Marsh & McLennan Companies Q1 2022 Earnings Call Transcript

Presentation

[Operator]

Welcome to Marsh McLennan's Conference Call. Today's call is being recorded. First quarter 2022 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 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.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Thank you. Good morning, and thank you for joining us to discuss our first quarter results reported earlier today. I'm Dan Glaser, President and CEO of Marsh McLennan. Joining me on the call today is John Doyle, our Group President and COO; Mark McGivney, our CFO; and the CEOs of our businesses, Martin South of Marsh, Dean Klisura of Guy Carpenter; Martine Ferland of Mercer; and Nick Studer of Oliver Wyman. Also with us this morning is Sarah Dewitt, Head of Investor Relations.

Marsh McLennan started 2022 strong, and we are well positioned for another good year. Our top line momentum continued. We generated the fourth consecutive quarter of double-digit underlying growth and the highest first quarter underlying growth in over two decades, with each of our businesses showing strength. Our adjusted operating income grew 12%. This comes despite a tough comparable of 20% growth in the first quarter of 2021. Adjusted EPS growth was 16%, the fifth consecutive quarter of double-digit growth. And we saw modest margin expansion despite the substantial investments we made in organic hiring last year. Overall, a strong start to the year.

At Marsh McLennan, advancing good in the world is important to us. In our view, great companies have to not only do well and deliver for investors but also do good and make a broader contribution to society. We believe in order to deliver long-term value for shareholders, we also have to be a good employer, a good global citizen and bring our best to our clients. We are proud of our track record on ESG and recently released our second environmental, social and governance report. Our report highlights the many ways in which we are confronting the most complex ESG challenges of our time, both within our own company and on behalf of clients.

We made progress on several ESG initiatives. For example, we are committed to energy transition and achieved a carbon-neutral certification in 2021. We also declared a new goal of being net zero by 2050 with a target of reducing carbon emissions 50% by 2030. We are committed to inclusion and diversity. We launched our Inclusion and Diversity Center of Excellence and enhanced our D&I disclosure in the areas of pay equity, workforce representation and talent flows. And we added Gaye Erkan to our Board of Directors, furthering our commitment to increase gender diversity on our Board.

We are also working across our businesses to help clients address the broad spectrum of complex ESG issues such as climate change, diversity and inclusion, affordable health care, cybersecurity and sustainable investing, among others.

I want to highlight several recent examples of how we are developing ESG solutions for clients. Marsh launched the new directors and officers liability insurance initiative that recognizes U.S.-based clients with superior ESG frameworks. Guy Carpenter arranged FloodSmart Re catastrophe bonds for FEMA to secure capital markets-based flood reinsurance coverage for its NFIP program. These bonds help FEMA pay for NFIP claims when disaster strikes.

Mercer continues to be a leader in helping firms quantify and address pay equity as well as diversity and inclusion challenges. As an example, our recently released Stepping Up for Equity Study provides insights on closing the opportunity gap for Black Americans.

Oliver Wyman helped clients pursue commercially viable climate transitions working with CDP, the World Economic Forum, the United Nations and others to set new agendas and build consensus on the issue of climate change. We are also helping clients develop low-carbon business models and manage risks associated with the transition from fossil fuels to renewable energy.

As we do our part to accelerate this transition, we recognize that a secure energy supply is crucial for the global economy and society as a whole. This is especially true in the context of today's geopolitical environment. We believe all communities are best served by working with both operators of clean energy assets and traditional energy companies to make the transition as quickly and smoothly as possible.

The work we are doing across all of these ESG-related areas has a direct impact on communities where we live and operate. We are making a difference through disaster mitigation and recovery, promoting healthy societies and diversity and inclusion. Overall, ESG continues to be an area where we see both significant growth potential and an opportunity to benefit our clients, colleagues and communities.

I'd like to take a moment to comment on the war in Ukraine. We strongly condemn the Russian government's invasion of Ukraine and are horrified by the tragic human toll this war is taking. On March 10, we announced the decision to exit our business in Russia. In a minute, John will provide more detail on steps we've taken to support colleagues and serve our clients during this crisis.

Turning to current economic conditions and the outlook for the rest of 2022, we see a picture with greater risks and uncertainties than when we entered the year. That said, we continue to see an environment that is supportive of growth. Based on our current outlook, we continue to expect mid-single digit or better underlying revenue growth for the full year. We also expect solid growth in adjusted EPS and to extend our track record of annual margin expansion. Macro challenges like supply chain pressures, energy market and commodity dislocations, rising cybersecurity concerns and future of work create demand for our services and opportunities to help clients. We also believe that over the long term, demand for our solutions will remain strong, given rising levels of complexity, volatility and uncertainty across the business landscape.

With that, let me turn it over to John for his comments on the quarter.

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Thanks, Dan, and good morning, everyone. Our first quarter results were strong. We had double-digit underlying revenue growth, with all businesses positively contributing. And our adjusted operating income hit a record level in the first quarter. Our strong start positions us well for 2022 despite greater uncertainty about the macroeconomic outlook.

Before I discuss market trends and our performance, I want to comment on our response to the crisis in Ukraine. As Dan noted, we condemn the Russian aggression, and we are saddened by the human suffering the war in Ukraine has caused. Our primary concern is the well-being of colleagues affected by this crisis. We took a number of steps to assist them, including providing evacuation support for Ukrainian colleagues and creating assistance programs in Poland and Ukraine. In addition, we've established a humanitarian relief fund to help the Ukrainian people. We're also bringing our capabilities and risk strategy and people to support clients as they grapple with the challenges of this conflict and its wider economic effects.

Oliver Wyman is helping clients, in the public and private sectors, manage a wide scope of issues. We are working on government security and defense matters, helping a number of banks manage their exposure to the region, supporting energy clients with their supply chain considerations and assisting large manufacturers as they manage the risk and production shutdowns.

Marsh is advising clients on risks around aircraft nationalization, cybersecurity, physical assets, supply chain and transitioning away from Russian energy. Mercer is helping clients deal with capital market volatility, asset allocation and Russian exposures. We are also working to provide continued health coverage for Ukrainians leaving the country.

Guy Carpenter is helping clients understand their exposures, portfolio concentrations and reinsurance recoveries. We're also advising clients on the complexities around sanctions and cause of loss, number of occurrences and claims aggregation.

I'm extremely proud of how our firm has responded to this crisis. Overall, we are harnessing the power of Marsh McLennan to help our colleagues and our clients in this moment that matters.

Now let me provide an update on current P&C insurance market conditions. Rate increases in the marketplace continue to persist, reflecting losses and concerns about the impact of inflation on claims and the firm reinsurance market. The Marsh Global Insurance Market Index showed price increases of 11% year-over-year. This marks the 18th consecutive quarter of rate increases in the commercial P&C insurance marketplace.

Looking at pricing by line, the Marsh Market Index showed global property insurance was up 7% and global casualty rates were up mid-single digits on average. Global financial and professional Lines, excluding cyber, increased high single digits while cyber rates more than doubled in some geographies. 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. April 1 renewals largely reflected a continuation of the January 1 pricing environment. The industry remains well capitalized, but finding capacity is challenging in specific segments. This reflects ongoing and emerging issues such as the frequency of severe events, cyber, climate change and core and social inflation. Overall, at April 1, U.S. property catastrophe rates were up in the high single digits for non-loss impacted accounts, while loss-impacted accounts generally increased in a range of 10% to 30%. U.S. cyber rates were up mid-teens or higher, depending on loss activity. Japanese property catastrophe rates increased low single digits. We remain focused on helping clients navigate challenging insurance and reinsurance markets and the evolving risk environment.

Turning to our performance in the quarter. As I noted earlier, Marsh McLennan had strong results. In the first quarter, we had double-digit underlying revenue growth in both RIS and Consulting. Adjusted operating income grew 12% on top of 20% in the first quarter of 2021, a terrific result. The first quarter marks the fourth consecutive quarter of double-digit underlying revenue growth, the longest stretch in over two decades.

Looking at Risk & Insurance Services. First quarter revenue was $3.5 billion, up 10% compared with a year ago or 11% on an underlying basis. This is the third quarter in the last 12 months, risk and insurance grew 10% or better, the best trend since 2003.

Adjusted operating income increased 12% to $1.2 billion, while our adjusted operating margin declined 10 basis points to 36.5%, reflecting investments in the business. At March, revenue in the quarter was $2.5 billion, up 10% compared with a year ago. Revenue growth was 11% on an underlying basis. We had excellent renewal growth, and we continue to see strong new business. U.S. and Canada had 10% underlying revenue growth. And this marks the U.S. and Canada's fourth consecutive quarter of double-digit underlying revenue growth. International was also strong with underlying revenue growth of 11%. Asia Pacific was up 17%. Latin America grew 16% and EMEA was up 9%.

Guy Carpenter's first quarter revenue was $1 billion, up 11% on an underlying basis, driven by a strong growth in new business and exceptional retention. Guy Carpenter has now achieved underlying revenue growth of over 10% in three of the last four quarters.

In the Consulting segment, revenue of $2 billion was a first quarter record, up 7% from a year ago or 10% on an underlying basis. This is the fourth consecutive quarter of 10% or higher growth. Adjusted operating increased 9%, to a first quarter record of $402 million. The adjusted operating margin was 20.6%, up 10 basis points versus a year ago.

Mercer's revenue was $1.3 billion in the quarter, up 6% on an underlying basis. The fourth consecutive quarter of 6% or higher growth. Career grew 16% on an underlying basis. We continue to see robust demand for solutions linked to new ways of working, skills gaps, workforce transformation and D&I issues like pay equity.

Health underlying revenue growth was strong at 9% in the quarter, reflecting growth across all geographies. This quarter's results benefited from strong demand for our services, higher retention, rising employment and medical inflation.

Wealth increased 2% on an underline, reflecting modest growth in both investment management and defined benefits. Our assets under management were $388 billion at the end of the first quarter, down 7% sequentially, as net inflows were more than offset by capital market declines. However, compared to the first quarter of last year, AUM was up 2%.

Oliver Wyman's momentum continued despite starting to lap tougher comparables to an outstanding 2021. Revenue in the first quarter was $667 million, an increase of 17% on an underlying basis. This represents the fifth consecutive quarter of double-digit growth and reflects continued strong demand across all geographies.

Overall, I'm pleased with our excellent first quarter performance and it sets us up for a good year.

Now I'll turn the call over to Mark for further detail on our financial results and a discussion of our outlook for the rest of 2022.

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

Thank you, John, and good morning. As Dan and John mentioned, our financial performance in the first quarter marked a strong start to the year. We saw another great quarter of double-digit underlying revenue growth and meaningful earnings growth despite tough expense comparison.

We generated GAAP EPS of $2.10 in the quarter and adjusted EPS of $2.30, up 16% from a year ago. Operating income was $1.4 billion and adjusted operating income was $1.6 billion, a first quarter record. Our adjusted operating margin expanded 10 basis points in the first quarter to 29.7%, despite the impact of the significant organic investments we made last year. We remain excited about the benefits we expect from the investments, but they come with upfront costs we continue to absorb in the short term.

The first quarter was also an active quarter for capital management. We completed the highest quarterly level of share repurchases since the third quarter of 2015. The pace of acquisition activity continues with the recent announcement of our acquisition of Booz Allen Hamilton's MENA practice, and we announced an additional $5 billion share repurchase authorization.

John covered our business operating results and I'll cover some of the other aspects of our performance and outlook. Adjusted corporate expense was $60 million in the first quarter. Foreign exchange was a headwind of $0.04 to our adjusted EPS. Assuming exchange rates remain at current levels, we expect FX to be a modest headwind in the second quarter. Our other net benefit credit was $62 million in the quarter. For the full year 2022, we expect our other net benefit credit will be about $250 million. Investment income was $26 million in the first quarter on a GAAP basis or $17 million on an adjusted basis and mainly reflects gains in our private equity portfolio.

Interest expense in the first quarter was $110 million, compared to $118 million in the first quarter of 2021, reflecting lower long-term debt balances. Based on our current forecast, we expect a similar level of interest expense in the second quarter.

Our adjusted effective tax rate in the first quarter was 23.1%, compared with 24.3% in the first quarter of last year. Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation similar to a year ago. Excluding discrete items, our effective adjusted tax rate was approximately 25%.

When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative. Based on the current environment, it is reasonable to assume an adjusted effective tax rate of around 25% for 2022.

In the first quarter, we recorded a $52 million charge, which is mostly noncash relating to our exit from Russia. This has been treated as a noteworthy item and excluded from adjusted results. We reached an agreement to transfer ownership of our Russian business to local management who will operate independently in the Russian market. This situation resulted in the deconsolidation of our business and an associated write-down of our carrying value. In terms of ongoing effect, revenues and operating income from Russia are not significant.

Turning to capital management, now balance sheet. We ended the quarter with total debt of $11.7 billion. Our next scheduled debt maturity isn't until March of 2023. In the first quarter, we repurchased 3.2 million shares of our stock for $500 million, reflecting our strong financial position and outlook for cash generation. We continue to expect to deploy approximately $4 billion of capital in 2022 across dividends, acquisitions and share repurchases. The ultimate level of share repurchase will depend on how the M&A pipeline develops.

As we've consistently said, we favor attractive acquisitions over share repurchases as we view high-quality acquisitions as the better value creator for shareholders and the company over the long term. However, we also recognize that returning capital to shareholders generates meaningful returns for investors over time, and each year, we target raising our dividend and reducing our share count.

Our cash position at the end of the first quarter was $772 million. Uses of cash in the quarter totaled $813 million and included $272 million for dividends, $41 million for acquisitions, and $500 million for share repurchases.

As we look ahead to the rest of the year, we see continued strong demand for our advice and solutions, even though we start to lap tougher growth comparisons in the second quarter. The investments we made in hiring last year will continue to be a headwind to expense in the first half, but as we get further into the third quarter, this becomes less of a drag. Also, we recognize there is a higher level of uncertainty and outlooks caused by the war in Ukraine and its potential impact on the global economy.

Overall, our strong start leaves us well positioned for another good year in 2022. For the full year, we continue to expect to deliver mid-single digit or higher underlying growth, solid growth in adjusted EPS and margin expansion.

And with that, I'm happy to turn the call back to Dan.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Thanks, Mark. And operator, we're ready to go to Q&A.

Questions and Answers

[Operator]

[Operator Instructions] 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 organic growth, another double-digit growth quarter. So it sounds like you guys are still expecting that revenue benefit from the hires that you guys did last year is more something that we should think about coming in the future. Can you give us a sense if there was any benefit from those hires that positively impacted the Q1 and how we should think about the rest of the year? Or is this still more a benefit you expect in '23 and beyond?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Sure. Sure, Elyse. Good morning. I'll take it to begin with, and then I'll hand off to John to add some detail to it. There's many factors which are underpinning our growth. We are in fundamental growth markets. You look at the areas of risk, strategy and people, the demand is all on the rise. And we are the most strategically positioned company in the world as an adviser in those areas. So I think that broadly, and fundamentally, we've got some competitive advantages, which are assisting growth and will continue to do so. The hiring strategy of last year has given us a mild benefit thus far, in particular on Guy Carpenter. But John, why don't you go into that in a little bit more detail?

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Sure, Dan. Elyse, as I noted earlier, we're very pleased with our start to the year. Growth was strong pretty much across the board. I think you're referring to strat hires in RIS, but I want to note the growth in consulting was quite strong in the quarter as well as we're seeing good demand for our services across the board. We're pleased with the start in terms of the strat hire impact. As Dan noted, the impact was a little bit more notable in Guy Carpenter at this point. But it will take some time for them to become really fully accretive to our revenue expectations. It's a 2- to 3-year period. And so our focus is on onboarding them as successfully as possible, but so far, so good. The quarter really creates some good momentum for us. Obviously, there's a macroeconomic uncertainty given the war, given rising rates, supply chain issues, inflation, although we know inflation is generally a good thing for us on capital markets volatility, but we're well positioned, as I said earlier, there's strong demand for our services and we expect a good strong year of growth.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Thanks. And then my follow-up on -- within RIS, if I look at the other operating expenses on an adjusted basis, they look to be flat to down modestly versus last Q1, which represented a pretty tough comp. So any color on the drivers of that, given that I would think T&E should have been higher there? And how should we think about the outlook for the other op expenses over the balance of the year?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Sure. I mean similar to last year, the growth of expense was virtually all related to compensation and benefits. And so we continue to manage our expenses as we've always done. And when we look at the start of this year, yes, things like T&E are a bit higher than what they were, and we would hope that that would continue because it would point to more of a return to a normal operating environment. However, our searches for efficiency never ends. Our goal, and I think I've said it on previous calls in the past, I mean, a healthy comp and ben as a percentage of revenue is a good thing for our business, for a people business. But continued focus on reducing all other operating expenses, particularly as we grow the firm bigger and bigger and use our -- some of our scale advantages to get some economies is something that's a core to how we operate the firm. So I don't think you're going to see a lot of growth in the all other expense category. In fact, over time, you'll see reductions there. Next question, please.

[Operator]

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

[Jimmy Bhullar, Analyst at JPMorgan Chase & Co.]

Hi. Good morning. You spoke about this a little bit in your comments as well. But can you talk about what you're seeing in terms of just pricing in both the commercial market and in reinsurance and it seems like the prices are still up, but the pace is slowing down. And what sort of pushback are you getting, if any, from your clients on the study increases? And what are some of the things that they're doing, whether increasing retention or otherwise?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

It's a good question. John, do you want to take that?

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Sure. Jimmy, as I noted in my prepared remarks, the insurance and reinsurance markets remain pretty challenging for our clients. Having said that, rate increases are decelerating in, at least, most insurance markets around the world. Cyber, of course, is the most notable exception. For us, though, there is a mitigating impact of that rate deceleration around inflation and values. But let me ask Martin and Dean to comment a bit. Martin, maybe you could start -- offer a bit more color on what's happening in the insurance market?

[Martin South, President and Chief Executive Officer, Marsh & Vice Chair at Marsh & McLennan Companies]

Sure. Thank you, John. Well, as you noted, it's the 18th consecutive quarter of rate increases. So clients are weary, that's a concern. But they decelerated as I noted in the last call we had, they came down by 2 points in the last quarter, another 2 points this quarter to 111% [phonetic]. Geographically, still, as I noted last time, there's one outlier, which is Latin America, where they saw modest rate increases, but they have been flatter during the rest of the cycle. By product, across the board, growth casualty still strong at 4%, property up 7%. Fin and pro lines, which includes cyber, 26%. If you're stripping that out, that comes down, and we're still seeing double-digit and doubling of rates in cyber, over 110% in the U.S., and the U.K. rate is up 100% there. So it's a lot more concern about that. But otherwise, as noted, a mild deceleration.

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Thanks, Martin. Dean?

[Dean Klisura, President and Chief Executive Officer, Guy Carpenter & Vice Chair at Marsh & McLennan Companies]

Thank you, John. As John mentioned earlier, the April 1 renewal reflected a continuation of the January 1 pricing environment. But there's challenges in the reinsurance market in certain segments that are driving pricing up. Examples of that would be the property catastrophe market where aggregate capacity continues to be constrained in the trading environment. Parts of the cyber market, including aggregate capacity, for XoL, excess of loss contracts, is currently a challenge, and we're seeing double-digit pricing in the cyber market.

And then I would refer to segments of the London specialty market that are really being impacted by the Russia, Ukraine war, including war, terrorism, political violence, aviation and marine coverages, we're experiencing very challenging renewals for excess of loss contracts. And then certainly retrocession capacity, again, as capital has flowed out of the ILS market in Bermuda and London aggregate capacity for retrocession coverage continues to be very expensive and a challenge for our clients.

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Thanks, Dean. Just one quick last point, Jimmy. We continue to invest heavily in data and analytics, really help our clients navigate the market and make the trade-offs that work for them. So it's a client-by-client outcome, ultimately.

[Jimmy Bhullar, Analyst at JPMorgan Chase & Co.]

Okay. And if I could just ask one more on Russia. Russia, directly, obviously, is a very small part of your business, Ukraine as well. But the full impact of the conflict in terms of any sort of collateral impacts or something, is that fully reflected in your results? Or is there something that would be a lag in future periods because it sometimes takes clients time to react? And like, should we expect anything noticeable in 2Q from Russia?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Yes. There's no inherent buildup issues that we're aware of, but there are implications to this war that -- this war in Ukraine, that are yet to play out. And so we don't know what those are. What's the impact on energy prices? What's the impact on GDP globally, in particular, in Europe? Is there a continuation of taking sides, which creates more division in the world? And what's the impact on that basis in terms of the last 20 years' globalization developments? And so there's a lot of factors, Jimmy. And that's part of the uncertainty that we've all talked about.

We're doing very well. In some ways, we thrive in periods of uncertainty and volatility because our clients want to talk issues through and we're a company that they turn to on some of these issues. But in terms of headwinds that it could conceivably create, I think it's going to play out for quite a while now. We'll just have to see how it goes. But we've demonstrated in many different periods of time, whether it's a global financial crisis, COVID, etc., that we are an extremely resilient organization.

Next question, please.

[Operator]

Our next question comes from the line of Yaron Kinar with Jefferies.

[Yaron Kinar, Analyst at Jefferies Financial Group]

Thank you. Good morning, everybody. My first question, I guess, maybe continuing your last comment, Dan. Clearly, you have a very strong track record of posting expenses that are lower than revenues. But with the significant hires you had last year, if we do head into a recession this year, do you think that you can still achieve margin expansion?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

We're going to have margin expansion this year. And it will be our 15th year of -- consecutive years of margin expansion. We run our business where every year, our revenue growth will exceed our expense growth. And it's not every quarter, but it's most quarters, and it's certainly every year. It's the way we approach the business. And we have a tremendous capability of managing that expense base in both good times and tough times. Some ways, managing your expense base in tough times is easier than managing your expense base in good times where everybody wants to do neat and different things. But ultimately, we're comfortable that we've got growth momentum, and that will continue based upon the industries that we serve.

[Yaron Kinar, Analyst at Jefferies Financial Group]

Okay. And my second question is with the Fed hiking rates now, fiduciary income, I'm assuming it's going to move up. Do you expect to have that flow all to the bottom line? Or do you have some maybe additional investments that you'd see taking action on or taking advantage of the higher margin coming from fiduciary income?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

No, it's a good question. So Mark, do you want to take that?

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

Yes, Yaron. Good morning. That fiduciary interest income is certainly a source of upside for us and exactly how much and when we see the benefit all depends on when rates move. But the vast majority of that would just flow right through to the bottom line. In 2019, we had $105 million of interest income. Last year, it was $15 million, and we've overcome that. These days, we're averaging about $10 million of fiduciary assets. So if rates move across the world, where all our balances are, by 100 basis points, that's $100 million of upside for us.

[Yaron Kinar, Analyst at Jefferies Financial Group]

Thank you.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Next question, please.

[Operator]

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

[Meyer Shields, Analyst at KBW]

Thanks. Good morning. I wanted to follow up on that, if I can. Do clients push for -- push back against fee increases when fiduciary income is rising? Or those fees are completely separate?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

No. It's a good question. And I've been in the business for 40 years. Clients don't want to get involved in the -- paying the 27 underwriters who are on their account and some of those things are semiannual payments and some are even monthly or quarterly. It is an administrative complexity that clients have no interest in being part of. We take our fiduciary responsibilities very seriously. So it's not like we can invest long on fiduciary assets. So it's all the short end of the curve. But we would anticipate no pushback on getting some income from fiduciary income because the fact of the matter is, for a number of years, this has only been a one-way traffic in the direction of down. And so there's been many years where we've done an awful lot of work around billings and payments in which there was very little or no compensation related to it. So we're looking at this as a potentially large upside to us.

[Meyer Shields, Analyst at KBW]

Okay. Perfect. Second question. I was hoping you could frame I guess, clients' willingness to spend on ESG? How has that been developing? And is there any difference based on client size?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

No, it's a very good question. And in some ways, the addressable market for ESG has not yet been determined. It's going to go wide. It's getting larger every year. And fundamentally, I think that every company from private or public, midsize or larger is going out to demonstrate that they're a good company. And they demonstrate that in a multitude of different ways, but to -- with tight labor markets, that's the kind of company that people want to work for. Clients want to be associated with companies who are doing good work in the world. But I think it's an interesting question. I'd like to go around the horn a little bit and maybe John can talk about it. And then maybe Martine and Nick can address it a little bit because they're seeing a lot of ESG benefit in their results. But John?

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Sure, Dan. Meyer, we're quite excited about our role here and the ability to impact clients and their future, and it's contributing positively to our growth now, but we're in the very early stages of what's possible here across all the businesses. And Dan noted some of the work that we're doing in his prepared remarks. But again, we're developing new solutions, new products and working with our clients every single day. We're part of the sustainable markets initiative overall as a company. So we're excited about that. Nick, maybe I'll ask you to comment first. You're doing a lot of work, particularly around climate but on broader issues as well.

[Nick Studer, President and Chief Executive Officer, Oliver Wyman Group, & Vice Chair at Marsh & McLennan Companies]

Yes, John, thank you. Thank you, Meyer, for the question. The -- Oliver Wyman has been working a great deal with companies across sectors to help plan for a smart climate transition along the lines that Dan described in his prepared comments. As you know, we largely work with the larger companies, so I can't talk to the segmentation part of your question. But whether it's in financial services, supporting backhaul industry as they move to support their clients, or whether it's with some of the hard-to-abate sectors like steel, like some of the transportation sectors, we see an enormous amount of work on our climate and sustainability plans has more than doubled last year. It's as big as some of our significant industry practices already.

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Martine, maybe you could comment? Obviously, we see big demand in career services but also, you're doing a lot of work in investments.

[Martine Ferland, President and Chief Executive Officer, Mercer & Vice Chair at Marsh & McLennan Companies]

No. Absolutely, John, and thanks for the question, Meyer. We've been pioneering in ESG for many, many years now. First and foremost, the transition to the low-carbon economy. So the investors or clients who work with us in managing their assets, they want to understand the transition to a lower net zero emission economy and also the impact of, for example, the investments they're making and their exposure to Russia, which falls under, for them, their ESG policies. So we're helping them look at this and the consequences on oil supply, the energy strategy, etc. So there's high demand for research, for advice, for modeling of the risk that are associated with that and the rewards of various investment strategies.

And as you mentioned, John, of course, in the diversity, equity and inclusion domain, that's another place where we've been very active. We have many studies that help clients bridge the gender gap or the race and ethnicity gap. We do workforce analytics, we do pay equity. We have help clients build diverse workforces. And that's been such a top of mine -- agenda item for our clients in the last couple of years. We just issued as we said in the opening remarks, a Stepping Up for Equity study where we worked with 50 clients to identify the techniques, the strategies that you can employ for employers to really help close the gap on opportunities for Black Americans.

And there's a G in the ESG, and that's also been always on our agenda. When you think about the work we do for executive compensation, DB and DC, the pension fund governance advice, our OCIO business is very much pinned on different governance model that gives agility and integrity to the investments. So that's really top of mind of our clients and its business that's been growing really fast over the last many years.

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Thank you, Martine. What's happening at Marsh?

[Martin South, President and Chief Executive Officer, Marsh & Vice Chair at Marsh & McLennan Companies]

Thank you, John. There's exciting things going on in Marsh. We do look at the resilience index to have separate posting from clients to see their progress on that business. We're testing hypotheses on clients about how a positive score can impact on their loss cost going forward in an initial study on D&O rates, as mentioned in your remarks. It's showing that claims can be dispensed earlier and a lower outcome if companies are seen to be doing good.

We're testing that hypothesis in other areas of the business, other casualty lines that offset social inflation. And property as well where companies are investing heavily in social, in pollution protection and so forth. We'll make an impact there. We feel that we're going to back that up with the data strategy that we have and make a positive for our clients as they look ahead, and it's a good work for us, too.

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Thank you. Dean, the last one?

[Dean Klisura, President and Chief Executive Officer, Guy Carpenter & Vice Chair at Marsh & McLennan Companies]

Thanks, John. Obviously, climate change is a top priority for Guy Carpenter's clients, and we're working very closely with them to support them in these efforts. Obviously, helping them understand physical risk to climate change across their portfolios, across the world, and we're doing a lot of modeling and analytics work there to help them support there. We're inviting them on regulatory requests that come in, that want to access climate. We do credit rating advisory, lots of questions about the impact on climate change. And last, John, I would mention structuring transitional reinsurance solutions to help kind of mitigate that exposure for our clients.

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Thanks, Dean.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

So you can see, Meyer, we're all over the ESG space and expect it to underpin our growth in future years. Next question, please.

[Operator]

Our next question comes from the line of David Motemaden with Evercore ISI.

[David Motemaden, Analyst at Evercore ISI]

Hi. Thanks. Good morning. I just wanted to clarify a comment on the reductions in other G&A expenses over time. I guess, was that a comment for this year? Or is that over a medium-term time frame? And -- also just want to get a sense for what's driving that. Because I know in the past, Dan, you've spoken about the operational excellence program, which might be contributing. But I'm also wondering, are there any sort of other sort of like real estate optimization or any other cost save programs that you're implementing as a result of some of the changes that have been put in place due to COVID-19 and what that means for the workplace. Is that also a driver that's coming through in that comment as well?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Yes. It absolutely is, David. Ultimately, the way we run our business is -- one of the operative words that we use is more. We want to get better every year. We want to provide our clients with more capabilities with less internal costs. And so our search for efficiency is a core part of this executive team's job and something that we're very focused on. And whether it's real estate, more purposeful travel, tech modernization, operational efficiency gains, the fact that we've got several new faces around the table and new faces come up with good ideas and fresh ideas. And there's lots of ways of running the business. And our goal over time is supporting our clients with a combination of really good comp and ben because that makes us a strong company and helps us be an employer of choice in the industries that we operate. But always relentlessly going after all other expenses that have -- just fundamental aspects of running a multinational. So this is a midterm and a long-term downward trend in our expense base in all other expenses.

Next question -- or you have a follow-up, David?

[David Motemaden, Analyst at Evercore ISI]

Yes, I do have a follow-up. That's helpful, Dan. I appreciate that. And you mentioned a lot of new faces around the table, which is obviously -- you guys have been prolific in hiring. I guess, I look at the $30 million of legal claims that you guys have incurred this quarter. I think it's around $90 million over the last five quarters. Is there a way to approximate how much revenues are coming with those just from some of the teams that you guys have hired? Is it $50 million? Is it $90 million? Is there just like a rule of thumb that we can think about for the potential revenue impact over the next few years as those people are onboarded?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Yes. I mean, I think the way to look at it is -- our revenue over the next several years should benefit from the organic hiring that we did last year. I mean you look at it on the basis of -- last year, we had an opportunity to make significant organic investments in building our business. And it's something that we always focus on, delivering good results today, but always focusing on the future and how we can build a better company. And this is an opportunity that John and I haven't seen in our careers in terms of being able to build the business on an organic basis. And so we had the opportunity and we had the means, and last year's strong levels of organic growth helped provide those means and meant that we could still deliver good results to investors last year while we were making these strong organic investments.

You have to know that we all know around the table that organic investments are always short-term dilutive, and it's harder to do in some ways than acquisitions just by the P&L map, but we made the right decision and pressed forward. The vast majority of that expense is comp and ben.

And the way I would look at it is we've got another two or three quarters, and then the expense growth is going to be in the rearview mirror but the capability and the growth kicker will remain. And so this is a huge benefit to the overall organization.

We're not going to quantify whether Henry & Sally are delivering today. I mean we're a big organization. We've added to our market-leading capabilities. We like where we are positioned right now in terms of the performance of some of that strategic hiring, and this is going to be a benefit for us in coming years as well as this year.

[David Motemaden, Analyst at Evercore ISI]

Understood. Thank you.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Next question, please.

[Operator]

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

[Brian Meredith, Analyst at UBS Group]

Yes. Thanks. A couple of quick questions here. First, maybe Mark, free cash flow this quarter was pretty weak, and it looked like there was a lot of paid compensation. How much of that was called onetime in nature, just from all the hires that you had last year? And kind of how do I think about free cash flow here going forward?

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

Sure, Brian. So I'd start by saying, if you look back over a long stretch of time our track record on free cash flow growth has been terrific. In the last decade, we've generated double-digit free cash flow growth. And you expect that given our strong earnings and our outlook is for continued strong earnings growth and continued strong free cash flow growth.

If you look back over that last decade though, you'd see a lot of volatility, and you see that volatility just in the last couple of years. So we generally would stay away from talking about predicting free cash flow in a given year, although we expect strong cash generation this year.

Now as you pointed out, first quarters typically are low for cash generation because we do pay out the majority of our variable comp in the first quarter. And the reduction this year was because our variable comp payouts were up. And that was mostly a function of the strong performance we had last year, both on new business growth and sales-related plans as well as just the overall growth in earnings and the bonus plans that accrue from that.

[Brian Meredith, Analyst at UBS Group]

Great. And then my next question, just curious, perhaps you could talk a little bit about what the M&A kind of environment landscape looks like right now, given all of the uncertainties right now with respect to what economic growth could look like over the next 12 months and -- I wonder if you could comment on that.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Sure. I'll start, and then I'll hand to John. M&A is a big part of our organization and not just for the last decade, but literally since its inception. We don't have a budget around acquisitions. We're cautious when we make acquisitions, we like to cultivate relationships over long stretches of time. As has been commented in the marketplace before many times, over the last decade, multiples have risen. So therefore, we're even more selective than we used to be, and we're careful around pro formas because most of the companies that we acquire are private, and we want to really understand the ongoing characteristics of the business and not some fancy dressed up pro forma statement.

And so the one thing that we're committed to is capital deployment. And so we look at -- we favor share repurchase -- we favor acquisitions over share repurchase, but we certainly favor share repurchase over building more cash on the balance sheet. And so we will utilize that circa $4 billion between dividend, which is sacrosanct and growing, acquisitions and then share repurchase. But the M&A pipeline ebbs and flows, it looks pretty good right now. But we don't really have -- we wouldn't, at this stage, have a strong idea of where we would end up the year on that because many of the discussions we have are exclusive and the discussion is essentially the company deciding whether they want to join forces with us or stay private. But John, do you want to talk about the pipeline or how we're looking at M&A these days?

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Sure. Good morning, Brian. We did three small deals in the quarter, one at Oliver Wyman, in Australia, one at MMA here, of course, in the United States, and then we did one at Mercer Marsh Benefits in France. So yes, we remain very active in the market. The pipeline, as Dan noted, is pretty solid. Generally speaking, the pipeline is deepest in the middle market brokerage space, and that's typically where we see some of our best and most attractive opportunities. But I would point out, we've done some work at Oliver Wyman, a lot of work at Oliver Wyman of late, not just in the quarter, but in the later part of last year. And you may have seen that we recently announced that we expect to close on Booz Allen Hamilton's Middle Eastern business sometime in the second quarter. So we'll see how the market evolves. Part of the dynamic here is our reputation as a buyer is very strong in these markets. And so we get a good look at very attractive assets.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Next question, please.

[Operator]

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

[Ryan Tunis, Analyst at Autonomous Research]

Hey. Thanks. Just on EMEA within RIS, these results were particularly strong. Just curious if you could give us some color on sort of how demand and trading trends developed, I guess, as the quarter went on as geopolitical got a little more complicated?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Sure. John?

[John Q. Doyle, Group President, Chief Operating Officer & Vice Chair at Marsh & McLennan Companies]

Sure, Ryan. Yes, we're pleased with our start in EMEA. We had good growth in the U.K. as we've shared in the past, for Continental Europe, the first quarter is a big part of the overall year. So we're pleased to get off to a strong start. I think the one area that was probably notable on the RIS side is the impact of capital markets, the slowdown in M&A, the slowdown in IPOs, we began to see a bit of an impact as the quarter went on. But overall, demand, again, for our services remains quite strong, and we feel good about how we're positioned and -- all over the world, but in EMEA, in particular.

[Ryan Tunis, Analyst at Autonomous Research]

Got it. And then on the Mercer side, results were strong again there as well. Could you maybe just remind us, is there a seasonality to discretionary aspect of that? I wasn't sure if perhaps first quarter, there are more discretionary projects and maybe that's why it was outsized, so is that even throughout the year? And also curious, I guess, for Martine, on the wealth side, with higher interest rates and choppier markets, what are the headwinds and tailwinds the debt produces?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Are you sneaking in two questions?

[Ryan Tunis, Analyst at Autonomous Research]

I might have, Dan. Sorry.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Thanks. Martine?

[Martine Ferland, President and Chief Executive Officer, Mercer & Vice Chair at Marsh & McLennan Companies]

Yes. Thank you, Ryan. Well, first, you asked about the discretionary project. And I would say, no, this is not -- there's no cycle to this. It's pretty much through the year. It's big projects that clients work with us. And there's still lots of demand for these projects. So of course, we always keep an eye on the outlook. In terms of potential recession, as we know, this is -- the discretionary projects are a little bit more sensitive to that than other parts of the business. But so far, so good, the demand is really strong and we see, in the immediate, a very strong outlook for the year.

And you just think about the solutions that we're solving through with our clients in the discretionary projects, whether they are the future of work or -- and there's a link here to your question on the volatility on the Wealth business because when there's uncertainty, clients need us to do more modeling or more planning around the investments in the pension plan. So the bottom line is it's not seasonal.

And just to complete the thought on your question on the Wealth side, of course, the capital markets have been creating some headwinds on the short-term basis or part of the business that's linked to our assets under management. We call it the outsourced Chief Investment Officer business, OCIO. It's a fantastic business. It's given us many, many years of strong growth. We have strong flows. But of course, on the short term, as this business grows in proportion to our portfolio we'll maybe see a little bit more volatility there, but we're able to manage that in the grand scheme of the firm. And we've done so this quarter because it has been negatively impacted since the beginning of the year.

The other thing, the other end on this, and you've alluded to that in your question is the -- first of all, the AUM portfolio, our assets are diversified. So there's some risk management in that equity fixed income alternatives. In the long run, it will grow.

It's also that this business now is larger than our traditional DB business. And therefore, over the long run, we also see that as a tailwind. And the market but just creates demand for stronger governance, better agility and moving assets from one fund to the next. And you'll see this as interest rates go up and the pension funding gets better. You'll see clients wanting to secure that and start shifting assets to fixed income and also provides them more opportunity to think of de-risking that side of the business, which has been a trend for many years now.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Perfect. Next question. Thanks.

[Operator]

Our next question comes from the line of Josh Shanker with Bank of America.

[Josh Shanker, Analyst at Bank of America]

You've been really generous with your time and we're at the end, so I'll be quick with just one easy one. Can we just talk about COVID in Asia Pac right now? And what that means for the coming quarter and how you see that playing out?

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Sure. I mean I think we -- I used the resilience before, it's not just us. I think the world has gotten pretty resilient in that. We're not in 2020 anymore, and we've been able to adapt to different ways that have occurred in certain segments, whether that's in Europe, U.S., Asia, I mean, the one thing about COVID is no part of the world actually escaped. And so we don't see a tremendous impact on our results from COVID. It would be more of a softer potential impact on just any headwind on GDP or business development. But other than that, we feel pretty good.

I mean you just look at Marsh's results as an example, in Asia Pac in the quarter, it wasn't -- it's not COVID free. It was pretty active in Asia Pac. So in some ways, in terms of impact on our results, we think COVID is pretty much in the rearview mirror as well, knock wood.

[Josh Shanker, Analyst at Bank of America]

All right. Thank you.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

Thanks.

[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.

[Dan Glaser, President and Chief Executive Officer at Marsh & McLennan Companies]

So thank you all for joining us today and we look forward to speaking to you next quarter and a particular shout out to all of our colleagues for their hard work and dedication in serving our clients. So thank you very much.

Participants

Corporate Executives

• Dan Glaser, President and Chief Executive Officer
• John Q. Doyle, Group President, Chief Operating Officer & Vice Chair
• Mark McGivney, Chief Financial Officer
• Martin South, President and Chief Executive Officer, Marsh & Vice Chair
• Dean Klisura, President and Chief Executive Officer, Guy Carpenter & Vice Chair
• Nick Studer, President and Chief Executive Officer, Oliver Wyman Group, & Vice Chair
• Martine Ferland, President and Chief Executive Officer, Mercer & Vice Chair

Analysts

• Elyse Greenspan, Wells Fargo & Company
• Jimmy Bhullar, JPMorgan Chase & Co.
• Yaron Kinar, Jefferies Financial Group Inc.
• Meyer Shields, KBW
• David Motemaden, Evercore ISI
• Brian Meredith, UBS Group AG
• Ryan Tunis, Autonomous Research
• Josh Shanker, Bank of America Co.