威達信集團 (MMC) 2017 Q4 法說會逐字稿

Welcome to the Marsh & McLennan Companies' Conference Call.

Today's call is being recorded.

Fourth quarter 2017 financial results and supplemental information were issued earlier this morning.

They are available on the company's website at www.mmc.com.

Please note that remarks made today may include forward-looking statements.

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

For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K, all of which are available on the MMC website.

During the call today, we may also discuss certain non-GAAP financial measures.

For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release.

I'll now turn this call over to Dan Glaser, President and CEO of Marsh & McLennan Companies.

Thank you, Kathy.

Good morning, and thank you for joining us to discuss our fourth quarter results reported earlier today.

I'm Dan Glaser, President and CEO of Marsh & McLennan Companies.

Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses: John Doyle of Marsh; Peter Hearn of Guy Carpenter; Julio Portalatin of Mercer; and Scott McDonald of Oliver Wyman.

Also with us this morning is Dan Farrell of Investor Relations.

I recently returned from the World Economic Forum in Davos, which I have attended for the last 9 years.

This is the first time I left Davos more optimistic than when I arrived.

Several economic factors indicate that the world may finally be emerging from the long slow growth aftermath of the financial crisis.

And in my conversations with other CEOs, it was clear that they were more confident about the next few years than they have been in the recent past.

However, looking further out, they had a lack of visibility and some anxiety about the acceleration of advances in technology, including potential exponential growth in AI, robotics and 3D printing, digitization and disruption and the implications for their companies and workforce.

For the 13th consecutive year, the WEF released its annual global risk report, which was prepared with the support of Marsh & McLennan Companies and other partners.

Some of this year's concerns with likely probability included extreme weather events, natural catastrophes, cyberattacks, data fraud and the failure of climate change adaptation and mitigation.

The global issues discussed at Davos are a reminder of the uniqueness of MMC and the value we bring to our clients.

And I came away from this year's meeting confident and Marsh & McLennan is well positioned.

Beyond our involvement in the global risk report, we held many prominent sessions and gatherings on key topics.

Highlights included Mercer's when women thrive session, which for the second year in a row, was a highly attended event.

Another well-received session was Oliver Wyman's annual state of financial services lunch, which addressed how FS companies can learn from technology firms.

Our purpose is to be a trusted adviser in the moments that matter, critical moments of peril and of strategic opportunity bringing advice and solutions to clients in the areas of risk, strategy and people.

These areas involve dealing with enduring challenges, providing us a fundamental underpinning for growth and resiliency.

The strength of our strategic position and consistency of our strategy are true differentiators and the execution of our balanced approach continued in 2017.

Over many years, we've consistently improved our mix of business and positioned the company for future growth through acquisitions and organic investments.

Since 2009, we have invested nearly $9.2 billion of capital towards growth and the improvement of Marsh & McLennan.

This includes $6.4 billion of capital across 143 transactions and $2.8 billion of capital expenditures.

An example of our efforts to build a better company is our expansion into U.S. middle-market brokerage through Marsh & McLennan Agency, accounting for 62 acquisitions and nearly $2.8 billion of capital deployed.

This is a faster-growing area of our overall business and now accounts for about $1.2 billion of annual revenue.

Recently, we have build -- we have been building out our underwriting and claims capabilities in our MGA platform with the announced acquisition of ICAT in 2017, providing catastrophe capacity in the small and middle-market space.

Our growing MGA business is an example where we are developing new products and services and expanding our participation in the value chain.

As a reminder, our MGA platform underwrites on behalf of insurers and reinsurers, but we do not take any underwriting risk.

Over the last several years, Guy Carpenter has made significant investments in innovations in data and analytics as well as building out capabilities in the areas of public sector, including flood, mortgage, structured risk and cyber.

Consulting growth going forward should also benefit from the significant investments we have made in both Mercer and Oliver Wyman.

As representative examples, in Mercer, we have made investments in Thompson's online benefits and Mercer Marketplace 365, further strengthening our leading position in global health and benefits.

Through acquisitions and organic expansion, we have driven considerable growth in delegated asset management.

We have also built a strong workday implementation practice in our career business.

All of these investments enhance our position in faster-growing segments within Mercer.

Increasingly, clients expect digital offerings to be a core part of everything a firm does.

And with that in mind, Oliver Wyman has repositioned its digital technology and analytics team, or DTA, to become a powerful horizontal capability supporting clients across industry sectors.

Oliver Wyman now has over 400 people aligned with these capabilities.

Within DTA, we continue to build out Oliver Wyman labs, which helps clients create impact from their data through advanced analytical techniques and new technology.

Our recent acquisitions of LShift and Draw further expand our technical and digital design capabilities.

As we have made these ongoing investments to improve our businesses and position for longer-term growth, we have continued to deliver consistent and strong performance.

Over the last 5 years, we have expanded revenue to $14 billion, added 10,000 colleagues, grown adjusted NOI from $1.9 billion to $3 billion.

Increased adjusted operating margin 560 basis points to 21.2% and delivered average annual adjusted EPS growth of 13%.

Consistent execution takes discipline as investments are almost always a near-term headwind to EPS growth when compared with share repurchase.

While we are striving to deliver strong financial performance in the near term, we favor mid- to long-term value creation for our clients and shareholders.

When I look back over the last 5 years, I am proud of what we have delivered for our clients, colleagues and shareholders.

I am optimistic that the next 5 years will provide continued opportunities for Marsh & McLennan.

Before moving to our results, I'd like to give you a brief update on P&C market conditions.

There remains a wide range of estimates around losses from 2017 catastrophic events, but what is a abundantly clear is that 2017 was a devastating year for many communities affected by these losses.

According to Guy Carpenter's estimates, 2017 is only the third time in history that annual global insured catastrophe losses have been over $100 billion.

As we said last quarter, the market would find its own equilibrium against this backdrop of loss activity as capital remains abundant and demand has not fundamentally changed.

Guy Carpenter estimates that dedicated reinsurance capital was up 2% overall in 2017, with alternative capital up 9% despite the sizable catastrophic losses incurred by the industry.

As of January 1, reinsurance renewals, some agreements were [bound] later than normal, but the end results were fairly orderly with the overall Guy Carpenter global property catastrophe rate online index up 6%.

This moderate level of rate firming focused mostly on the U.S. and Caribbean, which is far less volatile than the hard market years of 2001 and 2006 when the rate online index increased 28% and 37%, respectively.

In primary lines, the Marsh global insurance rate composite saw a slight increase, with rates up 1% on average, compared to previous low single-digit declines.

Global property lines show the largest degree of rate increases while casualty and FINPRO were flat to down slightly.

While we are not in a hard market, it is fair to say that the rate of change in pricing is slightly higher than it has been for the last several years.

Now let's move to our financial performance.

We capped off another excellent year with a strong fourth quarter.

In the fourth quarter, we produced underlying revenue growth of 4% on a consolidated basis, including 3% growth in RIS and 6% growth in consulting.

We also delivered 18% growth in adjusted EPS, driven by strong operating income growth and margin expansion in both segments as well as the benefit in the tax rate from discrete items.

In terms of our full year performance, MMC had an excellent year delivering underlying revenue growth of 3%, comprised of 3% growth in RIS and 4% in consulting, 70 basis points of adjusted margin expansion and 15% growth in adjusted EPS.

Although there is a lot of focus on underlying growth and rightfully so, acquisitions have been a consistent and important part of our global growth story contributing to MMC strong 6% revenue growth in 2017.

In Marsh, overall revenue grew 7% for the year with underlying growth coming in at 3%.

Results were led by our U.S./Canada division, which grew 9% overall with 4% underlying growth highlighted by strong performance across our U.S. businesses.

Guy Carpenter had an outstanding year capped by a strong fourth quarter, producing 4% underlying growth for the full year.

Mercer's underlying growth was 2% primarily due to a falloff of the project work in our DB consulting business.

However, overall revenue was up 5% in Mercer as we continue to invest in acquisitions in faster-growing areas.

Mercer's underlying revenue growth of 4% in the fourth quarter positions us well going into 2018.

Oliver Wyman finished the year strong and delivered 7% underlying growth in 2017.

Lastly, we continue to deliver on our capital commitments, double-digit increase in our dividend and annual reduction in our share count.

Before I touch on our outlook, I would like to comment on U.S. tax reform.

The legislation that was passed goes a long way towards leveling the playing field from a capital flexibility and tax rate perspective.

Not only for us, but for all U.S.-based multinationals that compete globally and have done so at a disadvantage.

As a result of the legislation, we expect sustained benefit to our tax rate, earnings and cash flow.

Looking ahead to 2018, we see the potential for a slightly better operating environment than in 2017.

The macro picture seems stable, if not a bit brighter, but bear in mind, overall GDP growth rates across the globe are still extremely modest by historical standards.

Our consolidated underlying revenue growth has grown in the range of 3% to 5% for the last 8 years, and this remains our expectation for 2018.

In addition, we expect to expand margins in both segments and deliver strong growth in adjusted EPS.

Before closing, I want to say I'm exceedingly proud of the way our people all around the world responded in critical moments last year.

I would like to acknowledge and thank our nearly 65,000 colleagues for continuing to deliver for our clients while also stepping up to support each other and our communities.

With that, let me turn it over to Mark to give you more details on our fourth quarter performance.

Thank you, Dan, and good morning.

Our fourth quarter performance represented a great finish to an excellent 2017.

We delivered underlying revenue growth in all of our operating companies, strong adjusted operating earnings growth and adjusted operating margin expansion in both segments.

Consolidated revenue increased 10%, reflecting solid underlying growth of 4% and the continued contribution from acquisitions.

Operating income increased 8% while adjusted operating income rose 12% to $755 million.

And our adjusted operating margin increased 40 basis points to 20.5%.

Because of the significant onetime adjustments relating from U.S. tax reform as well as other noteworthy items, our GAAP EPS in the fourth quarter declined to $0.06 per share.

Adjusted earnings per share increased 18% to $1.05.

Looking at Risk and Insurance Services, fourth quarter revenue grew 9% to $2 billion and was up 3% on an underlying basis.

Adjusted operating income increased 12% to $473 million, and the adjusted margin expanded 60 basis points to 24.1%.

In Marsh, revenue in the quarter rose 9% to $1.7 billion, increasing 3% on an underlying basis.

The U.S./Canada division underlying growth was 4% for both the quarter and the full year.

This represents the best full year underlying growth for U.S./Canada in a decade.

In the quarter, the International division had underlying growth of 1%, Latin America up 9%, Asia-Pacific up 5%, and EMEA down 3%.

Guy Carpenter's revenue was $239 million, an increase of 7% on an underlying basis, representing a strong finish to an outstanding year for Guy Carpenter.

Growth in the quarter benefited from reinstatement revenue and backup cover activity resulting from the significant catastrophe losses in the third and fourth quarters.

In the Consulting segment, revenue increased 10% to $1.7 billion with underlying revenue up 6%.

Consulting's adjusted operating income increased 10% to $330 million, the adjusted operating margin expanded 10 basis points to 19%.

Mercer's revenue increased 9% in the quarter, $1.2 billion with underlying growth of 4%.

Wealth increased 4% on an underlying basis.

Within wealth, invested management and related services increased 12% while defined benefit consulting and administration increased 1%.

Assets under delegated management continued to grow and at quarter-end were $227 billion.

Health revenue grew 3% on an underlying basis in the fourth quarter, reflecting improved retention and a rebound in project work.

Career grew 6% on an underlying basis and continued strong growth in our survey business and workday offering.

Oliver Wyman grew revenue 12% in the fourth quarter of $546 million with underlying growth of 9%.

Results were driven by widespread growth across the portfolio, particularly in consumer, industrial and services sectors.

Before I continue with a discussion of our results, I want to talk about 2 new accounting standards we will be adopting in the first quarter of 2018.

The first and most significant is the new revenue accounting standard, ASC 606.

This new standard will have a meaningful effect on the seasonality of our revenue and earnings, with revenue and profitability shifting to the first and second quarters from the third and fourth quarters.

While revenue and profitability will be accelerated across quarters, there should be no material change to our full year results.

For us, the largest impact on revenue will be in Guy Carpenter, where we will see an acceleration of revenue across most of our Treaty business.

Revenue will shift from the third and fourth quarters to the first and second, with the first quarter seeing a bulk of the lift.

In Marsh, on certain fee business, we will move to recognition at placement as opposed to a more proportional performance-based approach.

This will result in revenue shifting out of the first quarter and into the subsequent quarters, but not enough to offset the acceleration in revenue in Guy Carpenter.

In Mercer and Oliver Wyman, we don't expect any significant impact on revenue.

The standard also required that we capitalize and amortize certain costs associated with obtaining new clients and fulfilling our contractual obligation.

Whereas today, we largely expense these costs as they are incurred.

The changes will affect both segments.

For the company, the net of all of this is that we expected overall lift in revenue and NOI in the first quarter and more modest lift in the second quarter and decrease in the third and fourth quarters.

As I mentioned, we don't expect a material change on a full year basis.

We will adopt this new standard using the modified retrospective approach, which means we will not restate prior years and quarters, but rather we'll reflect the change prospectively starting in 2018.

As required under this approach, when we report results in 2018, we will also be providing our 2018 numbers on the old basis of accounting, so investors can clearly see the impact of the accounting change and gauge our underlying operating performance.

We recognize that the transition to this new accounting presents a challenge in projecting our quarterly results for 2018.

In order to help you better assess the potential impact on 2018, we intend to share a recap of 2017 revenues and expenses by segment as well as overall adjusted operating income and EPS for each quarter and the full year according to the new standards.

We plan to provide this unaudited, non-GAAP pro forma information to you through an 8-K filing by the end of March.

The information we furnish will be our best estimate of what 2017 results would have looked like had we applied ASC 606 last year.

In addition to the new revenue standard, we will also be adopting another new accounting standard relating to the presentation of defined benefit pension cost in our income statement.

Previously, all components of defined benefit pension cost were combined and reflected as a net amount in compensation and benefits.

Starting at January 1, only the service cost component will be presented in compensation and benefits.

All other elements of defined benefit pension cost will move into a separate line item below operating income.

Given that our plans are reasonably well funded, these other pension components have been a credit or an expense offset within the overall pension expense now.

Therefore, this change in income statement presentation will result in a decrease in operating income.

It's important to recognize that this is a change in presentation only and that all of the major elements of pension expense have always been disclosed in our financial statements.

This change has no impact on our EPS, net income or cash flow.

Under this standard when we report our 2018 financial results, we are required to restate prior years.

In order to assist you in understanding this change and to provide a basis for modeling going forward, we've included restated segment operating income and consolidated income statement information for 2016 and 2017 on Page 13 of our supplemental schedule.

Also for modeling purposes, we would suggest using the amount of this credit in 2017 as a reasonable basis for estimating this line item in 2018.

Now back to our results.

As we typically do on our fourth quarter calls, I'd like to update you on our global retirement plan.

2017 was another active year for further reducing our exposure to defined benefit pension risk and volatility.

We closed our defined benefit pension plan in Canada, our third-largest plan, and undertook a voluntary cash out program in our U.S place.

These actions combined with the closures of our U.K., U.S., Ireland and other DB plans over the last few years have significantly reduced our exposure to interest rate volatility and long-term pensions and risk.

Cash contributions to our global defined benefit plans were $314 million in 2017, including a $50 million discretionary contribution to our U.S. plan in the fourth quarter.

Given the improvement in funded status for global plans into 2017, we expect cash contributions to drop to roughly $100 million in 2018.

One final item to note on pension.

In the fourth quarter, we recorded a $54 million charge resulting from distribution elections made by participants in our U.K. pension plan.

This charge is reflected as a noteworthy item and not included in our adjusted results.

Investment income was $12 million in the fourth quarter, a majority of which was due to a gain on sale as an investment.

Our full year 2017 investment income was $15 million compared with less than $1 million in 2015.

For 2018, we expect only modest investment income.

Our adjusted tax rate in the fourth quarter was 23.4% compared to 25.5% in the fourth quarter of 2016.

Fourth quarter adjusted tax rate reflects a number of discrete items, a more significant of which was the impact of the accounting change related to share-based compensation.

For the full year, our rate benefited significantly from this accounting change with the total benefit of EPS amounting to approximately $0.15 per share.

Given some tax-driven planning and accelerated option exercises from 2018 into the fourth quarter of 2017 as well as the lower tax rate in the U.S., we currently project substantially less tax benefit from this item in 2018.

For the full year 2017, our adjusted tax rate was 25.4% compared with 28% in 2016.

Let's spend a minute on U.S. tax reform.

Overall, we are pleased with the tax reform legislation.

We will benefit from a more competitive tax rate in the U.S. and the leveling of the playing field due to the new territorial system.

Although legislation on the whole was a long-term positive for MMC, it did result in a couple of onetime charge.

In the fourth quarter, we recorded a noncash charge of $220 million to reduce the value of our deferred tax assets and liability.

In addition, we recognized the U.S. tax liability of $240 million on previously untaxed foreign earning.

This deemed repatriation tax liability will be paid in equal installments over 8 years.

Given the nature of these adjustments, both are reflected as noteworthy items and, therefore, excluded from our adjusted results.

Based on the current environment and taking into account our estimate of how we will benefit from U.S. tax reform, it is reasonable to assume a tax rate between 25% and 26% for 2018.

When we give forward guidance on our tax rate, we do not project discrete items, which can be positive or negative.

In addition, our tax rate is sensitive to other factors such as changes in the geographic mix of our earnings.

As U.S. tax reform legislation is very new and there's a possibility that as we move through the year, there will be further guidance from the U.S. Treasury and other on interpretation or application of the new rules.

This could result in adjustments to our estimates.

Corporate debt at year-end, 2017 was $5.5 billion.

As we've said in the past, as part of our capital deployment plans, we will likely increase our debt balance each year in line with any debt capacity we create through earnings growth.

Accordingly, we would expect to be active in the debt market during 2018 although the exact amount and timing of an issuance is uncertain.

Obviously, our current run rate of interest expense will change depending on the amount and timing of any new debt.

Our next scheduled debt repayment is in October 2018 when $250 million of senior notes will mature.

Cash in our balance sheet at year-end was $1.2 billion.

As planned in 2017, we deployed $2.5 billion of capital across dividends, acquisitions and share repurchases.

Uses of cash in the fourth quarter totaled $535 million and included $300 million for share repurchases, $195 million for dividends and $40 million for acquisitions.

For the full year, our uses of cash totaled $2.5 billion and included $900 million for share repurchases, $740 million for dividends and $872 million for acquisitions.

For 2018, we expect another year of significant capital deployment.

Based on our current outlook, we would expect to deploy at least as much capital as we did in 2017 across dividends, acquisitions and share repurchases.

Lastly, in 2017, we delivered on our capital return commitment.

We reduced our share count by 6 million shares or 1.1% and increased our dividends per share by 10%.

For the full year 2017, we produced 3% underlying revenue growth, 10% adjusted operating income growth, 70 basis points of adjusted operating margin expansion and 15% growth in adjusted EPS.

As Dan said for 2018, we expect underlying revenue growth in the 3% to 5% range, margin expansion in both segments and strong growth in adjusted EPS.

With that, I'm happy to turn it back to Dan.

Thanks, Mark.

Operator, we're ready to begin the Q&A.

(Operator Instructions) We'll take our first question from Elyse Greenspan with Wells Fargo.

My first question is just on the margins that we saw in the quarter.

Was there an element of, maybe, you guys saw a pretty strong growth quarter accelerating some expenses.

If we could just get a little bit more color on just the expense level really in both of the segments because I had thought in consulting that you guys had pointed to margins better in the back half than the first half of the year and it did slow down a little bit in the fourth quarter.

And I know you guys saw a strong growth in Guy Carpenter, which I thought might have driven the margins a little bit more in RIS.

Thanks, Elyse, and good morning.

I mean, as we've said a couple of times before, we focus on earnings of the company.

And overall, when I look at the quarter, we're up 12%, when I look at the year, we're up 10%, so we feel very good about that.

You're very right in that when we run the business we're seeking to grow our revenues at a faster pace than our expense.

Certainly every year and in most cases in every quarter as well.

And so this year was kind of a different year because we had a little bit less visibility on the revenue line as we've said before, we thought some of the project work was softer than we expected.

And so we ran the business on the expense side reasonably tightly.

When we got some visibility into the fourth quarter and saw that we're going to have a nice top line, we decided to do a little bit of catch-up.

So I wouldn't -- the way I look at it is, over the long stretches of time, either a year or rolling 4 quarters, there's always things that we want to do to invest in the business, both on the people side and on the technology side, and so this was just business as usual in our minds.

Okay.

And my second question on -- I appreciate the commentary on the pricing environment.

If you can maybe just give a little bit more color on kind of the dialogue with your clients as you talk about pushing for price, those that had losses and didn't have losses over the past year.

And then also, is it possible -- can we get a breakdown of your business mix between commissions and fees for both RIS and Consulting?

Okay.

Well, first of all, we're on the client side within the table so we're not pushing for price.

We're the group pushing against price and -- but generally, we recognize the market is the market, right?

We don't set the price, we negotiate with a number of different high-quality insurance companies and the market determines where the prices are going, and usually, as you noted that has a -- it's impacted by what was the loss activity in previous quarters and previous years.

The single biggest determinant of prices going forward is losses looking backwards.

But -- John, you want to talk a little bit more about price and the commission fee split?

Sure.

Rate change continued to move upward slightly in the fourth quarter, as Dan mentioned in his prepared remarks.

It's mixed, of course, by product and geography, but it's within a pretty tight range, I would say.

As Dan said prices were up globally by 1%.

The biggest change in the quarter on a product basis, of course, was in property where we saw the prices up 3% in the fourth quarter driven, of course, by CAT.

Casualty pricing was down 1% in the quarter although, there was a slightly lesser decline than what we observed in the third quarter and then our financial lines pricing in FINPRO what we saw was flat after being down more than 1% in the third quarter.

U.S. pricing overall is still down slightly in the aggregate.

Australia is probably the biggest outlier where we saw the largest change, where prices were up nearly 10% in the quarter.

As Dan mentioned, capital remains plentiful.

We're working and focused on optimizing the right outcome for our clients.

From a fee commission split, it's trended more towards commission as we've increased exposure to the middle market and growing both organically and inorganically in that segments of MMA and Jelf.

And I think we last mentioned, it was about 60-40 a couple of years ago and it's inched up a bit from that over the course of the last several years.

Okay, next is Kai Pan with Morgan Stanley.

My first question is on the tax rate guidance, 25% to 26%, just want to confirm that number is inclusive of less benefits from the stock-based compensation and also any -- or you plan to spend some of the tax savings into sort of reinvesting the sector back into the business.

Okay.

So I'll make a couple of comments, Kai, then I'll hand over to Mark to give you some more information, but let's just start by saying, we're really pleased that tax legislation finally passed, and we think that this will help level the playing field, will improve U.S. competitiveness.

It was good for us, but it's good for a lot of our clients in the U.S. as well, so we might see some exposure growth, some investment as a result of it.

So overall, really good news.

As I said before, the bulk of the tax savings will drop into earnings and improve free cash flow.

However, we will make 2 adjustments for colleagues in the U.S. who are at a lower end of our PayScale.

So the couple of things we are going to do.

First, all U.S. colleagues earning below $16 on an hourly basis will be increased to $16 per hour.

And second, U.S. colleagues earning $55,000 or less will receive a onetime award of $1,000.

So we'll tell our colleagues that basically right now what we felt that we wanted to share a little bit and it's a right thing for a people company to do, but Mark, you want to add some more?

And Kai, to your specific question on the tax rate guidance.

So the outlook for next year 25% down to 20% -- or for this year, 25% to 26%, that excludes all discrete items so just to be clear.

That doesn't include any provision for any benefit we might get from this tax accounting change last year, but as I said, we'd expect a lot less benefit this year than we got last year.

Anything else, Kai?

Just a follow-up on Elyse question on margin.

If you look at last 5 years average year-over-year margin -- underwriting margin expansion, it's about 120 basis points, and 2017 is a little lower at 70 basis points.

I'm just wondering, is that pace of improvements going to slow?

Or you still have like in addition to top line growth, but there are potentially cost-saving opportunities within organization.

But we always have both top line opportunities and efficiency opportunities.

The drive for efficiency gains never ends, and it's something that the company is very actively engaged within all segments.

I'd just take a step back for a second, say, we have had 10 straight years of margin expansion with the last 8 years being in both segments.

And we've said, many times, we don't actively manage to expand margins.

We manage the business to grow earnings, and we do our best to run a proper business where revenue growth exceeds expense growth almost all the time.

And so we are pleased with 70 bps of margin expansion in a year, where underlying revenue growth was 3%.

We think that's a really good outcome, and it's not ideal.

But we have proven, over time, particularly in RIS that we can grow margins at 3% underlying growth.

We've done it 5 years in a row in RIS.

So next question, please?

And we'll go next to Yaron Kinar with Goldman Sachs.

Dan, one thing you said actually resonated with me.

You said -- I think -- you guys said on the client side in the conversations with insurers and a lot of time pricing is actually determined where the losses have been retrospectively or backwards looking.

Can you maybe help us think about the environment going into 2018 where -- it seems like capital is still pretty adequate in the industry and hasn't moved much.

Haven't really seen, at least on the casualty side, a whole lot of losses emerge.

I think the industry is still profitable, and then you have tax reform kicking in on top of that.

As you sit and present the client, and an insurer asks for price increases, how do you think about that?

And how likely do you think these pricing increases are to stick?

Well, there's a couple of things, and then I'll hand over to John.

But I'd start by saying, why -- when I look at the market over the last several years, I don't think it was a soft market driven by aggressive broker activities or clients demanding rate reduction.

I think it was a market driven by many insurance companies, lots of capital and the pursuit of growth by many insurers.

And so it was more about, I'd say, supply of capital exceeding demand than any other factor.

When you look at the overall discussions that we have with clients, clients are usually pretty balanced about their carrier.

They want some -- a few deep strategic relationships with capital providers and then they sort of want some regional relationships and maybe some specialty ones.

But ultimately, there's a lot less switching based upon price, certainly in our portfolio.

And the more you get into the large account area, the more that resonates.

But the -- whether carriers can obtain pricing or not, certainly, there's many carriers that would disagree with your view that casualty looks good, at least from what they have said to us.

But John, you want to add some to that?

Yes.

I would emphasize, Dan, I think while most of our clients do take a long-term view and they don't look at every insurer relationship as the same.

They're typically quite balanced about it.

Having said that, while the economy has approved -- improved a bit, we're still operating in a low growth world.

And so our clients are quite cost conscious from that perspective.

But insurers are telling us is -- they're starting to see signs of lost cost inflation pick up in certain lines of business.

Financial lines, for example, would be a -- and certain other casualty classes.

So as Dan mentioned, I think, some of them at least are feeling some strain, certainly in casualty.

And obviously, last year was a big CAT year, but the last several years, were fairly modest CAT losses, and I think a lot of insurers also reported favorable development.

So all those factors are part of a conversation that we have with our clients.

And again, it's -- I think there are lead relationships, certain insurers that have that lead position in critical lines of business with our clients.

Those conversations are very different than other lines.

So the outcome on the insurance company side can be quite different from insurer to insurer.

Yaron, anything else?

Yes.

Just one other question.

So last year, I think when you give the 3% to 5% organic growth guidance, you'd said, but just given the environment, which is probably going to be more on the lower end of that.

This year, just given that exposure growth is improving a bit and seems like pricing has flattened or it's firming, would you be willing to venture in and say that it would be on the higher end of that 3% to 5% rate?

Or 3% to 5% is where you're comfortable being right now?

Yaron, I've been at this too long.

I'm not willing to venture in any way when we're just starting the new year.

We're 1 month in.

So my view is that we've been 8 years in a row, 3% to 5%.

That captures where we're likely to be, I think, right now based upon the macro factors and how we see the world.

And so 3% to 5%, and I'll leave it at that.

Next question.

And we'll go next to Arash Soleimani with KBW.

I just had a quick question.

I know you're still seeing optimistic on margin expansion potential.

I just wanted to ask, do you think from a wage inflation perspective, it's becoming a bit tougher to expand margins by as much?

We watch for wage inflation.

We're a good payer.

When I look at our comp and benefits as a percentage of revenue, it's consistent with the people business.

Our people are our greatest asset by far.

And so we try to stretch ourselves and support them where we can.

And so when we look at wage inflation in general, we recognize the economics theory as unemployment drops, there's probably more pressure on wages and we see that.

We haven't seen that come through yet.

We do think that some of the productivity gains over the last several years for a lot of companies have a technology backbone to them, and also just have a -- people work longer than they used to backbone to it.

And so clearly, wages are a significant part of our -- and comp and benefit in general is a significant part of our cost base, but we don't see inflation at this stage, and we believe that overall, we pay our people properly.

Okay.

And then I just wanted to just double check on the pension accounting change.

So question for Mark, I guess.

To what extent did you say it will impact operating EPS in 2018?

I know you said GAAP EPS won't be impacted, but what to what extent could it impact operating?

They're -- basically, it will affect adjusted EPS and GAAP EPS and you can get to the adjusted EPS in the schedule that we provided.

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

With regard to the comment of expectations of strong adjusted EPS growth in 2018, I just wanted to understand first, is $3.92 the baseline we should be starting from in 2017?

Mark, you want to take that?

Yes, Jay, with the caveat.

You'll see our pro formas.

We don't expect meaningful year-over-year change in revenue recognition, but -- and just also, factor in the change in taxes.

So we had that significant benefit from the tax accounting change.

But of course, the benefit this year from tax reform.

But once you consider those factors, absolutely the results for 2017 are a good baseline for 2018.

Okay.

And just a follow-up on that if I'm thinking about it the right way.

So if I lower the adjusted tax rate expectation for 2018 to the range you gave, that seems to be like a $0.20 benefit.

But taking out that net benefit credit on pension, that seems to be like a $0.30 headwind.

So it sounds like there would be just in the core business, more earnings growth, plus the benefit of share buybacks that would get you to that strong adjusted perspective, right?

Well the thing I would point out, Jay, is remember, the pension accounting change doesn't have any impact on EPS.

So that's P&L geography above the line.

So if you're looking at adjusted EPS or GAAP EPS, I wouldn't consider that in your roll call.

And we'll go next to Sarah DeWitt with JPMorgan.

I had a question on FX.

The dollar has had a big move.

So how should we be thinking about the benefit of that for 2018?

And can you just remind us your sensitivity to the dollar?

Mark?

Sure, Sarah.

FX wasn't much of a story in the fourth quarter, which is why I didn't mention it.

And the dollar has weakened here in the early part of this year.

So as we sit here today, if the dollar doesn't move, FX looks like it could be a bit of a tailwind as we go into 2018.

Obviously, there's been a lot of volatility over the last couple of months.

But as we said, if it stays where it is, we can see some tailwind.

And to get a sense for it, if you reference, if you look back to some of our 10-K disclosures, if the dollar moves directionally against the top 4 currencies that we have.

So pound, euro, Canadian dollar, Australian dollar, 10% move in the dollar across those 4 currencies is around a $50 million change in operating earnings.

We'll go next to Paul Newsome with Sandler O'Neill.

I want to ask whether or not some of the -- we might see some margin compression due to the acquisitions.

Are we -- is it generally the case that you're buying things that will have lower margins than your existing margins?

And is that something we should look out for in the future?

No.

I mean, generally what we focus on is -- over the last several years is acquiring companies that are growing faster than our company.

And when they have a technology or digital bent to them, you're right, in that the costs for them on a multiple basis because of their high growth may be higher than an acquisition of a company that's more traditional, growing in a more traditional way.

And so we saw the impact of that through this year, particularly in the first half.

But really, for the full year, there was a bit of a drag on our overall margins because of acquisitions that we had done last year.

And we expect the higher growth from those acquisitions to help us kick in and turn them positive.

Where we've been investing for growth for many years, all you have to do is look at the increases in our amortization expense and you can see that we have been absorbing a reasonable amount of acquisition type of costs as we continue to build our margins, and as we build a better company.

We've always said that we are working real hard to deliver good financial returns in the short term as we build a better company and we favor putting money to work for the mid- and long term for Marsh & McLennan.

We feel an obligation to do that as an executive committee.

So that's where our focus is.

The other thing that we've done and Julio can add a little bit more to this.

I mean, and particularly within Mercer and a couple of acquisitions, we saw such an opportunity that even though they were recent acquisitions, rather than just run them as-is, we started investing money into them to capture more of the growth opportunity for the future.

But Julio, you want to take that?

Thanks, Dan.

I mean, what you said is a very accurate assessment of what's going with our acquisitions.

They continue to be, our acquisitions continue to be a very critical part of our growth strategy and we have a strong track record over many years of being able to make very value-driven acquisitions, and we will continue to do that as time goes on.

Just like any other decisions that we may, we make it in the backdrop of short, medium and long-term consequences.

We're going with our eyes wide open.

That means that on occasion, we can make an acquisition whereas in the short term, it could be a little tempering to short-term profit as we continue to invest when for the medium and long-term returns.

And the acquisitions mentioned that Dan was alluding to, are around the whole SaaS technology model being more digitized, putting us as significant outcomes from our clients who need that type of support as they grow their digital strategies.

So we want to be that partner.

We want to be there and be strong with them as we look at growth and pivot to where our clients need us most.

Thanks, Julio.

Paul, anything else?

No, I just wanted to be clear.

Because I mean, it -- this has been sort of a -- whether you like it or not -- a story where it's been a lot about margin expansion.

And there's been a lot of stock buybacks.

Essentially, the earnings growth mix is shifting to more of a revenue growth from a more of a margin growth.

That's all I'm trying to get at.

Well, I would disagree with you, Paul.

I don't think this is a margin expansion story.

If look over 10 years, this is an NOI growth story.

And it will continue to be an earnings story.

Fair enough.

Knock on wood, you've had some margin growth.

That's -- nothing to be ashamed of...

Yes, yes, yes.

No, no.

We'll take the margin expansion, absolutely.

But we're focused more on earnings growth, and we have been for a long time.

So next question, please?

And we'll go next to Jay Cohen with Bank of America.

Question, I guess, on the RIS segment is EMEA.

You get a sense that the economy in Europe tends to be doing better, but the organic growth there year-over-year was kind of the worst comparison we've seen in a long time.

I'm wondering, one, what's happening?

Two, what the outlook would be for that geographic region?

It's a good question, Jay, and I'll hand over to John.

I mean -- in looking at the business and all of its moving parts, not only geographically, but in the opcos and line of business, I don't think we've had a quarter yet in 10 years where everything worked in concert.

So there was usually something.

And clearly, I know from conversations with John, there's been a lot of digging into the results in EMEA.

But John, you want to give us some more?

Sure, Dan.

Thanks, Jay, for the question.

We certainly were disappointed in the results in EMEA.

But again, to frame it, overall, we thought it was a good growth year.

Some strong total revenue growth both in the quarter and the year.

U.S. and Canada had its best year in quite a long time.

It was -- as Mark mentioned, both in MMA and in the Marsh brokerage operations.

So on the International side, it was more of a mixed results.

Latin America had a terrific year.

Asia-PAC, particularly in Asia, really an outstanding year.

Continental Europe, to your point, actually had a solid year.

The disappointment in EMEA was in the U.K. and in the Middle East.

In the U.K., we had a tough prior year comp.

It continues to be a challenging insurance market there.

And of course, the macros in the U.K. economy are difficult at the moment.

We made a big acquisition a couple of years ago with Dell, 1 year ago with Bluefin.

We're quite pleased that have a long-term view and like having exposure to the middle market part of the economy there, but it's challenging at the moment.

In the Middle East, it was also a challenge.

We had less project revenue in the fourth quarter.

Less new business overall, and we were struggling to overcome some nonrecurring business from the fourth quarter in 2016.

But again, overall, I'm pleased with the growth we had for the year with at 3% underlying growth and the strong core revenue growth for Marsh.

Is there anything else, Jay?

It sound like the headwinds will persist for a little bit in 2018?

Certainly the macros.

I think, some of the nonrecurring challenges are a bit more quarter-to-quarter.

Some of our specialty operations have had more challenging results, but we certainly expect a bit more in the U.K. and Middle East next year.

We will go next to Josh Shanker with Deutsche Bank.

Yes.

I guess I want to ask a question based on something Paul was getting at.

If we look at the growth rate within Mercer, obviously, is a very different growth depending on the business.

And over the year, margin has been about flattish.

If we look in the individual businesses, our margin is very different for the different businesses, and is there a way of structuring Mercer for better growth over the long term by focusing on certain lines and whatnot?

Yes.

So a couple of things: one, we don't declare margins by individual operating companies.

We have 2 segments, Consulting and RIS, and we've shown our margins on that basis for a long period of time.

There obviously are differences between the different businesses, including within the businesses on a margin basis, but ultimately, we run them -- we run our businesses as segments and we declare margins on that basis.

If I look at Mercer for the year.

Mercer had a decent year except for the third quarter, where they were 0, right?

And so from that standpoint, and I look over Mercer.

Number of quarters over a number of years, they've generally been a 3%, sometimes even a 4% type of grower.

And so fundamentally, there's nothing wrong with Mercer.

There's nothing wrong with Mercer's structure, nor the structure of the company.

We expect to have growth between 3% to 5% of strong EPS delivery for the year and margin expansion in both segments in 2018.

So for us, it is business as usual going ahead, similar to as we've done over the last decade.

And as you look at bolt-ons, potentially, is there more properties and opportunities on the brokerage side than there are in the consulting side, or vice versa?

Or is it really they're both quite fertile with a lot of opportunities?

No, they're both fertile with a lot of opportunities.

The brokerage side, when you see a bolt-on, you may be looking at a company that's existed for 20 years or 25 years, and they had happened to be small and local, but that it's been -- it has a long history.

Whereas on the consulting side, you see a lot more boutiques that may have been formed in the last 5 or 10 years, less of a track record of performance, but maybe greater capability in an area that we might be a little short.

And so we've good opportunities in the pipeline.

It's kind of a joke.

Internally, I start every year saying, the pipeline doesn't look as good as it should.

Well -- and every year, we end up spending between $800 million and $1.2 billion or-something on acquisitions which are not particularly large for a company of our size.

And so this year right now, we look at it and there's plenty of things for us to engage in and we're getting a lot of looks at things.

Where -- you run a labyrinth here in terms of when we make an acquisition, right?

We do a thorough review of the chemistry and the counterparties and we want to be as open and transparent with whatever company we're seeking to acquire as they are with us.

And so we want to make sure that it's a good match before we tie the knot.

And so we're working that right now on a continuum.

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

One quick question here for you.

Just on the Guy Carpenter's results in the quarter, the great organic revenue growth we had.

How much of that growth was kind of one-timers backup covers, transactions that happen as a result of the significant events in the third quarter?

We've seen that happen in previous years.

Well, first of all, bless you, Brian, for asking Mr. Hearn a question after a terrific 7% quarter and a 4% year.

I wanted to -- Peter, you want to take that?

Yes, yes.

Thank you, Dan.

Brian, yes, we certainly benefited from reinstatement.

It was a backup coverage, that's clear.

But we're also pleased that the balance of our growth was across all of our regions and businesses as well as a breakdown between new business and renewal business as well.

Also, we benefited from growth in a lot of the initiatives that Dan talked about in his opening comments as well.

So yes, there's no doubt that reinstatement backup coverage helped our quarter, but we had a strong quarter nevertheless.

Great.

Just wanted a quick one.

Just thinking about outlook here, economic growth as we look going forward.

Can you just remind us what is the lag effect that your business has relative to when we see nominal GDP rising in the U.S., U.K. and other areas of the world?

I mean, I've never actually figured that out on a technical basis.

I would just say that we do -- we do see a correlation in our businesses to GDP and to business confidence.

GDP more on the RIS side, a mixture of GDP and business confidence on the consulting side.

When you look at -- recurring revenue tends to have an annual renewal period, and so there's a lag as an example of that.

That fundamentally, you don't get an immediate lift if you see exposure growth until that renewal happens, and a big part of Marsh, Guy Carpenter and Mercer is recurring revenue.

So from that standpoint, there's always some element of built-in lag.

And I was trying to make the point before, that it does feel brighter on the macros.

It is still very sensitive and relatively fragile.

And you are not seeing a booming level of growth anywhere.

I mean if you look at in the newspapers recently about global growth statistics around the world, apart from a few countries, everybody was in that 1 to high 2s range.

And it's just low levels of growth.

So I am not expecting a boom of exposure.

Although I do think U.S. tax reform will be a benefit to many companies investing in the U.S., and also resident in the U.S. And so I look forward to the company being able to capture some of that benefit.

But I'd like, operator, I think we're finished with the Q&A now.

So I would just like to reiterate that I'm very proud of the team.

I think it was an excellent year both on the overall delivery of earnings and margin expansion, revenue growth, both GAAP basis and on an organic underlying basis.

So we look forward to 2018.

I'd like to thank our clients for their support, and our colleagues for their hard work and dedication in serving them.

So thank you very much.