Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Fourth quarter and full year 2013 financial results and supplemental information were issued earlier this morning. 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 risk 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 MMC 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 the call over to Dan Glaser, President and CEO of Marsh & McLennan Companies.
Thanks, Shirlon, good morning, and thank you for joining us to discuss our fourth quarter and full year results reported earlier today. I'm Dan Glaser, President and CEO of MMC. Joining me on the call today is Mike Bischoff, our CFO. I'd also like to welcome our operating company CEOs, Peter Zaffino of Marsh, Alex Moczarski of Guy Carpenter, Julio Portalatin of Mercer, and Scott McDonald, who was named CEO of Oliver Wyman Group on January 1st. Scott succeeds John Drzik, who has moved to Marsh to become President of Global Risk and Specialties, overseeing Marsh's global industries and practices, analytics and technologies, and the Insurer Consulting Group. John has also been named chairman of the newly formed MMC Global Risk Center, where he will strengthen collaboration on risk issues across the firm.
This exemplifies the depth of our senior management team and our successful efforts to move talent throughout the organization. Also with us this morning is Keith Walsh, Head of Investor Relations. I am very pleased with our fourth quarter results, which capped an excellent year for MMC. Underlying revenue growth was 4%, exceeding the increase in underlying operating expenses as it has for 22 of the past 23 quarters, a record that stands out in the industry. Our consolidated adjusted margin rose 130 basis points to 16.3%, our highest fourth quarter margin in a decade. In the risk and insurance services segment, adjusted operating income grew 9%, and the margin expanded 80 basis points to 20%. Marsh had strong underlying revenue growth of 4% in the quarter. The international operations rose 4%, and the U.S. Canada division grew 3%.
Guy Carpenter generated underlying revenue growth of 6%, its best performance in 2013. In the consulting segment, adjusted operating income grew 16%, and the margin expanded 160 basis points to 14.9%. Mercer grew underlying revenue 4% for the third consecutive quarter, driven by outstanding results in health and investments. Oliver Wyman's 5% increase in underlying revenue was its strongest performance in the past six quarters, reflecting significant growth in financial services. For the year, we delivered underlying revenue growth of 3% while managing underlying adjusted expense growth to 1%. This produced strong operating leverage with 14% growth in adjusted operating income and an increase in the adjusted operating margin of 180 basis points to 17.4%. Adjusted EPS increased 15%. In 2013, each of our segments produced double-digit growth in adjusted operating income.
Notably, this was the fourth consecutive year of double-digit growth in adjusted operating income and margin expansion in both segments. In recent years, we have made tremendous progress in improving productivity, capturing efficiencies, and reducing risk. This progress was driven in part by investments in our businesses. One indicator of our level of investment is capital expenditures, which has increased over 40% from two years ago. We are well positioned to deliver on our long-term goal of 13% annual EPS growth. In risk and insurance services, revenue for 2013 was $6.6 billion, with underlying revenue growth of 3% at Marsh and 5% at Guy Carpenter. Adjusted operating income increased 11% to $1.5 billion. This represents the sixth consecutive year of double-digit growth in adjusted operating income. The adjusted margin rose 150 basis points to 22.1%, the highest in a decade.
To put the outstanding long-term performance of this segment into perspective, since 2007, adjusted operating income has more than tripled, and the adjusted margin has expanded by more than 1,300 basis points. At Marsh, revenue was $5.4 billion in 2013, as all major geographic regions contributed to underlying revenue growth of 3%. In the U.S. Canada division, underlying growth was 2%. The international division expanded 4% as solid underlying revenue growth continued throughout Marsh's vast international footprint. Marsh continued to produce strong levels of new business with $1.1 billion for the year, a new annual record. Last week, Marsh & McLennan Agency announced the acquisition of San Diego-based Barney & Barney, the country's 34th largest insurance brokerage firm with $100 million of annual revenue, 500 employees, strong leadership, and an outstanding record of growth. Barney & Barney will be MMA's Western regional hub.
Marsh has also continued to expand its international footprint. Recent acquisitions include the leading insurance advisors in Peru, the Dominican Republic, and most recently in Scotland, where Marsh acquired Central Insurance Services. Guy Carpenter produced record revenue of $1.1 billion in 2013, an increase of 5% on an underlying basis. Three-quarters of this growth came from outside of Guy Carpenter's 25 largest clients, reflecting our strategy to broaden relationships by customer size and geography. Revenue growth was broad-based across North America, international, Global Specialties, and U.K. Facultative. Guy Carpenter has grown organically for 20 straight quarters with average annual underlying revenue growth of 5%. As a result of building headwinds, including record levels of capacity, higher risk retentions by clients, and significant rate reductions seen in January, we currently expect modest underlying revenue growth at Guy Carpenter in 2014.
In 2013, the consulting segment continued to make substantial progress to increase profitability. Revenue was $5.7 billion, up 2% on an underlying basis. Focused expense management held underlying adjusted expenses flat, producing adjusted operating income of $847 million, an increase of $100 million or 13% from the prior year. The segment's margin increased 160 basis points to 14.9%. Mercer had solid underlying revenue growth, fueling record profitability. Revenue was $4.2 billion, an underlying increase of 4% for the third consecutive year. This was driven by health and investments, which led the way with increases of 6% and 9% respectively. Growth was spread across all geographic regions. We have experienced success in the U.S. healthcare exchange space with the launch of Mercer Marketplace, which just last month became a standalone division within Mercer. Mercer Marketplace has delivered a differentiated platform for both middle market and large clients.
Oliver Wyman's underlying revenue growth steadily improved throughout the year, culminating with strong fourth quarter growth of 5%. For the year, revenue was $1.5 billion, a modest decrease from 2012, as solid growth in financial services, Lippincott, NERA, and the international regions was offset by declines in other practices. In summary, the three-year period, the adjusted operating margin improved 330 basis points. We are well-positioned to deliver on our long-term goals, which should lead to superior returns for our shareholders. With that, let me turn it over to Mike.
Thank you, Dan, and good morning, everyone. In the fourth quarter, MMC's revenue was $3.1 billion, an increase of 4% on an underlying basis. Adjusted operating income rose 13%. The consolidated margin increased 130 basis points to 16.3%, and adjusted EPS grew to $0.57 from $0.52 in the prior year. Both GAAP and adjusted EPS included $24 million of expense or $0.03 per share due to the early extinguishment of debt. Full-year results. MMC's revenue rose 3% on an underlying basis to a record $12.3 billion. Adjusted operating income grew 14%, with the margin increasing 180 basis points from 15.6% to 17.4%. GAAP EPS increased 14%, and adjusted EPS grew 15%. Investment income was $11 million in the fourth quarter. While difficult to forecast, we anticipate investment income could approach $10 million in the first quarter.
MMC's tax rate for the year was 30% on both a GAAP and adjusted basis, which is also appropriate to use for modeling purposes this year. Interest expense in the fourth quarter decreased to $43 million, which reflects the debt funding that occurred last fall. Most likely, we will utilize the commercial paper market this quarter for the first time since 2007, and as we approach the July $320 million debt maturity, we will refine our thinking concerning the amount and term of the refinancing. Let's turn to MMC pension plans. We would like to update you on the funded status, cash contributions, changes to our U.K. pension plans, and pension expense for the year. At the end of 2012, on a GAAP basis, the net funded status of our global defined benefit plans was a deficit of $1.5 billion.
At the end of 2013, this has moved to a surplus of approximately $100 million. The significant improvement was due to strong market returns, cash contributions, and an increase in the discount rate of 85 basis points in the U.S. Last year, we made total cash contributions to our defined benefit plans of $650 million. The anticipated funding this year is approximately $200 million. Changes to our U.K. pension plans. After an in-depth review of our U.K. retirement plans, we are implementing a new defined contribution plan effective in August. We are moving from several diverse plans to one unified competitive DC offering for all U.K. colleagues. We anticipate very modest impact on profitability from this change.
Based upon the year-end measurement, which takes into account such factors as the discount rate, asset returns, mortality, inflation, salary increases, and cash contributions, annual pension expense will decrease in 2014 for the first time since 2008. We anticipate the year-over-year decline in pension expense, net of compensation considerations, will be approximately $0.10 per share. The impact of foreign exchange on MMC's operations throughout the year could partially offset this benefit. If exchange rates at the end of January hold for the remainder of the year, EPS will be reduced by $0.05 per share. Less than half of this relates to our four major currencies, GBP, EUR, CAD, and AUD. Unlike prior years, the currency impact from emerging markets could be meaningful. We expect minimal impact in the first quarter from the foreign exchange, with the greatest impact coming in the second quarter.
In summary, we believe the net result of the pension benefit and the FX impact could increase EPS by $0.05 this year. Moving on to cash. Cash on the balance sheet at year-end was $2.3 billion, of which $940 million was in the U.S. These cash levels anticipate payments for variable compensation, several recent acquisitions, the largest being Barney & Barney, and returning capital to shareholders. Our cash utilization in the fourth quarter included $139 million for dividends and $150 million to repurchase 3.2 million shares, marking seven consecutive quarters of share buybacks. For the year, we bought back 13.2 million shares for $550 million. We plan to continue our share repurchase program in the first quarter. With that, I am happy to turn it back to Dan.
Thank you, Mike. Operator, we are ready to begin Q&A.
The question and answer session will be conducted electronically. To ask your question, please press the star key followed by the 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 to pose your question. We'll have our first question from Gregory Locraft with Morgan Stanley.
Hi. Good morning, guys. Great quarter and great year. Congratulations.
Thanks a lot, Greg.
Wanted to ask a bit about the organic growth, specifically in Guy Carpenter. It was the best quarter of the year, and your competitors are in some ways showing the same, not quite as strong, but still decent growth also. What's the disconnect between the top-line performance in global reinsurance brokerage and the pricing declines that seem so widespread across the reinsurance marketplace? If you could tie that to why you think you'll be able to grow the business this year, as you stated in your outlook, that'd be great.
Thanks, Greg. It's Dan. I'll take the first part of that and then hand over to Alex to give a bit more detail. I'd say a few things. You have to really look at what has happened in reinsurance brokerage and advisory over the last number of years, 5, 6-year period. There's been very few players who have able to build out very strong advisory capabilities. It's not just a reinsurance transaction that drives results anymore. In many ways, Guy Carpenter is far closer to their client base than any other advisor with those clients. The C-suites of reinsurance companies come to rely very heavily on the advice and capabilities, analytic capabilities, relationship of Guy Carpenter. It's a more balanced organization than it was in the past.
Having said that, obviously rating levels have an impact because they do participate in transactions, it may be more muted than it had been 5 or 10 years ago. Alex, you want to give us some more detail?
Yeah, sure. The fourth quarter was a great quarter for us. It's not a very big cat quarter, and it's really in the cat space that prices have fallen so much.
First quarter is quite a strong cat quarter for us. However, the reason why we believe we'll grow is 1, we have a very effective segmentation strategy, which has allowed us to increase our penetration in the mutual market, the excess and surplus markets. Our international footprint continues to grow. We feel good that we can eke out some growth in this year.
One thing I would just like to say is that because January 1 is a big date and is a big transactional date, when we're looking at Guy Carpenter for the year, we're expecting to see modest growth, not quite sure what we'll see in the first quarter. We're really looking at GC over the course of the year rather than in one individual quarter.
Okay, great. Shifting gears entirely to just the capital deployment. You guys bought back a lot of stock on the year. At least you bought back more than you have in many years, yet the share count still is not yet going down. When do you expect the impact of the more aggressive share repo to impact the share count?
Okay. Well, first of all, I'm glad you noticed that we've been buying back more shares, because that is certainly something that we are committed to, and being really a consistent buyer of our own company shares is something that this management team is very interested in. Your specific question in terms of share count and bending the share count, is important to us as well. Mike, you want to give us some more flavor?
Yeah, I'd be more than happy to, thanks for the question, Greg, I apologize that it's going to be a little bit more detailed, but I think you need to have color in how we look at it. As I talked on the third quarter call, if you go back to the end of 2009, the overhang on potential shares outstanding because of colleague equity grants in previous years was about 69 million shares. That included stock options and restricted stock units of various kinds. If you look at what that overhang has worked its way down to by the end of this year, it was actually 28.6 million shares.
What that meant, Greg, is that in the last two years, we've seen a significant amount of stock option exercise from prior years is probably close to 13.5 million total shares, including restricted stock grants in 2012 and about 14.5 million in 2013. If you do the math, if 14.5 million shares were required for this overhang to work down in 2013, and we repurchased 13.2 million shares, the actual net change was 1.2 million. Now to go to your heart of your question with that history and backdrop, we think that overhang has been significantly worked down. We can never totally know what the amount of stock option exercise would be in any given year.
In aggregate, we're modeling for 2014, and most likely 2015, only half the levels that we saw in 2012 and 2013. As Dan and I have indicated, we plan to continue our share repurchase program. It's a balance with regard to other return of capital to shareholders, acquisitions, investing in the business. We think that we'll start to bend that curve down this year.
Thank you.
Sorry. You have something else, Greg?
If I may, just to clarify, Mike, that was incredibly detailed. Roughly half of what you've seen in terms of the exercises, that's roughly $7 million. You just bought back 13 million shares. We should be seeing, I'm just giving you the math back, a 5-plus million decrease in share count, all else being equal, if you were to do the same exact buyback activity this year as before. Is that what you said?
That's what I said, all else isn't equal. The average stock price, we would hope, goes up this year, we can't control that factor.
That's perfect. Great. Thanks for the clarity.
I imagine that sometime in the next month, some of our colleagues will be expecting to receive some more shares.
Well, fortunately, we took that into account.
Great here, guys. Thanks.
Thank you, Greg.
Thanks, Greg. Next question, please.
Larry Greenberg, Janney Capital.
Hi. Mike, just a little bit on the pension. Is there a big difference on the impact of financial markets on the U.S. versus the U.K.? Is there some negotiating or massaging that goes on the U.K. side of things? Secondly, just looking for a little bit of an update on Marsh agency and where things stand there.
Okay. Mike will handle the first part of that question, then we'll pass over to Peter Zaffino, who will give us some more color around MMA, the Marsh & McLennan Agency. Mike, pension.
Thank you, Dan. Larry, let me talk to the point, Larry, if I don't specifically address your question, please come back to me before we go to agencies. If you look at our global plans, at the end of 2013, there are about $13.6 billion of assets, and as I indicated, about $13.5 billion of liabilities, which puts us on a global basis, a net surplus of $100 million. If you look at the size of the respective major geographies, the U.K. is our largest plan Very overfunded, and assets about $7.7 billion, and liabilities on a GAAP base is about $6.8 billion. The next question that you asked, I think with regard to the mix of the assets that are allocated or the portfolios roughly in the U.S. and the U.K.
The U.K., we've disclosed that in the 10K, the U.K. is a little bit more geared towards bonds. I think it's 50% of what they call return-seeking assets, heavily geared towards equities and 50% bonds. The rate of return on those assets is typically a little bit lower than in the U.S.
Okay, thanks.
Yeah. Just before I hand over to Peter, a couple of things just to round out pension, your comment about negotiations or in the U.K. is probably just in the context of the U.K. has a different format to where large companies have trustees of.
Right
Mike and his team do work with the trustees to essentially plan for our fulfillment of our obligations under the pension plans in the U.K. The U.K. trustees have their own specific responsibilities with regard to being a guardian of the U.K. pension plans.
Is it fair to say that in the U.K. it's not driven quite as much by the numbers that we tend to focus on here in the U.S.?
I think in the U.K., certainly the same sorts of issues in terms of, well, what's the discount rate? What's the market return? What's the return on plan assets? What is the allocation between different categories of asset classes, mortality, are all similar factors. The one difference is in the U.K., there is an independent group of trustees who take their own view and have their own advice in terms of what all of those variables mean in taking together. The U.K. also has different types of rules and regulations, and a different measurement system, where we clearly, as a company, look at our plans on a GAAP basis around the world where we have DB plans. In the U.K., they look not only at a GAAP basis, but also on a, what they call a technical provision basis.
Dan, let me just add one other thing is, Larry, as you can see, it's extremely complex looking at the plans, not only in the U.S. and the U.K., but I have to say we have fantastic advisors, teams on both sides of the Atlantic working with us, literally almost on a daily basis. I'm pleased to report those teams are part of Mercer.
Thanks, Mike. Turning to the agency, I'd just like to start by saying, this has been a consistent strategy over really a five-year period that we started truly executing about four years ago. We will ultimately really reap the benefit of the agency strategy. I just think that hats off to Peter and his team because the reality is, in early stages, as we build out platform hubs, and because we eat all of the deal costs and amortization and all of that, it actually hurts Marsh's overall NOI and the segment's NOI on a margin basis. Clearly, at some day, when we reduce the level of amortization, which is still some years off, then it will be a big help forevermore. This is a clear strategy that the management team has been executing for a number of years. Peter?
Thanks, Dan. As you said, it's been a journey. We have acquired 35 agencies since 2009. Our annualized revenue is approaching approximately $600 million. As Dan had mentioned in his opening comments, we're really excited about the acquisition of Barney & Barney, which is going to be MMA's western region hub. We have a much more of a balanced national platform now. We also made two other acquisitions in January. The momentum is quite strong. Very pleased with the organic growth, certainly in line of what our expectations are, in line with other middle-market brokers within the U.S., and believe that we're building a platform that is going to be the premier agency in the United States over time. We're going to stick to the strategy of attracting high-quality agencies, believe that the pipeline is strong, and very optimistic on the future.
Do you have all your hubs in place now?
We don't have, Larry, a prescription of how many hubs we want for the national platform. I would expect us to do a couple of other acquisitions for hubs. Again, our geographical footprint is getting to be quite strong. The geographic areas where we want to expand is really in a couple parts of the U.S. I think we would do a couple more hubs, but again, no rush.
The watch word for this is not really geography, it's quality. Where there are quality agencies in the United States, regardless of size, we are interested in acquiring quality.
Great. Thank you.
All right, next question, please.
Jay Gelb, Barclays.
Thank you. For the risk and insurance services segment, you mentioned that Guy Carpenter growth could be somewhat slower, but I'm wondering if Marsh can continue to grow faster, even though primary pricing, reinsurance pricing faces headwinds, the economy is certainly recovering. Does that net out to 3% or better going forward?
Yeah. When we're looking at the RIS segment in total, we've been in a world of 3%-5% over the last several years. We think we still live in that world, notwithstanding the headwinds that Guy Carpenter is facing.
Thanks, Dan. I believe in the past you said within that range, RIS can still generate margin expansion?
Yes, that's absolutely right.
Okay. Can you give us a bit more color on the underlying expense growth? I think 1% underlying growth is a pretty impressive achievement. How are you able to keep it there? That 1% may be for the overall company, right?
Yeah, the 1% is for the overall company. In the fourth quarter, RIS grew expenses 3% and consulting grew expenses 2%. Corporate was -4% in the quarter. When we look at it, obviously there's a lot going on under the hood. Our level of expenses is benefited by prior year actions, in terms of capturing efficiency and rolling forward actions that we've already done. The short answer is that we are spending a fair amount of money, not only on colleagues, but on investing for future growth and on operational improvements. The good news is, our search for efficiencies doesn't end. Each year, we have been able to find significant areas in which we could improve the underlying performance of the company, and it actually masks our overall level of expense growth, because generally, when we're finding those efficiencies, we're letting them roll through.
To give you a couple of ideas, we've significantly reduced our real estate footprint over the past five years, and we use space a lot better than we ever have before. Another item is that we've increased the headcount in our own service center in India by over 600 people since January of 2011. We've centralized procurement, which obviously influences demand management, but also gives us spend leverage. I could go on and on. There are literally dozens of items that we have done to attack all other operating expenses. All you have to do is look at our compensation and benefits, which is a leading driver of expense. Our comp and ben, as a percentage of revenue, we finished the year at 58.8%, which is stable to what it has been in the past. We are letting comp and ben flow to our colleagues.
Within our improvements in profitability, I'm very proud of the fact that we've had five consecutive years of increases to the total bonus pool.
Let me just add to what Dan said. You can see that we're putting a lot of investments in the business. We're putting a lot of CapEx. We're putting a lot of money into analytics. The other side of that is that we have a goal as a management team to make MMC a great place to work. As a result of that, we're not going to get the profit improvement on the backs of our colleagues. As Dan said, compensation is up a great degree year after year after year. We're looking at other things that can make the environment more attractive for our colleagues.
Even in the space reduction on real estate that Dan alluded to, our global real estate teams say it's not just an issue of densification, because you can fit more people into square footage, but you end up with a not as hospitable work environment. We've adopted a smart office concept, where we look at the needs and motivational surveys with regard to our staff to make the environment that they work in much more conducive to their lifestyles and work styles. Overall, it's a combination of not only investing in the business, but making MMC a great place for our colleagues as well.
I see. Okay. Just switching gears. Health exchange revenues for contracts signed this year all come in in 2014, correct?
Julio?
They will come on as the continuation of payments come on. We recognize it throughout the year with no big bubble effect in any one quarter.
Okay. That would all be organic growth additionally in 2014, correct?
Well, keeping in mind that we have sold clients that were both with us or with Mercer, and we sold some clients that are new to Mercer. Of those clients that we've sold that were already H&B clients or Mercer clients, we do have an expansion average revenue because we are selling voluntary and ancillary products, so we do get that uplift. Those that are new, of course, you get that. It's not all new coming into Mercer.
Thank you.
Okay. Next question, please.
Meyer Shields, KBW.
Thanks. Good morning.
Good morning, Meyer.
I guess we keep on hearing these reports of slowing economic growth in some emerging markets. Is that something that could temper organic growth in Asia Pacific and Latin America next year?
Well, we read the same reports. Clearly, there's issues in the emerging market. You really have to look at country by country. It's not that the emerging market is some monolithic area that all has the same characteristics. In certain of the countries, the issues are ambulatory or anti-business practices. In other countries, there's political elections, I think in a number of countries in the emerging world, there are elections within the next 12 months, and that has created some level of activity and commentary. Clearly, when we look at our businesses, the emerging market is very important to us in all four of our opcos, but no more so than in Marsh & Mercer.
Having said that, if you look at just the size of our company and where we get our revenue from, tell me how we're doing in the U.S. and the U.K., Australia, Canada, Germany, and France, I put those countries together, and I'll tell you how we did as a firm. The emerging market largely can be additive to us. The great thing about the emerging market is that you get not only the activity in the marketplace from an exposure growth standpoint, there's some mild levels in certain of the countries and higher than mild in other countries of inflation. You get the benefits of GDP growth, albeit that GDP growth in certain places may be slowing.
You also get the benefit of increased penetration, not only of insurance, but also for advisory services that impacts Oliver Wyman and Mercer and Guy Carpenter as well. When we look at the emerging market, it can clearly have an impact on us from a growth standpoint, but we're not overly concerned with it. We have been able to grow through good times and bad in our footprint around the world. There's a lot less competition in some of the countries in terms of having the capability that a company like Marsh & McLennan has in some parts of the emerging world. There's a series of puts and takes, but overall, we're not overly concerned.
Mike brought out in his commentary earlier how, for the first time in a real long time, the emerging markets' weakness against the dollar could have an impact on us this year. Thankfully, we've got some tailwinds on pension that will offset that potential weakness in foreign exchange.
Okay, thanks. That was very helpful. If I can change topics briefly, if I look anecdotally at the deals announced by some of the acquisitive brokers in established markets, there seems to be maybe an above average number of brokerages the size of Barney & Barney that are for sale. Is that a legitimate observation, and is that likely to benefit MMA as an acquirer of hubs or maybe additional hubs in current areas?
I'll take that initially, then I'll hand over to Peter to give some more comment. If you look at all of the major brokers, really, they're a product of acquisitions over long periods of time. Certainly when you look at Marsh & McLennan Companies, all the way back to Henry Marsh and Donald McLennan, who came together and formed Marsh & McLennan, we have proven to be a very good acquirer over a long period of time. There's periods of time, either through concerns about regulation, tax compliance, et cetera, there's also generational periods of time where certain agencies come up in different parts of the world. I think clearly what we have done is built a company, not a franchise, but a company in Marsh & McLennan Companies, which is attractive as a buyer. We don't jump into processes and buy something.
We cultivate relationships over long periods of time. When we look at acquisitions, whether it's in the risk and insurance services segment or any other segment, the first thing that we're thinking about is how does it make us better? How does it give us capability that we don't currently possess? What does it give us in terms of either geography or segment that we don't currently have? That's our thought process. Then after that, it's very much in terms of, is there a chemistry between the teams, and is there a cultural fit? The terms and conditions are largely an afterthought when everything else slots into place. Peter, do you have any other views?
Yes, that was very comprehensive, I would just add that many of the acquisitions that we have made, the agencies have not been for sale. It's just really cultivating relationships over a period of time and making sure that they're aligned with the strategic intent of what we're trying to build. I would keep that in mind. Our pipeline is strong, as I mentioned before, as Dan mentioned, it's really cultivating the relationships, and we've been doing that over several years. I haven't seen any more activity in terms of assets for sale than we have over a period of time. I just think we've been doing a much better job of proactively working with potential acquired assets, and it's worked out quite well.
Okay, fantastic. That was very helpful.
Sure. Thanks. Next question, please.
Elyse Greenspan, Wells Fargo.
Hi. Good morning.
Hi, good morning.
I was hoping that we could talk more about what you guys are seeing in terms of the economic conditions within the U.S. In particular, any changes with exposure changes, and how that impacted the organic revenue growth that did pick up in the quarter, also just in terms of what your expectations are for the U.S. in 2014 as well.
Okay. I'll take the first part of that, then I'll hand off to Scott McDonald to just talk about macro issues a little bit in the U.S. and even in other parts of the world if we might expand that out. Economic conditions are clearly an impact because they drive exposure, whether it's in really in all four of our operating companies. You take a Marsh and clearly areas around construction or economic activity drive some of the values that are used as the exposure base. Payrolls could be rising, which certainly impacts workers' comp as well as Mercer.
When we look at GDP overall, we have been bouncing along the bottom, and we've been in a phase which we've called the grind-it-out years, which is essentially low levels of GDP growth in the developed world, including the United States, and a cautiousness around expansion, that we believe in a lot of ways still exists. Clearly something that may have been a light headwind might be a light tailwind, but it's certainly not buoyant out there. There's still a lot of concerns throughout the market. An awful lot of companies have a cash on the balance sheet, which they're not putting to work. Having said all of that, exposure units is just one of several factors that drive our performance.
Whether our revenue retention and account retention, very important, new business, as you mentioned, GDP growth, also interest rates, also P&C types of pricing. There's a number of factors that drive our performance, and the exposure units are just one of them. Scott, you want to give us a little bit more flavor from Oliver Wyman's perspective?
Sure. Elyse, Oliver Wyman tends to be, or at least our pipeline tends to be a pretty good indicator of the economy. Based on what we see across clients, across sectors and regions, what we're looking at for 2014 is continued growth and activity in the U.S. I think this is supported by the really strong bounce back we had in Q4 with our U.S. business, and that was pretty consistent and across industries. We see continued stabilization in Europe, as Dan highlighted earlier, some increased volatility in the developed markets, driven by a number of things, including the tapering, uncertainties around Chinese growth, and the many idiosyncratic things that Dan mentioned earlier.
One point of caution on the U.S. that I'd mention is that much of the work we did in the second half of 2013, even as our business improved, was driven by cost-cutting, efficiency projects, and restructuring rather than projects focused on growth initiatives. That suggests to us that many companies, particularly in the U.S., are still cautious going into 2014. They're still holding cash, and we may not be in a booming period yet.
Thank you.
Okay. Thank you. Very helpful. Then just switching back to the healthcare exchanges, quickly, following on the 2013 enrollment season, how would you just kind of describe the growth trajectory and any initial comments, I guess, pointing towards 2014 from some conversations that you might have already had with either existing or potential new clients for your platforms?
Julio, you want to take that?
Thank you. Our pace of sales continues. Given our significant reach in both the mid-market and the large accounts, we are seeing conversations beyond just traditional calendar year. That pace of conversations continues to increase. Since our last update, as an example, on client counts and lives, we have sold additional clients onto Mercer Marketplace. To give you an idea, our last update, I think, was in our October call, when we spoke about 220,000 lives. We're up to 270,000 lives now. That includes retirees as well as active across 64 companies. We're pleased. We're really pleased with the progress. I think you'll see that will continue to be the case. Pipeline looks strong. We'll continue to have good consultative discussions as to timing with our clients. We want to make sure we balance that well to their needs.
We're seeing some really good uplift. When everything is said and done, we have always said, and always been very clear that, the impact on revenue in 2014 will be modest. Over a long period of time, we see this as being something that is going to really help on our ability to be able to grow and to satisfy our client needs.
Thank you.
Okay. Thank you very much.
Next question.
Congrats on a great quarter.
Thank you very much. Next question, please.
Jay Cohen, Bank of America.
Okay.
Yes, thank you. Good morning.
Good morning.
A couple of questions. Barney & Barney talked about the revenue that they had. Is there any seasonality there? As we model this, should we assume that comes in fairly evenly over the course of the year?
Okay. I'm not sure if we have that level of depth in this room on that. We are talking about $100 million as part of $12.3 billion, so I'm not sure it would be that impactful either way. Do you have any flavor?
I think it's fairly even, but I would like to caution that we haven't dove into the details of each quarter. I think there's no real seasonality from what we reviewed.
Marsh's quarterization is very interesting. You've got really three quarters which have about 26%, and the third quarter, which is their shortest quarter, is 23%. It's really even throughout the whole year, quarter by quarter, except for the third quarter.
Right. Okay. The other question was on corporate expenses were well below the run rate from the first three quarters of the year. Is this a new level that we should think about, or should we think about more full year numbers as we look at 2014?
Okay. It is true that for the year, corporate expenses are 8% lower than the prior year. That was driven largely by efficiency and also because we eliminated the group president position. Mike, do you want to give us some more flavor?
For very good reason. Yes, thanks, Dan. Thanks, Jay. Corporate quarterly expenses, Jay, can move around quarter to quarter. You're really asking what is an appropriate run rate for the year. I would take our corporate expenses overall not much differently in 2014 than 2013. You could be looking at roughly $44 million-$45 million a quarter. I would say that's the part that you see. There's a larger part on shared services that's allocated to the operating companies. Speaking to what Dan alluded to earlier, our drive for efficiency to continue to find ways to reduce costs, we'll continue to do that. With regard to corporate expenses, in the neighborhood of $175 million-$180 million for the year is probably good for modeling purposes.
Thanks. Great. Thanks a lot.
Thanks. I think we have time for one or two more questions. Next question please, operator.
Brian Meredith, UBS.
Yeah, good morning. I'll be quick here. Mike, I'm wondering if you could just chat a little bit about the kind of cash usage as you look into 2014, particularly with the savings from the pension. Should we expect an increase in CapEx? Is that going to go to share buyback acquisitions? What is your thoughts there?
Mike?
Okay. Thank you, Dan. Thanks, Brian, and good morning. That point just tees it up great because we're in a position of having an enormous amount of operating cash flow, a lot of questions with regard to cash utilization, capital structure, where is this balance and where do we seem to direct it, and we really can't wait for you to come and hear more depth at Investor Day on March 11th.
Thanks.
How's that?
Appetite.
Thanks.
All the secrets of the temple will be revealed on March 11th.
All right. Eagerly waiting. Second question, just quickly, I'm curious, you've kind of provided what your thoughts are on commercial lines pricing on a global basis with some of your recent releases. Is it possible to kind of parse that out as far as what you're seeing at Marsh Agency versus the global basis? Is there kind of different commercial lines pricing dynamics going on in that business?
Why don't we have Peter address that a bit, if I move it over to Alexander Moczarski, he can talk from a reinsurance perspective. I only say that because after 30 years in the business, oftentimes what you see in reinsurance, you end up seeing in the primary markets within 12 months or so. Peter, why don't we start with you?
Okay. Yeah. As a macro overview, we've seen slight headwinds in the international and modest benefit in the U.S. If you break that down into Agency, that would be consistent. They've seen a modest tailwind. The one line of business that seems to still be receiving rate increases every quarter has been workers' compensation. That is the one that has sustained itself, and then some segments within professional liability. Agency has had a mild benefit in the quarter and in the year.
Thanks.
Alex?
Thank you.
Okay, clearly we've been talking about the new capital coming into the cat space, some $40 billion of either private equity or pension capital tied together with stronger balance sheets from the insurance companies as the economies have improved, tied together with centralized buying. All indications are that prices are moving downwards rather than upwards. We've seen that as a result of the cat pressure, the reinsurers have become more flexible on the offerings that they're providing around other lines of business into the overlap. It would indicate that there is no pressure to push prices up at this moment.
Okay, I think we have time for one more question, please.
Paul Newsome, Sandler O'Neill.
Thank you, and congratulations on the quarter. Just a quick one. On the exchanges, does the announcements that a lot of these insurance companies are going to lose money on their exchanges impact your position in that business in any way?
Julio?
One thing that you can count on is that there's going to continue to be evolving changes to how the ACA is going to impact both our clients and carriers. That's why I think any one thing is difficult to point to as far as what the impact is going to be. As an example, we all know they've just announced that there's going to be some changes to the mandate laws, medium-sized companies, 50-99 employees, will have an extra year now till 2016, while large companies, 99+, will have to offer coverage up to 70% of employees instead of 95, which was prior to that's continuing to change.
When you think about carriers, there was always a assessment that was made early on as far as what carrier rates should be on exchanges, on public exchanges we're talking about now, as opposed to private exchanges, much different, two different sets of discussions. On the public exchanges, the assumption was that you would get an adequate distribution of risk, that distribution of risk has not materialized. Whether or not it was a public exchange or just regular core medical, when distribution of risk did not materialize, you have to review your rate levels, you have to make decisions as to what the right rates will be next year. The impact will be what it is, whatever that impact is as a result of those change in distributions between expected and reality.
Yeah. I think just to sum it up, the core point is there's a huge difference between public and private exchanges. In the Mercer Marketplace, which is a private exchange, carriers know who their customers are going to be and can rate them appropriately. A lot of the things that you're reading from insurance companies losing money on exchanges is their comments with regard to the public exchanges.
That's right. Then if I just can add one more thing. Also, on the private exchanges, keep in mind that Mercer Marketplace in particular offers both a fully insured and self-insured option, which means it's wide open for people to consider private exchange Mercer Marketplace as an option.
Okay. Does that answer your question, Paul?
It did indeed. Thank you. Congratulations.
Okay, thank you. Thanks. I'd like to thank everyone for joining us on the call this morning. We look forward to seeing you at our Investor Day, which will be held on March 11th, as Mike mentioned, at the Pierre Hotel in New York. We will provide more insight into MMC's growth and financial strategies, including presentations from the CEOs of each operating company. Finally, I would like to thank our clients for their support and our colleagues for their hard work and dedication in serving them. Have a good day.
That concludes today.