Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Fourth quarter 2011 financial results and supplemental information were issued earlier this morning. They are available on Marsh & McLennan Companies'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. In particular, references during this conference call to anticipated or expected results of operation for 2012 or supplemental periods are forward-looking statements, and Marsh & McLennan Companies's actual results may be affected by a variety of factors.
Please refer to Marsh & McLennan Companies's most recent SEC filings as well as the company's earnings release, which are available on the Marsh & McLennan Companies's 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 would now like to turn the conference over to Mr. Brian Duperreault, President and CEO of Marsh & McLennan Companies.
Good morning. Thank you for joining us to discuss our results, as reported earlier today. I'm Brian Duperreault, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Dan Glaser, Group President and COO, and Vanessa Wittman, our CFO. Also, I'd like to welcome our operating company CEOs, Peter Zaffino of Marsh, Alex Moczarski of Guy Carpenter, Julio Portalatin of Mercer, and John Drzik of Oliver Wyman. Also with us is Mike Bischoff. My remarks will focus primarily on our full year results, and Dan will provide more detail on the fourth quarter. Vanessa will update you on our financial position. Before we begin the discussion of our results, I'd like to welcome Julio to our company. Julio joined us as President and CEO of Mercer two weeks ago.
He comes to us from AIG, where he held a broad range of senior positions over 19 years. Most recently, he was President and CEO of Chartis Growth Economies. Julio has had a very successful track record of running large global businesses. His strong leadership characteristics and international experience will serve him well as Mercer's CEO. Let's move to our financial results. I'm very pleased that we continue to deliver revenue and earnings growth across the enterprise. Marsh & McLennan's performance this year was outstanding. In 2011, we generated revenue growth of 9% with 5% growth on an underlying basis. Importantly, we continue to achieve this revenue growth while maintaining control over expenses, with adjusted underlying expenses increasing 4%. As a result, we produced a 12% growth in adjusted operating income for the year.
In fact, this is the second consecutive year that both of our operating segments achieved double-digit growth in operating income. You've heard me talk many times since our September 2010 Investor Day about our plans to produce double-digit organic growth in adjusted operating income. Over the past two years, we have delivered against that goal, averaging 11% growth. Within Risk and Insurance Services, revenue increased 9%. Importantly, underlying revenue growth of 5% represents a significant increase from the 2% underlying growth in the prior year. We generated 12% growth in adjusted operating income and margin improvement. Marsh produced underlying revenue growth of 4%, with all major geographies contributing. This was driven by higher client retention rates and new business development. Guy Carpenter also produced impressive results in 2011. Underlying revenue growth was 5%, driven both by ongoing revenue, new business development, and higher retention rates.
This was a milestone year for Carpenter as well, as revenue exceeded $1 billion for the first time. The Consulting segment also delivered an impressive performance. Revenue grew 9%, with underlying growth of 5%. Adjusted operating income rose 12%, and the segment margin improved as well. Mercer produced underlying revenue growth of 4%, and Oliver Wyman's growth was 7% for the second straight year. In summary, throughout Marsh & McLennan last year, we saw revenue increases and higher levels of profitability. We are very pleased with this performance, which confirms the investment case we articulated at Investor Day in September 2010. We generated organic growth in adjusted operating income of 12%. Growth in adjusted EPS was 13%, excluding the early debt retirement, and these are the earnings from which we plan to grow this coming year. Our dividend yield averaged 3%.
We maintained low capital requirements, we generated high levels of cash, and we made progress in lowering the company's risk profile. As we move forward, we remain committed to focusing on profitable growth and prudent deployment of our excess cash flow in order to produce outstanding long-term returns for our shareholders. With that, let me turn it over to Dan to review our fourth quarter results in more detail.
Thank you, Brian, and good morning, everyone. In the fourth quarter of 2011, Marsh & McLennan continued its excellent performance. We generated solid growth in both underlying revenue and adjusted operating income for the sixth.
We achieved underlying revenue growth at each of our operating companies. Revenue rose 4% to $2.9 billion in the quarter, while underlying revenue growth was 3%. Risk and insurance services revenue was up 6% to $1.6 billion, with underlying revenue growth of 4%. With ongoing effective expense management, which is now embedded within the culture of the risk and insurance services segment, adjusted operating income increased 11%, $288 million. The segment achieved a 90 basis point increase in margin while continuing its pace of investment in global analytics, client technologies and strategic recruitment, and absorbing additional severance costs. The positive momentum continued at Marsh as it produced another strong quarter. Revenue increased 6% to $1.4 billion in the quarter. Underlying revenue rose 4%. Marsh's growth was across all geographies, led by increases of 9% in Asia-Pacific and 8% in Latin America, reflecting high retention rates and new business development.
In fact, for the year, new business production exceeded $1 billion. In the U.S.-Canada division, underlying revenue growth was 2% in the quarter. Last month, we significantly expanded Marsh's operations in South Africa, Botswana and Namibia with the acquisition of the insurance broking business of Alexander Forbes. The completion of the acquisition of Alexander Forbes operations in five other African countries is on track. Marsh continued to build its agency platform with the acquisition of Seitlin Insurance, one of the largest insurance broking firms in South Florida, with revenue of $24 million. Marsh & McLennan Agency now has annualized revenue of $330 million. Turning to reinsurance broking, Guy Carpenter continued to produce strong results. Revenue was $193 million, an increase of 5% on both the reported and underlying basis. This growth was led by its international operations, reflecting the successful execution of Carpenter's long-term business strategy.
Carpenter has now produced underlying revenue growth every quarter over the past three years. This growth was accomplished through ongoing strong new business development and high client retention levels. Turning to our consulting segment, we continue to generate revenue growth. More importantly, both Mercer and Oliver Wyman contributed to double-digit growth in earnings and higher margins for the year. At Mercer, fourth quarter revenue increased 3% to $940 million, and underlying revenue growth was 2%, with all geographic regions contributing to this growth. Over the past 10 months, I have had an opportunity to explore Mercer's businesses and analyze its strengths, opportunities and challenges. Overall, I am very positive about Mercer's future. My key observations are that Mercer is a global leader in retirement, health and benefits as well as talent, rewards and communications. Mercer has important capabilities in outsourcing and investments.
Mercer has a committed and talented colleague base and deep client relationships. Mercer is well positioned to continue to expand both organically and through selective acquisitions. Julio, Mercer's new CEO, brings a wealth of experience to his new role. At Chartis, he had responsibility for operations in Asia-Pacific, Latin America, the Middle East, Africa, and Central Europe. Previous key leadership roles he held included President of the Worldwide Accident and Health Division at AIU. I'm confident that Julio, with the help of the Mercer leadership team, will drive profitable growth. Looking at Mercer's financial performance for the year, I am generally pleased with the results. Underlying revenue grew 4%, retirement declined 1%, and outsourcing was flat. Health and benefits, talent rewards and communications and investments all showed very strong revenue growth. Turning to Oliver Wyman.
On the third quarter earnings call, we indicated that it would be difficult for Oliver Wyman to achieve growth in the fourth quarter due to the economic uncertainty in Europe. I'm pleased to report that Oliver Wyman's results in the quarter came in slightly stronger than we expected, with revenue of $406 million, an increase of 2% on both the reported and underlying basis, representing Oliver Wyman's eighth consecutive quarter of underlying growth. For the year, Oliver Wyman's overall results were also strong, including underlying revenue growth of 7%. In conclusion, we are very pleased with the 12% growth in adjusted earnings per share the company produced in the fourth quarter. This capped off a very successful year for Marsh & McLennan, both financially and operationally. We remain confident regarding our ability to produce double-digit growth in operating income. With that, let me turn it over to Vanessa.
Thank you, Dan, and good morning, everyone. As you have heard, the strong financial performance of Marsh & McLennan continued in the fourth quarter. On a GAAP basis, net income was $256 million or $0.46 per share. Adjusted earnings per share was also $0.46, representing growth of 12% from the prior year. We are proud of the tremendous progress made over the past year to greatly reduce items that are excluded from adjusted operating income. As a result, our GAAP and adjusted earnings for the year are similar. In 2011, on an expense base of $9.9 billion, an operating income of $1.6 billion, the net adjustments to GAAP totaled only $23 million. For the year, adjusted earnings per share totaled $1.77. This includes $72 million of expense related to the early extinguishment of debt last July. Excluding this item, the growth in adjusted EPS was 13%.
Let me add some color regarding other items. In the fourth quarter, we took advantage of favorable credit market conditions by arranging a new $1 billion, five-year revolving credit facility that replaced the three-year credit facility that was due to expire later in 2012. This new facility increases our financial flexibility with an extended duration and reduces our costs going forward. In the fourth quarter, we had an investment loss of $4 million. In the first quarter of 2012, we anticipate that investment income will be similar to the first quarter of last year, which was $19 million. Looking at taxes, as you know, the adjusted tax rate fluctuates from quarter to quarter, primarily due to our geographic mix of earnings and discrete items such as audit settlements and valuation allowances.
For the full year, our adjusted tax rate was 30%, and we feel a tax rate of between 30% and 31% is reasonable for financial modeling purposes in 2012. Discontinued operations for 2011 of $33 million includes a credit of $50 million relating to the sales of Putnam and Kroll, bulk of which relates to Putnam. At the time of the sales, we provided certain indemnities, primarily related to tax uncertainties and legal contingencies. The credit results from the resolution of tax and legal matters, as well as insurance recoveries. Also affecting discontinued operations is the impact of Marsh's decision to sell its life insurance BPO unit. This unit provides policy, claims, call center, and accounting operations to life insurance companies. Marsh ceased investing in and is selling the BPO business. Capitalized software of $17 million, net of tax, was written off in 2011.
These items are described more fully in the supplemental schedules in our press release. Let me make a few observations regarding pensions. We have seen marked increases in our reported pension expense over the past three years, primarily due to declining discount rates, as well as the impact of asset losses in 2008. At year-end 2011, interest rates for longer debt maturities used to measure pension liabilities were significantly lower than the prior year. The accounting for pensions is extremely complicated. In addition to the effect of discount rates and asset returns, annual pension expense reflects the impact of factors such as salary increases over many years, mortality rates, demographics, inflation, and cash contributions, to name a few. Based on our year-end measurement, which takes all of these factors into account, pension expense in 2012 will increase.
Net of bonuses and other mitigating items, operating income will be reduced by approximately $20 million, or $0.025 per share for 2012. Moving to capital management. Our cash position increased substantially throughout the year, reflecting the strong earnings power of the company. Uses of cash in the fourth quarter included $120 million for dividends and $121 million for acquisitions, including Seitlin and a partial funding of Alexander Forbes. For the year, major discretionary uses of cash included $480 million for dividends, $361 million for share repurchases, $258 million for acquisitions, $100 million for the reduction of debt in July, and $72 million of expense related to that early extinguishment of debt. Year-end cash was $2.1 billion.
In the first quarter, anticipated uses of cash include the annual payment of incentive compensation awards, a regular quarterly dividend of approximately $120 million, about $100 million for acquisitions, including the remaining portion of the insurance broking operations of Alexander Forbes, and a $100 million tax-deductible discretionary contribution to our U.S. pension plan. We also have a $250 million senior note maturing in March. We continue to maintain our financial flexibility regarding the funding of this maturity. At the end of the year, our net debt was $815 million. This is our lowest level of net debt at year-end since 1996, which speaks to our efforts in strengthening our balance sheet. With that, I'll turn it back to Brian.
Thanks, Vanessa. Operator, I think we're ready for Q&A.
Thank you, sir. Ladies and gentlemen, if you wish to signal for a question or comment, followed by the digit one on your telephone keypad. Once again, as a reminder, ladies and gentlemen, to signal for a question or comment, please press star one at this time. We'll pause a moment to allow everyone an opportunity to signal for a question. We will go first to Mr. Keith Walsh with Citi.
Hey, good morning, everybody. First question, I guess, Dan, in your commentary, or questions for Dan or Vanessa, you mentioned absorbing additional severance costs in the brokerage margin. You do break out restructuring and consulting and corporate this quarter. I guess the question is, what's the dollar amount threshold to when this gets excluded from adjusted EPS?
Vanessa, why don't you take that?
Sure. Keith, the way that we have approached restructuring is that if there are permanent changes to the business, then it meets our threshold for restructuring, and if there are changes that may be temporary or the dollar is being reinvested, then it runs through earnings. It isn't really a dollar threshold, but a function of what's being changed.
Okay. Then my second question for Alex. A lot of news reports about the one-one renewal with some large insurers retaining a lot more coverage and buying less reinsurance. Can you talk a little bit about how, if any, impact that would have on your organic revenues, as I believe they were clients of yours. Thanks.
Great. Thanks. First of all, obviously, we have seen rate increases, rate on line on catastrophic property in general, somewhere between 5% and 15% on even loss-free contracts. Companies do have budgets. This will be what they buy. Also, we have fee business, we have caps on remuneration. We will expect to have some tailwind, but it's not going to be proportional to the rate increases, and I'll take that little bit of wind any day. Okay, Keith?
Okay. Thanks a lot.
Good. Next question, please.
We go next to Jay Cohen with Bank of America Merrill Lynch.
Yeah, thank you. I'm wondering more on the Marsh side, if you could talk about the impact from pricing on your revenue. It feels as if listening to the companies and listening to the dialogue in the industry, that things are getting better. It did seem as if your underlying growth slowed basically in every region versus the third quarter. I know quarter to quarter, sometimes these comparisons get distorted, but what's happening from a pricing standpoint? Is there more of a benefit now than there was, say, earlier in the year?
I think Peter should take that. Peter?
Sure. There absolutely is a trend of rate improving when you look at earlier in the year as well as year-over-year, would generally speak about a theme of rate stabilization. You need to really break it down into components. You need to break it down into geography, segment of business, and then also size. If you look at the segments of business, property is clearly the one line of business that's having the most rate impact, and we saw that in our own portfolio within Q4. Cat exposed areas like Australia, Japan, New Zealand, Chile, and Thailand are having the impacts. If you go to geography, it's really the U.S. and then Pacific that are having the biggest impact. There's more lines of business. For instance, in the U.S., we've seen property, workers' comp, as well as excess casualty and general liability starting to increase.
We'll see that trend probably into 2012. When looking at the rest of the international geography, there are still headwinds, particularly in casualty, where rates are stable, improving, but still, generally speaking, down year-over-year. When I look at the U.K., parts of Europe, and Asia, there's still a little bit of a headwind. You really need to look at the overall composite.
Okay, just to follow up, given that throughout the years, let's take the U.S., where the rating environment did get better. I was a little surprised to see the organic growth rate slow in the fourth quarter. Was there anything unusual that impacted the year-over-year comparison at all?
Yeah. In the U.S., I think our performance is actually better than the 2%, and I'll tell you why. We had, for some reason, a lot more one-time items in Q4 of 2010 that came off, they had a bigger hurdle in terms of growth. They also had some impact on rate. In our U.S. business, we have a consumer business. We also have Stars, and they didn't probably see the composite rate lift that the traditional part of the U.S. did. I think the performance is actually better than the two, and again, we just had some one-time items that we had to overcome from 2010.
That's helpful. Thanks, Peter.
Okay, next question, please.
We will go next to Meyer Shields with Stifel Nicolaus.
Thanks. Good morning, everyone.
Morning, Meyer.
I'm sorry. Thank you. Vanessa, when you give higher tax rate guidance for 2012 compared to 2011, does that reflect optimism in terms of the U.S.?
I'm sorry, Meyer, I didn't hear the last part.
Oh.
Can you just repeat the question? I'm sorry.
Absolutely. Should we interpret the higher tax rate guidance in 2012 relative to 2011, despite faster growth outside the U.S., as a reflection of greater optimism regarding domestic earnings?
Actually, we're fairly consistent 2011 to 2012, Meyer. We can't pinpoint it precisely for you because we can't predict the exact mix of earnings. We had guided between 30 and 31 for 2011, and we're giving the same guidance for 2012.
Okay. Shouldn't I expect it to go down as international operations grow a little bit faster than the domestic ones, though?
Yes, except for the fact that if you repatriate earnings back to the U.S., you're subjected to the U.S. tax rate.
Oh, okay. Good point. Second question, if I can. Is there any way of ballparking the impact of the life insurance BPO business on recent either organic growth or margins?
It was a small revenue business, and I would say it has a de minimis impact on either revenue or margin, in both the quarter and then year-over-year.
Okay. Thank you very much.
You're welcome. Next question, please.
We will go next to Yaron Kinar with Deutsche Bank.
Good morning, everybody. To follow up on Meyer Shields' question on taxes for next year. Two of your peers have now either moved or are in the process of moving to a more favorable tax jurisdiction, possibly putting you at a slight disadvantage from that sense. Is that something you're thinking about?
Yaron Kinar, this is Brian Duperreault. Yeah, I guess I'm not surprised by the question. I'm not going to talk about what other companies do or speculate about what we might or might not do. I'm really not going to comment.
Okay.
Okay.
Yeah. Maybe talk about Julio Portalatin's appointment at Mercer. This is now the second CEO appointment that comes from somebody from outside of the industry, outside of the consulting industry, at least. What does that mean about the talent pool or the executive base at Mercer today? How are you thinking about that? With a P&C veteran coming in, how long will it take before Julio Portalatin's really ready to make some initiatives and changes in the business?
Okay, Yaron Kinar, I think Dan Glaser wants to take this question.
Okay.
Hi. First of all, we ran an exhaustive search, we looked at both internal candidates and external candidates, we had several strong internal candidates. Really, the way we phrased this, in terms of how we were looking at it, we really wanted to find someone truly exceptional that would be able to not only drive Mercer to better performance, but also contribute at the executive committee level of Marsh & McLennan. I'm very happy with where we have landed. I've known Julio for more than 10 years. We've worked together at AIG. 5 of our 6 members of our operating company and leadership team with Brian and I have experience both on the insurance company side and on the brokerage side.
Julio has that also adds an additional dimension in that he has experience in the consumer businesses and in health and benefits, having run one of the largest health and benefits organizations in the world in AIU, accident and health. Really, the driver for us was getting somebody who had deep experience in running large global businesses, had a lot of experience in running a matrix environment on a global basis, was well-schooled in P&L management and running a business from always having revenue exceed expense, and really a track record where every job over the course of a 30-year career was more successful than the one before. In addition to a lot of inspirational and personal leadership characteristics, I think I'm very comfortable that Julio will be a great addition. Now, how long it will take him to be fully up to speed?
I would give it another two weeks. Because he's hit the ground running, and based upon his questions, he's getting there in a fast pace.
Great. Thank you very much.
You're welcome. Next question, please.
We'll go next to Jay Gelb with Barclays Capital.
Thanks. I just wanted to set the baseline for 2012 earnings. Should we be thinking at, as in terms of $1.77 of adjusted earnings per share plus the $0.09 impact from debt extinguishment costs in 2011? The baseline, the starting point is more like $1.86 and double-digit earnings growth off that?
Jay, that's the way I'm looking at it.
Okay. On the risk capital holdings, you're saying $19 million in the first quarter. It was $9 million for all of 2011. Should we expect a better result in 2012?
Jay, that one's too difficult to call. We've really seen a lot of volatility over the course of 2011 and no reason not to expect the similar volatility. We give you what we have as we've got it because we report on a one-quarter lag. We saw a very low number, a negative number in Q4, which was really on the back of the horrible equity markets in Q3. For Q1, we saw the equity markets recover in Q4, and that's reflected in the $19 million number we gave you.
Right. Let's cross our fingers. If equity markets stay strong in 1Q, that should be pretty good for second quarter results then, right?
Well, your guess is as good as ours. I don't know. It's hard to speculate. Really is, Jay.
All right. For Peter.
I wish we could give you more, but it's not something we have total control of.
I understand. For Peter, we had overall modest margin expansion in risk and insurance services for all of 2011. What are the levers you have to generate margin expansion again in 2012?
Peter.
Certainly we're going to continue on the path of having very strong client retention, very strong new business. As Dan said in his comments, we had over $1 billion of new business. We've been investing in 2011 for the future of 2012 and make sure that we're going to position our businesses for strong top-line growth while controlling expenses. We've had a lot of strong growth across the world. Dan gave you the quarter numbers, but for Latin America, we're up 14% organic growth for the year. Asia PAC was nine, EMEA was four. We want to continue to focus on high growth areas and make sure our investments are yielding that type of benefit on the top line and bottom line. We're very well-positioned for 2012.
Maintain expense control. Alex is a part of this segment. Alex, why don't you add to that?
Yeah, it's pretty similar to Pete. We've got good revenue pipeline. Our expense discipline is good. Again, the overseas, the international piece is exciting. Also on the facultative side, we see good growth. We're cautiously optimistic we'll continue to improve the margin.
That's great. Thank you.
You're welcome. Next question, please.
Yes, we'll go next to Larry Greenberg with Langen McAlenney.
Hi, good morning. I have kind of a consulting and maybe it's a corporate question combined. We're hearing that some of the retirement annuity companies are offering annuity products as a solution for defined benefit pension plans. I'm just wondering if, from a corporate standpoint, that's something that you've looked at, and maybe from a consulting standpoint, is that a product that you guys believe in? Is it a product that you recommend? Is it a product that competes with your business? Just curious how that fits into the grand scheme of things.
Well, I'll take that, Larry. This is Dan speaking. A couple of things. One, clearly, those type of products, large annuity products and pension buyouts, so to speak, have been around for about 20 years, but they've gone through cycles of when they become more attractive to companies. We're definitely in the mix with regard to not only creating those sorts of products, but also advising clients on when it's appropriate to purchase some of that type of product. Particularly, there's been a fair amount of activity in the U.K., and I would say that we're one of the market leaders in the U.K. on that type of thing. It's a de-risking approach.
From that standpoint, oftentimes when a DB plan closes and freezes, then it transfers in terms of responsibility from, say, the senior HR officer to the CFO, the CFO often would look at, well, how can we bring the risk down on a frozen plan? We've been very actively engaged in that. We don't think of that as a competitor to our capabilities. We view that as one of the arrows that we have in our quiver to serve clients.
Is it something that you've considered from a corporate standpoint?
I would answer that. We look at all the different possibilities for our plan. Our plan is not frozen, and we are constantly looking at it to make sure there's a proper balance of risk. It might be a product we look at, but I think the way we're handling the plan now is appropriate for us.
Dan, I infer from what you're saying, there's really not something terribly new that's hit the market in the last year or two relative to the things that have been available for a while.
That's right. What you've seen is product innovation, but not new product. There's nuance differences between the kinds of products available today and the kinds of products that were available 20 years ago. I think what you're really seeing is the effect of having deep asset reductions and some level of recovery and certain companies saying with that level of recovery that we don't want to have risk of a deep asset reduction again, let's de-risk our plan.
Great. Thanks very much.
Welcome.
We go next to Adam Klauber with William Blair.
Good morning. Thanks. Mercer seemed like most segments, the underlying revenue growth was down somewhat from the last couple of quarters. Is that being driven by Europe?
Dan, can you do that?
Yeah. Hi. Well, as you can appreciate, there is some movement around in all of our segments, in particular on the consulting segment from quarter to quarter. When I look at the full year of 2011, I'll start with the basis that we saw double-digit growth in earnings in the segment and in both Mercer and Oliver Wyman. Specifically with regard to the fourth quarter
It wasn't abnormal reaction from Europe as resulting in the result of being 2% growth. Actually, areas that, for example, retirement, which last year was -3% and is -1% for the year, actually grew 1% in the fourth quarter. When I look at the drop in sequential growth rate in the fourth quarter, I don't see that as establishing any new kind of trend for Mercer. I would more look at the year, which grew at about 4%, as being more indicative of where the business is performing.
Great. Just one quick follow-up. On margins, you showed nice steady progress in both businesses, up 40 basis points. Can we expect nice steady progress again in 2012?
I would say, Adam, that our primary focus is on growing our net operating income. That's our focus, that's the thesis we put forward at the investor day, that's where we're going. Now, if you look at the segments, given our view of 2012, I think that's going to result in margin improvement, in both segments. I got to tell you that to me, the margin is a result of the work being done to get growth organically in our top line and managing our expenses. It's a result, put it that way. We're primarily focused on increasing our income.
Great. Thank you very much.
Okay.
We will go next to Raymond Iardella with Macquarie.
Good morning. I guess a question on M&A. Should we expect, maybe excluding the Marsh & McLennan Agency strategy and sort of the M&A going forward there, should we expect acquisitions going forward to reflect sort of non-U.S. acquisitions as opposed to looking at some M&A in the U.S.?
Not necessarily, no. We're certainly interested in balancing out geographically, we're balancing out by capability, and we're looking for great acquisitions. We're looking for really top-notch companies to join us. They may be in the U.S. Be nice if they were. We have a nice pipeline, and we'll see where they come from.
Okay. Then.
emphasis on a geography.
Okay. Then maybe just going back, Brian, to your four pillars of success for the company. You'd spent a lot of time talking about revenue growth, controlling expenses, and growth in operating income. I guess, could you provide a little bit more color on where the risk profile of the overall organization is, and maybe point to some specific things that you guys have done over the past year and a half, two years, to address the risk profile of the business?
Sure. Be happy to. We think the first line of defense is producing a product that's a quality product, that's what the client has needed and that we have agreed to deliver, and we deliver that product as promised. That means a real professionalism in our work. It's attention to detail. It's an operational thing. There's been a lot of work done on both consulting and risk and insurance to improve the way we handle our business processes, our business. It produces efficiencies. It produces better expense levels for us, but it also produces a better quality product. That's our first line of defense. Our E&O risks are our largest risks. A lot of progress there. I think we can see that in our own results.
Without getting into details, we do see that in the levels of activity of issues that we have to deal with. We've de-risked our balance sheet. We've talked a lot about that. That's an important component. We have a lot of cash flexibility, debt flexibility. The other line of defense is really after the fact, with limits of liability, and we were the first to institute limits of liability. We've got it on both the consulting and in risk and insurance now. I'd say that that's been a very successful program for us, and I think appropriate for where we are.
I guess another thing to talk about, I probably ought to emphasize, is when we're delivering our products, we spend a lot of time in reviewing those, peer reviews, to make sure that it is of the highest quality and delivering the promises that we've made to the client. All of those combined, I think, has delivered a great result. The last thing I want to point out is we redid our code of conduct this year. That can be a pretty dry thing. We wanted it to be alive, embedded as part of the psyche of the company. We call it The Greater Good. It's something that I'm so proud of, and there's a film that we produced around that I think is extraordinary. It's won some awards.
Most importantly, I think the way we go about our work now, doing the right thing, producing the business in the best possible way is really part of who we are, part of our culture. All of those combined, I think, has really taken a big part of the risk of this company out.
Great. Appreciate the color.
You're welcome.
We will go next to Michael Nannizzi with Goldman Sachs.
Thanks. Vanessa, one question was on, you kind of walked through the cash contributions for, or cash items for 2011. I thought that in the K you'd said you expected to fund $300 million or so in the pension in 2011. You didn't mention that. I don't know if that's because those were non-discretionary contributions, or you can help me with that, I'd appreciate it?
Sure. What I called out was specifically the discretionary contributions in 2011. Our contributions to the U.S. and the U.K. plan for the last couple of years have run about $300 million, $320 million. Then on top of that, last year we had $100 million. I mentioned that we have already committed $100 million of discretionary funding for 2012, and obviously we'll maintain our flexibility about making further discretionary contributions over time.
Got it. Did the pension status factor into your decision not to buy back stock in the fourth quarter? If it didn't, what drove that decision?
Sure. The pension did not have any interplay with the share buyback decision in the fourth quarter. As we've said all along, our share buyback plan, in our uses of cash, it will first go to accretive acquisitions. In the fourth quarter, we were uncertain of the timing around the closing of the Alexander Forbes transaction, which we had a partial funding of in the fourth quarter, and we'll have the rest of the funding in the first quarter. That timing was uncertain till very late in the quarter, so we stayed out of the market from the share purchase perspective.
I see. Okay, just one follow-up, if I could. Maybe Dan or maybe Brian, if you could talk a little bit about just the pipeline in Europe, both on the brokerage and consulting side, I guess more on the consulting side. How is that looking today versus the end of the third quarter or late last year? Thank you.
I want to make sure, the pipeline of what?
Just business activity, so on the consulting side project.
Business activity.
Yeah.
Okay. Why don't we start with John?
Sure.
He can tell us about Oliver Wyman.
Yeah. On the fourth quarter or the previous earnings call, looking ahead to the fourth quarter, we had signaled that there was some weakness in our European business, particularly in financial services. I think we see that continuing a little bit into the first quarter of this coming year in 2012. Looking ahead to the whole of 2012, I think we're seeing a macroeconomic environment that's broadly similar to what we saw in 2010 and 2011. Our expectations for our business growth are similar to the last couple of years that we think will stay, in general, on that similar trajectory. Although for the first quarter in particular, there will be a little bit of carryover from the weakness in Europe in the fourth quarter into the first.
Your baseline there for Oliver Wyman is an environment in Europe, an economic backdrop in Europe that's similar to 2010 and 2011?
I think the global environment and the developed world environment as a whole, we're seeing as similar to 2010 and 2011, probably a little stronger in the U.S., a little weaker in Europe, overall the picture for 2012.
Dan can talk about Mercer.
Great.
Yeah. It's kind of interesting, in that if you look at our fourth quarter as an example, and we look at countries which had greater than 5% organic growth, you might see some surprises on that list. As an example, Portugal, Italy, Finland, Norway, Spain, and Ireland all grew more than 5% in the fourth quarter. Oftentimes the macro environment, while it may have an impact, it may not appear right away, and it may not be something that is a direct result of, say, macro factors or GDP factors in terms of what is actually driving Mercer's growth.
Got it. There also, your baseline expectation for Europe is similar as John's kind of the 2010, 2011 sort of backdrop?
I mean, basically what we try to look at country by country is GDP growth, that our goal is to outgrow GDP. When we're outgrowing GDP, we think we're doing well. When we look at, as we've done this year, where we've had reasonable growth in both the RIS segment and also in consulting in Europe, we would expect that to continue.
Great. Thank you.
Okay, good. Another question, please.
Yes. We'll go next to Michael Zaremski with Credit Suisse.
Okay, thanks. A little overlap with the prior question, I think. For 2012, should we expect outsourcing segments revenue growth to remain weak? On the other hand, should we expect talent rewards and communication to remain strong? Any color on those two would be helpful.
I mean, as we go through our planning and we look forward into the year, bearing in mind we're only in mid-February, we're looking out over the whole year. In terms of what we have seen over the past couple of years, we've seen very strong growth in talent rewards, communications, investments, and H&B.
Some weakness in retirement, which started to abate a little bit by the end of the year, but it's still a tough environment. With respect to outsourcing was flat in the overall year. As we approach next year, we're hoping to generate low single-digit growth in outsourcing. It's a competitive environment for a lot of different reasons. We're not expecting any kind of significant levels of growth out of outsourcing.
In talent rewards, is that coming from a specific sector and/or geography?
It's pretty well spaced geographically. If you take a step back and just think about what are the kinds of things that concern C-suites around the world, it tends to be the same things, right? It's macro factors, it's innovation, it's risk, and it's also talent management. Even though unemployment levels are high in many countries, the reality is for skilled positions and for critical positions, actually, there's a war for talent out there. We advise across the human capital spectrum, not only on rewards, talent management, which includes everything for pay-for-performance kinds of issues, performance appraisals, colleague engagement surveys, compensation surveys broadly, et cetera. When we look at our talent rewards and communication segment, there are many sub-segments to it, and they're all actually doing quite well.
Okay, lastly, for Vanessa, just to clarify in your prepared remarks regarding the pension expense, it's $20 million higher than fiscal year 2012 expected versus 2011?
That was the operating income impact.
Okay.
It is net of bonus, et cetera. It'll roll down to $20 million at the operating income level or $0.025 a share.
Thanks for the color.
Okay, good. Why don't we take one last question?
We go next to Dan Farrell with Sterne Agee.
Thank you. Good morning. You've commented a bit about the impact of pricing on organic growth. I was wondering if you could just talk about where premium audits stand right now in the comparisons, if they're sort of flat now versus a headwind, if they're slightly positive.
Peter?
Yeah.
I think at this point, there's really no trends. We haven't seen many decreases from any economic conditions, and we haven't really seen much in terms of increases from inflation. Certainly insured values are going up in areas where there's high inflation, but generally speaking, on the portfolio, it's neutral.
Okay. Could you maybe update us on your growth efforts within the Marsh agency business? Maybe just talk a little bit about deal pipeline, competition for deals, things like that.
Sure. We feel, as we've commented in prior quarters, Dan had in his opening comments, that we're very pleased with where we are to date. Just acquiring Seitlin, again, another geographical expansion with a high-quality agency is another step forward to building out our plans over a three to five-year period. The pipeline is strong, we're very careful in terms of looking at opportunities that are going to give us either geographical expansion or a product line expansion. I think you can see us continue that pattern over the next 12-24 months. Having said all that, we're going to be very careful in terms of what properties we're going to go after. The pipeline is very strong. Again, there's no timeline on when we're going to make these acquisitions. Okay?
Okay. Thank you very much.
Good. Well, let me wrap this by saying, we had an outstanding year last year, an outstanding year. I want to first take the opportunity to thank our clients for all the business they give us. I very much want to thank all our talented colleagues out there for your hard work and continued dedication to the company. Thank you very much. Thank you for calling in.
Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.