Marsh & McLennan Companies, Inc. (MRSH) Q3 2013 Earnings Report, Transcript and Summary

Daniel S. Glaser - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Finance Committee J. Michael Bischoff - Chief Financial Officer Peter Zaffino - Chief Executive Officer of Marsh Inc and President of Marsh Inc Julio A. Portalatin - Chief Executive Officer of Mercer and President of Mercer John P. Drzik - Chief Executive Officer of Oliver Wyman Group and President of Oliver Wyman Group Alexander S. Moczarski - Chairman of Marsh & Mclennan Cos International, Chief Executive Officer of Guy Carpenter and President of Guy Carpenter

Michael Zaremski - Crédit Suisse AG, Research Division Gregory Locraft - Morgan Stanley, Research Division Larry Greenberg - Janney Montgomery Scott LLC, Research Division Dan Farrell - Sterne Agee & Leach Inc., Research Division Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division Jay Gelb - Barclays Capital, Research Division Brian Meredith - UBS Investment Bank, Research Division Michael Nannizzi - Goldman Sachs Group Inc., Research Division Jay Adam Cohen - BofA Merrill Lynch, Research Division Charles J. Sebaski - BMO Capital Markets U.S.

Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Third quarter 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'd 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. And now I'll turn this over to Dan Glaser, President and CEO of Marsh & McLennan Companies.

Thank you. Good morning, and thank you for joining us to discuss our third quarter 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 companies' CEOs: Peter Zaffino of Marsh; Alex Moczarski of Guy Carpenter; Julio Portalatin of Mercer; and John Drzik of Oliver Wyman. Also with us is Keith Walsh, Head of Investor Relations. Following my comments, Mike will discuss our financial results in more detail, and then we'll take your questions. Before I turn to the quarter, I would like to take a moment to recognize our Vice Chairman, David Nadler, who will retire at year-end after 13 years with the company. David leaves MMC with my personal appreciation, as well as that of our executive committee and the Board of Directors for a job exceedingly well done. Marsh & McLennan's performance in the third quarter included 15% growth in adjusted operating income. This result underscores our journey to be an elite company, as we successfully execute our 4-pillar strategy to create sustainable long-term shareholder value. As a global growth company, the first pillar of our strategy is to grow revenue and earnings. We have consistently delivered underlying revenue growth. We have also steadily expanded adjusted EPS in recent years, including increases of 13% in 2011, 16% last year and 17% through 9 months of this year. At the same time, we continued to execute on our other 3 pillars by maintaining low capital requirements, intelligently managing the risk profile of the firm and generating strong free cash flow. Our results reflect significant investment in our businesses that we absorb on an ongoing basis. In addition, an increasing portion of our growing cash flow is available for…

Thank you, Dan, and good morning, everyone. In the third quarter, MMC's revenue was $2.9 billion, an increase of 4% on an underlying basis. Adjusted operating income increased 15%. The consolidated margin increased 150 basis points to 14.1%, and adjusted EPS grew 18% to $0.46. These results are on top of 18% growth in adjusted EPS in the third quarter of last year. With investment income was $0.01 higher than anticipated in the quarter, this was more than offset by a higher tax rate that negatively impacted EPS by approximately $0.02. For the 9 months of this year, MMC's revenue was $9.1 billion, an increase of 3% on an underlying basis. Adjusted operating income increased 15%, with the margin increasing 190 basis points from 15.8% to 17.7%. GAAP EPS for the 9 months increased 14% to $1.89, and adjusted EPS grew 17% to $1.91. Investment income. The recognition of carried interest from Trident III led to investment income of $14 million this quarter. While it is difficult to forecast, we anticipate approximately $10 million of investment income in the fourth quarter. Taxes. The corporate tax rate in the U.K. was reduced in July. While this will benefit us going forward, the value of our U.K. deferred tax asset was reduced, which is the main reason for the increase in this quarter's tax rate to 32.4%. MMC's tax rate for the first 9 months of this year was 30.2%, which is more representative of our underlying tax rate. Interest expense in the third quarter decreased from $44 million last year to $40 million this quarter. When we funded our $250 million debt maturity in February from available cash, we indicated that we planned to enter the debt markets later in the year. In September, the company issued $500 million of debt, comprised of $250 million of 5-year senior notes and $250 million of 10-year maturities. Additionally, proceeds from the new debt issuance were used in October to redeem $250 million of our existing senior notes due in 2015. This new funding allowed us to refinance at lower interest rates, while at the same time extending the average maturity of our debt portfolio. The cost of the early extinguishment of the 2015 debt was $24 million or $0.03 per share. This expense will be included in both GAAP and adjusted fourth quarter results. Cash utilization. Cash on the balance sheet at quarter end was $2.2 billion. The increase from last quarter reflects strong operating cash flows in the $500 million debt financing. Our cash utilization in the third quarter included $150 million to repurchase 3.6 million shares of stock, marking 6 consecutive quarters of share buybacks. Year-to-date, we have purchased 10 million shares of our stock for $400 million. Also, in the quarter, approximately $140 million of cash was used for dividends, which reflects the recent 9% dividend increase and $20 million related to acquisitions. With that, I am happy to turn it back to Dan.

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

[Operator Instructions] And we'll take our first question from Mike Zaremski with Crédit Suisse. Michael Zaremski - Crédit Suisse AG, Research Division: In Risk and Insurance Services, U.S. and Canadian organic growth has been trending very, very low single digits on an organic basis. Could you talk to the market dynamics and outlook, and also how Marsh & McLennan agencies middle markets strategy has been impacting the segment's growth rate?

Okay, so first of all, I'll just say that in the RIS segment, we have Marsh and we have Guy Carpenter and your question is really pertaining more to Marsh than it is to the entire segment. So I'll hand off to Peter who can give us a little bit more detail.

Sure. Thanks, Dan. First, I'd like to highlight some of the real strong performance we had in the quarter and year-to-date. Latin America, as Dan said in his opening, we had 15% growth. Asia-Pac was 7%, and despite economic headwinds in EMEA, we had 3%. We recognize in the U.S. /Canada division, we have had modest growth at 1% in the quarter. It's a seasonably low quarter for Marsh and the U.S./Canada division. We have had in the quarter some negative variability from some of the programs we have within the segment, and we would expect growth to be higher in the future than what we have reported in this particular quarter. Some of the fundamentals are quite strong. New business through the 9 months is up year-over-year, and as we mentioned, we had record new business when we look at the comparables year-over-year. So overall, again, it's been a little bit lumpy. If you look at our comparisons to competitors, you have to remember we don't report Latin America in our U.S./Canada division, and also employee Health & Benefits for the core brokerage in the U.S. is reported in Mercer. To answer the second part of your question on agency, they've had good organic growth, where we would expect them to be in line with their comparables in the middle market in the U.S. So they've been growing organically, have been making a contribution, and exactly where we thought they would be on the revenue and margins at this point in time. Michael Zaremski - Crédit Suisse AG, Research Division: Okay, that's helpful. Lastly, this is probably for Mike Bischoff. Is there any kind of sensitivity or you can give us around the pension-related expenses and cash contributions? If the assumptions are changed at the end of the year. I believe since the plans are open, there could be a material impact to the expense level, as well, running to the income statement?

So Mike, you want to take that?

Sure, I'd be happy to. You're absolutely right on 2 categories. First, pension expense and second, contributions into our pension plans. Let me deal with the pension expense first to put it into context. The main driver of the change in pension expense on a GAAP basis year-over-year is interest rates, and over the last 5 years, we've seen interest rates go down dramatically. I should say, this is more in the immediate -- intermediate and longer-term rates, where the discount rate is calculated. And we've absorbed through our P&L approximately $250 million of additional pension expense during that time period. So your question is very appropriate. What's the outlook going forward? Well, the irony of pension expense accounting is that you do a measurement at year-end, and so you don't take the average where interest rates or the discount rate would be over the course of the year. You do it at year-end. And for that reason, it's very hard to anticipate where pension expense would be. I would just point you to -- say that there's 2 interest rates that you should track. One is obviously the U.S. rate and the other one is the U.K. rate because we have a very large U.K. pension plan. The second part of your question deals with cash contributions into the plan, and you can see that we're on track, including the pre-funding of some of our obligations to fund about $650 million into our global pension plans this year. We would think that, that would be markedly reduced for 2 reasons. At this point in time, we do not plan to make any discretionary contributions into our global plans. And as we've indicated, $250 million of the funding for this year was dedicated to pre-funding of future obligations in the U.K. that would cover the '14, '15 and '16 time period.

And we'll go next to Greg Locraft with Morgan Stanley.

I wanted to ask about the -- your healthcare exchange initiative. Really 2 questions around that. First, your large competitor has -- is guiding to a lot of seasonality in their Consulting segment, and partially due to the way the revenues flow in, revenues and costs flow due to health care exchanges. Do you have similar seasonality as they do? Therefore, it might be a big fourth quarter. And where will we see that, which division should we be modeling that in? And then the other question in healthcare exchange just could you compare and contrast your initiative relative to others in the marketplace?

Okay, Julio, so the first question first.

Okay, thank you. I'm going to start off by saying that we have a large business, of course, in total Mercer. That's right over $4 billion of revenue. Any movement in the exchange in 1 quarter or the other would have some impact, but not significant impact in the overall results in Mercer. It's a very large organization. But specific to your question about whether or not you're going to see a fourth quarter bump or not in revenue, so let me just say, simply, no. Even though a lot of the work and a fair amount of work is done in all of our H&B business that we work on in the third and fourth quarter of this year, the actual exchange contracts themselves incept on January 1, in this case, 2014. So the revenue will be earned throughout the 2014 year, and so there will be little -- in fact, there'll be no revenue in fourth quarter 2013, and then there will be an appropriate revenue throughout the year in 2014.

Thank you, Julio. And the second question was, if I paraphrase, Greg, how would you compare Mercer Marketplace with the competitive offerings in the market?

Yes, great question, Greg. Because I know with everything that's going on, sometimes, it's difficult to see whether there's distinctive factors. I want to really focus on a couple of things that I think has been out there, and first, allow me to level-set a bit. Mercer Marketplace supports both a fully-insured and self-insured funding model and funding models. Mercer Marketplace also offers a panel of carriers for either structure. Mercer Marketplace offers core medical. And in addition to core medical, also voluntary and ancillary products. Of our clients on the platform to date, roughly about 75% of them have chosen fully-insured model, and the remainder have chosen self-insured model. This is a reflection of the more middle market representation in our book. Generally, mid-market companies have fully-insured, and they've chosen to continue that fully-insured under the Mercer Marketplace model. Our larger clients, again, determined that they are most advantaged by staying in self-funded options, and they continue to use those under Mercer Marketplace. Even in an active exchange, no matter what the model, each employer group is rated separately. So in our exchange, we ensure that competitive pricing is taking place for each one of our clients, as we work with carriers to design programs for them and their group. A self-insurance funding model tends to be lower cost overall for larger groups due to savings on risks, changes, as well as premium taxes. And so these advantages don't necessarily go away when you go on to the exchange. So overall, when you combine what we believe is a very large availability of choice, we have up to -- we have 30 carriers, as an example on our particular exchange. Some of them, of course, work just in the core medical space, and some of them in the ancillary and voluntary space. When you compare all those advantages, we think we're very well-positioned as we look at the competition and the future.

Perfect. Thank you, Julio.

Okay, thanks, and then one quick follow-up on that is just can you remind us what the economic model is around the exchanges, both from a revenues and a margins perspective?

Sure. Julio?

Okay. Thank you, Dan. We have had a -- there's a lot of discussion going on and speculation about how big this market is going to be in time, and certainly, and how quickly it's going to develop. I'm not going to get too crazy about the speculation of that. I'll leave that for others. But based on what we have seen in our own book and through this sales season, I think we know that there's significant interest by our clients. I think the concept is obviously something that generates that interest, and the trend is certainly here to stay. That said, it's anyone's guess as to how big this also will become, and no matter what the outcome, we think we're very well-positioned. So as Dan mentioned earlier, we're very pleased with the clients that we've sold in the first year so far. And we're pleased with the pipeline that's developing, not only for '15, but also for mid-year '14 and we've been pretty consistent in saying that while we expect these changes to be a contributor to revenue and earnings, in the medium term, in the short-term, the impact will be modest.

Thanks, Julio.

And we'll go next to Larry Greenberg with Janney Capital.

Couple of questions. One, can you talk a little bit about the turnaround in the organic at Oliver Wyman? And how much of that might be Europe coming back? And then, just to stay with Julio, you're driving a really strong margin improvement, and we know you're spending money on investment initiatives and we're all fixated on the health care exchanges, but just wondering if you might be able to comment on some of the other initiatives you have in place that may be pretty specifically directed towards margin improvement.

Okay, Larry. So let's start with John on the turnaround. I'm not sure we would use that same word in terms of a full turnaround, but we're happy to see positive growth return. And I only say that because when we think about turnaround, we generally think about profitability as well, and John and his team have done a really superb job of fighting through some struggles on the top line and maintained it on the bottom line. And so from that standpoint, it's hats off to John and his team. But John, you want to talk about the return to growth?

Sure. As Dan said, Larry, in his opening comments, our performance has been steadily improving through the year, and business has actually been strengthening in all of our major regions. So to your question, Europe has contributed to that growth, and we do see improved conditions in Europe and expect that to be sustained. North America has also contributed, as has our international market. So overall, we're seeing growth -- or improvement across-the-board, and we expect that improvement to sustain. So looking ahead, based on the pipeline we're seeing, we expect to sustain positive revenue growth in Q4, and have good momentum going into 2014 in all of our major markets.

Okay, and then turning to Julio, and I'd just start by saying that we've been really pleased with both of our segments. I mean, with Marsh and Guy Carpenter, we started margin improvements several years ago, and that has created its own momentum and has sustained itself and we have every expectation that the Consulting segment, albeit in its second year of significant margin improvement, will sustain margin improvements in the future. So Julio, do you want to take that?

Thanks, Dan. The third quarter represented another quarter of solid performance for Mercer. We continue to execute on our growth initiatives. We're delivering against our strategic priorities, and we're generating increasing earnings and margins just as we have, really, over the last several quarters. Our revenue, as you know, is up 4%. The areas that we continue to see improvement in are the ones we're investing in. Of course, the health area and investment business overall. We're also seeing some good growth coming from our growth markets initiatives to expand internationally, and we're seeing the beginning fruits of that labor. And we're also seeing good margin improvement as well in those same areas, where we traditionally had done some investments in different ways in the past. We continue to carefully manage expenses as you can imagine. I mean, you go in an organization, you have opportunity to really take a bird's eye view on what's going on. You make assessments where you need to disinvest. And at the same time, you make assessments where you need to invest more, and we've been doing that and calibrating that over the last couple of years, and that's also going to be a discipline that we'll continue to do as time goes on. As far as specific areas of investment that we're making in our business, we continue to be very focused on ensuring that when we think about investments, we think about them in short, medium and long-term ways, and so exchanges obviously is one thing that we've talked about, and I'm sure we'll continue to talk about as time goes on. But talent, client -- talent and client-facing technology is very important to us, as well, and we've put a lot of breadth of improvement, especially in an area that's like data and surveys. We see good margins there, and obviously, we're investing in those areas to bring that to be a larger portion of our portfolio. We're taking legacy systems, and we're obviously retiring some, investing in new generation systems. Salesforce.com was a big investment for us. We think that we'll be able to enhance our broadening of client relationships through having a good CRM tool, which also will continue to improve margin, and hopefully top line overtime. Retirement Studio, which is an enabling vehicle for us to be able to do some additional actuarial work for retirement. Strategic hires, expansion and geographic growth areas like emerging markets that I mentioned earlier. And platforms to expand our delegated Investment Solutions, and you see that continuing to move in the right direction, profitably. So all these things, I think, are things that we continue to look at, continue to invest. We continue to calibrate appropriately, again, disinvestment and investment. We'll continue to do that and run the company in a disciplined manner.

Okay, thanks Julio. Next question, please?

And we'll go next to Dan Farrell with Sterne Agee. Dan Farrell - Sterne Agee & Leach Inc., Research Division: Of the roughly $2.2 billion of free cash in the balance sheet, can you give us the mix of international versus U.S. cash currently? And then could you also talk about the outlook for getting cash from the international subs to the U.S. as we move through the rest of the year?

Okay. Mike, do you want to handle that?

Yes, the $2.2 million of cash at the end of the quarter -- I'm sorry, $2.2 billion. Yes, where'd that extra money go, anyway? Of that $2.2 billion, there's actually $2,174,000,000. $250 million of it, as I indicated, was paid down in October for funding the 2015 debt. And so when you look at our remaining cash, what we typically do during this time period is you see it grow because we're working towards the first quarter with regard to bonus payments. So it's very typical for us to have higher levels of cash, not only at the end of the third quarter, but at the end of the fourth quarter. But going to the heart of your question, you'll also notice on a year-over-year basis, our cash is down when you look at it quarter-to-quarter, not sequentially. And the reason for that is that we are and have had a strategy to bring back in a tax-efficient manner our international cash for U.S. funding purposes, and those funding purposes are acquisitions in the U.S., dividends and share repurchase. And so we're the process of moving more of our international funds, even as I'm speaking now, into the U.S. for share repurchase and for looking at bonus payments in the first quarter. So overall, we're working down our excess cash. We're bringing it into the U.S. in a tax-efficient manner, and it's a very good story with regard to returning capital to shareholders. Dan Farrell - Sterne Agee & Leach Inc., Research Division: Can you give the mix of how much is U.S. now or is it more appropriate to wait till fourth quarter, given you're in the process?

I think it's probably more appropriate to wait. I have right in front of me the Treasury sheet that gives me on a daily basis what our mix is between the U.S. and global. So I have that information, but I think it's probably just best to wait.

Thanks, Mike. Any other questions, Dan? Dan Farrell - Sterne Agee & Leach Inc., Research Division: Yes. Just also just on your -- just with regard to Guy Carpenter, I was wondering if you could talk about the outlook for growth going forward. I mean, you've had continued nice organic there. And I think your competitors have as well, maybe better than I would've thought, given some potential headwinds there that we're seeing on pricing. But maybe if you could talk about the outlook, and then also maybe other revenue opportunities that could emerge because of some of the changes in the marketplace.

Alex, you want to take that?

Sure. As you say, we've been on a good run of organic growth for quite a while. And despite, I would say, headwinds during all that, and I think that stands to the quality of our people, the quality of our offering and the fact that we have good discipline. We've widened our net. We've segmented our client base, and we're coming up with discreet value propositions for each of those areas. I would point out a mutual segment that's very successful and E&S segment that we've just opened up. We've invested in Accident and Health, which we see as a growth area, of course, and areas such as agriculture, as well as overseas. So we think that there is room to grow. We think that we're the employer of choice. We've got the best people. We're investing, and we will continue to grow, we believe.

Thanks, Alex.

And we'll go next to Meyer Shields with Keefe, Bruyette, & Woods. Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division: If I can follow up on that question. Does the -- I guess, recent merger of 2 slightly smaller reinsurance brokerages, does that change the competitive dynamics in your reinsurance markets?

Clearly there's a change because something just happened, but we'll continue to -- we respect our competitors, but we're focused on our clients and focused on growing, focused on having the best people investing right, and that's what we'll continue to do. So we're not blind, we keep our eyes open, but we move ahead. Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, fair enough.

And we generally -- Meyer, we generally think competition is a good thing. Competition keeps us on our toes, and makes sure that we're always innovating and creating additional value for clients. And so we have a lot of respect for our competitors, but we believe our proposition is unique. Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division: Yes, and the results have certainly been there. One quick numbers question, can we get a sense of how many shares are typically issued over the course of the year for compensation?

Sure, absolutely. And I would just say in a broader sense, we're now in passing our sixth consecutive quarter of share repurchase. When we were talking with you, I guess about 18 months ago, we committed to meaningful share repurchase, and we're following through on that. And our view is that, as we go forward, our uses of cash would very much remain continuing to invest in our business, although that's usually not lumpy because we've been doing it on a pretty consistent basis, our dividend, and growing our dividend year-by-year as we grow our earnings on some basis, maybe not fully aligned with that, but certainly in the ballpark, acquisitions, and then share repurchase. And so Mike, do you want to take the specific question about the actual share count?

Yes, Dan. I'd be happy to do that. But I think it probably is good to put into context what you were describing, which is really what's the aggregate level of shares outstanding that we had with regard to our stock options and the restricted stock unit, so essentially, what was the overhang. And if you go back on -- and look at as recently as the end of '09. When you combine those 2, the overhang that we were dealing with or looking at was 69 million shares that would, we think, eventually come into the market, and we would deal with that. And if you look at it at the end of the third quarter, which is more specific to your question, the number is 31 million shares. So over the course of the last few years, we've really been absorbing and catching up with this overhang. So when we look at it, not only for this year -- and I'll give you a little bit of a projection on it, but going forward, we really feel that, in aggregate, we have to make up -- we're looking at about 15 million of shares issuance this year for the restricted stock. But predominantly a stock option exercise, dealing with, for many years, we had very limited exercise of stock options. But now, it's fairly high. And we think that for this year, it will be about 10 million. So specifically answering. Your question, the 14 million or 15 million shares that we're going to be dealing with this year. About 10 million of it is just with regard to stock options that are being exercised, and the rest is just restricted stock, so really not a large number. And then we think after this year, and like I said, a little bit of projection, but we think after this year, the heavy overhang is behind us, and the uses or requirements for restricted stock and option exercise will decline significantly. So now just completing what Dan was saying, we think we're through the most of the catch-up. And if we continue meaningful share repurchase, which is our intent, we'll flatten out the share count, and perhaps even turn it downward.

And we'll go next to Jay Gelb with Barclays.

First one for Mike, just to isolate the one-time items in 4Q. So the Trident -- if I could just get those numbers again, the Trident benefit in 4Q, the new run rate interest expense, and the impact of redeeming the, debt because my sense is that will all flow through adjusted, correct?

That's correct. Mike?

Okay. Dealing with interest expense, the run rate, I think, for the last couple of quarters is about $40 million. We did just issue debt. The average cost of that debt, though, is 3.3%. And so the calculation, when you look at it on a quarter-to-quarter basis, won't be much of an increase. With regard to the extinguishment of the debt, it's already occurred. We know it's $24 million. That's $0.03. The third part of your question, I think, dealt with investment income, predominantly, the carried interest with regard to Trident III, and we do not do the calculations. That calculation is done by the private equity firm that manages and oversees Trident III. It's a fairly complex calculation that they have to go through every one of the investments that they have because it has to do with regard to the partner interest, and what part of that partner interest no longer can be clawed back. And so I do have some sympathy for them when they're going through the calculation and giving us that information, trying to give it to us on a timely fashion. That's why we say it's very difficult to forecast because it has to do with the harvesting of their profits and how it impacts the specific part of the carried interest that could not be clawed back. So that's a long way of saying, we don't know for sure, but we would put it in the $10 million range for the fourth quarter.

That's helpful. Thanks, Mike. And then my separate broader question is on the opportunity for Risk and Insurance Services margin expansion. That spread between organic revenue growth and underlying expense growth seems to be widening over the past 8 quarters, and perhaps, you can just give us a bit more perspective on what you're doing on the expense front to keep that low.

Sure, sure. And so let's just start by saying that if you look at our expenses in total, our comp and benefit expenses have actually been rising over the last several years. And it's not just salary inflation, which runs about 30% a year for the people who are still at the company, but it's also pension expense, as we've mentioned before, and some other areas of benefits. And so the comp and ben line has been rising. So the real story is the great job that we've been doing on all other expenses. And so from that standpoint, it's everything from premises to T&E, to meetings, and there's literally about 30 categories of expense that we've been pretty focused on and relentless to make sure that everything is on a need-to-have basis, as opposed to a nice-to-have basis. And so a big part of the story, frankly, over the last 4 years that you have seen in the RIS segment and that which you have begun to see in the Consulting segment is the ability during a year to do things which will benefit you in future years and so -- and to wear that within your P&L. And so what you're seeing here is not a 1-year story. It's basically a couple of years that roll forward as a benefit and in with the things that we're doing with respect to comp and ben. Now let me just say, our expectation is for some pretty reasonable growth in margin in the coming couple of years. The way we look at it, though, we actually put margin third on our hit parade. We look at growth in revenues first, both organic and through acquisition, then we look at earnings. And our focus really is driving earnings, and in particular,…

Right. So essentially, you're saying next couple of years, pretty clear go wide path to continued margin improvement and EPS growth and -- I'm sorry, earnings growth in the RIS segment?

Correct.

And we'll go next to Brian Meredith with UBS.

Two quick questions. One, just back on the exchanges, just quickly, of the new clients that you've got, I guess, 56, I'm just curious, how many of those were actually existing benefits administration clients for Mercer? So what's the actual new business that you're actually getting versus just putting somebody in the exchange?

Okay, and so here's one thing, Brian. As you recall, if you go back a quarter or 2, we were saying that any time you're in a business where it has some real innovation going forward, the focus is on existing clients, explaining to current clients what the alternatives are. And so I'll hand over to Julio to give you the details. But certainly, our belief was very much that this was going to be in the first iterations existing clients, as opposed to new clients. But Julio?

Right. Thanks, Dan. Of H&B clients, of the 34 clients in the active space, one of them is actually new to Mercer. And again, this was expected. As Dan mentioned, we expected to have a lot of discussions with our clients as we were trying to design responses to different changes that were happening in the marketplace, under ACA and others. We have a really solid pipeline, though, I want to say again, for both mid-year enrollments and also 2015. And I also want to make sure it's very clear that on our existing clients, we still see opportunity for expanding because we have a great breadth of additional ancillary and voluntary products that we traditionally have not worked with clients on. So that gives us a potential for opportunity on the upside. And of course, in most cases, we are brokering additional lines of coverage as we expand these relationships and adding new services such as a full plan administration that we may or may not have had in the past. And also we get the opportunity, as I said, for ancillary products which tend to have higher commission in core medical. So there are a lot of opportunity even with our current clients to expand our relationship with them and broaden it even further.

So there is going to be a revenue pickup from putting existing clients in exchanges because of the other services, plus it's just a different revenue model? Is that correct?

Yes, I mean, we expect it. Time will tell because we're just launching now, right? So 2014 clients are launching as we speak. They're obviously coming in and looking at what we have to offer, and time will tell in the near future as to how the revenue -- average revenue per client actually behaves.

Great. And then one quick one on the reinsurance, if I may. Wonder if you could chat a little bit about the supply of kind of alternative capital right now coming in for one more renewals? And is there still reasonable amount of demand from pension funds and stuff to actually invest in this business, and then what impact do you think it has on 1, 1?

Alex?

Clearly, it's the big subject in the reinsurance world, and we also made around $45 billion and growing of interest looking to be deployed, because not that much is -- that amount is deployed. I think the insurance companies are taking a balanced look. They're going to use traditional reinsurance. They're going to use this new capital. The effect on us, clearly, it's a bit of a headwind. But on the other hand, we're seeing that because of the way we have our revenues, either from just a fee structure or capped commission, the effect is being mitigated somewhat. And we're actually doing a lot of cap -- new cap business, so we're doing -- I think our revenues are probably double what they were last year, year-to-date. So it's providing a lot of options to our clients and where there are options there's need for advice, and that's what we're doing. We're making sure we understand the appetite of the suppliers of capital and the appetite or demand of those who need it, and try to match that. So we're kind of excited about this so we recognize that it just makes life more interesting.

Got you. How much of your business right now is fees or cap commissions so you're not going to see the impact?

Well, I would rather not give you that indication right now...

It's actually a relatively small fee.

It's a relatively small amount, given...

Yes, it's a relatively small fee.

And we'll go next to Michael Nannizzi with Goldman Sachs.

Most of my questions have been answered. I had a question on the exchange. I'm trying to understand, I think, if someone moves to an exchange, I'm guessing part of the reason they do that is to kind of divorce themselves from rising health care costs. Can you talk about why a company would move to an exchange to self-insured? Is it really from a -- just to outsource the management of the benefits or is there another aspect to that decision that I'm missing?

Julio, you want to take that question?

Yes, there are several reasons why companies considers exchanges. Certainly, to give their employees the opportunity to have a wider range of choice as to how they design their specific benefits in relation to their needs, and that's a big impetus. Second impetus, of course, is, yes, clients are looking for the opportunity to understand how they might be able to structure programs for better cost control as time goes on and time goes into the future. Now that's usually as a result of moving from a defined benefit type of a health offer to defined contribution. But we actually saw many of our clients convert, at least for this time period, and stay under the defined benefit piece, which means that they would continue to be potentially vulnerable to increases in medical inflation. But over time, I'm sure they'll make decisions as to how best to be able to do that, might move to a defined contribution. Thirdly, yes, there are a lot of requirements under the new ACA for administration and considerable cost associated with that. And they want to make sure that they can put themselves in a position where they can rely on someone who already has the experience to do that, and hopefully, more efficiently and more effectively, for them and their employees. And then there are several other reasons as well as each individual circumstance is evaluated, and we design programs to address those needs.

Yes, one of the benefits in bending the cost curve is not about necessarily clients moving from defined benefit to defined contribution, but it's using the services of Mercer to bend the cost curve through wellness programs and comparison shopping between different medical providers, and so it's a very broad subject. I would just remind everyone that the health benefit is one of the core benefits that people look at when they're deciding which company to give their services and time to, and so companies will have to be relatively cautious because there is a war for talent out there, and it would take a very brave company, and perhaps, even to go very quickly to say, "We want to get out of health care. Because if your competitors don't, then you may be opening yourself up to some talent vulnerability.

And I guess, I mean, on that point, I mean, how do you weigh the decision, Dan, to move or not move to an exchange with your employee base? And I'm guessing you -- to the extent you did, you probably already know which exchange you would go with.

I pretty much have that one down, and Julio is sitting right next to me on my right. So I mean, for us, is that -- when we first looked at Mercer Marketplace, the first thing that we said was we want in because it created greater flexibility to individual colleagues to make choices which are relevant to them and their family sizes and a whole slew of other things, and so to me, it was very flexible. What we didn't want to do was crowd-out existing Mercer clients, and put ourselves in front of the queue, so to speak. And so just to be clear, the Marsh & McLennan Companies will be joining Mercer Marketplace at the point in time the Mercer Marketplace says, we'll make the catch without impacting any other clients.

We'll go next to Jay Cohen with Bank of America Merrill Lynch.

Two questions. The first is, on the Consulting business, do you see a natural limit to the margins you've given? That business has gone up because, clearly, you need to be investing in the business as you do. So is there a natural limit to the margin ceiling, if you will? And then secondly just to make sure I got the numbers, when you talked about the number of lives in Mercer Marketplace, I think you said 220,000. Is that in both the active and retiree exchanges?

Okay, so let me take the first question first. The 220,000 lives are both in the active and the retiree space and count both existing employees and their families. That takes care of that one. In terms of the Consulting segment's margin overall, I would say there's no natural cap to those businesses, but recognize that the Consulting segment is different than RIS. It has lower levels of aggregated recurring revenue streams and so it's more about the mechanics of the business in terms of how the P&L is arrived at. And so, naturally, there's higher levels of acquisition cost because you always have to find the next project, the next account in some parts of the business. Now both Julio and John are working to find ways of making the business stickier with clients and more recurring. But I would doubt that it would ever be at the levels of RIS, where, in insurance, people just say "Hey, I'd buy an insurance policy year-after-year, and it's not as cyclical and I don't really care about what economic conditions are. I might change my deductible or terms and conditions, but I'm buying that policy." It's different on the Consulting side. So while there's no natural cap, I think the idea that there's 2 elements to it: one, the P&L construction is less recurring revenue; and two, on the people side, the Consulting segment, in general, has some of our most highly-educated, world-renowned experts and you pay for those experts. And so from that standpoint, there's a bit of a constraint just on the comp and ben side.

So we'll take our final question from Charles Sebaski with BMO Capital Markets.

Have a final wrap up here on the healthcare exchange and margin accretion. I guess, Julio, when you talked about the breakdown of sort of the 25% that are still using a self-insured model within the exchange, within the Mercer Marketplace, if I was to think of a current Mercer benefit client that's a self-insured client, a larger, corporate America client, and was going to transition to a Mercer Marketplace exchange on a -- continue on a self-insured basis, is there any margin change in that client? Outside of ancillary, I understand all that different, but just on the core service, is there a margin difference?

Julio?

It's difficult to discount the impact ancillary and voluntary products will have on that margin and relationship we have with our client. So if you were to take an apples-to-apples client situation, it usually ends up when they go on the actual marketplace, there's a potential, even under self-insured, for that margin to hopefully improve, to be quite honest with you. Because over time, they will continue to sell, like I said, via voluntary and ancillary. We made a conscious decision when we went in, unlike potentially others, that we wanted to have that as a very important platform, a part of the platform. And so it's difficult to distinguish it when we made it as part of our major strategy and part -- a strong part of the platform and value proposition for all of our clients that come onto Mercer Marketplace.

Okay. I think I understand. The other question I have, quickly, is on the brokerage side of the business, on the risk side and the Marsh Agency business. I guess, when I look at the revenue base, and I know recently you said at a presentation that Marsh Agency's got about $450 million of revenue. I guess I would have thought the risk business would have had more growth? And so I guess my question would be is, on the traditional Marsh client, pre-agency, what is the retention both on number of clients and fee basis been on that piece of the business?

Sure. Let me just start by speaking broadly, and then I'll hand it over to Peter. First of all, the RIS segment, we're very happy with the level of growth and the consistency over many quarters. We've grown organically 14 quarters in a row within RIS. And when we look at the overall Marsh business in total, there's been a good mixture of high levels of revenue retention, as well as new business. So we look at that business, and we're pretty comfortable. As Peter was mentioning earlier, and we have an ethos in this shop of not calling out individual small items and trying to make everything an exception, we wear our results. But to give Peter a little bit of a pat, what he was alluding to earlier was that there was a little bit of timing in the U.S. and Canada. And there was one particular program within the agency, which is nonrecurring, which used to be a pretty big program, and a government agency decided not to buy it. And so that has had an impact in a quarter where we don't expect to be a recurring impact, and -- but I'll hand over to Peter and see if he wants to elaborate at all.

Thanks, Dan. That's very thorough, and what I would add is that I want to emphasize, again, that the fundamentals of the core business are strong. New business is strong. Client retention is very strong, and so overall, the performance, looking at it in 1 quarter, you can draw conclusions. But I try to take a look at it over a longer period of time, and I'm very confident that we're going to perform very well. And just a reminder that the 6 different businesses that we report in that segment, so it's U.S./Canada, Marsh & McLennan Agency, we have an MGA, we have a STARS, which is our RMS platform technology business, we have programs, we have private clients. So when you take that all in the mix, they don't all move in the same direction in a particular quarter. So again, Dan had highlighted some of the anomalies. There are a few more, but overall, I can assure you that the fundamentals are quite strong.

Yes, I mean, I wasn't talking about this quarter, and I probably should have said that, per se. It's just sort of, if I look at Marsh, ex-Guy Carpenter, ex-fiduciary, look at Marsh revenue, I've got about $5.5 billion for 2013 and just over $5.2 billion in 2011. And I look over that time period and go, okay, we've got $400 million of agency revenue build-up, and go, I would have thought that $5.2 million plus $400 million plus some organic growth from the traditional business would have had overall Marsh level, just higher, just on a theoretical basis, not like this quarter and anything like that.

That's fair enough, and I just want to draw it to a close. But I would, as a reminder, just go back into the notes and have a look at the consumer business, which we pulled out of Marsh, the couple hundred million dollars, and now it's counted within Mercer. And so in those numbers that you were citing, you would have to restate it for that consumer business. Okay. So thanks, Charles, and thank you, everybody. I'm very happy everybody was able to join us on the call this morning. I would also like to thank our clients for their support and our colleagues for their hard work and dedication in delivering such fine results. So have a good day, everybody.

And again, that does conclude today's conference. We thank you for your participation.