Marsh & McLennan Companies, Inc.
Q4 2012 Earnings Call Transcript

Published: 12 Feb 2013

[Operator:]

Good day, everyone, and welcome to Marsh & McLennan Companies Conference Call. Today's call is being recorded. Fourth quarter and full year 2012 financial results and supplemental information were issued earlier this morning, and they are available on the company's website at www.mmc.com. Before we begin, I would like to 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, and a variety of factors may cause actual results to differ materially from those contemplated by the forward-looking statements. Please refer to the company's most recent SEC filings, 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 will now turn this call over to the Dan Glaser, President and CEO of Marsh & McLennan Companies. Please go ahead.

[Daniel S. Glaser:]

Okay. Thank you. Good morning, and thank you for joining us to discuss our fourth quarter and full year 2012 results as reported earlier today. I'm Dan Glaser, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Mike Bischoff, our CFO. Also, I'd like to welcome our operating companies' CEOs

[J. Michael Bischoff:]

Thank you, Dan, and good morning, everyone. In the fourth quarter, consolidated revenue was $300 (sic) [$3] billion, an increase of 3% on an underlying basis. Adjusted operating income rose 10% to $450 million and the consolidated margin increased 90 basis points to 15%. GAAP EPS was $0.47. Adjusted EPS grew 13% to $0.52 from $0.46 in last year's fourth quarter. Revenue at Risk and Insurance Services was $1.6 billion, with underlying growth of 3% at both Marsh and Guy Carpenter. By holding adjusted underlying expense growth to 1%, adjusted operating income rose 8% to $312 million. Margins expanded by 80 basis points, reaching 19.2% in the quarter. At Marsh, underlying revenue growth was led by a 5% increase in the International division. This included 13% growth in Latin America and 3% for both EMEA and Asia Pacific. Overall, Marsh's revenue growth was driven by record new business production of approximately $300 million. Guy Carpenter continued its long-term trend of solid financial performance and underlying revenue growth. Its 3% growth was led by Canada, U.S. facultative, Latin America, the U.K. and certain global specialties. Turning to our Consulting segment. Revenue was $1.4 billion, reflecting underlying revenue growth of 3%. Adjusted operating income rose 8% to $179 million and the margin expanded 70 basis points to 13%. At Mercer, underlying revenue growth was 6%, its strongest quarter of the year. Excellent growth was achieved at Investments, Health & Benefits and Outsourcing. As you are aware, Oliver Wyman's 3% decline in underlying revenue in the quarter was anticipated due to the weak European economic environment and the timing of revenue recognition between the first and fourth quarters. As was the case for the full year, we saw strong growth in the Health & Life Sciences and Communications practices. MMC's consolidated underlying revenue growth for the year was 4%. Adjusted operating income rose 12% to $1.9 billion and the margin grew 120 basis points to 15.6%. For the year, GAAP EPS was $2.13. Adjusted EPS increased 21% to $2.15. Excluding the early extinguishment of debt in 2011, adjusted earnings growth was 16%. We anticipate annual corporate expense this year will be lower than 2012. Quarterly expenses should average 75 -- I'm sorry, $45 million a quarter. Investment income in the fourth quarter was $4 million. Effective yesterday, Trident II divested its remaining position in AXIS. As a result, MMC's investment income in the first quarter will approach $20 million. Regarding our restructuring in the fourth quarter, the vast majority relates to Mercer. As Dan indicated, this results from Mercer's repositioning as it implements its new long-term strategy. 1/3 of the $51 million expense was due to the sale of a small Canadian outsourcing business, which was announced last October. The balance of the expense included position elimination, software writeoffs and real estate rationalization. We have greatly reduced noteworthy items that are excluded from adjusted operating income. On an expense base of over $10 billion, net adjustments to GAAP for the past 2 years were only $22 million in 2011 and $35 million in 2012. Taxes. For the year, our adjusted tax rate was 30% and we feel this is a reasonable rate to use for financial modeling purposes in 2013. Pension expense. On December 31, interest rates for longer debt maturities used to measure pension liabilities were again lower than the prior year. Based on the year-end measurement, our pension expense will increase this year by $30 million. Moving to capital management. The largest use of our cash in the fourth quarter was $149 million for acquisitions, including 5 at Marsh & McLennan Agency. Today, MMA has annualized revenue of $450 million. Also in the quarter, we used $128 million for dividends and repurchased 1.4 million shares of our common stock for $50 million. Since instituting our share repurchase program 2 years ago, we have repurchased 22 million shares for almost $700 million. For the year, the major uses of cash included approximately $500 million for dividends, $340 million for acquisitions, $230 million for share repurchase and $200 million for discretionary pension contributions. The use of cash over the course of 2012 approaches $1.3 billion. Additionally, last month, we made a $70 million discretionary contribution to one of our international pension plans. We are prepared to make additional contributions if there is a long-term economic rationale and it can be accomplished in a tax-efficient manner. With that, I am happy to turn it back to Dan.

[Daniel S. Glaser:]

Thank you, Mike. And operator, we are ready to begin the Q&A.

[Operator:]

[Operator Instructions] We'll take our first question from Greg Locraft with Morgan Stanley.

[Gregory Locraft:]

I wanted to ask why is the organic growth in the P&C brokerage segment? It was one of the lowest in many quarters and also is now well below peers that have already reported.

[Daniel S. Glaser:]

Okay. So I think the best thing to do is to go to Peter and Alex on that. So I'll start with Peter.

[Peter Zaffino:]

Sure. Greg, when you look at the variability that happens quarter-to-quarter, I would encourage us to focus on what happens in the year, as well as looking year-over-year. So when I look at U.S. and Canada in 2011, the segment grew at 3% and in 2012, it grew at 3%. When I look at the International growth in 2011, it was 6% and in 2012, it was 6%. So it's challenging to take just a look at the quarter. It's much better to look at what is the last 4 quarters and I think you can see we've had very consistent growth. International has contributed more than the U.S. and Canada. We've had terrific performance from Latin America, where they grew 13% during the year. EMEA, with all of its challenges and economic headwinds, grew 5% for the year. Asia Pac grew 7% for the year. So overall, with the challenging headwinds, we're pleased with what's happened during the year. If I can just comment for a second on what happened in the U.S. and Canada because I'm sure some curiosity as to why it's 0%. Again we look at 2012 and are pleased with the performance. There's always variability and nonrecurring items in quarters. We've mentioned that before, both positive and negative. And having said that, in the fourth quarter, U.S. and Canada did get hit with an abnormal amount of negative variability that impacted the growth in that segment. So again I would encourage us to take a look at the year, the key performance indicators for new business. As Dan mentioned, we had record new business in the year. But we also had record new business in the quarter, including in the U.S. Retention, absent the variability, was consistent with prior quarters and our overall pipeline is quite strong. So when you take a look at the quarter and the year, I'd encourage you to take a look more at the year. And as we look to 2013, we don't give guidance, but the year will reflect more of the growth than the quarter.

[Daniel S. Glaser:]

Okay. Alex?

[Alexander S. Moczarski:]

Yes. I mean, 3% underlying growth, actually I think it was a fairly decent quarter. There was no doubt that last year, it was a more benign year from the point of view of catastrophes. And so there were some pressures on rates. But all in all, we actually did a little bit better than we expected to be in what is our smallest quarter. So I really don't have much to add to that.

[Daniel S. Glaser:]

Okay. Also just one comment, Greg. I think you have to be cautious when looking at peers or your comment with regard to underperformance versus peers. We don't have many peers. And so there may be some reporting which would be more equivalent to a smaller segment within our business. But our RIS business is a $6.5 billion annual business, and we're in every geography in every segment. And so there may be -- we don't have many peers out there.

[Gregory Locraft:]

Okay. So I guess, to just -- very thorough answer. What I'm sort of taking away from it is that empirically, you guys limped into year end in the P&C brokerage segment. So that's just the way it is, and it was actually centered in the U.S./Canada segment as you said, which flies totally in the face of what we're seeing from the peers. But you feel very, very good given where pricing is going in the U.S, given the trends you see that this quarter is not a quarter to be extrapolated into 2013 and beyond. There's nothing in the core business that you see that you want to call out right now that we should be -- that should cause us frankly to all be lowering our organics in that segment going forward.

[Daniel S. Glaser:]

Yes, I think your summary is correct.

[Operator:]

Our next question will come from Jay Gelb with Barclays.

[Jay Gelb:]

The outlook for margin expansion seems to be a bit stronger in Consulting than the Risk and Insurance Services segment. And that certainly was the case for the full year 2012. I was wondering if you could talk about that in relation to your long-term 13% EPS growth target as well.

[Daniel S. Glaser:]

Sure. Look, well, first, let me just hand over to Mike.

[J. Michael Bischoff:]

Yes, this is Mike. Just to correct, I would say the margin improvement in Risk and Insurance Services was 130 basis points in 2012 and for Consulting, 140. So I would say that we saw a very significant margin improvement in both of our segments over the course of the year. I just wanted to make sure that, that was factually correct right there.

[Daniel S. Glaser:]

Yes. And Jay, when we look at the businesses, of course, RIS started earlier, right, in terms of really focusing on the business disciplines and profit improvement. And we really started getting going in Consulting with the arrival of Julio and Julio's leadership team at Mercer and forming strategies around improving profitability. And so when we look at both segments where we stand today, I'm actually quite optimistic that we have the ability over the next few years to continue to expand margins in each of our segments. And I wouldn't really put an emphasis on larger margin expansion in Consulting versus RIS. I think that there's capabilities in both to do that. Of course, it remains -- it's subject to the overall environment, the GDP environment around the world, the macroeconomic environment, a little bit of the PC -- P&C pricing cycle. But ultimately, as long as we can achieve modest levels of revenue growth, we feel comfortable that we will be able to continue to expand our margins in both segments.

[Jay Gelb:]

Okay. And with regard to the organic expense growth, Mike, I think you talked about 3% underlying. And is that something that can persist?

[J. Michael Bischoff:]

Yes. I mean, certainly, Jay, when we look at how we run the business, we have been continually investing in the business over the last several years and very much focused on creating mid- and long-term value for our shareholders. And so when we look at the expense base, we've been wearing those investments, we've been wearing some higher pension costs, et cetera. And we believe we can continue to do that.

[Operator:]

Next, we'll hear from Meyer Shields with Stifel.

[Meyer Shields:]

Dan, you talked a little bit about changing the segment reporting within Mercer. When you talk about including the affinity stuff from Marsh, is that going to have a material margin impact?

[Daniel S. Glaser:]

No, it will not. I mean, the margins of that business are relatively consistent with the overall margins of the Consulting segment.

[Meyer Shields:]

Okay. Can I infer from that, that it'll boost margins in Risk and Insurance a little bit?

[Daniel S. Glaser:]

If you want to cut a fine line to it, yes, the math works that way. But it would be so small relative to the size of RIS that it would barely turn up.

[Meyer Shields:]

Okay. When you look at both segments, I'm talking about the 2013 outlook, are you budgeting for or expecting any slowdown in consumer spending because of higher payroll taxes?

[Daniel S. Glaser:]

When we look at our business from a budgeting perspective, we tend to look at where the business has been performing over the course of like a rolling 4 quarters basis and what the macro environment looks like on a rolling 4 quarters. So we don't put any real optimism into our numbers based upon the fact that we feel that at least the sentiment seems to be improving a bit from where it was midyear last year. And on the other hand, we don't put many pessimistic thoughts in there, too, as to the impacts of something like a payroll tax. So ultimately, our business should perform a little bit above GDP in most jurisdictions. And so that's probably, on a broad sense, the more accurate thing to look at.

[Operator:]

Next, we'll hear from Larry Greenberg with Langen McAlenney.

[Larry Greenberg:]

I'm wondering if you could just talk about the underlying insurance pricing impact that you felt in 2012 for the year. And I know it's incredibly early in 2013 but perhaps look into the crystal ball and see how the impact in '13 might compare with '12.

[Daniel S. Glaser:]

Okay. So I think that question as well, Larry, is probably best for Peter and for Alex. So Peter, why don't we start with Marsh?

[Peter Zaffino:]

Sure. Thanks, Larry. And let me start with the fourth quarter. We measure what's called a Marsh Risk Management Global Insurance Index, and that rose 1.2% on a global basis. If you think about how our portfolio splits in the quarter, it's about 49% U.S., 51% International. If I look back on the first, second quarter, in the U.S., we started to see a lot more probably modest increases in property, started to see more momentum in some of the more stressed casualty lines. And I would say that's continued in the third and fourth quarter, although modest increase when you compare quarter-to-quarter. The International business, again, a lot harder to just give a statement because they're in different geographies, there's different lines of business, but generally speaking, that's been fairly flat. Some lines of business have increased. I would think more around peak zone properties, so if you go into Asia, if you go into Pacific, parts of Latin America and then other segments' lines of business have been coming off. So on average, I would think for the year that the International has been flat. And again with the U.S., we've had a little bit of an impact on Sandy, not much. And that started to fall off a little bit in the fourth quarter.

[Daniel S. Glaser:]

Okay. Alex?

[Alexander S. Moczarski:]

Yes. On the reinsurance side, really as I said before, the year was benign from the point of view of catastrophes compared certainly to a year prior. And we saw some general softening. Sandy probably strengthened the resolve of some underwriters to try and keep some pricing. And if you had a portfolio that was affected by Sandy, I believe there were some price increases. But we didn't see any tailwind from rating so far in the renewals for 2013.

[Larry Greenberg:]

Great. And then just one housecleaning. Mike, with Trident's sale of AXIS, is that going to effectively eliminate investment income post the first quarter?

[J. Michael Bischoff:]

Larry, that's a very good question. We do have investments in a number of other private equity firms. But the issue really that has caused running through our P&L is the accounting treatment for private equity firms when they hold a public company. And essentially, that was AXIS that Trident II held. And so when they marked it to market for each quarter, we would have to realize that through our P&L in the subsequent quarter. And so with Trident II essentially being closed down, it essentially then means that we would really not have, after the first quarter, much running through our investment income line.

[Operator:]

Moving on, we'll hear from Mike Nannizzi with Goldman Sachs.

[Michael Nannizzi:]

Just wanted to expand, if I could, a little on the kind of pricing and market conditions commentary. Where are you seeing the impact of firming market conditions in the U.S. impacting your results, whether on a revenue or margin basis? And then just one follow-up.

[Daniel S. Glaser:]

Okay. Peter?

[Peter Zaffino:]

The pricing, if you translate it to our results, again, we saw some changes in the market based on Sandy in the fourth quarter. And I really put them into 3 categories. One is pricing. So if you had Northeast exposure, loss-affected or flood-exposed, you started to see pricing. There has been as much focus on coverage. I mean, we saw a lot about storm surges. Is it in the wind or is it in flood? Deductibles increasing. And then looking at capacity and how that's going to be impacted in the future. The U.S., our business has been moving more to commission, but we still have a split of a fee and commission, and then we also have a business that's well populated with high deductibles, or SIRs, which will be less affected than a guaranteed cost and what you perhaps are seeing in the market for what's happening with pricing. So overall, I think the pricing had a modest impact and in line with what we said for the global index, which was in the 1% to 2% range.

[Michael Nannizzi:]

So does the fact that you're securing better rate for your customers than the market overall, how -- does that manifest in retention? Does that -- like other than just pure margin, how do you see firming market conditions in the U.S. impacting your business overall?

[Peter Zaffino:]

The firming conditions, I think, will have a couple of impacts. One would be, as you mentioned, on the retention. So we will tend to retain more clients based on the service capabilities, our ability to execute on claims. And I also believe that there's a flight to quality when there's a challenge in placing business. And we have tremendous expertise in our infrastructure for line of business, for industries' segments. And we're well represented across the U.S. in terms of how we trade with markets. And so our clients tend to want to stay and we have prospects that tend to want to come. So I would expect to see that new business trend to be strong, retentions to be strong and for us to be able to grow as a result of it.

[Michael Nannizzi:]

Great. And then just, Dan, if I could, just on deployment. About $1.3 billion-ish to spend, if our math is right, maybe half of that dividends and pension. First question is, is that still the right way to think about that? And second is how do you think about the other half? I mean, are you biased towards building out MMA, the agency platform? Or do you see more value on the buyback side?

[Daniel S. Glaser:]

Yes, okay. So I do think that our dividend is pretty sacrosanct over the last 50 years, and that's going to be a call on our free cash each year. Pension, as Mike was saying in his script, will vary in terms of discretionary contributions to pension based upon the economic rationale and the tax efficiency of doing those sorts of things. And that may vary over time. In terms of the balance between acquisitions and share repurchase, I would say we are always focused on creating value for shareholders. And so therefore, we are looking at, in making acquisitions, what adds to the strength of Marsh & McLennan Companies, what creates additional value that we would be able to then achieve over the mid- and long-term. And our own thought process is that as long as we acquire well, we should be able to build more value through acquisitions than any other means. Having said that, acquisitions, even when you have a reasonable pipeline, you can't predict year-by-year of how much you're going to spend with acquisitions. And so therefore, share repurchase remains a very viable and appropriate way for us to utilize excess cash. Buying back around $700 million over the last 2 years has been pretty consistent and a significant sum. We have a share repurchase authorization up to $1 billion. Clearly, authorizations are board decisions, but we would expect that our board would consider that sort of thing in the future. And certainly, we think that share repurchase would be a good use of excess cash when we don't have acquisitions to make.

[Michael Nannizzi:]

So acquisitions first, then buybacks?

[Daniel S. Glaser:]

Correct. I wouldn't say acquisitions. I would say good acquisitions, accretive acquisitions.

[Operator:]

Next, we'll hear from Jay Cohen with Bank of America Merrill Lynch.

[Jay Adam Cohen:]

Two questions. The first, in Mercer, with the change in the presentation where you're, I guess, getting rid of Outsourcing, I assume that will just be merged into the other businesses.

[Daniel S. Glaser:]

Julio?

[Julio A. Portalatin:]

Yes. Thank you, Jay. Yes, I want to make it clear that I certainly wouldn't qualify our change as getting rid of Outsourcing. We are very much committed to keeping our Outsourcing business alive and well and a viable option for our clients. We know that there are administrative supports that are necessary in order for us to be able to drive the high-margin business and value proposition to our clients for core offerings like Retirement, core offerings like H&B or Health & Benefits, and of course, Investments. And so with that, we will have the Outsourcing that supports those businesses be part of the P&L in those businesses and also part of the overall strategy to expand and broaden our client relationships. So Outsourcing will exist inside the lines of businesses that it supports.

[Jay Adam Cohen:]

And when I said get rid of it, I just meant from a financial reporting standpoint. But thanks for that for mentioning that. And Julio, while you're on the phone there, can you talk about the exchange that you launched and what your outlook is? And when do you think it could actually help from an earnings standpoint?

[Julio A. Portalatin:]

Thanks again, Jay. As many are aware, just a few weeks ago, we announced the launch of Mercer Marketplace, which is our active exchange for the U.S. market. And we're really excited about the new offering. Mercer Marketplace is a private, active benefit exchange designed to help employers and their employees more effectively manage their benefit costs while providing employees and their dependents with superior choice, flexibility and service. So the employees of our clients will have access to a broad array of traditional as well as voluntary benefits from multiple insurance providers. And along with education tools, which is very important, to support and help employees customize their choices and to better fit their needs and make informed decisions. Our exchange can be scaled for employees with -- or employers with very few employees, as well as the largest of employers with thousands of employees. It goes live for enrollment for the 2014 enrollment period, which means we'll be up and going by the end of the year during the enrollment time. So we're in discussions with several of our clients, as you can imagine, there's been varying degrees of interest as we move forward. I really want to focus on the fact that the whole exchange arena continues to be a developing type of market for us and various others. And I think what's important now is to ensure that we have some sort of distinction in the way we are offering our exchange versus others. So Mercer's Marketplace, as I said, is going to be very scalable. It will offer a complete set of solutions and products across a full scale, ranging from medical, life, disability, et cetera, et cetera. The platform accommodates both insured and self-insured plans. I want to make that clear, it accommodates both insured and self-insured plans. And we'll offer a lot of plan designs and support a broad defined contribution strategy for our health and welfare benefit. So as you can see, it's going to be quite a launch for us as we move forward with it. There will be some really good competitive advantage, and we'll continue to actually calibrate our investments for the Mercer Marketplace as we validate proof of concepts and testing that we'll be doing along the way to ensure that it really appeals to our target audience.

[Operator:]

Next, we'll hear from Ray Iardella with Macquarie.

[Raymond Iardella:]

Maybe just wanted to touch a little bit more on sort of the restructuring in the quarter and the reorientation within Mercer. And I know kind of one of the beneficial points in the past is your ability to absorb some of the restructuring costs. I'm just curious -- and I know, Mike, you gave some numbers around the adjustments to operating income. But restructuring costs are up year-over-year. So I'm just curious are you guys planning to change sort of your ability to absorb restructuring costs? Kind of how should we think about potential restructuring? Or is sort of the operating platform such a way that you guys would like at this point?

[Daniel S. Glaser:]

Okay, Ray. So it's Dan here. There's no change in our philosophy with regard to restructuring and there is no thought in our minds that our ability to absorb normal course types of changes to the business and structures is any different than it has been over the last couple of years. So I would look at this more along the lines of Julio and his team doing a kind of drains up review, comprehensive review of their business. And usually, a new CEO gets about one crack at that. So well done, Julio, and we move on from here.

[Raymond Iardella:]

That's helpful. And just, I guess, following up on cash on the balance sheet. Just curious, do you know how much cash you guys hold onshore versus offshore at year end and maybe talk about how to get that cash offshore back into the U.S.

[Daniel S. Glaser:]

Okay. Mike, do you want to take that?

[J. Michael Bischoff:]

Sure, Dan, I'd be happy to. Well, actually we were very effective in bringing our cash onshore. At the end of the year, we have $933 million of cash in the U.S. out of the $2.3 billion.

[Raymond Iardella:]

Okay, that's helpful. And then last quick, if I can squeeze it in. In terms of debt, you guys have a maturity coming, I guess, this month. How should we think about debt, given your debt to capital is around 30% and debt to EBITDA is around 1.3x?

[Daniel S. Glaser:]

Mike?

[J. Michael Bischoff:]

Thank you, Dan. You're absolutely right. We have a $250 million debt maturity this month. Let me first say that we have no plans to actively delever our balance sheet beyond where we are today. We think with the growth in the earnings that we'll see -- not just the last few years but we'll see in the coming years, we'll effectively continue to delever the balance sheet and improve our credit metrics, which are important to us. That said and the fact that we were very successful in bringing back quite a bit of cash into the U.S. for a variety of uses, the timing of when we essentially will fund that debt maturity over the course of the year, I think, is still open. So we'll be very attentive to when we go back into the debt markets. So it will be done this year, but the timing of it is yet to be determined.

[Operator:]

Moving on, we'll hear from Josh Shanker with Deutsche Bank.

[Joshua D. Shanker:]

Coming back to a little bit on Greg's question earlier in the call. Can you subdivide a little bit the growth rates for middle markets, upper middle markets and large case business, so we can like sort of try and then pace out what 2013 is going to look like?

[Daniel S. Glaser:]

Yes. No, we're not going to segment our business on growth rates because we feel if we did that, we would then do it every quarter and it would create a lot of management time to create the information and vet it properly for external reporting. Let me just say this. The small commercial business in the Marsh & McLennan Agency is probably the area that is most appropriately matched against the peer group that some of you have been thinking about. And in our view, the core brokerage business within Marsh & McLennan Agency is performing at our expectations and is consistent overall with what we would expect looking at their peer group.

[Joshua D. Shanker:]

Okay. And which is a smaller peer group, obviously.

[Daniel S. Glaser:]

Yes, that would be a smaller peer group.

[Joshua D. Shanker:]

And so in thinking about in terms of the opportunity going forward, when you were looking at the pricing, I mean, we've seen that there's obviously the tailwind coming from the middle market segment. What do you think is the -- this time next year, what will we be seeing for the large case business in terms of sort of the tailwind? Do you think it will catch up to the smaller middle market business in terms of pricing?

[Daniel S. Glaser:]

There's a couple of ways to approach that question, Joshua. I think on an overall sense, in Peter's commentary or answer to the previous -- one of the previous questions, he was saying you should really look at the year of both top line for Marsh overall but also specifically with regard to the U.S./Canada division. I think one interesting point, which might be a little bit different, which I'll ask Peter to expand on, is that Marsh has made significant progress over the last few years converting some of their book and growing the commissionable book in some of their offerings. So Peter, you want to expand on that?

[Peter Zaffino:]

Sure. We have new business each year that represents around 15% to 20% of our revenue and we have been very conscientious of trying to convert the new business to as much commission versus fee. And I think in the past, we had said that we are around 50-50 fee versus commission. And now when you look at the -- in fourth quarter, the portfolio in its entirety, it's now around 40% fee, 60% commission. And that is a positive because, again, one, it is more transparent with clients, although certainly fees are transparent. Is that it's more aligned with the market in terms of when you'd perhaps see some pricing increases, you may perhaps see less, depending on what geography, what line of business, what segment and what's happening at that point in time in those specific areas.

[Joshua D. Shanker:]

Does that make any changes in employee retention if you're higher commission rates?

[Peter Zaffino:]

I'm sorry?

[Joshua D. Shanker:]

If more of the business is coming from commission rather than fees, does that change employee retention characteristics at all?

[Daniel S. Glaser:]

When we look at revenue retention, any lift, whether it's fee lift or commission lift, would benefit revenue retention. So clearly, it doesn't do anything with account retention. But with regard to revenue retention, it would. But we try to get higher fees as well when we talk year-over-year with our clients. So really, any lift in fees or commissions help revenue retention.

[Operator:]

Next, we'll hear from Adam Klauber with William Blair.

[Adam Klauber:]

In Consulting, it looked like both H&B and also Outsourcing were pretty strong for the quarter. I guess, 2 questions. One, was there any project revenue that helped either of those segments? And would you say the outlook going into 2013 for both those areas is continuing strong or even getting better as we go into 2013?

[Daniel S. Glaser:]

Julio?

[Julio A. Portalatin:]

So, thanks for the question. Let me start off first by saying that we were pretty pleased with the overall results that we had at Mercer on the revenue side for the entire year and the fourth quarter as well. You can see in the H&B line, that actually has been picking up quarter-by-quarter with this fourth quarter now being our strongest. We continue to see a lot of benefit and a lot of consultancy work coming out of all the clarification that happened around the Affordable Care Act. There is significant amount of activity with both state consultancy that we're doing, as well as client consultancy that we're doing. And we continue to also see a lot of interest in understanding how to be able to control costs and bring extra choice to employees, and thus a lot of interest in discussing and evaluating different options and approaches going forward. I think that it's fair to say that the H&B business is going to continue to see that type of demand of our services and I think we're well positioned for that. And I would ask you to think about that more along the lines of what the annual growth rate was for H&B, which was somewhere around 7% as opposed to the fourth quarter growth rate. I think it's more indicative to look at full year. And as far as Outsourcing is concerned, that was benefited by some, let's say, project work, out-of-scope project work. It continues to benefit from that. Outsourcing could be a little lumpy as the year goes on because of that very nature of project work that we can -- that we get. We saw that in the fourth quarter. It will continue to be kind of lumpy. And again I would point you to the annual growth rate for Outsourcing of somewhere around 4%.

[Adam Klauber:]

And one follow-up on the health care exchange. Do you have or at what point will you have a, I guess full suite or adequate suite of health insurers as part of that exchange? And also how long do you think it will take you to be up to speed to handle a large national client?

[Julio A. Portalatin:]

Yes, we'll be -- well, let me take the first part of the question first. As you can imagine, we're in active discussions right now with carriers. There is a lot of interest coming from them and I'm sure that soon enough we'll have an opportunity to discuss more specifically how many we'll have on as we go into the 2014 enrollment period that, of course, will take place later on in 2013. As far as going forward and where do we see it developing, I think as I mentioned earlier, there's a lot of moving parts in this, not just for ourselves but for our competitors. I think those who are going to win in this space are ones that can really understand the distinction and differentiation that'll be necessary in order to be able to have the appeal that is needed in the marketplace and in the targets that we're going to be focusing on. So stay tuned, I guess, is the best way to say how we're going to move forward. And there'll be development and we'll continue to keep you abreast of them as they continue to develop throughout the year.

[Daniel S. Glaser:]

If I might just add to that for a second. I mean, one of the reasons, and there were many reasons of moving the U.S. Consumer business to Mercer, is Julio's, in particular, expertise and leadership roles that he has had in his career in consumer businesses. And Julio, do you want to just expand a little bit on the call center operations that we're moving over?

[Julio A. Portalatin:]

Yes. There was a question earlier that talked -- that had asked a little bit about some of the reasoning perhaps for bringing the Consumer business of Marsh over. And I think there's a lot of pretty obvious ones. One is that you see the converging of the core medical health benefits and voluntary benefits happening more and more. There's a blurring of the lines between those 2 offers. We have a very expansive way to be able to handle that on the Mercer side and it just makes sense to put it together for the U.S. in that fashion. Also, as importantly is that as we build an appropriate offering for our exchanges, is an important element, as Dan mentioned, of the Consumer business that actually incorporates licensed agency call centers that allows us to obviously fulfill then more adequately the type of demands that we're going to see through the exchange. And then since Dan mentioned it, I guess I'll mention it as well, and that is that I have had extensive consumer market experience internationally and in the U.S. over my previous lives prior to joining Mercer, and certainly look forward to be able to bring more value out of that business for our organization as we go forward into the future. So there's a lot of really good reasons for doing this. And I think it does give us some sort of strength and differentiation in the way we'll be going through exchanges, as well as other aspects I mentioned on the voluntary and core Health & Benefits.

[Adam Klauber:]

One quick follow-up. As you further develop the exchanges, will expenses -- will you need to ramp-up expenses in the near term to do that?

[Daniel S. Glaser:]

Julio?

[Julio A. Portalatin:]

Thank you, Dan. We are carefully assessing the investments that are necessary and the returns that we should get from that investment or those investments on a short-, medium- and long-term basis. We're very disciplined about that. We'll continue to calibrate that appropriately. Don't want to overinvest early, don't want to underinvest. So I think it's really one of those things that we'll continue to look at. We'll continue to make sure it's properly aligned. But the focus is and continues to be margin expansion at Mercer, okay? We've had it in this year, we expect that we are going to continue down that path going forward. And we believe that exchanges will be a part of being able to contribute to that margin expansion as time goes on.

[Operator:]

We will go to Paul Newsome with Sandler O'Neill.

[J. Paul Newsome:]

A little bit of a follow-up here. Where exactly is housed this sort of critical, smallish business -- basically the 50 under lives and other type businesses at Marsh? I'm guessing it's pretty small. I know that Marsh Agency writes at least some of it, but geographically, where should we be looking for it when we get to that point where we need to see how things change?

[Daniel S. Glaser:]

If I can understand your question properly, I'll just rephrase it and let me know if I've got it right. You're looking to where we have essentially H&B business in the 50 lives or under category.

[J. Paul Newsome:]

Right. Because I think that's the business that is most likely to be changed one way or the other at the end of the year.

[Daniel S. Glaser:]

And you're right. We would have some of that business in Marsh & McLennan Agency and some of that business in Mercer. But even if you put them together, it would not move the needle for us in either H&B or our overall revenue for Marsh or Mercer. We just don't have a lot of that business.

[J. Paul Newsome:]

Is that business -- in your view, I know it's small. But maybe you'll have an opinion because I think it's a bit -- a much bigger issue for others that you'd like to voice. Is that business going to increasingly a self-insurance model? Or do you think it will just all go to the exchanges?

[Daniel S. Glaser:]

Yes. I think ultimately, because we're not large in that space, we read all the same commentary that you do. I think you can be comfortable that we're not going to -- we don't have strategy to drive into that space.

[Operator:]

Our last question today will come from Thomas Mitchell with Miller Tabak.

[Thomas Spikes Mitchell:]

In the risk side of things, the insurance brokerage business, I sort of tried to work with what I think of as a classic model of exposures, growth in exposures times growth in rate times underlying inflation and the values of things that are being insured times whatever your average fee or commission is. Now when I think along those lines, and I'm sure you follow this, you must think about it better than I do, the question that I come up with, if we look at just from your perspective the difference between U.S. and International with respect to the general trends in those 4 factors, is there something that emerges clearly? Because there is a clear contrast between your 3% annual growth rate in the U.S. and what underwriters were saying about the opportunities to write business that was available to them in the fourth quarter. And I'm wondering if you could spell it out a little more clearly.

[Daniel S. Glaser:]

I think for the last number of years, we have grown faster internationally than we have grown in the U.S./Canada division. And the underlying factor that drives that is there is more growth in the world than there has been in the developed U.S./Canada division. And so we have been grinding it out in U.S./Canada and in other -- some other parts of the developed world with good organic growth strategies. And we're pleased to be growing most often above GDP, even in the developed world. But we're -- in the RIS side, we're in 90 different countries. And so when there's more growth in the world, we're there to catch it. Now some of that growth frankly comes from the developed world into the developing world and so our client relationships in U.S./Canada and in Europe, to name 2 parts of the developed world, we capture in places like Latin America, Asia and Africa. But I wouldn't read too much more into it. There's more GDP growth outside U.S./Canada than there is inside. And that's the main factor that you see a differential growth rate. Thank you. And thank you, operator. Before ending this call, I'd like to just reiterate how honored I am to lead Marsh & McLennan Companies. I will keep a keen focus on 3 core constituencies

[Operator:]

And that does conclude today's teleconference. Thank you, all, for joining.