威達信集團 (MMC) 2013 Q3 法說會逐字稿

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 would like to remind you that remarks made today will include statements relating to future events or results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to inherent risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by the forward-looking statements.

Please refer to the Company's most recent SEC filings, which are available on the 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.

Now I will 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 am Dan Glaser, President and CEO of MMC.

Joining me on the call today is Mike Bischoff, our CFO.

I would also 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 Keith Walsh, head of Investor Relations.

Following my comments, Mike will discuss our financial results in more detail, and then we will 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 four-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 nine months of this year.

At the same time we continue to execute on our other three 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 dividends, acquisitions, and share repurchase.

We believe a balanced approach to deployment of capital will contribute to long-term earnings growth and maximize total return to shareholders.

Now let's look at our third-quarter results in more detail.

Both Risk and Insurance Services and Consulting delivered double-digit growth in adjusted operating income and excellent margin improvement, as they have each quarter this year.

Our consolidated adjusted margin rose 150 basis points to 14.1%.

Underlying revenue growth again exceeded the increase in underlying operating expenses, as it has for 21 of the past 22 quarters.

We expect to continue to achieve operating leverage while making investments across our businesses.

The operational improvements we have embedded over the last several years have led to higher colleague productivity, efficiencies in our global real estate footprint, and reduced professional liability costs.

At the same time, we are continuously investing in areas that will support future growth and drive additional efficiencies.

We are investing in growth markets and new offerings, building sales capacity, expanding distribution, creating innovative analytical platforms and capabilities, and making strategic hires and acquisitions.

We are confident we have a powerful engine to generate revenue and earnings growth in both segments.

Risk and Insurance Services produced another quarter of excellent profitability as adjusted operating income rose 14%.

Underlying revenue increased 3% at Marsh and 5% at Guy Carpenter.

The adjusted margin expanded to 15.2%, the segment's highest third-quarter margin in a decade and an increase of 130 basis points from the prior year.

At Marsh, revenue was $1.2 billion as all major geographic regions contributed to 3% underlying revenue growth.

The International division expanded 6%, led by growth of 15% in Latin America, 7% in Asia-Pacific, and 3% in EMEA.

In the US/Canada division, underlying growth was 1%.

Revenue growth was driven by client revenue retention supported by strong new business, which totaled over $250 million in the third quarter.

Guy Carpenter continued its solid financial performance and long-term trend of underlying revenue growth.

Revenue was $262 million in the third quarter, an increase of 5% on an underlying basis.

This is an impressive performance in an environment where Guy Carpenter is experiencing higher risk retentions by clients and softening pricing conditions.

Growth was broad-based across North America, International, Global Specialties, and UK Facultative, led by double-digit gains in Continental Europe, Canada, and Global Marine.

Consulting's performance in the third quarter was outstanding.

Revenue was $1.4 billion, up 4% on an underlying basis, the segment's best performance in the last five quarters.

Adjusted underlying expense growth of 1% reflects the benefit of prior actions and expense control.

This produced adjusted operating income of $231 million, an increase of 13%, marking the segment's third consecutive quarter of double-digit growth.

The segment's margin increased 150 basis points to 16%, Consulting's highest third-quarter margin in its history.

This marked improvement has occurred while navigating challenging macroeconomic conditions.

Mercer had an excellent third quarter.

Revenue was $1.1 billion, an increase of 4% on an underlying basis.

Health and Investments continued to lead the way, with increases of 5% and 8%, respectively.

Retirement had an increase in project work, resulting in 2% growth, and Talent grew 2% as well.

Growth was achieved across all geographic regions.

In October, Mercer announced that it had signed up 52 employers onto its private US healthcare exchanges.

Since that time, Mercer has signed up an additional four employers and now has 34 that will offer benefits through Mercer Marketplace, its active exchange, and 22 employers that are offering Mercer's Medicare retiree exchange solution.

In total, Mercer's exchanges will cover over 220,000 employees, retirees, and family members for 2014.

Oliver Wyman returned to positive revenue growth in the third quarter with underlying revenue increasing 2% to $365 million.

The revenue increase was driven by Financial Services, Oliver Wyman's largest practice, which represents approximately 40% of its revenue.

Oliver Wyman's sequential improvement in revenue performance was broad-based across major regions, including North America and Europe.

In summary, MMC's performance in the third quarter and through the first nine months of the year was excellent.

Our results show that the Company's strong earnings momentum continues.

We will host an Investor Day in New York on March 11, where we will provide more insight into MMC's operational and financial strategies.

We hope you will join us.

With that, let me turn it over to Mike.

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.

While 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 nine 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 nine 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 UK was reduced in July.

While this will benefit us going forward, the value of our UK 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 nine 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 five-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 and the $500 million debt financing.

Our cash utilization in the third quarter included $150 million to repurchase 3.6 million shares of stock, marking six 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) Mike Zaremski, Credit Suisse.

Hi, thanks.

Good morning.

In Risk and Insurance Services, US 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 Agency's middle markets strategy has been impacting this segment's growth rate?

Thanks.

Okay, so first of all, I will 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 will hand off to Peter, who can give us a little bit more detail.

Sure.

Thanks, Dan.

First I would like to highlight some of the real strong performance we had in the quarter and year to date.

In 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 recognized in the US/Canada division we have had modest growth at 1% in the quarter.

It is a seasonably low quarter for Marsh and the US/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 nine 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 US/Canada division.

And also employee Health and Benefits for the core brokerage in the US is reported in Mercer.

To answer the second part of your question on Agency, they have had good organic growth where we would expect them to be in line with their comparables in the middle market, in the US.

So they have 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.

Okay.

That's helpful.

Lastly, this is probably for Mike Bischoff.

Is there any sensitivity you could 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 through the income statement.

Thank you.

Mike, you want to take that?

Sure.

I would be happy to.

You are absolutely right on two categories -- first, pension expense and, second, contributions into our pension plans.

Let me deal with 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.

Over the last five years we have seen interest rates go down dramatically.

I should say this is more in the intermediate and longer-term rates where the discount rate is calculated.

We have absorbed through our P&L approximately $250 million of additional pension expense during that time period.

So your question is very appropriate -- what is 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 of 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 is very hard to anticipate where pension expense would be.

I would just point you to say that there is two interest rates that you should track.

One is obviously the US rate and the other one is the UK rate, because we have a very large UK pension plan.

The second part of your question deals with cash contributions into the plan.

You can see that we are 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 two reasons.

At this point in time we do not plan to make any discretionary contributions into our global plans.

And as we have indicated, $250 million of the funding for this year was dedicated to pre-funding of future obligations in the UK that would cover the 2014, 2015, and 2016 time periods.

Very helpful.

Thank you.

Greg Locraft, Morgan Stanley.

Thanks.

Good morning and congrats on another nice quarter.

Thank you.

Wanted to ask about the -- your healthcare exchange initiative.

Really two 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 healthcare 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?

Then the other question on healthcare exchange is 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 am going to start off by saying that we have a large business, of course, in total Mercer that is quite over $4 billion of revenue.

Any movement in the exchange in one quarter or the other would have some impact, but not significant impact in the overall results of Mercer.

It is a very large organization.

But specific to your question about whether or not you are going to see a fourth-quarter bump or not in revenue, 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 will 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 is going on sometimes it is difficult to see what are the distinctive factors.

I want to really focus on a couple of things that I think have 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 have 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 risk changes as well as premium taxes.

So these advantages don't necessarily go away when you go onto the exchange.

So overall when you combine what we believe is a very large availability of choice -- 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 are very well positioned as we look at the competition and the future.

Perfect.

Thank you, Julio.

Okay, thanks.

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 -- there is 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 is going to develop.

And I'm not going to get too crazy about the speculation of that; I will 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 is a 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 is anyone's guess as to how big this ultimately will become.

And no matter what the outcome, we think we are very well positioned.

So as Dan mentioned earlier we are very pleased with the clients that we have sold in the first year so far, and we are pleased with the pipeline that is developing not only for 2015 but also for midyear 2014.

And we have been pretty consistent in saying that while we expect exchanges to be a contributor to revenue and earnings in the medium term, in the short term the impact will be modest.

Thanks, Julio.

Okay, great.

Thanks and congrats again on the quarter.

Thanks, Greg.

Next question, please.

Larry Greenberg, Janney Capital.

Good morning, everybody.

A 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 are driving really strong margin improvement, and we know you are spending money on investment initiatives, and we are all fixated on the healthcare 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 am not sure we would use that same word in terms of a full turnaround, but we are 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.

So from that standpoint, it is 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 are seeing growth or improvement across-the-board and expect then improvement to sustain.

So looking ahead, based on the pipeline we are seeing, we expect to sustain positive revenue growth in Q4 and have good momentum going into 2014 in all of our major markets.

Okay.

Then turning to Julio -- and I'd just start by saying that we have 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, you want to take that?

Thanks, Dan.

The third quarter represented another quarter of solid performance for Mercer.

We continued to execute on our growth initiatives.

We are delivering against our strategic priorities, and we are 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 are investing in -- of course the health area and investments business overall.

We are also seeing some good growth coming from our growth markets initiatives to expand internationally, and we are seeing the beginning fruits of that labor.

And we are 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.

You go in an organization, you have opportunity to really take a bird's eye view on what is going on.

You make assessments where you need to disinvest, and at the same time you make assessments where you need to invest more.

We have been doing that and calibrating that over the last couple years, and that is also going to be a discipline that we will continue to do as time goes on.

As far as specific areas of investment that we are 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.

So exchanges obviously is one thing that we have talked about, and I am sure we will continue to talk about as time goes on.

But talent and client-facing technology is very important to us as well, and we have put a lot of breadth of improvement, especially in an area that is like data and surveys; we see good margins there and obviously we are investing in those areas to bring that to be a larger portion of our portfolio.

We are taking legacy systems and we are obviously retiring some, investing in new generation systems.

Salesforce.com was a big investment for us.

We think that we will 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 over time.

Retirement Studio, which is an enabling vehicle for us to be able to do some additional actuarial work for retirement; strategic hires; expansion in 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 will continue to do that and run the Company in a disciplined manner.

Thanks, Julio.

Next question, please.

Dan Farrell, Sterne Agee.

Hi and good morning.

Of the roughly $2.2 billion of free cash on the balance sheet, can you give us the mix of International versus US cash currently?

And then could you also talk about the outlook for getting cash from the International subs to the US 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, billion.

Yes, where did that extra money go anyway?

(laughter) Of that $2.2 billion -- it is actually $2.174 billion -- $250 million of it, as I indicated, was paid down in October for funding the 2015 debt.

So when you look at our remaining cash, what we typically do during this time period is you see it grow because we are working towards the first quarter with regard to bonus payments.

So it is 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 will 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 US funding purposes.

And those funding purposes are acquisitions in the US, dividends, and share repurchase.

So we are in the process of moving more of our international funds, even as I am speaking now, into the US for share repurchase and for looking at bonus payments in the first quarter.

So overall, we are working down our excess cash.

We are bringing it into the US in a tax-efficient manner.

And it is a very good story with regard to returning capital to shareholders.

Can you give the mix of how much is US now?

Or is it more appropriate to wait till fourth quarter, given you are in the process?

I think it is 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 US and global; so I have that information.

But I think it is probably just best to wait.

Thanks, Mike.

Any other questions, Dan?

Yes, also just on your -- just with regard to Guy Carpenter.

I was wondering if you could talk about the outlook for growth going forward.

You have had continued nice organic there, and I think your competitors have as well.

Maybe better than I would have thought, given some potential headwinds there that we are 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.

Well, as you say, we have been on a good run of organic growth now for quite a while and despite outside headwinds during all that while.

I think that is down to the quality of our people, the quality of our offering, and the fact that we have good discipline.

We have widened our net.

We have segmented our client base, and we are coming up with discrete value propositions for each of those areas.

I would point out a mutual segment that is very successful, an E&S segment that we have just opened up.

We have 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 are the employer of choice.

We have got the best people.

We are investing, and we will continue to grow, we believe.

Thanks, Alex.

Thank you very much.

Sure.

Next question, please.

Meyer Shields, Keefe, Bruyette & Woods.

Thanks.

Good morning.

If I can follow up on that question, does the I guess recent merger of two slightly smaller reinsurance brokerages, does that change the competitive dynamics in your reinsurance markets?

Well, clearly there is a change because something has just happened.

But we will continue.

We respect our competitors, but we are focused on our clients and focused on growing, focused on having the best people investing right, and that is what we will continue to do.

So we are not blind.

We keep our eyes open, but we move ahead.

Okay.

Fair enough.

And Meyer, we generally think competition is a good thing.

Competition keeps us on our toes and makes sure that we are always innovating and creating additional value for clients.

So we have a lot of respect for our competitors, but we believe our proposition is unique.

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 a year for compensation?

Sure, absolutely.

I would just say in a broader sense, we are now passing our sixth consecutive quarter of share repurchase.

So when we were talking with you I guess about 18 months ago, we committed to meaningful share repurchase and we are following through on that.

Our view is that as we go forward our uses of cash would very much remain continuing to invest in our business -- although that is usually not lumpy because we have 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, you want to take the specific question about the actual share count?

Yes, Dan.

I would be happy to do that, but I think it probably is good to put into context what you were describing, which is really -- what is the aggregate level of shares outstanding that we had with regard to our stock options and restricted stock units?

So essentially, what was the overhang?

If you go back and look as recently as the end of 2009, when you combine those two, 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.

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 have really been absorbing and catching up with this overhang.

So when we look at it not only for this year -- and I will 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 are looking at about 15 million of shares issuance this year for the restricted stock, but predominantly stock option exercise, dealing with -- for many years we had very limited exercise of stock options, but now it is fairly high.

And we think that for this year it will be about 10 million.

So specifically answering your question, of 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, I 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 are through the most of the catch-up, and if we continue meaningful share repurchase -- which is our intent -- we will flatten out the share count and perhaps even turn it downward.

That's very helpful.

Thank you so much.

Sure.

Next question, please, operator.

Jay Gelb, Barclays.

Thank you.

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 it will all flow through adjusted.

Correct?

That is correct.

Mike?

Okay.

Dealing with interest expense, the run rate I think for the last couple quarters is about $40 million.

We did just issue debt.

The average cost of that debt, though, is 3.3%.

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 was $24 million; that is $0.03.

The third part of your question I think dealt with investment income, predominantly the carried interest with regard to Trident III.

We do not do the calculations; that calculation is done by the private equity firm that manages and overseas Trident III.

It is 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 are going through the calculation and giving us that information, trying to give it to us in a timely fashion.

That is why we say it is 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 is 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.

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 eight quarters.

Perhaps you can just give us a bit more perspective on what you are doing on the expense front to keep that low.

Sure, sure.

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 is not just salary inflation, which runs about 3% a year for the people who are still at the Company; but it is also pension expense, as we have mentioned before, and some other areas of benefits.

So the comp and ben line has been rising.

So the real story is the great job that we have been doing on all other expenses.

So from that standpoint it is everything from premises to T&E to meetings, and there's literally about 30 categories of expense that we have 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.

So a big part of the story, frankly, over the last four 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 to wear that within your P&L.

So what you are seeing here is not a one-year story.

It is basically a couple of years that roll forward as a benefit and in with the things that we are 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 EPS.

And we have said you stick with us over a 10-year period, we will give you a CAGR of EPS of 13% or so.

We have been delivering on that basis.

We are not saying it is every year or every quarter, but we certainly think we will do it over the long term.

The last point is margin, and we seek margin expansion.

And we will always have margin expansion if we continue to have expense growth less than revenue growth.

Now, to be sure, as the margin gets higher and higher in either segment, the ability to deliver margin expansion of significant levels reduces, because the air that you would need between expense growth and revenue growth gets wider and wider as the margin goes up.

And it would be bad leadership and management if we looked at those businesses and said -- now that the margin is terrific, we want more air, so we want you to be investing less in day-to-day in those businesses.

So we are very open.

We don't see it in front of us now, but certainly over the years we would expect, as these margins keep improving, that at some point in time we won't be as focused on double-digit operating income growth.

We would remain very focused on double-digit EPS growth, but it would shift slightly.

But we don't see that in front of us today.

Right.

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

Correct.

Thanks, Dan.

Sure.

Next question, please.

Brian Meredith, UBS.

Two quick questions, one just back on the exchanges, just quickly.

Of the new clients that you've got, this I guess 56, I am just curious.

How many of those were actually existing benefits administration clients for Mercer?

So what is the actual new business that you are actually getting versus just putting somebody in the exchange?

Okay.

So just one thing, Brian, as you recall, if you go back a quarter or two we were saying that any time you are 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.

So I will 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 midyear enrollments and also 2015.

And I also want to make sure it is 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 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 than core medical.

So we have 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 just it's a different revenue model.

Is that correct?

Yes, I mean we expect it; time will tell, because we are just launching now.

Right?

The 2014 clients are launching as we speak.

They are obviously coming in and looking at what we have to offer, and time will tell in the near future as to how the average revenue per client actually behaves.

Great.

Then one quick one on the reinsurance, if I may.

Wonder if you can tell a little bit about your supply of alternative capital right now coming in for 1/1 renewals.

Is there still a 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 is the big subject in the reinsurance world.

We estimate around $45 billion and growing of interest, looking to be deployed, because not that much of that amount is deployed.

I think the insurance companies are taking a balanced look.

They are going to use traditional reinsurance; they are going to use this new capital.

The effect on us, clearly it is a bit of a headwind.

But on the other hand we are seeing, because of the way we have our revenues either from -- as a fee structure or capped commission, the effect is being mitigated somewhat.

We're actually getting a lot of new cap business, so we are doing -- I think our revenues are probably double what they were last year year-to-date.

So it is providing a lot of options to our clients, and where there are options there is need for advice, and that is what we are doing.

We are making sure we understand the appetite of the suppliers of capital and the appetite or demand of those who need it, and trying 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 capped commissions, so you're not going to see the impact?

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

It is actually a relatively small piece.

And is a relatively small amount given --

Got you.

Yes, it is a relatively small piece.

Next question, please.

Thanks.

Michael Nannizzi, Goldman Sachs.

Most of my questions have been answered.

I had a question on the exchange.

I am trying to understand.

I think if someone moves to an exchange, I am guessing part of the reason they do that is to divorce themselves from rising healthcare costs.

Can you talk about why a company would move to an exchange to self-insure?

Is it really just to outsource the management of the benefits, or is there another aspect to that decision that I am missing?

Julio, you want to take that question?

Yes, there several reasons why companies consider 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 is 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 is usually as a result of moving from a defined-benefit type of 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 am sure they will 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 costs 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 is using the services of Mercer to bend the cost curve through wellness programs and comparison-shopping between different medical providers.

So it is 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 are deciding which company to give their services and time to.

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 healthcare.

Because if your competitors don't, then you may be opening yourself up to some talent vulnerability.

I guess on that point, how do you weigh the decision, Dan, to move or not move to an exchange with your employee base?

I am guessing to the extent you did, you probably already know which exchange you would go with.

Yes, I pretty much have that one down.

And Julio is sitting right next to me on my right.

So for us, 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 were relevant to them and their family sizes and a whole slew of other things.

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.

So just to be clear, Marsh & McLennan Companies will be joining Mercer Marketplace at the point in time that Mercer Marketplace says -- we will make the catch without impacting any other clients.

Got it.

Understand.

Thank you.

Sure.

I think, operator, we have time for one or two more questions, so next question, please.

Jay Cohen, Bank of America Merrill Lynch.

Thank you.

Two questions.

The first is on the Consulting business.

Do you see a natural limit to the margins, given that business model?

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?

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.

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 is 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.

So it is more about the mechanics of the business in terms of how the P&L is arrived at.

So naturally there is higher levels of acquisition costs 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 buy an insurance policy year after year, and it is 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 am buying that policy.

It is different on the Consulting side.

So while there is no natural cap, I think the idea that there is two elements to it -- one, the P&L construction, there 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.

From that standpoint there is a bit of a constraint, just on the comp and ben side.

Got it.

Thanks, Dan.

Sure.

Okay.

I think we have time for one more question and then we will call it a morning.

Charles Sebaski, BMO Capital Markets.

Good morning.

Thank you.

Have a final wrap-up here on the healthcare exchange and margin accretion.

I guess, Julio, when you talked about the breakdown 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 Benefits client that is a self-insured client, a larger corporate America client, and was going to transition to a Mercer Marketplace exchange, 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 is difficult to discount the impact that 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 is 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, buy 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.

So it is difficult to distinguish it when we made it as part of our major strategy and 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 basis, recently you have said at a presentation that Marsh Agency has got about $450 million of revenue; I guess I would have thought the Risk business would have had more growth.

So I guess my question would be -- on the traditional Marsh client free agency, what has the retention both on number of clients and fee basis been on that piece of the business?

Sure.

Well, let me just start by speaking broadly and then I will hand it over to Peter.

First of all, the RIS segment, we are very happy with the level of growth and the consistency over many quarters.

We have grown organically 14 quarters in a row within RIS.

And when we look at the overall Marsh business in total, there has been a good mixture of high levels of revenue retention as well as new business.

So we look at that business and we are 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 pass, what he was alluding to earlier was that there was a little bit of timing in the US 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.

So that has had an impact in a quarter where we don't expect to be a recurring impact.

But I will hand over to Peter and see if he wants to elaborate at all on that.

No, thanks, Dan; it was very thorough.

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.

So overall the performance -- looking at it in one quarter you can draw conclusions, but I try to take a look at it over a longer period of time and am very confident that we are going to perform very well.

Just a reminder that the six different businesses that we report in that segment -- so it's US/Canada; Marsh & McLennan Agency; we have an MGA; we have a STARS, which is our RMIS platform technology business; we have programs; we have private client.

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 wasn't talking about this quarter and I probably should've said that per se.

It is just if I look at Marsh, ex-Guy Carpenter, ex-fiduciary, look at Marsh revenue, I have got it about $5.5 billion for 2013 and at just over $5.2 billion in 2011.

And I look over that time period, and go -- okay, we have got $400 million of Agency revenue buildup.

And go -- I would have thought that $5.2 billion 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.

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 have pulled out of Marsh, the couple hundred million dollars; and now it is counted within Mercer.

So in those numbers that you were citing, you would have to restate it for that Consumer business.

Okay.

Okay?

So thanks, Charles, and thank you, everybody.

I am 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.

Again, that does conclude today's conference.

We do thank you for your participation.