MITRE MINING CORPORATION LTD (MMC) — Q3 2017 Earnings Call Transcript

Thank you, Elaine. Good morning, and thank you for joining us to discuss our third-quarter results reported earlier today. I'm Dan Glaser, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses John Doyle of Marsh; Peter Hearn of Guy Carpenter; Julio Portalatin of Mercer; and Scott McDonald of Oliver Wyman. Also with us this morning is Dan Farrell of Investor Relations. Since the beginning of the third quarter, we have seen a heightened level of natural and man-made catastrophe losses, including major hurricanes and typhoons, earthquakes, wildfires, senseless acts of violence, and disclosures of large-scale cyber events. Before we get into our third-quarter results, I want to take a moment to discuss how we have been supporting our clients and colleagues, the potential market impact of these events, and the critical role that our industry plays in society. While the insurance industry has the capital strength and structural resilience to absorb these losses, the human toll has been sobering with significant injury and loss of life across these events. Many other individuals have been impacted through loss of homes, basic services, and business interruption. The natural catastrophes of this quarter directly impacted roughly 4,000 of our colleagues across over 50 of our offices. While we are very fortunate that all of our colleagues in these affected areas are safe and accounted for, there were some who tragically lost family members, and our deepest sympathies go out to them. Catastrophes that occur in a different geographic region can seem remote and distant unless we are directly impacted as individuals. This is not the case at Marsh & McLennan. We understand the devastation and the stress that severe losses put on people and organizations. We are on the ground helping our clients recover as soon as possible. This includes working closely with insurance companies to process claims swiftly. In these difficult times, the industry pulls together to support our mutual clients. We are reminded that our industry is a noble one. While the market impact of the recent catastrophe losses is yet to be fully determined, it is important to recognize the industry had record levels of capital and capacity leading into these events. Although the losses are significant, the impact may prove to be more of an earnings event for the industry than a capital event requiring a reloading of capital. However, after several years of relatively benign activity, the series of recent losses are a stark reminder of the potential loss exposures, which may cause some re-evaluation of coverage, limits, and risk tolerances. While there could be some movement in pricing in catastrophe-exposed areas and certain lines of coverage, the degree and sustainability of any changes remains uncertain. From our vantage point, too much is unknown about how losses will ultimately develop, how capital will react, or how client buying patterns will change. Ultimately these forces will play out, and the market will find its equilibrium. Right now, it is just too early to tell. Insurance is about more than just protection. Industry research shows that well-insured catastrophe events end up having a shorter term impact on economic growth. In contrast, events with less insurance coverage result in a more prolonged and in some cases permanent impact to the economic growth of an affected region. Recent losses serve as a reminder of how the world is still relatively underinsured in many areas. For instance, U.S. risk such as flood, cyber, and earthquake, to name a few, still have low insurance penetration relative to exposure and together account for just 2% of total U.S. premiums. Many factors contribute to global underinsurance or what is often referred to in the industry as the protection gap. They include cost and affordability, understanding and acknowledgment of risks, and a lack of sufficient incentives to mitigate risk and improve insurability. It will take the combined effort of carriers, brokers, and governments working together to address underinsurance in the world and better access industry risk-taking capacity. Nations and regions that have proactively addressed this protection gap are better positioned to respond and rebuild from natural catastrophes. In specific regard to flood, recent events further highlight the need for greater insurance protection and the importance for the private marketplace to play a greater role. There have been over 100,000 National Flood Insurance Program or NFIP claims related to Harvey and Irma. However, many of those affected lack appropriate flood coverage and will now face these life-changing events without adequate insurance support, making the economic impact of these events meaningfully larger. A recent article looking at FEMA data stated only about 17% of homeowners affected by Harvey have a flood insurance policy. And across the U.S., only 12% of homeowners buy flood insurance, according to the Insurance Information Institute. The industry should work to encourage the private market to take on more of the underinsured or uninsured flood risk. The insurance industry can improve the understanding of risk, promote loss prevention modifications, and bring more coverage into the private market, obviously at appropriate pricing. At Marsh, Guy Carpenter, and Oliver Wyman, we are utilizing data and analytics to enhance modeling and increase private market participation in floods. Earlier this year, Guy Carpenter helped place $1 billion of private reinsurance coverage for the NFIP. In December of this year, Marsh’s flood platform, Torrent Technologies, is scheduled to come online as the direct service provider to the NFIP. We believe there will be opportunities for the private market to take on increased roles and we look forward to working with government and carrier partners in these ongoing efforts. Also this quarter, Marsh’s Schinnerer Group announced the acquisition of International Catastrophe Insurance Managers or ICAT, a managing general agent providing property catastrophe insurance to small businesses and homeowners across the U.S. ICAT’s focus on property catastrophe complements Schinnerer’s existing services and solutions for small and middle market commercial and residential clients. ICAT’s claims and third-party administration capabilities will also provide enhanced services to our clients. The need for greater insurance protection is not limited to natural catastrophes, recent headlines related to cyber events underscore the greater need for protection in this area and we have seen continued strong growth in demand for cyber CAT programs from large global firms and cyber coverage more broadly. The vast majority of cyber premiums relate to U.S. companies. The European General Data Protection Regulation or GDPR will go into effect in May of 2018, likely resulting in expanding demand for coverage in the EU where premium volume is low compared to the U.S. Before turning to our results, I would like to give a brief update on the UK Financial Conduct Authority’s investigation into the aviation insurance and reinsurance sector. In early October, we received a notice from the competition authorities in Brussels that the European Commission has commenced a civil investigation of a number of insurance brokers including Marsh regarding the aviation insurance and reinsurance broking sector. In light of the actions taken by the European Commission, the FCA informed us at the same time that it has discontinued its aviation investigation under UK competition law. We are cooperating with the European Commission and taking the matter seriously. As this investigation is at an early stage, we do not intend to comment further at this time. Now to our results. Overall, we produced consolidated top line growth of 7% and underlying revenue growth of 3%. Operating income was up 4%, while adjusted operating income increased 11%. EPS was $0.76, and adjusted EPS rose 14% to $0.79. On a consolidated basis, our adjusted margin improved 70 basis points. Through the first nine months, reported revenue growth was 5%, underlying revenue growth was 3%, and the consolidated adjusted margin expanded 70 basis points. EPS for the nine-month period grew 11% on a gap basis and 13% on an adjusted basis. Looking at risk and insurance services, third-quarter revenue was $1.8 billion with reported growth of 8% and underlying revenue growth of 3%. Adjusted operating income increased 12% to $337 million with the margin expanding 60 basis points to 19.1%. For the nine-month period, RIS has grown revenue by 6% on a reported basis, while underlying revenue grew 3%, similar to the full-year growth rates in 2015 and 2016. Adjusted operating income of $1.5 billion rose 10% and the adjusted margin also improved 90 basis points to 26%. In the consulting segment, third-quarter revenue was $1.6 billion, increasing 5% on a reported basis and 2% on an underlying basis. Adjusted operating income increased 7% in the quarter to $330 million. The margin of 20.8% was up 40 basis points versus the prior year. For the nine-month period, consulting has grown revenue by 4% on a reported basis, while underlying revenue grew 3%. Adjusted operating income of $873 million rose 5%, and the adjusted margin increased 10 basis points to 18.6%. In summary, we are pleased with the results for the first nine months of the year. For the full year 2017, we continue to expect underlying revenue growth in the 3% to 5% range, margin expansion across both operating segments, and strong growth in adjusted EPS. With that, let me turn it over to Mark.

Thank you, Dan, and good morning. Our third-quarter results were solid. Consolidated revenue increased 7%, 3% on an underlying basis. Operating income in the quarter increased 4%, while adjusted operating income was up 11% to $624 million. Adjusted operating margin increased 70 basis points to 18.7%. GAAP EPS rose 4% to $0.76 and adjusted EPS increased 14% to $0.79. Looking at Risk & Insurance Services, third-quarter revenue was $1.8 billion, reflecting growth of 8%, 3% on an underlying basis. Adjusted operating income increased 12% to $337 million, with our margin expanding 60 basis points to 19.1%. For the first nine months of the year, revenue was $5.7 billion with growth of 6% with 3% on an underlying basis. Adjusted operating income for the first nine months of the year increased 10% to $1.5 billion with a margin of 26%, up 90 basis points. At Marsh, revenue in the quarter was $1.5 billion, an increase of 9%, with a strong contribution from acquisition activity. On an underlying basis, Marsh’s revenue increased 3% in the third quarter. In the U.S. and Canada, underlying revenue growth was 3% in both the third quarter and the first nine months. In the international division, underlying growth was 2% in the quarter. Latin America was up 9%, Asia-Pacific grew 7% and EMEA was down 2%. For the first nine months, international underlying revenue growth was 3% with 7% growth in both Latin America and Asia-Pacific and 1% growth in EMEA. Guy Carpenter's revenue was $270 million, an increase of 4% on an underlying basis driven by strong growth in the U.S. Underlying revenue growth in the first nine months was also 4%. In the Consulting segment, revenue of $1.6 billion was up 5%, 2% on an underlying basis. Adjusted operating income increased 7% to $330 million, and the adjusted operating margin increased 40 basis points to 20.8%. As we discussed on our second-quarter call, foreign exchange and acquisitions had a dampening effect on first-half earnings and margins in consulting. As we expected, these headwinds lessened in the third quarter, and we continue to expect margin expansion and solid earnings growth in consulting for the full year 2017. Mercer's revenue increased 4% in the quarter to $1.1 billion, also reflecting strong contribution from acquisition. On an underlying basis, growth was flat. Overall wealth declined 1% on an underlying basis in the quarter. Within Wealth, Investment Management & Related Services increased 10%, while Defined Benefit Consulting & Administration declined 5% largely due to lower project-based revenue. Assets under delegated management at quarter-end were $213 billion, increasing 12% from the end of the second quarter. Health revenue was flat on an underlying basis in the third quarter, primarily due to softness in the U.S. And career grew 2% with continued strong growth in our survey business and our Workday offerings partly offset by a slowdown in project-based consulting. Oliver Wyman's revenue increased 8% in the quarter to $438 million. Underlying revenue growth was 7%, led by strong growth in the Middle East and Asia. Moving to investment income, we had a loss of $2 million in the third quarter compared with less than $1 million of income in the third quarter of last year. The impact of foreign exchange on adjusted operating income in the quarter was a slight positive. Assuming exchange rates remain at current levels, we expect a modest positive impact in the fourth quarter, which would bring us to a slight positive for the full year. Our adjusted tax rate in the third quarter was 26.6%, compared with 28.7% in the third quarter of last year reflecting discrete items, including the impact of the required change in accounting for equity awards. Through the first nine months, our adjusted tax rate was 26.1%, compared with 28.8% last year. We continue to expect a 29% tax rate for the remainder of 2017 excluding any impact from discrete items. Total debt at the end of the third quarter was $5.5 billion compared with $5.6 billion at the end of the second quarter, mainly reflecting lower short-term debt at quarter-end. The term structure of our debt portfolio provides us flexibility, with modest near-term repayment obligations. Our next scheduled debt repayment is not until the fourth quarter of 2018, when we have $250 million of notes maturing. In the second quarter, we repurchased 2.6 million shares of our stock for $200 million. Through nine months, we repurchased 8 million shares for $600 million. The third quarter marks the 22nd consecutive quarter we have bought back our stock. Since March 2014 when we announced our commitment to reduce our annual share count, shares outstanding have declined by 38 million or 7%. Our cash position at the end of the third quarter was approximately $1.1 billion, with $154 million in the U.S. Uses of cash in the third quarter totaled $703 million and included $200 million for share repurchases, $194 million for dividends, and $309 million for acquisitions. For the first nine months, uses of cash totaled approximately $2 billion and included $600 million for share repurchases, $545 million for dividends, and $832 million for acquisitions. For the full year 2017, we continue to expect to deploy capital in line with the level in 2016 across dividends, acquisitions, and share repurchases. Year-to-date we produced 3% underlying revenue growth, 70 basis points of adjusted operating margin expansion, and 13% adjusted EPS growth. As Dan said, for the full year, we continue to expect underlying growth in the 3% to 5% range, margin expansion in both segments and strong growth in adjusted EPS. And with that, I'm happy to turn it back to Dan.

Thanks, Mark. Okay Elaine, we're ready to go to Q&A.

Hi, thanks. Good morning. So, I guess just following up on Dan’s comments in his prepared remarks, it sounded like, I think you said this may just be an earnings event for the industry and that might not have as great of an impact on price, I guess one question is, is there a view at Marsh about – I guess what the ultimate loss might be from all of these CATs because one of the debates going around is, is it a $120 billion or is it more like a $50 billion or $60 billion event you kind of infer from some of the announcements?

Thanks Ryan. There are a couple of things. Let me just start, and then I think I will hand over to Peter rather than John to give you a view as to the overall market and level of losses, and I can say it is going to take some time to determine the aggregate level of loss per claim and how it is ultimately distributed amongst insurance companies and also other capital providers. What is clear so far is that the announced losses thus far are far short of the estimates provided by the modeling firms. I mean that – and that is not that different from some other catastrophes that have occurred in the past. It is just too early to tell what the ultimate losses will be. Having said that, catastrophe losses tend to get larger over time rather than smaller, but Peter do you have more to add to that?

Yes, Dan. I think Ryan, if we look at what has been – to your question, what has been reported to date is about $30 billion, and if you add FEMA into it, and you add another $20 billion on top of that for unreported to date, there is still a delta between that and what the modeled loss of $100 billion that has been thrown around. So these are long-duration complex losses, and they take a long time to settle out. We tend to get a number set in our mind, and as Dan said, property losses have a toll on them, not as long as casualty losses, but they have a toll on them, and these will develop. And over time, I would imagine that delta will reduce.

Yes. Regarding the 4% organic growth in Guy Carpenter, can you provide any insights on what the normalized growth looks like? Is it possible to quantify how much this quarter's growth may have been influenced by any purchasing related to the storms? Thank you.

I mean a couple of things. I will hand it off to Peter in a second, but bear in mind over a long stretch of time, Guy Carpenter has been a good grower for us, and in fact, has grown underlying revenue 26 of the past 27 quarters, and we have got three consecutive quarters at 4%. It is hard to talk about what normal is, I mean, at the end it is a very segmented, specialized business, which will have its ups and downs, but certainly for us the last three quarters have been at 4%. But Peter?

Thank you Dan. I mean, Ryan, revenue from reinstatement covers as a result of Harvey, Irma and Maria didn't have a meaningful impact on our Q3 results.

Thanks Peter. Next question please.

Hi, good morning. My first question, I just was hoping maybe to get a little bit more color on the pricing environment to stand to some of your comments that kicked off the call, I guess. Maybe this is both a primary and a reinsurance question but how is the dialogue following the storm going with both insurance carriers as well as your clients? As we think about some insurance companies have pointed to wait going outside of just areas impacted by losses and the reinsurance market and then if we think about the commercial lines market more broadly, some saying maybe this will have the potential to increase weight outside of just property-related coverage. So, how is the dialogue going even a way from just whether this is a $50 million to a $100 million event but how is conversations going in and around the level of rate that might come next year?

Thanks Elyse, it's a good question. I'll take it to begin with on an overview standpoint and then I think it's good to hear from both John and Peter to get their views of what's happening in their respective areas. But I think we have to start by saying the insurance market itself is a large global and well capitalized. And there are many insurers and other capital providers, so the market is competitive. Certain markets it's true have been hit pretty hard by these series of events and they're going to one rate increases. That doesn’t mean they're going to get the rate increases they want. I mean, that's where the competitiveness of the market comes in and this is going to play out overtime. Our job is to be on the client side of the table and to get the most comprehensive level of coverage that they're seeking at competitive terms. And so, John you want to talk about what you're seeing at Marsh so far?

Sure, Dan. Good morning, Elyse. Why don’t I start with what we saw in the third quarter and then I can share a little bit of data on what we've seen over the course of the last few weeks. But in the third quarter, rates were down 1.6%, which compares to a decline of 2.2% in the second quarter or so. Things have been trending a little bit closer to zero over the course of the last several quarters. But I would say by major product it's a pretty type range when you look at it on a global basis. The U.K. and commonly Europe have continued to remain in those competitive markets on a price change basis. Australia pricing for the second quarter in a row has set up. Looking ahead, insurers have certainly been communicating to us their need for increased rates given the recent cat events. Some were suggesting that the rate need for them is across the board; others have been communicating needs more focused on cat property. As Dan said, it's really too early to tell what I can share is both over the last few weeks in property have ranged from minus five to plus 20 and there are no measurable impact so far in other lines at this point. Now would say in my experience it will be unusual for these events that drive pricing in long tail lines. Just maybe for a second talking about the impact of some of these price changes on Marsh; it would be mixed. On the one hand, we could see some modest uplift on pricing from commissionable premium; we'll see a little bit more work on our claims operation as well. However, it could impact and have some impact on our contingent revenue primarily at MMA course. And then we don’t know a buyer's basis that would be like operating in a low growth worldwide our clients are very cost-focused at the moment. We'll see whether or not particularly our larger clients choose to retain more risk over time. Then we'll have places like markets like Puerto Rico which will likely face some challenges. Also, while I now release that we've been expanding our capabilities in property cat, really trying to be responsive to this growing risk for our clients. Dan mentioned the acquisition of Blakestad in the second quarter or in the third quarter, excuse me, we also acquired Torrent, Dan spoke a bit about that and we created alternatives the first ever retail alternative capital facility in the second quarter or so. We're well positioned to help our clients navigate market as we go forward.

Thanks, John. Peter, you want to add to that?

Sure, thanks Dan. In the conversations we have with reinsurers as always it takes a client-specific, very measured approach based on their experience, individual clients experience, exposure, and their trading relationship with the reinsurers. And I preface it as it's early, it's too early to tell a leading indicators as to where prices are going. But that's the approach that we take, a very balanced and fair approach based on individual company, experience exposure, and their trading relationships.

Any other questions, Elyse?

Yes, thank you. And that was very thorough. I appreciate the color. In terms of the margins within RIS, the margin improvement did slow in the third quarter. And I know you guys pointed in your opening commentary that the year-to-date improvement. Was there anything that crept up in the third quarter that caused the slowdown in margins or was it just we see margins up to the year-to-date level?

You should always look to the year-to-date or rolling 12 months or even over multiple years. I mean, we're in the 10th consecutive year of margin expansion and so it's a great story considering we're not overly focused on it here at the executive table. But the other things to think about with regard to RIS, the third quarter is our lowest revenue quarter. So, if you've got some movement expansive would have a larger term impact. But there's nothing underlying that to point to anything that we're concerned with regarding RIS margins.

Much.

Sure, next question please?

Good morning and thank you. And just following up these question, the pace of margin expansion. I hope you can talk a little more about underlying drivers in terms, do you see any pressure on the wages, any investment you need to make into the fitness and any cost saving opportunities within the organization? And you have talked even past the margin expansion is a byproduct of your driving organic growth budget. I just want to understand it better.

Sure. And what we said in the past is that margin expansion is an outcome of running a business where almost always you expect to have revenue growth exceeding expense growth of maybe not every quarter but certainly every year. And when we looked back in our history, the 35 of the past 38 quarters, we have had revenue growth that exceeded expense growth. And so, it's just a core part of the way we operate the business. When you think about things like wage pressure, it's something that we look at carefully. The reality is that we have converted over the last number of years more of our compensation to variable than it has been in the past. We still have a large fixed component but the bonus pool is driven by earnings and some measure of top-line growth and that drives overall accruals within our bonus pool, as you can see. Our earnings have gone up multiple years in a row, which if it's a little bit more flexibility when we look at compensation in general because the variable component has ridden over a number of years. In terms of wage growth, it's interesting because in the global economy and here in the U.S. we haven’t really seen that operate. So, there is that economic theory about a tightening labor market ultimately playing through with wages, but I think with advances in technology and other factors and that improves efficiency, that is not playing out right now. So, there is not any built-up demand for wage inflation within the company. It's something that we watch country by country very carefully.

Yes, a follow-up just on pricing again. Is that how you position your broker colleagues in the potential changing marketplace? I should wonder if you can draw any comparison in the past if there is a big changes in marketplace, how would that impact your customer retention as well as the new business?

Yes, a couple of things. 1) It's interesting to note in every market, that is potentially hardening and I use the word potential here. If you look around the table, you got people who have seen hard markets and soft markets. Most of our careers have been in softer softening market environments, hard markets tend to be pretty swift. But ultimately on the underwriting side and on the booking side, we have a lot of people working for us who never experience an underwriter asking for a rate increase. You could have been in this business for decades and maybe not have ever heard those words. So, it will play itself out. My history in the business is people convert very quickly and it's all comparative in terms of how in achieving and broking the right individual arrangement for a client. I think brokers can change very quickly and adapt to changing market conditions. What it has meant to Marsh & McLennan in the past is generally been at higher levels, a moderately higher levels of prior retention in new business because of a slight increased quality. We got the broadest specialized placement capabilities in the world. And so, in times of stress, our phone rings more than in times that are easy.

Thank you. Could you update us on enrollment for 2018 in the private health exchange?

Sure. Well, let me just talk a little bit about the marketplace in general because as we said before we like our capabilities and we like our positioning and we expect Mercer marketplace 365 to be a contributor to Marsh's U.S. health and benefits business going forward. But it's important to understand it's still in the build stage for us and it's one solution just one part of an overall toolkit that we use in giving Marsh capabilities in health to clients. And so, I'm not sure if we're going to go into much detail on it. And by the way, for us it’s not really an exchange anymore. It's really a platform that is a year-round benefits platform. But Julio, you want to add some more to that?

Thank you, Dan and thank you Jay for the question and good morning. Yes, we like to think of our Mercer marketplace 365 benefits offering as an all-year-round platform as Dan mentioned. It offers year-round benefits like wellness along with the enrollment capability of how as well as voluntary benefits, life insurance, dental, and other important coverages. And then 365 continues to be a relatively small part of an overall broad health portfolio. Focus continues to be in finding the right solution to bend the cost curve on health for our clients. Yet, obviously at times when that is a good fit mainly, Mercer marketplace 365 is a good fit. So, we continue to have confidence that we have a platform that resonates with our client and it makes sense for some of them to take advantage of them. Mercer marketplace 365 had a good sales activity here this year and it will be helpful as we pivot to 2018 growth.

So, I feel that would agree with you. I think this is one of the things Jay, that in the past we said that this part of the business was getting too much attention and we thought some of the estimates that have been put out on the industry where we couldn't understand where the numbers were coming from. But ultimately giving things that's specific enrollment data, number of lives, that sort of thing on a relatively small part of the subset of our business. This doesn't seem to make sense. So, let's just take it as Julio said they had a strong selling season this year which will benefit us in the future and I will leave it at that. You have another question, Jay?

That's just fine. Sure, yes. Just a separate question on Guy Carpenter. If we look at environment where it's likely to have some pricing improvement, maybe some increased demand for property-related reinsurance covers. How much of a benefit could that be for Guy Carpenter either topline and earnings if you look at past cycles like 2011, 2005?

I mean, we one thing before I hand it off to Peter. We built our business to prosper in times that are generally broad market relative level of softness in the market, and then every once in a while there is a burst of activity in terms of heightening. But it certainly some of them are still brief; it's hard to refer to them as cycles, per se. And so, that we don’t look at our businesses as really operating under the basis of cycles. It's mainly almost all the way downward and then every once in a while there is a little spurt of something. The other thing is both in Marsh and in Guy Carpenter, there is always a series of puts and takes in terms of how a company's responding, and then I'll hand over to Peter. But I would imagine if the market is too tough, many well-capitalized insurance, we just make different decisions, right? And so Peter you want to answer that?

I think that's right. And this is a business of puts and takes. More importantly Jay, as I said in the last call we're building Guy Carpenter and delivering consistent growth there irrespective of market conditions. That means we're focused on building strong pipelines for new business and exercising continued discipline around our client service and retention. That we're not building a business that’s depended on rate environment.

Thanks. Next question, please?

Yes, thanks. Just one question on the consulting side and then the health practice. You said there were some I guess weakness or softness in the U.S. Can you talk about what is driving that?

Okay. So, I want to add a few points. While some competitors view their operations as strictly business lines, it’s important to note that we have a significant health business that operates in three distinct areas. Mercer is clearly a key part of our health business, but we also have a large health practice focused on various transformations that do not overlap with what Mercer does. Additionally, both Marsh and Marsh & McLennan Agency hold strong positions in the employee health and benefits markets. Collectively, this represents a substantial number, and we interpret it in various ways. I believe you were specifically asking about Mercer, so Julio, could you provide some insights into the Mercer health business?

Thank you, Dan, and Jay, I appreciate the question as well. Good morning. Mercer has a diversified, well-balanced portfolio that is geographically spread out. Over the past few quarters and years, we have achieved exceptional growth results. However, on a quarterly basis, there can be fluctuations, which is why we prefer to discuss growth over a longer timeframe rather than focusing on a single quarter. Taking health as an example, our health business has both areas of strong growth and some challenges. Our administrative sector, which is part of our health results, continues to grow, but we are currently undergoing a profitability improvement initiative. This can lead to pricing adjustments during contract renewals, which we sometimes need to make and sometimes do not. However, we are focused on enhancing profitability, which can occasionally hinder overall health growth in some quarters. Conversely, our commission brokerage work, especially in the U.S., remains robust, with increasing retention rates. The current uncertainty in the U.S. has affected some decision-making, while others are beginning to show progress. Nevertheless, we continue to invest in expanding our health business, particularly with acquisitions and initiatives like our online content or global health proposition, which positions us advantageously and will yield benefits over time, alongside our ongoing investments in the marketplace.

Thanks Julio. JD, do you have something up?

No, that’s it. Thanks a lot guys.

Okay, thank you. Next question please.

Hi, thank you. Just a quickie, I think earlier in the year you have indicated that some of the acquisitions you had done late last year were putting some pressure on margins in the first half of this year and you just needed to better scale to have those margins move up more in line with where you are. Can you just talk about that and whether there's still a bit of a drag from some of those deals that you did?

I'll take that Larry and then I will hand over to Mark to give you a little bit more, but there was a few things Mercer in particular acquired some companies at the very tail-end of last year that were more leaning toward higher growth technology-based organizations so by their very definition have a little bit more dilution to them in the early stages but we respect their higher levels of growth to make up for that over time and make them good acquisitions and so it's a little bit different than some of the other businesses that we've acquired but Mark can add to that?

Larry, in the comments we have made, we were specifically consulting business and if you remember back to the first couple of quarters, we can talk about how the underlying performance of the business which was just being masked by these acquisitions. And then you start to see that as the acquisitions left in the back half of the year are doing well, but we have had if you just look at the headline gap growth numbers acquisitions have contributing quite a bit, which is a good story. The thing you keep in mind and when we talked about this is the acquisitions are ahead within the near term because we're doing the purchase accounting through our results. We think pretty substantial growth and intangible amortization while we were delivering this solid NOI growth but as you see in the back half of the year some of the headwinds we talked about and mentioned.

I'm glad that Mark mentioned the GAP revenue growth because I think it's important to look like and look at, the people who look at Marsh the 9% growth for an awfully big, high-quality company in a given quarter that's going to benefit us enormously in coming years, sure it's not an underlying and we want to see better underlying growth but ultimately we were happy with that number. Do we have another question, Larry?

No, I'm good. Thank you.

Next question please.

Thanks, just a start off, I have a quick question, you mentioned, closing the protection gap in flood and I'm just curious to get your thoughts on how meaningful the wake-up call you think the third quarter events could serve towards starting to bridge that gap?

It's a great question. This issue pertains to both the U.S. and the global landscape. The protection gap is significant when viewed over several decades, with more catastrophe risks, particularly flooding, being borne by taxpayers rather than insurance companies in post-event scenarios. The private market adds value by managing risk and providing recommendations that help mitigate losses over time. However, when government entities fund recovery on a post-loss basis with taxpayer dollars, it raises concerns. We hope this serves as a wake-up call, but we remain uncertain. Before the recent series of loss events, the U.S. policyholder surplus was about $725 billion, a record high, and at that time, premium-to-surplus ratios were lower than they had been in the past 25 years. This indicates that there is capital available at the right prices to address risks, yet we have a significant mismatch, especially concerning floods in the U.S., which we see as a major risk for our clients. We have dedicated considerable time to discussing this issue and will monitor its developments, but we believe that greater collaboration across the entire industry is necessary. Are there any other questions?

Just one other quick question, I was just curious if you have any thoughts on the potential whether there would be loss adjustment expense surprised sort of speak with what the catch in the third quarter. I know I can't have a claim operation I think older claims maybe that have some insight to provide, I am just curious to get your thoughts on the last number increasing on the LAE side.

LAE, it has to be more of a percentage of overall losses as opposed to anything else and I think that there may be some stretching of adjustment expenses only because you look at a series of catastrophes and the strain that puts on organizations like loss adjustment firms, contractors, etcetera, the costs tend to rise as the number of them available for the next job decreases and certainly the number of claims has been close to unprecedented in a very short period of time and so that in another itself puts some strain on getting the right people to do the adjustment but I would say the industry itself steps up pretty well in the event of catastrophes and there's not much quibbling that is going on, it’s more of just getting the information and cutting a check and so from that standpoint I wouldn't expect any long drawn-out process on property claims. Now on business interruption claim that’s a little bit different and so maybe that becomes more of an area but that would be sort of typical of what our expense adjustments are and loss adjustments are on a post-catastrophe on BI claim. So we will see much in that area.

Hi there, good morning, thanks for the question. I just want to come back to Mercer numbers in the third quarter here; I know you guys certainly always fun to looking at a trailing base year to date in that regard I guess the flat growth here is and about the slowest in the quarter that we've seen in quite some time and some of it sounds like it's a slowdown in project-based work, I'm curious if there are any other factors that cause it to be flat this quarter? I know you had mentioned your colleagues were affected to some extent so did that, was that a factor in slowing down productivity? But just generally, three of the four businesses were slower year over year and as you look forward, do you guys have visibility on some of those businesses rebounding, coming back on at this point?

That's a great question. To begin, I would mention a couple of points before handing it over to Julio. Comparing this year to last year, particularly in terms of the third quarter, we had a zero in third quarter 2016 and now we are seeing a 4% increase. Julio may have some insights on this since Mercer was at 3% in the third quarter of 2016. It's important to remember that these are our clients' businesses, with whom we have long-standing relationships, so looking at performance on a quarterly basis may not give the full picture. On a year-to-date basis, Marsh & McLennan Companies has maintained a three, just as we did last year at this time. As we mentioned at the start of the year, we anticipated that 2017 would mirror 2016, and that has proven true, including the margin expansion we have observed, which is the same as last year. In terms of our individual operating companies, we have three up compared to last year, and one down on a year-to-date basis. For example, Marsh is at three, [indiscernible] is at four, OW is at six, and Mercer is at two. This mix is not uncommon for us; while we often see variability, it's rare for all four companies to perform well simultaneously. Julio, do you want to briefly add to that?

Yes. Thank you for the question. As I mentioned earlier, each quarter we experience various shifts in the business. For instance, in the wealth sector, Mercer continues to grow its earnings and introduce new offerings. We are also making acquisitions, not only in wealth but in areas like online content and solutions, which we believe will support our growth in the future. Regarding wealth, we are seeing consistent double-digit growth in our investment management delegated solutions, surpassing 230 billion in assets under delegated management, reinforcing our position in the industry. However, within the wealth business, the VB consulting actuarial segment is experiencing challenges, primarily due to a declining VB program and reduced project work related to cash outs and buyouts, impacting this quarter. Such fluctuations are typical, but overall, Marsh is performing well in achieving growth through both organic and inorganic investments, and we anticipate this trend will continue. Speaking of the consulting segment, despite its volatility, it has outpaced other areas over a longer period and posted a solid topline increase of 7% this quarter. Scott, would you like to discuss growth in OW?

Sure, thanks Dan. We had a what I describe as a good quarter, with strong growth across most areas of the portfolio. It was particularly strong in the public sector or actuarial business and in our health business. We alternate really strong growth in our growth markets in particular Asia and the Middle East. I think we could grow even faster than this. What's held us back in the third quarter from stronger growth is Europe, still remains a little sluggish and it's an overall demand for consultant, our branding business was a little weak given the up level in global branding. We're still managing our transition in our big financial services business from regulatory to more strategic work. But in all three of those areas we feel some momentum, if anything market demand is picking up as global growth seems to be picking up at least modestly, and our medium-term targets to have growth in mid to high single digits are fully intact.

Thanks, got it. That's great color on that.

David, do you have something up?

I did, I don’t want to beat the rates the rates earning to death here as you guys are talking about how uncertain it is at this point. But I'm wondering maybe as a history lesson, it seems like 2005 is the most common parallel. I'm wondering if you guys could just talk a little bit about the parallels or differences that you can draw from a national disaster that impacted your business back then. How they might be different or similar to the one that are affecting it now. And I'm just trying to think of things we might not be considering such as supply of capital is a lot more robust. But are there other factors that you would point us to say 'Hey, this is what you should be thinking about as you frame the impact of the industry.'

I think there's just too many moving parts here, David. In fact, in your last comments in terms of the number of capital providers or the supplied capital, you think about where the market was in 2005 versus where it is in 2017. It's a completely different situation. The number of insurance companies that write more than a billion dollars of premium as an example in the United States. The level of improvement on data and analytics, it really means that any emergent, frankly after things like KRW of alternative capital in the growth in alternative capital and other ways of companies dealing with risk transfer off of primary markets into the reinsurance market. I mean, there are many moving parts there. I would say that certain insurance companies have been hit pretty hard. Policyholders' surplus getting whacked in the double digits, and those insurance companies are going to be seeking rate. And they are going to be seeking rate probably everywhere that they issue a policy. And so, then the question becomes well what will other insurance companies do. Will they use this opportunity as a way to slot in somewhere beneath the incumbent as a way to grow their share in this time because they may not have been hit as badly. Now, this is a global market. If you look at the top 20 insurance companies, many of them are global but it's also a local market and a regional market. So, as John was saying earlier, the idea that in some country in Latin America or Asia, the casualty pricing will go up as a result of loss activity in the United States when there are so many regional and local champions to take the account if rates go up too high in those areas. That puts a lot of competitive pressure where the terms of conditions will ultimately outline that. We love to give you more but this is where our marketplace operates. And the losses are still being developed as we were saying earlier, the model numbers are far higher than what the aggregate reported numbers are. So, either the modelers are incorrect right now or the actual reported numbers are too low and will rise over time which will put more pressure on rating levels. We'll just have to see how it plays out.

Good morning. Just a couple of little simple questions, I think. I want to ask you about the discreet tax items and sort of the sustainability of those discreet items over time?

Sure, so Mark?

Yes, sure. Paul, we've been dealing with all here. There is this required accounting change related to stock-based compensation which has a big impact in our first quarter which we quantified in less impact and subsequent. So, we did have a few discreet items that affected our adjusted tax rate. But that tax accounting change was the largest and it is unpredictable just based on option exercise activity and when stock-based. So, that will be something going forward. That accounting changes is permanent if you will and we will have option exercises and equity-based compensation at best. But the amount of that volume is going to be a little bit volatile, depends on our stock price and when people actually take the action. That was the largest discreet item in the quarter.

Well, that makes a lot of sense. And then my second question. Just if there's any update on your thoughts about the revenue accounting change perspective, how we should be thinking about that when we're thinking about earnings estimates for 2018?

Yes, and it's still too early to give you. First, I'd have to give a little bit of color. It is, as you can appreciate beyond our industry of the company dealing with this pretty comprehensive change to revenue recognition. It is going to have a meaningful impact on the timing of not only our revenue recognition but the earnings pattern as well. So, I'll give you a little bit but it won't be till later in the year when we can give you a specific. So, there will be an impact on the timing of revenue in RIS for us more so than consulting. Most of the action we expect will be across the quarters, within our year most of our contracts are fairly short-term in nature. In Guy Carpenter for instance, there'll be an acceleration of revenue and a core to share business and some of our trading business. In January, we'll have some acceleration, some fee-based business and a couple of other areas. But again, most of the action will occur among quarters or across quarters within the year as opposed to the past years. Both of our segments, there is also the element of this which I'll show you, pretty sure that involves the fur of expenses that will affect both of our segments. And most of the impact there again would expect across quarters within the year as opposed to across the year but there will be certain elements or categories of expense that will have amortization periods that will spend a year. So, it is comprehensive, and as I said we get through the last part of the year we'll have more specificity for you. Our goal through all of this, I mean as I said would be a meaningful change. Our goal be to try to provide much transparency as possible so you can baseline the results as accurately as you can and at least get a sense of underlying performance.

I'm still wondering if this is something what we do talking about in December right before we get into the earnings announcements or if you expect it to come earlier than that. Just from a mechanical perspective and setting expectations for quarters.

Yes, I think at this point forward, still uncertain I mean certainly between now in our Q4 earnings call, we like we will not say anything.

Okay, well. I'd like to draw the call to a close and thank everybody on the call this morning for joining us today. I'd like to thank our clients for their support and our colleagues for their hard work and dedication and serving them. Have a good day everyone. Thank you.