Q3 2019 Earnings Call
Colin is being recorded.
Third quarter 2019 financial results and supplemental information.
Issued earlier this morning.
On the company's website www dot.
Please note that remarks made today may include forward looking statement.
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 more detailed discussion over those factories Reid. Please refer to our earnings release for this quarter and her most recent SEC filings, including our most recent forms 10-K on.
One of which are available on the M.C. website.
During the call today, we may also discuss certain non-GAAP financial measure.
A reconciliation of these measures didn't always killer T comparable GAAP measures. Please refer to this schedule in today's earnings release.
I'll now turn this over to Dan Glaser, President and CEO of Marsh <unk> Mclennan companies. Please go ahead.
Thank you.
Good morning, Thank you for joining us to discuss our third quarter results reported earlier today.
Dan Glaser, President and CEO of Marsh and Mclennan.
Joining me on the call today's Mark Mcgivney, our CFO Ms. Ceos of our business is John Doyle of March 14 for a lot of Mercer and Scott Mcdonald of Oliver Wyman.
Unfortunately, Peter Hearn of Guy Carpenter is sick with the flu I cannot join us today.
So what does this morning, as Sarah Dewitt head of Investor Relations.
We're pleased with our third quarter and year to date result.
We produced excellent top line growth in the quarter underlying revenue growth across both segments in our adjusted EPS growth is tracking well with our expectations.
We are generating strong results, while continuing to make progress on the JLTV integration and overall the combination is progressing nicely.
Our clients are beginning to see the power of our combined firm and we are demonstrating that we are better positioned to help them with their greatest challenges through our enhanced Howard capabilities and geographic footprint.
We are meeting our expectations in terms of our financial targets revenue growth and colleague retention in our businesses are coming together.
Co locating our teams is a critical part of our integration because it enables the culture is to coalesce as well as resulted in increased collaboration.
Today, we moved over 8000 colleagues and by the end of 2019, nearly all colleagues will be sitting side by side in their respective areas of operation globally.
We've also undertaken significant work to integrate our platforms.
We now have nearly all of the Jlp colleagues on our HR system and have integrated financial reporting as was our email environments.
This was possible because of investments we've made over the years to harmonize our systems and strengthen our infrastructure.
Our progress to date makes me confident we will comfortably exceed our 250 million savings target over three years.
As we've said from the beginning our combination with jail T is about growth and the benefits. This acquisition brings to clients colleagues and shareholders.
More and more we are working as one team for our clients.
Example, colleagues from several more scale t. specialty practices across multiple countries came together to provide a customized solution for a company managing a complex hydroelectric project.
So global collaboration and our augmented capabilities, we handled all the projects insurance requirements.
In Guy Carpenter, our cyber insurance team won an RFP for a large U.S. regional carrier like demonstrating the strength of the combined organization.
You know in Indonesia, a large manufacturer had been engaging carriers directly for their E H and be services, resulting in a suboptimized outcome for the client.
Sure Marsh benefits, which includes former JLTV colleagues reviews, the existing benefits and recommended critical changes to drive a better outcome.
This resulted in new business for him and be lower premium costs for the clients and a more optimized solution for our clients employees.
We also continue to capitalize on opportunities to serve clients across our businesses.
For example, we recently leverage our collective strides to create a compelling global value proposition for in Asia Pacific Transportation company, whose upgrading their infrastructure to a sustainable modern transportation network.
We won the mandate by leveraging March JLTV specialties, construction and marine expertise.
Oliver Wymans transportation in public sector expertise and guy Carpenter's risk transfer and alternative capital capabilities.
During the process. We also introduced M M B, who was appointed to manage the employee benefit portfolio.
Overall, I am proud of our company's progress impressed by the hard work of our colleagues and grateful for the ongoing support of our clients.
Let me spend a moment on current PNC insurance pricing trends pricing is firming across a wide range of geographies and lines. The March global insurance market index saw an increase of nearly 8% in the third quarter compared with 6% in the second quarter and 3% in the first.
Oh property insurance and financial and professional lines, so the highest average renewal rate increases and 10% and 14% respectively.
After the rates are up 1% on average, but mix by line with excess casualty rates rising and workers comp down.
Note that the March index skews to larger risks, which are seeing higher increases although middle market in small commercial insurance rates are up in certain geographies.
Turning to reinsurance in the property catastrophe market, we've seen reinsurance rates increase throughout 2019, as a function of loss activity geography and exposure increases.
Overall, we are focused on driving the best outcome for our clients in markets like these our capabilities and expertise shy through and become even more critical.
Now, let me turn to our third quarter financial performance, we delivered excellent results in the quarter with underlying revenue growth across both risk and insurance services and consulting.
We're executing well both delivering for clients, while working through the integration of jail tea.
Total revenue was 4 billion up 13% or 5% on an underlying basis.
Adjusted operating income increased 10% versus a year ago to 585 million. The adjusted operating margin increased 10 basis points to 16.9%.
Adjusted earnings per share fell 1% versus a year ago to 77 cents, reflecting seasonality Ajay L T.
Year to date, adjusted EPS increased 6% to $3 at 47 cents.
In risk and insurance services third quarter revenue was 2.2 billion an increase of 18% underlying revenue growth was strong at 6% in the quarter. This reflects 5% growth in March and 11% Guy Carpenter, which was helped by a true up of a multiyear contract, which mark will.
Discuss in more detail.
All right, yes, adjusted operating income increased 11% to 313 million you adjusted operating margin was 17.4%, reflecting JLTV seasonality.
In consulting third quarter revenue was 1.8 billion up 8% compared with a year ago underlying revenue was up 4% for the quarter driven by underlying growth of 7% did Oliver Wyman and 3% did Mercer.
Insulting adjusted operating income grew 9% in the adjusted margin expanded 50 basis points versus a year ago.
In summary, we are pleased with our third quarter results in <unk> and our progress integrating JLTV.
For 2019, we expect a solid first year as a combined company.
Underlying revenue growth in the 3% to 5% range margin expansion and solid growth in adjusted EPS.
With that let me turn it over to Mark for a more detailed review of our results.
Thank you Dan Good morning, we had excellent quarter.
Overall revenue grew 13% 4 billion, reflecting the meaningful step forward JLTV represents growth from.
Generating strong underlying revenue growth of 5%, 6% in all right at 4% in consulting.
Remember that underlying revenue growth in our communications and disclosures includes JLTV.
Operating income in the quarter was 467 million, while adjusted operating income increased 10% to 585 million.
Overall, our adjusted operating margin increased 10 basis points in the quarter, 16.9%. Good result, given the seasonality in jail tea.
Adjusted EPS increased to 59 cents in the quarter, an adjusted EPS was 77 cents.
For the first nine months of 29 team total revenue growth was 10% with underlying growth of 4%.
Our adjusted operating income grew 13% or adjusted operating margin increased 110 basis points to 22% and our adjusted EPS increased 6% to $3.47.
Overall, our year to date performance leaves us well positioned for a solid first year with JLTV.
And risk insurance services third quarter revenue grew 18% to 2.2 billion with underlying growth of 6%.
All right. After has now produced 5% or higher underlying growth in five of the last six quarters.
Adjusted operating income increased 11% to 313 million.
Adjusted margin decreased 30 basis points, 17.4%.
The first nine months of the year revenue was 7.2 billion with total revenue growth, 14% and underlying growth 4%.
Adjusted operating income for the first nine months of the year was up 12% to 1.7 billion.
At March revenue in the quarter was 1.9 billion with underlying growth of 5% representing another strong quarter growth.
You asked in Canada grew 6% on an underlying basis in the quarter.
Marks the sixth consecutive quarter that you Western Canada delivered 5% or higher underlying growth.
New international underlying growth was 3% with Asia Pacific up 7% EMEA up 2% in Latin America down one person.
First nine months revenue at March was 5.8 billion with underlying growth of 4%.
In Canada was up 5%, while international was up 3% [laughter].
Guy Carpenter's revenue was 273 million in the quarter underlying growth of 11%.
Strengthen the quarter was due to solid operating performance and a true up of a multiyear contract.
Excluding the multiyear contract adjustment underlying growth was mid single digits in the quarter.
The first nine months of the year Guy Carpenter's revenue was 1.3 billion with 4% underlying growth.
In the consulting segment revenue in the quarter was up 8% to 1.8 billion with underlying growth of 4%.
Adjusted operating income increased 9% to 320 million in the adjusted margin increased 50 basis points to 18.7%.
Consultings underlying revenue growth for the first nine months of 29 team was 4% with consolidated revenue of 5.3 billion.
Adjusted operating income for the first nine months of the year was up 13% to 916 million.
Mercers revenue was 1.3 billion in the quarter with underlying growth of 3%.
Health grew 7% in the quarter the best underlying growth since the first quarter 2018.
Career underlying growth was solid at 5% and wealth underlying growth was flat with mid single digit growth investment management offset by a low single digit decline and our defined benefit business.
Our delegated asset management business continues to show strong growth with assets under management, increasing to 290 billion.
The first nine months of the year revenue at Mercer was 3.7 billion, 2% underlying growth.
Oliver Wymans revenue was 505 million in the quarter with strong underlying growth of 7%.
This was the fifth straight quarter of 7% or higher underlying growth Oliver one.
Growth was solid across most regions with our financial services and health and life Sciences practices, showing particular strength.
First nine months of the year revenue was 1.6 billion with 9% underlying growth.
Turning to corporate adjusted corporate expense was 40 million in the quarter.
Based on our current outlook, we expect approximately 50 million in the fourth quarter.
Turning to the JLTV integration. This is our second full quarter post closing and I couldn't be happier with the progress we've made to date.
Dan said the integration is going well from an operational perspective, and we are on track with our financial targets.
We continue to expect the transaction will be modest we diluted adjusted EPS in the first year.
Even in year, two would be accretive in year three.
We are ahead of schedule on cost savings and associated restructuring charges.
We expect to exceed the 250 million of run rate savings and 375 million of cost to achieve those savings.
We currently plan to provide an update on our outlook for cost savings on our fourth quarter earnings call.
During the quarter, we incurred 133 million of interest expense.
We expect around $130 million of interest expense in the fourth quarter.
In the third quarter, we recorded 84 million of amortization, which includes the JLTV related amount as well as amortization from other transaction.
Our overall view of amortization related to the Jlp transaction is now 163 million annually.
As a result, we expect total deal related amortization in the fourth quarter will be about 93 million.
In aggregate the financial impact of the JLTV transaction is tracking well with our initial expectation.
As we look to the fourth quarter. There are few things to keep in mind.
March faces a tough underlying revenue comparison to a year ago and a continued impact on new business in JLTV seasonally strongest quarter.
As a result, we expect marsh's underlying growth to moderate in the fourth quarter, but still be solid for the year.
In addition, Oliver Wyman tends to be our most volatile business quarter to quarter as we've discussed in the past and our current outlook calls for a pullback in the fourth quarter.
Overall, however, Oliver Wyman is on track for a strong year.
In terms of the fourth quarter adjusted operating margin, we expect strong margin expansion that that is moderately higher than the pace year to date.
It's reflects expense savings and a seasonally strong quarter JLTV, partially offset by the sale of JLTV aerospace business, which generated nearly all of its earnings in the fourth quarter.
Turning back to the third quarter, we reported 118 million of noteworthy items, mostly related to the JLTV acquisition.
Included in this total or 77 million of JLTV integration costs largest category, which is severance 21 million of J LT acquisition related costs and 12 million of other restructuring costs, mainly related to Mercers program.
Thank you investment income on an adjusted basis, we had $3 million of investment income in the quarter and we continue to expect the contribution from investment income for the balance of 2019 will be immaterial.
On a GAAP basis investment income was 7 million in the quarter.
Foreign exchange with a slight benefit to adjusted EPS in the quarter.
So assuming exchange rates remain at current levels, we expect FX to be a two cents per share headwind in the fourth quarter.
Our adjusted effective tax rate in the third quarter was 25% compared with 25.3% in the third quarter last year.
For the first nine months of the year, our adjusted effective tax rate with 24.3% compared with 24.5% last year.
Based on the current environment, we continue expected tax rate between 25%, 26% for 2019, excluding discrete items.
Total debt at the end of third quarter was 12.6 billion or 12.2 billion, excluding commercial paper.
In September we repaid 300 million of senior notes that mature consistent with our deleveraging plan.
Our next scheduled debt maturities in March 2020, 500 million of senior notes will mature.
In the third quarter, we repurchased 2.1 million shares of our stock for 200 million.
Through nine months, we have repurchased 3.1 million shares for 300 million.
We continue to expect to repurchase enough shares in 2019 to reduce their share.
Our cash position at the end of third quarter was 1.2 billion.
Uses of cash in the third quarter totaled 486 million included 53 million for acquisition $233 million for dividends and 200 million for share repurchases.
For the first nine months uses of cash totaled 7.1 billion and included 6.1 billion for acquisitions 655 million for dividends in 300 million for share repurchases.
Overall, we're on track to deliver to deliver a solid year without I'm happy to turn it back to Dan.
Thank you Mark.
So clean nowhere ready to start the today.
Thank you and the interest of addressing questions from as many participants as possible. We would ask the participants limit themselves to one question and one follow up question, if you'd like to ask a question. Please take now by pressing star one on your telephone keypad.
For using a speakerphone. Please share your mute function is switched off to now you're thinking also reach fabric Whitman.
We will now take our first question from Mike Zaremski from Credit Suisse. Please go ahead.
Hey, good morning.
First question.
On the.
Insurance brokerage side of the business.
We're increasingly hearing from.
Some some of the larger corporations and ensures that deal with the let's say fortune 500 space that pricing has as much higher. There. Then then lets call to us SMB small limits side space.
I'm aware of that.
Marsh's.
Revenue Contractuals.
In that space or more fee base and I get asked a lot from from clients. How do we think about how the impact on to the broker when pricing is very high and and the large account space and maybe you can give us a sense of.
Are you are you seeing that as well that dynamic and historically heavier fee rates have they increased at a similar rates and maybe the overall brokerages organic rate of growth and anything there what would help.
Sure sure Tom I'll start and then I'll hand over to John to give you some more information in the first thing to know is that.
We've built the business to operate across cycles.
Softening cycles, usually lasts for a long time, and there's a period of tightening which generally are a much shorter in duration and so every market is different.
Both but we're not built or geared.
Based upon the cycle.
You're right in saying that that in the large account space. It skews a little bit a lot more to fee than to commission.
But you have to bear in mind between fees, we have discussions with our clients all the time with regard to the value that we're creating generally in the large accounts space is always a.
Year over year type of discussion, it's hard to get fees to increase as you can imagine in large accounts across the world you have procurement departments and.
Risk management expert to negotiate on their behalf when when we look at it you know when John and I look at this overall, we were facing a mild headwind for a number of years going back a few years ago, and maybe we have a mile tailwind today, but it's not material to the overall performance of the company.
Right, but John you want to tackle that.
Sure Dan.
He said I think it's a modest tailwind at the moment I think it's really important to keep in mind of course at our rules to get the best outcome for the client regardless of where where we are in a pricing cycle of a good chunk of our a portion of our large account business is on a fee for sure. We also have the worst risk consulting which is.
Fee based business and.
Our benefits business, which obviously is not subject to the PNC pricing cycle.
A moment middle market pricing is not moving up as much as as large account pricing, which which we have more exposure to from a commission point of view and we're certainly working with our clients to mitigate the impact of price increases in a lot of cases that.
Whether it's in large accounts were in the middle market that may be more clients retaining more risk, but so it's a challenging market in some segments.
Consider it actually one markets a collection of markets.
But it's a great time for us with our tremendous talent, we have great free talented colleagues and capabilities to create value for our clients.
Can you elaborate worse, yeah, I guess I'll move to the one more on moves a defined benefit.
You mentioned low single digit decline there I believe.
In the midst of taking actions to try to improve that level going into 2020, and I guess are related to given the big dip in interest rates.
To date versus last year does that business get up maybe a pickup in later in the year due to client activity looking into that their their impact to the pension funds from low rates.
Well, Mike I'll start with out of that and then hand over to my team to give you more detail but.
Mercer has done a really nice job over several years essentially preparing themselves to be able to deliver a high quality services to clients wildly, earning a good margin on the business in a.
Secular decline of defined benefit pension plans, so that that's playing itself out we're not surprised by the.
Low single digit decline those declines we saw last year as well.
Marty you have any further to add about the impact of interest rates and that sort of thing, yes of course and.
As Ben just said we are wealth business has now composed of.
Investments as much as to DB core benefit consulting and indeed, the economic conditions and the market conditions can influence the rhythm at which.
The employers will decide to de risk there DB plan. So there is a little impact of that it is a temporary measure because over time. These plans are getting close our clients and we're prepared for that so of course also the market conditions do impact our large investment.
Consulting and.
In particular, our CIO business and there again, we have a our clients maintain very balanced portfolio and therefore, the impact is mitigated because.
Asset classes across equities fixed income and alternatives.
Thanks next question please.
Question comes from at least Greenspan from Wells Fargo. Please go ahead.
Thanks. Good morning on my first question, it's just on Guy Carpenter.
As I said that there was a multiyear contract it did healthier chaotic and ex that it would have been a mid single digits. This quarter, but that's still a nice pick up from where you guys were in the second quarter I was hoping to get a little bit more color is that some new new business wins I know, Dan you mentioned the cyber overtime.
Chen because I think you know last quarter, you had mentioned that there was an impact on new business from jail T.. So just trying to get a sense of you know if things are turned around a little bit and the third quarter.
Sure and to just to be clear I'm happy to fill in with Peter anytime he has a double digit quarter.
So.
But yeah. It was you're right. It was a bit of a positive surprise to us in the third quarter, but bear in mind is a small revenue quarter for Guy Carpenter. So it doesn't take much for an outsize corner in either direction JLTV is going to continue to be a drag to underlying revenue growth as carpenter rebuilds.
New business pipeline, that's something that takes multiple quarters to do but that effort is already underway and so no. It's not going to last for years is temporary and in the meantime, comparators doing a great job managing expenses to deliver earnings growth, we mentioned the multi year contract true up.
And we called it out not because it's unusual but because it was large and small quarter and that's why we raised it but its normal course of business type of situation.
Okay. Thanks, and then in terms of the margins within our is I know Jlp was a drag this quarter, but the margin still seem to be trending better than I would've expected. You know if you could give a little bit of color I know you guys had seen finding better.
And plan on where the savings like Directionally pick up Q3 to Q2 and then maybe.
Some level of improved organic I'm, just trying to get a sense of you know what's driving.
It's still pretty strong margins, especially in a quarter, where you know jail team loses money.
Yes, so so overall.
The Marsh Mcclennan had a pretty materially higher margin than JLTV, both very high quality organizations Marsh <unk> Mclennan benefited I think more from some of the scale.
And broader half that we had as an organization, but every intention was to.
Convert JLTV within Marsh Mcclennan.
Two marsh Mcclennan style margins and then look to grow from there. We're pleased with the margin expansion that we're having this year I mean, we we expected so as we talk going into the year. We said that we expected to have margin expansion and it really is about you know were.
Again more revenue and we're doing it in a more efficient way and so the the notion that we feel comfortable at this stage, which is still really early stages of coming together as a single organization that we will comfortably exceeded $250 million of.
Expense savings that we we cited last September when when the deal was announced.
And as we've mentioned before we believe the majority of those savings are going to drop to the bottom line and so so where we're seeing that right now and as you can expect.
Even though JLTV the acquisition itself was not an expense synergy play. It's all about growth, we feel very happy with the level of talent and capabilities. The opportunities for colleagues that are developing and we expect revenues and earnings over time to to be better as a result of this car.
The nation of but having said all that you know, where we're a well run organization and when we see areas for capturing efficiencies areas like real estate technology functions like finance legal HR risk compliance all give us areas, where we believe we can be more efficient together.
Other so so what well do as Mark was mentioning in his script will give a more fulsome update next quarter about where we see that three year expenses and cost of achieving those expense saves.
Well do a review internally and we'll let you know next quarter.
Next question please.
We will now take the next question from Paul Newsome from Sandler O'neill I'm partners. Please go ahead.
Good morning.
Couple of follow ups.
The issues with.
The comparison for organic growth in March in the fourth quarter would that also extend into the first quarter next year given how strong.
Organic growth was in the first quarter or is that.
Not the right.
Pearson.
Obviously, the GLG deal makes that a little bit more complicated.
I mean no overall.
You know it where we're pleased with the year to date performance of not only March but our I asked on the overall from a consulting segment as well.
And Weve.
We believe the way, we'll evaluate the from both on the topline and on the bottom line is over multiple quarters and not looking at any one quarter, although having said that will baskin the glory of out of a terrific third quarter for a little bit aside, but but but ultimately 2019 is shaping up to be a solid year.
Especially in view of the effort of so many people within the organization who are working on integration efforts and those are people, who are legacy Marsh <unk> Mclennan and legacy JLTV, we'll all working together increasingly as one team to form a new organization, that's quite formidable into the into the future.
Sure we wanted to call out the fourth quarter, just because we expected to be more challenging. We we mentioned the importance of new business and new business pipeline, while the fourth quarter is JLTV highest new business quarter. So so if you play out that logic, well then they'll be more straight.
And in terms of achieving what they used to achieve because of pipeline issues that developed soon after the announcement was made those things are all solvable now whether whether we extended our view into next year or not I mean jobs you have any early read.
Look I think you said it well Dan the fourth quarter with such a seasonally strong new business quarter for JLTV. So, we'll see a little bit word headwind there in the fourth quarter, but we're well positioned for growth in 2020.
So again, if you take a longer view.
[noise] confident about where we're positioned in the market.
Thanks, Eddie hails Paul Yeah, just making a really more modeling question Theres, a fair amount of disposals happening obviously, you had the aerospace business.
It looks like the international business was where the disposals were how should we think about that little piece.
Going forward, we're trying to get to our organic growth overall revenue growth.
Yes.
Why do you want to Hilton.
Yes, Paul there was a lot of the third quarter was noisy in that underlying growth.
Schedule and there were a couple of things at the sale of Aerospace that you mentioned there is also the sale of it data business in March last year, where gain was recorded in revenues as a little bit of a heavier impact if you looked at the year to date schedule.
You see a plus one for acquired revenue and that's probably not a bad estimate for.
For the full year, but this is actually a lot of the transactions. We did this year, so love it and to shave Bouchard it into making relatively early in the year. So though there's there's less rollover revenue just given the lower activity this year than we typically have.
So maybe a little bit of rollover into the early part of next year and then next year's acquired growth it would depend on the level of deal activity.
Hi.
Please.
The next question comes from Yaron Kinar from Goldman Sachs. Please go ahead.
Hi, good morning.
First question is really I guess follow up on leases question, just trying to get a sense of what the cost save impact was in the third quarter.
And maybe even year to date.
Now what we're not going to go into the details of how the cost saves are breaking out our quarter you know that as I mentioned before this is still.
Really early stages, where in the second quarter of being a combined company. We believe we have a multi year approach to capturing the expense savings that.
That we were identifying.
We are executing on a lot of different issues right now I mean, clearly with our margins being up.
As a company you know through through nine months.
It pretty much can say that.
That we're achieving a lot of savings right and it's not impacting growth because we're growing well as a firm and so you know I don't really want to get into a quarter by quarter description of all the activity were doing on the expense side.
Okay can at least comment on whether it's more fixed cost saves should be expected to be more back weighted than front weighted.
No I mean, I'd say I think that is a highly is what you're seeing in margin right now like where were jumping on efficiencies and making savings as we go in so there's not a sense of like all of this is going to happen in the third year I mean, there's there's many things that we can operate.
Sorry quickly on there's other things that take a little bit more time, you take something like.
As an example, the consolidation of vendors or real estate or reducing costs within JLTV that were geared to being a public company those sort of things we can move pretty quickly on there is other areas.
Let's say some areas of application technology, which take a little bit more time as they go but we have a three year plan and we're working through it and we expect.
I have I mean, this is our 12 year margin expansion, so im not going too far out on Ilim when I when I say why I think in 2020, we're going to expand our margins just like we did in 2019 and just like we've done for the last 12 years and so that's an indication of some of the benefits dropping.
To the bottom line.
Okay understood and my second question goes to the casualty business and Marsh I guess, one thing I struggle with is and this isn't a marcia issue its broader industry question.
I guess, we're seeing reaffirming our excluding workers comp even as loss picks excluding commercial auto remain pretty low by historical standards I assume that's something that you as a brokers see as well and just curious as to how much pushback.
There is and the conversations with insurance on the absence of for material loss trends.
Or is it or are you actually seeing real time loss trends picking up in claims are margins and maybe not pushing back as much.
Got you want to handle that one sure right. The underwriting community is clearly concerned about rising loss cost trends.
Dan and I had some of the rest of our leaders have been at Peter Hearn as well.
A number of different conferences, where we've spent a lot of time with the markets ugly.
So and there are clearly some.
Some very very large casualty losses in the markets for it as much discussion of course, a cat property, but there are some casualty cat events that are in the market that are concerned and then there is some big headline verdicts and and settlements that.
Underwriters concerns as well I think we've seen loss cost trends begin to emerge more quickly and commercial auto pricing has been up there are number different quarters.
Overall casualty pricing at the moment is mixed work comp is down five.
The primary Geo pricing is still down modestly including in the United States.
But excess liability is up 6% versus 3%.
Second quarter.
In that market seeing a bit more stress.
The moment so.
We of course again are trying to get the best outcome for our clients and and we'll find solutions, where they might be in the world.
I do expect upward pricing pressure to continue throughout next year.
However, I think we'll see shorter and shallower cycles than we have.
On average in the past its really going to micro cycles underwriters are moving quickly to.
Better data better management information, they're moving more quickly to deal with things, but capital moves very quick basically to where profit pools emerge as well so.
Again, I expect more shallow and shorter pricing cycles, and that's really I think John point is really important to.
The emphasize here.
Better management teams at underwriting firms better data and analytics creates more of a micro cycle environment, where it's not necessarily broad across all sectors and all segments.
And thats really occurring on the reinsurance side as well, we're not seeing broad market wide impact even as a result of the lost Creek that we've seen over the last.
Six months coming in from from prior years, and some big losses this year.
But there is potential significant.
Changes on individual programs based upon the individual programs characteristics like geography performance in the past of and that sort of thing. So I think I think the.
And our data and analytics or are making it more of the targeted approach as opposed to broad brush.
Next question please.
Next question comes from Ryan Tunis from Autonomous Research. Please go ahead.
Hi, This is Chris diluent for Ryan Tunis.
So our first question is about the EMEA organic growth. It seems to have been improving recently can you just give some comments on what drove organic growth improvement there.
Sure sure.
Sure I would say first of all overall I was pleased with the growth in the quarter, it's 70% gap growth, 5% underlying growth Mark talked about.
The strong consistent growth in the in the United States of internationally were up 3% and on a rolling basis.
In EMEA, we have very good results.
In Continental Europe , we had excellent growth in the middle East and in Africa as well in the UK. Our results are showing some positive momentum as I've talked about in the past we've made some leadership changes there it's a challenging environment, obviously, the UK economy.
Creating a bit of a drag for us at the moment, but.
Our leadership team is really on it and so I see some improving trends there for us as we look into next year.
Great and then on the retention compensation that's coming through.
Can you give an idea of what kind of quarterly level, we should expect on retention compensation going forward and when we can expect these payments to be concluded.
Thanks.
Yes, I mean in the context of acquisitions that we've we've done in the past its quite common for us to either have earnout arrangements or to have some sort of retention payments tied to a multi year view of how how of.
A person performs within the business and so that we view that is as kind of normal. It's all been modeled within our original deal consideration you'd expect that to really be more the first year 18 months and then reduced from from there because it is geared toward toward assisting in.
The transition of the organization to a new organization and so I wouldn't expect.
Any significant levels to persist over over a many year period.
Next question please.
The next question comes from Dave Styblo from Jefferies. Please go ahead.
Hi, good morning, Thanks for the questions just hoping we could peel back the little bit more on the cost saves and if you can provide additional color about.
The increased level that you're expecting to achieve in any out here. There is that more of just finding more opportunities within the same subset or they're just some new things that are emerging and to the extent that.
Tying that to the to the accretion guidance.
Is it a situation where you maybe you just want to comment yet on perhaps doing better than breakeven next year.
Or or perhaps should we expect that there might be an update where there could be some upside to the breakeven.
Target for next year.
Yeah, I mean I in any large organization in any large combination there's a series of puts and takes and I think that is now.
You need to view this and that.
We did not know on the day of acquisition that we would have to dispose of the aerospace business as an example.
The other and we had an idea that $250 million or so of expense synergy should be achievable over a three year period. You note. So is the fact that were able to.
Achieved more than that but at the same time, we've had some disposals that we did not anticipate though and I can tell you that there's probably a dozen of these puts and takes that you look forward and we end up you know about where we were where exceeding our expectations mildly on.
On virtually every measure and we end up with a view that is going to be.
On an adjusted EPS basis.
Slightly dilutive to what we otherwise would have done this year breakeven next year and accretive in year, three and so that that's kind of where we are.
The organization.
For a long period of time has.
Become more and more efficient we continue to see ways of becoming more efficient and may we run ourselves very much to where where.
We've got four very strong brands, but we're not a holding company does operating a business that that is not cohesive.
Where we are close to the client where commercially agile nimble highly segmented highly specialized the further you are away from the client where more horizontal then we capture synergies around finance legal HR.
And other functional costs.
We're smart about how we approach the use of of service operations in places like India and Poland in Kuala Lumpur, We will continue to that.
Personally I think we're at the early stage of being able to look at AI and machine learning robotics as a way to increase the efficiency of the business and so we can look you know.
Out for several years and believe we can continue to expand margins in the business.
Great. That's that's helpful of frame it thanks for that band maybe follow up for Mark Real quick do you have a or maybe some initial thoughts about how we should think about capital deployment in 2020 would it be maybe perhaps the same approach for 19, where you'd buy enough stock to to help shares come down a little bit while paying down debt and.
Opportunistically looking for M&A or would there be any noticeable changes from from how you approach this year.
David going back to either.
With a lot of things.
That we said it initially that things are playing out very very close to where we initially thought they would in that applies to capital management as well.
So this year is played out almost exactly as we thought if you remember back to some of the things. We said we said the focus for capital management for the first couple of years would be de leveraging.
But in those plans that we provided enough flexibility for return of capital as well as an M&A with the focus for M&A being on Marsh <unk> Mclennan agency and so as we look out to 2020 that really still is the focus that we're focused on the deleveraging.
And that we see we provide a person flexibility so that we.
We'll be able to have some return of capital as well and continue to focus on on M&A really the balance between those two is going to depend on strength of the M&A pipeline.
Yes, I think it's important to to remember the way we prioritize.
Our capital deployment as we put organic investment ahead of everything else that we've put our dividend, which we believe is sacrosanct and we've made a commitment to increase our dividend double digit each year and we intend to continue to do that we have set in the past that we favor acquisitions over share repurchase and we favor share repurchase.
So the growing cash on our balance sheet. So when you look at it in that context, you have to recognize that that if push came to shop, we would favor acquisitions over share repurchase and the way. We're looking at our pipeline is very strong you know and so we will continue to take steps to make us a stronger company.
And if that means that that puts a little pressure, sometimes on share repurchase and so be it.
Next question please.
The next question comes from Meyer Shields from KBW. Please go ahead.
Great. Thanks. Good morning, two very quick questions first can you give a sense as to what clients are assuming for exposure unit growth as they do that 2020 planning.
Well that's a good question a tough one so John .
I don't think clients are assuming unit exposure they have their own.
Their own.
Units of exposure growth, what I would say is that.
In some of the more mature economies that.
The.
That we operate at wary of big revenue streams or is there continues to be particularly around the United States modest modest exposure growth. So employment continues to grow sales are growing.
The number of vehicles on the street more flat.
For example, but the most most there is an exposure management.
In mature markets are showing some modest growth.
Okay. So it is.
And next question Meyer.
Yes, so just laughed with regard to the Guy Carpenter true up does all of that adjustment fall to the bottom line or their operating expenses.
Yeah.
Thats a great what Mark you want to handle that I mean, there's always the bonus pool right. So nothing will fully drops to the bottom line.
And as those tend to be geared to earnings but other than that it really does fall fall into the quarter.
Okay. Thanks, so much.
Your next question please.
The next question comes from Brian Meredith from <unk>. Please go ahead.
Yeah. Thanks first one just curious lat am negative organic I think its first time I've ever seen that out of the light and business is that related to JLTV or something else happened there.
Yeah. So so you're right in saying that I mean as is the first quarter of negative growth in last time. Since we started reporting last time in the first quarter of 2008, it's a great.
Region for Us and.
You know, it's usually neck and neck over a long stretches of time with Asia as to which grows better but some particular issues that we're facing in last time in the short term, but John you want to give more color.
Sure. It is legacy JLTV related it's both new business that we've talked about kind of more broadly and larger nonrecurring items in the.
In the region.
I would say those that the region absolutely remains a growth market for us and really encouraged by how the teams are coming together at both margin JLTV. It well it'd be is choppy second half.
Were up for Latin America, I do expect good growth from the region in 2020.
Thanks.
Great and then just curious.
A pop in Capex in the quarter to click 123 million was there something kind of unusual going in that and also on that free cash flow actually was pretty strong but was there anything unusual maybe an operating cash flow.
Yes, sure. So let me tackle capex versus it did increase was mainly related to timing of big real estate projects and that we can see that volatility from from year to year end.
No actually for for it will not remain at that level into the fourth quarter fourth quarter, probably looking more more in line with what we saw in the fourth quarters as last couple of years, There's just a couple of big real estate.
Projects actually level in Q2.
Lower for the for the same reason terms of cash flow growth is actually a really good story in the quarter, our operating cash flow notwithstanding all of the.
Of the integration related charges.
Was only down 2% I thought there was a really good result in the context of what were what we're going through so there's nothing nothing unusual in that.
Great. Thank you.
Thanks.
The next question please.
It comes from Larry Greenberg from Janney Montgomery Scott. Please go ahead.
Thanks, and good morning, I'm not sure if theres anything else to ask specifically on your corridor. So I'm. Just curious you know with that with social inflation being the big topic in the underwriting world.
I Wonder if you guys could either take your intermediary experiences or go back to your your underwriting base and and maybe just give your perspective on what's going out on that out there and whether there's any analogies you would you would.
To past periods, where.
The industry might have experienced some of these similar challenges.
Well.
Don has forgotten more about underwriting that I've been I ever news, so John anyway.
Look I think I mean, it's.
It's apparent to me.
The generic me is struggling to figure out what the trend line is right.
Much like I think.
I said pricing is not one market. It's a collection of markets I think the challenges, it's not one trend y grade it so.
As I said earlier Theres, some pretty big very material casualty losses of in the market and then you're seeing.
We have kind of more data where frequency in commercial auto.
Clear trend that's emerged over the course of the last several years and in the case of auto it's got to.
Shorter duration through it as you know than than other liability lines and so is.
It's quite again clear that.
They are trying to sort that out but.
Our our responsibilities.
Serving our clients.
To come up with the best outcome for them in this market.
But I would expect a bit more stress in the near term and the excess liability market in particular.
There you know there are some areas, where you can point to meaningful exposure changes right. So in the case Dino maybe for example, it's been a materially increase in the frequency of securities claims that are in the market rate that.
Obviously in the aggregate needs to be priced for so so there are some segments, where you're seeing clear exposure changes and then in other areas.
Areas of risk, you're just seeing higher settlements in judgments for a lot of reasons.
Yes, I mean, we were talking recently about workers comp a millionaire in time for one reason or another and you can have a lot of.
Opinions about what's underneath it but but in in times of full employment workers comp claims and to go down and in times of.
Economic stress they tend to tend to go up and so that sort of workers comp claims our.
Or in decent shape, now, but that Doesnt mean, its a permanent trend line and that may reverse with economic stress.
I would also point out and that after the financial crisis, we had a period, where there wasn't real loss cost inflation rate claim trends were quite stable.
Some lines of business deflation, which isn't what we normally observe over long period of time, but clearly we've come out of that environment.
Anything else Larry.
No. That's good thank you.
Thanks.
I would now like turn the call back over to Dan Glaser, President and CEO of Marsh <unk> Mclennan companies for any closing remarks.
Sure Thats clean and I just want to thank everybody for joining us on the call. This morning and want to express my gratitude to our 75000 colleagues for their commitment and hard work that they show US all the time as well as to our clients for their support.
Thank you all very much and we'll speak to you next quarter.
That will conclude today's call. Thank for your participation you may now disconnect.