Marsh & McLennan Companies Inc

NYSE:MMC

Earnings Call Transcript 2017-Q4

[Operator]

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 Web site at www.mmc.com.

Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risk 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 on 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 Web site.

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.

[Daniel Glaser, President and CEO]

Thank you, Cathy. 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 nine 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 Risks 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, cyber attacks, 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 that Marsh & McLennan is well positioned.

Beyond our involvement in the Global Risks 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 advisor in the moments that matter, critical moments of peril and of strategic opportunity bringing advice and solutions to clients in the areas of risks, 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 have 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 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 markets 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 and we do not take any underwriting risks.

Over the last several years, Guy Carpenter has made significant investments and 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 Thomsons 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 business and position for longer term growth, we have continued to deliver consistent and strong performance.

Over the last five years, we have expanded revenue to 14 billion, added 10,000 colleagues, growth 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 five years, I am proud of what we have delivered for our clients, colleagues and shareholders. I am optimistic that the next five 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 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 capacity 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. Of the January 1st 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-On-Line Index up 6%. This moderate level of rate firming focus mostly on the U.S. and Caribbean, is far less volatile than the hard market years of 2001 and 2006 when the Rate-On-Line 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 showed 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 an important part of our global growth story contributing to MMC’s 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 project work in our DB consulting business. However, overall revenue was up 5% in Mercer as we continued 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 commitment, double-digit increase in our dividend and annual reductions 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 toward 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 the results 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 eight 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 in our communities.

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

[Mark McGivney, CFO]

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 a 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 one-time 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 & 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%.

At Marsh, revenue in the quarter rose 9% to 1.7 billion increasing 3% on an underlying basis. In 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% with 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 benefitted 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%. Resulting 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 to 1.2 billion with underlying growth of 4%. Wealth increased 4% on an underlying basis. Within Wealth, Investment Management & Related Services increased 12% while Defined Benefit Consulting & 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 with continued strong growth in our survey business and workday offerings.

Oliver Wyman grew revenue 12% in the fourth quarter to 546 million, underlying growth of 9%. Results were driven by widespread growth across the portfolio, particularly in consumer, industrial and services sectors.

Before I continue with the discussion of our results, I want to talk about two 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 3D business. Revenue will shift from the third and fourth quarters to the first and second with the first quarter seeing the bulk of the lift.

In Marsh on certain fee business, we will move to recognition and placements 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 requires that we capitalize and amortize certain costs associated with obtaining new clients and fulfilling our contractual obligation. For as today, we largely expense these costs as they are incurred. These changes will affect both segments.

For the company, the net of all of this is that we expect an overall lift in revenue and NOI in the first quarter and a more modest lift in the second quarter and decreases 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 will 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 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 standard.

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

Starting on January 1st, only the service cost component will be presented in compensation and benefits. All other elements of defined benefit pension costs will move into a separate line item below operating income.

Given that our plans are recently well funded, these other pension components have been a credit or an expense offset within the overall pension expense amount. Therefore, this change in income statement presentation will result in a decrease in operating income.

It is 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 the 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 have 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 in further reducing our exposure to defined benefit pension risks 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. plan. These actions combined with the closures of our UK, U.S., Ireland and other DB plans over the last few years have significantly reduced our exposure to interest rate volatility and long-term pension risks.

Cash contribution 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 of our global plans in 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 UK 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 a sale of an investment. For full year 2017, investment income was 50 million compared with less than 1 million in 2016. For 2018, we expect only modest investment income.

Our adjusted tax rate in the fourth quarter was 23.4% compared with 25.5% in the fourth quarter of 2016. Fourth quarter adjusted tax rate reflect a number of discrete items, the most significant of which was the impact of the accounting change related to share-based compensation.

For the full year, our rate benefit is significantly from this accounting change with the total benefit to EPS amounting to approximately $0.15 per share. Given some tax driven planning with 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 the more competitive tax rate in the U.S. and the leveling of the playing field due to the new territorial system.

While the legislation on the whole is a long-term positive for MMC, it did result in a couple of one-time charges. In the fourth quarter, we recorded a non-cash charge of 220 million to reduce the value of our deferred tax assets and liabilities.

In addition, we recognize the U.S. tax liability of 240 million on previously untaxed foreign earnings. This deemed repatriation tax liability will be paid in equal installments over eight 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 the 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. This U.S. tax reform legislation is very new and there is a possibility that as we move through the year, there will be further guidance from the U.S. treasury and others on interpretation or application of the new rule. This could result in adjustments to our revenue.

Corporate debt at year-end 2017 was 5.5 billion. As we have 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 on 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 as 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 as 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.

[Daniel Glaser, President and CEO]

Thanks, Mark. Operator, we’re ready to begin the Q&A.

[Operator]

Thank you. [Operator Instructions]. We will take our first question from Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, Wells Fargo]

Hi. Good morning. 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, so if we could just get a little bit more color on just the expense level really in both of the segments? Because I 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 strong growth in Guy Carpenter which I thought might have driven the margins a little bit more in RIS.

[Daniel Glaser, President and CEO]

Thanks, Elyse, and good morning. 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 had said before, we thought that 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 were going to have a nice top line, we decided to do a little bit of catch up. So I wouldn’t – the way I’d look at it is over long stretches of time, either a year or rolling four 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 mind.

[Elyse Greenspan, Wells Fargo]

Okay. Thank you. And my second question, 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 have 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?

[Daniel Glaser, President and CEO]

Okay. Well, first of all, we’re on the hindsight of the table, so we’re not pushing for price. But we’re the group pushing against price. But generally we recognize the market. We don’t set the price. We negotiate with a number of different high quality insurance companies and the market determines where 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. And the single biggest determinant of prices going forward is losses looking backwards. John, do you want to talk more about price and the commission and fee split?

[John Doyle, Marsh LLC]

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 prices up 3% in the fourth quarter driven of course by cat. Casualty pricing was down 1% in the quarter although that was a slightly lesser decline than what we observed in the third quarter. And then our financial lines pricing, what we saw was flat after being down more than 1% in the third quarter. U.S. pricing overall 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 grown both organically and inorganically in that segment for MMA and [indiscernible]. And I think we last mentioned here was about 60/40 a couple of years ago and it inched up a bit from that over the course of the last several years.

[Daniel Glaser, President and CEO]

Thanks. Next question please.

[Operator]

We’ll go next to Kai Pan with Morgan Stanley.

[Kai Pan, Morgan Stanley]

Thank you. Good morning. 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 – are you planning to spend some of the tax savings into – reinvesting back into the business?

[Daniel Glaser, President and CEO]

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 that – we think that this will help level the playing field, will improve U.S. competitiveness. It’s 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 two adjustments for colleagues in the U.S. who are at the lower end of our pay scale. So there are a couple of things we’re 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 one-time award of 1,000. And so we’ll tell our colleagues that basically right now. But we felt that we wanted to share a little bit and it’s the right thing for a people company to do. But Mark, do you want to add some more?

[Mark McGivney, CFO]

Kai, to your specific question on the tax rate guidance, so the outlook for next year 25% to – 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 the tax accounting change last year. But as I said, we’d expect a lot less benefit this year than we got last year.

[Daniel Glaser, President and CEO]

Anything else, Kai?

[Kai Pan, Morgan Stanley]

Just a follow-up question on margin. If you’ve looked in last five years, the average year-over-year margin – underwriting margin expansion is about 120 basis points and 2017 is a little lower at 70 basis points. I’m just wondering is that pace of improvement going to slow or you still have in addition to top line growth, but there’re potentially cost saving opportunities within the organization?

[Daniel Glaser, President and CEO]

Well, 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 already actively engaged with in all segments. I’ll just take a step back for a second and say we’ve had 10 straight years of margin expansion with the last eight 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 bips 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 five years in a row in RIS. Next question, please.

[Kai Pan, Morgan Stanley]

Thank you.

[Operator]

We’ll go next to Yaron Kinar with Goldman Sachs.

[Yaron Kinar, Goldman Sachs]

Good morning, everybody. Dan, one thing you said actually resonated with me. You said I think – you guys said on the client side and the conversations with insurers and a lot of times pricing is actually determined by kind of 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 so 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 said and present to client and an insurer ask where price increases, how do you think about that? And how likely do you think these pricing increases are to fit [ph]?

[Daniel Glaser, President and CEO]

Well, there’s a couple of things and then I’ll hand over to John. But I’d start by saying – 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 reductions. 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 carriers. They want 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 areas, the more that resonates. But whether the carriers can obtain pricing or not, certainly there’s many carriers that would disagree with your view, the casualty looks good at least from what they have said to us. But John, do you want to add to that?

[John Doyle, Marsh LLC]

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 the same, they are typically quite balanced about it. Having said that, while the economy has improved a bit, we’re still operating in a low growth world and so our clients are quite cost conscious in that perspective. What insurers are telling us is they’re starting to see signs of loss cost inflation pick up in certain lines of business. Financial lines for example would be – and certain other casualty classes. So as Dan mentioned, I think some of them at least are feeling some strain, certainly casualty. And obviously last year was a big cat year but the last several years were fairly modest cat losses. I think a lot of insurers also reported favorable development. So all those factors are part of a conversation that we had with our clients and again it’s – I think the lead relationships of 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 insurers.

[Daniel Glaser, President and CEO]

Thanks. Yaron, anything else?

[Yaron Kinar, Goldman Sachs]

Yes, just one other question. So last year I think when you gave the 3% to 5% organic growth guidance, you had said that just given the environment it was probably going to be more on the lower end of that. This year, just given that exposure growth is improving a bit and it seems like pricing has flattened or is firming, would you be willing to venture 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?

[Daniel Glaser, President and CEO]

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 and we’re one month in. So my view is that we’ve been eight 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.

[Yaron Kinar, Goldman Sachs]

Thank you.

[Daniel Glaser, President and CEO]

Sure. Next question.

[Operator]

We’ll go next to Arash Soleimani with KBW.

[Arash Soleimani, KBW]

Thank you. 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?

[Daniel Glaser, President and CEO]

We watch our wage inflation. We’re a good payer. When I look at our comp and ben 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 economic theory is 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, a backbone to it. And so clearly wages are a significant part of our – and comp and ben 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.

[Arash Soleimani, KBW]

Okay. Thanks. And then I just wanted to just double check on the pension accounting change, so a 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 to what extent could it impact operating?

[Daniel Glaser, President and CEO]

Mark, why don’t you take that?

[Mark McGivney, CFO]

Basically it will affect adjusted EPS and GAAP EPS and you can get to the adjusted EPS in the schedule that we provided.

[Arash Soleimani, KBW]

Okay. Thank you.

[Daniel Glaser, President and CEO]

Thanks. Next question, please.

[Operator]

We’ll go next to Jay Gelb with Barclays.

[Jay Gelb, Barclays]

Thank you. With regard to the comment of expectation 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?

[Daniel Glaser, President and CEO]

Mark, do you want to take that?

[Mark McGivney, CFO]

Yes, Jay, with the caveat. You’ll see our pro forma. We don’t expect meaningful year-over-year change in revenue recognition. And just also factor in the changes 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.

[Jay Gelb, Barclays]

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?

[Mark McGivney, CFO]

Well, one thing I would point out, Jay, is remember this 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 – going forward.

[Operator]

We’ll go next to Sarah DeWitt with JPMorgan.

[Sarah DeWitt, JPMorgan]

Hi. Good morning. I have 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?

[Daniel Glaser, President and CEO]

Mark?

[Mark McGivney, CFO]

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 tailwind as we go into 2018. Obviously, there’s been a lot of volatility over the last couple of months but at least at the stage where it is, we could see some tailwind. And to get a sense for it, as you referenced, if you look back to some of our 10-K disclosure, if the dollar moves directionally against the top four currencies that we have, the pound, euro, Canadian dollar and Australian dollar, 10% moves in the dollar across those four currencies is around $50 million change in operating earnings.

[Sarah DeWitt, JPMorgan]

Okay, great. Thank you.

[Operator]

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

[Paul Newsome, Sandler O’Neill]

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

[Daniel Glaser, President and CEO]

Generally what we focus on over the last several years is acquiring companies that are growing faster than our company. And when they have a technology or digital venture to them, you’re right in that the cost 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. 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 have done and Julio can add a little bit more to this, 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, do you want to take that?

[Julio Portalatin, Mercer Investment Management, Inc.]

Thanks, Dan. What you said is a very accurate assessment of what’s going on 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 make, we make it in the backdrop of short-term and long-term consequences we go in with our eyes wide open. That means that on occasion we make an acquisition where in the short term it could be a little tempering to short-term profits as we continue to invest [indiscernible] 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 for 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.

[Daniel Glaser, President and CEO]

Thanks, Julio. Paul, anything else?

[Paul Newsome, Sandler O’Neill]

No. I just wanted to be clear because it sounds – 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. And essentially the earnings mix is shifting to more of a remnant growth from more a margin growth, that’s all I’m trying to grasp at.

[Daniel Glaser, President and CEO]

Well, I would disagree with you, Paul. I don’t think this is the margin expansion story. If you look over 10 years, this is the NOI growth story and it will continue to be an earnings story.

[Paul Newsome, Sandler O’Neill]

Fair enough. Knock on wood you’ve had some margin growth, so that’s good. Nothing to be ashamed of.

[Daniel Glaser, President and CEO]

Yes, we’ll take the margin expansion, absolutely. But we’ll focus more on earnings growth and we have been for a long time. Next question, please.

[Operator]

We’ll go next to Jay Cohen with Bank of America.

[Jay Cohen, Bank of America Merrill Lynch]

Thank you. A question I guess in the RIS segment is EMEA. I 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 before that geographic region?

[Daniel Glaser, President and CEO]

It’s a good question, Jay, and I’ll hand over to John. In looking at the business in all of this moving parts and 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’s usually something and clearly I know from conversations with John there’s been a lot of digging into the results in EMEA. But John, do you want to give us some more?

[John Doyle, Marsh LLC]

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 and strong total revenue growth both in the quarter and in the year. U.S. and Canada had a best year in quite a long time, as Mark mentioned, both in MMA and in the Marsh brokerage operations. On the international side, it was more of a mixed result. Latin America had a terrific year, Asia-Pac and particularly in Asia really an outstanding year. Continental Europe to your point actually had a solid year. The disappointment in EMEA was in the UK and in the Middle East. In the UK we had a tough prior year comp. It continues to be a challenging insurance market there and of course the macros in the UK economy are difficult at the moment. We made a big acquisition a couple of years ago with Jelf and a year ago with Bluefin. We’re quite pleased and 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 have less project revenue in the fourth quarter, less new business overall and we’re 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 at 3% underlying growth and the strong total revenue growth for Marsh.

[Jay Cohen, Bank of America Merrill Lynch]

But it sounds like the headwinds will persist for a little bit in 2018?

[John Doyle, Marsh LLC]

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 UK and Middle East next year.

[Jay Cohen, Bank of America Merrill Lynch]

Great. Thanks.

[Daniel Glaser, President and CEO]

Next question, please.

[Operator]

We’ll go next to Josh Shanker with Deutsche Bank.

[Joshua Shanker, 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 there’s very different growth depending on the business. And over the year margin has been about flattish. If we look into the individual businesses, our margins are 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?

[Daniel Glaser, President and CEO]

Yes, so a couple of things. One, we don’t declare margins by individual operating companies. We have two 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 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 zero. And so from that standpoint and I look over Mercer a 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.

[Joshua Shanker, Deutsche Bank]

And if you look at bolt-ons potentially, is there more properties and opportunities on the brokerage side than there are on the consulting side or vice-versa or is it really they’re both quite fertile with a lot of opportunities?

[Daniel Glaser, President and CEO]

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 happen to be small or 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 have good opportunities in the pipeline. It’s kind of a joke internally I start every year saying, oh, the pipeline doesn’t look as good as it should 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. You run a labyrinth here in terms of when we make an acquisition. We do a thorough review of the chemistry and the counterparties that 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 and will continue.

[Joshua Shanker, Deutsche Bank]

Good luck in the new year. Thank you.

[Daniel Glaser, President and CEO]

Thank you very much.

[Operator]

We’ll go next to Brian Meredith with UBS.

[Brian Meredith, UBS]

Thanks. One quick question here for you. Just on Guy Carpenter’s results in the quarter, the great organic revenue growth we had, how much of that growth was kind of one-timers, like backup covers, transaction that happened as a result of the significant event in the third quarter which did not happen in previous years?

[Daniel Glaser, President and CEO]

Well, first of all, bless you Brian for asking Mr. Hearn a question after a terrific 7% quarter and a 4% year. Peter, do you want to take that?

[Peter Hearn, Guy Carpenter & Co. LLC]

Thank you, Dan. Brian, yes, we certainly benefitted from reinstatements and 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 businesses. Also we benefitted 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.

[Brian Meredith, UBS]

Great.

[Daniel Glaser, President and CEO]

Sorry, go ahead, Brian.

[Brian Meredith, UBS]

Yes, just one other quick one just thinking about outlook here, economic growth as we look going forward. Can you just remind us what is the kind of lag effect that your business has relative to when we kind of see nominal GDP rising in U.S. and UK and other areas of the world?

[Daniel Glaser, President and CEO]

Yes, I’ve never actually figured that out on a technical basis. I would just say that 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 build in lag. And I was trying to make the point before that it does feel brighter on the macros but it’s still very sensitive, relatively fragile and we’re not seeing a booming level of growth anywhere. If you look at what was 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 that’s just low levels of growth. So I’m not expecting a boom of exposure units, although I do think U.S. tax reform will be a benefit to many companies investing in the U.S. and also residents in the U.S. And so I look forward to the company being able to capture some of that benefit.

Operator, I think we’re finished with 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.