Highway Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2021

There are 13 speakers on the call.

Operator

Welcome to Marsh McLennan's Conference Call. Today's call is being recorded. 3rd Quarter 2021 Financial Results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward looking statements.

Operator

Forward looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10 ks, all of which are available on the Marsh McLennan website. During the call today, we may also discuss certain non GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. I'll now turn this over to Dan Glaser, President and CEO of Marsh McLennan.

Speaker 1

Thank you. Good morning and thank you for joining us to discuss our Q3 results reported earlier today. I'm Dan Glaser, President and CEO of Marsh McLennan. Joining me on the call today is Mark McGivney, our CFO and the CEOs of our businesses, John Doyle of Marsh Peter Hearn of Guy Carpenter Martine Furlong of Mercer and Nick Studer of Oliver Wyman. Also with us this morning is Sarah DeWitt, Head of Investor Relations.

Speaker 1

Marsh McLennan had another outstanding quarter. Our 3rd quarter results reflect strong momentum across all of our businesses. Our continued strength represents a combination of the current environment as well as impressive day to day execution across the firm. Although there continues to be uncertainty and volatility in the macroeconomic and geopolitical environment, we are seeing solid demand for our are initiated advice and solutions. Even as COVID-nineteen continues to pose risks in many parts of the world, Vaccine rollouts are having a positive impact.

Speaker 1

We are taking advantage of opportunities to add to our deep bench of world class talent. Are outstanding people. And we continue to innovate and leverage the collective strengths of our organization to help clients address their most pressing concerns, including climate, diversity and inclusion, the future of work, cyber and digital strategies. As we have discussed, 2021 represents Marsh McLennan's 150th year and success over such a long period of time requires constant innovation and investment to deliver sustained growth and profitability. I'd like to discuss just a few recent examples of how we are innovating to develop new unique client solutions.

Speaker 1

Nick Studer leads our firm wide climate initiative. We view climate as a significant opportunity We are well positioned to help clients with this critical issue. In October, Oliver Wyman launched the Climate Action Navigator drawing on insights from across of the company. This product helps public and private sector leaders plot a path through climate science, are identifying emissions at the industry and regional level and quantifying the effects of multiple different are carbon reduction technologies and actions. We believe these tools will give business and government leaders vital insights to achieve their long term climate goals and be a significant enabler of the transition to low carbon climate resilient investment in the corporate sector.

Speaker 1

Mercer recently launched SkillsEdge, an innovative platform allowing employers to determine the most important skills for their future and design a talent strategy to assess, acquire and retain them. SkillsEdge provides quantitative insight into the demand and value of and supports both employees and organizations in rapidly reskilling for the future of work. And just last week, under the leadership of John Doyle, we launched our Cyber Risk Analytics Center. This brings together cyber risk data and analytics expertise across our firm and provides clients with a comprehensive assessment of their cyber threats, include existing and future controls and the potential economic impact. We are one enterprise and these are just a few recent examples of how we bring together and leverage knowledge and capabilities across the firm to offer comprehensive solutions to our clients and address their most pressing concerns.

Speaker 1

We are a growth are the company as demonstrated by our track record. Growth doesn't just happen. It takes consistent vision, alignment, commitment and execution. Since closing our acquisition of JLT, we have grown our total consolidated revenue by are 27%, our adjusted EPS by 34% and our colleague base by 22%. Achieving and sustaining growth requires consistent reinvestment in the business.

Speaker 1

We always strive to balance delivering results in the short term, while investing for the long term. In 2021, we generated year to date adjusted EPS growth that is higher than any annual period in over 3 decades, while at the same time investing for the future and making a significant press on hiring. We grew our headcount year to date by nearly 5,000 were around 7%, mostly organic ads with an emphasis on client facing roles. We expect this influx of talent will drive growth, add to our capabilities and enhance our ability to serve clients. Now let me provide an update on current P and C insurance market conditions.

Speaker 1

Many of the factors that drove the market to harden over the last few years continue, suggesting an inflection to a soft market is unlikely in the near term. The Marsh Global Insurance Market Index showed price increases of 15% year over year consistent with the 2nd quarter. This marks the are the 15th consecutive quarter of rate increases in the commercial P and C Insurance marketplace. Looking at pricing by line, The Marsh Market Index showed global property insurance was up 9%. Global financial and professional lines were up 32%, driven in part by a near doubling in cyber rates and global casualty rates were up high single digits on average.

Speaker 1

As a reminder, our index skews to large account business. However, small and middle market insurance rates continue to rise as well, although less than for large complex accounts. Turning to reinsurance, measured and moderate rate increases in global property catastrophe reinsurance witnessed in the first half of twenty twenty one could persist throughout the remainder of the year, reflecting adequate capacity offset by elevated global catastrophes, concerns around real and social inflation and a continuation of large individual risk losses. 2021 marks another year of significant catastrophe losses. Hurricane Ida generated material losses in both the Southeast ended Northeast.

Speaker 1

This is in addition to a record level of flood losses in Europe, flooding in China and the continuation of wildfire losses in many parts of the world. Marsh and McLennan remains focused are helping our clients navigate these challenging market conditions and making a difference for them in the moments that matter. Now let me turn to our terrific third quarter financial performance. We generated adjusted EPS of 1 point which is up 32% versus a year ago, driven by strong top line growth and continued low levels of T and E. Total revenue increased 16% versus a year ago and rose 13% on an underlying basis, are the 2nd consecutive quarter of record underlying growth in over 2 decades.

Speaker 1

Underlying revenue grew 13% in RIS and 12% in consulting. March grew 13% in the quarter on an underlying basis and benefited from strong new business and renewal growth. Guy Carpenter grew 15% on an underlying basis in the quarter, continuing Its string of excellent results. Mercer underlying revenue grew 7% in the quarter, the highest in over a decade. Oliver Wyman grew underlying revenue 25%, the 2nd consecutive quarter in excess of 20%.

Speaker 1

Overall, the Q3 saw adjusted operating income growth of 19% and our adjusted operating margin expanded 10 basis points year over year. Given our excellent Q3 and year to date performance, we are on track for a terrific year. We expect to generate the best underlying revenue and adjusted EPS growth in over 2 decades and expand margins for the 14th consecutive year. Our entire organization is on its front foot, focused and aligned, and this is evident in our excellent results. With that, let me turn it over to Mark for a more detailed review of our results.

Speaker 2

Thank you, Dan, and good morning. Our results were outstanding with record 3rd quarter revenue, 2nd consecutive quarter of double digit underlying growth, Margin expansion and significant earnings growth. Highlights from our Q3 performance included the 2nd straight quarter of 13% underlying growth in are IS with 13% at Marsh and 15% at Guy Carpenter and the 2nd consecutive quarter of 12% underlying growth in consulting were 7% at Mercer and 25% at Oliver Wyman. Growth in adjusted earnings per share exceeded 30% for the 2nd quarter in a row. Consolidated revenue increased 16% in the 3rd quarter to $4,600,000,000 reflecting underlying growth of 13%.

Speaker 2

Operating income in the quarter was $740,000,000 an increase of 37%. Adjusted operating income increased 19 GAAP EPS was $1.05 in the quarter and adjusted EPS increased 32% to $1.08 For the 1st 9 months of 2021, underlying revenue growth was 10%. Our adjusted operating income grew 21% to $3,400,000,000 are adjusted operating margin increased 120 basis points and our adjusted EPS increased 28% to $4.82 Looking at Risk and Insurance Services, 3rd quarter revenue was $2,700,000,000 up 17% compared with a year ago were 13% on an underlying basis. Operating income increased 21% to 403,000,000 Adjusted operating income also increased 21 percent to $469,000,000 and our adjusted operating margin expanded 20 basis points to are 20.4%. For the 1st 9 months of the year, revenue was $9,000,000,000 with underlying growth of 11%.

Speaker 2

Adjusted operating income for the 1st 9 months of the year increased 20 percent to $2,500,000,000 with a margin of 30.3%, are up 80 basis points from the same period a year ago. At Marsh, revenue in the quarter was $2,400,000,000 up 17% compared with a year ago or 13% on an underlying basis. Growth in the quarter was broad based are driven by nearly 40% new business growth and solid retention. U. S.

Speaker 2

And Canada delivered another exceptional quarter with and underlying revenue growth of 16%. In international, underlying growth was 9%. Latin America grew 12%, its best growth since the for the Q4 of 2015, Asia Pacific was up 9% and EMEA was up 8%. For the 1st 9 months of the year, Marsh's revenue was $7,300,000,000 with underlying growth of 12%. U.

Speaker 2

S. And Canada underlying growth was 14% and international was up 9%. Guy Carpenter's 3rd quarter revenue was $314,000,000 up 15% compared with a year ago on both the GAAP and underlying basis. Growth was broad based across geographies and specialties. Guy Carpenter has now achieved 7% or higher underlying growth in are 7 of the last 9 quarters.

Speaker 2

For the 1st 9 months of the year, Guy Carpenter generated $1,700,000,000 of revenue and 10% underlying growth. In the consulting segment, revenue in the quarter was $1,900,000,000 up 13% from a year ago or 12% on an underlying basis. Operating income increased 45 percent to $404,000,000 Adjusted operating income increased 15% to 350,000,000 The adjusted operating margin was 18.9 percent in line with the margin in the Q3 of 2020. Consulting generated revenue of $5,700,000,000 for the 1st 9 months of 2021, representing underlying growth of 9%. Adjusted operating income for the 1st 9 months of the year increased 25 percent to $1,100,000,000 and the adjusted operating margin expanded 180 basis point to 19.6%.

Speaker 2

Mercer's revenue was $1,300,000,000 in the quarter, up 7% on an underlying basis, are the highest results in over a decade. Career grew 13% on an underlying basis, reflecting the continuing rebound in the global economy and business confidence. Wealth increased 6% on an underlying basis, reflecting strong growth in Investment Management and modest growth in defined benefit. Our assets under delegated management grew to nearly $400,000,000,000 at the end of the 3rd quarter, up 24% year over year, benefiting from net new inflows and market gains. Health underlying revenue growth was 4% in the quarter driven by growth outside the U.

Speaker 2

S. Oliver Wyman's revenue in the quarter was $610,000,000 an increase of 25% on an underlying basis. This represents the 2nd consecutive quarter of more than 20% growth as demand remains strong across most geographies and practices. For the 1st 9 months of the year, revenue at Oliver Wyman was $1,800,000,000 an increase of 21% on an underlying basis. Adjusted corporate expense was $60,000,000 in the 3rd quarter.

Speaker 2

Foreign exchange had a negligible impact on earnings in Q3. Assuming exchange rates remain at current levels, we expect FX to be a modest headwind in the 4th quarter. Our other net benefit credit was $69,000,000 in the quarter and we expect it will remain at this level in the 4th quarter. Investment income was $13,000,000 in the quarter on a GAAP basis and $12,000,000 on an adjusted basis mainly reflects gains on our private equity portfolio. Interest expense in the Q3 was $107,000,000 compared with $128,000,000 in the Q3 of 2020, reflecting lower debt levels in the period.

Speaker 2

Are based on our current forecast, we expect interest expense in the 4th quarter to be similar to the amount in the 3rd quarter. Our adjusted effective tax rate in the 3rd quarter was 24.4% compared with 26.5% in the 3rd quarter last year. Are expected to be in the range of $1,000,000 Our GAAP tax rate was 24.2 percent in the 3rd quarter, down from 30.3% in the Q3 of 2020, which was impacted by some unusual items. Through the 1st 9 months of the year, our adjusted effective tax rate was 24.4% compared with 24.6% last year. Based on the current environment, we continue to expect an adjusted effective tax rate between 25% and 26% for 2021, excluding discrete items.

Speaker 2

Given our year to date performance, we are on track for an outstanding year. Looking specifically at the Q4, keep in mind that comparisons become more challenging given the rebound in growth in the Q4 of 2020. We also continue to build for the long term by investing and hiring. While we are excited about the future benefits these investments will deliver, come with upfront costs we absorb in the short term. That said, we've consistently demonstrated our ability to deliver exceptional results today while investing for the future and expect we will continue to do so.

Speaker 2

Turning to capital management and our balance sheet. We ended the quarter with $10,700,000,000 of total debt. Our next scheduled debt maturities in January of 2022 when $500,000,000 of senior notes mature. We continue to expect to deploy at least $3,500,000,000 of capital in 2021, of which at least $3,000,000,000 will be deployed across dividends, acquisitions and share repurchases. The ultimate level of share repurchases will depend on how the M and A pipeline develops.

Speaker 2

Our cash position at the end of the Q3 was 1,400,000,000 uses of cash in the quarter totaled $665,000,000 and included $272,000,000 for dividends, of $93,000,000 for acquisitions and $300,000,000 for share repurchases. For the 1st 9 months, uses of cash totaled 2,600,000,000 included $750,000,000 for dividends, dollars 566,000,000 for acquisitions, dollars 734,000,000 for share repurchases and $500,000,000 for debt repayment. We had a remarkable 3rd quarter positioning us well to deliver strong growth in both revenue and adjusted earnings in 2021. And with that, I'm happy to turn

Speaker 3

it back to Dan.

Speaker 1

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

Operator

Thank you, Mr. Glaser. In the interest of addressing our first question comes from the line of Elyse Greenspan with Wells Fargo.

Speaker 4

Hi, good morning. My first question goes back to the hiring that you guys have Done, which seems to have continued in the Q3. I was hoping to get more color on the impact you're seeing to both margin and top line growth. I think you alluded to some of this coming through on the expense and margin side from the hiring. But I'm hoping to get a sense of just the potential growth that could come from these hires given garden lease as well as potential RFPs on renewals coming in 2022.

Speaker 5

Yes. Thank you. Thanks,

Speaker 1

Elyse. We've been at it for 150 years, so things like guarding leaves don't bother us It's all that much. We're definitely in it for the long haul. As we mentioned in the script, our headcount growth year to date is up nearly 5,000 across the firm and the highest percentage growth by far is in Marsh and Guy Carpenter. And of course, the majority of the hiring that we've done is in client facing roles.

Speaker 1

And so we may not be like Other firms and that we generally hire to grow capability and talent rather than direct short term revenue production. But having said that, we are a people business. Our colleagues are our engine of growth and undoubtedly our increased hiring in 2021 will benefit next year and beyond. Sometimes it takes a bit of time to get all the hires fully integrated into the firm and producing at levels in terms of their own capacity At an optimal level, but we're very comfortable with that. And of course, there's a cost factor with that.

Speaker 1

We're not shy to say sophisticated talent is expensive, but it's worth it. And that's why we pursue it. And I don't want anyone to worry out there about our long term expense base by all of this hiring. We know how to run the business. Our comp and bend ratio, if I look at Q3 on a rolling 4 quarter basis and then go back 5 years and look at Q3 on a rolling 4 quarter basis is virtually identical.

Speaker 1

So over time, we're building the company, We're doing it through organic and we're doing it through acquisition. Next question.

Speaker 4

Thanks. And then, Dan, my follow-up

Operator

Our next question comes

Speaker 6

from the

Operator

line of Jimmy Bhullar with JPMorgan.

Speaker 1

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

Speaker 3

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

Speaker 1

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

Speaker 1

Good morning, Jimmy.

Speaker 7

Yes. As you noted, the P and C market conditions remain pretty challenging for our clients. Prices were up about 15% on average in the quarter, which was consistent And with the Q2, property market was plus 9 versus plus 12 in the second quarter. It was obviously quite an active cat quarter, flood and wind and wildfire related losses, but Secondary perils are getting a lot of attention from the underwriting community in the market. Casualty was up about 6%, although up closer to double digits globally when you exclude the work comp market in the United States where things remained pretty competitive, the excess market can remain are particularly challenging here in the United States.

Speaker 7

The underwriting community worried about loss cost inflation, social inflation really As courts reopen from being largely closed during the pandemic. The financial lines market, I think on average is the most difficult market for the moment for our clients, although having said that, public D and O pricing, it is still up, but it's up about 10 points versus 15 points in the 2nd quarter and that pricing that price increase, that rate of increase is the lowest it's been in the last 10 quarters. So, starting to see a little bit of settling in that market. Without question, the market that is most challenging at the moment is the cyber market, where prices were up more than 90% on average, driven by material growth in ransomware plans that I'm sure you're familiar with and as well as concerns about systemic events. We've had A few events that maybe modest compared to what potentially could happen, but underwriters remain concerned about that.

Speaker 7

You asked about clients. They're certainly frustrated by it for sure and some are retaining more risk. We've have been pretty active in creating new captives and there's premium growth in the captives that we manage as well. Some are also electing to retain more risk. And then in some cases, of course, the market is forcing some of our clients to retain more risk.

Speaker 7

It's client by client and exposure by exposure. As Dan said, we're aggressively working to help our clients navigate the market. I will add that although on average, the price was the average increase was the same globally. Most markets did see and rate moderation, the United States was really the one exception when you look at it on a global basis.

Speaker 1

Thanks, John. Peter?

Speaker 5

Thank you, Dan. Jimmy, a lot of my comments reflect from a reinsurance perspective, what John has said on an insurance perspective. You've had markets that are dealing with real and social inflation. They're dealing with low interest rate environment. And on top of that, we're facing something approaching $100,000,000,000 of Global catastrophe losses in 2021.

Speaker 5

So I think it's safe to say the prospect of that will influence property reinsurance pricing at 1onetwenty 2. But you have to look at the market through various lenses because there's a property market that's been affected by $300,000,000,000 plus losses over the last 5 years of catastrophe losses. If you look to the casualty market, the Significant underlying rate lift has stabilized and improved significantly property casualty reinsurance Contracts. And so I would say the casualty market has been more stable. As John says and the same is true in reinsurance, If I would suggest to suggest there's one hard element of our market right now, it is cyber.

Speaker 5

I think reinsurers are looking at cyber capacity the same way they look at Property catastrophe capacity, where they're going to allocate a certain amount of aggregate in which they hit that aggregate, that's it. So I'd say, as you know, we don't opine on 1one pricing or any significant quarter pricing, we believe the market finds its own equilibrium. And as a result of that, we're preparing our clients are based on exposure and experience for what they might expect at oneone. But certainly, the property market, given the fact that this is now the 5th year that reinsurers have had losses, is going to be challenging.

Speaker 1

Thanks, Peter. Jimmy, do you have a follow-up?

Speaker 3

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

Speaker 1

Yes. I mean, when we look at The impact of the pandemic, I think one of the biggest features is that most organizations will of our size and scale will adapt some sort of hybrid model. I think The days of 9 to 5 or 8 to 6, 5 days a week in the office are over for most companies. And so That will have an impact. It's a longer term impact because in the short term, you've got your leases established and We want some social distancing in the office and we're not sure how this will develop over time.

Speaker 1

So we're going to be Deliberate and flexible, and we're not going to move that quickly on it. I mean, we've had efforts over many years to become more efficient in our use of space and we've accomplished that quite a bit and that continues, but that certainly is our view. We also think that T and E won't come back quickly and may not reach the level of are in 2019 for quite a while. I know in Marsh and McLennan, our view is, yes, we look forward to a day We're going to visit clients and markets in their location, but we will travel with more purpose. Will probably travel with less people on various trips and we'll be more deliberate about it.

Speaker 1

And I think that our clients will have that expectation as well. So that hop on a plane anytime, anywhere culture probably takes are quite a long time to come back if ever. And so both of those things have expense implications for us that will be positive for shareholders in the long term. And I would say the other thing is we are constantly seeking efficiency gain. And we're working throughout the firm in order to drive efficiency gain and to become better at operations.

Speaker 1

So I want to why don't I turn to John for a second, so we can talk a little bit because about some of our headcount growth was in OpEx in the effort to drive some efficiency within the Marsh operation. And it's in its early stages, but there was a Pretty significant increase in headcount in that area. So John, you want to

Speaker 7

talk about that a second? Sure, Dan. We had the largest ever organic hiring in our history this year and we're quite excited about it. Dan touched on the market facing talent that we brought in are a bit earlier. I will say it starts with the team we began the year with though.

Speaker 7

Our teams are deep and as strong as it's ever been. We worked really hard to come together with the team at JLT and we worked on purpose and culture and our colleagues are highly engaged and focused. But one of the things we've been working on is been investing aggressively in our client service operations as well. We have a broad program called OpEx, short for operational excellence, to improve efficiency, to improve client service outcomes, But also to increase the capacity of our market facing colleagues as well. So a fair amount of the hiring came in service centers around the world.

Speaker 7

And And of course, it's not just talent. We're supporting that talent with investments in technologies. We try to automate more and more of our processes.

Speaker 1

Thanks, John. Next question, please. Yes.

Speaker 2

And we

Operator

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

Speaker 4

You guys reported 10% organic growth so far this year. We'll see how the Q4 shakes out. So could put you within the range of double digit for the year. Typically, you guys talk to a 3% to 5% view. Obviously, we've been better this year.

Speaker 4

You have all this hiring that seems like it will be incremental to revenue next year as well. So could you give us an initial view? I know you guys typically wait till the Q4, But just some initial thoughts that you could share with us when we think about the organic growth outlook for 2022?

Speaker 1

Sure, sure. And I'll just start with the idea. The 4th quarter, the top line becomes a little bit more challenging, right, because Marsh grew 4% in the Q4 of last year, Carpenter grew 5%, OW grew 4% and Mercer was down 3%. So across the piece, a little bit tougher, but we've got good momentum in the business and we feel good About this year, we also feel good about next year and the year after. I mean, we have have been fundamentally improving the company over the last decade.

Speaker 1

We are getting stronger in our capabilities, our geographic breadth, Our ability to serve, I mean, all of those areas have really dramatically improved. And we believe we are in fundamental growth markets in the areas of risk, strategy and people. I don't care what organization you are and what size, whether you're a large account or a midsized account, You have to address those on a strategic basis and it is incredibly relevant to the C suites of those companies and organizations to address broadly risks strategy and people. And I think we have enduring competitive advantages as well. I mean, As we were talking before, nothing happens here without our colleagues.

Speaker 1

I mean the quality of our organization, the talent that we have, The culture that we have, the broad capabilities, the global footprint are all enduring competitive advantages. We also continue to acquire talent in the market and acquire businesses which improve us and improve our capabilities, In particular, in middle market, on the brokerage side. So There's a lot of growth opportunities and just to touch as well on expansion opportunities. I mean, we're still weighted into upper middle market and large account. We've gotten better in the mid middle market.

Speaker 1

We're going to continue to get better. We're going to continue to broaden into the lower middle market and small commercial, consumer, you'll See us in all of those areas in the future. Now it's not going to be from 1 year to the next seeing some just massive change, but this is are inevitable in terms of how we build out our business. We're leveraging the combined strengths of our organization has won enterprise like never before in areas of healthy societies, cyber, protection gaps, Climate, I mean, all of those areas, we were going to market and addressing our clients' issues with them are on a broad basis, not on a narrow basis. And so our opportunities for revenue growth, in my view, are significant.

Speaker 1

I won't give you a number right now for 2022, but I think that having not only broken out of the 3% to 5%, but actually tremendously exceeded the 5% level. I think this company can be a real growth firm and then we'll prove that over time. We like to do and then say Rather than the opposite, so I think it'll be exciting times at Marsh McLennan.

Operator

Next question, please. Our next question comes from the line of David Motomativ with Evercore ISI.

Speaker 8

Hi, thanks. Good morning. I just had a question on the headcount adds. And so I just looking back, you added 500 of new headcount in the are down in the Q4 of 2020 and then 2,000 in the first half of twenty twenty one. I'm just wondering, Did that have any impact on the organic growth this quarter at all?

Speaker 8

Or is that still on the come?

Speaker 1

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

Speaker 8

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

Speaker 1

Yes. I'm not going to get into The expense that we're bearing now as a result, I think the one of the reasons that we have been Pressing on hiring is, twofold. 1, we are growing very well on the top line and that was our anticipation And also market opportunity. And so we are in our view an employer of choice are in the space and we are pressing our advantage at this moment in time. The hiring spurt is not going to last forever, but ultimately, we saw an opportunity in the market through dislocation and other factors, and we really pressed on that level.

Speaker 1

At the end, our expenses are relatively high Compared to historical type of expense growth for us, but our expense growth is essentially driven by Sales compensation by compensation and benefit, but that is very hard. Sales compensation due to much higher levels of new business, Variable compensation due to much higher levels of profitability and hiring. So comp and bed is driving most of our sales most of our expense growth in the quarter and will Eases itself out, but it's matching well with current levels of revenue growth. So we feel that this was a Tremendously opportune time to build capabilities within the firm on an organic basis.

Speaker 8

Got it. Great. Makes sense. Thank you.

Speaker 1

Next question please.

Operator

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

Speaker 6

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

Speaker 1

Sure, Meyer. John, you want to take that?

Speaker 7

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

Speaker 5

Okay, thanks. And then more broadly,

Speaker 6

obviously, the organic growth is phenomenal. I'm wondering, is there any element of the growth that is specific to like a post

Operator

pandemic era that wouldn't recur?

Speaker 1

Well, it's a good question. We're going to find out over time. I think the one issue to just bear in mind is The awareness around issues is higher. And I say that because risk awareness is far higher. I think people awareness is far higher.

Speaker 1

There's whole categories of opportunity in the world for us and others in areas such as ESG, which was not which is always considered by are subject to the company's and organizations, but not nearly to the extent it is today. And so when you think about just what's going on in the world With regard to climate or D and I, responsible investing, etcetera, these are all new areas of growth for us. You think about things like climate, which was probably not even considered by us 10 years ago, We think it's one of our major growth opportunities as a firm on a going forward basis. And so I would just say we want to be a leader on ESG and we look at the addressable market as ESG is being enormous and right now it's kind of the developed world public companies, it's going to be all companies everywhere. And so from that standpoint, the addressable market is going to be are quite large and we will be a significant player in it.

Operator

Great. Thank you very much.

Speaker 1

Next question please.

Operator

Our next question comes from the line of Mike Zaremski with Wolfe Research. Hey, great. Good morning. I guess a follow-up to Meyer's question and maybe Elyse's too. So as you're talking about you've been talking a while about broadening Marsh's capabilities, new categories, which are exciting.

Operator

Just curious if this kind of changes your views on M and A into new areas or technologies over time? Or is it really just kind of what we should be thinking about this kind of same sandbox as M and A sandbox as you're currently?

Speaker 1

Our M and A sandbox is very broad. Maybe our M and A that we've actually executed on is narrower than what we actually look at, but the SandBox is quite broad and I think you'd be surprised Some of the adjacencies and areas we look at, I mean, we I think, as I was mentioning earlier, the areas of risk, strategy and people have all kinds of elements to them that would enable us to continue to build capabilities with acquiring firms. We like firms that have recurring revenue. We like firms that are advisory based with transactions doesn't mean that all of our acquisitions will fit that criteria, but that's a lot of them. And then we also like firms where we can see the business benefit, the financial benefit to us, Even if it's a bit out there, we can see it.

Speaker 1

And some of the things we look at frankly in the amount of liquidity and Money that's being generated in the world and available, we just look at it and we just say, we can't we like the company and it's interesting, but boy, We don't have 30 years to figure out whether it worked or not. And so we're a disciplined acquirer and we want to require things that not only build our capabilities, but also help us financially as well even if only on an incremental basis. So I would say we have a very broad sandbox, But our level of execution has been relatively narrow over the last 5 or 10 years and that probably continues on that basis. We look at a lot of things and we execute on things that we're really committed to.

Operator

Okay, great. I guess my follow-up and not to harp on it too much, but your results were excellent. But it sounds like you're saying that some of the margins were impacted by new hires. Is that the main influence? Are there other items we should be thinking about?

Operator

And I to this hiring spurt should be expected to continue in the near term. And so we should be kind of thinking about that as we project margins and then maybe I guess when hiring slows, you have maybe easier comps in outer years?

Speaker 1

Yes. I mean, first of all, I wouldn't fret about the margins in the quarter. Ultimately, we've said many times, you have to look about margin expansion over longer stretches of time. We've improved our margins for 14 consecutive years and the results are really remarkable from a basis point improvement. Our margin is up 120 bps year to date and that's on top of 120 bps in 2020 110 bps in 2019.

Speaker 1

So there's another wrong with our margins and I would expect that our margins next year are going to be better than they are this year. And so that's the way We operate the business, but it's an outcome. We don't sit around the table figuring out how we're going to drive margin. What we do is we figure out How we're going to drive underlying growth and earnings. That's the focus of the firm and the outcome of margin expansion is how we run the firm, Where we think not every quarter, but certainly every year revenue growth needs to exceed expense growth.

Speaker 1

And that's what we do and we've done it consistently. And so we're thrilled about where we are. What I mentioned earlier is that a lot of the expense growth right now is being are driven by compensation around sales and around increased profitability. And so that's a really good place to be in and our earnings growth is very strong, remarkably strong. And so I hope that answers your question.

Speaker 1

Next question, please.

Operator

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

Speaker 9

Hey, thanks. A couple of questions here. First, Just curious, free cash flow down year over year, is that simply just due to the hires that you're having right now? And should we expect to see free cash flow start some good growth with earnings here production 2022.

Speaker 1

Thanks, Brian. I'm going to

Speaker 2

hand off to Mark for that. Thank you, Brian. Actually, we're really happy with free cash flow year to date. I think you have to be careful. There's a lot that can happen to cause volatility in a quarter with a cash flow statement, even across a year.

Speaker 2

But free cash flow growth for us has been a great story over a long period of If you go back over a decade, we've generated double digit growth in free cash flow and we're up if you look year to date this year, we're up 5% And that's on top of 56% growth in free cash flow last year. So I think any growth above a big stair step up last year is pretty good. So I think overall, our cash generation this year is strong and that's what's enabling us to deploy so much capital.

Speaker 9

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

Speaker 1

Yes. Why don't I take that and then I'll hand to John and Martine to just say, are you seeing inflation in any way in the conversations with clients and what we're hearing from markets. I mean historically, we've done some work and we tend to do as a company Better in inflationary periods. I mean elements of our revenue base react to inflation such as higher insured values and we've proven That we can manage our expense base and so sometimes the revenue runs a little bit because of inflation and we're still managing our expense base. So When we look back to inflationary periods over the last 25 years, we've tended to outperform and do pretty well.

Speaker 1

And Overall, I'll just mention on the economic environment, not just inflation. I mean, there's a lot of positive features about the economic environment, particularly in the United States. I mean, sales are up, consumer spending is up, Business confidence is positive, but there are a lot of potential risks and inflation is probably the biggest one of them, but you also have The supply chain issues that we've all been reading about, the return to office that we're all going to be navigating over the coming months, concerns around COVID variance. So it is a tremendously difficult time to look forward, say, 4 quarters or so and get a real beat on what the economic performance is. Although I do note that most GDP forecast for next year in that kind of 4% 5% range, so not bad.

Speaker 1

But starting with John, what are you hearing from Markets and clients around inflation and then we'll go to Martine.

Speaker 7

Tim, I'm certainly hearing concerns on multiple levels. Maybe I'll start on the Just on the claims side, for a second, Peter mentioned earlier that more than $100,000,000,000 worth of cat losses, of course, we're are typically accustomed to demand surge related kind of temporary inflation, if you will, around cat losses, but It's further those issues are further exacerbated by the supply chain challenges that we're seeing in market. So So some level of concern there in terms of what it will mean ultimately to loss costs around cats. I mentioned earlier the impact of social inflation around liability claims, particularly here in the United States and a couple of other jurisdictions as courts reopen After the pandemic and we're seeing some evidence of that, although broad based evidence is really yet to show itself. Of course, payrolls and employment levels are important from a demand perspective around commercial insurance and work comp in particular.

Speaker 7

And so there is concern about wage inflation from some of our clients and the impact on growing costs there. And maybe with that, I'll hand it to Martine to talk maybe more about the benefits of it. Thanks.

Speaker 10

Yes. No, thanks, John. And indeed, wage inflation and inflation in general, Usually, we do well in these times, one, because our clients really need help in managing these increased costs. So how do they manage through Medical inflation, which we believe is coming back now that regular care will resume, which is tended to keep premium a bit low during COVID, the same thing on wage inflation, looking at are accelerating transformation program with clients to address the pyramid and the profile of their workforce. And in terms of Pension plans as well, I mean, we have to watch on that.

Speaker 10

And as soon as there is pressures in the economy and system, Governance spike up in terms of helping clients manage the asset side of their pension funds more tightly. And therefore, that's usually good for the OCIO business in our Investment Management Solutions. And lastly, from management of our business, most, if not all of our multiyear assignments would have Automatic adjustment to inflation. So we've seen that movie before some years ago.

Speaker 9

Thank you.

Speaker 1

Thank you. Appreciate it. Next question please.

Operator

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

Speaker 6

Thanks. Good morning. First question on Andy, have you seen at the higher level any impact of tax reform on M and A activity at the industry level, either It's changing the timing of it, of M and A or deals paid, the multiples paid, any impact there at all?

Speaker 1

There's been there's a lot of deals out there, but that has been pretty consistent over the last several years and whether there is some marginal impact of people trying to get ahead of whatever could happen in the U. S. Tax environment, it would be on the edges. It's not driving like a more significant level than what we've seen. There's been a lot of sellers out there.

Speaker 1

I think there's a lot of sellers out there, mainly because there's a lot of capital out there And valuations are pretty strong. It's probably the biggest factor as to what's driving M and A activity.

Speaker 6

Okay, thanks. And then just a quick follow-up on the last couple of comments on inflation. You talked a lot about on the hiring you've got and possible impacts on your margins there. But I guess specifically to you guys on wage inflation, any impacts there you've seen, you felt and current margins, do you expect to impact that in your margins for you guys specifically?

Speaker 1

Yes. I'll hand off to Martine And then to Nick to just talk about whether they're seeing in the client base and in fact in our own firm any pressures around wage inflation. We're watching it Very closely, obviously, we're all reading about inflation in general and also In the dynamic between employers and employees across many industries, The employees seem to be in charge right now. And so I think that not only wages and benefits, are more broadly environment of how companies operate, the attractiveness of their work environment, etcetera, are key factors in terms of the ability to retain people and the ability to attract high quality people. But why don't we start with Martine and see what you're seeing and then we'll go to Nick.

Speaker 10

Yes. From a wage inflation Point of view in the market, what we're seeing is that there's more pressure at the lower end of the wage spectrum, where there's a lot of movement there to attract people to jobs that have been really hard hit during the pandemic. At the are higher end, white collar professional. What we're seeing is a little bit of a musical chair, I would say. So there's a great resignation that's kind of people have moved, people are are looking for different careers, and we need to help our clients manage through these pressures and demand.

Speaker 10

But I think this element of it will be temporary and will settle itself over time. I mean, as clients look at, as I said earlier, are transforming, focusing on the skills they need rather than jobs and roles. We see a very important trend there. Dan has spoken earlier about our SkillsEdge platform that helps clients migrate to that. These are all techniques that will help clients get through This change that we're seeing right now.

Speaker 1

So let me hand over to Nick with a bit of a shout out for Oliver Wyman because 2 quarters in a row of 20% plus Organic growth. Not bad, not bad. And I'm looking forward to finalizing the budget conversation with you later on today. But Nick, are you seeing some wage inflation? Are you hearing it from clients as well?

Speaker 11

Yes. Thanks, Dan. Thank you, Michael, for the question as well. I think I agree with the way that Dan and Martina both characterized this overall. In our is it is a competitive market for talent.

Speaker 11

I think we see it in our clients. I think we particularly see it in our business. And there have been a couple of times when with our strong growth, capacity constraints have constrained our ability a little bit. I'm not enormously worried by it. We are finding it we are hiring more than we've hired, I think, may be ever before, but certainly over the last 5 years, I'm hiring extremely rapidly, but we see some of the musical chairs, which Martine described across our businesses too.

Speaker 11

So So in short, yes, there is a period of employee power and rising wages.

Speaker 3

Thank you.

Speaker 1

I think we have time for another question or 2, but next question please.

Operator

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

Speaker 12

Hey, thanks. Good morning. Dan, I just had one. How do you think about the growth dynamics of The talent pool in the industry as a whole for whether it's a consulting you do or P and C brokerage. I guess I ask because we know there are some areas of brokerage, I guess it's more on the personal line side where there's kind of secular talent outflow.

Speaker 12

I'm just trying to get a can be

Speaker 1

No, it's a very good question. We see no Ryan, it's a great question, but we see no problem with our ability to attract talent. In fact, When we hire 5,000 people, you have to understand we are interviewing 25,000 to 30,000 with interviews taking place. We are very are selective in how we approach talent. Every time we're seeking talent, we have numerous applicants.

Speaker 1

And so I think at the very heart of it is the work that we do. We're not an insurance business, we're a risk business. We're not a people business from an administrative standpoint. We're a strategic people business. And so from that standpoint, The purpose of the organization of making a difference for companies in their moments that matter and those inflection points, I think it's very attractive.

Speaker 1

And so we're able to compete with the best firms in the world are for high levels of talent. And when you have the broad base that we have, you can take some risks Okay. So that person is not a subject matter expert, but boy, they've got a history of success. And let's see how they do. And so we can go a little bit broader.

Speaker 1

So we see none of the constraints that some folks in particularly in the insurance industry have in terms of inflow of talent.

Speaker 12

Thank you.

Operator

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

Speaker 1

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

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Highway Q3 2021
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