Marsh & McLennan Companies, Inc.
Q1 2012 Earnings Call Transcript

Published: 1 May 2012

[Operator:]

Welcome to Marsh & McLennan Companies Conference Call. Today's call is being recorded. First quarter 2012 financial results and supplemental information were issued earlier this morning. They are available on Marsh & McLennan Companies' website at www.mmc.com. Before we begin, I would like remind you that remarks made today may include statements relating to future events or results, which are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to inherent risks and uncertainties. In particular, references during this conference call to anticipated or expected results of operations for 2012 or subsequent periods are forward-looking statements and Marsh & McLennan Companies' actual results may be affected by a variety of factors. Please refer to Marsh & McLennan Companies' most recent SEC filings as well as the company's earnings release, which are available on the Marsh & McLennan Companies' website, for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. I'll now turn this over to Mr. Brian Duperreault, President and CEO of Marsh & McLennan Companies.

[Brian Duperreault:]

Good morning, and thank you for joining us to discuss our results as reported earlier today. I'm Brian Duperreault, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Dan Glaser, Group President and COO; and Mike Bischoff, our CFO. Before I continue, I'd like to thank Mike for serving as CFO as we search for a permanent replacement. With Mike's vast knowledge and experience, we have not missed a beat. Also I'd like to welcome 3 of our operating companies' CEOs

[Daniel S. Glaser:]

Thank you, Brian, and good morning, everyone. In the first quarter, Marsh & McLennan's excellent performance continued. We generated significant growth in underlying revenues, which, combined with effective expense control, produced double-digit growth in both adjusted operating income and earnings per share. The first quarter sets the stage for the rest of the year, so we are pleased that each of our operating companies generated strong results and are off to a good start. Risk and Insurance Services revenue increased 7%, a very strong performance. In fact, 7% is the highest underlying revenue growth rate we have generated in a decade. Profitability increased at both Marsh and Guy Carpenter. Adjusted operating income increased to $415 million and the adjusted operating margin for the segment improved 40 basis points in the first quarter. As I've said in the past, we are continuously investing in our businesses. We seek high-value initiatives that support growth and have effectiveness and efficiency and ultimately strengthen our competitive position. Marsh produced another strong quarter. Revenue increased 8% to $1.4 billion. Underlying revenue rose 7%. This growth was across the board with all geographies contributing, including notable growth in the U.S./Canada division of 6%. And in Marsh's International division, growth was 18% in Latin America, 10% in Asia Pacific and 5% in EMEA. We are pleased with the growth in the International division considering the very strong results in Latin America and Asia Pacific in last year's first quarter. Marsh's excellent growth reflects the continuation of outstanding new business development. We are very pleased that client revenue retention rates improved across the board, reaching the highest level since the first quarter of 2003. Guy Carpenter continued to produce strong results. Revenue in the first quarter increased 5% to $357 million. Underlying revenue growth of 7% was driven by Carpenter's international operations, including strong growth from global specialties, Continental Europe and Asia Pacific. Carpenter's revenue growth reflects its highest level of first quarter new business development since 2003. This strong growth now extends the trend of Guy Carpenter’s quarterly underlying revenue growth into the fourth consecutive year. Turning to our Consulting segment. Revenue was $1.3 billion, a 4% increase on both the reported and underlying basis. One of our strategic initiatives is to increase the level of profitability within Consulting. Our first quarter results indicate that we're off to an excellent start. By creating greater linkage between underlying revenue growth and expense growth, both Mercer and Oliver Wyman contributed to Consulting's double-digit growth in earnings and a higher operating margin. Adjusted operating income rose 24% to $162 million. The adjusted operating margin increased 200 basis points to 12.4%. Mercer’s first quarter revenue was $957 million, an increase of 4% on both a reported and underlying basis. We had particularly strong growth in Latin America, Asia Pacific and Canada. Looking at Mercer's underlying revenue by line of business

[J. Michael Bischoff:]

Thank you, Dan, and good morning, everyone. As Brian and Dan have discussed, the company has continued to deliver excellent financial performance. Consolidated revenue was $3.1 billion in the first quarter, an increase of 6% on both a reported and underlying basis. Adjusted operating income grew 12% to $530 million, and the adjusted operating margin increased 100 basis points to 17.4%. On a GAAP basis, net income was $347 million or $0.63 per share. Adjusted earnings per share was also $0.63. This represents growth of 13% from the prior year. Since Dan has already covered the details of our results by operating segment, let's move on to a few other areas. During the quarter, we refinanced a $250 million 6 1/4% senior note that was maturing. We took advantage of low interest rates to secure a rate of 2.3% for the new $250 million 5-year senior note. Our next debt maturity, also $250 million, is in February of next year and we have taken additional steps over the past year to improve the financial performance of the company. Last July, we successfully completed a $600 million tender and refinancing that extended our debt maturity ladder and reduced interest expense. In November, we closed a $1 billion 5-year revolving credit facility with lower rates that replaced our 3-year credit facility, which was scheduled to mature later this year. These transactions increased our financial flexibility, refined our capital structure, lowered our refinancing risk, extended maturities of our debt portfolio, slightly delevered our balance sheet and lowered interest expense. Corporate expense in the first quarter was $48 million, which is higher than normal. The primary reason for this is that certain members of our senior management team became eligible for retirement this year. As a result, their equity grants and stock options, including those granted this year, must be expensed over several months instead of over the normal 3- or 4-year time period. This will have an even greater impact to corporate expense in the second quarter. But after that, corporate expense should return to a more normalized level. Investment income this quarter was $20 million compared with $19 million in the first quarter last year. In the second quarter, we anticipate that investment income will be approximately $5 million, compared with an investment loss of $6 million in the second quarter of last year. Now turning to capital management. Cash utilization is typically the greatest in the first quarter, primarily due to the payment of incentive compensation awards. Our cash position at the end of March exceeded $1.4 billion compared with $1.3 billion a year ago. Other uses of cash in the quarter included discretionary pension contributions of $100 million into our U.S. plan and $100 million into our U.K. plan. Dividends were $121 million in the first quarter. And for acquisitions, we spent $73 million, the largest of which was Alexander Forbes. At the end of the first quarter, net debt was $1.5 billion compared with $1.7 billion a year ago. With that, I'm very happy to turn it back to Brian.

[Brian Duperreault:]

Thank you, Mike. Operator, we are ready for the Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Keith Walsh with Citi.

[Keith F. Walsh:]

No question the top line looks exceptional, but I guess the question is if I think about the organic growth, the implied expense growth is pretty substantial as well. And why is that, especially with higher-margin Guy Carpenter up, you're pretty much up across the board especially in some of the international businesses where it's higher-margin, I would have expected the margin to be a lot higher. If you could just talk to that.

[Brian Duperreault:]

Okay, I think Dan ought to take that. Dan?

[Daniel S. Glaser:]

Sure. First of all, I'd start with the overall company. And the overall company's margin improved by 100 basis points in the quarter, so it's a good quarter from a margin perspective. In RIS, we had over 9% growth in adjusted operating income, and as you stated, margins were up 40 basis points. Now the important thing is a couple of things

[Keith F. Walsh:]

And then just the second question. The top line just significantly higher than what I had in the model and I would have thought, thinking about you guys as a fee -- primarily a fee business, especially in the U.S., why are you seeing that kind of growth? Can you -- are you getting lift on fees that you're charging customers? Can you just give a little more color around that because it seems like it's a lot higher than I would have thought.

[Daniel S. Glaser:]

Okay, so there's really 4 factors that are generating our good growth in RIS and in Marsh, in particular. So the #1 factor is improved client revenue retention, which, as we mentioned in the script, is at its highest level since 2003. Now client revenue retention, there's a lot of things that go into client revenue retention, including the outcome of fee discussions or commission discussions with carriers. It's all in the revenue retention line and so that is the leading reason behind the growth. The second leading reason is new business. New business was up 9% in Marsh. As we mentioned on -- in the script, Guy Carpenter had its highest new business first quarter since 2003. The third reason is pricing trends. So pricing trends are complicated. We could probably spend the whole hour talking about pricing, so I don't want to do that. But I would say that property rates are being impacted more than casualty rates. And if you look at the U.S. property, workers' comp, excess casualty are all up moderately. General liability and D&O are still slightly down. If you look at the National Brokerage segment, which is our upper middle market and middle market, it's all up moderately across the board. In International, EMEA is flat to down, Asia Pacific was up in cat property and flat to down in non-cat and Latin America is flat to down except in cat. So from a pricing standpoint, it's not a headwind, but I wouldn't call it a tailwind either. You have to really look at, well, what geography are you talking about, what line of business are you talking about. It's very segmented and since we participate across all of those segments, it's muted from our perspective. And the fourth area that underpinned our strong growth and it's in that sort of order in terms of the impact, the fourth area is exposure unit. So both from a total insurable value and from a payroll standpoint, both were mildly higher. So, overall, just talking about Marsh specifically for a second because I think it demonstrates the broad strength of the growth, it was very well distributed. Every region had a growth rate better than the fourth quarter and better than their run rate for the full year 2011. We had 22 countries with greater than 15% underlying growth and 30 countries with greater than 10% growth.

[Operator:]

Our next question comes from Larry Greenberg with Langen McAlenney.

[Larry Greenberg:]

On the Consulting margin, my memory serves that you had been a bit more focused on improving the profitability in Europe; that, that was a priority. Is that perhaps what's driving the bigger part of the Consulting margin improvement? Then, secondly, Dan, you mentioned the revenue associated with, I can't remember exactly what you called it, early acceptances helping the Oliver Wyman number. Is that something that's going to negatively impact prospective quarters?

[Brian Duperreault:]

Okay. Dan, why don't you take the first piece and John can talk about the...

[Daniel S. Glaser:]

Perfect. So in terms of -- as we've mentioned before, we're committed to improving the Consulting segment margins over the next 2 to 3 years. So from that standpoint, we'll very much align expense growth to be lower than revenue growth and in that way we'll improve the margin. I'm not sure where the European focus came from, but it really doesn't stand out as a particular area that we have to improve the Consulting margins. I mean we're generally looking to do that across the board. Many of our Consulting businesses run as much on a line of business global basis as they do on a geographic basis so you can't fix one without the other. So we're doing both at this time.

[Brian Duperreault:]

John, if you take the other piece.

[John P. Drzik:]

Sure. So over the past few years, procurement departments for Oliver Wyman's larger clients have become more heavily involved in contract negotiations and this has led to general acceptance criteria being added into contracts for certain Oliver Wyman projects. These acceptance provisions create situations where revenue for work delivered in early parts of the year were reported as revenue in later quarters once those acceptance criteria were met. Based on an analysis of our experience with these acceptance provisions, we're now able to better align our reported revenue with the timing of project delivery. So as Dan noted, our reported results for Q1 includes the impact of this improved alignment, which did result in higher year-over-year growth in the first quarter and represented a little less than half of our underlying revenue growth in the quarter. And to your question, Larry, it would then play out that the growth later in the year would be lower because of the same effect and probably most principally in the fourth quarter.

[Operator:]

Our next question comes from Brian Meredith with UBS.

[Brian Meredith:]

A couple of quick questions here. First, just quickly, back in the question from Larry. The Oliver Wyman revenues, was there any impact on margins also in the quarter in Consulting from that timing on revenues?

[Brian Duperreault:]

John?

[John P. Drzik:]

Yes, there was some impact, but it wasn't significant and the Consulting margin growth would have continued to be -- or the profit growth would have been 20% or more. But it did have a positive effect of some amount.

[Brian Meredith:]

Great. And then, Brian, I wonder if you could talk about just thoughts on Europe and impacting business. It doesn't seem like the weakness in Europe is having much of an impact on your business right now.

[Brian Duperreault:]

I think it is having an impact, certainly it's having some impact on Oliver Wyman, particularly in the Financial Services component. It would have some impact -- we're in recession in parts of Europe so exposures will be down. So I wouldn't diminish it, but I think the interesting thing is, take Oliver Wyman, they're -- they've been able to really improve in the U.S., counterbalancing that. So I think it basically highlights the benefits of having a global structure and being able to take advantage of the areas where we have significant growth and Dan pointed them out. But, Julio, do you want to comment a little bit?

[Julio A. Portalatin:]

Yes, I would love to. Thanks, Brian. We saw a low- to mid-single digit growth in the U.K. and the broader Europe and the continent and although the macros in Europe, of course, are challenging and you just have to read the newspapers to see that, our sales activity still remains pretty strong. And as you know, we have a pretty balanced portfolio at Mercer. It's a pretty global operation for us. We look at this as geographically and by line of business. And if you note that 70% of our revenue is pretty much reoccurring revenue in Retirement, Outsourcing and Benefits area, especially Investments as well, we've had a solid base of renewal business as well. So if Europe continues to worsen, of course it affects everybody, but that's why it's important for us to maximize our global footprint and ensure that all areas are really achieving their objectives and continuing to move on all cylinders.

[Operator:]

Our next question comes from Yaron Kinar with Deutsche Bank.

[Yaron Kinar:]

With regards to market conditions in the P&C space, what I've been hearing a lot is that it's an income statement-driven marketing transition. So first, do you agree with that? And then if you do, what do you think would the outcome be for the market if this turned out to be a benign year in terms of weather events?

[Brian Duperreault:]

Well, I'll start by saying it's always great to try to characterize these. I mean they all have to have a name, I guess, what this market is. I mean the one thing is it's always a little different. Is it a hard market? I think not in the definitions we would apply. I think Dan pointed out that maybe there's some benefit in some areas for the carriers in terms of rate, but it's not across the board, and there are lines of business where rates are going down. Whole geographies where rates are down except for cat. So I don't know what you would call it. For us, it's just the market. That's the market we're in. But, Dan, you wanted to add anything?

[Daniel S. Glaser:]

Yes, I would just -- we don't -- we've been in the business here a long time and market cycles, our brokerage and risk management advisors work through the cycles and the cycles tend to be more downward pressure than upward pressure and so we don't -- we build our business around that fact. When we look at this, generally, the market follows levels of losses and the levels of losses have been specific to geography and specific to lines of business, so it's a pretty targeted correction of rates in certain areas, but not a broad-based "blood in the eye" hard market where underwriters are, en masse, walking away from clients. I mean we don't see that. There's still competition for new business. There's still innovation in the insurance market. And so overall, it's a market which doesn't have a tremendous amount of conviction in either direction.

[Yaron Kinar:]

Okay, and then looking ahead to the summer on the Consulting front, what would the impact, best case/worst case scenario, be of the Supreme Court decision regarding health care reform for Mercer?

[Brian Duperreault:]

Julio?

[Julio A. Portalatin:]

Yes, let me comment on that, if I may. The Health & Benefits business continues to be an evolving business in the U.S. and if you look at it, to a certain extent, also globally. Here, of course, with the Supreme Court's spending decision on individual mandate or maybe even more of an impact across the board, we're well positioned really for all types of outcomes depending on how the Supreme Court rules. And we've got significant amount of activity taking place, for example, in the private exchanges. We've got good activity taking place globally, again reminding everyone this -- we have a global business with our H&B where a lot of things are happening. And we're investing appropriately to make sure that whatever outcome comes out of the U.S. portion of that we're well positioned, and we believe we are.

[Operator:]

We'll go next to Jay Gelb with Barclays.

[Jay Gelb:]

In the first quarter, we saw much faster earnings growth in the Consulting business than RIS and I'd like to get your directional thoughts as to whether you think that trend will continue.

[Brian Duperreault:]

Dan?

[Daniel S. Glaser:]

Yes. Well, one, we made up a lot of ground in RIS over a number of years and we've really expanded our margins, so the pace of margin improvement in Consulting is not a surprise to us because Consulting had reduced margins through the economic downturn and now is recovering from that. When we look at our overall focus is on long-term delivering 10% or better improvement in adjusted operating income and that's our first thing, is growing profitability. Secondarily, we focus on margin. But as I was saying before, margin can be a little bit of a fool's game. You can get the margin you want and it actually hurt your business over a mid- and long term, and so we're very much focused on continuing to invest in our business as we go forward. When I look at the Consulting business in general, when you look over the last few years, the adjusted margin in Consulting in 2009 was 10.3%, then 11.4%, then 11.8%, so I wouldn't get ahead of ourselves necessarily and say that 200 basis points is the new reality quarter-by-quarter. We look at expenses aligned with revenues so revenue grew by 4%, expenses grew by 2%. That's what gave the big lift. Obviously, our expense growth, when we factor in April 1 raises, will tick up a little bit, which would create a squeeze in that basis point improvement unless we grow the top line more. So our focus, though, in Consulting is growing the margins in a sustainable way and we believe that it will vary quarter-by-quarter, but we'll deliver that margin improvement over the next several years.

[Jay Gelb:]

Okay, then also just one follow-up. Dan, you gave a really complete overview on what the drivers of the RIS growth and Marsh, in particular. Were those in rank order? Improved client revenue retention, new business pricing, exposure, was that from the greatest benefit to the least?

[Daniel S. Glaser:]

Absolutely.

[Operator:]

Our next question comes from Dan Farrell with Sterne Agee.

[Dan Farrell:]

First quarter obviously a big cash usage quarter for you, but you are sitting on a fair amount of cash in the balance sheet and obviously you'll be seeing that ramp as the year progresses. You've talked about the trade-off in the past of how you think about deploying cash either M&A or repurchase, but I was wondering if you can maybe refresh your thinking there in the trade-off given that we haven't seen repurchase in the last couple of quarters. And then also, maybe some commentary on your view of the M&A environment, pipeline in both Brokerage and Consulting in current deal -- pricing of deals in current environment.

[Brian Duperreault:]

Okay, well, we’re happy to. Yes, we don't -- we have -- simply it's been to have an authorization to buy back shares. We haven't bought them back in the first quarter because, as you cited, it's a high-cash usage quarter. But we certainly have the intent to buy back shares through the year. As Dan, as you pointed out, my priority is always acquisitions, accretive acquisitions, would be the preference because of its growth aspects of that. But we did say that we certainly want to acquire at least enough shares to blunt the dilution from our equity grants that occur. So that runs -- pick a number, $150 million a year or something like that would be the equity grants levels. And so that certainly is something that you should expect us to do through the year. Past that, we certainly will weigh the choices and it’s what's the most accretive use of cash after that. In terms of the acquisition pipeline, we feel good about it. I think we have a lot of very interesting opportunities. Some come to fruition, some don't. We do take a look at a lot of things and I would not limit that to necessarily just the agency business of Marsh. That pipeline is good, but we are looking at some other things. We want to grow our business either by adding components that we don't have, which will enhance the capabilities, sort of our R&D approach, through acquisition or just to increase geography. In Marsh, with the HSBC acquisition and then the price -- the Forbes acquisition, we increased geography significantly. I hope we can find some more like that. We keep looking. So I think growth through acquisition is an important part of our long-term growth and you heard me talk about how we believe in that. So I hope that answers your question, Dan.

[Operator:]

Our next question comes from Jay Cohen with Bank of America Merrill Lynch.

[Jay A. Cohen:]

Yes, most of my questions have been answered. Just a quick one for Mike Bischoff. Interest expense, just give us a sense, if you don't mind, for the balance of the year what the quarterly run rate’s going to look like, given the refinancing?

[J. Michael Bischoff:]

Jay, that's a very good question. When we're looking at interest expense, it was about $46 million this quarter and the $250 million refinancing with 4 percentage points off will contribute an additional benefit of about $7 million to $8 million. Because we did that maturity in March, it really did not impact the first quarter, so you'll be looking at about a benefit of $1.5 million to $2 million a quarter.

[Operator:]

Our next question comes from Ray Iardella with Macquarie.

[Raymond Iardella:]

I guess maybe a broader question for Julio now that he's been at the company 90, 100 days. Maybe if you could talk about the strengths that you see of the Mercer organization and maybe some of the challenges, if you will, ahead for the near and intermediate term.

[Julio A. Portalatin:]

Thanks for that question. I have been here, now today is actually my 3-month anniversary, so just to celebrate that. But over the past 3 months, I've traveled extensively, as you can imagine, and met with large numbers of clients and colleagues and I've been very impressed really with the deepness of the relationships we have with clients and the real added value that comes from our employees and colleagues around the world. I’ve also, as you can imagine, spent quite a lot of time immersing myself in the business itself and all of our financials and some of the things that may come out and pop out as potential opportunities. On balance, I'm very excited about what I've learned so far. Mercer's a strong global company. It has a solid position in all of our major businesses and at the same time, we're also very excited about the potential, notwithstanding our strong position, as I stated. In terms of early decisions, the things that I've been focused on most have been largely internal. However, at the same time, we’ve kicked off a strategic planning process and my goal is that by the end of the second quarter we have a clear perspective of where we want to take Mercer over the next 3 to 5 years. But I must tell you though, as I look at our global footprint, it's really terrific across 40 countries. Maximizing that footprint certainly will be one of the things that we'll be focusing on as we look at the strategic direction of Mercer going forward.

[Raymond Iardella:]

That's helpful. And then I guess another question for Mike. I mean, stock option expense, I know you said it might tick up, I think, in the second quarter. Did you quantify that, or is there any way you could help us quantify that?

[J. Michael Bischoff:]

If you look at our supplemental schedule on Page 9, you'll see a specific item with regard to stock option expense. And as you recall, this is information that we provide quarterly, so that people can get a better idea not only of the movement there, but some of our noncash items. And you can see in the quarter that it went up by $4 million. We certainly would expect that, while it's not just stock option, it also includes the restricted stock, the total equity awards. And you certainly would -- we expect it to go up an additional $4 million to $5 million in second quarter. And then after that, we will absorb the accelerated amortization and we'll go to a more normalized corporate expense run rate for the third and fourth quarter.

[Operator:]

Our next question comes from Meyer Shields with Stifel, Nicolaus.

[Meyer Shields:]

On ACE's quarterly call, Evan Greenberg noted that some of the data system monetization from the big 2 brokers had started taking root. I was wondering if you could sort of describe that, not necessarily a quantification, but what inning you're in, in terms of expecting revenues from that?

[Brian Duperreault:]

Sure. Okay, well, Dan?

[Daniel S. Glaser:]

A couple of things. One, we do provide market consulting and data analytics to insurers. And basically, those services make insurers more competitive on our clients' business. I mean they get more competitive because they set their appetites more clearly in the business that they want to see, and therefore, their quota submission ratios go up, making them more efficient. And also because they are targeting their submissions, they can have their buy-and-quote ratios improve as well and so that's something that they’re very interested in. Overall, we've described many times and we've been consistent in our approach, that we think that the real issue is carrier revenue streams from -- all carrier revenue streams. And as we've said before, we think that all carrier revenue streams create the potential for conflicts of interest, and so we're very in tune with that and we believe that all brokers receive carrier revenue in one form or another and each of those forms requires a good system of internal systems and controls to make sure that we're managing conflicts properly. At Marsh, we've got many different businesses, many geographies and so there's not a "one size fits all." So from our basis, the most important thing we're committed to is transparency and putting the interest of our clients first. In terms of amounts of money and what inning we're in, this is -- in the aggregate when you look at carrier revenue streams, you look at basic commissionable business as, by far, the biggest part in that will remain, by far, the biggest part. And we're not going to break out individual aspects of carrier revenue streams.

[Meyer Shields:]

Okay, that was helpful. Is there anything analogous on the Consulting side?

[Daniel S. Glaser:]

There is -- the only area that becomes analogous would be in Health & Benefits, and in some parts of the Employee Benefits business we're trying to create the same kind of big data insights to insurance carriers. But that's really where insurance carriers participate on the Consulting side is in EB.

[Operator:]

Our next question comes from Mike Zaremski with Crédit Suisse.

[Michael Zaremski:]

In regards to margins, I believe certain geographies and this is alluded to in the first question on the call, overseas, have higher operating margins, is that correct? And if so, is that one of the main reasons you're confident about improving margin dynamics going forward?

[Brian Duperreault:]

Well, the answer is yes. Different geographies, you have different margins. Particularly in Marsh's International operations, the margins are significantly higher than in the U.S. and so growth rates where margins are higher will always lift it. So no question about that. Is that where you're getting at, Mike?

[Michael Zaremski:]

Yes, so if we expected growth in Lat Am and certain parts of Asia to continue at a healthy growth rate, then should we expect that dynamic to lift the margin going forward, or is there other underlying things? I know growth is picking up in the U.S. now.

[Brian Duperreault:]

Yes, it's really a scale issue. The size of our U.S. business and our U.K. business, in particular, makes our other regions look fairly small. And so even though we've got better growth and very strong margins, ultimately, it will take quite a while. So you're right and maybe when we're sitting here in 5 and 10 years from now, we'll be able to really view it clearly. But it's going to take a long time to have an impact. The biggest impact is improving our U.K. and U.S. margins as we've done over the last several years and that would have more of an impact on our overall margins.

[Michael Zaremski:]

Okay, that's helpful. And lastly in regards to fee versus commission income. In the recent past, Peter who I know is not present today, he's talked about pushing more fee-based business within the Insurance segment. I believe the term he used is a la carte. Does that mean the Insurance segment is less levered to insurance price increases in the current cycle versus the past?

[Brian Duperreault:]

Dan?

[Daniel S. Glaser:]

Sure, okay. So if you look broadly, first of all, Marsh is about 50-50 between fee and commissionable business. It's weighted toward the U.S. about 60-40 and weighted toward -- in favor of fee and weighted internationally, about 60-40 in favor of commission. What Peter was referring to, the a la carte nature, would be that some of the analytics and modeling and risk consulting that we do apart from the transaction within the Marsh world that we could create fee revenue from those streams as opposed to building it in as a bundled solution for our clients. And so it's not movement of commissionable business to fee business. It's actually just creating additional fee revenue.

[Operator:]

Our next question comes from Michael Nannizzi with Goldman Sachs.

[Michael Nannizzi:]

So just following up on a question before, Brian, about capital deployment, should we think -- should we interpret your position on buybacks to offset dilution as a change in terms of the priority you're giving to buybacks in terms of capital deployment, or is that just kind of a nuance? And just one follow-up.

[Brian Duperreault:]

Thanks. Yes -- no. Nuance might be a better description of it. I mean the priority is accretive acquisitions. That remains, and I hope it always remains that way. But I did want to clarify that we do have an authorization for stock buybacks. We intend to use it. We won't use it every quarter because it may be that an acquisition is there or in the first quarter because we have uses of cash for other -- for our compensation. But I just wanted to make sure everybody understood that there is this commitment to get at least the dilution neutralized and then from there we have to make decisions about accretion and which is a more accretive use of the cash. I suppose there could be a time where we would have a whole year go by because we’d made acquisitions and didn't buy back shares, but there is a desire long-term to do that. I hope that helps.

[Michael Nannizzi:]

Sure, it does. And then just one question on the -- you mentioned -- someone on the call mentioned investments that you're making on the expense side. Just trying to think how much do revenues need to rise in order to allow Marsh to meet the overall earnings goal that you kind of outlined in Investor Day, and is the threshold for growth higher now than it was at Investor Day just given the investments you're making on the expense side?

[Brian Duperreault:]

Well, I think Dan talked about that. And I think what we're trying to point out is our goals are long term. Our goals are double-digit growth in profitability. And you've got to be intelligent about how you deploy your resources to ensure that, that long-term goal can be met. And it sometimes means that you have to put monies in investments, which have long-term benefits. You have a return-on-investment criteria that we apply. So it's not that our goals changed. We outlined a pretty simple arithmetic around growth in expense and growth in revenue. And we are mindful of times when we have a higher growth rate, we've got 7% growth rates here. That's a wonderful thing because it gives us the opportunity to invest whereas if we have lower growth rates, like we had in '09 and '10, we have to be intelligent about the investments. Now we still invested, but the opportunities, the ability, the flexibility we have enhances dramatically. And so I thought it was a wonderful thing to be able to take that 7% growth rate and do something with it that will be in the long-term interest of the company. And so that's where we are with it. 10%-plus growth in our earnings is the goal and we are going to continue to do this over a very long period of time, that's the commitment.

[Michael Nannizzi:]

And does that imply then that the growth of top line is sort of an enabler for the investing on the expense side and that you'll kind of look to that sort of 10% growth as a goal and hopefully increasing the quality of the earnings base, but kind of managing the expense side given how much room you have to do that and still meet your financial objectives given revenue growth? Is that how should we think about that sort of trade-off?

[Brian Duperreault:]

Yes, that's the art of management. I mean that's the beauty of it. You said it in simple terms. I mean it is a pretty simple thing to do -- I mean to say, harder to execute. And so we're not just going to squeeze out margin and have it drop to the bottom line if instead we could make an investment that is in the best interest of the shareholder long term. So we're going to do the latter. And as I said, it's just flexibility and freedom, and our degrees of freedom are rising. Dan wants to add something.

[Daniel S. Glaser:]

Yes, I would just point out that this is not a quarter-by-quarter thing. It's not that you can manage investments so clearly that you just have it wholly aligned. So you may see some quarters where you'll see bigger margin expansion, as an example, because it’s just not as consistently tied. But what we're painting is what our philosophy is over a mid- and long term and that's what you'll see as our investors stay with us over the 5-year period, 10-year period, they'll see an overall consistency, but it will vary quarter by quarter.

[Operator:]

Our next question comes from Adam Klauber with William Blair.

[Adam Klauber:]

Within Consulting, Health & Benefits and Reward, Talents continue to have relatively good growth rates. Is that more driven by new business or by growth at existing clients?

[Brian Duperreault:]

Julio?

[Julio A. Portalatin:]

Yes. As you can imagine, a good proportion of our business, overall 70%, is reoccurring revenue, okay? And balance, we really see that as being a strong driver. Now there's been obviously new opportunities. We’ve introduced new concepts to approach the markets, especially in the H&B business. You go around the world, you talk to CEOs about what's on their mind and obviously there's a lot of talent questions in their minds and we're providing solutions in those areas as well. We’ve recently launched the Mercer Marsh Benefits that we think really gives us a excellent foothold in client-facing activities in a common and constructive way. And it's proven to be in the early days pretty expansive in how it's working. So there's a lot of things that are going on that impacts our business positively also on the new business development side. But I'd like to remind again that 70% of our business is reoccurring and that's renewing at very good rate and very good opportunities.

[Adam Klauber:]

Okay, and just one follow-up. Outsourcing also actually had a nice turnaround from the last quarter. Well, I guess, what's driving that?

[Julio A. Portalatin:]

Well, we had some wins in the early part of last year that came on in this quarter. And as a result, we saw some good year-on-year improvement on top line. We continue to be focused on bringing new clients on that side of the business and have some good prospects as well.

[Brian Duperreault:]

I think we're going to end the call at this point. But before I do, there's a couple of things. I want to, first of all, on behalf of all my colleagues, extend our best wishes to Peter Zaffino and his family. And lastly, I do want to end by thanking the 53,000 colleagues around the world for your hard work and dedication, which really makes this such a fun place to be and also thank the clients out there for continuing to support us. And thank you for your interest in the stock, and we'll talk to you next quarter.

[Operator:]

This concludes today's conference. Thank you for your participation.