Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Second 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 and results, which are forward-looking statements as the 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 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'd now like to turn the conference over to Dan Glaser, President and CEO of Marsh & McLennan Companies.
Thank you, [Shirlon], good morning, and thank you for joining us to discuss our second 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. Mike is fighting a bad cold, so we're going to preserve his voice for the Q&A, so Keith will read his script following mine. Previously, we have talked about how volatility and complexity present unique opportunities for MMC to serve clients in the areas of risk, strategy, and people.
As we have throughout our history, we will continue to serve as a trusted advisor to our clients on the challenges and opportunities they face in this dynamic environment. Another Marsh & McLennan constant is our continued commitment to our core principles. We exist to serve clients. If we do so effectively, we will achieve our revenue and profit objective by our ability to execute, which is a core differentiator. We are always looking for the smarter way. We have a permanent dissatisfaction with the status quo, and we act with integrity and purpose in all that we do. Our continued commitment to these principles should rank us among elite global growth companies.
In recent months, several high-profile transactions have been announced in the insurance industry, including transactions involving trading partners and clients in the P&C and health insurance space, as well as a potential combination involving two of our largest direct competitors. Let me share some observations on their potential impact. Amongst a host of other reasons, a prolonged period of low interest rates and benign loss activity has led to an environment where pressure is likely to build on underwriting margins and ROEs for the P&C industry. This reality is even more acute on the reinsurance side of the business, where sharper price declines, alternative capital, and higher levels of risk retention are all prevalent. The number of insurance industry transactions and their aggregate value has been significant.
The insurance market is very deep, and we do not expect these recent deals to alter the overall competitive landscape in any meaningful way. As an example, despite what seems like a lot of consolidation over the last decade, the number of U.S. P&C carriers has actually increased in the last 10 years to more than 1,100 today. Furthermore, the share of U.S. industry premiums written by the top 5% of carriers is virtually unchanged from a decade ago. We believe the impact of these combinations to MMC and our RIS segment will be modest. In our view, the role of Marsh is even more critical at a time of industry consolidation. Specifically for Guy Carpenter, the combination of a few large clients could lead them to buy less reinsurance. We expect this impact will be gradual and limited.
Over the last several years, Guy Carpenter has been a market leader in a tough reinsurance environment, always innovating and finding ways to add value to clients by looking at the entirety of their risk profiles. Guy Carpenter has achieved strong levels of new business, broadened the client base by focusing on underserved segments, and expanded internationally. Despite the ongoing challenging environment, we will capitalize on our position as an employer of choice in the reinsurance industry and will continue to add talent and capabilities. Additionally, there have been a number of announced potential transactions among major providers of health insurance. These combinations may better equip the national carriers to deal with the challenges they face on multiple fronts, such as achieving greater scale and becoming more efficient, expansion in their government programs, the rise of public and private exchanges, and consolidation on the provider side of the business.
We don't see this as having any meaningful negative impact on our market position. To the contrary, the proposed combinations of major health insurers makes Mercer's role more relevant as we seek to drive comprehensive plan designs at competitive terms. Consolidation will cause our clients to have questions about how this impacts them. As a trusted advisor, there is no company better positioned than Mercer to help clients navigate their health and benefit options in this changing landscape. Lastly, we have recently seen the announcement of the potential merger of two direct competitors. I fundamentally believe that competition is good. We thrive on it, and it makes us better. These firms are good competitors, and we expect they will continue to be if they come together. That said, this really is a potential combination of two separate and quite different businesses that have little overlap.
This should not alter the competitive landscape for Marsh & McLennan Companies. Now, let's turn to our results. Given the broader operating environment, I am pleased with our results for the first half of the year. Over that period, adjusted EPS rose 6%. For the second quarter, underlying revenue was up 3%, and adjusted EPS increased slightly to $0.80, reflecting the continued effect of macroeconomic headwinds on our earnings. For our Risk and Insurance Services segment, revenue was $1.8 billion, with underlying growth of 2%. Adjusted operating income was $445 million, and the adjusted operating margin was 25.4%. Through six months, adjusted operating income rose 4%, approaching $1 billion, and the adjusted operating margin increased 160 basis points to 27.9%. At Marsh, revenue was $1.5 billion, and underlying growth was 3%.
The U.S./Canada division led the way with underlying revenue growth of 4%, reflecting strong performance from our U.S. operations. Within the U.S., both our core broking operation and Marsh & McLennan Agency had very good performance. MMA continues to be a strong contributor to revenue growth. In June, we acquired Dallas-based MHBT, one of the nation's largest and highest quality independent insurance brokers. With revenue of $75 million, MHBT will serve as MMA's Southwest regional hub. Also in July, MMA established its presence in Canada with the acquisition of Vézina, a leading Montreal-based firm. In our international division, underlying revenue growth was 2%, with 3% growth in EMEA, while Asia Pacific was flat, and Latin America grew 5%. Guy Carpenter's revenue of $275 million declined 2% on an underlying basis. The U.S. and Asia Pacific were areas of strength.
For the six months, Guy Carpenter's underlying revenue was flat, a reasonable performance given reinsurance industry pressures. In May, we announced the strengthening of our RIS management team. Peter Zaffino became Chairman of the Risk and Insurance Services segment and will continue to serve as Marsh CEO. Peter was CEO of Guy Carpenter for three years prior to becoming CEO of Marsh in 2011. His new strategic role is a natural evolution of his deep experience in the reinsurance industry, as well as his knowledge of the primary markets. Peter Hearn will join Guy Carpenter as CEO next June. Peter has over 30 years of industry experience and is known for his successful track record of driving growth and innovative thinking in the reinsurance space. He will continue to strengthen Guy Carpenter's position as a premier provider of advice and solutions for clients.
Alex has done an excellent job over the past four years as Guy Carpenter's CEO and will continue as CEO through May 2016. At that point, his full attention will be on his role as Chairman of MMC International, which was a part-time focus since 2012. Alex is the ideal person to drive MMC's international growth agenda and will report directly to me. Moving to consulting, revenue was $1.5 billion in the second quarter, up 4% on an underlying basis. Adjusted operating income was $244 million, and the adjusted operating margin increased to 16.4%. Through six months, adjusted operating income rose 4% to $491 million, and the adjusted operating margin increased 90 basis points to 16.9%. Mercer's revenue was $1 billion, an underlying increase of 4%. Revenue grew across major geographies, including continued solid performance in Europe, growth markets, and the United States.
All global businesses contributed, led by investments at 8%, with AUM now reaching $136 billion. Talent grew 4%, its third consecutive quarter of growth. Retirement increased revenue by 2%, and health rose 3%. Health in the U.S. continues to benefit from Mercer Marketplace. This was partially offset by lower revenue in our health and benefits administration business as we execute our strategy to improve profitability. Mercer continued to broaden its offerings to clients this quarter, with product launches in executive compensation, pension risk exchange, and growth management. Oliver Wyman's revenue in the second quarter was $441 million, reflecting underlying revenue growth of 3%. We are pleased with Oliver Wyman's underlying growth of 5% for the six months as it builds on mid-teens growth last year.
Revenue increases were achieved across all businesses, with the exception of financial services, which was off slightly from its record level posted in the same period last year. In summary, despite substantial macro headwinds in the second quarter, we produced solid underlying revenue growth and EPS in line with our expectations. We expect strong EPS growth over the second half of the year. For the full year, we expect to deliver underlying revenue growth, margin expansion in both operating segments, and high single-digit EPS growth. We will continue to return capital to shareholders through dividends and meaningful share repurchases. Additionally, we remain confident in our ability to grow EPS at a 13% CAGR over the long term. With that, let me turn it over to Keith.
Thank you, Dan, and good morning, everyone. In the second quarter, Marsh & McLennan Companies delivered solid underlying revenue growth in both segments. GAAP EPS was $0.77 and adjusted EPS was $0.80, a slight increase from the second quarter of last year. As we have previously discussed, results this year are being impacted significantly by two macroeconomic headwinds: the decline in global interest rates and the strength of the U.S. dollar. Based on current FX rates, we expect the macro headwinds to negatively impact EPS by approximately $0.32 this year, an increase from our earlier estimate of $0.30. The adverse impact in the first quarter was $0.12. In the second quarter, it was $0.07, and we expect $0.07 in the third quarter and $0.06 in the fourth quarter.
In this quarter, the headwinds had a greater impact on risk and insurance services than consulting. We expect the impact will be greater on the consulting segment in the third and fourth quarters. Due to the timing of the headwinds and the mitigation action taken in the first quarter, we believe you get a clearer picture of our earnings growth and margin improvement by viewing our results on a year-to-date basis. Through the first six months of the year, adjusted operating income increased 4% to $1.4 billion. The adjusted operating margin expanded 120 basis points to 21.6%, and adjusted EPS increased 6% to $1.70. As Dan just discussed, we expect strong EPS growth in the second half of this year. Investment income was $3 million in the second quarter, an increase of $5 million from a year ago.
We recently have been advised that Trident III is harvesting its final two investments. If this occurs in the third quarter, we should recognize investment income similar to the $26 million of investment income in last year's third quarter. Total debt was $3.9 billion at the end of the second quarter, including $50 million of commercial paper outstanding. Throughout the year, we have utilized the commercial paper market, which provides us with short-term liquidity and gives us greater cash management flexibility. The next debt maturity is a $50 million term loan due in March of 2016. Our GAAP tax rate was 27.9% in the second quarter, compared with 27.6% in the second quarter of last year. This quarter, we benefited from New York City tax reform, which was enacted in April.
The tax rate can fluctuate quarter to quarter, reflecting our geographic mix of earnings, tax settlements, completion of open tax years, and the impact of changes in international and state tax rates. However, for modeling purposes, based on the current landscape, it would be reasonable to assume a tax rate of 29.5% in the second half of this year and 29% for 2016. We are committed to returning capital to shareholders. In May, the board of directors renewed a $2 billion share repurchase program. The board also increased the quarterly dividend 11% to $0.31 per share, effective with the third quarter payment. Our cash position at the end of the second quarter was $930 million, with approximately $155 million in the U.S. Uses of cash in the second quarter included $151 million for dividends, $260 million for acquisitions, and $475 million to repurchase 8.2 million shares of stock.
Through six months, uses of cash included $302 million for dividends, $400 million for acquisitions and investments, and $775 million to repurchase 13.5 million shares of stock. Our share count has now declined five straight quarters and is down almost 3% versus the prior year. We remain on track to exceed the $2.3 billion we used last year for share repurchase, dividends, and acquisitions. With that, I am happy to turn it back to Dan.
Thanks, Keith, and well done. Operator, we're ready for Q&A.
To ask a question, please press the star key followed by the digit 1 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, star 1 for questions. We'll have our first question from Dan Farrell, Piper Jaffray.
Thank you and good morning. A question on your tax rate comments. You mentioned, I think, 29.5% for the back half of the year, and I think you said 29% in 2016. We're seeing a little incremental decline in sort of the guidance that you've put towards that. I'm wondering what's driving that, and I'm wondering longer term, if you see any opportunities or ways to try and gradually manage the tax rate down going forward. Thank you.
Thanks, Dan. We have made certain commitments to looking at our global tax position over time, and we have invested in a new head of global tax, Dina Shapiro, who started with us recently. It's too early for Dina to have a real impact on moving our tax rate down, but this has been a focus of the company for the last couple of years. When we look at our competitors, we are at a disadvantage by being a U.S. multinational company vis-a-vis what tax rate we have versus most of our competitors. We have to operate the business better. We have to grow faster, and we have to have better operating earnings to drive higher pre-tax to arrive at similar levels on an after-tax basis. We've been doing that.
The search for tax efficiency for us started several years ago, and we're beginning to see some of the benefits from that. Let me hand it over to Mike and test that throat of his to see if he's got anything to add.
Yeah. Thank you, Dan. No, you're absolutely right. We're at a disadvantage as an American company because of the high federal and then state tax rates. Also the issue of any of the international cash that we want to repatriate into the United States has a federal true-up to the 35% rate. Over the last three years, we've really dedicated a significant amount of resources in tax planning and strategies to be able to effectively repatriate cash into the U.S. in a tax-efficient manner. Now that we feel that that's fairly well settled, we can then pivot and turn more of our energies into other opportunities that we may see around the world. As Dan indicated, we have put additional resources into our tax group, particularly in the international tax planning.
When you look at that with regard to where the tax rates are on a global basis, for example, the U.K. continues to reduce its corporate tax. As we indicated in our scripts, New York State a year ago and then followed by New York City, effective in April of this year, reduced their tax rates. When we look at everything across the year, we feel that our tax rate for the second half of the year most likely will fall in the 29.5%. Because of all of these strategies and where we think we see some additional opportunities, it should be 29% as a base rate going forward.
Okay, great. Then one other quick question, if I can. In the risk and insurance services you mentioned, I think that a lot of the held up fairly well, which would imply, I think, some nice underlying margin growth, even though the organic was only moderate. I'm wondering what you see driving that margin growth. Are you still seeing some expense efficiencies, and how do you think about that as we move forward? Thank you.
Sure. Well, in terms of business performance, our main objective is to drive revenue and earnings growth. A secondary objective of ours is to improve our margins in both segments. We view that really as a natural outcome of growing revenues faster than expenses almost all the time. Now periodically, we're going to grow expenses faster than revenue for opportunistic reasons, but we're very careful in that, and it wouldn't last for very long. When we look at RIS and consulting margins, we think it's best to look at year-to-date and really a full year basis because mitigation against some of the headwinds we were facing fell so heavily in the first quarter. You really have to look over a longer period of time for this year. So we do expect to have margin expansion in both segments this year.
Thank you very much.
Sure. Next question, please.
Larry Greenberg, Janney Capital.
Hey, good morning. Just staying on that subject, can you give us what the underlying margin change was in the second quarter, adjusted for the headwinds? I think you gave that number in the first.
Yeah. Well, I think I would start by saying, if you look specifically at, say, RIS. The overall margin in the second quarter for the company was flat at 19.9%, but year to date for the whole company is 21.6%, so it's up 120 basis points on a year to date basis. As I was just saying to Dan, I think you might get the wrong kind of outcomes if you look in too short a period for this year, because the mitigation in the first quarter really does have an overextended effect on where margins are. Even if I broke down the margins for you, we were reluctant to in the first quarter, because as you remember, it was in the hundreds of basis points improvement on margins, which really didn't jive with the level of growth we were having on the top line.
Even though it looks more reasonable on a year to date basis and the margin increases come down a bit, so it's more credible, in terms of overall performance, it's still not the most accurate of pictures. All I could say is be patient and bear with us, and as we go through the year, you'll see the more active margin improvement. If I give you a little bit more than that, it would just be, we look at this year not that dissimilarly to how we looked at last year in terms of overall company performance on margins. Maybe a little bit better, maybe a little bit worse, but we're kind of in the same ballgame.
As we had said before, consulting, we expect to come off the very large pace of 150, 160 basis points annual margin improvement, and we expected RIS to actually improve a little bit from last year on margins. That's about as much color as I think is credible at this point in time.
Okay. That's fair. It would be helpful to us, I think, just to kind of back test the numbers we're using in our models. Certainly understand the point. I think, Dan, you mentioned that you had a bit slower growth in Health at Mercer and you're changing some things to improve profitability. Just wondering if you could elaborate on that a little bit.
Sure. Julio, you want to take that?
Sure. Thank you, Larry. Health remains a pretty profitable and growing business for Mercer. It will continue to be that as time goes on. As I discussed in the last call, we decided a few years ago to incorporate our ben admin business into our line of businesses, just to remind you of that action that we took. In this particular case, health and benefits, administration business or outsourcing, was actually incorporated into our health segment. When we did that, the results have been pretty positive because, of course, now we have a P&L manager managing the full breadth of the business as necessary to deliver our solutions. Of course, attention is being given to both top-line opportunity as well as bottom-line opportunity.
Part of those decisions had to do with, of course, on the bottom-line improvement on client and client retention of some of the businesses that perhaps over time have just not been able to meet the margin and profitability targets of our business. Because of that, if you take all of these elements into impact, Mercer Marketplace, impact, of course, of revenue growth, core H&B, revenue growth, then you take the impact of the good actions that we're taking to improve profitability and administration, you basically have similar type of growth patterns that you've had traditionally with the health business.
Welcome next to Kai Pan, Morgan Stanley.
Thank you. Good morning. First question. Dan, thank you for the extensive remark on the industry consolidation. Just follow up on that and for Marsh specifically, what do you think Marsh will play a role in this industry consolidation? Do you see either organic or inorganic opportunities?
Well, I'll start with that, and then I'll hand over to Peter for more commentary. Let me address inorganic first, because I don't really think that that would be spurred in any way by the insurance company level consolidation you've seen. When we consider Marsh has an active pipeline of acquisition opportunities. They work that pipeline over generally a number of years in developing relationships with companies in the RIS space. I would say it's mainly focused on organic. Our view is that Marsh, as a trusted advisor, is an incredibly valuable resource to clients and is on the client side of the table, is not a seller of insurance, but actually operates as assisting clients analyze their risk profiles and as a buyer of insurance once the design and placement structures are agreed on with the client.
When we look at the consolidation in the business overall on the insurance company side, it will be taking larger world-class firms in many instances and putting them together. Over the long term, we really expect that to have additional value for our clients in terms of broader product, new product, better financial stability in the industry overall. It sort of is consistent with the way many of our clients, particularly our largest clients, think about the business where they want to have fewer, deeper, more strategic relationships with fewer capital providers. Peter, you want to add to that?
Yeah, what I would add, Dan, is just that, as you mentioned, being advocates of clients is making sure that we're working closely with the insurance companies in the consolidation on strategy, how they intend to integrate the organizations and how that affects risk appetite. There could be some overlap today on signings, and so how do we manage through that? Also, there could be specific geographies where they're overweight, underweight, and making sure that we're giving our clients real-time advice on how they interact with the companies after consolidation.
That's great. Just follow up on the capital management side. Looks like the pace of the buyback had been faster than last year. You're almost done the full year of buyback amount in the first half. I just wonder, will the pace be sustained? What source of funding for the buyback? Do you need to increase your leverage to fund the buybacks? Thanks.
Sure. Well, let me start with that, and then I'll hand over to Mike if I leave him any room, because he's well drilled me over the past couple of years in how we think about capital management in general. As we outlined on Investor Day, we expected to have higher levels of cash to be deployed on a go-forward basis. That was generally from three factors, higher free cash flow owing to our string of strong operating results and our improving operating performance, declining calls on our cash, and also optimizing our balance sheet. We explained how over time we expected to reduce the cash on our balance sheet and also grow our leverage over time. We have been doing that, and it's a very balanced strategy.
When we think about after reinvesting in our people and our existing businesses, there's basically three ways that we deploy our cash, M&A, dividends, and share repurchase. M&A, as we've said before, can be lumpy. We don't have a budget around M&A. We talk to a lot of people, but we don't do many deals. From that standpoint, we've done about $400 million of M&A through the first two quarters of this year, which is not dissimilar to the pace that we had last year, but I couldn't tell you what the back half of the year is going to look like. What I can say is the pipeline looks about like it did over the last several years, not much higher, not much lower, but the conversations are kind of continuing. You look at dividends. We're very happy that we recently raised our dividend 11%.
That's our second consecutive year of double-digit increases, that's one of the commitments we made at Investor Day. Also what we said at Investor Day is that we intended to shrink our share count every year. We're very happy that this is our 13th straight quarter of buyback and the fifth straight quarter that we have actually reduced our share count. That story continues. What I couldn't say is whether we were going to keep the same pace of what we had in the first half of the year going out into the future, not only in the back half but also beyond. What I can say is that we will remain active in share repurchase, that we will repurchase a meaningful amount of shares, and that we will do that over virtually every quarter over the course of time.
Mike, did I leave you any room?
I've got to say, a very comprehensive answer. I would only touch on two points that you already made, Dan, on cash. We have worked over the last two years to get at our excess cash. We have been reducing that. We effectively reduced it, not just through the end of last year, but through the first six months of this year, which we obviously applied to share repurchase. The second point I would just make with regard to the question with regard, do we need any additional debt capacity or offerings over the second half of this year to reach the goals that we've set? The answer is no. We've been working over three years to recraft our debt portfolio. We really don't have anything meaningful renewing until 2017.
By reducing our cash and basically dealing with all the debt funding, it gives us an opportunity to manage our working capital needs with regard to commercial paper, which we're doing more this year. Now, having said we don't need to go to the capital markets this year, never say never, don't know what opportunities will present themselves, but it's not a requirement.
Thank you so much for all the answers.
Okay, thanks, Kai. Next question, please.
Jay Gelb, Barclays.
Thank you, good morning.
Good morning.
With regard to the Willis Towers Watson transaction, my sense is typically that there's some level of dislocation of any two companies or going through a major merger. I'm wondering if that offers Marsh or Mercer the opportunity to perhaps pick up additional business or perhaps people.
Thanks, Jay. We're not going to comment about Willis and Towers and that potential combination other than how it relates to us. The way we view it is how it relates to us is that basically, we're focused outside the shop in terms of growing our business, serving clients, getting new clients, expanding our business and recruiting people strategically. We're doing all of those things. When I think about our company overall, this is very much a people business. In my view, not just in RIS, but across Marsh & McLennan Companies, we really are a talent magnet. We have a caliber of people that is quite high, smart, creative, committed people. What we have found over time is smart, creative, committed people like working with smart, creative, and committed people.
We're doing meaningful work for clients here, work that is interesting, and it's impactful. You can pick up a newspaper any day and look at various articles in that newspaper, and it's like Marsh & McLennan is all over those kind of issues and challenges that our clients are facing. I also think we benefit, frankly, particularly in the RIS segment from a proven leadership team that is from the business, that grew up in the business, that understands the nuances of the business. I expect that that will reap benefits for Marsh & McLennan on the client side over a long stretch of time.
That's helpful. Thanks, Dan. My separate question is on the third quarter boost from investment income. If that's $26 million pre-tax in the third quarter, I think that works out to around $0.03-$0.04 a share after tax. Was that inclusive of your view that EPS growth will be stronger in the back half and also the ability to get to high single-digit EPS growth for the full year? Will that additional revenue, that $26 million, will that be essentially offset by reinvestments in the business? I'm just trying to get a perspective of whether that investment income boost was taken into account in terms of the ability to generate the high single-digit EPS growth this year.
Yeah, no, it's a fair comment. I think what you have to first do is look back at last year because it's really not much of a boost. It's pretty consistent with the investment income that we earned in the third quarter of 2014. From that standpoint, it doesn't really do much for our EPS growth when compared to last year. Because if we didn't have it, then it would be an additional headwind that we would have to make up. In terms of your question about, do we need that to get to high single digit? It's kind of too early for us to tell. I'm glad we have it, but ultimately, we feel very comfortable with the high single-digit basis of how we expect to achieve the year. Mike Bischoff, you got something to add?
Yeah, the one thing I would add, and Jay Gelb, very good question, is with regard to headwinds. As we indicated in our scripts, the headwinds now that we're facing for the totality of the year has been from $0.30-$0.32. Actually, in the second half of the year, it increases by $0.03. You can also hear from our statements that we've not backed away from any of the earlier guidance that we gave with regard to how we think the year looks in the second half of the year. That basically says that we can absorb an additional $0.03 of headwinds. By the way, with regard to the amount of investment income coming in the quarter, you said, could it be $0.03 or $0.04? I think it's more like $0.03.
I appreciate that, Mike Bischoff. It's probably worth noting as well that that FX headwind this year is probably a 10% headwind to EPS growth, right?
Yeah. If you look at EPS on a year-to-date basis, we've grown 6%, but if you looked on a constant currency basis, we'd be 12% or 13%. If you factor that in terms of our view of being able to grow in the high single digit on a constant currency, that would put you in that 13%-14% area on constant currency EPS growth.
Makes sense. Thank you.
Okay. Cheers. Next question, please.
Sarah DeWitt, J.P. Morgan.
Hi, good morning.
Morning.
At Guy Carpenter, could you talk about what drove the decline in organic growth this quarter? Given the challenging reinsurance market conditions, do you think you can still grow organically in this business going forward in the near to medium term?
Sure. Alex, you want to take that?
Okay, I've signaled before in the last call that we thought that the second quarter would be clunky and difficult. I would rather look at the year to date and say that we're flat. I still believe that we'll finish flattish for the year.
Luckily, we've been working on diversifying our portfolio for quite a while now through segmentation by client size, client appetite, and also through product. We have a pretty robust portfolio spread across the different geographies as well as through different client types. I'm still optimistic that it's a good business and that we are the employer of choice. We have a list of people who want to come and join us. We've had some good wins recently. The pipeline looks good going forward. Also, I take comfort from the fact that the U.S. is showing good results. I'm cautiously confident that we will be in good shape.
Thanks. Sarah, any other question?
No. Thank you for the answer.
Okay. Thank you. Next question, operator.
Joshua Shanker, Deutsche Bank.
Yeah. Good morning, everyone. I'm wondering if we can talk a little about the next year outlook for Oliver Wyman and where you're seeing growth and where you're seeing maybe moderation.
Okay. Let me just make one comment before I hand it over to Scott, because I'm actually very pleased with Oliver Wyman's growth performance this quarter. When you think about what it is coming on top of last year, in the second quarter they grew 3%, they grew 17% in the second quarter of 2014. It is showing quite a bit of strength in Oliver Wyman. Scott, you want to talk a little bit about the outlook?
Sure. Josh, we're very happy with the business at the moment, and we think over the medium term, we're still targeting mid to high single digit growth. We think all the fundamentals are in place, and we're in a competitively good position. We also think we should grow faster than MMC overall. Given we're smaller, we should be able to take market share more easily. I think for 2015 overall, given that we're growing off the back of the strong mid-teens growth from last year, it could be a little lower than that guidance, the first half has been good and at 5%, and we see good prospects in the second half.
Any other questions, Josh?
Is there a line of business that you can indulge us with a little bit? How banking's doing and whatnot.
Sure. The first half of the year was pretty much strong across all sectors, with a couple of exceptions, and they're for different reasons. Energy was slow. For obvious reasons, that industry is just under pressure. Telecommunications was slow for similar, although not quite as intense reasons. Our FS business was slightly slower, but it grew at more than 20% last year, so they're just struggling to grow off the back of that. It's still a fundamentally very strong business. Then regionally, the U.S. and our international markets, so all of Asia, Middle East, Latin America, are very strong. Europe is the one part of the portfolio which is a little weaker compared to last year, although we're already seeing some signs of that picking up.
Excellent. I wonder if we can sort of do the same sort of postmortem on a little bit of turbulence around Asia Pacific in the RIS segment.
Sure. I think you're referring to Marsh within the segment because we.
Yeah, Marsh. Marsh.
Yeah. Actually Guy Carpenter did reasonably well in Asia Pac in the quarter. Peter, you want to give some color on Marsh?
Yeah, sure. In Asia Pacific, we weren't pleased with the flat growth. Within the region, Pacific was more responsible for that than Asia. When I look at Pacific, its economic slowdown, some lower new business, lower construction, some pressure on pricing contributed to the results in the quarter. Asia, the underlying fundamentals are still strong. They had a very tough comparable year-over-year with having 15% organic growth in the second quarter of 2014. That was coupled with about 600 basis points of non-recurring business that was a delta in new business year-over-year. They had a real challenge, and they still grew. Overall, the margins are still strong in the region and expect to have better performance if you look at the full year, and Asia Pac is still a meaningful contributor to overall Marsh.
Sorry, I don't mean to beat a dead horse. In trying to think about things, is 1Q or 2Q or maybe first half of 2015 in totality is more indicative of how we should think about things going forward?
Yeah. I think when you look at the company and RIS specifically, we still very much live in the 3%-5% organic growth world. Just a couple of reminders on the history of our performance. If you look back at, say, 2012, RIS grew 7% in the first quarter, followed by a six, a four, and a two in the fourth quarter. I'm sure it seemed to everybody like the world was coming to an end. Then in the next nine quarters, we're 3% or better. I don't think you can look at one quarter in this business as being indicative of what a trend looks like, and we're comfortable going forward. Clearly, we're adding another headwind that we did not have, so in terms of property and casualty pricing is under even more pressure than it was before.
In an overall sense, that in some ways will get at least partially offset by better economic outlooks in many parts of the world other than, say, the commodity types of countries that Peter was referring to, like Australia and Canada as examples. Peter, do you have anything to add here?
Yeah, I just would suggest when we look at international, we should look at the full year. Heavily dominated by continental Europe in the first quarter. We had some anomalies in the second. I think you'll have a much more accurate picture of what the growth rate's going to be if we look at the full year.
The next question, please.
Thank you.
Brian Meredith, UBS.
Hey, thanks. Good morning. I guess my first question is just more follow-up on the broker M&A. I get two of your biggest competitors on the consulting side are now operating or will be operating at a lower tax rate, and the recent merger of Willis and Towers appears to at least have been partially motivated by tax. Why should we not think of your higher tax rate as a competitive disadvantage in the consulting business?
Well, I think when you first look at it, you have to look at an overall company's profile and what its advantages are and what its disadvantages are. One thing is, in our view, we would not change our strategic positioning with any other company in our space, even with their tax advantage. We have to do things in our business to make up for the fact that U.S. companies operate at a tax disadvantage relative to the rest of the world. Now, I take with a glimmer of hope the fact that if New York State and New York City can actually change their tax rate, anything is possible in the future. Ultimately, it's something that we operate our business at a high-performance level. We will continue to do that.
We will not use the tax disadvantage that we have in certain areas as any kind of caveat or excuse to our performance. We will continue to perform well in the marketplace over a long period of time, and we certainly don't feel disadvantaged vis-à-vis any of our competitors.
That's helpful. Then, I guess my follow-up was just on health organic. I guess this is the second quarter where there's been a little bit of a drag, I guess, from benefit admin that's made you guys come in a little bit below core. I'm wondering how long we should expect that to put pressure on that reported organic number, if it's just sort of a 2015 type event, or if this is a longer process.
Julio, you want to take that?
Yeah, sure. Thank you for the question. As you know, when you make decisions that are associated with, especially the ben admin business, it does have some quarters before it runs itself through completely, right? I would think that if you look at the underlying growth, that should be of big attention for folks like yourself and others. Again, if you back out the ben admin impacts, the underlying core growth of our business continues to be very healthy as expected, similar to previous years. You're likely to see these types of impacts vacillate again quarter by quarter as time goes on because you make the right decisions, as far as keeping your focus on both top and bottom line. We'll see how it goes as we continue to make those decisions with clients.
Remember that clients come up for renewal and we have conversations, and generally speaking, we land in a good place where both of us see it as a win-win. In some cases, we don't. It's not as predictable as you would like it to be.
Thanks so much.
Next question, please.
Elyse Greenspan, Wells Fargo.
Hi, good morning.
Morning.
Just quickly on the headwinds, the $0.07 that you pointed to in the Q2. Is there any way that we can get the impact between both currency and pension as well as just the impact on each of the two segments?
Mike, you want to take that?
Yeah. Roughly it works out to about $60 million of NOI headwinds, and within that, it would be a little bit higher in FX and a little bit lower on the average in the net retirement plans.
Okay, in terms of the breakdown between RIS and Consulting?
Well, like we said on the script, the overall impact in the second quarter was felt more in RIS than it was in Consulting. With regard to the magnitude, I would say within $5 million-$7 million between the two segments. We expect that to flip for the second half of the year, and Consulting will really feel more of the brunt of the headwinds, which is another reason why Dan continues to say that the margins and the growth in the different segments are better when you look at how we deal with these headwinds year-to-date. As the management team, we're cognizant of these headwinds, and we make management decisions throughout the year aware of that. That's why we keep pointing people to year-to-date.
Okay, thank you. In terms of Mercer Marketplace, as we head towards next year's enrollment season, just any update, Julio, that you can give on the conversations that you're having with companies surrounding moving over to your exchange? Also, do you expect there to maybe be a fallout and some opportunities associated with the merger that Towers Watson is going through? Thank you.
You're welcome.
Yeah, please, Julio.
I want to first just generally comment about the potential merger of two competitors. First thing, we know the firms pretty well, and of course, they are good competitors. From our perspective, we're going to continue to execute our strategy, and our strategy is to stay focused on the things that already are working for us and even have more focus on the things that are beginning to pick up pace. Things like Mercer Marketplace, our international expansion, our global footprint with our global clients, and of course, our investments business continues to do well, and we'll continue to invest in those things. These are actions that we control, of course, and if anything, these things kind of just pinpoint your focus even that much more in terms of really being able to execute with pace and intensity. Having said that, a little bit on the exchanges.
As you know, we reported last in October about our exchange results, and you're pretty familiar with those as it is. Some additional color that might be helpful to you is that there's a lot of discussion around fully insured versus self-insured, and we're seeing a trend that basically shows that there's more clients now going self-insured than we had seen in our first 60 or so clients that went first to Mercer Marketplace. As far as the DC DB distribution, about two-thirds are DB, one-third is DC. As you know, we're still in the active season right now. We're moving more towards implementation and execution, delivering to our client. There's also the off-cycle of opportunities that we have, especially in the middle market, that we continue to work through.
Our focus is to continue to sell the value proposition of Mercer Marketplace, continue to be able to increase our pipeline, talk to our clients about any concerns they have, especially as we think about the Cadillac tax coming up in 2018 or, as I call it, the Prius tax, because I really do believe that it affects much more than what people may believe. We believe that somewhere in the first of 2018, if nothing is done, somewhere about 30%-40% of clients may be hit with a Cadillac tax. Although Mercer Marketplace or exchanges is not the silver bullet to deal with a Cadillac tax, it certainly allows for flexibility for you to be able to implement certain actions against something like a Cadillac tax.
Overall, we're pleased, pipeline is strong, and we'll continue to focus on delivering to our clients. Thanks, Elyse. Operator, I think we have time for one or two more questions if we go reasonably rapidly. So
Brian Meredith for UBS.
Yeah, thanks. I just got a quick one here, Dan.
Okay.
On your Guy Carpenter in reinsurance, just curious, a couple of senior hires that you've made of late, obviously Peter Hearn and a couple of others. Are those hires because maybe you see kind of a bottoming out here in the reinsurance growth areas, some demand picking up, or is there some other reasons why you've decided to add talent at this point?
I would start by saying no, we're not recruiting strategically because we see a bottoming in reinsurance. We're recruiting strategically because we can. I think this is a situation where we're committed to the reinsurance business. It's a tough environment right now, but in a lot of ways, using our strengths in that kind of environment to build our capabilities and our talent is opportunistic. We certainly are looking broadly. Even though Peter Hearn we hired from one competitor, it's not that we're just looking to add talent from a single competitor. We're actually doubling down in our reinsurance business and looking to add talent this year and next year as we invest through the cycle.
I'm just curious, why now?
I think it's more opportunity than anything else. Let me talk a little bit about our RIS structural change. Then I think we can call it a day from there because I think it's all part and parcel of the way we view the market. To us, the RIS world is changing. How much is secular and permanent and how much is cyclical is unclear. What is clear is that we're in an active period of consolidation. It's a softening market. Certain of the larger insurance companies are retaining more risk. There's certainly been an increase in alternative capital and an increase in alternative paths to capital. There's also been an increase in its facilities, programs, specialty placement, and an increase in the increased need for analytics.
You put all of those things together, and I don't think there's a company better positioned in the world than Marsh & McLennan Companies to take advantage of that volatility and uncertainty that exists in the market. We're in a terrific position in terms of being able to invest despite some headwinds. We have no doubt that over time, that turns around and some of those headwinds become tailwinds. We're very excited about our new structure in RIS. I think it gives us the opportunity to get specialists, whether it's placement specialists, program design specialists, analytics professionals, collaborating more between Guy Carpenter and Marsh. They'll help us promote growth, help us avoid cost duplication. It certainly utilizes the talents of our executive team most effectively. For a whole variety of reasons, we view this as a good time to be an investor in this business.
I'll just end by saying that we're optimistic, not only for the back half of this year, where we expect to have solid performance, but also as we look to next year. We've been working hard this year to make sure that if FX and interest rates are about where they are today, that even though those headwinds would continue to exist, that we take steps to improve our business and to have a good EPS performance next year. We're quite optimistic where we sit today. With that, I think it's time to end the call, operator. I would just like to thank everyone for joining us this morning, and specifically, I'd like to thank our clients for their support and our colleagues for their hard work and dedication in serving them. Have a good day.
That does conclude today's conference. Thank you for your participation.