. Before we begin, I would like to remind you that remarks made today may include statements relating to future events or results, which are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to inherent risk and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by the forward-looking statements. Please refer to the company's most recent SEC filings, which are available on the mmc.com website for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.
I'll now turn over the conference to Dan Glaser, President and CEO of Marsh & McLennan Companies.
Good morning. Thank you for joining us to discuss our third quarter results. I'm Dan Glaser, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Mike Bischoff, our CFO, and our operating company CEOs, Peter Zaffino of Marsh, Alex Moczarski of Guy Carpenter, Julio Portalatin of Mercer, and Scott McDonald of Oliver Wyman. Also with us is Keith Walsh of Investor Relations. I am pleased with our results for both the third quarter and nine months. Over these periods, we produced underlying revenue growth across all operating companies, along with higher adjusted operating income and margin expansion in both segments. For the nine months, adjusted EPS rose 8%. We continue to execute and grow in a challenging macro environment.
As a global growth company, we are not immune to the effects of modest global GDP growth, low interest rates, a strong U.S. dollar, or the slowdown in emerging economies. Despite this environment, we are on track for 2015 to be the sixth consecutive year that we have generated underlying revenue growth of at least 3%. We have several attributes which make us optimistic about our ability to generate good long-term revenue growth. We have a vast geographic footprint in all of our businesses, especially RIS. This gives us the balance to benefit from varying levels of global growth. In most years, global premiums tend to rise despite negative pricing trends. In addition, we view risk as a growth business. Increasing exposures from new emerging risks, globalization, and economic uncertainty create volatility and disruption. Our clients' need for advice and services is only rising.
We are able to meet these needs through the quality and depth of our colleague base and our collaborative and cohesive culture. This underpins our consistent long-term revenue growth, both organic and acquired at RIS. In addition, we are well-positioned to benefit from favorable long-term global trends in consulting. At Mercer, the need for advice around issues of health, wealth, and career are increasing. Mercer is a trusted advisor, serving clients and their more than 110 million employees in over 100 countries. Oliver Wyman provides deep industry knowledge and strategic expertise to their clients around issues of growth, change, and efficiency. We also use capital management to drive growth. Through nine months, we have already exceeded the $2.3 billion of capital deployed for acquisitions, dividends, and buybacks for all of 2014. The primary sources of this capital have been increasing levels of operating cash flow and using our balance sheet.
In 2015, we raised $1.1 billion of incremental debt, and we continue to work down cash balances. While capital utilization has been substantial, we have maintained balance sheet flexibility, which we believe is prudent. We manage for the long term, and reinvestment is a constant. We invest through cycles and preserve our ability to take advantage of periods of dislocation to invest in our colleagues and capabilities, add to our talent base, and make acquisitions. This balanced strategy has served us well, as evidenced by our ability to deliver in a variety of market environments. Now let's turn to our results. In the third quarter, we produced underlying revenue growth of 4%, 6% growth in adjusted operating income, a 100-basis point rise in our adjusted operating margin to 15.6%, our highest third-quarter margin in more than a decade, and 13% growth in adjusted EPS.
Through nine months, underlying revenue rose 3%, adjusted operating income was up 5%, the margin expanded 120 basis points, and adjusted EPS increased 8%. For Risk and Insurance Services, revenue in the third quarter was $1.6 billion, with underlying growth of 2%. Adjusted operating income grew 3%, and the margin increased 70 basis points to 15.7%. Through nine months, underlying revenue growth was 2%, adjusted operating income rose 4% to $1.2 billion, and the margin increased 130 basis points to 24.1%, the highest in over a decade. This margin improvement continues a march we have been on since 2007, when adjusted margins in the RIS segment were at their lowest. At Marsh, revenue in the third quarter was $1.3 billion, with underlying growth of 2%. The U.S. Canada division grew 2%, led by Marsh & McLennan Agency. The MMA strategy has been very successful.
Since 2009, MMA has made approximately 50 acquisitions, with annualized revenues approaching $900 million. In our international division, the increase was also 2%, reflecting modest growth in EMEA and Asia Pacific, and a 6% increase in Latin America. In September, Marsh announced its intention to acquire U.K.-based insurance broker, Jelf Group. This aligns with Marsh's strategy to expand globally in the SME space. We expect the transaction to close within the next several months. With the recent acquisition of Dovetail, Marsh continues to broaden its services in the small commercial segment. Dovetail's flexible and scalable technology offers agents access to online real-time quoting and binding from multiple insurance providers. Through nine months, Marsh's underlying revenue was up 3%, reflecting growth of 3% in U.S. Canada and 2% in the international division.
Guy Carpenter's revenue was $261 million in the third quarter, an increase of 2% on an underlying basis and 1% through nine months. This was a reasonable result considering the significant rate reductions in many lines. The U.S. and EMEA were areas of strength, driven by strong retention rates and new business wins in treaty. Moving to consulting, revenue was $1.5 billion in the third quarter, reflecting strong underlying growth of 6%. Adjusted operating income increased 4% to $285 million. The adjusted operating margin expanded 70 basis points to 18.5%, the 15th consecutive quarterly increase. Similar to RIS, consulting has a record of achieving higher adjusted operating margins in recent years. The improvement has been at least 150 basis points in each of the past three years. With additional expansion so far in 2015, the third quarter margin was the highest in over 30 years.
Through nine months, underlying revenue growth was 5%, adjusted operating income increased 4%, and the margin expanded 90 basis points to 17.5%. Mercer's revenue was $1.1 billion in the third quarter, reflecting an underlying increase of 5%. Revenue growth was achieved across all three of Mercer's major geographies, North America, Europe/Pacific, and Growth Markets. Mercer's growth was broad-based, with investments, talent, and health each growing 6%. Retirement rose 2%. Investments continued its long-term positive performance. AUM increased to $138 billion as new client assets more than offset market and FX pressure. Talent, once again, performed well. It generated its fourth consecutive quarter of growth, driven by its seasonally strong survey business and increased demand for project consultancy work. Mercer recently announced its strategic alliance with Transamerica, which will acquire Mercer's U.S. defined contribution record-keeping business.
Mercer continues to directly serve client benefit administration needs in both the defined benefit and health businesses. The Transamerica alliance enables an integrated total benefit outsourcing solution. Health continues to benefit from Mercer Marketplace despite lower growth in our administration business as we execute our strategy to improve profitability. Earlier this month, we issued an update on the progress of Mercer Marketplace. In total, the exchange now serves over 700,000 employees and retirees and provides exchange access for an anticipated 1.5 million lives, an increase of 43% compared with last year. We are pleased with the continuing growth of Mercer Marketplace, although we would highlight we do not expect it to contribute to earnings in 2016. Oliver Wyman's revenue in the third quarter was $450 million, reflecting strong underlying revenue growth of 9%.
Through nine months, we are pleased with Oliver Wyman's underlying revenue growth of 6%, which builds on growth of 15% in the same period last year. The nine months performance reflected revenue growth in all practice groups and business units. In summary, we are pleased with our third quarter and nine months results as we continue to execute well. For the full year, we expect to deliver underlying revenue growth, margin expansion in both operating segments, and high single-digit EPS growth. With that, let me turn it over to Mike.
Thank you, Dan. Good morning, everyone. In the third quarter, we delivered underlying revenue growth in each of our operating companies. Both segments generated adjusted operating income growth with margin expansion. GAAP EPS rose 13%, and adjusted EPS increased 13% as well. Considering the macro headwinds we are facing and our mitigation activities, we believe you get a clearer picture of earnings growth and margin improvement by viewing our results on a year-to-date basis. Our financial results through nine months show adjusted operating income increased 5% to $1.9 billion. The adjusted operating margin expanded from 18.5% to 19.7%, with RIS expanding 130 basis points and consulting increasing 90 basis points. Both GAAP and adjusted EPS increased 8%, indicative of our progress this year. Our results are being impacted significantly by the strength of the U.S. dollar against major currencies, especially the EUR.
In the second half of the year, the dollar has continued to strengthen against the Canadian and Australian dollar and the currencies of most emerging markets. At the beginning of the year, we estimated the negative impact to EPS from foreign exchange would be approximately $0.15 per share, the highest level in MMC's history. We now estimate the full year impact will be $0.18 per share, $0.06 in the first quarter, $0.04 in the second, $0.03 in the third, and we now expect a $0.05 impact in the fourth quarter. We recently changed the structure of our U.S. defined benefit plan by dividing it into two separate plans, one that includes active colleagues, and a second that includes inactives, which account for about 70% of U.S. plan participants, both retiree and terminated vested.
This structure better positions MMC to take advantage of de-risking opportunities in the future, such as voluntary lump sum offers and annuity purchases. This change has no effect on the future benefits earned by our U.S. colleagues or the benefits previously earned by former colleagues. We are using a longer amortization period for the inactive plan, which will lower annual pension expense, although the benefit this year is modest. Many factors go into determining our pension expense. Assumptions for mortality changes, asset performance, and the discount rate, to name a few. As we typically do each year, we will provide an outlook for MMC's retirement plan expense on our fourth quarter earnings call in February, after the year-end measurement.
While it is too early to give an estimate for next year, based upon the variety of factors we are looking at today, we believe the company is well positioned to offset any retirement expense headwinds we could face in 2016. Investment income. Trident III, which was created in 2003, sold its last two investments in the third quarter. As a result, MMC's carried interest is no longer subject to clawback. In the third quarter, the $34 million of investment income primarily came from Trident III. For the nine months, investment income was $39 million, a slight increase from $37 million last year. MMC's private equity portfolio is $85 million, which should generate only modest investment income on an annual basis. Total debt was $4.5 billion at the end of the third quarter.
We took advantage of favorable credit market conditions by pulling forward the debt issuance we had contemplated for the first quarter of next year. Also influencing this decision was our robust acquisition pipeline, and we wanted to take advantage of the decline in the equity markets to repurchase our shares at attractive prices. The $600 million senior note issued in September has an interest rate of 3.75% and will mature in 2026. We've been restructuring our debt portfolio the last several years and have reduced our average interest rate from 5.6% to 3.5%. Our annual interest expense in 2011 was $200 million, with $3 billion of debt outstanding. Today, with $4.5 billion of debt, our annual interest expense would approximate $175 million. We have reduced our refinancing risk by spreading out maturities over a number of years.
For example, the next bond repayment of $250 million is not due until April of 2017. The debt is supported by a significantly higher level of operating earnings. The company is in a strong financial position today. Over the last few years, we have used our balance sheet while maintaining flexibility to take advantage of growth opportunities. The recent volatility in the equity markets allowed us to pull forward a portion of our share repurchases planned for the fourth quarter and the first quarter of next year. We repurchased 9.9 million shares in the third quarter for $550 million. Over the first nine months, we repurchased 23.4 million shares for $1.3 billion. Our tax rate fluctuates quarter to quarter, reflecting the geographic mix of earnings, tax settlements, completion of open tax years, and changes in international and local rates. For the third quarter, our adjusted tax rate was 28.4%.
This represents an underlying tax rate of 29.5% and a slight benefit related to filing our 2014 federal tax return in September. For modeling purposes, based on the current landscape, it would be reasonable to assume a tax rate of 29.5% in the fourth quarter and 29% for 2016. Our cash at the end of the third quarter was $1.3 billion, with $445 million in the U.S. Uses of cash in the third quarter included $165 million for dividends, $190 million for acquisitions, and $550 million for share repurchases. Through nine months, uses of cash included $470 million for dividends, $590 million for acquisitions and investments, and $1.3 billion for share repurchases. At our Investor Day in March 2014, we made two commitments concerning returning capital to shareholders. One, double-digit annual dividend increases, and two, a reduction in our share count each year.
We are delivering on these commitments for 2015 as we did in 2014. Our annual dividend increased 11.3% this year after increasing 10.4% last year. Our share count will decline for the second straight year. In fact, shares outstanding have declined by 27 million shares since Investor Day. Capital deployed for share repurchases, dividends, and acquisitions was $1.2 billion for 2013. In 2014, capital deployed almost doubled to $2.3 billion, and through the first nine months of this year totaled $2.4 billion. Our robust capital management has been supported by strong operating cash flows, the deployment of excess cash, and increased debt. With that, I am happy to turn it back to Dan.
Thank you, Mike. Before we go to Q&A, I would like to make a few comments about our recently announced CFO transition. Mark McGivney will become MMC's Chief Financial Officer at the start of 2016. Over the past year in his current position as Senior Vice President of MMC Corporate Finance, Mark worked closely with Mike and me in developing and executing our financial strategy. Mark also has a very strong operational background and becomes the first MMC Chief Financial Officer to have served as CFO of both Marsh & Mercer. Mark was CFO at Marsh from 2007 to 2011, where he was a key member of my leadership team and oversaw substantial restructuring actions and operational improvements that reestablished Marsh's profitability. From 2011 to 2014, Mark was CFO and Chief Operating Officer of Mercer, where he worked closely with Julio to drive strong improvement at Mercer. Welcome, Mark.
We look forward to hearing from you on next quarter's earnings call. I would also like to say a few words about Mike and to take a moment to recognize the many contributions he has made to Marsh & McLennan Companies over the past 34 years, the last three and a half as Chief Financial Officer. Mike has worked tirelessly and creatively on an array of complex issues in leading our finance colleagues around the globe. By always demonstrating tremendous skill, knowledge, and judgment, Mike leaves a legacy of extraordinary professionalism, commitment, and dedication for us to build upon in the future. I am pleased that Mike will serve as a part-time senior advisor to MMC through the first quarter of 2016. On behalf of the 58,000 colleagues at Marsh & McLennan Companies around the world, I would like to say thank you, Mike, for your outstanding service.
Operator, we are ready to begin Q&A.
If you'd like to ask a question, you may do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to pose a question. We'll have our first question from Daniel Farrell, Piper Jaffray.
Thank you, and good morning.
Hi.
I wonder if you could talk a little bit about the brokerage organic, specifically in Marsh. We're seeing a little slowdown in both the U.S. and internationally. Could you give us a little more color in terms of sort of headwind from both pricing and exposure? Could you talk about your ability to offset that with sort of net new business and how much you think you can offset further headwinds? Thank you.
Sure. I think because much of the impact on our revenue as a company relates to some macro factors like GDP or the P&C cycle, maybe a good idea for me to give just a very brief comment and then just go around the horn and have each of our operating companies give an assessment as to what they're looking at today and as they look forward for revenue growth. I'm pretty pleased because despite macro headwinds, as I mentioned, from GDP, property and casualty rates, and some tough comps, MMC grew revenue by 4%. Year-to-date revenue growth underlying is up 3% versus the prior year-to-date at 5%. I feel pretty good about where we are, and I'm confident that we remain in the 3%-5% underlying revenue growth zone as an overall company. Peter, you want to start with Marsh?
Sure. It's probably helpful to put a little context around the numbers for the quarter. Compared to last year's Quarter 3, again, it was a 5% organic growth, so it was going to be challenging for us. That was the highest underlying growth rate we've had in the past 12 quarters, so it is a tough comparable year-over-year. Some countries have been particularly challenged, specifically in large commodity-based economies like Australia, Canada, Brazil, even parts of Africa. Those have been a little bit of a headwind. You mentioned pricing. Pricing has been orderly, but it has been coming off year-over-year and slightly from the second quarter to third quarter. We have been undergoing several yield initiatives to offset some of the rate decreases, and there's been some economic growth, albeit slow in sales, payroll, total insured values.
Overall, the 2% is not what we believe will be our medium and long-term growth rates. Overall, when I look at the core underlying parts of the business, new business, client retention, it's very strong.
Okay. Thanks, Peter. Alex?
Sure. The headwinds in the reinsurance area are well known, have been discussed, I guess, pretty much over the last three or four years. We've continued to be able to grow. I said at the beginning of the year that some quarters might be clunky, but at the end of the day, we are still feeling fairly positive. The pipeline remains good. We're benefiting from segmentation and specialization. Shares have actually grown with the mid to larger size insurance companies as they find out how good our teams are, how useful our tools are, and how sophisticated our solutions are. We're still looking in growth mode.
That takes care of RIS. Why don't we spend a little time on consulting? Julio, you want to talk to us about revenue growth?
Thanks, Dan. First, I'd like to just start off by saying that we were pretty pleased with the solid revenue growth that we had and demonstrated in the third quarter. I was particularly pleased with the balance of that growth across our LOBs. We have a habit now of quarter after quarter, finding a way to continue to have that spread between revenue growth and expenses. Of course, the margins continue to also improve. We've entered into a strategic alliance with Transamerica, which we think is going to be good for our clients, good for us going forward, and it continues to reinforce, as we've talked about in the past, disinvesting in some of our non-core as we continue to invest in our core for growth into the future.
Like things like bolstering our talent business, investing in things like building Mercer Marketplace and expanding our solutions even further in things like Workday with implementation capabilities to Jeitosa, et cetera. Expanding also our European investment capabilities, which has shown up in some of the improvement that we've had in assets under management going to $138 billion this particular quarter. Our investments have been well-calculated. We continue to look for opportunities to accelerate our growth into the future by increasing footprint across the globe and doing other things. We're pretty optimistic about how we can continue to generate growth at Mercer.
Thank you. Just rounding it all out, Scott.
Sure, Dan. Oliver Wyman also had a good quarter. Year to date, we've had strong growth across most sectors. In the nine months, all of financial services, health, actuarial, Lippincott and NERA grew more than 7%. In any annual period, we continue to target growth at the high end of the range for MMC that Dan highlighted, say 5% or better, driven by continued growth and demand for high-quality consulting, as well as our ability to take share from competitors. It is important to keep in mind, though, that given the nature of much of our business, which is large, lumpy consulting projects, there'll certainly be volatility around that target from quarter to quarter. Overall, the business is in good shape and getting better, we expect to be able to continue to grow.
Thanks, Dan. I know that was an overall long question, but I figured revenue was likely to be on several people's minds, so we wanted to cover it broadly. Do you have any other questions?
No, that's helpful detail across all the segments. Thank you. Mike, all the best to you going forward.
Thanks, Dan.
Next question, please.
Ryan Tunis, Credit Suisse.
Hey, thanks. Good morning. I guess my first question is for Mike, and it's on the U.S. benefit plan. I guess some of the optionality you've maybe created there. You mentioned lump sums and perhaps some other alternatives. It sounds like to me that would probably eliminate some of the interest rate sensitivity you've seen around the pension expense and also maybe mitigate it. I just want to make sure I'm thinking about that correctly as a positive, and I guess, I don't want to call it a negative, but presumably this would also come with a cost. Would doing a lump sum or a closeout or that type of thing create a meaningful near-term use of cash?
Let me start, Ryan, then I'll hand over to Mike. I think it's too premature to consider the cost of buyouts, et cetera, because we haven't determined yet whether we would offer a discount, if any, to the actual carrying costs that we have for those benefits. We're at the early stages of working through those issues. We think that structurally setting up the two plans make it easier for us to address things like annuity buyouts and lump sum arrangements, in an overall de-risking effort for our inactives. Overall, I'll hand to Mike to see if he's got additional color. Mike?
Dan, you're exactly right. It takes a lot of time and effort in different stages to go through when looking at any major or substantial change to a defined benefit program. We've actually been looking at the changes that may be inherent in the U.S. DB plan for a number of years, did the administrative work, then implemented the change to basically separate the DB plan into two separate plans, one active and one inactive. As Dan indicated, this is just a step along the road, and we haven't made a decision on the timing when to offer lump sum buyouts or annuity purchases. This will come in the future. The other thing that, Ryan, I would just put into context for you, the U.S. is our second-largest plan.
The U.K. is by far our largest plan, then after the U.S., is followed by Canada and Ireland. We actually made some changes in Ireland as well. This is more of a long-term philosophical approach to organize all of our plans on a geographic basis, but do it within a common umbrella that Dan and the management team have established.
Got it. Okay. Then I guess just shifting gears to exchanges. I think you mentioned that next year, despite 40%+ enrollee growth, not expected to be a contributor to earnings. I guess just to get a better understanding of how that's impacting consulting margins, how does that roughly compare to the contribution of exchanges this year to the bottom line?
Well, I'll start with that, then I'll hand it over to Julio. I think the important thing to note is when we're looking at our exchange, the most important thing to us now is creating a platform and a framework for us to handle a lot of lives and to grow on a rapid but pretty consistent basis for many years to come. It really is all about creating the right quality organization. I was quite pleased when I saw some of the survey data from clients of ours who used our call center and their satisfaction levels, which were in the upper 90s and were even an improvement on last year. For us, in early stages, you have to look at this as really a startup organization in some ways.
From that perspective, it's not going to be meaningful to earnings, at least on a MMC basis, for quite a while. I just specifically wanted us to comment on it because I see some notes from time to time out there, which just seem to me that some folks might be getting ahead of themselves a little bit, so we wanted to make some specific comments. Julio, do you want to add to that?
In the context of overall MMC, $13 billion revenue, and then you think about the $4.4 approximate billion of revenue of Mercer, and then you think about the $1.5 billion global revenue we have in H&B, in context, this is clearly a growth strategy for us. We are wearing the results within the P&L results of Mercer, and we will continue to do that. I think that we have demonstrated that we can manage that in the context of the improvements that we've had in our margin over the last several years now. We'll continue to do that time and time. By the way, there are other things we invest in too that we also wear inside the Mercer results, and we'll continue to do that as well.
It's really a great position to be in, to be able to deliver significant margin improvement in both RIS and in consulting while we're investing in those businesses and while we're acquiring in those businesses and wearing higher amortization and deal costs, et cetera. Next question, please.
Joshua Shanker, Deutsche Bank.
Yeah, thank you. I don't want to turn this into an exchange conversation. We've been through this before. Can you just walk through the process, and I think we've been through it some places, on a current customer, if they choose to go onto your exchange, where do you lose revenues? Where do you gain revenues? How do we see that come through the P&L?
Well, a couple of things. One, half of the new clients that we had on the exchange this year were actually new H&B clients for Mercer. That is an improvement over last year and shows the draw of the actual concept of an exchange. As Julio has mentioned before, when our anticipation over a long period of time would be that when it's fully up and running at scale, et cetera, that the likely exchange type of margin would be similar to the H&B margins that we have in a regular transaction, of course, supplemented and supported by the voluntary benefits programs that we sell through the exchange. Overall, I think it's way premature to even consider the margins. This is off into the future in terms of what our expectations are.
I can just tell you that when I look at overall consulting margins, I'm quite satisfied. For us, the exchange is a growth opportunity rather than an earnings opportunity at this stage. Do you have any other questions, Josh?
For those new I'm just surprised, I guess, not that it has to be significant, but those new customers coming on aren't creating additional high revenue margin ultimately. The P&L, we've been over this for about two years, I guess. The P&L seems mysterious. It seems like you are adding customers. You've already invested in the systems, I guess. I'm just surprised. It doesn't have to be a big contribution, but I'm surprised it would be a flat to negative contributor on profitability, I guess, at this point.
Well, I would say a couple of things to look at that. One, January 1 is the renewal date for the 2016 plans. The statistics that Mercer released in their press release in October relate to 2016 and not to 2015. Also, this is a build mode. This is about acquiring clients, marketing well, serving clients well, being able to handle large amounts of incoming. It's not just in time inventory of people and capabilities. That will be more how it operates several years down the road. Right now, this is a build, not a just add on. Next question, please.
Thank you.
Kai Pan, Morgan Stanley.
Good morning. Thank you. First, congratulations to both Mike and Mark. My first question is on the foreign exchange impact. Looks like it's bigger than you anticipated at the beginning of the year. If currency stay the same as today, do you see currency also a meaningful headwind for you to return to your 13% EPS long-term goal in 2016?
Yeah, no. Kai, when we look over periods of time, like 10 years or 20 years within the company, foreign exchange has been a wash. When we look at Marsh & McLennan and our footprint around the world, we are very much a global business, foreign exchange is a part of our reported results, and we've got to wear foreign exchange. I think when you look back over the last few years, we were wearing $0.03, $0.04 per year of foreign exchange headwind. We didn't whine about it. We delivered 13% plus EPS growth while wearing that kind of headwind. This year is remarkable. The spike of the strengthening dollar in this year really caught everyone by surprise and was shocking in its ascent.
In terms of this year, there was just no way to operate the company in a proper way without pulling back expense levers incorrectly, I would say. As we look forward, if we look at next year, if we return to the regular $0.03 or $0.04, $0.05 kind of headwind that we've had in past years, it shouldn't disrupt our ability to get back to our strong levels of EPS growth that we've been used to. I would just add, for this year, it's about six points of EPS growth has been lost to foreign exchange. The delivery of 8% year-to-date on EPS growth is, in my view, a remarkable achievement for the company. Do you have anything else, Kai?
Yes. A second question on capital management. Looks like you're already exceeding your $2.3 billion total capital management in 2014. You mentioned that you're going to basically third quarter, pulling forward first quarter and first quarter of next year buybacks. I just wonder, are we going to see sort of meaningful decrease in buybacks? Overall, if you think about your overall capacity for capital return, is the $2.3 billion still a run rate annual number, or you still have some excess cash capacity, including debt as well as excess cash position that could be on top of that?
As we outlined on Investor Day, we anticipated that we were going to be returning higher levels of capital to shareholders because we knew that we would have higher cash flows from operations, we were reducing cash on the balance sheet, and we had declining calls on our cash, and we also intended to increase our leverage while remaining prudent. Right now, our corporate debt to EBITDA is around a 1.6x. I would say it's well within the level that we're comfortable with. This year, for a variety of different reasons, acquisitions have run, at least on a year-to-date basis, a little bit higher than what we had been doing the past couple of years, and last year was a pretty big year as well.
Doing $2.4 billion through nine months with the anticipation of our transaction with Jelf, which is already announced and should happen within the next two to three months. Combined with the idea that we pay out our bonuses in the first quarter, we tend to be more cash light in the first quarter than in other quarters. I would say that you will see less share buyback, certainly in the fourth quarter and most likely in the first quarter as well than what we've done this year. When I look forward to next year, I think that 2016 probably looks a little bit more like 2014. $2.3 billion kind of number sounds about right for return of capital to shareholders.
Thank you so much.
Next question, please.
Larry Greenberg, Janney.
Thank you, and good morning. Just wondering if Alex could comment a little bit on the reinsurance market. Some have pointed to a reduction in third-party capital this year into the sector, and just the absolute level of prices in certain segments of the reinsurance business is maybe signaling that at least things aren't getting as bad on the margin. Maybe we're about to trough out on where things are.
Alex, you want to take that?
Sure. We calculate there's now about dedicated reinsurance capital of $400 billion, of which $66 billion is collateralized and $334 billion is rated. More or less $66 billion or $60 billion of alternative capital that's come into the marketplace. Clearly it's had its effect on rates and also on terms and conditions as the traditional reinsurers have tried to maintain market share. Do we feel that it's troughing out? We certainly are seeing some signs of, I wouldn't call hardening, I would say less softening than we've seen in the past. Frankly, the collateralized products and traditional reinsurance products are pretty much at the same price right now, sort of competing at the bottom, perhaps. There are signs that it's harder to place business than it was a year ago, but those are very, very pale signs.
In a lot of ways, Larry, it's tougher to be a reinsurance capital provider than a reinsurance broker. For us, it's not about the premium per se, it's about the value we create. In tough market environments like this, companies want and need advice, and we're there to provide innovative solutions to help them cope with these difficult market conditions.
Great, thank you. I too want to congratulate Mike on just an outstanding career, and best wishes in the future.
Thanks, Larry.
Next question please.
Sarah DeWitt, JP Morgan.
Hi, good morning.
Morning.
In the consulting business, that's been a great story in terms of strong organic growth and margin expansion. Where do you think the margins in the consulting business could head over time?
It's a good question. I'd start with an easy answer, higher than they are today. As I'm looking at Julio and Scott because they're the ones who have to deliver it on the ground. Overall, our margin story in Consulting has been pretty consistent over the last several years. When you look at Consulting overall as a division in 2012, they delivered 150 basis points of growth. In 2013, 160 basis points. In 2014, 160 basis points. Year to date, 90 basis points. In a lot of ways, our focus is more on earnings and growing our Net Operating Income, that's how we're geared as a company and focusing on our output. Margin, in a lot of ways, is one of those outputs. We have an approach in the company, in both Consulting and in RIS, that revenue growth should almost always exceed expense growth.
When that doesn't happen, we want it to be our choice. We're making specific investment decisions in a quarter or two, and we call that being upside down. Whenever we're upside down, we expect to get right side up in the very near future. We have a consistent approach. When we look at the work that we've done throughout our Consulting division, in part it is a focus on a mix of business issue, which favors our higher margin parts of the business. As I was saying earlier, we are investing actively in things like MMA and others, which pull down the margin of the Consulting division. We're making the right decisions about investing with today's money and today's earnings to drive better opportunities for us in the future. Do you have another question, Sarah?
Yes, thanks. Just circling back on the private health exchanges, how large does that business need to be in terms of lives before it becomes a contributor to earnings?
Yeah. I don't know if we even have that answer, I'm going to hand over to Julio because I think maybe a broader discussion around exchanges are in order. I say that I don't even know if we have the answer, because I know I don't know the answer, and I have not pressed the business for it because I think it's so premature. At the end of the day, our focus on the exchange is not earnings, and hasn't been earnings over the last few years. We're in a terrific position of being able to build a business without the pressure of delivering earnings today. I think the overall focus of the leadership team on the exchange business is making sure we're positioned to capture the full opportunity over a multi-year basis. Julio, you want to add to it a bit?
Dan, thank you. Mercer Marketplace is certainly an important contributor to our growth in the health business, and will continue to be so for some time to come. We think that over time, it will continue to be the type of business we want to invest in, make sure that our clients have that option as we think through the strategies that they are thinking about for their benefits. That's a very important distinction, right? Because we are trusted advisors, strategy first, discussions with many of our clients take place all the time. Some have concluded that Mercer Marketplace is the right place for them to be able to maximize the desired outcome that they have for broader employee choice, a quality colleague experience, flexibility, and savings.
That continues to be the case, we will continue to invest because it will give us that kind of revenue uplift, ultimately, it's what our clients want. If we end up with those discussions being this option, we want to be there for them. As you know, in total, the exchange now serves over 700,000 employees and retirees, with a projected exchange access for anticipated 1.5 million lives. We're pretty pleased with that, we'll continue to invest.
I guess, just to round out the question on earnings and why we're not focused on earnings, because in our overall size of company and overall earnings growth, it just doesn't matter. When something's not contributing to earnings, the first year it does, it contributes to earnings. What's that number look like? Then the year after that, let's say it doubles its earnings for a couple of years in a row. It's still relative to our overall size of Mercer, let alone the size of Marsh & McLennan Companies, just not big enough to get the level of attention on earnings that it may generate. Next question, please.
Vinay Misquith, Sterne Agee.
Hi, good morning. The first question is on margins in the RIS segment. Those expanded about 130 basis points year to date this year. Curious about how much you can expand margins, when the organic growth slows to the 2%-3% range, given that we're at pretty high margins right now.
It's a fair question, I would say that, when we look at the company overall, we're pretty satisfied with our margins. We have a discipline about growing our revenue faster than growing our expenses. We will consistently see margin expansion going out into the future. It has not been a one or two or three-year story in RIS with regard to margins. We are in the eighth consecutive year of margin expansion in RIS. Just as a reminder, even though we were talking about margins in 2011 and 2012 about, can you grow margins anymore? You've come so far since 2008. We grew RIS margins 120 basis points in 2012, 150 basis points in 2013, 30 basis points last year, or 130 basis points year to date. We have demonstrated an ability over a long period of time of growing margins.
Where we sit today, obviously, we don't control all the macro factors, but we feel pretty comfortable that we will be able to expand margins into the future. Certainly when we look at 2016, we would expect to see margin expansion in both segments. As we've said before, margins are one of the last things we look about. We think about our organic growth, our level of organic investment to build a better company and support future levels of organic growth. We look at our earnings and whether we're growing NOI and delivering value for our clients and shareholders on that score. Then we look at margins, and margins to us is more of an outcome than anything else. We would gladly give up a bit of margin for faster levels of organic growth. When we see those opportunities, we'll take those opportunities.
Okay. Thank you. The second question is on the debt. You mentioned that you pulled forward some debt issuance from next year, but your debt to EBITDA is only 1.6x. Are you planning on raising more debt next year and keeping the leverage ratio same next year versus this year?
I'll hand to Mike in a second, but I would say, yes, we're at 1.6, but we were at 1.1. Ultimately, well, if I just look at it from year-to-date last year, how we finished the year, ultimately when we think about debt, we've got $1.1 billion of more debt than we had at year-end of 2014, and $600 million less of cash. We obviously are flexing in different ways. We've had levels of corporate debt to EBITDA over the last 25 years, everywhere from, say, a one to a three or three and a quarter. Within that range, we would be comfortable depending on what factors were existing at that point in time. I wouldn't say that we're targeting 1.6 or any other corporate debt to EBITDA at this point in time. We've maintained a prudent approach.
What I could say is that it would be unlikely that we would create more leverage only to buy back more shares. Certainly other opportunities, both organic and acquisition related, would be more likely that that would generate more leverage. Mike, you want to add?
Yeah, Dan, well stated. I would just add a few things. We always look for balance on everything, and so it's a balance with regard to leverage, with regard to the growth opportunities we see. We don't begin by looking at it adjusted leverage. We look at the operating cash flows and the growth of the company, and then we think, okay, what's a normalized level of debt to accompany the growth that we're looking at in those very strong operating cash flows? The other thing we look at is really what is our refinancing risk and what's our liquidity. As I indicated in my remarks, we spent really the better part of three and a half years reshaping our debt maturity ladder so that we do not have any major towers coming against us in any one year.
In fact, over the next four or five years, we have very small amounts of debt coming due. We've created a situation where the debt maturity ladder is very nice, which gives us a little bit more flexibility if an opportunity presents itself. The other thing I would say is I kind of look at it as an interest expense budget, so to speak. That's why we also talked about at $3 billion of debt a number of years ago, our interest expense on an annual basis was about $200 million. You look at the $4.5 billion today, and it's actually less than $170 million. If you throw in the cost of commercial paper and the revolver, that's why I said it's in the neighborhood of $170 million-$175 million.
We look at it many different ways, not just leverage, but we think we have a lot of flexibility. If an opportunity presents itself in the future, as Dan indicated, we can take advantage of it.
Next question, operator.
Elyse Greenspan, Wells Fargo.
Hi, good morning. I just had one quick question first on the private healthcare exchanges. I was wondering if you can break down the enrollment between those that chose the self versus the fully insured option. I guess, how does that compare to what you saw last year as well as your expectations?
Okay, thanks. Julio, you want to take that?
Sure. Thank you for the question. In the fully insured and self-insured, we're really not seeing people make conscious decisions to change from what they have traditionally already been implementing. If they were fully insured before, they tend to stay fully insured. If they're self-insured, they tend to stay self-insured. As an example, I will show you that based on the clientele that we accumulated in our first year, 2014, it was 75% fully insured, 25% self-insured. In 2015, it was 60% fully insured and 40% self-insured. In 2016, it's about the same, 57% fully insured and 43% self-insured.
Okay, thank you. I think we have time for one more question, operator.
Charles Sebaski, BMO Capital Markets.
Good morning. Thanks for fitting me in.
Morning.
Was hoping to get a little bit more color on the Marsh agency business and how that has been a contributor to the margin expansion there and whether or not, given the size being, as you said, $900 million in revenue now, that we might be able to get to see that as a separate broken-out line item, given that $900 million kind of falls in the size of your other discrete line item businesses. Thanks.
Well, Charles, I'm glad you got the last question because I had all this series of exchange questions for Julio, and meanwhile, we got this $900 million business that we've invested in for the last seven years. Peter, you want to take that and talk a little bit about the agency?
Sure. In terms of its contribution to margin, as Dan mentioned in his opening comments, we're wearing the amortization for the acquisition. While it is a contributor, that is certainly going to be a headwind for the short run. The revenue that we had mentioned on $900 million is the estimated annualized as we hit into next year. That's not what is actually being earned this year. If I step back, Marsh & McLennan Agency is hitting on all cylinders. We have acquired the highest quality agencies across the U.S., now created substantial hubs within California and Texas. Our pipeline is as strong as it's been for spokes and fold-ins, we'll be able to expand our business and be more dense in areas that we want to expand. Its organic growth engine has been terrific this year, and it's been very balanced.
We've had growth within property and casualty and employee health and benefits and believe that will continue. Overall, incredibly pleased with what we've acquired, what we're building, how they're coming together as a leadership team, and we're very optimistic for the future.
How does pricing compare this year on the pipeline you said is very strong on what's going on relative to last year? Seems to be a very competitive market in that business.
Yeah, I would say overall, I don't think it's very much different this year to last year. It is a competitive market, I would say the difference is really when you look back four or five years ago, the multiples were lower than they are today. It's very important for us to understand that. One of our focus is on quality and a history of good performance and stability of the leadership team, the chemistry. All of those other factors become more important as we evaluate agencies versus each other and determine which ones should be a part of Marsh & McLennan Agency. It's also very important for us to really come to an understanding of what the EBITDA really is. That may be even more important than multiple because these are largely all private companies.
There is a pro forma aspect of figuring out what the EBITDA is, and it takes some skill in determining what is ongoing EBITDA. I think there may be some players out there that might get the multiple right, but they get the EBITDA wrong. We want to be right on both the EBITDA and the multiple. I think that just about does it. We've passed our one-hour commitment. I'd like to thank everyone for joining us this morning. I'd particularly like to thank our clients for their support and our colleagues for their hard work and dedication in serving them. Hope everyone has a very good day, and let's go Mets.
That does conclude today's conference. Thank you.