Q2 2020 Marsh & McLennan Companies Inc Earnings Call
Today's call is being recorded.
Second quarter 2020 financial results can supplemental information were issued earlier this morning.
There are available on the company's website at Www Dot and then see dotcom.
Please note that remarks made today may include forward looking statements, including certain expectations related to cobot 19, and other matters.
Forward looking statements are subject to risks and uncertainties in a variety of factors may cause actual results could differ materially from those contemplated by such statements.
For more detailed discussion of those factors. Please refer to our earnings release for this quarter into our most recent FCC filings, including our most recent form 10-K, all of which are available on the MMC website.
During the call today, we may also discuss certain non-GAAP financial measures.
A reconciliation of these measures to the most closely comparable GAAP measures. Please refer to the schedule in today's earnings release.
Now I'll turn this over its a Dan Glaser, President and CEO of Marsh <unk> Mclennan company.
Thank you operator, and good morning, and thank you for joining us to discuss our second quarter results reported earlier today.
Dan Glaser, President and CEO of watching the company.
Joining me on the call today's Mark Mcgivney, our CFO and the Ceos of our businesses John violent March Peter Hearn of Guy Carpenter My team for a long Mercer and Scott Mcdonald Obama Hawaii.
Also with US this morning that Sarah Dewitt head of Investor Relations.
I am pleased with our second quarter results, which demonstrate marsh <unk> Mclennan strike and resiliency as we navigate the current global health crisis and economic recession.
The world is experiencing too dramatic an unforeseen events at the same time first the global paying down there and second the global economic crisis, driven by an unprecedented simultaneous lockdown in almost every part of the world.
In addition to Saudi reached the Breakingpoint I'm racial and acquired will begin to qualities, which has persisted for far too long.
And the bases. This extraordinary combination of events Marsh <unk> Mclennan colleagues rose to the occasion and continue to serve our clients with excellence they distinction.
I want to site galleries, 76000 colleagues globally, and our leadership team for their dedication and outstanding execution in these challenging times.
Well the impact to our business from the economic downturn and health crisis. So far has been manageable we live in troubled times and the conditions in many parts of the world's remain extremely difficult and uncertain.
The world they have avoided the worst case health and economic scenarios, but the downturn maybe longer than many initially expected with ways the virus resurgence in certain geographies.
While the most parts of the World. We are thrilled the initial phases peak fear and uncertainty around health outcomes. We're now in a period of dealing with the economic fallout and living with the continuing help implications.
Economic and help uncertainty could last a year or longer challenging companies well into 2021.
Regardless of the shape of the recovery, we have proven our business is resilient, we have strong control over our expense base and the need for our license solutions is now more critical than ever.
Our management team has made a number of tough calls and I believe the like ones as we navigated through these first month of the crisis. We continue to take actions that balance the short term with a focus on positioning for the long term.
These include maintaining jobs and that the company and then as well is proceeding with our annual salary increases.
Good morning, a hiring freeze and continuing to make strategic hires in the face of industry dislocation.
And moving forward with several acquisitions, so far this year and M&A as we continue to pursue inorganic growth.
We've cut back significantly on discretionary expenses and has set a high bar for what is deemed essential spending which is driven cost down while we preserve job and salaries.
We also enhances our liquidity by establishing a new credit facility and issuing additional long term debt.
Looking beyond the current crisis I believe we will emerge as a stronger from our organization has never been flatter faster and better connected then it is today.
I want to pause and comment on racial and the quality.
Racial and the quality in our society is the pervasive issue there recently changed to a breakingpoint within traffic deaths that George Floyd.
Systemic racism has caused in equities injustice healthcare education careers wealth creation and freedom.
The recent events have been shocking to me and all too familiar to others.
Our executive Committee has been fully engaged listening to our black colleagues and others speaking up alongside them and implementing concrete actions to make a difference.
We are determined to seize this moment to create a more diverse and inclusive company.
The need dynamic times, we're pressing to develop new solutions to address rising in involving risks globally.
Our businesses are collaborating more than ever to bring the power of our firm to clients.
For example, Martian Guy Carpenter are leading the industry to create a new market from pandemic insurance.
We initiated a dialogue and Congress in late March to create a public private partnership for pandemic risk, which would facilitate future economic recovery and enhance resiliency alone companies going forward. We're also developing public private pandemic solutions in multiple countries.
And Oliver Wyman, we developed a leading disease progression model pandemic navigator, which is being used by governments and companies to predict virus spread and guide decisions.
Both Oliver Wyman end Mercer are advising clients across a number of industries utilizing pandemic navigator to make returned to office plant understand future demand recovery patterns manage supply chains forecast credit losses, and assess early warning signals.
Mercer and Marshall is consulting have also joining forces to work with employers are there new normal strategies, helping clients use this time as an opportunity to adapt reinvent and become more resilient.
In summary, I am proud of how our company continues to innovate while responding to the immediate pressures caused by the crisis.
Let me spend a moment noncurrent PMT insurance market conditions, PMT insurance pricing continues to accelerate the March global insurance market index increased 19% year over year versus 14% in the first quarter and 11% in the fourth quarter and 29 team.
Global property insurance was up 19% and global financial and professional lines were up 37%, while global casualty rates are up 7% on average.
Keep in mind, our index skews to large account business, where we typically earn fees.
However, you want to small and middle market insurance pricing is up meaningfully as well, although not to the same magnitude as large complex accounts.
Overall underwriters continue to push for higher levels of rate increases as a result of social inflation pressures persistently low yields at a number of large underwriting losses, including called at 19.
This is before the peak of the hurricane season.
While capital remain adequate the risk appetite of insurers is reduce as they are increasingly cautious in an uncertain environment.
Turning to reinsurance the midyear renewals, which are largely focused on southeast U.S. wouldn't exposure saw meaningful rate increases, Florida peak zone property catastrophe reinsurance programs were up 25% to 35%. These are some of the highest rate increases seen since 2012.
Non Florida midyear renewals were typically up 5% to 15%.
Reinsurers are being cautious regarding the amount of capital. They are currently willing to expose in an environment of great uncertainty.
Overall, mobile PMT and insurance and reinsurance markets remain challenging with accelerating price increases and narrowing terms and conditions. It is in times like these where our experience advice and solutions are even more critical.
Now, let me turn to our second quarter financial performance, we delivered excellent adjusted EPS growth of 12%, despite the global impact that cold in 19.
Our strong EPS growth in the quarter reflects greater execution on the part of our colleagues the immediate benefit of expense management actions and the delayed impact of the coldest 19 crisis on our revenue.
Total revenue was 4.2 billion down 4% were down 2% on an underlying basis underlying revenue grew 2% in all right and.
Declined 6% in consulting.
In risk and insurance services second quarter revenue was 2.6 billion an increase of 1%.
Underlying revenue growth was up 2% in the quarter, reflecting strong 9% growth the guy Carpenter and 1% in March.
Excluding a reduction in revenue we booked in the quarter related to estimated exposure declines underlying revenue at both our is end March was up 3% in the quarter, which is a strong result in the face of the economic downturn.
All right as adjusted operating income increased 19% to 762 million and the adjusted operating margin expanded 430 basis points versus a year ago.
In consulting second quarter revenue was 1.6 billion underlying revenue declined by 6% for the quarter.
I Wonder Wyman and Mercers career business itself the greatest impact on the locked down as expected.
Consulting adjusted operating income declined by 13%.
Adjusted margin declined by 70 basis points versus a year ago.
Overall, adjusted operating income increased 10% versus a year ago to 984 million.
Our adjusted operating margin increased 270 basis points to 25.5% adjusted earnings per share increased 12% versus a year ago to $1.32 cents, reflecting expense tightening and strong execution.
Even though colder 19 will impact our results for the remainder of the year. Our strong second quarter performance is evidence that our businesses resilient and that we were able to manage through challenging environments.
While our year to date results are strong economic outlook is weak and uncertainty is still very high.
For the full year 2020, we continue to expect a modest decline in underlying revenue. However, given our strong second quarter performance. We now expect to generate modest growth in adjusted EPS for the full year. Despite the decline in underlying revenue.
With that let me turn it over to Mark for more detailed review of our results.
Thank you Dan and good morning.
We're pleased with our second quarter results. Despite a modest decline in revenue driven by the current crisis, we delivered strong earnings and continue to enhance our balance sheet and liquidity position.
Overall revenue declined 4% in the second quarter to 4.2 billion or down 2% on an underlying basis.
Operating income in the quarter was 885 million an increase of 30% over last year.
Adjusted operating income increased 10% to 984 million and our adjusted margin increased 270 basis points to 25.5%.
GAAP EPS was one dollar in 12 cents in the quarter and adjusted EPS increased 12% to $1.32 cents.
For the first six months of 2020 underlying revenue growth was 2%. Our adjusted operating income grew 13% to 2.2 billion or adjusted margin increased 190 basis points and our adjusted EPS increased 10% to $2.96.
Before I go deeper into our results I want to discuss a 36 million dollar reduction to previously recorded revenue we booked in the quarter.
This adjustment reflects the estimated impact of the economic downturn on exposure units.
Primarily impacted mark, but there was also a reduction in Mercer and help.
A significant portion of brokerage revenue is recognized that policy inception, including in some cases, where ultimate revenue was uncertain.
In these cases premiums and commissions are recorded based on estimates of ultimate exposure.
These estimates are typically not updated until the end of the policy term as variability in most cases model.
However, due to the impact of Cobot 19, and the economic downturn exposures in many lines of business will likely be lower than originally anticipated requiring that we update our estimates sooner.
It is important to note that this charge is included in underlying growth and an adjusted earnings.
Returning to result in risk and insurance services second quarter revenue was 2.6 billion with underlying growth of 2% or 3%, excluding the revenue adjustment.
A decline in fiduciary interest income was also a 70 basis point drag on underlying revenue.
Operating income increased 34% to 696 million.
Adjusted operating income increased 19% to 762 million and the adjusted margin expanded 430 basis points to 32.1%.
For the first six months of the year revenue was 5.5 billion with underlying growth of 4%.
Adjusted operating income for the first half of the year increased 20% to 1.7 billion, where the margin of 33.4% up 280 basis points from the same period a year ago.
At March revenue in the quarter was 2.2 billion an increase of 1% on an underlying basis were 3% excluding the impact of the revenue adjustment a strong result in the current environment.
And you asked in Canada underlying growth was 3% in the quarter.
In the International Division underlying growth was flat with M&A down, 3% Asia Pacific up, 4% and Latin America up 4%.
For the first six months of the year Marsh's revenue was 4.2 billion with underlying growth of 3%.
You asked in Canada underlying growth is 4% in international was up 2%.
Guy Carpenter had another great quarter.
Revenue was 433 million, reflecting underlying growth of 9%.
Growth was driven by solid retention strong demand driving new business and a tailwind from the current pricing environment.
For the first six months of the year Guy Carpenter generated 1.3 billion of revenue and 8% underlying growth.
And the consulting segment underlying revenue declined 6% in the quarter, reflecting the impact of the current prices.
Operating income decreased 8% to 255 million.
Adjusted operating income decreased 13% to 265 million and the adjusted margin decreased 70 basis points to 17.3%.
Consulting generated revenue of 3.4 billion for the first six months of 2020, representing an underlying decline of 1%.
Adjusted operating income for the first half of the year was down 7% to 554 million.
Mercers revenue was 1.1 billion in the quarter down 3% on an underlying basis.
Wealth underlying revenue declined 2%, reflecting modest growth in defined benefits offset by a decline in investment management solutions.
Our assets under management were approximately 306 billion at the end of the second quarter up 8% year over year.
Health increased 1% on an underlying basis in the quarter or 2%, excluding the impact of the revenue adjustment.
In Korea underlying revenue declined 16% careers, where we have more discretionary project business, which drove the revenue decline.
The first six months of the year revenue. It Mercer was 2.4 billion with 1% underlying growth.
Oliver Wymans revenue was 467 million in the quarter declined 13% on an underlying basis, which was better than we expected coming into the quarter.
For the first six months of the year revenue would Oliver Wyman was 978 million a decline of 7% on an underlying basis.
Adjusted corporate expense was 43 million in the quarter.
Based on our current outlook, we expect approximately 96 million in total for the second half the year.
Turning to investment income.
On an adjusted basis, we had an investment loss of 7 million in the quarter.
On a GAAP basis, we reported an investment loss of 31 million, primarily driven by the sale of a portion of our equity ownership and Alexander Forbes.
Foreign exchange was neutral to EPS in the quarter.
Assuming exchange rates remain at current levels, we would expect FX to have a minimal impact on EPS for the remainder of the year.
Our adjusted effective tax rate in the second quarter was 25 per cent compared with 25.9% in the second quarter last year.
Excluding discrete items are effective adjusted tax rate was approximately 25.5%.
Through the first half of the year, our adjusted effective tax rate was 24% compared to 24.1% last year.
Based on the current environment and continue to expected tax rate between 25, and 26% for 2020, excluding discrete items.
The most challenging parts of the JLTV integration are now well behind us as demonstrated by our strong first half results. We are on plan or ahead of schedule on all of our key milestones, including cost savings and restructuring actions.
We incurred 57 million of JLTV integration and restructuring costs in the second quarter, bringing the total to date to 472 million.
In total we still expect to incur approximately 625 million of cash costs and 75 million of non cash costs to generate at least 350 million of savings.
We expect the majority of these costs will be incurred in the savings achieved by the end of 2020.
I want to take a minute and provide an update to our outlook for this year.
Our revised view contemplates recessionary conditions persisting through at least the remainder of 2020.
But it goes without saying that uncertainty remains very high and conditions could turn out materially different than our assumptions, which would affect our projection.
For the full year 2020, as Dan mentioned, we now expect to generate modest EPS growth. Despite our outlook for a modest decline in underlying revenue.
We currently expect adjusted EPS the decline in the back half of the year, reflecting the full impact of the pandemic on revenue as well as some rebound in spending in certain areas.
At March we still see the potential for modest underlying revenue growth for the year, although the back half will be challenging.
For the full year 2020, we continue to expect mid single digit growth a guy Carpenter.
Underlying revenue growth for the second half of the year will likely be more muted, but these are seasonally small quarters for guy Carpenter.
Also keep in mind that Guy Carpenter faces a difficult year over year comparison in the third quarter, which as we mentioned last year benefited from a 17 million dollar true up of a multiyear contracts.
We continue to expect Mercers underlying revenue will decline for the remainder of the year and be down modestly for the full year.
Finally revenue week with weakness in Oliver Wyman could persist through the back half of the year.
Turning to the balance sheet, we ended the quarter with 1.7 billion of cash a sequential reduction and outstanding debt in the entirety of our combined 2.8 billion of credit facilities available.
Since the onset of the pandemic, we have taken prudent steps to enhance our financial resources and flexibility.
In April we secured a new $1 billion line of credit and in May issued 750 million of 10 year senior notes at a coupon of 2.25%.
We remain committed to deleveraging and expect to reduce debt. This year, although the ultimate amount will depend on our cash generation in the current environment.
Total debt at the end of the second quarter was 13.2 billion down from 13.6 billion at the end of the first quarter, representing a reduction of 439 million.
Our next scheduled debt maturities in December 2021, 700 million of senior notes mature.
We also have a 500 million dollar term loan due in January 2021.
Interest expense in the second quarter was 132 million.
Based on our current forecast, we expect approximately 131 million of interest expense in third quarter.
Although uncertainty in our outlook remains high we feel comfortable that we have the resources and flexibility to manage through the crisis from a liquidity perspective.
In line with our commentary on the first quarter call, we did not repurchase any shares in the second quarter.
Given the ongoing uncertainty if the current environment, we do not plan to repurchase shares for the remainder of 2020.
Earlier this month, we announced an increase to our quarterly dividend.
To 46, and a half cents per share. This increase represents the 11th consecutive year of dividend increases at Marsh and Mclennan.
Uses of cash in the second quarter totaled 684 million and included 450 450 million for acquisitions and 234 million for dividends.
For the first six months uses of cash totaled 1.2 billion and included 694 million for acquisitions and 466 million for dividends.
Overall, we're pleased with our performance in the first half of 2020, we've shown resiliency the level of commitment in execution throughout the organization has been outstanding.
And while the crisis is far from over we believe we are positioned to continue to navigate it well and with that I'm happy to turn it back to Dan.
Thanks, Mark operator, we're ready to begin acumen Ed.
Certainly in the interest of addressing questions from as many participants as possible, we ask that participants limit themselves to one question and one follow up.
So if you have a question at this time, please press star one on your telephone.
So your question first the penalty please standby, while we compile the culinary roster.
No.
And our first question comes from the line to build Stefano with Deutsche Bank.
Yes, thanks, and good morning.
Dan in your opening remarks, you're talking about the immediate benefit of the transaction delayed impact of revenue from cobot It feels like.
In the second quarter results. It was most clearly seen on the margin in brokerage.
I was hoping you could dig a little more into that and maybe help us understand what drove the expansion in second quarter in them as we think about the next couple of quarters or even year or to.
Do go hard decisions can may be dial back.
How do you think about managing the expenses versus maybe what your revenue expectations are at this point.
Sure sure. So it's a good question I'd start by saying, let's look at the overall macro environment a bit I mean, it may not feel like it but so far the world has avoided the worst case health and economic scenarios I mean, we're still in the early days the economic downturn may last longer since.
There will likely be waves of virus research and so when we when we were doing all of our scenario planning and stress testing very early stages of of the health elements of the crisis.
You could imagine a lot of.
Reports scenarios right and certainly not a rosy picture from here, but some of the worst case scenarios appeared to have been avoided and so we we pulled back.
Our expenses very quickly where a company that police and distributed leadership, we put a lot of authority out in the field was our.
Leaders in countries and in specialty divisions et cetera.
But there are times, where you need to pull that authority back and I have to say the executive Committee and I moved very quickly to essentially control the expense base of the company said, a very high bar for what essential expenses were and then.
Hold back heavily on other items, you know not not only to things that naturally fall away like teeny, but overtime temps contractors slowing down hiring not hiring freeze, but slowing down the pace of our hiring and focusing it on revenue producing tyco tis positions.
I'm very proud of the notion that that we in the team decided that not only to preserve jobs in the tick of the pandemic, but also we did not have salaries now you may notice that our overall comp and then of absolute number is down a bit and that's because the broad category of course.
And then also includes some things like overtime in sales plans and some contractors and some of our variable plans et cetera.
I feel pretty good about you know how quickly we were able to dial back expenses and there is a bit of a lab in terms of how.
How revenue headwind actually turns up.
Clearly we had some some good pipeline you looked at our first quarter results, 5% underlying growth overall, so we had nice nice.
Momentum and some of that momentum carried into the early parts of the second quarter that goes away and so we'll have a little bit more revenue pressure and also because the worst case scenarios are unlikely to occur either help or economy type of macro factors.
Well, we'll we will ease up dramatically below ease up a bit will become a little bit more open to.
The other levels of investment that we could make you know so when we when we look at the second half of the year.
It's still a great deal is uncertainty.
We think that delivering reasonable financial results in the context of the crisis, while continuing to invest for future growth is the right position for us to be it.
Yes, I understand that just one follow up would be.
Based on the actions you've seen or how the world has unfolded. We thus far appreciate it's early days last quarter, we're talking about maybe the sustainability of some of these things.
Do you have any thoughts you can put around the actions you took that we're hard at first but maybe feel like.
The benefit could be something that for persist.
One scope it is comfortably in the review.
Yeah, I mean I, yes, there are certainly certain things I mean, we've been able to demonstrate that we can do a placement activity and manage client.
Deliverables on a remote basis now, it's not ideal and all circumstances, but it is pretty ideal in some circumstances. So I'm not sure ROE will go running back to hopping on an airplane to go to Singapore for a 100000 dollar opportunity may may be will be a little bit.
More cautious about the teeny type of spending.
So while it will come back it may not returning to previous levels for a long time and maybe never.
Flexible work arrangements is another item, we won't see a benefit to our real estate.
Footprints or our real estate cost for a while because of social distancing type of requirements, but over time could we assume that envision more of a hybrid type of operation where colleagues come to the office and also work from home sometimes during the week and so we can go too.
Much more of an agile.
Workplace in many many locations yet that's probably likely I also think that there will be more digital I mean, we it's important to note, while we slowed down our capex a little bit in the second quarter actually through six months Capex is higher than it was last year and it's because we're continuing we're continuing.
To invest in our business and I think that those those items.
Our are things that would persist I also I can't underestimate or the notion of how this crisis has brought the from together prices can bring out the worst than you are the best to do what I'd tell you Marsh <unk> Mclennan has risen and we have never been more collaborative and connected than we are today.
Okay.
When it continues to be well.
Thank you too.
Thank you.
Next question comes from the lot of might so Rimsky with credit Suisse.
Hey, good morning.
First question.
Maybe focusing more on the consulting segment since that's where I think investors are are asking.
The most questions about.
Yes, Dan you said you you guys.
Fortunately I think we need to be all portion has avoided the worst case scenarios so far.
Does that hold true for kind of what you will you you all were thinking might happen to organic revenues.
In the overall consulting segment clearly they work.
They were down, but maybe not down as much as there's at least consensus expected. Maybe you can kind of give us some updates on what you're seeing and hearing in the consulting segments relative to two your thoughts last quarter.
Sure I mean, we were the.
The pleased with Consultings overall performance on on organic growth, we clearly expected decline in revenue and pressure, particularly in the project related businesses. Oliver Wyman is almost purely a project business in some parts of Mercer like the career business is very project oriented and projects.
And to be discretionary in the eyes of of clients and so I think overall a minus 6%.
So is a good result in the circumstances of within our consulting business and both of our main businesses and consulting Merck Serono W have done a nice job protecting shareholders by really focusing on discretionary expenses within our own shop.
And pulling that back I mean, if I ever.
Every crisis is different in in a lot of ways. This crisis is is.
A more concerning then the global financial crisis, but when you look at the global financial crisis Mercer was down 4% in 2009, Oliver Wyman was actually down a bit in 2008 and more significantly in 2009 and had six quarters in a row.
Of contraction and so wherever resilient front, we can operate.
Overall from on that basis, and the bounced back in 2010 for Mercer and Oliver Wyman was was quite good and we would expect something similar.
There is a lack of discretionary projects on companies. It doesn't mean that they don't need those projects and that they don't want to focus on their future growth in their future ways to be more efficient and where it's going to company for them a across people issues and strategy issues and so we feel good about that.
Consulting business it could've been worse and when we looked at it I think we're in decent shape I don't know what the second half frames.
And then on the at the end we've indicated that we think Mercer will be modestly down through the year. They had a very nice first quarter, but overall for the year, we expect them to be modestly down and Oliver Wyman.
I've said many times before has a little bit more volatility to quarterly results then than any of our other businesses, but we're well positioned and we feel pretty good about where we ended up on on the bottom line in both of those areas of the company.
Okay understood that's helpful. Lastly.
The dollars moved a lot I'm not sure Mark could you talk about FX, and whether you thinking about it or having an impact going forward.
Well, Thanks, Mike Mark you want to take that.
Sure Yes.
The FX was was not much of a story for EPS in the second quarter as we looked at the back half of the year. We don't expect much impact if rates stay where they are much impact for the balance of the year to TPS.
Thank you.
Next question please.
Your next question comes from the line of Jimmy Bhullar with JP Morgan.
Hi, good morning.
Question on the reinsurance business.
Yes.
I think you implied to slow down and growth in the second half in your comments.
With that exist.
Comps getting more difficult to worse as maybe.
And exposure is declining and what's the interplay with rice and getting better.
There are cost like are you being overly conservative or are you actually seeing some.
Headwinds to growth given comps and exposures.
Sure I mean, I think when we were not find to be overly conservative.
But we also always want to be realistic and transparent with without our investor base and so a lot of this is carpenter has the third and fourth quarter, a much smaller and so therefore yada counter to could swing things in different directions, and as Weve pointed out in our remarks.
There was a one off last year that we we acknowledge last year of $17 million.
A tall hill to overcome but Peter you want to talk a little bit about either where do you see exposure rates and whether this is overly conservative or not.
Yes. Thank you Dan Jimmy I would just reiterate would dances Q3, and four or historically small quarters and they're subject to.
Volatility with the movement of business from one quarter to the next or timing.
From a from a new business standpoint, our new business growth has been strong.
For the past three years and we anticipate the same thing in Q3 and four but again, we have tough comparables from Q3 and four of last year, but we've seen no diminution in.
Revenue basis in buying habits.
And we've done over several hundred stress tests on client balance sheets to anticipate what the rest of the year could look like from catastrophic events for an adverse situation with regard to covert 19. So we're winning new mandates on a regular basis I feel good about where we are for the year and you know is both.
Mark and Dan said, they're small volatile quarters and subject to change, but there's been no overarching issue that we've seen with exposure bases in revenue.
Okay and there was some there's been some concern among investors about you know you know exposure or negligence related lawsuits against brokers do you have anything that you can sort of look what are your views on.
What your exposure might be and any sort of.
Quantification of what your retention would be if you'd want to see something because I'm, assuming you got insurance on that as well so.
Yes, I mean, we havent publicly disclosed the details of our email insurance programs I'm not going to do it here.
You know our role and our principal focus at the brokers to advocate forcefully for policyholders no. We do that by obtaining blood coverages in in the event. They havent claim we do our best to assist them with recoveries and we've got very strong list management practices, you know high level of professional standards.
You know training of thousands of colleagues.
So at the end of no it's not something that we spend a lot of high on obviously, there's some coverage disputes that are occurring between clients who.
May believe that they have some coverage within some of their policies related to Colby and some of those clients. You know may end up suing everybody, but that really hasn't occurred yet and I'm not overly concerned with it I think we have good systems and controls and frankly, just slight kicks in.
It wouldn't be impossible today is why public private partnerships are being talked about.
Broad scale.
Pandemic insurance is not insurable it goes into the trillions of dollars and potential exposure and so on on that basis. You know, it's not like that every client could've gotten full scale broad endemic protection because there's not there's not a market for it has to be targeted limited.
Certain industry certain clients and very expenses.
So next lets includes.
Your next question comes from the line of you're wrong Konare with Goldman Sachs.
Hi, good morning, everybody.
First question on free cash flows seemed like they were very strong this quarter was curious what drove that.
I think one of your compares it talks about cures Act.
Pushing tax payments back a little bit, but any color you can offer on that and how to think about cash flows maybe for the rest of the are too.
Sure sure Mark you want to take that.
Yeah, we cash generation in the quarter whats wrong is as he sets. We're obviously pleased with that number factors contributed you. The most important of which was just the strong earnings growth too we had solid earnings growth.
So that was a big factor in driving free cash flow.
There was less and then there's a number of other factor so less spending on jlp related items, if you compare last year.
We got nicked, a little bit more by FX than we did a this year in and then.
In any given quarter there can be fluctuation in some of the balance sheet accounts in working capital that can affect cash flows and and we had good results on on that front and so whether it's the quarter year to date or cash generation was strong for the remainder of the you're really it's going to be about how our earnings trend.
Okay.
And then what's your parts exposure or the impact of exposure declines I just want to make sure I was thinking about it correctly. So im consulting tdm back then so be more immediate and than in our I asked it takes a day, there's a bit more for lack of is that a fair summation.
But most of the exposure declines were actually in Marseille, I'll hand off to John and he can describe a little bit that the types of areas, where you would see exposure unit decline.
More mild in consulting and generally around the health business. If you look at employment as an example, as a proxy for for the lives covered under plastic employment is down and then the anticipated amount of premium would be down because is less lives. The John we want to talk about exposure unit.
It's within the large world because that's where most of the adjustment took place.
Sure as Mark talked about earlier on the call a number of different products or adjustable and exposure unit.
Driven so some of the.
Industry group.
Marine Aviation Energy for example, we took steps.
Making adjustments to accrue for for left for exposure units over the course of policy period.
Product lines that are more impacted commercial auto of course, we're calm.
Transaction risk.
There was those kinds of things so.
So overall.
Our growth historically is.
Correlated to economic growth and you know.
Construction flows down other investment slows down there is a bit of a lag effect.
And then so that that impacted our ability to write new business, but.
But we all except to make an adjustment the prior period or.
Both.
Thank you.
Next question please.
Our next question comes from the line of the lease Greenspan with Wells Fargo.
Hi, Thanks. Good morning on my first question is on the.
Yes, I see.
Uh huh.
Not as well.
Whereas before by kind of on you know maybe slightly negative to just about positive depending on what happened to organic critical here, but if I think about that.
Just under 10% Dps growth in the first half of the year, which implies about a mid single the decline in the back half, which probably would have been where we would have been in your prior guide just for the second half of the year. So I guess I'm trying to package I read all the comments together.
Your outlook does seem like better although still cautious for the second half of the year. So I think that that would come together and that.
Side or is it something to do with timing of JMP expenses that were more pronounced in the second quarter I'm, just trying to understand what Cps outlook for the second asking here is that perhaps stronger than what you thought it was three months ago.
Sure. It's a fair question and so let me address it this way.
Leaving a business as our business leaders within the company do every day is as much aren't as it is science, we can make the margin go up at any point in time by drawing back expenses by being very tough on rehiring by just pulling it off warranty.
Great deal the art is figuring out what should we deliver today, while we are investing for the future, while we're going to position the company to emerge stronger and so from that standpoint, the way we looked at it yes, our second quarter performance was really terrific, but the reality is we pulled the expense leverage hard.
And we felt the immediate benefit of that lower spending and the revenue came in a bit higher since there's a lag in the full revenue headwind since all the activity thats pretty cold, but in terms of projects still benefited us in the second quarter. So you've got it takes a revenue headwind will be a bit stiffer in this.
Second half of the year and because of our worst case scenarios are not going we do not anticipate though the macro environment to go into the worst case scenarios will ease off a little bit on some of these transactions and the combination of that will be that we've got of E.
Yes pressure in the back half the year and our focus is okay. What is a reasonable result to delivered to shareholders any year in which we expect modest revenue decline of the overall from Oh and you can look we expect.
Modest improvement overall, it all right at 10 and pressuring consultant. So I think you can kind of cotton onto the idea that.
No. It is that all right, yes, well have better margin outlook today than what the consulting division will have the we're not going to artificially do things in consulting to drive margin when when the topline is is under that kind of pressure.
Thanks, and then my second question on [laughter] Cume bars on I know you guys had pointed out.
Last quarter that there would be a lab.
Third quarter on you know what the worse than the second quarter. It sounds like from your comments about.
Oh I get my question is more thinking further out than that.
If there isn't a spike in cases that no colby kind of is maintained well it will be today do you think within your business on the Q4 should should represent about a third quarter and this is just on specifically to Mars.
Okay. So I'll hand off to John in the second I'll, just say, we're thrilled with the positioning of law.
And when we look at the future for March.
You know we couldn't be it a better position in terms of.
Our risk in advisory businesses, our placement capabilities in our broader capabilities and that I couldn't be happier with the combination with JMP and I'll just as a reminder, that's all about well growth in talent growth and capability growth in scale revenues earnings and within one year, we came to.
Together as one single for mineable team.
Textbook integration.
Does that happen throughout the company and really kudos to to my leadership team for pulling it off that we made people in structural decisions very quickly we work through destruction in fast and we are ahead of schedule on total amount and timing when it comes to cost savings overall, well planned well.
Well executed.
John you want to talk a little bit about how you see marsh back half of the year and as you look out to 2021 2020 to 2023 in terms of just Youre your flavor.
Sure Dan.
We've talked about the second half is likely to be a bit more challenging given you know given the economic consequences of the pandemic.
You know I don't want to get into third quarter versus the fourth quarter. I mean, obviously things are quite fluid with pandemic and it's hard to predict the economic consequences.
We've talked about many time uncertain environment. You know we've operated and you are having said that as Dan pointed out I think were extraordinarily well positioned our team is highly focused on our clients.
During the best outcome. It is very very difficult environment. They have been there for one another obviously a time of suppressed for our colleagues.
And so I couldn't be more pleased with how they've come together and as.
There are some silver lining of course you.
Well it overall, a human tragedy, what we've all been living through.
The cultural integration.
Gone exceedingly well so.
So I'm confident our ability to.
Performed well on a relative basis and you know as things improve we'll we'll continue to see him.
Performance in the business.
Next question please.
Your next question comes from the line of Meyer Shields with KBW.
Great. Thanks, one quick accounting question to start Mark you pointed out in the press release of the 36 million dollar.
Revenue adjustment for exposure units does that all fall to the bottom line or their offsetting reductions to expenses.
Mark.
And also for the bottom line, where I mean, if it could be an overall earnings and bonus formulas, a little bit of impact to the extent earnings grow or shrink for a year, but but thats specific adjustment. It is directed to revenue and bottom line.
Okay. So that's I think that as a good news that drug question and I think this is for Dan.
Back I don't know less than we had like rate increases that were this powerful marches, obviously very heavily fee focus, but the general takeaway was that it was able to negotiate higher fees because of the incremental work.
But more or less matched to the revenue increases that would've come on a commission basis and I'm wondering given the recessionary conditions, how does that play out in the current environment.
Well I mean Marshall brought a long period of time has become a much larger middle market from particularly in the us in the UK and with that they're gets to be a little bit more element of commission versus fee and I think the last time, we spoke to you.
Think about a a roundabout of two thirds on a commission basis and a third on a fee basis. You know, it's not that it's not easy out there Meyer whether its way negotiating with the clients are negotiating with within insurance company and so this negotiations that take.
Place account by account as to a level of work and what the proper level as we move duration is for for the intermediary and so it's not a direct line that you know revenue or or premium is often so therefore immediately you know we pop on the same spaces. There. This is all about account by account discussion in.
Negotiation and trying to determine the value that we provide in the market one as an advisor to clients that also sometimes as a distributor for insurance companies.
Okay understood. Thank you very much.
Okay next question please.
Your next question comes from the lineup Paul Newsome with Piper Sandler.
Hi, Good morning, I, just one question.
Some questions from investors about just the enormous amount of.
Change, we're having with your competitors and merging with more should.
[laughter] anniversary with Willis and.
It seems like Theres, a private equity firm everyday popping up.
Competitor, what's happening with the.
With.
Through town is it gotten easier or harder given all the changes we've seen in the market.
Yes.
It's a really good point because actually we are in the talent business. That's what it is this a people business do we have of smarter more creative harder working more dedicated to client service colleagues then what our competitors do not I'll start by saying very broadly the competition is good.
Good competition refreshes competition puts you on your fund flows in Kikuyu, you know very active in innovative and clearly you know there's some PE guys in the market is largely on the middle market part of the business.
And your scares me a little bit with your coffee with your comment about these get together as a on in March and I thought you were breaking news there for a second but you know that I'm not going to comment in depth John on anything to do with a on a Willis we do think that we'll have lots of opportunities I mean.
I like our strategic positioning I wouldn't trade places with any of our competitors.
And on a personal comment you know as somebody who's had almost 40 years in this business.
I don't think da on Willis combination is good for clients or good for the market, but I do think it's good from Washington, but I mean come on the big three becomes the big to how could that cannot be a benefit to us.
Oh thanks.
For the answers apologies for the Brody inflow.
Yeah exactly.
Next question please.
Our next question comes from the line of Michael Phillips with Morgan Stanley.
Thanks morning, just one for me as well as Dan just love to hear thoughts on how.
The pandemic is influenced valuations in the M&A space for brokers.
Yeah, I noted that first of all the M&A space for brokers, what do you see most of the activities in the upper middle market and below.
And as a Paul was just alluding to there's a lot of PE in that space and then the Max maybe a little bit different for them because the leverage levels are a bit higher and you know the ability to borrow money. It at low interest rates are at least probably even more improves that.
It was a year or two ago until you know that's going to remain an active market.
I don't think you're going to see much change in multiples right now multiples are high.
Problem too hot Oh in our opinion in some areas, but the multiples are high so it really is well what's the structure of the deal.
With all the uncertainty out there you are probably look at a more of an earn out component than what you would otherwise see a year or two ago and you also have to be really focused on what to EBITDA most of the.
Businesses, which which are you know for sale so to speak a private companies and so it all gets pulled form is and I think actually the EBITDA calculation on a pro forma basis is is more important to be reviewed and scrutinizing and to get comfortable with.
Then the multiple itself you want to know what will that business do in your hands and so you know we're still active.
We don't generally compete with PD in that space, because we're we're generally having.
More limited discussions with.
With companies in it in the brokerage space, particularly in the U.S. with Marsh Mcclennan agency, but where we're committed to that part of the market. We think it's a great businesses and we will continue to be a buyer.
Great. Thank you Dan appreciate it.
Sure next question please.
Our next question comes from the lineup, Josh Shanker with Bank of America.
Good morning, everybody.
I want it maybe maybe mark could give us a little detail on numbers, but can we talk about TV.
And you said you're going to be.
Starting to do team you down at least in some weve coming from put some numbers behind that how much was suppressed in the second quarter and how much do that way or anything.
Yes, Josh we never we never give absolute numbers on TV because once you do it wants to do it forever I mean again see any into Oh, it's not an immaterial number but you obviously, you're not talking double digits of spending in travel and entertainment, but you have to think that's too.
Things one.
In the second quarters, you've got to think Teeny was off big time like you talking about mid Ninetys type of percentage points, nobody was traveling or entertaining. So that's a huge downdraft and I may have missed spoke in terms of what I, what I talked about T. TV I don't expect TV to bounce back in any way.
In the second half of the year, it's all year they'll still there won't be much put it this way travel or entertainment for the balance of the year. What I was trying to get across was over time, even looking into 2021 in 2022, I'm not sure teeny ever at the same level it was pretty cold.
I don't know as people will really travel as much because I don't think its is necessary as what the perception was before so I do think over the long term team maybe one of those areas, where we have an expense benefit.
It is lasting whereas we will wear team you will obviously go up from from near zero, but it won't go back to the level that it had been pretty coding.
So we would then my when I try and think about expenses in the back half the year right spectrum still to be materially down from the second half 19.
But you're I know, you're not giving explicit guidance modest EPS increased for the full year sort of implies a material downturn EPS in the back after the year with expenses down I mean, I'm not I know you don't give explicit guidance, but it seems like weather and ill let him on expenses still persist in the back half year.
I'm not sure why we should expect a year over year decline in earnings.
Even if raw revenues fall off a bit.
Well I mean, I see anywhere where a revenue based company as you look at our second quarter, where.
All right yet margins were up 430 basis points with modest levels of revenue increase that obviously is not sustainable which means we basically shut down large swaths of the expenses of this organization because of the up the great uncertainty as to what was going to.
Happen on the topline, we now have more clarity around what's going to happen on the topline and we do believe the top line across the firm will feel a bit more pressure than the second quarter doesn't mean, we're going to fall off the cliff, but it doesnt mean that some of the benefit we had in the second quarter of momentum we had.
From the fourth in the first.
A base and then went just faced with no debt now of revenue pressure and we want to release a little bit of some of the of expense hold back draw back that we had.
And I thought was saying before Josh. This this is this is an art of rather than a science when do we could cut our expenses.
Significantly from here and deliver a margin improvement in the back half the year, even if our top line is negative but it would not be good for the company in any type of mid term or long term perspective. So we're not going to do that we're going to continue to invest in this organization the dislocation that exists.
In the market the ability to strategically you recruit the movements in Digitization, our technology modernization all of that work continues and we're going to continue.
Thank you and I would now anything else.
[noise] [noise] I would now like to turn the call back over to Dan Glaser, President and CEO of Marsh and Mclennan companies for any closing remarks.
Thank you operator, thank you to all of you joining us on the call. This morning in closing I want to thank our 76000 colleagues for their hard work and dedication as well as they're supportive each other clients and local communities I am impressed and humbled by their response during these challenging times I also want.
And thank our clients for their continued support. Thank you all very much and I look forward to speaking with you next quarter.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.
[music].