Marsh & Mclennan Companies, Inc. (MRSH) Q1 2023 Earnings Call Transcript

Welcome to Marsh & McLennan's Earnings Conference Call. Today's call is being recorded. First quarter 2023 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. The operator will now provide instructions and will open the call for questions at the appropriate time. I'll now turn this over to John Doyle, President and CEO of Marsh & McLennan.

Good morning and thank you for joining us to discuss our first quarter results reported earlier today. I'm John Doyle, the President and CEO of Marsh & McLennan. Joining me on the call is Mark McGivney, our CFO; and the CEOs of our businesses, Martin South of Marsh; Dean Klisura 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 a strong start to 2023. Our first quarter results were excellent and we are well positioned for another good year. Top line momentum continued as we generated 9% underlying revenue growth on top of 10% growth in the first quarter of last year. We had strong growth across most businesses, segments and geographies with underlying growth at Marsh, Guy Carpenter and Mercer accelerating compared to the fourth quarter. Adjusted operating income grew 13% versus a year ago, reflecting our strong growth. Our adjusted operating margin expanded by 150 basis points compared to the first quarter of 2022 and adjusted EPS growth was strong at 10%, building on 16% in the first quarter of 2022. In addition to delivering terrific results, we continued to execute on acquisitions. On April 1, we completed the merger of BT Super with Mercer Super Trust creating one of Australia's most competitive super funds with approximately 850,000 members and 63 billion of assets under management. I'm pleased with our performance, especially when viewed in the context of the volatile macroeconomic environment. The global economy has been contending with high inflation, aggressive tightening of monetary policy by central banks, some recent bank failures and the effects of geopolitical instability. We have a track record of resilience across economic cycles, and there are factors that support continued growth in our business. Although the outlook for real GDP growth continues to be under pressure, inflation remains elevated, driving higher insured values and loss costs. P&C insurance and reinsurance rates continued to increase as carriers priced to account for the rising frequency and severity of catastrophe losses, social inflation and higher reinsurance costs. Healthcare costs are trending higher and employers expect further increases in the years ahead. Labor markets remain tight in most major economies with 3.5% unemployment and nearly 10 million unfilled jobs in the U.S. and short-term interest rates are at the highest level since the financial crisis, lifting fiduciary income. Change and uncertainty create complexity as well as opportunity for clients. Marsh McLennan's leadership and capabilities and risk strategy and people help them navigate shifting landscapes. Turning to insurance and reinsurance market conditions, primary insurance rate increases persisted with the Marsh Global Insurance Market Index up 4% overall in line with the fourth quarter. Property rate increases accelerated to 10% and casualty pricing was up in the low single digit range. Workers' Compensation was flat and financial and professional liability insurance rates were down mid-single digits. Cyber insurance saw the highest increase in our index, although the rate of increase continued to moderate. In reinsurance market conditions remained challenging from January 1 through April 1. Risk appetite for property catastrophe reinsurance remains constrained. Reinsurers continue to push for structural changes and tightened terms and conditions. Limited new capital has entered the market to support property catastrophe risks. At April renewals U.S. property cat reinsurance rates saw increases of 40% to 60% on average for non-loss affected accounts with higher increases for loss affected business. U.S. casualty reinsurance rate increases were more modest. In Japan, property cat rates were up 15% to 25%. The impact of rate increases on ceded premiums was mitigated by higher retentions. We continue to help our clients manage through these challenging market conditions. Now, I'd like to take a moment to provide an update on our recent strategic initiatives and highlight some of the steps we've taken. As we discussed last quarter, our leadership team is focused on delivering the full capabilities of Marsh McLennan to our clients, continuously improving the client and colleague experience, efficiently managing capital and driving growth and value for shareholders. There are meaningful opportunities at the intersections of our businesses where our colleagues can deliver the benefits of our scale, data, insights and solutions that are highly valued by clients. In February, we named Flavio Piccolomini to lead Marsh McLennan for International and Pat Tomlinson to lead U.S. and Canada. Since then, we have also named additional Marsh McLennan region and country leaders. These leaders are driving greater client impact through enhanced collaboration, while at the same time maintaining the strength of the value propositions of each of our businesses. This deliberate focus on collaboration is already yielding benefits. Let me share some examples. Guy Carpenter Securities and Mercer Investments successfully arranged an insurance linked securities transaction for a major insurer to transfer earthquake risk. This type of win, the first of its kind in the insurer's market was possible because of the combined strength of Guy Carpenter's leadership in earthquake parametric structuring and Mercer's deep local investment and regulatory expertise. As we drive deeper collaboration, we're also finding new ways to operate, reduce complexity and organize for impact. As we noted in January, we took actions to align our workforce and skillsets with evolving needs, rationalized technology, and reduced our real estate footprint. We see opportunities for savings beyond the actions we have already taken. Mark will provide further details, but overall, we now expect roughly $300 million of savings by 2024 with total cost to achieve these savings of $375 million to $400 million. Our leadership appointments, go-to-market collaboration and restructuring actions are an opportunity to accelerate impact for clients, reinvest in our capabilities, and to be more efficient and connected. Before I turn to our results, I want to comment on ESG. Our recently released ESG report highlights the many ways in which Marsh McLennan is meeting these challenges and helping clients better manage their strategies. We have a track record of ESG engagement, and it's an area where we continue to see an opportunity to support our colleagues, clients, and communities. Sometimes this work takes place at the macro or community level like Guy Carpenter's work helping communities build resilience in the face of natural disasters through community-based catastrophe insurance. But more often it takes place in our work with clients such as helping clients navigate an evolving climate landscape or our efforts to help organizations address gender and racial pay equity and ensure fairness in rewards. We are proud of the work we do in this area and consider it a privilege to help clients progress their ESG strategies. Now, let me turn to our first quarter financial performance. We generated adjusted EPS of $2.53, which is up 10% from a year ago, or 12%, excluding the impact of foreign exchange. On an underlying basis revenue grew 9%. Underlying revenue grew 11% in RIS and 5% in consulting. Marsh was up 9%, Guy Carpenter grew 10%, Mercer grew 7%, and Oliver Wyman was flat after growing revenue nearly 40% over the last two years. Overall the first quarter saw adjusted operating income growth of 13% and our adjusted operating margin expanded 150 basis points year-over-year. Turning to our outlook, we are well positioned for 2023 and continue to expect mid-single digit or better underlying revenue growth, another year of margin expansion and strong growth in adjusted EPS. Our outlook contemplates that current macro conditions persist, but as we discussed earlier, there's uncertainty regarding the economic backdrop, which could turn out to be different than our assumptions. In summary, the first quarter was a great start to the year for Marsh McLennan. Our business delivered strong performance and we continue to execute well on our strategic initiatives. I'm proud of the focus and determination of our colleagues and the value that they deliver to our clients and shareholders. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, John, and good morning. Our first quarter results were outstanding and reflected continued momentum in underlying growth, strong margin expansion and double-digit growth in adjusted EPS. Our consolidated revenue increased 7% in the first quarter to $5.9 billion with underlying growth of 9%. Operating income was $1.7 billion, and adjusted operating income increased 13% to $1.8 billion. Our adjusted operating margin increased 150 basis points to 31.2%. GAAP EPS was $2.47 and adjusted EPS was $2.53, up 10% over last year. Looking at risk and insurance services, first quarter revenue was $3.9 billion, up 10% compared with a year ago or 11% on an underlying basis. This result marks the eighth consecutive quarter of 8% or higher underlying growth in RIS and continues the best stretch of growth in nearly two decades. Adjusted operating income increased 17% to $1.4 billion, and our adjusted operating margin expanded 210 basis points to 38.6%. At Marsh, revenue in the quarter was $2.7 billion, up 8% from the first quarter of last year, or 9% on an underlying basis. This comes on top of 11% growth in the first quarter of last year, and reflects acceleration from the fourth quarter. Growth in the first quarter reflected excellent retention and strong new business. In U.S. and Canada, underlying growth was 7% for the quarter, a solid result given the continued headwind from lower M&A and capital markets activity. In International underlying growth was strong at 10% and comes on top of 11% growth in the first quarter of 2022. Asia-Pacific was up 11%. EMEA was up 10% and Latin America grew 10%. Guy Carpenter's revenue was $1.1 billion, up 7% or 10% on an underlying basis, driven by strong growth across all regions and global specialties and reflecting the tighter reinsurance market conditions. In the Consulting segment first quarter revenue was $2 billion, up 1% from a year ago or 5% on an underlying basis. Consulting operating income was $411 million, and adjusted operating income was $406 million, up 1%, reflecting continued foreign exchange headwinds and the softer quarter at Oliver Wyman. Our adjusted operating margin in Consulting was 20.3% in the first quarter, a decrease of 30 basis points. Mercer's revenue was $1.3 billion in the quarter, up 7% on an underlying basis. Career revenue increased 12%, the eighth straight quarter of double-digit growth and reflected continued demand in rewards, talent strategy and workforce transformation. Health underlying growth was 12% and reflected strength in employer and government segments and momentum across all regions. Wealth grew 2% on an underlying basis, driven by continued strength in defined benefits consulting, partly offset by a decline in investment management due to continued capital market headwinds. Our assets under management were $354 billion at the end of the first quarter, up 3% sequentially, but down 9% from the first quarter of last year due to market declines and foreign exchange that more than offset positive net flows. Oliver Wyman's revenue in the first quarter was $687 million, which was flat on an underlying basis. As John noted, this follows a nearly 40% increase in Oliver Wyman's revenue over the past two years. Recent sales activity has been encouraging, however, suggesting we could see a return to modest growth in Oliver Wyman in the second quarter. Foreign exchange was a $0.04 headwind in the first quarter. Assuming exchange rates remain at current levels, we expect FX to be a $0.02 headwind in the second quarter and mostly neutral in the second half. I want to provide an update on the restructuring program we discussed last quarter. Based on our plans today, we expect total charges related to this program of between $375 million and $400 million. To date, we have incurred nearly $250 million of charges and currently expect to incur most of the remaining costs in 2023. We expect to achieve total savings of approximately $300 million by 2024 with $160 million to $180 million realized in 2023 and the balance in 2024. Our other net benefit credit was $58 million in the quarter. For the full year of 2023 we continue to expect our other net benefit credit will be about $235 million. Investment income was $2 million in the quarter on a GAAP basis, or $4 million on an adjusted basis. This compares to $17 million of investment income in the first quarter of 2022 on an adjusted basis. Interest expense in the first quarter was $136 million, up from $110 million in the first quarter of 2022. This reflects an increase in long-term debt and higher interest rates on commercial paper, which we use for efficient working capital management. Based on our current forecast, we expect approximately $150 million of interest expense in the second quarter and approximately $575 million for the full year. Our effective adjusted tax rate in the first quarter was 25% compared with 23.1% in the first quarter of last year. Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation similar to a year ago. Excluding discrete items, our effective adjusted tax rate was approximately 25.5%. When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative. Based on the current environment, it is reasonable to assume a tax rate between 25% and 26% for 2023. Turning to capital management, our balance sheet, we ended the quarter with total debt of $13 billion. This includes the $600 million of senior notes we issued in March. Our next scheduled debt maturity is October, 2023 when $250 million of senior notes mature. Our cash position at the end of the first quarter was $1 billion. Uses of cash in the quarter, totaled $876 million, and included $296 million for dividends, $280 million for acquisitions, and $300 million for share repurchases. We continue to expect to deploy approximately $4 billion of capital in 2023 across dividends, acquisitions, and share repurchases. The ultimate level of share repurchase will depend on how the M&A pipeline develops. While there continues to be uncertainty in the outlook for the global economy, we feel good about the momentum in our business and there are factors in the macro environment that remain supportive of growth. I would also note that while our current outlook contemplates margin expansion in the second quarter, we expect it will be more modest than in the other quarters, reflecting the talent investments we continued to make last year, the timing of annual raises and a continued rebound in expenses such as travel and entertainment relative to last year. Overall, our strong start leaves us well positioned for another good year in 2023. Based on our outlook today, for the full year we continue to expect mid-single digit or better underlying growth, margin expansion and strong growth in adjusted EPS. And with that, I'm happy to turn it back to John.

Thank you, Mark. Operator, we're ready to begin Q&A.

The line is now open for questions. Our first question comes from the line of David Motemaden with Evercore ISI.

Thanks, good morning. I had a question just on the increased cost saves from the restructuring, so a pretty big increase in that target. I'm wondering, John, if maybe you could just talk about the sources of those benefits and if this is all we should expect or if there's anything more that we could expect potentially in the future?

Sure. Thanks David and good morning. So, as I mentioned in my prepared remarks we're excited about the opportunities at the intersections of our businesses. We're being more deliberate and focused on areas of collaboration, and that's creating both revenue and efficiency opportunities for us. I spoke about the appointments of Flavio and Pat, so I'm excited about that and the other regional and country leaders that we put in place to really capture these opportunities for us. From an efficiency point of view, they're in similar areas to what we talked about on the fourth quarter call earlier this year. It's in the area of talent of course and re-skilling and moving talent to important growth opportunities. And I would point out we are reinvesting as well; the savings we talked about are net of reinvestment. Beyond people, it's technology and real estate and so it's our best estimate at the moment. But again, we're going to continue to look for opportunities along the way.

Got it, thanks and, oh sorry, go ahead.

Oh, go ahead. Sorry, David, follow up.

Yes, I guess I would just follow up on that and just ask, talent is one that you had mentioned. I'm just wondering the Marsh Operational Excellence program and using Centers of Excellence, I'm just wondering how many employees do you have in these centers and where do you think you can get that to over what time period?

Yes, we're not in the early stages of the game in terms of mid and back office efficiency opportunity. And I would point out it's broader than Marsh; similar opportunities exist at Mercer and at Guy Carpenter as well. There's still opportunities in front, but we're also still investing in capabilities including in talent and in technology to support these efforts. And so that will drive further efficiencies for us down the road. Thank you, David. Operator, next question?

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

Hey, good morning. So I had a question on organic growth and the acceleration you reported in the first quarter in the RIS division. Just wondering to what extent results benefited from sort of one off type timing of business type things, or were there other factors that you think are more sustainable in nature?

Yes, sure Jimmy, and good morning. I was very pleased with the start to the year, as you noted, and I pointed out in my prepared remarks, it's an acceleration from our growth in the fourth quarter. I talked about some of the macros that are supportive of growth, not just in RIS, but in our business more broadly. But I also want to point out we've invested in talent in growth areas. We've deployed capital in markets that we think have strong growth fundamentals. And we've also been quite focused all throughout the company in investing in our sales operations capabilities, in tools as well. There's nothing really one-off about what happened in the first quarter. And we feel good about the revenue growth. Maybe I'll ask Martin to share some details and then Dean to give a little bit more color of where we saw some of the strong growth in RIS in the quarter.

Thank you, John. I'd be delighted to. We're very pleased with the strong organic growth at 9% in Q1, which is on top of the 11% posted in Q1 2022. Our strongest quarter last year, and better than the full year growth of 8%. Solid growth is across International 10%, APAC at 11%, EMEA 10%, LAC at 10%, U.S. and Canada at 7%. And as expected, the U.S. and Canada results were once again impacted through tough comps and transactional risk and elevated M&A, SPAC and capital markets activity at the beginning of 2022, when the overall 9% growth in the quarter was on top of 11% in Q1 2022. The specialty growth was good. Credit specialties, construction, aviation, and marine cargo, easily offset the drop in M&A growth. Renewal growth is very strong in U.S. and Canada, fueled by the new business we put on in 2022 and stronger client retention and reduced loss business which is very pleasing. So we feel very good about how we're positioned. We're very good about our talent, the capabilities in the business and the consistency of the performance across the book and over a number of quarters.

All right, great, thanks Martin. Dean, do you want to share some thoughts on the reinsurance market?

Thanks, John. Similar to Martin, we're very pleased with Guy Carpenter's 10% underlying growth in the quarter. Again, following 11% growth in the first quarter of 2022, we had very strong growth, consistent growth across all of our regions globally. And despite significant headwinds in the ILS capital market impacting retrocession placements, our global specialty team had a very, very strong first quarter. Certainly our results reflect tightening market conditions and restrictions in capacity, as John noted, but I think demand for our advice and solutions remains very, very strong in a very challenging environment for our clients. We think the marketplace will be a pricing tailwind moving throughout 2023 and beyond. And keep in mind at Guy Carpenter, we hired significant talent in the marketplace the last three years, and that showed up with record new business levels in 2022 with very strong momentum into the first quarter and beyond.

Great, thanks Dean. Jimmy, do you have a follow up?

Yes, just a similar question on Oliver Wyman. I think Mark mentioned that you expect modest growth in the second quarter, but should we assume that the results this quarter were impacted by just economic uncertainty and to the extent that continues, then that's the business that will see slower growth through the course of this year?

Sure. Jimmy, I'll ask Nick to jump in, but I want to reiterate again, there's a step change in the size of Oliver Wyman's business over the last couple of years. We saw 40% growth and so there is good demand for capabilities at Oliver Wyman. But Nick, maybe you can talk a little bit more about the first quarter and what you're seeing in the pipeline at the moment.

Thank you very much for the question, Jimmy. We've known it was coming. I think as I was looking back over the transcripts, it's four or five quarters, I've had the question about economic uncertainty and growth. And you can see from the business headlines, it's a tougher environment for consulting firms right now. We have flat underlying growth. We have added some size through excellent acquisitions. Even at that level, I'm confident that we continue to gain share. It's a fragmented market. It's falling back from the peaks of the last couple of years. We signaled in Q4 a slowing in our sales as our clients and probably a little bit us as well, paused after a torrid two years and we were taking stock, they were taking stock. In our clients' cases there was that economic uncertainty that you've highlighted. And add on top of that, the regular drumbeats of deal driven revenues in our private equity practice and across our industry practices also remains depressed. I'm extremely confident for the future. We continue to be selective to support clients in significant transformations around the world. We have growth in a range of our businesses. Our India, Middle East and Africa business, where we had a good acquisition last year is growing strongly. Our top sectors are the public sector, automotive and manufacturing and energy, so quite broad based. Our strategy, top brands and innovation business, our economic consultancy and our macro practice are in robust health. Our digital practice continues well. And as I've said before, we've been preparing for more countercyclical offerings in our nascent restructuring practice. Although it's small, it's growing strongly. So we generally guide that through the cycle, we expect mid- to high single-digit growth. But last year was obviously much higher than this. We're now in the slower part of the cycle. But as Mark said, we are currently expecting modest growth in Q2.

Thanks Nick. Before we leave the revenue growth story, I want to ask Martine to jump in here as well. We had a terrific quarter at Mercer, a particularly strong growth in both Career and our Benefits business, but also a rebound in investments. Martine, maybe you could share some thoughts.

Yes, thank you, John and indeed, we're very pleased with our results, 7% overall and following a 6% Q1 last year, it's across all the regions. And I would say, the current macroeconomic environment is really supportive of the services that we bring to market. Inflation and interest rate volatility, volatile capital markets, well-funded defined benefit plans, tight labor markets, demand for digital health services, new ways of working. And we've made quite a lot of investments as well in clear strategy, client segmentation, much more focused investment in talent, in digital tools and intellectual capital. Therefore, I would say that these market conditions, combined with the clarity of our strategy and our investment, are conducive to this kind of growth. The pipeline that we see and the sales that we are entering Q2 with is strong, and we have good visibility in the next quarter and a little bit beyond. Of course, we're always monitoring the macroeconomic conditions, as we've discussed with Oliver Wyman. But over the years, we've also invested in diversifying our portfolio towards faster growth elements and more recurring businesses in the portfolio. So it looks solid for continuity in the year.

Thank you, Martine. Operator, next question?

Our next question comes from the line of Michael Zaremski with BMO Capital Markets.

Hey, good morning. I hope the questions are okay. I'm curious about any comments on the U.S. Federal Trade Commission proposal to get rid of noncompetes. One of your peers commented publicly that they were against that. Any color? Did you guys make a comment and do most producers in the U.S. do have noncompetes in their contracts?

Yes, thanks Mike. I don't think there's a lot to report on here. We, of course, are always monitoring any potential regulatory changes or possible impacts on our business. We're certainly very well aware of the FTC proposal, and we've offered feedback through a number of different industry channels. We think Marsh McLennan is an employer of choice in a very competitive industry. We see a healthy environment for sure. And there really aren't noncompetes in our businesses for our producers. And if you read the trade press, you'd see a pretty active market for talent. It's a market that we're a net winner in, but nonetheless, there's an active market and talent moving around throughout the industry.

Okay, understood. My follow up is on the better-than-expected consulting results ex-Oliver Wyman. Just curious if you'd be willing to share whether the results were better than you internally had expected given the macro outlook, especially in Career, or are things really just we're maybe focusing too much on some of the headlines and things underneath the surface aren't as bad as some of the headlines might suggest?

Look, the economy has proven to be quite resilient. And I think when you think about Mercer's Career business, there are services that we provide that were probably more discretionary in the past than they are in the current environment. Martine also noted how we've really tried to move into and deployed capital into more growth markets. We have high expectations for our businesses. Again, we're pleased with the start to the year; it was terrific growth. Martine talked about the environment, it remains quite strong, so no major surprises. But again, we're pleased with the start to the year. Operator, next question?

Our next question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, thanks and good morning. My first question is on the savings program. Can you give us a sense of how much of those $160 to $180 million hit your results in the first quarter? And I'm also interested in getting a breakdown between RIS and Consulting. Also, can you give us a sense of the pacing for whatever costs are left and how that should hit results for the balance of the year?

Sure. Thanks, Elyse, for the question. Mark, do you want to talk a bit more about that?

Yes. We haven't been terribly specific, but I'll try to be helpful. So in terms of how much hit in the first quarter, I think we took a lot of action in the fourth quarter of last year, as you saw through the size of the charges. So I think it's probably a reasonable assumption to — if you wanted to assume a ratable pacing of the $160 to $180 million throughout this year, that's probably not bad. And as John noted earlier, that's net of reinvestments, so that will flow to the bottom line. In terms of split across businesses, we haven't been specific there, but you could look at the proportion of charges in some of our disclosures and make a rough approximation. So I think ratable spreading of the $160 to $180 million through this year is not a bad way to go.

Do you have a follow up, Elyse?

Yes. On the reinsurance side, you guys have highlighted that's an area where you've hired a lot of talent over the last few years. I think I've also seen recently, you might have lost some talent, which we often see in the industry. So just as you think about the tailwinds of strong pricing in that business, which came up earlier, do you think we can continue to see double-digit organic growth within that business as we kind of see the full impact of the midyear renewals and beyond?

Sure, Elyse. Look, again, it was a terrific start to the year. I'm very proud of our team. It's a very difficult marketplace and helping our insurance company clients navigate in a very, very challenging market. And it obviously has a follow-on effect on our clients at Marsh as well and so we're investing in our capabilities there and are well positioned for growth. It is an active talent market. From a talent point of view, I really like how we're positioned. Our focus from a talent value proposition is about being your best at Marsh McLennan in all of our businesses and again we've been a net winner there. From time to time, obviously, we'll have some voluntary turnover, but the turnover you may have read about won't impact the trajectory of Guy Carpenter or our business. So we'll see where the market heads. Both Dean and I commented, property cat is the big headline at the moment, that's a line of business that's most acute here in the United States; we have a much bigger, broader business than that. But demand for our services there remains quite strong. So we look forward to a good year at Guy Carpenter. Operator, next question?

Our next question comes from the line of Robert Cox with Goldman Sachs.

Hey, thanks for taking my question. I was hoping to drill into the retirement business and just any comments on how the economic backdrop may be impacting the business in providing any benefits?

Sure, Robert. Thanks for the question. Maybe I'll ask Martine to unpack some of the investment in Mercer's wealth and the results overall. Martine?

It was a good quarter for the defined benefit business. The market conditions and volatility require a lot that we can do to help clients navigate through these changes. I'm proud of the team that has been quite innovative and proactive in addressing these challenges. With the rise of interest rates, even though the asset side of the pension plans are depressed through equity, we've seen a great improvement in the funding of these plans. When the funding of these plans becomes better, a lot of our clients look for ways to divest the liabilities and assets to insurers. So we're seeing activity there in the buyout space, and that has fueled the DB Consulting business. That being said, the DB segment itself is in structural decline. So underneath this, you'll continue to see that long-term trend. But in the meantime, with the volatility, it does require quite a lot of work, and we're happy to help clients through these times. On the investment side, in Consulting we were very busy helping through the volatility and the decline in equity. Our OCIO business is taking basis points on the value of assets as a way to pay for the services we render and of course, when the value of assets are depressed, our revenue goes down. But we have positive net flows into that business. It's a business that has very good long-term growth through net flows and returns. It's just been a more difficult period over the last year and a half. We're still seeing year-over-year headwinds, because the decline in the market really started in Q2 and then through Q3 last year. So that pressure on the year-over-year basis should ease out; if AUM values stay at current levels, we should see that starting to turn around in Q3.

Terrific, thank you. Robert, do you have a follow up?

Yes, thanks and just one follow up. Are you seeing any benefit from China reopening in RIS? And just wondering if that's something you expect could potentially be a tailwind as we progress through the year?

It's hard to say overall, Robert. What I would tell you is that our business in China has performed well, even through what you might call the shutdown period. So we've had good solid growth in our business, both in Mainland China and in Hong Kong. I think, broadly speaking, the reopening of that economy should ease some of the economic uncertainty all around the world. To the extent that that could be helpful from a macro point of view, we certainly are pleased with those developments. But it's hard to draw a direct correlation. We haven't seen a meaningful uptick in growth in China since the reopening.

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

Thanks, good morning. I know we've talked about this in the past John, but I was hoping you could walk us through the impact of higher fiduciary income on margins. I'm asking specifically about second quarter, where you were talking about more cautious margin expansion expectations despite the fact that, at least in the first quarter, your fiduciary income was up significantly?

Obviously, fiduciary income is a factor in our overall results. We don't look at it separately. We're constantly trying to balance near-term performance, delivering excellent results in the near term with also investing in the capabilities that are going to lead to sustainable growth in the future. We're very thoughtful about how we manage our expense base. That leads to very few surprises for us around our results. I think we've hit that balance well over the course of the last couple of years. So we're very pleased with the start to the year from a margin point of view. As we've talked about in the past, margins are particularly in a quarter not our primary objective. It's an outcome of the way we've run the business. We've had 15 consecutive years of margin expansion. We expect 2023 to be year number 16. But from quarter-to-quarter, some seasonality to investments we make and some other variability could lead to a different outcome. So it won't be a straight line quarter-to-quarter.

Okay, that's helpful. Thank you. The second question, if I can. In your prepared remarks, you talked about health care costs going up and I was hoping you could talk us through from, I guess, our perspective, how that impacts, I'm thinking predominantly Mercer because I wouldn't think it would have the same upside that P&C rate increases have.

Well, where we are in commission, it could be helpful and we get paid in different ways and in different E&H markets around the world. It's not a straight line. And much like we've talked about in the context of reinsurance, we're very transparent about the compensation we earn and how we get paid with our clients. Effectively, a rising cost of risk is a tailwind, whether it's in P&C or in benefits to us. But we also provide other consulting services to help our clients navigate some of the challenges. The tight labor market is a factor here as well. Martine, maybe you can offer a little more color?

You're absolutely right. There's another element within Health that distinguishes it from P&C in that very often our clients are looking not to increase net cost for their employees because they often share in the cost. So we see a lot of demand for consulting work to change plan design and come up with digital solutions to control costs. Inflation does not always directly manifest itself in premiums or coverage. There's also a good part of our book that is fee-based rather than commission-based. So overall there are many different components pushing pressures, but employers are seeking innovative solutions and we provide many of those services.

One other point on our Health and Benefits business is that it's an important proof point around the possibilities of collaboration inside the company. This is a business that Mercer and Marsh work on together all over the world and it's been an important growth driver for us and a source of inspiration around what's possible as we come together more and bring our collective capabilities to the client. So thank you, Meyer. Operator, next question?

Our next question comes from the line of Yaron Kinar with Jefferies.

Good morning. Thanks for taking my questions. I have two, both margin-related. The first one: you've had three consecutive quarters of 200 basis points or more of adjusted margin improvement in RIS, which is very notable. At the same time, fiduciary income added significantly this quarter and cost saves add another component. Could you talk about those elements and any offsets in RIS?

I don't think of it in terms of offsets. I'm pleased with the margin expansion in the quarter. We're very disciplined about how we manage our cost base. We're not trying to optimize margins in any given quarter; we're trying to strike the balance between delivering terrific results today and sustainable growth and investment in capabilities that our clients want in the future. So I'm very pleased with our start to the year from a margin perspective.

I apologize if I'm belaboring the point, but I'm still a little confused, because I thought the $160 million to $180 million of cost saves that were going to be ratable over the year were net of reinvestments. It sounds like there was some reinvestment in growth this quarter?

We're always investing in future capabilities that will lead to sustainable growth. There are some direct hirings and investments connected with growth opportunities and collaboration, but we continue to invest broadly across the business. There's also travel and entertainment pressure and other inflationary impacts on the expense base of the company. Again, I'm pleased with 150 basis points of margin expansion in the quarter.

Got it. And my second question is on the consulting side. I think if it weren't for the JLT legacy legal charges, adjusted operating margin would have expanded nicely this quarter. Where are we with those charges? Are there ongoing items and should we expect them to continue?

We're pretty far along in that story. There could be some smaller charges that happen going forward. Those items are excluded in the adjusted margin that we report. Most of what happened in the first quarter was the resolution of some legacy litigation that existed at JLT. There could be some real estate items we're still addressing, but we're largely past these charges.

Our next question comes from the line of Andrew Kligerman.

Hey, good morning. I have two quick questions. Martin mentioned a headwind from the robust IPO and M&A markets in the first quarter of last year. Could you help us size that headwind in the first quarter and any color on next quarter as that effect fades? I had heard from some competitors that it had a roughly 5% dampening effect on organic revenue growth last year.

We're not going to size that specifically. We talked about it a bit in the fourth quarter. It was a bit more of a headwind in the fourth quarter than it was in the first quarter, but it remained a headwind. Capital markets are just one input to the overall macro environment and what we're doing to execute and to expand our growth. You can look at the big data and get a sense of when M&A and IPO activity started to tail off. We wouldn't project a major rebound in that market over the next quarter or two.

Got it, okay. And you had another good year of net hiring—around 3,000 last year following 6,000 in 2021. Curious what your outlook is for 2023. Are you expecting to see material net hiring? Any color on geographies?

A lot of the hiring we did last year was connected to mid- and back-office investments and some contractors were converted to full-time employees. We will always be active in the market in trying to bring talent that makes us better and stronger. We feel very good about our brand in the market and voluntary turnover across our businesses is at or below historical levels, so we feel terrific. We'll hire less this year than we did last year or the year before, but it's not only the raw number. It's who's on the team and making sure we're aligning talent with our clients' needs. Operator, next question?

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

Thanks. First, I want to dig into Oliver Wyman a bit more. Mark said sales activity looks like it picked up and we might see better results. I assume that is partly due to your strong financial services practice and some spillover from the banking situation. Also, are you seeing any slowdown in corporate spending that might cause caution going forward?

We have a little less visibility into the pipeline at Oliver Wyman historically, but recent sales activity has been better. We appreciate the point about the financial institutions practice; we have a great team there. Nick, could you add color?

Thank you, Brian. It's a good question. I think what we've really seen is uncertainty more than an economic decline. A lot of what we do is a matter of choice. Some of those choices become harder not to take right now, so clients have been pausing because of uncertainty. We don't necessarily see that as a big downward step, but they're not quite sure if they're investing for growth or investing for cost. The recent banking turmoil extends that period of uncertainty. We're proud of our market-leading financial services practice and very engaged in the global banking situation—supporting banks on funding, deposit and interest rate risks; working with parties on sale and purchase of assets; preparing for restructuring that will come. In the medium to longer-term, that will continue to fuel growth in that practice.

Brian, do you have a follow up?

Yes. I wanted to ask about commercial property insurance pricing. You mentioned strong price increases in the first quarter. Are we seeing acceleration in the second quarter as carriers adjust to higher reinsurance costs? Could that be a tailwind for Marsh as we look into the remainder of the year?

We did observe higher rate changes in property in the first quarter, given what happened late in the year and the reinsurance market at January 1. Broadly, it's a challenging market for our insurance clients at Marsh. Inflation is driving higher cost of risk and frequency of weather-related losses. We saw the U.S. retail property market begin to react to some of the reinsurance market changes as well. We're in the middle of the story right now as 2023 renewals progress.

John is right; it's not a good day for our clients, and our focus is on getting the best deals for our clients and driving innovation where we can. It's the 22nd consecutive quarter of rate increases overall. Property picked up momentum into Q1, accelerating from 7% rate increases in Q4 2022 to 10% in Q1 2023. In addition to rate increases, there's clear inflation and exposure growth, so real pain for clients. A good chunk of the high-risk business with high catastrophe exposure is fee-based and provides us stability. Casualty is being driven by social inflation, and workers' compensation remains relatively flat. One area with deceleration in price increases is some financial liability lines, like D&O, where new carriers have entered the marketplace. So it's a mixed picture, but property is the highlight in terms of rate growth.

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

All right, thank you, Andrew, and thank you all for joining us on the call this morning. In closing, I want to thank our over 85,000 colleagues for their hard work and dedication. I also want to thank our clients for their continued support. Thank you all very much. I look forward to speaking with you again next quarter.

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