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 Daniel Glaser, President and CEO of Marsh & McLennan Companies. Please go ahead.
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 company CEOs, Peter Zaffino of Marsh, Alex Moczarsk i of Guy Carpenter, Julio Portalatin of Mercer, and John Drzik of Oliver Wyman. I'm also very pleased to welcome Keith Walsh, our new Head of Investor Relations. Keith joined us in December following many years of covering the insurance industry as an analyst at Citi. Following my comments, Mike will discuss our financial results in more detail, and then we'll take your questions. I feel truly honored to be leading this call, my first as President and CEO of Marsh & McLennan Companies.
My principal role as CEO of MMC will be to build on our success, finding new ways to grow, invest, innovate, and realize the full potential of our businesses. As many of you know, I was previously Group President and COO of MMC for over a year and a half, and CEO of Marsh for more than three years prior to that. During my time as Group President, I also briefly acted as the CEO of Mercer before Julio joined the executive team. It was an invaluable experience for me to have run both Marsh and Mercer. Along with the rest of the executive team, I was actively involved in developing our four pillar strategy, first articulated in 2010. Growth in revenue and earnings per share, low capital requirements, high cash generation, and managing the risk profile of the company.
The best thing about our four pillar strategy is that we are executing it well. We have successfully generated both revenue and profitability growth over the last three years. Further, we have maintained low capital requirements and generated strong free cash flow. This gives us a high degree of flexibility to innovate and expand, particularly in growth markets. It also allows us to return capital to shareholders via a strong dividend and a meaningful share repurchase program. The broad four pillar strategic framework will continue to serve us well. Our goal remains to produce at least 10% organic growth in operating income over the long term. Effective capital management, including disciplined deployment of excess cash into acquisitions and share repurchase, should contribute to EPS growth approaching 13%, and with our dividend, shareholder returns around 16%.
Moving on to our financials, I'm pleased with our fourth quarter results, which reflected our ongoing strong performance over the course of 2012. Reflecting on our performance for the year, we delivered underlying revenue growth of 4%, with growth in each operating company for the third consecutive year. Underlying expense growth was less than 3%, which produced 12% growth in adjusted operating income, and our overall margin increased 120 basis points to 15.6%, an excellent performance. Risk and Insurance Services produced another outstanding year. Underlying revenue growth was 5%, with both Marsh and Guy Carpenter contributing. Adjusted operating income rose 12%, with margin expansion to 20.5%, an increase of 130 basis points. This is the segment's highest annual margin since 2003.
To put this into perspective, over the last five years, we have more than doubled the Risk and Insurance Services adjusted margin from less than 9% to over 20%, despite lower fiduciary income, higher pension expense, significant investments in the business, and a challenging economic and pricing environment. This speaks to the strength of our core earnings and underlines the operating leverage we have built into the business. Marsh's underlying revenue rose 5% in 2012, with all geographies contributing. Latin America was up 13%. Asia Pacific increased 7%. EMEA grew 5%, and the U.S./Canada region increased 3%. Marsh continued to generate strong levels of new business with $1.1 billion for the year, a new annual record. Guy Carpenter produced 6% underlying revenue growth for the year. This marks 16 consecutive quarters Carpenter has delivered underlying revenue growth.
Growth was driven by Carpenter's international operations, particularly Global Specialties, Asia Pacific, EMEA, Latin America, and Global Facultative. The consulting segment also delivered solid underlying revenue growth in 2012, with both Mercer and Oliver Wyman contributing to the 4% increase. We have made substantial progress in the execution of our strategy to increase profitability. Adjusted operating income increased 14%, and the adjusted operating margin expanded 140 basis points to 13.2%, consulting's highest annual margin since 2004. Mercer had a strong year, which represents an excellent start on their path to growing profitability and increasing margins. Underlying revenue grew 4%, reflecting higher revenue across all regions. Every line of business contributed to this growth as investments grew 8%, health and benefits increased 7%, outsourcing rose 4%, and both talent and retirement grew 1%.
Since joining Mercer a year ago, Julio and his team have undertaken a comprehensive review of Mercer's operations. Today, Mercer has been reoriented around four core lines of business: health, retirement, talent, and investments. As a result, beginning in the first quarter of 2013, Mercer will no longer report outsourcing as a standalone business. These services, which generated over $700 million in revenue last year, will remain an important part of Mercer's capabilities. One of Mercer's objectives is to build broader client relationships. More closely aligning administration services with Mercer's core business lines will help achieve this. We also made the decision to transfer the affinity and voluntary benefits businesses of Marsh's U.S. Consumer division to Mercer in the first quarter of 2013.
We believe this business, which had $225 million of annual revenue and growth consistent with the Marsh U.S. Canada region, will be further enhanced as part of Mercer. It has become clear to us that traditional and voluntary benefits are converging, so aligning these businesses within Mercer enables us to concentrate our efforts and expertise. Another important development at Mercer is the recent launch of its U.S. Health Exchange, known as Mercer Marketplace. We are excited to add this new offering to an already robust set of products and solutions in Mercer's health business. At Oliver Wyman, underlying revenue growth for the year was 3%, which we believe to be a reasonable result given the macroeconomic environment and weakness in Europe. This growth was driven by strong increases in the health and life sciences and communications practices, complemented by steady growth in financial services, Oliver Wyman's largest practice.
In closing, we are very pleased with MMC's operational and financial performance. I believe 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 to review our results in more detail.
Thank you, Dan, and good morning, everyone. In the fourth quarter, consolidated revenue was $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 in 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 and benefits, and outsourcing. As you're 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 and 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 $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. A third 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 write-offs, 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 two 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 31st, 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 Five 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 two 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.
Thank you, Mike. Operator, we are ready to begin the Q&A.
Thank you. If you would like to ask a question, please signal by pressing *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. Once again, please press *1 at this time if you do have a question. We'll pause for just a moment. We'll take our first question from Greg Locraft with Morgan Stanley.
Yeah. Hi, good morning. 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.
Okay. I think the best thing to do is to go to Peter and Alex on that. I'll start with Peter.
Sure. Greg, when you look at 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. 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%. It's challenging to take just a look at the quarter. It's much better to look at what is the last four quarters, and I think you can see we've had very consistent growth. International's 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.
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 there's some curiosity as to why it's 0%. Again, we look at 2012 and are pleased with the performance. There's always variability and non-recurring items in quarters. We've mentioned that before, both positive and negative. 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. 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. 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's quite strong. When you take a look at the quarter and the year, I'd encourage you to take a look more at the year. As we look to 2013, we don't give guidance, but the year will reflect more of the growth than the quarter.
Okay, Alex?
Yeah, I mean, 3% underlying growth, actually, I think it was a fairly decent quarter. There's no doubt that last year was a more benign year from the point of view of catastrophes. There was some pressure on rates. All in all, we actually did a little bit better than we expected in what is our smallest quarter. I really don't have much to add to that.
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. There may be some reporting which would be more equivalent to a smaller segment within our business. Our RIS business is a $6.5 billion annual business, and we're in every geography and every segment. We don't have many peers out there.
Okay. 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. That's just the way it is. 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. 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 should cause us, frankly, to all be lowering our organics in that segment going forward.
I think your summary is correct.
Okay. Thank you.
Okay.
Our next question will come from Jay Gelb with Barclays.
Thanks, and good morning.
Morning.
The outlook for margin expansion seems to be a bit stronger in consulting than the risk and insurance services segment. 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. Thanks.
Sure. Well, first let me just hand over to Mike.
Yeah, 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. 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, Greg.
Yeah. Jay, when we look at the businesses, of course, RIS started earlier, right, in terms of really focusing on business disciplines and profit improvement. 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. 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. 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's subject to the overall environment, the GDP environment around the world, the macroeconomic environment, a little bit of the P&C pricing cycle.
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.
Okay. With regard to the organic expense growth, Mike, I think you talked about 3% underlying, and is that something that can persist going forward?
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. 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.
Thanks very much.
Next, we'll hear from Meyer Shields with Stifel.
Thanks. 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?
No, it will not. The margins of that business are relatively consistent with the overall margins of the consulting segment.
Okay. Can I infer from that it'll boost margins in risk and insurance a little bit?
If you want to cut a fine line to it, yeah, the math works that way, but it would be so small relative to the size of our RIS that it would barely turn up.
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?
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 a rolling four quarters basis and what the macro environment looks like on a rolling four quarters. 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 mid-year last year. On the other hand, we don't put many pessimistic thoughts in there too as to the impacts of something like a payroll tax. Ultimately, our business should perform a little bit above GDP in most jurisdictions, that's probably, on a broad sense, the more accurate thing to look at.
Great. Thank you very much.
Next we'll hear from Larry Greenberg with Langen McAlenney.
Good morning. I'm wondering if you could just talk about the underlying insurance pricing impact that you felt in 2012 for the year. I know it's incredibly early in 2013, but perhaps look into the crystal ball and see how the impact in 2013 might compare with 2012.
Okay. I think that question as well, Larry, is probably best for Peter and for Alex. Peter, why don't we start with Marsh?
Sure. Thanks, Larry. Let me start with the fourth quarter. We measure what's called the Marsh Global Insurance Market Index, 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. 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. Generally speaking, that's been fairly flat. Some lines of business have increased, I would think more around peak zone properties.
If you go into Asia, if you go into Pacific, parts of Latin America. Other segments, lines of business have been coming off. On average, I would think for the year that the international has been flat. 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.
Okay, Alex?
On the reinsurance side, really, as I said before, the year was benign from the point of view of catastrophes compared certainly to the year prior. We saw some general softening. Sandy probably strengthened the resolve of some underwriters to try and keep some pricing. If you had a portfolio that was affected by Sandy, indeed there were some price increases. We didn't see any tailwind from rating so far in the renewals for 2013.
Great. Just one housecleaning. Mike, with Trident's sale of AXIS, is that going to effectively eliminate investment income post the first quarter?
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. Essentially that was AXIS that Trident II held. So when they marked it to market for each quarter, we would have to realize that through our P&L in the subsequent quarter. So with Trident II essentially being closed down, it essentially then means that we will really not have, after the first quarter, much running through our investment income line.
Great. Thanks.
Moving on, we'll hear from Michael Nannizzi with Goldman Sachs.
Thanks. Just wanted to expand, if I could, a little bit 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? Then just one follow-up. Thanks.
Hey, Peter?
The pricing, if you translate it to our results, again, we saw some changes in the market based on Sandy in the fourth quarter. I really put them into three categories. One is pricing. If you had Northeast exposure, loss affected, or flood exposed, you started to see pricing. There's been as much focus on coverage. We saw a lot about storm surge. Is it in the wind? Is it in flood? Deductibles increasing. 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 fee and commission, and then we also have business that's well-populated with high deductibles or SIRs, which will be less affected than a guaranteed cost and what you've perhaps seen in the market for what's happening with pricing.
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%-2% range.
Does the fact that you're securing better rate for your customers than the market overall, does that manifest in retention? Other than just pure margin, how do you see firming market conditions in the U.S. impacting your business overall?
The firming conditions, I think will have a couple of impacts. One would be, as you mentioned, on the retention, we will tend to retain more clients based on the service capabilities, our ability to execute on claims. 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. Our clients tend to want to stay, and we have prospects that tend to want to come. 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.
Great. Thanks. Just, Dan, if I could just on deployment. You've got a $1 billion three-ish to spend, if our math is right. Maybe half of that, dividends and pension. First question is that still the right way to think about that? Second is, how are you thinking about the other half? Are you biased towards building out the agency platform? Or do you see more value on the buyback side? Thanks.
Yeah. Okay. 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'd say we are always focused on creating value for shareholders. 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?
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. Therefore, share repurchase remains a very viable and appropriate way for us to utilize excess cash. Buying back around $700 million over the last two 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. Certainly, we think that share repurchase would be a good use of excess cash when we don't have acquisitions to make.
Acquisitions first, then buybacks?
Correct.
Is that okay.
Correct.
Thanks.
I wouldn't say acquisitions, I would say good acquisitions, accretive acquisitions.
Got it. Thank you.
Next, we'll hear from Jay Cohen with Bank of America Merrill Lynch.
Yeah, thanks. 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?
For Julio? Yeah. Thank you, Jay. 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 support 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 and benefit, and of course, investments. 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. Outsourcing will exist inside the line of businesses that it supports.
Thank you. When I said get rid of, I just meant from a financial reporting standpoint, thanks for mentioning that. Julio, while you're on the phone there, can you talk about the exchange that you launched and what your outlook is? When do you think it could actually help from an earning standpoint?
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 benefits 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. The employees of our clients will have access to a broad array of traditional as well as voluntary benefits from multiple insurance providers, 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 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. We're in discussions with several of our clients. As you can imagine, there has 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. 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. Mercer's Marketplace, as I said, is going to be very scalable. It'll offer a complete set of solutions and products across a full scale, ranging from medical, life, disability, et cetera. The platform accommodates both insured and self-insured plans.
I want to make that clear, that it accommodates both insured and self-insured plans. We'll offer a lot of plan designs and support a broad defined contribution strategy for all health and welfare benefits. As you can see, it's going to be quite a launch for us as we move forward with this. There'll 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.
That's great, Julio. Thanks for that clarification.
Thank you, Jay.
Next, we'll hear from Raymond Iardella with Macquarie.
Thanks, and good morning, everyone. Maybe just wanted to touch a little bit more on sort of the restructuring in the quarter and the reorientation within Mercer. I know one of the beneficial points in the past is your ability to absorb some of the restructuring costs. Just curious, and I know, Mike, you gave some numbers around the adjustments to operating income, but restructuring costs are up year-over-year. I'm just curious, are you guys planning to change sort of your ability to absorb restructuring costs? How should we think about potential restructuring? Or is the operating platform situated you guys would like at this point?
Okay, Ray. 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. 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. Usually, a new CEO gets about one crack at that. Well done, Julio, and we move on from here.
That's helpful. Just, I guess following up on cash on the balance sheet. Just curious, how much cash do you guys hold onshore versus offshore at year-end? Maybe talk about how to get that cash offshore back into the U.S.
Mike, you want to take that?
Sure, Dan. I'd be happy to. 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.
Okay, that's helpful. 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 1.3 times?
Mike?
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 and the earnings that we'll see, not just the last few years, but we'll see in the coming years, will 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. We'll be very attentive to when we go back into the debt markets.
It will be done this year, but the timing of it is yet to be determined.
Okay, thanks again.
Sure.
Moving on, we'll hear from Joshua Shanker with Deutsche Bank.
Yeah, good morning. 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 try and pace out what 2013 is going to look like?
Yeah, 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. 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.
Okay, which is a smaller peer group, obviously.
Yes, that would be a smaller peer group.
Yeah. In thinking about in terms of the opportunity going forward, when we were looking at the pricing, we've seen there's obviously the tailwind coming from the middle market segment. What do you think this time next year, what will we be seeing for the large case business in terms of the tailwind? Do you think it will catch up to the smaller middle market business in terms of pricing?
There's a couple of ways to approach that question, Joshua. I think on an overall sense, in Peter's commentary or answer to 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. Peter, you want to expand on that?
Sure. We have new business each year that represents around 15%-20% of our revenue, we have been very conscientious of trying to convert the new business to as much commission versus fee. I think in the past, we had said that we are around 50/50 fee versus commission. Now when you look at the fourth quarter, the portfolio as an entirety, it's now around 40% fee, 60% commission. That is a positive because, again, one is more transparent with clients, although certainly fees are transparent, is that it's more aligned with the market in terms of when you perhaps see some pricing increases, we may perhaps see less, depending on, again, what geography, what line of business, what segment, and what's happening at that point in time in those specific areas.
Does that make any changes in employee retention if you higher commission rates?
I'm sorry?
If more of the business is coming from commission rather than fees, does that change employee retention characteristics at all?
When we look at revenue retention, any lift, whether it's fee lift or commission lift, would benefit revenue retention. Clearly, it doesn't do anything with account retention, but with regard to revenue retention, it would. We try to get higher fees as well when we talk year-over-year with our clients. Really any lift in fees or commissions help revenue retention.
Okay, thank you. I'll move that stuff over. Appreciate it.
Okay.
Next, we'll hear from Adam Klauber with William Blair.
Thanks. Good morning. In consulting, it looked like both H&B and also outsourcing were pretty strong for the quarter. I guess two questions. One, was there any project revenue that helped either of those segments? Would you say the outlook going into 2013 for both those areas is continuing strong or even getting better as we go into 2013?
Julio.
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, a lot of consultancy work coming out of all the clarification that happened around the Affordable Care Act. There is a significant amount of activity with both state consultancy that we're doing, as well as client consultancy that we're doing.
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. 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 seven, as opposed to the fourth quarter growth rate. I think it's more indicative to look at the full year. As far as outsource 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 get. We saw that in the fourth quarter. It will continue to be kind of lumpy. Again, I would point you to the annual growth rate for outsourcing of somewhere around four.
Thank you. One follow-up on the healthcare exchange. Do you have, or at what point will you have, I guess, a full suite or adequate suite of health insurers as part of that exchange? Also, how long do you think it will take you to be up to speed to handle a large national client?
Yeah. Let me take the first part of the question first. As you can imagine, we are in active discussions right now with carriers. There is a lot of interest coming from them, and I am sure that soon enough, we will have an opportunity to discuss more specifically how many we will 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 is 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 will be necessary in order to be able to have the appeal that is needed in the marketplace and in the targets that we are going to be focusing on. Stay tuned, I guess, is the best way to say how we are going to move forward. It will be development, and we will continue to keep you abreast of them as they continue to develop throughout the year.
Thanks.
If I might just add to that for a second. One of the reasons, and there were many reasons, of moving the U.S. consumer business to Mercer is Julio, in particular, expertise and leadership roles that he has had in his career in consumer businesses. Julio, do you want to just expand a little bit on the call center operations that we're moving over?
Yeah. There was a question earlier that asked a little bit about some of the reasoning, perhaps, for bringing the consumer business of Marsh over, 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 two offers. We have a very expansive way to be able to handle that on the Mercer side. It just made sense to put it together for the U.S., in that fashion. Second, also as importantly, is that as we build an appropriate offering for our exchanges, there's 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.
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, certainly look forward to being able to bring more value out of that business for our organization as we go forward into the future. There's a lot of really good reasons for doing this, 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've mentioned on the voluntary and core health benefit.
Thanks, Julio.
Thanks. One quick follow-up. As you further develop the exchanges, will we need to ramp up expenses in the near term to do that?
Yeah, Julio?
Thank you, Dan. We're 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 over-invest early, don't want to under-invest. 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. 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. We believe that exchanges will be a part of being able to contribute to that margin expansion as time goes on.
Great. Thank you very much.
Sure. operator, we've had some terrific questions. I think we have time for two more questions.
Okay, sounds good. We will go to Paul Newsome with Sandler O'Neill.
Good morning. Thank you for the call. A little bit of a follow-up here. Where exactly is housed this critical small-ish business, basically the 50 lives and under type businesses at Marsh? I'm guessing it's pretty small. I know that Marsh Agency writes at least some of it.
Yeah.
Geographically, where should we be looking for it when we get to that point where we need to see how things change?
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.
Right. I think that's the business that is most likely to be.
Right
changed one way or the other.
Yeah
at the end of the year.
You're right. We would have some of that business in Marsh & McLennan Agency and some of that business in Mercer. 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.
Is that business, in your view, and I know it's small, but maybe you have an opinion because I think it's 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 would just all go to the exchanges?
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 don't have strategy to drive into that space. Terrific. Thank you.
Our last question today will come from Thomas Mitchell with Miller Tabak.
In the risk side of things, the insurance brokerage business, I sort of try 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. 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 four 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.
I'm wondering if you could spell it out a little more clearly.
I think for the last number of years, we have grown faster internationally than we have grown in the U.S./Canada division. 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. We have been grinding it out in U.S./Canada and in 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. In the RIS side, we're in 90 different countries. When there's more growth in the world, we're there to capture it. Some of that growth, frankly, comes from the developed world into the developing world.
Our client relationships in U.S., Canada, and in Europe, to name two parts of the developed world, we capture in places like Latin America, Asia, and Africa. 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.
Okay, thanks very much.
Okay. Thank you. 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 three core constituencies, colleagues, clients, and shareholders. This call is naturally oriented toward meeting our commitment to shareholders. I also want to take this opportunity to express my appreciation to our 54,000 colleagues for their hard work and professionalism and to our tens of thousands of clients for their belief in Marsh & McLennan. Thank you very much.
That does conclude today's teleconference. Thank you all for joining.