Marsh & Mclennan Companies, Inc. (MRSH) Q3 2021 Earnings Call Transcript

Welcome to Marsh & McLennan's Conference Call. Today's call is being recorded. Third quarter 2021 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the Marsh & McLennan website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. I'll now turn this over to Dan Glaser, President and CEO of Marsh & McLennan.

Thank you. Good morning and thank you for joining us to discuss our third quarter results reported earlier today. I am Dan Glaser, President and CEO of Marsh & McLennan. Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses, John Doyle of Marsh; Peter Hearn of Guy Carpenter; Martine Ferland of Mercer; and Nick Studer, of Oliver Wyman. Also with us this morning is Sarah Dewitt, Head of Investor Relations. Marsh & McLennan had another outstanding quarter. Our third quarter results reflect strong momentum across all of our businesses. Our continued strength represents a combination of the current environment as well as impressive day-to-day execution across the firm. Although there continues to be uncertainty and volatility in the macroeconomic and geopolitical environment, we are seeing solid demand for our differentiated advice and solutions. Even as COVID-19 continues to pose risk in many parts of the world, vaccine rollouts are having a positive impact. We are taking advantage of opportunities to add to our deep bench of world-class talent. At the core of our business is a focus on our colleagues and we are dedicated to Marsh & McLennan being an exciting and dynamic place to work for outstanding people. And we continue to innovate and leverage the collective strengths of our organization to help clients address their most pressing concerns including climate, diversity and inclusion, the future of work, cyber, and digital strategies. As we have discussed 2021 represents Marsh & McLennan’s 158th year and success over such a long period of time requires constant innovation and investment to deliver sustained growth and profitability. I'd like to discuss just a few recent examples of how we are innovating to develop new unique client solutions. Nick Studer leads our firm-wide climate initiative. We view climate as a significant opportunity and we are well positioned to help clients with this critical issue. In October Oliver Wyman launched the Climate Action Navigator drawing on insights from across the company. This product helps public and private sector leaders plot a path through climate science, identifying emissions at the industry and regional level, and quantifying the effects of multiple different carbon reduction technologies and actions. We believe these tools will give business and government leaders vital insights to achieve their long-term climate goals and be a significant enabler of the transition to low carbon, climate-resilient investments in the corporate sector. Mercer recently launched Skills-Edge, an innovative platform allowing employers to determine the most important skills for their future and design a talent strategy to assess, acquire, and retain them. Skills-Edge provides quantitative insight into the demand and value of skills that supports both employees and organizations and rapid re-skilling for the future of work. And just last week under the leadership of John Doyle we launched our Cyber Risk Analytics Center; this brings together cyber risk data and analytics expertise across our firm and provides clients with a comprehensive assessment of their cyber threats, existing and future controls, and the potential economic impact. We are one enterprise and these are just a few recent examples of how we bring together and leverage knowledge and capabilities across the firm to offer comprehensive solutions to our clients and address their most pressing concerns. We are a growth company as demonstrated by our track record. Growth doesn't just happen, it takes consistent vision, alignment, commitment, and execution. Since closing our acquisition of JLT we've grown our total consolidated revenue by 27%, our adjusted EPS by 34%, and our colleague base by 22%. Achieving and sustaining growth requires consistent reinvestment in the business. We always strive to balance delivering results in the short-term while investing for the long-term. In 2021 we generated year-to-date adjusted EPS growth that is higher than any annual period in over three decades while at the same time investing for the future and making a significant push on hiring. We grew our headcount year-to-date by nearly 5,000 or around 7% mostly organic adds with an emphasis on client facing roles. We expect this influx of talent will drive growth, add to our capabilities, and enhance our ability to serve clients. Now let me provide an update on current P&C insurance market conditions. Many of the factors that drove the market to harden over the last few years continue suggesting an inflection to a soft market is unlikely in the near-term. The Marsh Global Insurance Market Index showed price increases of 15% year-over-year consistent with the second quarter. This marks the 16th consecutive quarter of rate increases in the commercial P&C insurance marketplace. Looking at pricing by line the Marsh Market Index showed global property insurance was up 9%, global financial and professional lines were up 32% driven in part by a near doubling in cyber rates, and global casualty rates were up high single digits on average. As a reminder our index skews to large account business. However small and middle market insurance rates continued to rise as well although less than for large complex accounts. Turning to reinsurance, measured and moderate rate increases in global property catastrophe reinsurance witnessed in the first half of 2021 could persist throughout the remainder of the year reflecting adequate capacity offset by elevated global catastrophes, concerns around reinsurance and social inflation, and a continuation of large individual risk losses. 2021 marks another year of significant catastrophe losses. Hurricane Ida generated material losses in both the Southeast and Northeast. This is in addition to a record level of flood losses in Europe, flooding in China, and the continuation of wildfire losses in many parts of the world. Marsh & McLennan remains focused on helping our clients navigate these challenging market conditions and making a difference for them in the moments that matter. Now let me turn to our terrific third quarter financial performance. We generated adjusted EPS of $1.08 which is up 32% versus a year ago driven by strong top line growth and continued low levels of T&E. Total revenue increased 16% versus a year ago and rose 13% on an underlying basis. The second consecutive quarter of record underlying growth in over two decades. Underlying revenue grew 13% in RIS and 12% in consulting. Marsh grew 13% in the quarter on an underlying basis and benefited from strong new business and renewal growth. Guy Carpenter grew 15% on an underlying basis in the quarter, continuing its string of excellent results. Mercer underlying revenue grew 7% in the quarter the highest in over a decade. Oliver Wyman grew underlying revenue 25%, the second consecutive quarter in excess of 20%. Overall the third quarter saw adjusted operating income growth of 19% and our adjusted operating margin expanded 10 basis points year-over-year. Given our excellent third quarter and year-to-date performance we are on track for a terrific year. We expect to generate the best underlying revenue and adjusted EPS growth in over two decades and expand margins for the 14th consecutive year. Our entire organization is on its front foot, focused and aligned and this is evident in our excellent results. With that let me turn it over to Mark for a more detailed review of our results.

Thank you Dan and good morning. Our results were outstanding with record third quarter revenue, second consecutive quarter of double-digit underlying growth, margin expansion, and significant earnings growth. Highlights from our third quarter performance included the second straight quarter of 13% underlying growth in RIS with 13% at Marsh and 15% in Guy Carpenter and the second consecutive quarter of 12% underlying growth in consulting with 7% at Mercer and 25% at Oliver Wyman. Growth and adjusted earnings per share exceeded 30% for the second quarter in a row. Consolidated revenue increased 16% in the third quarter to $4.6 billion reflecting underlying growth of 13%. Operating income in the quarter was $740 million, an increase of 37%. Adjusted operating income increased 19% to $759 million and our adjusted operating margin increased 10 basis points to 18.5%. GAAP EPS was $1.05 in the quarter and adjusted EPS increased 32% to $1.08. For the first nine months of 2021, underlying revenue growth was 10%, our adjusted operating income grew 21% to $3.4 billion, our adjusted operating margin increased 120 basis points, and our adjusted EPS increased 28% to $4.82. Looking at risk and insurance services, third quarter revenue was $2.7 billion up 17% compared with the year ago or 13% on an underlying basis. Operating income increased 21% to $403 million. Adjusted operating income also increased 21% to $469 million and our adjusted operating margin expanded 20 basis points to 20.4%. For the first nine months of the year, revenue was $9 billion with underlying growth of 11%. Adjusted operating income for the first nine months of the year increased 20% to $2.5 billion with a margin of 30.3% up 80 basis points from the same period a year ago. At Marsh revenue in the quarter was $2.4 billion, up 17% compared with the year ago or 13% on an underlying basis. Growth in the quarter was broad based and driven by nearly 40% new business growth and solid retention. U.S. and Canada delivered another exceptional quarter with underlying revenue growth of 16%. In international underlying growth was 9%, Latin America grew 12%, it’s the best growth since the fourth quarter of 2015, Asia Pacific was up 9%, and EMEA was up 8%. For the first nine months of the year Marsh's revenue was $7.3 billion with underlying growth of 12%. U.S. and Canada underlying growth was 14% and international was up 9%. Guy Carpenter’s third quarter revenue was $314 million up 15% compared with the year ago on both the GAAP and underlying basis. Growth was broad based across geographies and specialties. Guy Carpenter has now achieved 7% or higher underlying growth in seven of the last nine quarters. In the first nine months of the year, Guy Carpenter generated $1.7 billion of revenue and 10% underlying growth. In the consulting segment revenue in the quarter was $1.9 billion up 13% from a year ago or 12% on an underlying basis. Operating income increased 45% to $404 million. Adjusted operating income increased 15% to $350 million. The adjusted operating margin was 18.9% in line with the margin in the third quarter of 2020. Consulting generated revenue of $5.7 billion for the first nine months of 2021 representing underlying growth of 9%. Adjusted operating income for the first nine months of the year increased 25% to $1.1 billion and the adjusted operating margin expanded 180 basis points to 19.6%. Mercer’s revenue was $1.3 billion in the quarter up 7% on an underlying basis, the highest result in over a decade. Career grew 13% on an underlying basis reflecting the continuing rebound in the global economy and business confidence. Wealth increased 6% on an underlying basis reflecting strong growth in investment management and modest growth in defined benefit. Our assets under delegated management grew to nearly $400 billion at the end of the third quarter up 24% year-over-year benefiting from net new inflows and market gains. Health underlying revenue growth was 4% in the quarter driven by growth outside the U.S. Oliver Wyman’s revenue in the quarter was $610 million, an increase of 25% on an underlying basis. This represents the second consecutive quarter of more than 20% growth as demand remains strong across most geographies and practices. For the first nine months of the year, revenue at Oliver Wyman was $1.8 billion, an increase of 21% on an underlying basis. Adjusted corporate expense was $60 million in the third quarter. Foreign exchange had a negligible impact on earnings in Q3. Assuming exchange rates remain at current levels we expect FX to be a modest headwind in the fourth quarter. Our other net benefit credit was $69 million in the quarter and we expect it will remain at this level in the fourth quarter. Investment income was $13 million in the quarter on a GAAP basis and $12 million on an adjusted basis and mainly reflects gains on our private equity portfolio. Interest expense in the third quarter was $107 million compared with $128 million in the third quarter of 2020 reflecting lower debt levels in the period. Based on our current forecast we expect interest expense in the fourth quarter to be similar to the amount in the third quarter. Our adjusted effective tax rate in the third quarter was 24.4% compared with 26.5% in the third quarter last year. Our GAAP tax rate was 24.2% in the third quarter down from 30.3% in the third quarter of 2020 which was impacted by some unusual items. Through the first nine months of the year, our adjusted effective tax rate was 24.4% compared with 24.6% last year. Based on the current environment we continue to expect an adjusted effective tax rate between 25% and 26% for 2021 excluding discrete items. Given our year-to-date performance we are on track for an outstanding year. Looking specifically at the fourth quarter keep in mind that comparisons become more challenging given the rebound in growth in the fourth quarter of 2020. We also continue to build for the long-term by investing and hiring. While we are excited about the future benefit these investments will deliver, they come with upfront costs we absorb in the short-term. That said, we have consistently demonstrated our ability to deliver exceptional results today while investing for the future and expect we will continue to do so. Turning to capital management and our balance sheet. We ended the quarter with $10.7 billion of total debt. Our next scheduled debt maturity is in January of 2022 when $500 million of senior notes mature. We continue to expect to deploy at least $3.5 billion of capital in 2021 of which at least $3 billion will be deployed across dividends, acquisition, and share repurchases. The ultimate level of share repurchases will depend on how the M&A pipeline develops. Our cash position at the end of the third quarter was $1.4 billion. Uses of cash in the quarter totaled $665 million and included $272 million for dividends, $93 million for acquisitions, and $300 million for share repurchases. For the first nine months uses of cash totaled $2.6 billion and included $750 million for dividends, $566 million for acquisitions, $734 million for share repurchases, and $500 million for debt repayment. We had a remarkable third quarter positioning us well to deliver strong growth in both revenue and adjusted earnings in 2021 and with that I'm happy to turn it back to Dan.

Thanks Mark. And operator we are ready to begin Q&A.

Thank you. Our first question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, good morning. My first question goes back to the hiring that you guys have done, it seems continued in the third quarter. I was hoping to get more color on the impact you're seeing to both margin and top line growth. I think you alluded to some of that coming through on the expense and margin side from the hiring. But I'm hoping to get a sense of just the potential growth that could come from these hires given as well as potential RFPs on renewals coming in 2022?

Yeah, thanks Elyse. We've been at it for 150 years so things like cyclical changes don't bother us all that much. We're definitely in it for the long haul. As we mentioned in the script, our head count growth year-to-date is up nearly 5,000 across the firm and the highest percentage growth by far is in Marsh and Guy Carpenter and of course the majority of the hiring that we've done is in client facing roles. We generally hire to grow capability and talent rather than direct short-term revenue production. But having said that, we are a people business, our colleagues are our engine of growth, and undoubtedly our increased hiring in 2021 will benefit next year and beyond. Sometimes it takes a bit of time to get all the hires fully integrated into the firm and producing levels in terms of their own capacity at an optimal level but we're very comfortable with that. And of course there's a cost factor with that, we are not shy to face sophisticated talent is expensive. But it's worth it and that's why we pursue it. And I don't want anyone to worry out there about our long-term expense base, or why all of this hiring. We know how to run the business. Our comp and ben ratio if I look at Q3 on a rolling four quarter basis and then go back five years and locate Q3 on a rolling four quarter basis is virtually identical. So, over time we're building the company, we're doing it through organic and we're doing it through acquisition.

Thank and then my follow-up.

Our next question comes from the line of Jimmy Bhullar with J.P. Morgan.

Thanks, and Andrew maybe later we go back to Elyse because she did not get a chance to ask her follow-up.

Hi, good morning. So I just had a question on pricing and if you could talk about what's going in primary commercial as well as reinsurance and then how much of a pushback are you seeing from clients now that they're facing sort of price on price because rates have been going up for a while now?

That's a very good question Jimmy. And it is a tough market out there. Why don't we start with John and then we'll go to Peter afterwards and we will address the primary markets and reinsurance. So John?

Sure, good morning Jimmy. As you noted the P&C market conditions remain pretty challenging for our clients, prices were up about 15% on average in the quarter which was consistent with the second quarter. The property market was plus 9 versus plus 12 in the second quarter. It was obviously quite an active cat quarter, flood and wind and wildfire related losses but secondary perils are getting a lot of attention from the underwriting community in the market. Cat was up about 6 although up closer to double-digit globally when you exclude the workers' comp market in the United States where things remained pretty competitive. The excess market remained particularly challenging here in the United States, the underwriting community worried about loss cost inflation and social inflation really as courts reopened from being largely closed during the pandemic. The financial lines market I think on average is the most difficult market for the moment for our clients although having said that public D&O pricing is still up but it's up about 10 points versus 15 points in the second quarter and that rate of increase is the lowest it's been in the last ten quarters. So starting to see a little bit of settling on that work. Without question the market that is most challenging at the moment is the cyber market where prices were up more than 90% on average driven by material growth in ransomware claims as well as concerns about systemic events. We have had a few events that maybe modest compared to what potentially could happen but underwriters remain concerned about that. You asked about clients, certainly frustrated by it for sure and some are retaining more risk, we've been pretty active in creating new captives and there's a premium growth in the captives that we manage as well. Some are also electing to retain more risk and then in some cases of course the market is forcing some of our clients to retain more risk. So, it's client by client and exposure by exposure. As Dan said we are aggressively working to help our clients navigate the market. I will add that although on average the price was the same globally, most markets did see great moderation. The United States was really the one exception when you look at it on a global basis.

Thanks John. Peter?

Thank you Dan. Jimmy, a lot of my comments reflect from a reinsurance perspective what John has said on insurance perspective. You have had market issues dealing with real and social inflation. They're dealing with low interest rate environment and on top of that we're facing something approaching $100 billion of global capacity losses in 2021. So I think it's safe to say that prospect of that will influence property reinsurance pricing at 1/1/22. But you have to look at the market through various lenses because there's a property market that has been affected by significant losses over the last five years. If you look at the cash market, the significant underlying rate lift has stabilized and improved significantly. Property reinsurance casualty contracts and the casualty reinsurance market I would say have been more stable. As John says and the same is true in reinsurance, I would suggest there is one hard element of our market right now and it is cyber. I think reinsurers are looking at cyber capacity the same way they look at property catastrophe capacity with it allocated certain amount of aggregate and once they hit that aggregate that's it. So, I would say reinsurers are cautious. We don't opine on 1/1 pricing or any significant quarter pricing; we believe the market finds its own equilibrium and as a result of that we are preparing our clients based on exposure and experience for what they might expect at 1/1. But certainly the property market given the fact this is now the fifth year that reinsurers have had losses is going to be challenging.

Thanks Peter and Jimmy do you have a follow-up?

Maybe I will ask just one on expenses and obviously in the near-term I'm assuming T&E is going to stay depressed but as you think about your expenses longer term, are there things that you're going to change resulting from the pandemic whether it's a lower real estate footprint or whatever else that you think provides you more of a long term benefit?

Yeah, when we look at the impact of the pandemic, I think one of the biggest features is that most organizations of our size and scale will adopt some sort of hybrid model. I think the days of 9-to-5, five days a week in the office are over for most companies. And so that will have an impact. It's a longer-term impact because in the short-term you've got your leases established and we want some social distancing in the office and we're not sure how this will develop over time. So we're going to be deliberate and flexible. We're not going to move that quickly on it. We've had efforts over many years to become more efficient in our use of space and we've accomplished that quite a bit and that continues. But that certainly is our view. We also think that T&E won’t come back quickly and may not reach the level of 2019 for quite a while. In Marsh & McLennan our view is yes, we look forward to a day where we are going to visit clients in markets in their location. But we will travel with more purpose, we will probably travel with fewer people on various trips. And we will be more deliberate about it and I think that our clients will have that expectation as well. So that hop-on-a-plane-anytime-anywhere culture probably takes quite a long time to come back if ever. And so both of those things have expense implications for us that will be positive for shareholders in the long-term. And I would say the other thing is we are constantly seeking efficiency gains and we're working throughout the firm in order to drive efficiency gains and to become better at operations. So, why don’t I turn it to John for a second, because some of our headcount growth was in OPEX in the effort to drive some efficiency within the Marsh operation. It's in its early stages but there was a pretty significant increase in headcount in that area. John, you want to talk about that a second?

Sure Dan. We have the largest ever organic hiring in our history this year and we're quite excited about it. Dan touched on the market facing talent that we brought in a bit earlier. I will say it starts with the team, we began the year with teams that are deeper and stronger than ever. We worked really hard to come together with the team at JLT. We worked on purpose and culture and our colleagues are highly engaged and focused. One of the things we are working on has been investing aggressively in our client service operations as well. We have a broad program called OPEX, short for operational excellence, to improve efficiency, to improve client service outcomes but also to increase the capacity of our market facing colleagues as well. So a fair amount of hiring came in service centers around the world and of course it is not just talent, we're supporting that talent with investments in technologies. We try to automate more and more of our processes.

Thanks John. Next question please.

And we have a follow-up question from Elyse Greenspan with Wells Fargo.

Welcome back Elyse.

Hi, thanks for taking me back. You guys reported 10% organic growth so far this year, we'll see how Q4 shakes out. So put you within the range of double-digit for the year. Typically, you guys talked to a 3% to 5% view. Obviously we've been better this year to have all this hiring that seems like it'll be incremental to revenue next year as well. So could you give us an initial view, I know you guys typically wait till the fourth quarter, but just some initial thoughts that you could share with us when we think about the organic growth outlook for 2022?

Sure. I'll just start with the idea that fourth quarter comparisons become a little bit more challenging, right. Because Marsh grew 4% in the fourth quarter of last year, Carpenter grew 5%, Oliver Wyman grew 4%, and Mercer was down 3%. So across the piece, a little bit tougher. But we've got good momentum in the business, and we feel good about this year. We also feel good about next year, and the year after. We have been fundamentally improving the company over the last decade. We are getting stronger on our capabilities, our geographic breadth, our ability to serve. All of those areas have really dramatically improved and we believe we are in fundamental growth markets: the areas of risk, strategy, and people. Every organization has to address those on a strategic basis. And it is incredibly relevant to the C-suite of those companies and organizations to address broadly risk, strategy and people. I think we have enduring competitive advantages as well. The quality of our organization, the talents that we have, the culture that we have, the broad capabilities, the global footprint, are all enduring competitive advantages. We also continue to acquire talent in the market and acquire businesses which improve us and improve our capabilities, in particular in middle market on the brokerage side. There's a lot of growth opportunities, and then on expansion opportunities, we're still weighted into upper middle market and large account; we've gotten better in the mid middle market, and we're going to continue to broaden into the lower middle market and small commercial. You'll see us in all of those areas in the future. Now, it's not going to be from one year to the next, seeing some massive change but this is inevitable in terms of how we build out our business. We're leveraging the combined strength of our organization as one enterprise like never before, in areas of healthy societies, cyber protection gaps, climate. All of those areas we are going to market and addressing our client’s issues with them on a broad basis, not on a narrow basis. Our opportunities for revenue growth, in my view are significant. I won't give you a number right now for 2022 but having not only broken out of the 3% to 5%, but actually tremendously exceeded the 5% level, I think this company can be a real growth firm and that we will prove that over time. We like to do and then say rather than the reverse, so I think it'll be exciting times at Marsh & McLennan. Next question, please.

Our next question comes from the line of David Motemaden with Evercore ISI.

Hi, thanks. Good morning. I just had a question on the headcount adds and so I just — looking back you added 500 of new headcount in the fourth quarter of 2020 and then 2,000 in the first half of 2021. I'm just wondering, did that have any impact on the organic growth this quarter at all or is that still on the come?

Yeah, it's negligible. We are seeing some revenue benefit from hiring that we've done at the end of last year and into this year. But most of it's on the comp. So tends to be — you get the expenses right away and you get the revenue a bit later.

Got it, thanks. And just to follow-up on that last point, Dan. It sounds like really big hiring quarter this quarter, 3,000 new headcount, if I sort of take the 5,000 that you said you've hired year-to-date, is there any rule of thumb just to think about or maybe any sort of number you can give me in how much that weighed on the operating margins in this quarter specifically?

I'm not going to get into the specific expense that we're bearing now as a result. One of the reasons that we have been pressing on hiring is twofold. One, we are growing very well on the top line and that was our anticipation, and also market opportunity. We are an employer of choice in this space, and we are pressing our advantage at this moment in time. The hiring spurt is not going to last forever, but ultimately we saw an opportunity in the market through dislocation and other factors and we really pressed on that level. At the end, our expenses are relatively high compared to historical type of expense growth for us, but our expense growth is essentially driven by sales compensation and benefits. It's driven by much higher levels of new business and variable compensation due to much higher levels of profitability and hiring. So comp and ben is driving most of our expense growth in the quarter and will ease itself out. But it's matching well with current levels of revenue growth. So we feel that this was a tremendously opportune time to build capabilities within the firm on an organic basis.

Our next question comes from the line of Meyer Shields with KBW.

Great, thanks. Two quick questions. We saw sort of a bit of a fall-off in organic revenue growth in EMEA and an acceleration in Latin America. I was hoping you could talk about what's going on in those individual markets?

Sure Meyer, John do you want to take that?

Hey Meyer, it is really nothing all that extraordinary that happened in any of the regions. Quarter-to-quarter, obviously, you can see some variation. We did have a bit of non-recurring issues and tougher comps in EMEA in the quarter, but they weren't material either. I am pleased with the growth in both regions and I expect us to continue to perform in both territories going forward.

Okay, thanks. And then more broadly, obviously, the organic growth is phenomenal. I'm wondering, is there any element of the growth that is specific to like a post-pandemic era that wouldn't recur?

It's a good question. We're going to find out over time. One issue to bear in mind is the awareness around issues is higher. Risk awareness is far higher, and people awareness is far higher. There's whole categories of opportunity in the world for us and others in areas such as ESG, which used to be considered by companies but not to the extent it is today. When you think about climate or diversity and inclusion, responsible investing, these are all new areas of growth for us. Climate, which was probably not even considered by companies a decade ago, we think is one of our major growth opportunities as a firm going forward. We want to be a leader on ESG and we look at the addressable market in ESG as being enormous and currently skewed to developed markets public companies; it will expand to all companies everywhere. From that standpoint, the addressable market is going to be quite large and we will be a significant player in it.

Our next question comes from the line of Mike Zaremski with Wolfe Research.

Hey great, good morning. I guess a follow-up to Meyer’s question and maybe Elyse's, too. So, you've been talking a while about broadening Marsh's capabilities, new categories which are exciting. I'm just curious if this kind of changes your views on M&A into new areas or technologies over time, or is it really just kind of what we should be thinking about as the same M&A sandboxes you're in currently?

Our M&A sandbox is very broad, and maybe our M&A that we've actually executed on is narrower than what we actually look at. But the sandbox is quite broad and I think you'd be surprised at some of the adjacencies and areas we look at. The areas of risk, strategy and people have many elements that would enable us to continue to build capabilities with acquiring firms. We like firms that have recurring revenue, we like firms that are advisory-based or transaction-oriented. Doesn't mean that all of our acquisitions will fit that criteria but many do. And then we also like firms where we can see the business benefit, the financial benefit to us even if it's a bit out there. We're a disciplined acquirer and we want to acquire things that not only build our capabilities, but also help us financially as well, even if only incrementally. So, I would say we have a very broad sandbox, but our level of execution has been relatively narrow over the last 5 or 10 years and that will probably continue. We look at a lot of things and we execute on things that we're really committed to.

Okay, great. I guess my follow-up and not to harp on it too much but your results were excellent. It sounds like you're saying that some of the margins were impacted by new hires. Is that the main influence, are there other items we should be thinking about? And I guess, hiring spurt should be expected to continue in the near term and so we should be thinking about that as we project margins and then maybe, when hiring slows, you have easier comps in outer years?

First of all, I wouldn't fret about the margins in the quarter. Ultimately, you have to look at margin expansion over longer stretches of time. We have improved our margins for 14 consecutive years and the results are remarkable from a basis point improvement. Our margin is up 120 basis points year-to-date and that's on top of 120 basis points in 2020, and 110 basis points in 2019. So it's another improvement in our margins and I would expect that our margins next year are going to be better than they are this year. We don't sit around the table figuring out how we're going to drive margin; we figure out how we're going to drive the underlying growth and earnings. That's the focus of the firm and the outcome is margin expansion. Revenue growth needs to exceed expense growth over time. That's what we do and we've done it consistently. A lot of the expense growth right now is being driven by compensation around sales, and around increased profitability. That's a good place to be and our earnings growth is very strong. I hope that answers your question.

Our next question comes from the line of Brian Meredith with UBS.

Hey, thanks. Couple questions. First, just curious, free cash flow down year-over-year, is that simply just due to the hires that you're having right now and should we expect to see free cash flow growth with earnings here in 2022?

Thanks, Brian. I am going to hand it off to Mark for that.

Thank you, Brian. Actually, we're really happy with free cash flow. Year-to-date, you have to be careful. There's a lot that can happen and cause volatility in a quarter with the cash flow statement even across the year. But free cash flow growth for us has been a great story over a long period of time. If you go back over a decade, we've generated double-digit growth in free cash flow and we're up — year-to-date this year, we are up 5% and that's on top of 56% growth in free cash flow last year. So I think any growth above a big stair up last year is pretty good. Overall, our cash generation this year is strong and that's what's enabling us to deploy so much capital.

Great. It's really helpful. And then second question, Dan more just a broad based question here, inflation has been obviously a hot topic across the markets. Just give us your perspective on kind of what's going on with inflation right now and particularly as it relates to some of the commercial lines, insurance market, are you seeing any inflationary pressures when you start handling claims for clients or not at this point?

Yeah. I'll start and then I'll hand to John and Martine to talk about what they're seeing. Historically we've done well in inflationary periods. Elements of our revenue base react to inflation, such as higher insured values, and we've proven that we can manage our expense base. When we've looked back to inflationary periods over the last 25 years, we've tended to outperform. Overall on the economic environment, there are a lot of positive features, particularly in the United States: sales up, consumer spending up, business confidence positive. But there are also potential risks and inflation is probably the biggest one of them. You also have supply chain issues, the return to office that we're navigating, concerns around COVID variants, so it's difficult to look forward four quarters and get a real bead on economic performance. Most GDP forecasts for next year are in the 4% to 5% range, so not bad. John, what are you hearing from markets and clients around inflation? And then Martine will address benefits.

I am certainly hearing concerns on multiple levels. I'll start on the claims side. We're accustomed to demand surge related temporary inflation around catastrophe losses. Those issues are further exacerbated by the supply chain challenges that we're seeing. So there's some concern in terms of what it'll mean ultimately for loss costs around catastrophes. I mentioned earlier the impact of social inflation around liability claims particularly here in the United States and a couple of other jurisdictions as courts reopen after the pandemic, and we're seeing some evidence of that, although broad-based evidence is yet to show itself. Payrolls and employment levels are important from a demand perspective around commercial insurance and workers' comp in particular. So there is concern about wage inflation from some of our clients and the impact on growing costs there.

Indeed, wage inflation and inflation in general usually creates demand for our services because our clients need help in managing these increased costs. How do they manage through medical inflation, which we believe is coming back now that regular care will resume after COVID? The same thing on wage inflation: we help clients with transformation programs to address workforce structure and profiles. This is good for our business, for example in investment management solutions where clients look to manage pension plan assets more tightly. Many of our multi-year assignments include adjustments for inflation. So we've seen this before and it tends to increase demand for the advisory work we provide.

Thank you.

Thank you. Appreciate it. Next question, please.

Our next question comes from the line of Michael Phillips with Morgan Stanley.

Thanks, good morning. First question — have you seen at a higher level any impact of tax reform on M&A activities at industry level, either changing the timing of deals or the multiples paid, any impact there at all?

There's been a lot of deals out there but that's been pretty consistent over the last several years. Whether there is some marginal impact of people trying to get ahead of potential U.S. tax changes would be on the edges. It's not driving a significantly higher level than what we've seen. There's a lot of sellers out there because there's a lot of capital and valuations are strong; that's probably the biggest factor driving M&A activity.

Okay, thanks. And then just a quick follow-up on the last couple comments on inflation. You talked a lot about hiring and possible impacts on your margins there. But specifically on wage inflation, any impacts you've seen and how you expect that to impact margins?

I'll hand off to Martine and then to Nick to talk about whether they're seeing in the client base and within our firm any pressures around wage inflation. We're watching it very closely. Employees seem to have more leverage right now; not only wages and benefits but the broader work environment matter for retention and attraction of talent. Martine?

From a wage inflation point of view in the market, we're seeing more pressure at the lower end of the wage spectrum where roles have been hard to fill throughout the pandemic. At the higher end of white collar professional roles, it's more like musical chairs with people moving between opportunities. We help clients manage through these pressures by focusing on skills rather than static job descriptions. Our Skills-Edge platform helps clients migrate to that model and it should help them manage through this change which I expect will be temporary and settle over time.

Let me hand over to Nick with a bit of a shout out for Oliver Wyman, two quarters in a row of 20% plus organic growth, not bad. Nick, are you seeing some wage inflation or capacity constraints?

Thanks Dan and Michael. I agree with how Dan and Martine characterized this. In our business it is a competitive market for talent and we particularly see it. There have been times when capacity constraints have constrained our ability a bit given our strong growth, but I'm not enormously worried. We are hiring rapidly — more than we have in recent years — and we see the musical chairs across our businesses too. In short, yes, there is a period of employee power and rising wages but we are actively managing it.

Thank you. I think we have time for another question or two. Next question, please.

Our next question comes from the line of Ryan Tunis with Autonomous Research.

Hey thanks. Good morning. Dan, I just had one. How do you think about the growth dynamics of the talent pool in the industry as a whole whether it's consulting you do or P&C brokerage? I ask because we know there are some areas of brokerage where there's secular talent outflow, I'm just trying to get a sense…

It's a very good question. We see no problem with our ability to attract talent. When we hire 5,000 people, you have to understand we are interviewing 25,000 to 30,000 people. We are very selective. The work we do is compelling: we're a risk business and a strategic people business. The purpose of the organization — making a difference for companies in moments that matter — is attractive. Because of our broad base, we can take some calculated risks on hires who show a history of success even if they are not yet subject matter experts. So we see none of the constraints some folks in the insurance industry report.

Thank you.

I would now like to turn the call back over to Dan Glaser, President and CEO of Marsh & McLennan for any closing remarks.

Thank you, Andrew. And thank you everybody for joining us on the call this morning. In particular, I want to thank our 81,000 colleagues for their commitment to hard work and dedication to Marsh & McLennan, it shows. Thank you all very much and I look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for participating and you may now disconnect.