Marsh & Mclennan Companies, Inc. (MRSH) Q2 2023 Earnings Call Transcript

Welcome to Marsh McLennan’s Earnings Conference Call. Today's call is being recorded. Second 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 included in 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. Operator Instructions. 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 second quarter results reported earlier today. I'm John Doyle, 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 second quarter results were excellent. We performed well across our businesses and geographies, extended the best run of quarterly underlying revenue growth in over two decades and generated double-digit growth in adjusted EPS. Top line momentum continued with 11% underlying revenue growth on top of 10% growth in the second quarter of last year. Adjusted operating income grew 17% versus a year ago. Our adjusted operating margin expanded 100 basis points compared to the second quarter of 2022 and adjusted EPS grew 16%. We also raised our quarterly dividend by 20% to $0.71 and completed $300 million of share repurchases during the quarter. I'm pleased with our performance, especially when viewed in the context of the current macroeconomic and geopolitical environment. While the U.S. and other major economies have been resilient, there remains significant uncertainty given persistent inflation, continued central bank tightening and geopolitical instability. However, we continue to perform well. As we have discussed in the past, there are factors that are supportive of our growth. We also have a track record of resilience and believe we are well positioned to perform across economic cycles. We manage our business to grow revenues faster than expenses in both good and challenging periods. We've made meaningful investments in market-facing talent and improving sales operations and client engagement, which are contributing to our growth. And we continue to deliberately shift our business mix to faster growth areas. So, while the macroeconomic and geopolitical environment remains volatile, we see opportunity to deliver greater value to clients through our leadership and capabilities in risk, strategy and people. A good example is Marsh McLennan's work to aid Ukraine's economy. Our four businesses together are mobilizing our unique expertise to support their future recovery and reconstruction efforts. In June, I attended the Ukrainian recovery conference hosted by UK Prime Minister Rishi Sunak. We have the honor of hosting a delegation of Ukrainian and British officials at our London offices where we announced proposals to help with Ukraine's recovery. Some estimates suggest over $1 trillion may be required for this effort. Yet investment capital will not be forthcoming until investors can protect themselves from war risk. To this end, we propose to Ukraine and the G7, the creation of a war risk insurance pool that would ensure commercial insurance is available for reconstruction projects. We also announced that we will partner with the Ukrainian government and insurers to create a data platform for the assessment of war risks. This project draws on Marsh McLennan's expertise and leverages data and information provided by the Ukrainians. By enabling effective and targeted risk modeling, it represents a critical first step for the industry to offer commercial insurance and unlock capital. Our colleagues at Oliver Wyman also partnered with the Ukrainian government to develop a post-war transformation strategy. This would reposition Ukraine's economy in a way that leverages national strengths to move beyond resilience to opportunity. At Marsh McLennan, we consider it a privilege to support these endeavors. Now I'd like to take a moment to provide an update on the strategic initiatives we discussed last quarter. As a reminder, in the first quarter, we appointed new leaders for Marsh McLennan International and U.S. and Canada as well as region and country leaders. These leaders are driving client impact through enhanced collaboration, while at the same time maintaining the individual value propositions of the businesses. We are bringing our collective capabilities where there is opportunity to provide greater value. This allows us to harness the benefits of our scale, data, insights and expertise to meet our clients’ challenges and realize possibilities. This approach is already yielding benefits and improving the client and colleague experience. At the same time, we are also finding new ways to operate, reduce complexity and organize for impact. The actions we are taking aim to realign our workforce and skill sets with evolving needs, rationalize technology, and reduce our real estate footprint. As we said last quarter, we expect roughly $300 million of total savings by 2024 with total cost to achieve these savings of $375 million to $400 million. Our go-to-market collaboration and restructuring actions are an opportunity to drive higher growth, enhance the colleague value proposition and be more efficient and connected. Turning to insurance and reinsurance market conditions, primary insurance rate increases continued with the Marsh Global Insurance Market Index up 3% overall versus 4% in the first quarter. Property rates increased 10% — the same as last quarter. Casualty pricing was up in the low single-digit range. Workers' compensation was down low single-digits and financial and professional liability insurance rates were down high single digits. Cyber insurance pricing stabilized after several years of increases. In reinsurance, challenging market conditions persisted at mid-year renewals. Reinsurers were disciplined and rate increases remained significant, although the market showed more interest in deploying capacity than at January 1, given the firm pricing and improved terms. Global property cat reinsurance risk-adjusted rates increased about 30% on average with loss-impacted clients seeing higher pricing. The impact of rate increases on ceded premiums was mitigated by higher retentions. On the casualty side, pricing pressure continued across most lines driven by prior year loss development and concerns about social and economic inflation. We continue to help clients manage these dynamic market conditions. Now let me turn to our second quarter financial performance. We generated adjusted EPS of $2.20, which is up 16% from a year ago. On an underlying basis, revenue grew 11%. Underlying revenue grew 13% in RIS and 8% in consulting. Marsh was up 10%, Guy Carpenter 11% versus 6% and Oliver Wyman grew 11%. Overall, the second quarter saw adjusted operating income growth of 17% and our adjusted operating margin expanded 100 basis points year-over-year. For the six months, consolidated revenue grew 10% on an underlying basis. Adjusted operating income grew 15% and our adjusted operating margin expanded 130 basis points. Adjusted EPS was $4.74, up 13% from a year ago. Turning to our outlook, we are well positioned for a strong year in 2023. In terms of revenue outlook, given our momentum, we expect full-year underlying revenue growth to be high single-digits. This reflects a continuation of current trends, but as we noted, the macro outlook remains uncertain and can turn out to be different than our assumptions. As for the bottom-line outlook, we continue to expect margin expansion for the full year and strong growth in adjusted EPS. Overall, I'm proud of our second quarter performance, which demonstrates our continued execution on strategic initiatives and momentum across our business despite an uncertain macro environment. I'm grateful to our colleagues for their focus and determination and the value they delivered to our clients, shareholders and communities. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, John, and good morning. Our second quarter results were outstanding with continued momentum in underlying growth, mid-teens adjusted EPS growth and solid margin expansion. Our consolidated revenue increased 9% to $5.9 billion with underlying growth of 11%. Operating income was $1.5 billion and adjusted operating income was also $1.5 billion, up 17%. Our adjusted operating margin increased 100 basis points to 27.7% — a good result given the headwinds from the talent investments we made in 2022, the timing of our annual raises and the continued rebound in expenses such as travel and entertainment that we mentioned last quarter. GAAP EPS was $2.07 and adjusted EPS was $2.20, up 16% over last year. For the first six months of 2023, underlying revenue growth was 10%. Our adjusted operating income grew 15% to $3.3 billion. Our adjusted operating margin increased 130 basis points and our adjusted EPS increased 13% to $4.74. Looking at risk and insurance services, second quarter revenue was $3.7 billion, up 12% compared with a year ago, or 13% on an underlying basis. This result marks the ninth consecutive quarter of 8% or higher underlying growth in RIS and continues the best stretch of growth in nearly two decades. Operating income increased 20% to $1.2 billion. Adjusted operating income increased 18% to $1.2 billion and our adjusted operating margin expanded 140 basis points to 34.2%. For the first six months of the year, revenue in RIS was $7.6 billion with underlying growth of 12%. Adjusted operating income increased 17% to $2.6 billion and the margin increased 170 basis points to 36.4%. At Marsh, revenue in the quarter was $3 billion, up 9% from a year ago or 10% on an underlying basis. This comes on top of 9% growth in the second quarter of last year. Growth in the second quarter reflected strong new business and excellent retention. In U.S. and Canada, underlying growth was 9% for the quarter. In international, underlying growth was 10% and comes on top of 9% in the second quarter of 2022. Latin America was up 17%, EMEA was up 11% and Asia Pacific grew 6%. For the first six months of the year, Marsh's revenue was $5.8 billion with underlying growth of 9%. U.S. and Canada grew 8% and international was up 10%. Guy Carpenter's revenue was $576 million in the quarter, up 10% or 11% on an underlying basis driven by strong growth across all regions and global specialties. For the first six months of the year, Guy Carpenter generated $1.6 billion of revenue and 10% underlying growth. In the Consulting segment, second quarter revenue was $2.2 billion, up 4% from a year ago or 8% on an underlying basis. Consulting operating income was $388 million. Adjusted operating income increased 9% to $403 million. The adjusted operating margin was 19.2% compared to 19.3% in the second quarter of last year. For the first six months of 2023, Consulting revenue was $4.2 billion representing underlying growth of 6% and adjusted operating income increased 5% to $809 million. Mercer's revenue was $1.4 billion in the quarter, up 6% on an underlying basis, representing the ninth consecutive quarter of 5% or higher underlying growth in Mercer. Wealth grew 3% driven by continued strength in defined benefits. Investment management also delivered modest growth. Our assets under management were $393 billion at the end of the second quarter, up 11% sequentially and 14% compared to the second quarter of last year. Growth was driven by a modest rebound in capital markets, positive net flows and our transaction with Westpac. Health underlying growth was 10% and reflected strength in all segments and regions. Career revenue increased 6% on top of 17% growth in the second quarter of last year. We continue to see demand for rewards, talent strategy and workforce transformation advice and solutions. With the first six months of the year, revenue at Mercer was $2.7 billion with 7% underlying growth. Oliver Wyman's revenue in the quarter was $798 million, an increase of 11% on an underlying basis and reflected continued strength in the Middle East and Europe and a rebound in the Americas. With the first six months of the year, revenue at Oliver Wyman was $1.5 billion, an increase of 6% on an underlying basis. Foreign exchange was a $0.02 headwind in the second quarter. Assuming exchange rates remain at current levels, we expect FX to be a $0.01 headwind in the third quarter and a $0.01 benefit in the fourth quarter. We reported $65 million of total restructuring costs in the quarter, approximately $50 million of which relates to the program we announced in the fourth quarter. These charges include costs related to severance, lease exits and streamlining our technology environment. We continue to expect total charges under this program to be $375 million to $400 million. To date, we’ve incurred approximately $300 million of charges and currently expect to incur most of the remaining costs in 2023. We still expect to achieve total savings of roughly $300 million by 2024, and now expect to realize approximately $200 million in 2023. Our other net benefit credit was $60 million in the quarter. For the full year 2023, we expect our other net benefit credit will be about $240 million. Investment income was $3 million in the second quarter on a GAAP basis and $2 million on an adjusted basis. Interest expense in the second quarter was $146 million, up from $140 million in the second quarter of 2022. This reflects an increase in long-term debt and higher interest rates on short-term borrowings, which we use for efficient working capital management. Based on our current forecast, we expect approximately $142 million of interest expense in the third quarter and approximately $567 million for the full year. Our effective adjusted tax rate in the second quarter was 24.2% compared with 23.7% in the second quarter of last year. Our tax rate in both periods benefited from favorable discrete items. The largest discrete item this quarter was the accounting for share-based compensation. 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 and our balance sheet, we ended the quarter with total debt of $12.6 billion. Our next scheduled debt maturity is October 2023, when $250 million of senior notes mature. 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. Last week, we raised our quarterly dividend by 20%, marking our 14th consecutive year of dividend growth. This increase, the largest in 25 years, reflects our strong earnings growth over the past couple of years and confidence in our outlook. Our cash position at the end of the second quarter was $1.2 billion. Usage of cash in the quarter totaled $1 billion and included $295 million for dividends, $421 million for acquisitions and $300 million for share repurchases. The first six months, uses of cash totaled $1.9 billion and included $591 million for dividends, $701 million for acquisitions and $600 million for share repurchases. Given our strong results in the first half, we now expect high-single-digit underlying revenue growth for the full year. We continue to expect margin expansion for the full year and strong growth in adjusted EPS. This guidance is based on our outlook today, but as John mentioned, there continues to be uncertainty in the environment looking forward. So outcomes could be different than our current assumptions. Overall, our excellent start leaves us well-positioned for another great year in 2023. And with that, I'm happy to turn it back to John.

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

Certainly, we will now begin the question-and-answer session. Operator Instructions. And our first question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, thanks. Good morning. My first question, you guys updated your organic growth guidance for the full year to high-single-digits. You guys started off the year pretty strong at 10% organic growth through the first six months. So, trying to get a sense, as you think about the back half, what businesses might you expect to see some kind of moderation in, right, to get the high-single-digits for the full year? And then embedded within that guide, what are you assuming for fiduciary investment income in the back half of the year?

Good morning, Elyse. Thanks for the question. Yes, we're — as I said, I’m quite pleased with the growth year-to-date, and the macro environment although volatile remains supportive of good strong growth — inflation, pricing, tight labor markets — our tailwinds. But, as I pointed out in my prepared remarks, we've been shifting our mix of business to better growth markets. We've been investing in talent, sales operations, client engagement. We've sold some non-core businesses and recently announced the sale of a non-core business. So, we've been working very hard at the growth profile of the company. And, our outlook remains quite positive. So, we upped our guidance to high-single-digits, it’s again a terrific start of the year. I feel like we're well-positioned. Our team is executing very well in the marketplace, and in spite of the volatile macro environment, I think we'll have a good second half of growth as well. We're not going to give specific guidance on fiduciary income, but you saw what it looked like in the second quarter — obviously meaningful growth — and we expect that to likely continue in the second half.

Thanks. And then my second question is on margin. You guys had pointed out that Q2 would see lower improvement than the other quarters of the year. Does that still stand and when do you expect margin improvement to pick up in Q3 and Q4? And with the higher expense savings now $200 million this year, does the higher savings in 2023 — do those all come in the back half or was that spread throughout the year?

Yes, I'll ask Mark to talk about the restructuring program, but I was very pleased with the margin improvement in the quarter and year-to-date — 100 basis points in the second quarter, 130 basis points year-to-date. And, just a reminder for everyone, margins and outcomes for us, it's not the primary objective, but we do expect to grow revenue more than expense over time, and we're constantly trying to balance delivering today and investing for the future. I think we're getting that balance right. Our growth in both topline and earnings shows that. We did guide to less improvement in the second quarter; Mark talked about in his prepared remarks some of the drivers behind that. But again, I'm quite pleased with where we are. We expect solid margin expansion again for the full year. Mark, maybe you can talk about the restructuring program.

Hi, Elyse, how are you? Elyse, you see that we did take up the outlook for this year to $200 million but left the overall at $300 million. It just reflects the fact that we're executing well, and we've just moved a little bit quicker. And as we said last quarter, it wouldn't be a bad assumption just to assume the savings comes in ratably across the year. And, I would say the same thing. It's just that we've achieved the savings a little bit quicker. So, I would just assume a ratable spread over the course of the year as opposed to all the increase coming in the back half.

And we do have a bit of better second half comps on the expense line. So, thank you, Elyse. Operator, next question?

Thank you. And our next question comes from the line of Jimmy Bhullar with J.P. Morgan.

Hey, good morning. First, just a question on revenues in the RIS business. You've grown at a pretty fast rate the last several quarters and I think generally better than some of your larger peers, and part of that might have been just the benefit from the hiring activity that you've done over the past couple of years. Is the tailwind from that fully reflected in your results and has it fully ramped up or is there sort of more to go there?

Thanks, Jimmy. As I said, we’re quite pleased with our growth. You picked up one of my words — there is benefit from some hiring. As I noted, we've been working quite hard at shifting the mix of business, bringing in talent, improving our sales operations, and investing in client engagement. We've made terrific inorganic investments as well. So, it's much more than lateral hiring that's in the market. Having said that, we were quite pleased with the hiring we did, and we've gotten good returns from those investments. And, as I pointed out in the past, not only have we been pleased with the financial outcome, culturally we were thoughtful about who we brought into the organization and they're not only helping us grow, but they're making us better as well. So, we're quite pleased with those investments.

And then you mentioned macro and geopolitical a bunch of times and geopolitical obviously is understandable. Macro, from the outside it seems like most of the factors are tailwinds more than they’re headwinds — the equity market strong, inflation's high, GDP growth held in. So, maybe you could elaborate a little bit on what it is on the macro side that you see as a negative. Specifically on inflation, if it stays elevated, is that — obviously it's a positive on your growth, but is it a positive on your earnings as well overall or is the benefit offset by just higher expenses in your own business?

Yes, it's a good question. I was trying to thread the needle a bit. Again, the economy has been quite resilient, but inflation remains persistent. You're beginning to see it come down here in the United States, but not at the level that the central bank seems to be targeting. With their mission to reduce inflation, that's going to have an impact on not just the market here, but in other markets. And so, I think there is still a meaningful risk of recession. In fact, in other parts of the world we have economies in recession currently. That said, nominal GDP is a better indicator of demand for us rather than real GDP, and overall inflation we do think is beneficial to the company. We're not immune to some of the challenges from an inflationary environment in our expenses, but overall it's a net benefit. I would also say that equity markets have improved year-over-year, and while we had some headwinds in our investment business from a growth perspective, we're pleased with the improving growth profile year-to-date in Mercer Investments. Thank you, Jimmy. Operator, next question?

Thank you. And our next question comes from the line of Michael Zaremski with BMO Capital Markets.

Hey, great. First question, maybe I'll try to ask Jimmy's question differently. So, in the RIS segment specifically, organic growth much stronger than consensus expectations, which is great. Any way you can offer any thoughts on whether a material portion of that excess growth was market share taking versus just the overall market conditions for the entire industry being stronger than maybe some expected?

It's a mix of impacts, of course. It's difficult to say with real precision. You've started to see inflation come down here in the United States, and in many markets you're seeing GDP growth slow. P&C pricing moderated a bit in the quarter as well, and tight labor markets remain a positive factor. Compared to the 2010 to 2020 decade, we certainly have more tailwinds than headwinds. But again, we've been working aggressively to shift our mix and to improve the growth profile of the company and not just be a passive index on GDP or P&C pricing. So again, we're pleased. I forgot to mention earlier when Jimmy asked the question, I talked about the economy a bit, but the geopolitical environment remains a risk as well. So again, just trying to thread the needle between what's been a terrific first half of the year and what we think is a strong outlook for revenue growth in the second half, while acknowledging macro risk.

Okay. That's helpful. My follow-up is on cash flow from operations net of CapEx: it looks like it's growing at a pretty big clip. Do you expect free cash flow at this point to grow faster than earnings and any comments — if that's the case — whether your cash flow conversion will take a step up this year?

Thanks, Mike. We try not to emphasize focusing too much on free cash flow growth in any quarter or even a year; it can be really volatile. Yes, as you point out in the second quarter, free cash flow was up quite nicely. We have to be careful especially early in the year because it's a bit of a low base issue — our cash flows tend to be lower early in the year, then higher later in the year. But look, we've had a terrific run over a long period of time of double-digit free cash flow growth that has tracked pretty closely to our run of double-digit earnings growth. We're confident in our outlook for continued strong earnings growth and would expect free cash flow growth in the future would track that as well.

Thank you, Mike. Operator, next question?

Thank you. And our next question comes from the line of Robert Cox with Goldman Sachs.

Hey, thanks for taking my question. Just thinking about the Marsh business, and I realize growth has been strong both domestically and internationally. But, if you look at those domestically and internationally, over the next year and the next five years, which are you most excited about?

We're not going to give revenue guidance beyond what we've given today. But we're performing well and well-positioned. I think we have the best talent in the market, and I do believe we are capturing share. Martin, maybe you can talk a little bit about the growth so far this year and what you see for the rest of the year. Martin?

Thanks, John. As we said, we had strong organic growth of 10% in the second quarter, which is on top of 9% in the second quarter of 2022, and better than full year growth of 8%. It's a great balance: international was 10%, Latin America is 17%, EMEA 11%, APAC 6%, U.S. and Canada 9%. The specialties growth was strong — credit specialties, construction, aviation, energy and power were strong. Our advisory business, part of the risk advisor of the future, was very strong with double-digit growth. MMB was strong. Renewal growth was strong. So, it's a nice mix across the board, both new business and renewal.

Thanks, Martin. The consistency of growth has been outstanding in addition to the total. Do you have a follow-up, Rob?

Yes, thanks. Maybe switching to Oliver Wyman, growth came in well above the levels you guys had guided from last quarter. And there have been a number of positive economic data points as of late. Do you see the pipeline reflecting that? Is it looking like growth in the back half?

We're very pleased with the growth at Oliver Wyman. Nick, maybe you can talk a bit more in detail.

Thank you, Robert. We still see a relatively wide range of possible future outcomes. When we gave guidance at the end of the first quarter, that was based on what we saw in our sales pipeline, which was ticking up nicely but not aggressively. In the second quarter, we saw quite strong growth in sales. It's a reflection of places where Oliver Wyman’s being selected to support clients in transformative moments, led by our public sector practice, banking practice, transportation and services, and telco teams. Also, some of our other businesses — our economic research consulting, our brand consulting business Lippincott — showed strong growth and our digital practice is showing strong growth. I wouldn't say it's solely correlated with an economic uptick. Clients need support for performance transformation as well as growth strategy. Sales in the second quarter have been better than expected and in the near term I'm relatively optimistic. In the longer term, the economic outcomes are still fairly widely ranged.

Thank you, Nick. Operator, do we have a follow-up?

Question comes from the line of David Motemaden with Evercore ISI.

Hey, thanks. Good morning. Just had another question on the increased outlook to high-single-digits for the year. Was that improved outlook more a function of the results you've achieved to date or has your outlook improved at all going forward?

Thanks, David. It's really a function of both. We've had a terrific start to the year — broad-based growth and strong execution — which gives us confidence. That, combined with our shifting mix and investments, supports the higher outlook. That said, geopolitical and macroeconomic volatility remain, so we remain mindful of those risks but feel good about the second half.

Got it. Thanks. Maybe a question on Mercer Career. I saw that growth decelerated a bit; the compare wasn't that much harder than the first quarter. Is there anything you see on the pipeline or anything that indicates clouds on the horizon?

We love what we're doing at Mercer Career. Martine, could you talk about the results?

Thanks, David. The quarter's growth was on top of a challenging 17% comparable in the second quarter of last year. This quarter's 6% was also impacted by delays in the start of certain projects. But the fundamentals remain strong: we have 9% growth year-to-date. Demand continues as clients grapple with labor shortages, wage inflation, new ways of working and technology in the workplace. We discuss generative AI with clients. Career is also a business that can be impacted by discretionary spending, but our sales, pipeline and client sentiment are very strong. This gives us good visibility into strength for the third quarter and beyond. I'm confident the rest of the year will be good for Career.

Thanks, Martine. Thanks, David. Operator, next question please.

Thank you. And our next question comes from the line of Mike Ward with Citi.

Thanks. Good morning. You called out global specialty in Guy Carpenter. Can you discuss some of those trends, the runway, and how significant those impacts are?

Thanks, Mike. Dean, would you talk about Guy Carpenter's trends?

Sure. We're very pleased with our 11% underlying growth in the quarter, and 10% for the first half. We've seen strong growth across all regions, in particular internationally and in global specialties. Global specialties plays deeply in the retrocession and capital markets based in London and globally, and while there have been some capital challenges, we've seen some capital inflow into the marketplace. Despite market conditions our global specialty team continues to grow and perform impressively. New business across Guy Carpenter continues to accelerate, helped by talent we've hired and strong market demand for our analytics platform, which we believe is best in the marketplace. Demand for our advice and solutions remains strong, and clients are experiencing a flight to quality in a challenging market environment where capital is constrained and reinsurers are driving challenging terms and conditions. Guy Carpenter Securities is differentiating in the marketplace — we did over 20 catastrophe bond deals in the first half of the year, with some new ILS capital coming into the marketplace. We've done ILS structuring for key clients. So, there's real momentum globally. The market continues to be a tailwind; there's not enough new capital to change the trajectory of pricing.

Thanks, Dean. Martin, maybe you could talk a little about growth in specialties at Marsh?

As I mentioned earlier, we've seen strong growth in specialty areas: credit specialties — perhaps not surprising given the environment — construction has been strong internationally, aviation has bounced back, and energy and power are transitioning which drives demand. Our advisory business ties into these areas as well; we're advising clients on how to manage losses and cost drivers during the energy transition. All of those specialty areas are showing strong growth and momentum and help differentiate us.

In a world where the cost of risk is escalating, our risk consulting efforts are important to clients and are driving value. On the reinsurance side, after several years of pricing increases, it's a difficult market. We take our role as a market maker seriously. In the quarter we announced a multiline facility in London called Fast Track for our clients, and we created a reciprocal inside our MGA operations at Victor, trying to bring new solutions to a difficult market for clients. Do you have a follow-up, Mike?

That was super helpful. Last quarter you spoke about developing counter-cyclical products in Oliver Wyman. Can you share some examples?

Nick, you want to talk about some capabilities we've been building inside Oliver Wyman?

Yes. There are sectors which are less exposed to cycles. Last year we acquired Avascent, an aerospace and defense specialist, as an example. Some of our sectors we've positioned carefully through the cycle. On the capabilities side, we do a significant amount of performance transformation work — needed when clients face margin pressure or top-line challenges — and a restructuring practice we started a couple of years ago has shown strong growth. Since the pandemic we've seen a reduction in correlation between industries: some have been in downturn for a long time, some have mini crises requiring advisory support, and some are cyclical. Our private capital practice, which slowed recently, has started to pick up with activity both pre- and post-deal. That's a bit of a picture across the business.

Thank you, Nick. Thank you, Mike, for the questions. Operator, next question please?

Thank you. And our next question comes from the line of Brian Meredith with UBS.

This is Weston Bloomer on for Brian. My first question is a follow-up on Oliver Wyman: obviously strong growth there and you highlighted a few subsectors that saw growth. Within financial services and banking, was any of that growth driven by the banking turmoil earlier in the year or more one-off opportunities? Is that something that could play out in the back half of this year or 2024 given the earlier turmoil?

Thanks, Weston. Nick, maybe you could talk about that?

There were different puts and takes in our growth numbers. Perhaps 35% to 40% of our growth was driven by our banking practice. That's a preeminent business for us. At the beginning of the crisis we felt uncertainty could lead to pauses in decisions which might slow the pipeline. In the second quarter we saw some work coming through. It's hard to separate exactly how much was crisis response versus banks preparing for capabilities they now need given the different interest rate environment. There's work on liability management, interest rate risk, deposit management, branch network value, and tuning up for new tech and AI capabilities. We've seen that be a driver of some business already and we continue to expect that over the coming quarters.

Thanks, Nick. Go ahead.

Have you given a rough sense of whether financial services is the largest subsector within Oliver Wyman? I assume it is, but just confirming.

We don't give a detailed breakout, but it's one of our strongest and largest practices and a major sector in global management consulting.

Got it. Then within Guy Carpenter, can you talk about dynamics versus treaty versus facultative placements and the growth outlook? Are there more opportunities within facultative given changes in buyer behavior?

We've seen good growth over the last couple of years in both facultative and treaty. Guy Carpenter and Marsh work closely to bring all available capital to clients. Growth has been strong in both facultative and treaty.

Thank you. And our next question comes from the line of Paul Newsome with Piper Sandler.

Good morning. I didn't hear much about the M&A environment. Any updated thoughts on M&A and how you see the new environment given interest rate changes?

We remain quite active with a solid pipeline. We look for businesses with solid growth fundamentals, strong leadership and talent that make us better and we can make better. The pipeline is broad across RAS and consulting. We did a significant deal in Mercer Investments on April 1, which we're excited about in Australia. The number of deals is down as some buyers, primarily financial buyers, are sitting out, but strategic players remain active. Demand for high-quality businesses is strong. While the cost of capital increased, priced assets still trade at a premium. We've built a strong reputation as a buyer, which creates opportunities.

Follow-up: could you talk about the divestitures you've made and how important they are to margin improvements over the last quarter or year? I know they're small.

They are relatively modest in size, primarily at Mercer. We recently announced the divestiture of a non-core admin business — lower growth, capital intensive. There are better owners for assets like that who can bring scale and technology. We don't expect to do a lot more, but where divestitures make us stronger and enable investment in our core, we'll act.

Thank you. Our next question comes from the line of Jing Li with KBW.

Hi there. Thank you for taking my questions. A question on Asia Pacific business: I see a slower rate this quarter. Can you add color on the quarter and whether you expect that to continue in coming quarters?

Sure, Jing. Martin, could you talk about APAC?

When we look at international, we like to look at growth over longer periods. APAC was 6% underlying growth in the quarter and 8% year-to-date, which is more indicative of longer-term growth. Similarly, Latin America had elevated growth and we expect normalization. We have a great business in Asia Pacific and feel confident about the future.

There are lots of opportunities. It's a region with a meaningful protection gap, and we're well positioned with distribution throughout major countries. The JLT acquisition made us stronger there. We're excited about the region.

So the 6% this quarter is more of a one-time moderation and not indicative of a slowdown; do you expect double-digit going forward?

We're not giving specific guidance on APAC underlying growth, but it's an area where we expect strong growth going forward. We're well positioned and excited about the opportunities there.

I'm showing no further questions at the moment. Operator Instructions.

Operator, we can wrap up if there are no more questions.

I'm showing we do have a question, a follow-up. One moment, please. Our follow-up question comes from Robert Cox with Goldman Sachs.

Hey, just one follow-up on the M&A and capital markets activity. Can you give us a sense directionally if that was more or less of a headwind in this quarter versus the first quarter?

Sure. Martine, can you unpack Mercer Investments performance and the impact of capital markets?

Our OCIO business has grown rapidly over the last few years but has been impacted by capital markets in recent quarters. It does benefit from net AUM inflows, and volatility can drive demand for OCIO services. In Q2 there was still a small drag year-over-year from capital markets, but based on levels at the end of the quarter, we see small accretive growth from capital markets for Q3. It's a good business for us, diversified across portfolios. Volatility in equity markets has come down, and while bond markets remain somewhat elevated, this environment has contributed to client demand for advice on funding pension plans and related matters. Overall it's good for us and clients are finding ways to manage the environment.

Thank you, Martine, and thanks Rob for the follow-up. I want to 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 and we look forward to speaking with you next quarter. Operator, thank you.

Ladies and gentlemen, this does conclude today's program. You may now disconnect.