Marsh & McLennan Companies, Inc.
Q2 2012 Earnings Call Transcript

Published: 7 Aug 2012

[Operator:]

Welcome to the Marsh & McLennan Companies Conference Call. Today's call is being recorded. Second quarter 2012 financial results and supplemental information were issued earlier this morning. They are available on Marsh & McLennan Companies' website at www.mmc.com. Before we begin, I would like 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 risks and uncertainties. In particular, references during this conference call to anticipated or expected results of operations for 2012 or subsequent periods are forward-looking statements, and Marsh & McLennan Companies' actual results may be affected by a variety of factors. Please refer to Marsh & McLennan Companies' most recent SEC filings, as well as the company's earnings release, which are available on the Marsh & McLennan Companies' 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 this over to Brian Duperreault, President and CEO of Marsh & McLennan Companies. Please go ahead, sir.

[Brian Duperreault:]

Good morning, and thank you for joining us to discuss our results as reported earlier today. I'm Brian Duperreault, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Dan Glaser, Group President and COO; and Mike Bischoff, our CFO. Also, I'd like to welcome our operating companies' CEOs

[Daniel S. Glaser:]

Thank you, Brian, and good morning, everyone. In the second quarter, Marsh & McLennan Companies continued to produce excellent financial results. For the eighth consecutive quarter, we achieved underlying revenue growth at each of our operating companies. Risk and Insurance Services revenue was up 5%, with underlying growth of 6%. Adjusted operating income rose 14%, and the adjusted operating margin improved 200 basis points. The double-digit growth in profitability and the margin improvement reflect the exceptional performance of both Marsh and Guy Carpenter. For the 6 months, we achieved 110 basis points of margin improvement. At the same time we produced these results, we continued to make significant investments to enhance client service, improve efficiencies and strengthen our competitive position. Marsh produced another strong quarter. Underlying revenue rose 6%, with all geographies contributing. Latin America increased revenue 14%. Asia Pacific grew 10%. EMEA grew 5%, and the U.S./Canada division rose 4%. Marsh's revenue growth reflects $281 million of new business in the second quarter. This is the strongest quarter of new business in Marsh's history. Guy Carpenter also produced strong results in the second quarter. Revenue increased 7%, and underlying revenue growth was 10%, driven by growth across its international operations, including global specialties, Asia Pacific, EMEA and Latin America. This now extends the trend of Guy Carpenter producing underlying revenue growth for 14 consecutive quarters. As we look at current conditions in the reinsurance marketplace, with July renewal pricing showing signs of stabilization for property catastrophe coverage and risk retentions by several of Guy Carpenter's key clients increasing, we expect only modest revenue growth in the second half of the year for Guy Carpenter. Turning to our Consulting segment. Revenue was $1.3 billion, with 4% underlying revenue growth. Our second quarter results show that we continue to make progress in increasing profitability, as both Mercer and Oliver Wyman contributed to the segment's double-digit growth in earnings and a significantly higher operating margin. Adjusted operating income rose 14% to $176 million, the highest level of quarterly Consulting earnings in our history. The adjusted operating margin increased 140 basis points to 13.1%. For the 6 months, adjusted operating income grew 18% and the adjusted margin rose 160 basis points to 12.7%. Mercer's second quarter underlying revenue growth was 3%. Results reflect increased revenue across all regions, with strong growth in Asia and Latin America. Looking at Mercer's underlying revenue by line of business

[J. Michael Bischoff:]

Thank you, Dan, and good morning, everyone. Consolidated revenue was $3 billion in the second quarter, with an increase of 5% on an underlying basis. Adjusted operating income rose 13%, and the adjusted operating margin increased 150 basis points to 17.3%. Earnings per share from continuing operations increased 20% to $0.60 on a GAAP basis. Adjusted earnings per share grew 22% to $0.61. This is notable given weak economic conditions, low interest rates, foreign exchange headwinds and the ongoing investments we are making and continue to make in our businesses. Interest expense was $45 million in the second quarter compared with $49 million last year. The only debt maturity we have over the next 2 years is the $250 million senior note in February 2013. As we discussed last earnings call, our corporate expense this quarter is higher than normal. This is primarily the result of accelerated amortization of senior ex equity awards. This will that be an issue for the remainder of the year. Investment income this quarter was $4 million compared with a loss of $6 million in last year's second quarter. In the third quarter, we anticipate reporting an investment loss of approximately $5 million. Now turning to capital management. Our cash position at the end of June was $1.5 billion. In deploying our excess cash this quarter, we used approximately $70 million for acquisitions and $100 million to repurchase 3.1 million shares, and this was primarily to offset the effects of equity grants. Since December of 2010, we have repurchased 18.7 million shares for approximately $550 million, with $450 million remaining under our current board authorization. Another major use of cash in the quarter was $121 million for dividends. With the continuing European financial crisis, we wanted to give you an idea of the magnitude of Marsh & McLennan's European revenue and how conditions are affecting the results of each of our operating companies. As you're aware, we breakdown Marsh's revenue on a geographic basis, and you can see, for both the second quarter and the year-to-date, that Marsh's revenue growth on an underlying basis in EMEA was 5%. But we wanted to give you a little bit more richer detail with regard to our European position and revenue. So in total, the company generates about $12 billion of annual revenue, with approximately 1/3 of this coming from Europe. Our U.K. operations, which represent approximately 1/2 of our European revenue, continues to perform well. Now let's look at our recent results. Of Marsh's $5.4 billion in annual revenue, approximately 1/3 is in Europe, with 45% coming from the United Kingdom. Marsh's revenue in the U.K. rose 6% for the second quarter and the first half of the year. New business production was particularly robust in the U.K. in the second quarter. For continental Europe, Marsh's revenue grew 4% in the quarter and 3% for the first half of this year. About 1/3 of Guy Carpenter's $1.1 billion in annual revenue is generated in Europe, and the U.K. accounts for more than 75% of this revenue. And Guy Carpenter's U.K. revenue rose double-digits for both the second quarter and the first half of this year, driven by its global specialties. Continental European revenue growth was modest in the quarter and year-to-date for Carpenter. Now turning to our Consulting segment. Mercer's European revenue over the past year was $1.1 billion or about 30% of Mercer's global revenue. The U.K. represents just over 1/2 of Mercer's European revenue, with low single-digit growth for both the first and second quarters. This was true as well for Mercer in Continental Europe. So even though European economic conditions have been difficult, 3 of our 4 operating companies have continued to generate revenue growth in Europe. Oliver Wyman has the greatest exposure to Europe, with approximately 40% of its revenue coming from European clients. Over the past 3 quarters, Oliver Wyman has experienced modest revenue declines in this region. But as you can see from our second quarter earnings release, Oliver Wyman has produced excellent overall results in spite of the continuing weakness in Europe. With that, I am happy to turn it back to Brian.

[Brian Duperreault:]

Thank you, Mike. Operator, I think we can start our question-and-answer period.

[Operator:]

[Operator Instructions] And I'll take our first question from Keith Walsh with Citi.

[Keith F. Walsh:]

I guess the only thing, if I want to nitpick, the plus 4% in the U.S., which is down a little bit, but still better than your peers. If maybe you could talk to that. And in the context of your new business comment, either Dan or Peter, what are you guys doing? Is it more how well your clients are recovering in the large case part of the market versus the smaller end of the market? Or is it new, new business? You're actually going out and winning accounts, if you could talk to that. And then I've got a follow-up for Julio.

[Daniel S. Glaser:]

Okay. So Peter, do the 4% U.S.

[Peter Zaffino:]

Yes. Overall -- again, when we report the U.S., there's several segments that are within the U.S. and Canada division. We're very pleased with the growth that we've seen in the core U.S. brokerage business. And the trends have been very steady from quarter-to-quarter and expect that to continue through the rest of 2012. To answer your question in terms of -- I think what you're asking, Keith, around the overall growth is, we've had very strong client retention across the world, we've had very strong rollover from new business last year. We have had record new business in the second quarter, which has grown around 10% year-over-year. We're executing on our initiatives. There's been less of a headwind in pricing in 2011 in the second quarter, there were headwinds. We're seeing some slight uptick, certainly, in property and other lines of business that are a little bit distressed, so I look at excess casualty and some workers compensation. So that's affected the U.S. And overall, as Dan said in his comments, we've grown in every part of the world, so we have a nice balance. And when you've done all of those things together, you get good organic growth.

[Keith F. Walsh:]

And then for Julio, the improvement at Mercer, we can see it already. You guys did a nice job, given us some of the European sensitivity there. But can you just give us an idea, what's the plan to protect margins against potential declines in Europe as we head into 2013?

[Julio A. Portalatin:]

Yes, sure, sure, sure. Thanks, Keith. First, I want to say that I'm pretty optimistic about Mercer's profitable growth prospects moving forward. Any business where you are in a mission to promote the health, wealth and performance of companies' best assets, which is, of course, their employees, I think puts you in a good position for the future. So you add Mercer's global footprint, its innovative added-value solutions, and I think we're in good shape. But as you look at calibrating and always looking at what our revenue growth is going to be across the world, we see opportunities that are popping up in different places. Europe might be slowing down, but we have a good business in other places, like in the emerging market world. We want to, obviously, have even more footprint there as time goes on, and I think that's going to really give us some good uplift in the future. Additionally, again, keep in mind that we have some businesses that perform very well in down times and others that don't. And 70% of our business is annuitized; 30%, of course, is program- or project-oriented business. And as we continue to flip that and get more of the annuitized business and less of the project business, I think you'll see that we'll be able to continue to calibrate growth pretty well in the future. Now that said, any time that we're looking to make sure that our margins continue to expand, we have to be very disciplined on the expense side. We continue to do that, and we'll always make sure that, that is calibrated appropriately to what our revenue expectations are.

[Operator:]

We'll move on to Dan Farrell with Sterne Agee.

[Dan Farrell:]

Could you speak generally to the impact of currency in the quarter 2 results? And then also, do you happen to have the GAAP pension expenses running to the results in the quarter?

[Brian Duperreault:]

Michael?

[J. Michael Bischoff:]

Yes, thank you. If you look at foreign exchange, you can see on our earnings release that the currency impact was about 3% negative with regard to revenue. That indicates that we're converting most of our major currencies

[Brian Duperreault:]

There was a question on...

[Dan Farrell:]

Just pension expense.

[J. Michael Bischoff:]

With regards to pension expense, as we indicated at the beginning of the year, gross pension expense would be about $30 million higher for the entire year, and gross impact would be in the low- to mid-20s. And that, obviously, is equal over the course of the year. So in this particular quarter, pension expense -- when we file our 10-Q, gross pension expense, we show about $9 million more than it did in the second quarter of last year.

[Dan Farrell:]

Okay. And just one additional question. With regard to Consulting margins, can you talk about how much Mercer versus Oliver Wyman is driving margin improvement? Are both of those driving margin expansion? Then, on the Oliver Wyman piece, to the extent that you're seeing a revenue slowdown there, are there levers to continue to push margin improvement?

[J. Michael Bischoff:]

Okay Dan, I'll answer the first question, which is that both of the components of the Consulting segment are driving good margin improvements, so it's across the board. But John, do you want to comment anything on Oliver Wyman?

[John P. Drzik:]

Sure. Well, on Oliver Wyman margins, I'd make -- I'd divide your question into 2 parts. So one is if we experience revenue weakness in one geography, as you are, for example, in Europe now, it doesn't really affect our overall margin because we run our capacity on a global basis. So for example, in the first half of this year, a lot of our people who are based in Europe would have been deployed in the United States or other geographies where growth was stronger. So what really affects -- would affect our margin is aggregate global revenue weakness rather than weakness in any particular geography. And when -- and we have levers to pull in those scenarios as well. So as long as the revenue pattern is a modest decline, we have disciplined compensation programs in place that reacts with respect to revenue decline, so there shouldn't be a substantial margin decline.

[Operator:]

That will come from Morgan Stanley, Greg Locraft.

[Gregory Locraft:]

Wanted to just go back to Europe because it is a big concern in some subset of the investment community out there. And I guess, what you've highlighted is that it's really 15% of revs that are at risk. And I guess, is there a decline in that 15% of the business that would jeopardize your double-digit operating income growth goal?

[J. Michael Bischoff:]

Well, let me try this, Greg. I think when we outlined -- decided to outline Europe, we wanted to show that it's too simplistic to say 1/3 of our business comes from Europe because Europe is an interesting, diverse area, and a large portion of that's coming out of the U.K. And so you have to -- if you're trying to decide the impact of Europe, you have to first understand how the business is spread around and not just geographically, but by component, by our operating companies and segments because the Insurance business acts differently than Consulting, certainly, in recession periods. So there's much more continuing revenue that gives us a ballast against economic changes. So I wouldn't say it's 15% at risk. I mean, everything is at risk. But I think what we're trying to point out is, we have, I think, the last 12 months or so, been experiencing issues in Europe and still, have been able to handle that. We believe we can continue to handle that going forward. And I think, as John said, unless it's some overall, complete meltdown of the global economy, we feel comfortable of that exposure. So I think Dan also wants to add something.

[Daniel S. Glaser:]

I'll just say a couple of things. One, even if you go back 5 years ago or so, Europe, continental Europe was not a high-growth area for us. So it was a low to mid single-digit growth area, and it's remained pretty much a low and single-digit growth area. Our global network really benefits us quite a bit because while European companies might not be doing all that well in Europe, they are doing as anybody else on -- with their multinational footprint. So we're working on French companies around the world, Spanish companies around the world, and you often hear a refrain when you visit these companies about how they're not doing well in their local market, but they're doing quite well outside of their local market.

[Brian Duperreault:]

Okay, Greg?

[Gregory Locraft:]

Okay, good. And then any quick updates on the CFO search process that's under way?

[Brian Duperreault:]

Well, thanks for asking that question because it gives me the opportunity to thank Mike who's done a terrific job and continues to do a terrific job as our CFO. So yes, we're still -- we're in the interview phase. So things are progressing nicely. I feel very good about the process, and I don't think I'll say anything more than that.

[Operator:]

Next question will come from Jay Gelb with Barclays.

[Jay Gelb:]

With total organic revenue growth in 2Q of 5% and the company facing some comparison headwinds in Guy Carpenter and Oliver Wyman on the organic revenue growth front, what should we be thinking about in terms of overall organic revenue growth in sort of the back half?

[J. Michael Bischoff:]

Well, what we've told you is 2 of the operating companies who had pretty good results, 7% and 10%, they're not going to have those numbers in the second half. We're not saying anything about the other 2, and there's a balance to everything. And I don't live and die on the pure organic growth number. It's managing your growth and your revenue and expense through the ups and downs, the cyclicality, seasonal cyclicality where the third quarter isn't that strong for Marsh. But we don't expect that we would have issues with respect to our bottom line, and we think we'll close out the year well. We have a goal of double digit. I firmly believe that, that's a goal that we can achieve. And so we're not -- I'm not just -- we're not talking about the rest of the organic growth, but the fact that we have a goal to make a bottom line, and we believe we can do that.

[Jay Gelb:]

Okay. And then on the -- in the Consulting segment, with the 13% margin in the second quarter, clearly, an improvement versus a year ago. Should we expect continued improvement in the second half on the Consulting margin?

[J. Michael Bischoff:]

Well, again, I want to reinforce that our goals have been a growth in our operating income, growth in earnings per share. I'm -- I don't -- so each of the operating companies, each of the segments, they have -- they know what they need to do. They know what the kind of growth requirements we have, and so with respect to Consulting, John and Julio know what's expected of them. And so we would expect that they'll manage through this year and the next accordingly, that may produce good margin improvements. But the important thing for us is they produce those double-digit growth in earnings.

[Jay Gelb:]

Okay. And then on share buyback that sort of resumed in the second quarter after, I believe, no buybacks for the prior 2 quarters, what's your outlook there?

[Brian Duperreault:]

Well, our policy about that is that we will buy back shares through capital management, if we don't have alternative uses of that cash, basically for acquisition. So we would prefer acquisitions, I would anyway, because I think it's more accretive long term. We have the minimum that we would buy back shares so that we don't dilute with our compensation issues. But past that, I think it's more what opportunities present themselves, and actually, I prefer that those opportunities come in the form of acquisitions. But if not, then we would increase our share repurchasing.

[Operator:]

Moving on to Meyer Shields with Stifel, Nicolaus.

[Meyer Shields:]

I'd like to follow up on that, if I can. Does the turmoil in Europe present any increased opportunity on the M&A front?

[Brian Duperreault:]

Well, that's an interesting question because that's -- usually, the source of great opportunity is when there's trouble. And so yes, I guess, that's a possibility. I'm not signaling anything here but yes, certainly, a possibility. But we've -- our acquisition approach has been more targeted to areas where we want to fill out that we're not as robust as we need to be. That could be geographically, also in capabilities. And so if those opportunities emerge in Europe, they'll have to get in line and meet the criteria that the other ones are meeting or exceeding. So -- but yes, certainly, that's a real possibility.

[Meyer Shields:]

Okay. And just to clarify something. If you've got a Spanish client that's doing well in Latin America, sort of their subsidiary, does that revenue growth show up in EMEA or Latin America for you?

[Brian Duperreault:]

That would show up in Latin America.

[Operator:]

Moving on to Ray Iardella with Macquarie.

[Raymond Iardella:]

So I guess maybe for Peter. Thinking about the new business growth in Marsh and the record quarter that you guys had, is there anything in particular you guys are doing on that side to drive that growth? Any new products or anything you can talk to?

[Peter Zaffino:]

Well, thanks Ray for the question. Certainly, the first and foremost is execution. We have a very strong pipeline, strong coverage on our global sales. We introduced, years ago, something called Marsh 3D, which is define, design and deliver, and that really takes us through a thorough risk management approach in making sure that we're assessing every opportunity. We've had a strong focus on growing share of wallet, connecting our multinational network and where we can grow market share from clients that we already have. And taking advantage of being a global organization. We behave as one firm, and there's great opportunities to collaborate and bring the strength of the organization together. The investments that have been made over the years in terms of industry and specialty expertise, there's a flight to quality. When it's more difficult to place business in a very challenging market, we've seen an uptick as a result of that. And we're having more robust discussions around analytics and how we can be more thoughtful in terms of recommendations around volatility. We expanded our own analytical platform to be able to do more stochastic modeling, do more cap modeling on the larger accounts. So that has given us opportunities for growth as well.

[Raymond Iardella:]

Okay. That's helpful. And then one quick numbers question, I guess, for Mike. Just to confirm, the operating income had a negative impact from FX on -- in both segments?

[J. Michael Bischoff:]

That's correct.

[Operator:]

From Langen McAlenney, Larry Greenberg.

[Larry Greenberg:]

I was just wondering if you could quantify or give us some order of magnitude the impact of pricing underlying commercial lines pricing on your revenue growth.

[Brian Duperreault:]

Peter?

[Peter Zaffino:]

Yes. Pricing, again, it's a long answer if we went segment by segment. I won't do that. But you do have to look at geography, line of business, each of the segments and then look at the year-over-year performance. When you start to take a look at what's the line affected most, it's property. So world peak zones, cat exposed, loss impacted business have seen the biggest rates. In the U.S., property is the one that stands out. 60% of our clients saw a rate increase, but 40% saw either no increase or were modestly down. You have to look at total insured values. Those are starting to move, again, very modestly. Excess -- I mentioned before, excess umbrella and lead D&O pricing is starting to move modestly, but the excess layers are still very competitive. And then workers' comp in the U.S., based on the pressure of the accident years, we've seen that go up in the mid-single digits. You have to shift overlooking into the international. EMEA and Asia Pac, generally speaking, if you take the peak zones out, pricing was flat to down. And we feel the same way about Latin America, where pricing conditions were predominantly slightly down. When you take all that together and look at the overall index that we have published with our top 20 countries with the top lines of business that I just covered, we've seen around a 1.4% increase in price. So I think that's had a modest impact in the overall 6%. But I'm not going to give a specific as to what that contributed. But again, I said, in 2011, it was a headwind, and it's a modest help in 2012.

[Brian Duperreault:]

Alex, do you want to -- I was going to answer, Peter, by the way. Alex, do you want to add to that?

[Alexander S. Moczarski:]

I won't be as expansive as Peter. Essentially, we calculate -- the effects on our results were about 2 to 2.5 points in the second quarter. And that effect is diminishing since it's a pretty benign year compared to the first 6 months of last year. And obviously, we're in the windstorm season, so we don't know how that will play out. But yes, we'll take the points, and we'll see what happens in the second half of the year.

[Operator:]

That will come from Mike Zaremski with Credit Suisse.

[Michael Zaremski:]

Could you touch on whether the operating strategy within Health & Benefits is evolving in light of the Supreme Court decision, including whether Marsh will move forward with the health care exchange initiative, as, I believe, some of your competitors appear to be doing?

[Brian Duperreault:]

Yes. Julio?

[Julio A. Portalatin:]

Thanks. Thank you for the question. We could talk for a long time about this topic because it's obviously a very appropriate discussion these days. But first, let me just level set a little bit. Health care reform requires the states set up their own health exchanges or partner with or use the to-be-created federally facilitated exchange. To date, there's been about 16 states that have indicated that they will create their own exchanges, 7 have said that they will not and another 16 are still studying their options. The remaining states appear to have taken kind of a "let's wait and see" or "no significant activity" approach. States have to submit a blueprint to the federal government by mid-November if they want to move forward with an exchange by 2012. Otherwise, the federal government steps in. So establishing these exchanges is a very complex undertaking for the federal government, as well as it is for states. And they need a lot of help and assistance, and that's where Mercer's coming in. And a lot of individual subsidies and employee penalties are subject to if, in fact, you don't move forward with the degree of pace as outlined in my earlier comment. Our primary role in all of this has been to provide expertise and advice to states on developing their perspectives and helping design their strategies. So far, we've worked with several states, and we expect additional work with those and more over the coming months. We're also spending a lot of time helping our corporate clients understand and prepare for these regulations. We're working with our employer clients as they manage through the complex reform, provide advice and solutions, and we're partnering with carriers as well on new products that can help employers lower the cost of health care through the use of high-quality networks and customized care management. One offering, in particular, is the Mercer Health Advantage, which is getting good response in the market, and we expect to have about 500,000 enrolled -- employees enrolled in this and similar plans for 2013. So this whole area is evolving very quickly, it's exciting. I think Mercer is well positioned to play a leadership role in the evolution of it. I also want to add one more note that we've launched most recently, the Mercer Marsh solution, which brings both the added-value, client-facing solutions for the market of both Mercer and Marsh. And that's moving quite nicely as well.

[Michael Zaremski:]

I mean, would you say, to a certain extent, that Marsh is taking a "let's wait and see" approach just because there's a lot changing?

[Julio A. Portalatin:]

In terms of exchanges, you're referring to?

[Michael Zaremski:]

Correct.

[Julio A. Portalatin:]

I wouldn't say wait and see. I would say, be part of the solution and move forward, and that's the approach I would like to take with this. I think we have to make sure that we calibrate the opportunity with the investment necessary to take advantage of the opportunity as time goes on. And I think we're doing that quite well right now.

[Michael Zaremski:]

Okay. And lastly, a follow-up to Jay Gelb's earlier question. Could we get an update on what type of M&A opportunities Marsh is most focused on? And Brian, I recall last quarter you mentioned adding components and capabilities that Marsh didn't have. I'd be interested in what those capabilities would be.

[Brian Duperreault:]

Well, first of all, we're -- the M&A activity, I guess begins with the Marsh agency. We've been spending a lot of time on that. And I think we have about $70 million spend in the quarter. Some of that was agency, some of that was continuing to spend for the African acquisition that we made. So there -- Marsh is getting its fair share of this to expand both its capabilities in the U.S. and geographically. We didn't have anything else in the quarter for the other operating companies. But what we've done typically is, say, in Oliver Wyman, finding a segment. I mean, our life sciences segment, which is growing dramatically now, really started a few years ago with the acquisition. And so trying to find a group of people who have the capability in an area that we're not as strong in would be a typical acquisition on Oliver Wyman. And I think you would continue to see that going forward. In Julio's case, well, there's -- I could pick a number of things. I mean, we've got a number of segments that he has, that whether it's investments where we've made investments in the past to fill that out or it could be geography, too. It's hard to be specific, because if I had one, I could tell you about it. So you just have to take the general comment that it's filling in areas that we feel we need to fill in.

[Operator:]

We'll move on to Jay Cohen with Bank of America Merrill Lynch.

[Jay A. Cohen:]

Two questions. The first is, I didn't quite catch this, when you talked about Oliver Wyman in the second half having more modest growth, what was the rationale behind that?

[Brian Duperreault:]

John?

[John P. Drzik:]

So Jay, I think there's 2 reasons for it. First, we're expecting the weaker economic conditions in Europe to continue. So as we mentioned, we're experiencing a revenue -- have been experiencing a revenue decline in Europe in the first half of the year, and we expect that weakness to continue into the second half. Now on the first half of the year, that was offset by very strong growth in the U.S. market, and we're expecting that growth to taper a bit, so therefore, the overall growth rate would come down, say, from the 7% in the first half to something in the low-single digits for the second half, and it's principally that. There is a second reason which has a modest effect, which is, in the Q1 call, we explained that we have timing of revenue from contracts with acceptance provisions that occurred earlier this year, and this boosted our Q1 growth but will actually lower our second half growth, particularly in Q4. So that's the second effect.

[Jay A. Cohen:]

That's very helpful. And then secondly, I guess related to Europe, my recollection is a lot of the European business -- as I recall, I think it is in Marsh -- gets done early in the year and maybe that's true with Consulting as well, I'm not sure. As you're looking out towards the first half of 2013, given the environment which doesn't feel like it's getting much better over there, is that the bigger risk when you look in the first half of '13?

[Brian Duperreault:]

Let me start, and then I think you guys could fill in. But yes, the insurance is sort of front-end loaded in the year, early part of the year. That's not the case in Consulting, which is spread much more evenly throughout the year. We've pointed out that Marsh had pretty good results, certainly, in the first half of this year, both in the continent and in the U.K. And so I would say we're not overly concerned about the renewal season.

[Daniel S. Glaser:]

There's a few things. There's a lot that goes into what organic revenue looks like in all geographies, but in particular, in Europe. So you have to first start with, "Okay, what's going on with GDP? And is the economy growing? Are exposure units growing?" And then you would say, "Well, what's happening with regard to rate? What's happening with regard to client retention? What's happening with regard to negotiations with carriers over commission yields? And then what's going on with new business?" So there's a number of factors that are at work that you aggregate them together and come up with your organic growth number. I mean, we think -- there's a few things, particularly on the insurance side. Companies in Europe will continue to buy insurance as of January 1, and that can be the announcement. So Europe is -- while they're in difficult times, in some ways, having insurance protection with quality carriers and a top-quality intermediary is more important than when times are buoyant.

[Brian Duperreault:]

Okay, Jay?

[Jay A. Cohen:]

Yes. I appreciate that.

[Operator:]

That will come from Adam Klauber with William Blair.

[Adam Klauber:]

Margin expansion in Risk and Insurance Services was better in the second quarter than it had been in the last couple of quarters. Is that partially attributable to strong growth at Guy Carpenter? And what else is driving that?

[Brian Duperreault:]

Dan, why don't you do that?

[Daniel S. Glaser:]

Sure. We're talking about margins in general. As Brian pointed out earlier, our first focus is growth and growth of actual profit, our earnings and looking to do that on a double-digit basis in more years than we don't. And then we also, obviously, look at margins. So it's kind of like organic growth, earnings and then margins. And when we look at margins, we start with both segments, not just the RIS segment, and we're -- our expectation is, over the next several years, we will improve margins in both of our segments. And we'll do that for a variety of different ways, but most specifically, by calibrating expense growth with revenue growth and being very alive to what's happening on revenue week by week and month by month in calibrating our expenses accordingly. When we look at our RIS, as we mentioned in the first quarter, we're making a lot of investments. Those are not quarter by quarter as being perfectly timed, so you see some level of ebb and flow on the cost of investments that roll through and the cost of strategic recruitment, et cetera. And so that all is playing itself out. Overall, we think our margins in RIS are strong; I think, through 6 months, may even be market-leading. But on the basis, we do believe we will improve them over time. And -- but I wouldn't read into this quarter versus last quarter, because we don't manage our business that way. As we've described about Consulting in the past, we expect more out of the margins in Consulting over time because the margins in Consulting through the recession had gotten lower than they've historically been. So we are on a path back to our historical performance.

[Adam Klauber:]

One follow-up. The growth in the U.K. was clearly strong, but the U.K. has been slowing down economically in the last 6 months or so. Are you a bit worried about that?

[Brian Duperreault:]

Well, there's a couple of things about the U.K. A very significant chunk of our business in the U.K. on the RIS side is global business that comes to the U.S -- to the U.K. for placement. And so that's really a global phenomena, as opposed to U.K. only. When you're looking at U.K. only in specific, you're really looking, more often, on the RIS side as Marsh's retail business. And that's actually been performing well. You're very right to point out that the U.K, like a lot of places in the world, are struggling with overall growth. We have not seen that affect us to date, but we're very watchful and mindful of that.

[Operator:]

And that will come from Michael Nannizzi with Goldman Sachs.

[Michael Nannizzi:]

Couple of questions. Retirement, Health & Benefits were flat over the first quarter. But Outsourcing year-over-year slowed, and Talent slowed. I'm just trying to understand kind of what happened there and how should we think about that. And just one follow-up.

[Daniel S. Glaser:]

Yes. On the Outsourcing front, you may have recalled, in the last quarter, I talked about us benefiting from some of the year-on-year comparisons in the first quarter because of business that had been secured the year before. And I think in the second quarter, we felt a more year-on-year likely comparison, I guess, between last year and this year. And we see Outsourcing continuing to be a support for our core businesses, and we'll continue to manage it that way as we go forward. I think what you see as far as growth pattern is very much within expectations.

[Michael Nannizzi:]

And then on the Talent side?

[Daniel S. Glaser:]

Talent is being impacted, of course, mostly from the discretionary side of the project work that we do. There is a proportion of our business in the talent world that, obviously, is project-oriented and very much related to how corporations and clients are spending and their spending behaviors. And certainly, Europe would be one of those places where we've seen a bit of a slowdown on the discretionary projects. We -- on the opposite end of that, we've seen some good revenue growth in other parts of the world that's offsetting a bit of that challenge. But that's some of the headwinds that we're seeing, and we hope that, that will continue to recover as time in the year goes on.

[Michael Nannizzi:]

Great. And then just one -- I'm sorry, if I could, one more. Brian, is that okay?

[Brian Duperreault:]

Yes, please go ahead, yes. I was going to ask you to.

[Michael Nannizzi:]

And then Oliver Wyman, you kind of talked about. It sounds like the driver of the expectations for slower growth on the back half of the year are not Europe, actually, it's the U.S. and what may be happening there. I guess, my question is, what's happening outside of the U.S. and Europe in terms of Oliver Wyman? And how is that part of the world and part of the business doing? And within the U.S., what exactly drove other than these contracts that you maybe talked about in the last Q and just mentioned briefly here? What else happened to cause that spike in activity?

[Brian Duperreault:]

Okay, John.

[John P. Drzik:]

Yes. So let me take the U.S. part, first. I mean, the fastest-growing segments we had in the business in the U.S. and globally were our health care business and consumer business, so that accounted for the spike. Now those businesses jumped up quite a bit in the first half of the year, so it's not that we're projecting adverse conditions for the U.S., it's more that we don't expect the growth to offset as much as it did the European growth. So we still expect to grow in the U.S. in the second half of the year and grow at quite a healthy pace, but probably, not at quite the same rate as in the first half. But it was driven by health care and consumer, principally in the U.S. In terms of outside the U.S., in Europe, about 15% to 20% of our business falls into that category, and it's been sort of a mix of different outcomes in different regions. Our business isn't large enough in any one region to say decisively. It had -- certain regions have been growing faster over a long period time. If you look just at 2012, which is perhaps your question, we've been growing better in the Middle East, in Brazil, in Russia and not as strongly in Asia. So that's been this year's pattern. But again, the businesses aren't large enough that the pattern changes from quarter-to-quarter and year-to-year.

[Brian Duperreault:]

So let me close this by saying that we had, as I said earlier, an excellent quarter, and we couldn't have that without the hard work of our 53,000 colleagues. So let me take this opportunity to thank them for their great work and also, thank all of you on the phone for your interest in Marsh & McLennan. Thank you very much.

[Operator:]

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a great day.