Marsh & McLennan Companies Q3 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
October 17, 2024
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Operator

Welcome to Marsh McLennan's Earnings Conference Call. Today's call is being recorded. Third quarter 2024 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com.

Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent form 10-K, all of which are available on the Marsh McLennan website.

During the call today, we may discuss certain non-GAAP financial measures. For a reconciliation of those measures to the most recently comparable GAAP measures, please refer to the schedule in today's earnings release. [Operator Instructions] I'll now turn the call over to John Doyle, President and CEO of Marshall McLennan.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Good morning, and thank you for joining us to discuss our third quarter results reported earlier today. I'm John Doyle, President and CEO Marsh McLennan. On the call with me is Mark McGivney, our CFO and the CEOs of our businesses; Martin South of Marsh, Dean Klisura of Guy Carpenter, Pat Tomlinson of Mercer and Nick Studer of Oliver Wyman. Also, with us this morning for her last quarter as Head of Investor Relations is Sarah Dewitt. We'd like to congratulate Sarah on her new role as chief financial officer of Marsh.

Before I get into our results, I'd like to take a moment to comment on hurricanes Helene and Milton, which have devastated communities in Florida and the southeast United States. These events are first and foremost a human tragedy, and our thoughts are with all of those impacted by the storms. Our primary concern has been the wellbeing of our colleagues and their families as well as our clients, and we are actively working to assist in their recovery.

While the ultimate insured loss won't be known for some time, the impact of these storms will be significant, and given their wide paths of destruction and close timing, they will put enormous pressure on resources available for recovery. Both hurricanes also highlight the meaningful disparity between economic loss and insured loss. According to some estimates, Helene may have the largest multiple of economic to insured loss of any U.S. storm. This protection gap imposes a meaningful burden on the economy, makes near term recovery more challenging, and undercuts resilience.

In addition, rising frequency and severity of extreme weather events, higher property values and increased development in cat prone areas are driving the need for greater protection. We and the insurance industry help communities, businesses and governments build resilience to manage these perils. But as these storms highlight, there is opportunity to do more through risk mitigation, event preparedness and alternative solutions such as community based parametric products.

Turning to our results, the third quarter marked another milestone for Marsh McLennan. We continue to perform well across our business, and we were thrilled to announce the acquisition of McGriff Insurance Services. In the quarter, we generated 5% underlying revenue growth following 10% in the third quarter of last year, reflecting solid execution in RIS and consulting. We grew adjusted operating income 12%. Our adjusted operating margin expanded 110 basis points, adjusted EPS grew 4% or 11% excluding a discrete tax benefit in the third quarter of last year, and we completed $300 million of share repurchases in the quarter.

Turning to McGriff, it is a leading provider of insurance broking and risk management services in the U.S. with approximately $1.3 billion in revenue. I have long admired McGriff. They have excellent leadership, talented colleagues and a track record of strong growth. Their deep specialty and industry capabilities will strengthen the value proposition and expand the reach of Marsh McLennan Agency in the vast and growing middle market segment. McGriff's client focus, culture of collaboration and commitment to excellence and integrity mirror our own. Together, McGriff and MMA will create new opportunities for colleagues to be their best and helping them deliver even greater value to clients.

The $7.75 billion transaction will be funded by cash on hand and debt financing. We expect to close by year end, subject to regulatory approval. We would also expect the transaction to be modestly accretive to adjusted EPS, excluding amortization, in year one and become more meaningfully accretive in year two and beyond. We have a terrific track record of acquiring and integrating businesses, and we are excited to welcome McGriff's over 3,500 colleagues to the company when the deal closes.

McGriff has added to what is already an active year for M&A across our business. We are on track record for the largest M&A year in Marsh McLennan's history, with nearly $10 billion of capital committed to acquisitions year-to-date, including McGriff, Vanguard's U.S. OCIO business, Cardano, Horton and FBBI. These acquisitions highlight our strategy to deploy capital to faster growing segments of our business. As we have said before, we consistently focus on delivering in the near term, while investing for sustained growth over the long term.

Shifting to the macro environment the overall backdrop remains supportive of growth despite what continues to be a complex and volatile landscape. Central banks have begun a cycle of easing and consensus views of the likelihood of near-term recession for most major economies are well below where they were coming into the year. We continue to see economic growth across most of our major markets. Inflation remains elevated but declining, labor markets remain healthy and the cost of risk in health care continue to rise. That said, uncertainty remains with rising geopolitical tensions and continuing conflicts in Ukraine and the Middle East.

Clients across the world continue to assess the implications of technology advances and AI, the ever-persistent threat from cyberattacks, supply chain risk and the impact of increasing frequency and severity of extreme weather events on their businesses. Our talent, expertise and solutions help clients manage challenges and accelerate opportunities to thrive. So, we remain positive in our outlook for growth. We are well positioned and have a track record of performing across economic cycles due to the enduring value we bring to clients and the resilience of our business.

Turning to insurance and reinsurance market conditions the, Marsh Global Insurance Market index was down 1% overall in the third quarter versus flat in the second quarter. Rates in the U.S. and Latin America were up low single digits, Europe was flat, and in the UK, Asia and Pacific rates were down mid-single digits. Global property rates were down 2% versus flat in the second quarter. However, global casualty rates increased 6% with U.S. excess casualty up approximately 20% in the quarter.

Workers' compensation decreased low single digits. Global financial and professional liability rates were down 7%, while cyber decreased 6%. In reinsurance, demand continued to rise and capacity remained adequate in the quarter. While it is too early to know the ultimate insured losses from hurricanes Helene and Milton, we expect there to be an impact on 2025 property, insurance and reinsurance pricing.

Cap ons, which posted record volume in the first half, remain likely to have elevated issuance activity through year end, driven by a heavy maturity schedule. And capacity for casualty programs is expected to be adequate despite concerns over the pace of lost cost inflation. As always, we are helping clients navigate these dynamic market conditions.

Now let me turn to our third quarter financial performance. We generated adjusted EPS of $1.63, which is up 4% from a year ago, or 11% excluding a $0.10 discrete tax benefit in the third quarter of last year. On an underlying basis, revenue grew 5%, underlying revenue grew 6% in RIS and 4% in consulting. Marsh was up 7%, Guy Carpenter 7%, Mercer 5%, and Oliver Wyman grew 1%. Overall, in the third quarter, adjusted operating income grew 12%, and our adjusted operating margin expanded 110 basis points year-over-year. For the nine months, consolidated revenue grew 7% on an underlying basis. Adjusted operating income grew 12%, and our adjusted operating margin expanded 110 basis points. Adjusted EPS was $6.93, up 10% from a year ago.

Turning to our outlook, we are well positioned for another great year in 2024. We continue to expect mid-single digit or better underlying revenue growth, another year of margin expansion and strong growth in adjusted EPS. Our outlook assumes current macro conditions persist. However, the environment remains uncertain and the economic backdrop could be materially different than our assumptions.

Overall, I'm pleased with our third quarter performance, which demonstrates execution of our strategy and continued momentum across our business. I'm grateful to our colleagues for their focus and determination, and the value they deliver to our clients, shareholders and communities. With that, let me turn it over to Mark for a more detailed review of our results.

Mark Christopher McGivney
Chief Financial Officer at Marsh & McLennan Companies

Thank you, John and good morning. Our momentum continued in the third quarter with solid underlying revenue growth, significant margin expansion and 4% growth in adjusted EPS, or 11%, excluding a large discrete tax benefit last year. Our consolidated revenue increased 6% to $5.7 billion with underlying growth of 5%. Operating income was $1.1 billion and adjusted operating income was $1.2 billion, up 12%. Our adjusted operating margin increased 110 basis points to 22.4%. GAAP EPS was $1.51. Adjusted EPS was $1.63.

For the first nine months, underlying revenue growth was 7%. Adjusted operating income grew 12% to $4.9 billion. Our adjusted operating margin increased 110 basis points to 28% and adjusted EPS increased 10% to $6.93. Looking at risk and insurance services, third quarter revenue was $3.5 billion, up 8% from a year ago or 6% on an underlying basis. This result marks the 15th consecutive quarter of 6% or higher underlying growth in RIS, and continues the best stretch of growth in two decades.

Note that fiduciary income was $138 million in the quarter. In looking ahead to the fourth quarter, we expect to see this amount decline by approximately $30 million, reflecting recent rate cuts and a seasonal drop in fiduciary assets.

Operating income in RIS increased 15% to $733 million. Adjusted operating income increased 16% to $775 million and our adjusted operating margin expanded 130 basis points to 24.7%. For the first nine months, revenue in RIS was $11.7 billion, underlying growth of 8%. Adjusted operating income increased 12% to $3.7 billion and the margin increased 100 basis points to 33.6%.

At Marsh, revenue in the quarter was $2.9 billion, up 9% from a year ago or 7% on an underlying basis. This comes on top of 8% growth in the third quarter of last year. Growth in the third quarter was broad based and reflected solid retention and new business growth. In U.S. and Canada, underlying growth was 6% for the quarter, led by strong growth in MMA and in Victor, our MGA business.

In international, underlying growth was 7% and comes on top of 10% in the third quarter of last year. Latin America was up 8%, EMEA was up 7% and Asia Pacific was up 5%. First nine months of the year, Marsh's revenue was $9.2 billion with underlying growth of 7%. U.S. and Canada grew 7% and international was up 7%. Guy Carpenter's revenue was $381 million in the quarter, up 6% or 7% on an underlying basis, driven by strong growth in international, including global specialties. For the first nine months of the year, Guy Carpenter generated $2.2 billion of revenue and 8% underlying growth.

In the consulting segment, third quarter revenue was $2.3 billion, up 3% from a year ago or 4% on an underlying basis. Consulting operating income was $462 million and adjusted operating income was $478 million, up 7%. Our adjusted operating margin in consulting was 21.7% in the third quarter, an increase of 90 basis points. The first nine months, consulting revenue was $6.7 billion with underlying growth of 5%. Adjusted operating income increased 7% to $1.3 billion, and our adjusted operating margin increased 60 basis points to 20.7%.

Mercer's revenue was $1.5 billion in the quarter, up 5% on an underlying basis, this was Mercer's 14th consecutive quarter of 5% or higher underlying growth. Health underlying growth remained strong at 8% and reflected growth across all regions. Career grew 5% where we saw strong growth in rewards and talent strategy. Wealth grew 4%, driven by continued demand in defined benefits consulting and growth in investment management. Our assets under management at the end of the third quarter rose to $548 billion, up significantly from the third quarter of last year and up 11% sequentially.

Year-over-year growth was driven by the impact of capital markets, our transaction with vanguard and positive net flows. For the first nine months of the year, revenue at Mercer was $4.3 billion with 6% underlying growth. Oliver Wyman's revenue in the quarter was $810 million, up 1% on an underlying basis. This reflects a tough comparison to 12% growth in the third quarter of last year and softness in certain geographies. We currently see this trend extending into the fourth quarter.

The first nine months of the year, revenue at Oliver Wyman was $2.4 billion, an increase of 5% on an underlying basis. Foreign exchange had very little impact on earnings in the third quarter. Assuming exchange rates remain at current levels, we also expect minimal FX impact in the fourth quarter.

Total noteworthy items in the quarter were $78 million. These included $54 million of restructuring costs, mostly related to the program we began in the fourth quarter of 2022, as well as some transaction related charges. Our other net benefit credit was $68 million in the quarter. For the full year 2024, we expect our other net benefit credit will be about $270 million. Interest expense in the third quarter was $154 million, up from $145 million in the third quarter of 2023, reflecting higher levels of debt and higher interest rates.

Based on our current forecast, we expect approximately $151 million of interest expense in the fourth quarter, excluding any amounts related to the McGriff transaction. Our adjusted effective tax rate in the third quarter was 26.7%, compared with 20.5% in the third quarter of last year. Our tax rate last year included the release of a valuation allowance on foreign deferred tax assets.

Excluding discrete items, our adjusted effective tax rate was approximately 26.5%. When we give forward guidance around our tax rate, we do not project discrete items which can be positive or negative. Based on the current environment, we expect an adjusted effective tax rate of approximately 26.5% for 2024.

Turning to our McGriff transaction, McGriff is a terrific company with excellent leadership, a culture similar to MMA's, a diversified business mix, presence in faster growing U.S. markets and a strong track record of performance. We will be paying $7.75 billion in cash consideration, funded by a combination of cash on hand and new debt, and we expect to close by year end subject to regulatory approval.

As part of the transaction, we expect to assume a deferred tax asset valued at approximately $500 million. As we've noted in the past, we maintain considerable balance sheet flexibility to position us for this type of opportunity. We've secured a committed bridge loan facility for the full amount of the purchase price, and currently plan to replace these commitments with permanent financing in the fourth quarter as we get closer to closing. Based on our outlook today, we expect to raise $7.25 billion in new debt to fund the transaction. We value our high-quality ratings, and we were pleased that all three rating agencies recently affirmed our current ratings with no changes in outlook.

The financial and capital management plan contemplated in the transaction is not only consistent with maintaining our current ratings, but we also expect to have meaningful flexibility for capital deployment next year. Although initially, our leverage ratios will increase, the substantial cash flow we expect to generate, as well as increased debt capacity through earnings growth will enable us to bring our leverage ratios back in line with levels necessary to maintain a strong ratings profile. As a result, while we intend to pause share repurchases in the fourth quarter, as we think about capital management into next year, we expect we will maintain our balanced approach that includes increasing our dividend and reducing our share count each year as well as continuing to fund high quality acquisitions. We will obviously have more guidance around our outlook for capital deployment in 2025 on our fourth quarter earnings call early next year.

As John noted, we expect the transaction will be modestly accretive to adjusted EPS, excluding amortization in year one, becoming more meaningfully accretive in year two and beyond. This transaction is a great reflection of several elements of our capital management strategy, maintaining flexibility to take advantage of opportunities, a bias to reinvest capital for growth and delivering in the near term, while challenging ourselves to invest to sustain growth into the future.

Earnings capital management in our balance sheet, we ended the quarter with total debt of $12.8 billion. Our next scheduled debt maturity is in the first quarter of 2025, when $500 million of senior notes mature. We currently expect to deploy approximately $4.2 billion of capital in 2024 across dividends, acquisitions and share repurchases, excluding the McGriff transaction. Our cash position at the end of the third quarter was $1.8 billion. Uses of cash in the quarter total $1.1 billion, and it included $404 million for dividends, $435 million for acquisitions and $300 million for share repurchases. For the first nine months, uses of cash totaled $3.3 billion, included $1.1 billion for dividends, $1.3 billion for acquisitions and $900 million for share repurchases.

I want to spend a minute on our plans to change how we report adjusted EPS. Starting next year, we will exclude the impact of acquisition related amortization from adjusted EPS. We will also exclude the other net benefit credit, another noncash item. These changes will improve the comparability of our results and give investors a better sense of our core earnings power. They will also conform our adjusted EPS reporting with how we report adjusted operating margins.

While there continues to be uncertainty in the outlook for the global economy, we feel good about the momentum in our business, and the current environment remains supportive of growth. Overall, we are well positioned for another great year in 2024. Based on our outlook today for the full year, we continue to expect mid-single digit or better underlying growth, margin expansion and strong growth in adjusted EPS. With that, I'm happy to turn it back to John.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

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

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Operator

Certainly. [Operator Instructions] And our first question comes from the line of Elyse Greenspan with Wells Fargo.

Elyse Greenspan
Analyst at Wells Fargo & Company

Hi. Thanks. Good morning. My first question is on the McGriff deal. When you guys say, right, that you expect it no accretive to earnings less intangibles, what are your -- can you give us some color on what your assumptions are for revenue growth relative to the $1.3 billion that you're taking on? And then also, what are you assuming for margin? I guess my questions for the year one guide, but any guide you kind of want to give us for year two and beyond would be helpful as well.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Sure, Lisa, and thank you for the question. I just want to reiterate how excited we are to bring, welcome McGriff into the family, obviously subject to regulatory approval. They have a really strong culture, it's a competitive group. They're so client focused. I spoke to the talent in my prepared remarks, and they'll extend our reach into -- it's a vast and fragmented middle market. They have excellent specialty capabilities and industry focus. And working together with MMA, we know they can drive better outcomes for clients, and we can create new opportunities for their colleagues as well. So, we're excited about all that. We've shared the details that we're going to share about the business. Like other MMA transactions, we don't disclose their margins when we acquire them or for that matter, how they're growing or, but we're excited about it. As I said, it'll be modestly accretive in year one and more so after that. And we expect to earn a good return on the investment over time. So, there are synergies, of course, but we're conservative in our modeling, and we're very excited about what the combination can mean.

Elyse Greenspan
Analyst at Wells Fargo & Company

Thanks, and then my follow up on U.S. and Canada. Growth was 6% again this quarter. Can you just give us a sense of some of the dynamics that you're seeing within that market and then relative to, like, the IPO and SPAC in that business, right, it has been a headwind for a couple of years. Have you seen any improvement there in the quarter?

Mark Christopher McGivney
Chief Financial Officer at Marsh & McLennan Companies

Sure. You know, I'd start at least just with, you know, overall, I'm very pleased with our underlying growth in the quarter. I thought we had a terrific quarter. Marsh, Guy Carpenter and Mercer all had terrific growth, and it was really widespread. It was across all regions and practices. And so, we felt good about that. We obviously had a softer quarter of growth at Oliver Wyman, but overall, I thought that the growth was good, and we're well positioned. I spoke to the macro environment. It is shifting and changing. And obviously, interest rates have begun to come down in some major economies around the world, and that's meant some new opportunity in SPACs and IPOs and. Well, maybe not SPACs, but IPOs and M&A activity were starting to pick up a bit. But Martin, maybe you could talk a little bit about the U.S. marketplace and some of the opportunities we're seeing.

Martin South
Chief Executive Officer at Marsh & McLennan Companies

Sure. John? Well, thank you. As you said, very pleased with our underlying growth of 7%, which is kind of in line with 8% in 3Q '23 and 3Q '22. Very good balance of growth across international and in the U.S., but I'll double click a little bit on the U.S., performed very well, six on top of six in Q3. So very good growth from MMA and Victor. And to Elyse's question, we did see double digit growth in the capital markets and M&A products, construction, aviation performed well and globally. Very strong growth in our benefits business as well. So overall, pleased with that, good momentum and expect that to continue.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

The double-digit growth, Elise, in capital markets, of course, is off a lower base right after a couple of years of a soft environment there. So, thank you for your questions. Andrew, next question, please.

Operator

Absolutely. Our next question comes from the line of Jimmy Bhullar with J.P. Morgan.

Jimmy Bhullar
Analyst at J.P. Morgan

Hey, good morning. So first, just had a question following up on your comments on Milton and its impact on the market. So just specifically on reinsurance, just wondering what your expectations are on how Milton affects renewals. And should one assume that prices could actually go up or they're just going to go down less given the high loss?

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Yeah, I think, Jimmy, at the end of the day, it's too early to know that at this point. There's obviously a range of estimates out there, and the ranges are quite wide. And so, there's still a lot for us to learn. Many property owners are just getting to their facilities at this point. And so, I spoke about the overall economic impact to the southeast, and what it means to those communities at a human level as well. It's going to be a challenging recovery, and it's going to extend for a bit of period of time. Maybe I could ask Dean to comment a little bit about what we're expecting in advance of those storms and any thoughts he has on the impact it might have. Dean?

Dean Klisura
Chief Executive Officer at Marsh & McLennan Companies

Yeah. Thanks, John, and Jimmy, as we entered the kind of fall conference season ahead of Helene and Milton, I think our clients, and we anticipated a very competitive market environment at the upcoming January 1 property cat renewal. I think post Milton, it's still early, but I think we see a flattening of pricing in the property cap market at the upcoming January 1 renewal. If you think about kind of lower and mid-level layers and programs, we kind of see risk adjusted flattish at this point without all the data in. And you could still see some softening, some rate reductions in more remote risk layers and property cat towers. As John said, keep in mind it's early, we're still in wind season. There could be additional cat events over the next several weeks that would shape the market. And as John noted, it'll be several weeks before we have sufficient claims data to make accurate loss estimates and those impacts on our clients. And right now, we're just relying on all of our cap modeling partners to come up with some of those estimates. But to sum it up, Jimmy, I would say overall property cat demand should increase at January 1 from our clients.

We think capacity in the marketplace will be adequate. We think the renewal will be manageable for most of our clients. You know, the market is well capitalized to trade forward and meet client demand. And keep in mind, I think the headline, Jimmy, is the major of the cat losses this year will be borne by our clients, given the high attachment points that were imposed on them after Hurricane Ian two years ago.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Thank you, Dean. Jimmy, do you have a follow up?

Jimmy Bhullar
Analyst at J.P. Morgan

Yeah, just on Oliver Wyman. Obviously, the comps were tough as well. But you noted seeing weakness in some geographic regions. Was that a function of the economy, or is there something else that's affecting results in the areas that you mentioned?

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Yeah, sure. You know, 1%, obviously, underlying was softer. You know, we planned for, you know, it was a tough comp, and we're up 5% year to date. And, you know, what I would also say is, you know, I mentioned to you in the past there's going to be more volatility quarter to quarter at Oliver Wyman. We do expect higher underlying revenue growth from Oliver Wyman over the medium to long term. But Nick, maybe you could share some insights on what you're seeing in the market.

Nick Studer
Chief Executive Officer at Marsh & McLennan Companies

Thank you, Jimmy. We often say this is a mid to high single digits business through the cycle. And I think it's fair to say we're at a low point in the cycle. And we've talked for a few quarters now about that being a tough market, and we do see that continuing. Maybe at a macro level, I'd just note we're more than 50% larger than we were pre-pandemic. We're two-thirds larger than that pandemic year. I think we are consolidating those gains in that tough market. But so, the quarter itself, no one likes a one. No one likes a one following a three, they were a 12 and 11 comp. Thank you for noting that in the question. When we look at the year as a whole, we're a five. I think I do want to note we're on the front foot inorganically as well, because there are parts of our business where scale does matter, and so the business is 8% larger than in the same periods, first three quarters of last year. And that represents a form of progress.

We've seen very strong growth in Asia and the Pacific region, bouncing back from a tougher period. Our India, Middle East and Africa business continues to grow. The regional softness has been more in the Americas and in Europe. I think some of that is linked to the economy, but also just corporate buying habits, given uncertainty in the Americas, the maybe there's in the U.S. particularly some waiting for the election.

Sector wise, our best growth has been in our communications, media and technology practice. Our insurance and asset management practice growing very strongly, automotive and manufacturing doing well, and our large banking practice continuing to be pretty robust. But overall, we see it as being a relatively tough market, which we'll continue to work our way through.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Thank you, Jimmy, for your questions. Andrew, next question, please.

Operator

Our next question comes from the line of Greg Peters with Raymond James.

Gregory Peters
Analyst at Raymond James

Good morning. I guess for my first question, I'd like to focus on the free cash flow results. I was looking in the statement of cash flows -- operating cash flow through the nine months down a little bit, not growing in line with revenue. I'm sure there's some puts and takes in there. Just some color there would be helpful.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Yes, sure, Greg. As we've noted in the past, there's going to be more volatility to free cash flow growth, certainly than our earnings growth. But Mark, maybe you could share some color.

Mark Christopher McGivney
Chief Financial Officer at Marsh & McLennan Companies

Yeah, just, I'll repeat that, John. Free cash flow is something that is volatile, volatile quarter to quarter and year to year. So best looked at over long stretches of time. Our track record in free cash flow growth, as we've noted before, has been terrific. So, we're double-digit free cash flow growth for a decade plus. And that's what you'd expect for a company that's grown its EPS double digit, given our high cash generation capital type model. There's no story in the results year to date. So, free cash flow is down. Year to date was up 28% last year. It was actually up in the third quarter. So, what you're seeing year to date is just a number of factors that caused this period-to-period volatility. So, we had higher variable compensation payouts in the first quarter because of our strong results last year. Receivables are up because of growth and just a little bit of business mix and timing. And there's just a handful of one-timers in last year's period, this period that affect the year-over-year comparison. So overall, we have an outlook for continued strong growth in earnings, and therefore our free cash flow growth into the future should be strong as well.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Thanks, Mark. Greg, do you have a follow up?

Gregory Peters
Analyst at Raymond James

Yeah. Mark, in your comments, I think you mentioned something about fiduciary income and interest income, and you provided some guidance. And I'm wondering if you could just, you guys are flying through so many comments. If you could just revisit those comments, and sort of, I think you're framing it for fourth quarter, and if we could push it out and sort of frame it for next year or two for us, it would be helpful.

Mark Christopher McGivney
Chief Financial Officer at Marsh & McLennan Companies

Yes, sure. Let me repeat what I said. We did have a lot in the, in the script this quarter, so we just wanted to flag that as we look into the fourth quarter, we typically see, especially in Guy Carpenter, just given the seasonality of their revenue, with so much activity in the first half, we do see fiduciary balances that tend to fall off in the fourth quarter. So, we do expect fiduciary income to be $30 million or so lower in the fourth quarter from the level we saw in the third quarter. And it's a combination of the rate cuts that have happened, and the impact that they will have, as well as this seasonal drop in fiduciary balances. We look out to 2025, it's really going to depend on what rate actions happen from here, what happens in the balance of this year, what happens into next year. And so we're going to -- we're going to stay away from speculating there. But, but just to repeat some of the things we've said in the past. The math is pretty straightforward. So, we've got roughly $11.5 billion of balances on average these days. And so, you can use that as a basis to try to do some sensitivity analysis around what that could mean to fiduciary income. There would be some offsets, there is some interplay with some of our variable compensation programs. We obviously would pay less in terms of interest on short term debt, but we'll just have to wait and see what happens with further cuts as we look into next year.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Greg, I would just add, we're accustomed to operating in a lower rate environment, so we'll adjust our plans accordingly. It will likely be an increasing headwind for us into 2025. And we model out the various scenarios, not just from this headwind, but from other headwinds as well. So, we make plans accordingly, but a lower rate environment could also likely will impact other parts of our business as well. We touched on increasing transaction risk as a result of higher volume in M&A markets, IPOs, construction, Mercer Wealth, of course, overall, our cost of capital will be impacted as well. So, there'll be lots of ins and outs from a lower rate environment, and we're working our way through all those issues. Thank you, Greg. Andrew, next question.

Operator

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

Michael Zaremski
Analyst at BMO Capital Markets

Hey, good morning. Thanks. First question on the -- thanks for the update on the Marsh pricing index, which moved to negative one territory, I believe. Can you help tease out how this index and kind of pricing in this marketplace is having an impact on Marsh's organic growth? I know that there's an element of fees and then commissions as well, but is this -- is the index as it's decelerated in the last year or so, has it had any material impact on your Marsh's rate of organic growth?

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Look, first of all, Mike, what I would say is that the markets overall on average are stable. Insurers have picked up quite a bit of price over the course of the last several years. So minus one was some welcome relief, at least for many of our clients at Marsh, after what's been a tough pricing environment. Of course, price is ultimately a reflection of the cost of risk over time. And so, as I mentioned in my prepared remarks, the cost of risk continues to escalate.

About half of our business at Marsh is sensitive to our revenue, that is, is sensitive to P&C pricing through commission. The rest of it, of course, is on a fee. And it's not a direct line. You know, you have direct, you know, you have buying habits, you know, changes. Markets soften a bit and the risk environment changes. You may have clients retain less risk than they had over the course of the last few years. We've talked on prior calls, for example, about the growth in our captives' business. The premium and the captives that we manage have been growing faster than the premiums that we seed into the marketplace. You know, if the market continues to get a bit more competitive, that may change. So, obviously it has an impact, but it's not a straight line from, you know, from price.

What I would also point out to you is that our index is skewed to large accounts, and that the middle market pricing is more stable, and it's up low to mid-single digits. I hope that's helpful. You have a follow up, Mike?

Michael Zaremski
Analyst at BMO Capital Markets

Yeah, quick follow up. I'll stick with your pricing commentary. Hopefully other people ask about Mercer Health being strong, but so, in U.S. liability market, I believe you said was plus 20. That's a pretty big number. Maybe you can talk about it, whether there's dislocation in the marketplace or what's going on, is there going to be moves to the E&S market or maybe that's not even an ENS, maybe just anything, any color you could add that seems like it's a number that's distressed for some of your clients.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Yeah, I'm sure. Mike, on the last call, in fact, I talked about some real troubling signs in the US liability market. Maybe I'll ask Martin to share some insights on what we're seeing in that marketplace.

Martin South
Chief Executive Officer at Marsh & McLennan Companies

Yes, thank you, John. I'll just start with a comment that overall, the composite rating index is up about one and a half times since 2012. The casualty book is up 6% in North America with the excess book up 21%. At the moment, we're not seeing dislocations in that. The capacity that clients are requesting, we can place. There are smaller limits that insurers have, and we're doing jobs to think what we can do to place quota share programs for our clients to avoid compression of limits. And so, we don't see anything too sinister in terms of supply for clients at this point. Certainly, there's been a movement to the E&S market, and we're big players in that space. And that segment of the market has grown significantly. There's more agility and rate movement in those areas there. So, we're well positioned to help them with that. And we'll be continuing to work with them as our clients deal with some of the social inflation that we've talked about in the past as well. So, lots of other services that we need to wrap around that to help our clients navigate this market.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Thank you, Mike. And thank you, Martin. Andrew, next question, please.

Operator

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

Brian Meredith
Analyst at UBS Group

Yeah, thank you. First one for Dean on the reinsurance side, you mentioned that you expect ample capacity in the casualty lines. I'm just curious, can you maybe talk a little bit about how are the reinsurers, you think, going to be reacting to this tort inflation that we continue to see in the marketplace at one-one, you think we'll see a lot of tightening in terms and conditions? You know, what are you hearing? What are you seeing from them?

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Yes, thanks, Brian. I'll hand it to Dean in a second. But, you know, lost cost inflation in casualty lines remains a real, a real challenge for the marketplace overall. And, you know, we're concerned about it from our clients' perspective. And, you know, was the talk of conference season, I think, in advance of Helene and Milton. So, you know, Dean, maybe you could share some thoughts on what you're seeing in reinsurance casualty.

Dean Klisura
Chief Executive Officer at Marsh & McLennan Companies

Yeah, thanks, John. You know, Brian, as John said, I think, you know, reinsurers generally continue to express great concern about the U.S. casualty reinsurance market, focused in particular on excess casualty, as noted by John and Martin for all the factors we've been discussing. That said, as we head to the one-one renewal season, we think current market conditions will largely prevail in the casualty market at one-one. That said, we continue to see downward pressure on ceding commissions for quota share deals averaging 100 basis points. Therefore, that's a rate increase, excess of loss contracts, more robust rate increases in the 5% to 25% range, and maybe many structural changes to get those deals across the line. We do expect adequate capacity in the marketplace, maybe more limited for XOL deals. Thus far, these deals are challenging, but they're getting done. They're getting across the line in the marketplace, and I really think the key for our clients, as Martin and John have said, is going to be the performance of their underlying portfolios. Are they getting underlying rate increases in their books? Are they managing limits and excess casualty and other lines that will be the key formula for successful renewal, but casualty is challenging right now in the market, but we think it's stable and most deals will get done.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

So clear signs of lost cost inflation, lost development patterns, disrupted by the impact of the economy and closing of courts during the pandemic, and then kind of the economic rebound. So, it's challenging for all of us to get our arms around it. We're obviously doing our best to help clients navigate the uncertainty around it. Brian, do you have a follow up?

Brian Meredith
Analyst at UBS Group

Yeah, absolutely, John. And I know we've talked about this before, but maybe just your perspective on the business continuing to flow to the non-admitted market, do you think that's slowing here? And then also, how can Marsh kind of react to that, to mitigate that or maybe recapture share? And does McGriff have anything that could potentially help you benefit you in the non-admitted area?

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Well, to be clear, we're not losing share as a result of the growth in the E&S market in the United States. You're seeing, you have seen and observed outsized growth in wholesale broking as a result of that. But we have access to those markets, and we'll access that capital if it's the right solution for our clients. Generally, we prefer admitted solutions for our clients given, you know, kind of what comes with, you know, with being an admitted insurer. So, you know, our strategy is about accessing as much of the market directly, including E&S insurers as possible. Overwhelmingly, the E&S premium that we place into the market today, we do directly today, right, so, to be clear.

In terms of market growth, future market growth, you know, it's hard to say, but, you know, and I certainly understand in this dynamic risk environment, certainly multi-channel insurers that have both admitted and non-admitted, why they want to use more non-admitted solutions, it gives -- it gives them more flexibility to react more quickly to the changing risk environment. So, I understand that. Again, our focus is, you know, is accessing capital as directly as possible and as efficiently as possible so we can continue to drive the best solutions for, you know, for our clients. We'll continue to use wholesale brokers, but, you know, for niche expertise where they serve us and our client well. So, anyway, that's really how we see it, Brian. Andrew, next question, please.

Operator

Our next question comes from the line of Grace Carter with Bank of America.

Grace Carter
Analyst at Bank of America

Hi, everyone. I was hoping to ask a couple of cleanup questions regarding McGriff. Is there any possibility that you all might give us some of the below the line impacts, like how much you're thinking amortization might increase, associated with the deal and any sort of transaction or integration expenses that we should expect over the next few quarters. Thanks.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Good morning, Grace, and thanks for the question. No, we're not prepared to do that. You know, as I said, it's a typical MMA transaction. So, you know, we haven't disclosed margins or the underlying performance of the businesses, other than, I will say we're very impressed with the performance of McGriff. It's had strong underlying revenue growth. Its sales velocity is quite strong as well, very similar to the performance of MMA.

Grace Carter
Analyst at Bank of America

Thanks. And I guess on the tax rate, I know it's a bit early to be looking at next year, but just kind of considering how the geographic mix of the business might be impacted by the deal. I mean, is kind of the 25 to 26.5 original guide for this year still kind of fair to assume? And while we're on the subject of tax, if you could help us maybe think about the timeline for utilizing the DTA that you're getting.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

We're not going to guide to 2025. We'll talk about that in January on the call. So, Mark, anything else to share on tax overall?

Mark Christopher McGivney
Chief Financial Officer at Marsh & McLennan Companies

Just to your question, on the deferred tax assets. So, the value I talked about is the present value of the future tax deductions stream that we affect. Again, that is going to go out over a long period of time.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Thank you. Thank you, Grace. Andrew, next question, please.

Operator

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

Rob Cox
Analyst at The Goldman Sachs Group

Hey, thanks. Appreciate that it's the largest M&A year in MMC's history. I'm curious if the price you're paying for top 100 brokers has changed your thought process at all on relative capital deployment across the different avenues.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Look, we've talked about our approach to capital management. We favor investing in the business over buybacks. We, as you know, aspire to be to raise our dividend each and every year as well. We have a responsibility, obviously, to be good stewards of our capital. So, although multiples have increased over the course of the last several years, we have great confidence in our ability to earn a return well in excess of our cost of capital. And so, should that change or should we see a deal that doesn't accomplish those objectives, we'll deploy capital elsewhere, but we have a very strong reputation as a buyer in the marketplace. We spend a lot of time game planning various scenarios from small to midsize, kind of tuck-in store business to more material deals like McGriff. And we're very well positioned in that marketplace. Mark talked about, even after McGriff, we maintain a lot of flexibility if we see the opportunity to make, not make ourselves, not just bigger but better as a business going forward. So, that's our approach. You have a follow up, Rob?

Rob Cox
Analyst at The Goldman Sachs Group

Yeah, thanks, John. Yeah, I just wanted to ask a question on something that I feel like doesn't get a lot of air time, but I was hoping to get an update on the commission rates and fee rates in the brokerage operations. Is there anything you can tell us about how these take rates have changed over the course of the hard market in recent years, and if not, what's driving the stability?

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

So, I actually, I don't view the last several years as a hard market, right. Just to start with that. I thought what we observed as challenging it was for our retail clients at Marsh was largely kind of a catch-up period for insurers on average to catch up with accelerating loss costs. It's not to say certain markets in a shorter period of time weren't challenging. For example, when ransomware picked up in the cyber market, and the underwriting community had not really priced for that kind of risk, the market jumped pretty quickly, but then it settled quite quickly as well. And in fact, you know, the market's coming back in favor of our retail clients a bit at the moment. So, I would start with that. But over a fairly long -- extended period of time, our average commission rates at Marsh have remained fairly stable from product line to product line. You know, there's, you know, there's some movement, but for the most part, average acquisition expense through Marsh has been pretty constant. Thank you, Rob, for your questions. Andrew, another question, please.

Operator

Yes, our next question comes from the line of Andrew Kligerman with TD Cowen.

Andrew Kligerman
Analyst at TD Cowen

Excellent. I made it. Thanks for taking my questions, John and Mark, you know, your underlying growth in RIS is, you know, nothing shy of outstanding. And we look last year at double digit underlying growth. This year, it's kind of decelerated down to 6%, which is still excellent. But the question for you going forward, and I know you guide to mid-single digit or better underlying growth across businesses. So, what kind of gives you the confidence that it kind of holds in this kind of sick zone, maybe even slightly less and doesn't decelerate further?

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Yeah, thank you Andrew. We always have time for you, Andrew, just to be clear. You know, look, as I mentioned in our, in my prepared remarks, you know, the macro environment remains supportive of growth overall. A fire alarm here, sorry, we'll check in on that, but I'll try to push through it. Hopefully, everybody can hear us. But we're in this elevated risk environment, geopolitical risk, frequency and severity of weather, cyber events, lost cost inflation, all those things creating opportunities for us to help clients. And pricing has moderated, but markets have been disciplined overall, and we've been very focused on building and adding to our capabilities, right. And, you know, McGriff's kind of the latest example of that. We're investing organically and inorganically. We've been reshaping the mix of our business over time, right. So, McGriff, another example of deploying capital into the faster growing middle market. I would also note that we're working together better than we ever have as well. That's driving some real growth opportunities for us as well. So, again, we'll guide, you know, around 2025 in January, but I feel like we're executing well. And in this elevated risk environment, there's real opportunities for us to continue to drive good growth in our business.

Andrew Kligerman
Analyst at TD Cowen

Got it. And you just touched on the faster, you know, the faster growth in MMA. Any color, John, that you could provide around, you know, how much it outpaces the large corporate business.

John Quinlan Doyle
President and Chief Executive Officer at Marsh & McLennan Companies

Yeah, I mean, we're not going to disclose kind of segment growth, but it is higher. It's over time. And by the way, not in every quarter, and in every year, for that matter, over the course of the last several years, has it outpaced the upmarket growth at Marsh. But it's been a more consistent growth business for us. And what really excites me about that marketplace is how we can bring scale benefits to clients, really at a different level. So, I think McGriff is a great example. It's a terrific business with outstanding fundamentals, terrific leadership, outstanding talent all throughout its business. And we've shown, and as we've brought firms into MMA, we can make them even stronger. We can bring capabilities from MMA and Marsh to help them better serve clients. So, we are excited about that.

So, thank you, Andrew. I appreciate the questions, and Andrew, I think we'll wrap up the call at this point, given that we're having a fire alarm in our building. So, I want to thank you all for joining us on the call. In closing, I want to thank our colleagues for their hard work and dedication. I also want to thank our clients for their continued support. So, thank you all, and we look forward to speaking with you again next quarter.

Operator

[Operator Closing Remarks]

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