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Executives

Brian Duperreault - Chief Executive Officer, President, Director, Member of Finance Committee and Member of Executive Committee

Daniel S. Glaser - Chief Operating Officer and Group President

Vanessa A. Wittman - Chief Financial Officer and Executive Vice President

Alexander S. Moczarksi - Executive Officer

Peter Zaffino - Chief Executive Officer of Marsh Inc and President of Marsh Inc

John Drzik - Chief Executive Officer of Oliver Wyman Group and President of Oliver Wyman Group

Analysts

Keith F. Walsh - Citigroup Inc, Research Division

Jay A. Cohen - BofA Merrill Lynch, Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Yaron Kinar - Deutsche Bank AG, Research Division

Jay Gelb - Barclays Capital, Research Division

Larry Greenberg - Langen McAlenney

Adam Klauber - William Blair & Company L.L.C., Research Division

Raymond Iardella - Macquarie Research

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Marsh & McLennan Companies (MMC) Q4 2011 Earnings Call February 14, 2012 8:30 AM ET

Operator

Welcome to Marsh & McLennan Companies Conference Call. Today's call is being recorded. Fourth quarter 2011 financial results and supplemental information were issued earlier this morning. They are available on Marsh & McLennan Companies' website at www.mmc.com.

Before we begin, I would like remind you that remarks made today may include statements relating to future events or results, which are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to inherent risks and uncertainties. In particular, references during this conference call to anticipated or expected results of operations for 2012 or supplemental periods are forward-looking statements and Marsh & McLennan Companies' actual results may be affected by a variety of factors. Please refer to Marsh & McLennan Companies' most recent SEC filings as well as the company's earnings release, which are available on the Marsh & McLennan Companies' website, for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. I would now like to turn the conference over to Mr. Brian Duperreault, President and CEO of Marsh & McLennan Companies

Brian Duperreault

Good morning, and thank you for joining us to discuss our results as reported earlier today. I'm Brian Duperreault, President and CEO of Marsh & McLennan Companies. Joining me on the call today is Dan Glaser, Group President and COO; and Vanessa Wittman, our CFO. Also, I'd like to welcome our Operating Company CEOs, Peter Zaffino of Marsh; Alex Moczarksi of Guy Carpenter; Julio Portalatin of Mercer; and John Drzik of Oliver Wyman. Also with us is Mike Bischoff.

My remarks will focus primarily on our full year results and Dan will provide more detail on the fourth quarter. Vanessa will then update you on our financial position. Before we begin the discussion of our results, I'd like to welcome Julio to our company. Julio joined us as President and CEO of Mercer 2 weeks ago. He comes to us from AIG, where he held a broad range of senior positions over 19 years. Most recently, he was President and CEO of Chartis Growth Economies. Julio has had a very successful track record of running large global businesses. His strong leadership characteristics and international experience will serve him well as Mercer’s CEO.

Now let's move to our financial results. I'm very pleased that we continue to deliver revenue and earnings growth across the enterprise. Marsh & McLennan's performance this year was outstanding. In 2011, we generated revenue growth of 9% with 5% growth on an underlying basis. Importantly, we continue to achieve this revenue growth while maintaining control over expenses with adjusted underlying expenses increasing 4%. As a result, we produced 12% growth in adjusted operating income for the year. In fact, this is the second consecutive year that both of our operating segments achieved double-digit growth in operating income.

You've heard me talk many times since our September 2010 Investor Day about our plans to produce double-digit organic growth in adjusted operating income. Over the past 2 years, we have delivered against that goal, averaging 11% growth. Within Risk and Insurance Services, revenue increased 9%. Importantly, underlying revenue growth of 5% represents a significant increase from the 2% underlying growth in the prior year, and we generated 12% growth in adjusted operating income and margin improvement.

Marsh produced underlying revenue growth of 4% with all major geographies contributing. This was driven by higher client retention rates and new business development. Guy Carpenter also produced impressive results in 2011. Underlying revenue growth was 5% driven by both ongoing revenue with new business development and higher retention rates. This was a milestone year for Carpenter as well as revenue exceeded $1 billion for the first time.

The Consulting segment also delivered an impressive performance. Revenue grew 9% with underlying growth of 5%. Adjusted operating income rose 12% and the segment margin improved as well. Mercer produced underlying revenue growth of 4% and Oliver Wyman's growth was 7% for the second straight year.

So in summary, throughout Marsh & McLennan last year, we saw revenue increases and higher levels of profitability. We are very pleased with this performance, which confirms the investment case we articulated at Investor Day in September 2010. We generated organic growth and adjusted operating income of 12%. Growth in adjusted EPS was 13%, excluding the early debt retirement and these are the earnings from which we plan to grow this coming year. Our dividend yield averaged 3%. We maintained low capital requirements. We generated high levels of cash and we made progress on lowering the company's risk profile. As we move forward, we remain committed to focusing on profitable growth and prudent deployment of our excess cash flow in order to produce outstanding long-term returns for our shareholders.

With that, let me turn it over to Dan to review our fourth quarter results in more detail.

Daniel S. Glaser

Thank you, Brian, and good morning, everyone. In the fourth quarter of 2011, Marsh & McLennan continued its excellent performance. We generated solid growth in both underlying revenue and adjusted operating income. For the sixth consecutive quarter, we achieved underlying revenue growth at each of our operating companies. Revenue rose 4% to $2.9 billion in the quarter while underlying revenue growth was 3%.

Risk and Insurance Services revenue was up 6% to $1.6 billion with underlying revenue growth of 4% and with ongoing effective expense management, which is now embedded within the culture of the Risk and Insurance Services segment, adjusted operating income increased 11% to $288 million. The segment achieved a 90 basis point increase in margin while continuing its pace of investment in global analytics, client technologies and strategic recruitment and absorbing additional severance costs. The positive momentum continued at Marsh as it produced another strong quarter. Revenue increased 6% to $1.4 billion in the quarter. Underlying revenue rose 4%. Marsh's growth was across all geographies, led by increases of 9% in Asia-Pacific and 8% in Latin America, reflecting high retention rates and new business development. In fact, for the year, new business production exceeded $1 billion.

In the U.S./Canada division, underlying revenue growth was 2% in the quarter. Last month, we significantly expanded Marsh's operations in South Africa, Botswana and Namibia with the acquisition of the insurance broking business of Alexander Forbes. The completion of the acquisition of Alexander Forbes operations in 5 other African countries is on track, and Marsh continued to build its agency platform with the acquisition of Seitlin Insurance, one of the largest insurance broking firms in South Florida with revenue of $24 million. Marsh & McLennan Agency now has annual guidance revenue of $330 million.

Now turning to reinsurance broking, Guy Carpenter continued to produce strong results. Revenue was $193 million, an increase of 5% from both the reported and underlying basis. This growth was led by its international operations, reflecting the successful execution of Carpenter's long-term business strategy.

Carpenter has now produced underlying revenue growth every quarter over the past 3 years. This growth was accomplished through ongoing strong new business development and high client retention levels.

Turning to our Consulting segment, we continued to generate revenue growth. More importantly, both Mercer and Oliver Wyman contributed to double-digit growth in earnings and higher margins for the year. At Mercer, fourth quarter revenue increased 3% to $940 million and underlying revenue growth was 2% with all geographic regions contributing to this growth. Over the past 10 months, I have had an opportunity to explore Mercer’s businesses and analyze its strengths, opportunities and challenges. Overall, I am very positive about Mercer’s future. My key observations are that Mercer is a global leader in retirement, health and benefits, as well as talent, rewards and communications and Mercer has important capabilities in outsourcing and investments.

Mercer has a committed and talented colleague base and deep client relationships and Mercer is well-positioned to continue to expand both organically and through selective acquisitions. Julio, Mercer’s new CEO, brings a wealth of experience to his new role. At Chartis, he had responsibility for operations in Asia-Pacific, Latin America, the Middle East, Africa and Central Europe. Previous key leadership roles he held included President of the Worldwide Accident and Health Division at AIU. I'm confident that Julio, with the help of the Mercer leadership team, will drive profitable growth.

Looking at Mercer’s financial performance for the year, I am generally pleased with the results. Underlying revenue grew 4%, retirement declined 1% and outsourcing was flat. Health and benefits, talent rewards and communications and Investments all showed very strong revenue growth.

Turning to Oliver Wyman. On the third quarter earnings call, we indicated that it would be difficult for Oliver Wyman to achieve growth in the fourth quarter due to the economic uncertainty in Europe.

I am pleased to report that Oliver Wyman's results in the quarter came in slightly stronger than we expected with revenue of $406 million, an increase of 2% on both the reported and underlying basis, representing Oliver Wyman's eighth consecutive quarter of underlying growth. For the year, Oliver Wyman's overall results were also strong, including underlying revenue growth of 7%.

In conclusion, we are very pleased with the 12% growth in adjusted earnings per share the company produced in the fourth quarter. This capped off a very successful year for Marsh & McLennan both financially and operationally. We remain confident regarding our ability to produce double-digit growth in operating income. With that, let me turn it over to Vanessa.

Vanessa A. Wittman

Thank you, Dan, and good morning, everyone. As you have heard, the strong financial performance of Marsh & McLennan continued in the fourth quarter. On a GAAP basis, net income was $256 million or $0.46 per share. Adjusted earnings per share was also $0.46, representing growth of 12% from the prior year. We are proud of the tremendous progress made over the past year to greatly reduce items that are excluded from adjusted operating income. As a result, our GAAP and adjusted earnings for the year are similar. In 2011, on an expense base of $9.9 billion and operating income of $1.6 billion, the net adjustments to GAAP totaled only $23 million. For the year, adjusted earnings per share totaled $1.77. This includes $72 million of expense related to the early extinguishment of debt last July. Excluding this item, the growth in adjusted EPS was 13%.

Now let me add some color regarding other items. In the fourth quarter, we took advantage of favorable credit market conditions by arranging a new $1 billion 5-year revolving credit facility that replaced the 3-year credit facility that was due to expire later in 2012. This new facility increases our financial flexibility with an extended duration and reduces our costs going forward. In the fourth quarter, we had an investment loss of $4 million. In the first quarter of 2012, we anticipate that investment income will be similar to the first quarter of last year, which was $19 million. Looking at taxes, as you know, the adjusted tax rate fluctuates from quarter-to-quarter primarily due to our geographic mix of earnings and discreet items such as audit settlements and valuation allowances.

For the full year, our adjusted tax rate was 30% and we feel a tax rate of between 30% and 31% is reasonable for financial modeling purposes in 2012. Discontinued operations for 2011 of $33 million includes a credit of $50 million relating to the sales of Putnam and Kroll, the bulk of which relates to Putnam. At the time of the sales, we provided certain indemnities primarily related to tax uncertainties and legal contingencies. The credit results from the resolution of tax and legal matters as well as insurance recoveries. Also affecting discontinued operations is the impact of Marsh's decision to sell its life insurance BPO unit.

This unit provides policy, claims, call center and accounting operations to life insurance companies. Marsh ceased investing in and is selling the BPO business. Capitalized software of $17 million net of tax was written off in 2011. These items are described more fully in the supplemental schedules in our press release.

Now let me make a few observations regarding pensions. We have seen marked increases in our reported pension expense over the past 3 years, primarily due to declining discount rates as well as the impact of asset losses in 2008. At year end 2011, interest rates for longer debt maturities used to measure pension liabilities were significantly lower than the prior year. The accounting for pensions is extremely complicated. In addition to the effective discount rates and asset returns, annual pension expense reflects the impact of factors such as salary increases over many years, mortality rates, demographics, inflation and cash contributions to name a few. Based on our year end measurement, which takes all of these factors into account, pension expense in 2012 will increase. Net of bonuses and other mitigating items, operating income will be reduced by approximately $20 million or $0.025 per share for 2012.

Moving to capital management. Our cash position increased substantially throughout the year, reflecting the strong earnings power of the company. Uses of cash in the fourth quarter included $120 million for dividends and $121 million for acquisitions, including Seitlin and a partial funding of Alexander Forbes.

For the year, major discretionary uses of cash included $480 million for dividends, $361 million for share repurchases, $258 million for acquisitions, $100 million for the reduction of debt in July and $72 million of expense related to that early extinguishment of debt. Year-end cash was $2.1 billion. In the first quarter, anticipated uses of cash include the annual payment of incentive compensation awards, our regular quarterly dividend of approximately $120 million, about $100 million for acquisitions, including the remaining portion of the insurance broking operations of Alexander Forbes and a $100 million tax-deductible discretionary contribution to our U.S. pension plan.

We also have a $250 million senior note maturing in March. We continue to maintain our financial flexibility regarding the funding of this maturity. At the end of the year, our net debt was $815 million. This is our lowest level of net debt at year end since 1996, which speaks to our efforts in strengthening our balance sheet. With that, I'll turn it back to Brian.

Brian Duperreault

Thanks, Vanessa. Operator, I think we're ready for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And we will go first to Mr. Keith Walsh with Citi.

Keith F. Walsh - Citigroup Inc, Research Division

First question, I guess, Dan in your commentary -- or this question's for Dan or Vanessa, you mentioned absorbing additional severance costs in the brokerage margin. Now, but you do breakout restructuring and Consulting and corporate this quarter. So I guess the question is what's the dollar amount threshold to when this gets excluded from adjusted EPS?

Brian Duperreault

Vanessa, why don't you take that?

Vanessa A. Wittman

Sure. So Keith, the way that we have approached restructuring is that if there are permanent changes to the business, then it meets our threshold for restructuring. And if there are changes that may be temporary or the dollar’s being reinvested, then it runs through earnings. So it isn't really a dollar threshold, but a function of what's being changed.

Keith F. Walsh - Citigroup Inc, Research Division

Okay. And then my second question's for Alex. A lot of news reports about the 1 1 renewal with some large insurers retaining a lot more coverage and buying less reinsurance. Can you talk a little bit about how, if any, impact that would have on your organic revenues as I believe they were clients of yours?

Alexander S. Moczarksi

First of all, obviously, yes, we have seen rate increases, rate on line on catastrophic property in general somewhere between 5% and 15% on even loss-free contracts. Companies are -- they do have budgets vis-à-vis what they buy. Also we have fee business. We have cats and remuneration. So we will expect to have some tailwind, but it's not going to be proportional to the rate increases and I'll take that little bit of wind any day.

Operator

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

Jay A. Cohen - BofA Merrill Lynch, Research Division

I'm wondering more on the Marsh side if you could talk about the impact on pricing -- from pricing on your revenue. It feels as if listening to the company and listening to the dialogue in the industry that things are getting better. It did seem as if your underlying growth slowed basically in every region versus the third quarter. I know quarter-to-quarter, sometimes your comparisons get distorted, but what's happening from a pricing standpoint? Is there more of a benefit now than there was, say, earlier in the year?

Brian Duperreault

I think Peter should take that, Peter?

Peter Zaffino

Sure. There absolutely is a trend of rate improving when you look at earlier in the year as well as year-over-year. We generally speak about a theme of rate stabilization, but you need to really break it down into components. You need to break it down to geography, segment of business and then also size. If you look at the segments of business, property is clearly the one line of business that's having the most rate impact and we saw that in our own portfolio within Q4. Cat-exposed areas like Australia, Japan, New Zealand, Chile and Thailand are having the impacts. And if you go to you geography, it's really the U.S. and Asia-Pacific that are having the biggest impact. There's more lines of business. So, for instance, in the U.S., we've seen property, workers comp, as well as excess casualty and general liability starting to increase, and we'll see that trend probably into 2012. But when looking at the rest of the international geography, there are still headwinds particularly in casualty where rates are stable, improving, but still generally speaking, down year-over-year. So when I look at the U.K., parts of Europe and Asia, there's still a little bit of a headwind. So you really need to look at the overall composite.

Jay A. Cohen - BofA Merrill Lynch, Research Division

Okay. And then I guess just to follow up, given that throughout the year, let's take the U.S., where the rating environment didn't get better, I guess I was a little surprised to see the organic growth rates slow in the fourth quarter. Was anything unusual that impacted the year-over-year comparison at all?

Peter Zaffino

Yes, in the U.S., I think our performance is actually better than the 2% and I'll tell you why, we had for some reason a lot more one-time items in Q4 of 2010 that came off, and so they had a bigger hurdle in terms of growth. And then they also had some impact on rate but in our U.S. business, we have a consumer business, we also have stars and they didn't probably see the composite rate lift that the traditional part of the U.S. did. So I think the performance is actually better than the 2 and again, we just had some one-time items that we had to overcome from 2010.

Operator

And we will go next to Meyer Shields with Stifel, Nicolaus.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Vanessa, when you give higher tax rate guidance for 2012 compared to 2011, does that reflect optimism in terms of the U.S.?

Vanessa A. Wittman

I'm sorry, Meyer, I didn't hear your- - the last part. You said -- can you just repeat the question? I'm sorry.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Absolutely. Should we interpret the higher tax rate guidance in 2012 relative to 2011 despite faster growth outside the U.S. as a reflection of greater optimism regarding domestic earnings?

Vanessa A. Wittman

Actually, we're fairly consistent, '11 to '12, Meyer. We just -- we can't pinpoint it precisely for you because we can't predict the exact mix of earnings. So we had guided between 30% and 31% for '11 and we're giving the same guidance for '12.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Shouldn't I expect it to go down as international operations grow a little bit faster than the domestic ones though?

Vanessa A. Wittman

Well, that also is -- yes, except for the fact that if you repatriate earnings back to the U.S., you're subjected to the U.S. tax rate.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Okay, good point. And second question if I can, is there any way of ball parking the impacts of the life insurance BPO business on recent either organic growth or margins?

Vanessa A. Wittman

It was a small revenue business and I would say it has a de minimis impact on either revenue or margin in both the quarter and then the year-over-year.

Operator

And we will go next to Yaron Kinar with Deutsche Bank.

Yaron Kinar - Deutsche Bank AG, Research Division

Maybe a follow-up on Meyer's question on taxes for next year. Clearly, your peers have now either moved or are in the process of moving to a more favorable tax jurisdiction possibly putting you at a slight disadvantage from that sense. Is that something you're thinking about?

Brian Duperreault

Yaron, this is Brian. You know what? I guess I'm not surprised by the question, but I'm not going to talk about what other companies do or speculate about what we might or might not do, so I'm really not going to comment.

Yaron Kinar - Deutsche Bank AG, Research Division

Okay. Yes, and then maybe talking about the -- about Julio’s appointment at Mercer. This is now the second CEO appointment that comes from somebody from outside of the industry, outside of the Consulting industry at least. What does that mean about the talent pool or the executive base at Mercer today? How are you thinking about that and with a P&C veteran coming in, how long will it take before Julio is really ready to make some initiatives and changes in the business?

Brian Duperreault

Okay, and I think Dan wants to take this question.

Daniel S. Glaser

Well, first of all, we ran an exhaustive search and we looked at both internal candidates and external candidates and we had several strong internal candidates. So really, the way we phrase this in terms of how we were looking at it, we really wanted to find someone truly exceptional that would be able to not only drive Mercer to better performance, but also contribute at the executive committee level of Marsh & McLennan, and so I'm very happy with where we have landed. I've known Julio for more than 10 years. We've worked together at AIG and Julio brings all -- 5 of our 6 members of our operating company and leadership team with Brian and I have experience both on the insurance company side and on the brokerage side. Julio has that, but also adds an additional dimension in that he has experience in the consumer businesses and in health and benefit, having run one of the largest health and benefits organizations in the world in AIU Accident & Health. So really, the driver for us was getting somebody who had deep experience in running large global businesses, had a lot of experience in running a matrix environment on a global basis, was well-schooled in P&L management and running a business from -- always having revenue exceed expense, and really a track record where every job over the course of a 30-year career was more successful than the one before. So in addition to a lot of inspirational and personal leadership characteristics, I think I'm very comfortable that Julio will be a great addition. Now how long it will take him to be fully up to speed, I would give it another 2 weeks, because he’s hit the ground running and based upon his questions, he's getting there in a fast pace.

Operator

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

Jay Gelb - Barclays Capital, Research Division

I just want to set the baseline for 2012 earnings. Should we be thinking as in terms of $1.77 of adjusted earnings per share plus the $0.09 impact from debt extinguishment cost in 2011, so the baseline, the starting point is more like $1.86 and double-digit earnings growth off that?

Brian Duperreault

Jay, that's the way I'm looking at it.

Jay Gelb - Barclays Capital, Research Division

Okay. And on the risk capital holdings, it was -- so you're saying $19 million in the first quarter. It was $9 million for all of 2011. Should we expect a better result in '12?

Vanessa A. Wittman

Jay, that one’s too difficult to call. We've really seen a lot of volatility over the course of 2011 and no reason not to expect the similar volatility. We can -- we give you what we have as we've got it because we report on a one quarter lag. We saw a very low number, a negative number in Q4, which was really on the back of the horrible equity markets in Q3. And then we -- for Q1, we saw the equity markets recover in Q4 and that's reflected in that -- in the $19 million number we gave you.

Jay Gelb - Barclays Capital, Research Division

Right. So I mean, if equity -- let's cross our fingers, if equity market stays strong in 1Q, that should be pretty good for second quarter results then right?

Brian Duperreault

Well, your guess is as good as ours. I don't know. It's hard to speculate, it really is, Jay. I wish we could give more, but it's not something we have control of so...

Jay Gelb - Barclays Capital, Research Division

I understand. And then for Peter, we had overall modest margin expansion in Risk and Insurance Services for all of 2011, what are the levers you have to generate margin expansion again in 2012?

Peter Zaffino

Well, certainly, we're going to continue on the path of having very strong client retention, very strong new businesses, as Dan said in his comments. We had over $1 billion of new business. We've been investing in 2011 for the future of 2012 and make sure that we're going to position our businesses for strong top line growth while controlling expenses. And we've had a lot of strong growth across the world. Dan gave you the quarter numbers, but for Latin America, we had 14% organic growth for the year. Asia Pac was 9%. EMEA was 4% and so we want to continue to focus on high-growth areas and make sure our investments are yielding that type of benefit on the top line and bottom line. So we're very well-positioned for 2012.

Brian Duperreault

And maintain expense control. Alex is a part of this segment. Well, Alex, why don't you add to that?

Alexander S. Moczarksi

Yes, it's pretty similar to Pete's -- Peter's. We've got a good revenue pipeline. Our expense discipline is good. Again, the overseas, the international piece is exciting. Also on the facultative side, we see good growth. So we're cautiously optimistic we'll continue to improve the margin.

Operator

We'll go next to Larry Greenberg with Langen McAlenney.

Larry Greenberg - Langen McAlenney

I have kind of a Consulting and maybe it's a corporate question combined. We're hearing that some of the retirement annuity companies are offering annuity products as a solution for defined benefit pension plans. And I'm just wondering if from a corporate standpoint, if that's something that you've looked at and maybe from a Consulting standpoint, is that a product that you guys believe in? Is it a product that you recommend? Is it a product that competes with your business? Just curious how that fits into the grand scheme of things.

Daniel S. Glaser

Well, I'll take that, Larry. So it's Dan here. A couple of things, one, clearly, those type of products, the large annuity products and pension buyouts, so to speak, have been around for about 20 years, but they've gone through cycles of when they become more attractive to companies. We're definitely in the mix with regard to not only creating those sorts of products, but also advising clients on when it's appropriate to purchase some of that type of product. And particularly, there's been a fair amount of activity in the U.K. and I would say that we're one of the market leaders in the U.K. on that type of thing. It's a de-risking approach. And so from that standpoint, oftentimes, when a DB plan closes and freezes, then it transfers in terms of responsibility from, say, the HR, Senior HR Officer to the CFO, and the CFO often would look at, well, how can we bring the risk down on a frozen plan, and so we've been very actively engaged in that. We don't think of that as a competitor to our capabilities. We view that as one of the arrows that we have in our quiver to serve clients.

Larry Greenberg - Langen McAlenney

And is it something that you've considered from a corporate standpoint?

Peter Zaffino

Well, yes, I would answer that. I mean, we certainly -- we look at all the different possibilities for our plan. Our plan is not frozen, and we are constantly looking at it to make sure there's a proper balance of risk. So it might be a product we could look at, but I think the way we're handling the plan now is appropriate for us.

Larry Greenberg - Langen McAlenney

Okay. So Dan, I infer from what you're saying. There's really not something terribly new that’s hit the market in the last year or 2 relative to the things that have been available for a while?

Daniel S. Glaser

Well, what you've seen is product innovation, but not new product. And so there's nuance differences between the kinds of products available today and the kinds of products that were available 20 years ago. I think what you're really seeing is the effect of having deep asset reductions and some level of recovery and certain companies staying with that level of recovery that we don't want to have risk of a deep asset reduction again, so let's de-risk our plan.

Operator

And we'll go next to Adam Klauber with William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

Mercer, it seemed like most segments the underlying revenue growth was down somewhat from the last couple of quarters. Is that being driven by Europe?

Brian Duperreault

Dan, can you do that?

Daniel S. Glaser

Yes, so as you can appreciate, there is some movement around in all of our segments in particular on the Consulting segment from quarter-to-quarter. So when I look at the full year of 2011, I'll start with the basis that we saw a double-digit growth in earnings in the segment and in both Mercer and Oliver Wyman. Specifically, with regard to the fourth quarter, it wasn't abnormal reaction from Europe resulting in the result of it being 2% growth and actually areas that -- for example, retirement, which last year was minus 3% and is minus 1% for the year actually grew 1% in the fourth quarter. So when I look at the drop in sequential growth rate in the fourth quarter, I don't see that as establishing any new kind of trend for Mercer. I would more look at the year, which grew at about 4% as being more indicative of where the business is performing.

Adam Klauber - William Blair & Company L.L.C., Research Division

Great. And just one quick follow-up. On margins, you showed nice steady progress in both businesses, up 40 basis points. Can we expect nice, steady progress again in 2012?

Brian Duperreault

I would say, Adam, that our primary focus is on growing our net operating income. That's our focus and that's the thesis we put forward at the Investor Day, so that's where we're going. Now, if you look at segments, given our view of 2012, I think that's going to result in margin improvement in both segments. But I got to tell you that to me, the margin is -- it's a result of the work being done to get growth organically in our top line and managing our expenses, and so it's a result, put it that way. We're primarily focused on increasing our income.

Operator

And we will go next to Ray Iardella with Macquarie.

Raymond Iardella - Macquarie Research

So I guess a question on M&A. Should we expect, I mean, maybe excluding the Marsh & McLennan Agency strategy and sort of the M&A going forward there, should we expect acquisition going forward to reflect sort of non-U.S. acquisitions as opposed to looking at some M&A in the U.S.?

Brian Duperreault

Not necessarily. No, I mean, we're certainly interested in balancing out geographically. We're balancing out our capability and we're looking for great acquisitions. We're looking for really top-notch companies to join us and maybe in the U.S. it would be nice if they were. So we have a nice pipeline and we'll see where they come from. [indiscernible] emphasis on that geography.

Raymond Iardella - Macquarie Research

Okay. And then maybe just going back, Brian, to your 4 pillars of success for the company, I mean, you've spent a lot of time talking about revenue growth, controlling expenses and growth in operating income. But I guess could you provide a little bit more color on kind of where the risk profile of the overall organization is? And maybe point to some specific things that you guys have done over the past 1.5 years, 2 years to address sort of the risk profile of the business?

Brian Duperreault

Sure, I'd be happy to. We think the first line of defense is producing a product that's a quality product that's what the client has needed, and then we have agreed to deliver and we deliver that product as promised. And so that means real professionalism in our work. It's attention to detail. It's an operational thing and there's been a lot of work done on both Consulting and Risk and Insurance to improve the way we handle our business processes, our business. It produces efficiencies. It produces better expense levels for us, but it also produces a better-quality product. That's our first line of defense. Our E&O [ph] risks are our largest risks. So a lot of progress there and I think you can -- we'll see it. We can see that in our own results, so without getting into details, we do see that in our levels of activity of issues that we have to deal with. We've de-risked our balance sheet. We've talked a lot about that. That's an important component. We have a lot of cash flexibility, debt flexibility. The other line of defense is really after the fact with the limits of liability and we've -- we were the first to institute limits of liability, and we've got it on both the Consulting and Risk and Insurance now. So I'd say that's been a very successful program for us and I think appropriate for where we are, so -- and there's, I guess, another thing to talk about I probably ought to emphasize is when we're delivering our products, we spend a lot of time in reviewing those, peer reviews to make sure that it is of the highest quality and delivering the promises that we have made to the client. So all of those combined, I think, has delivered a great result and the one thing -- the last thing I want to point out is we redid our code of conduct this year, and that could be a pretty dry thing. We wanted it to be alive, embedded as part of the psyche of the company. We call it The Greater Good. It's something that I'm so proud of and there's a film that we produced around that, I think, is extraordinary. It's won some awards. But most importantly, I think just the way we go about our work now, doing the right thing, producing the business in the best possible way is really part of who we are, part of our culture. So all of those combined, I think, has really taken a big part of the risk of this company out.

Operator

And we will go next to Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So Vanessa, one question was on -- you kind of walked through the cash contributions for -- or cash-outs for 2011. I thought that in the K, you’d said you expected to fund $300 million or so in the pension in '11. You didn't mention that. I don't know if that's because those were nondiscretionary contributions or -- if you could help me with that, I'd appreciate it.

Vanessa A. Wittman

Sure, the -- what I called out was specifically the discretionary contributions in 2011. Our contributions to the U.S. and the U.K. plan for the last couple of years have run about $300 million, $320 million. And then on top of that, last year, we had $100 million. I mentioned that we have already committed $100 million of discretionary funding for 2012 and obviously, we'll maintain our flexibility about making further discretionary contributions over time.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Got it. And then did the pension status factor into your decision not to buy back stock in the fourth quarter? And if it didn't, what drove that decision?

Vanessa A. Wittman

Sure, the pension did not drive the -- have any interplay with the share buyback decision in the fourth quarter. As we've said all along, our share buyback plan and our uses of cash, it will first go to accretive acquisitions. And in the fourth quarter, we had -- we were uncertain of the timing around the closing of the Alexander Forbes transaction, which we had a partial funding of in the fourth quarter, and we'll have the rest of the funding in the first quarter. But that timing was uncertain until very late in the quarter, so we stayed out of the market from a share repurchase perspective.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

I see, okay. And then just one follow-up if I could. Maybe Dan or maybe Brian, if you could talk a little bit about just the pipeline in Europe both on the brokerage and Consulting side? And I guess more on the Consulting side. How is that looking today versus the end of the third quarter or late last year?

Brian Duperreault

I want to make sure, the pipeline of what?

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Just business activity, so on the Consulting side project.

Brian Duperreault

Business activity? Okay, well, why don't we start with John? He can tell us about Oliver Wyman.

John Drzik

Yes, so on the fourth quarter or the previous earnings call, looking ahead to the fourth quarter, we had signaled that there was some weakness in our European business, particularly, in financial services. I think we see that continuing a little bit into the first quarter of this coming year in 2012. So looking ahead to the whole of 2012, I think we're seeing a macroeconomic environment that's broadly similar to what we saw in 2010 and 2011, and our expectations for our business growth are similar to the last couple of years that we think we'll stay in general on that similar trajectory. Although for the first quarter, in particular, the carryover -- there will be a little bit of carryover from the weakness in Europe in the fourth quarter into the first.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So your baseline there is for Oliver Wyman is an environment in Europe and economic backdrop in Europe that's similar to 2010 and 2011?

John Drzik

I think the global environment and the developed world environment as a whole we're seeing is similar to 2010 and 2011, probably a little stronger in the U.S., a little weaker in Europe, overall the picture for 2012.

Brian Duperreault

Dan can talk about Mercer.

Daniel S. Glaser

Yes, it's kind of interesting in that if you look at our fourth quarter as an example and we look at countries, which had greater than 5% organic growth, you might see some surprises on that list. As an example, Portugal, Italy, Finland, Norway, Spain and Ireland all grew more than 5% in the fourth quarter. So oftentimes, the macro environment, while it may have an impact, it may not appear right away and it may it not be something that is a direct result of, say, macro factors or GDP factors in terms of what is actually driving Mercer’s growth.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Got it. And they're also your baseline expectation for Europe is similar as John's, kind of a 2010, 2011 sort of backdrop?

Daniel S. Glaser

I mean, basically, what we try to look at country by country is GDP growth and that our goal is to outgrow GDP. And when we're outgrowing GDP, we think we're doing well. And so when we look at -- as we've done this year, where we've had reasonable growth in both the RIS segment and also in Consulting in Europe, we would expect that to continue.

Operator

We'll go next to Mike Zaremski with Crédit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

So a little overlap with the prior question, I think. But so for 2012, should we expect outsourcing segment revenue growth to remain weak? And on the other hand, should we expect Talent, Rewards & Communication to remain strong? Any color on those 2 would be helpful.

Daniel S. Glaser

I mean, as we go through our planning and we look forward in the year, bearing in mind we're only in mid-February, and so we're looking out over the whole year. But in terms of what we have seen over the past couple of years, we've seen very strong growth in Talent, Rewards & Communications investments in H&B, some weakness in retirement, which started to abate a little bit by the end of the year, but it's still a tough environment. And with respect to outsourcing, outsourcing was flat in the overall year and as we approach next year, we're hoping to generate low single-digit growth in outsourcing, but it's a competitive environment for a lot of different reasons, and so we're not expecting any kind of significant levels of growth out of outsourcing.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And in talent, rewards, is that coming from a specific sector and/or geography?

Daniel S. Glaser

It's pretty well-spaced geographically. I mean if you take a step back and just think about what are the kinds of concern "C" suites around the world, it tends to be the same things, right? It's a macro factor, it's innovation, it's risks and it's also talent management. There -- even though unemployment levels are high in many countries, the reality is for skilled positions and for critical positions, actually, there's a war for talent out there and so we are -- we advise across the human capital spectrum not only on rewards talent management, which includes everything for paper performance kinds of issues, performance appraisals, colleague engagement surveys of -- compensation surveys broadly, et cetera. So when we look at our Talent, Rewards & Communications segment, there are many sub-segments to it and they're all actually doing quite well.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay and lastly for Vanessa, just to clarify in your prepared remarks regarding the pension expense, it's $20 million higher in fiscal year 2012 expected versus 2011?

Vanessa A. Wittman

That was the operating income impact, so it is net of bonus, et cetera. It will roll down to $20 million at the operating income level or $0.025 a share.

Operator

And we'll go next to Dan Farrell with Sterne Agee.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

You commented a little bit about the impact of pricing on organic growth. I was wondering if you could just talk about where premium audit sort of stand right now in the comparisons, if there's sort of a flattening out versus a headwind, if they're slightly positive?

Brian Duperreault

Peter?

Peter Zaffino

Yes, I think at this point, there's really no trend. We haven't seen many decreases from any economic conditions and we haven't really seen much in terms of increases from inflation. Certainly, insured values are going up in areas where there's high inflation. But generally speaking, on the portfolio, it's neutral.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Okay. And then could you maybe update us on your growth efforts within the Marsh Agency business, maybe just talk a little bit about deal pipeline, competition for deals, things like that?

Peter Zaffino

Sure. We feel as we've commented in prior quarter's and Dan has in his opening comments that we're very pleased with where we are to date just acquiring Seitlin, again, another geographical expansion with a high-quality agency is another step forward to building out our plans over a 3- to 5-year period. The pipeline is strong, but we're very careful in terms of looking at opportunities that are going to give us a either geographical expansion or a product line expansion. And so I think you can see us continue that pattern over the next 12 to 24 months. Having said all that, we're going to be very careful in terms of what properties we're going to go after. The pipeline is very strong. But again, there's no timeline on when we're going to make these acquisitions.

Brian Duperreault

Good, well, let me wrap this by saying we had an outstanding year last year, an outstanding year. And I want to thank first, take the opportunity to thank our clients for all the business they give us and I very much want to thank all of our talented colleagues out there for your hard work and continued dedication to the company. Thank you very much and thank you for calling in.

Operator

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.

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