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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

J. Michael Bischoff - Chief Financial Officer

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

Julio A. Portalatin - Chief Executive Officer of Mercer and President of Mercer

Analysts

Keith F. Walsh - Citigroup Inc, Research Division

Larry Greenberg - Langen McAlenney

Brian Meredith - UBS Investment Bank, Research Division

Yaron Kinar - Deutsche Bank AG, Research Division

Jay Gelb - Barclays Capital, Research Division

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

Jay A. Cohen - BofA Merrill Lynch, Research Division

Raymond Iardella - Macquarie Research

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

Michael Zaremski - Crédit Suisse AG, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

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

Marsh & McLennan Companies (MMC) Q1 2012 Earnings Call May 1, 2012 8:30 AM ET

Operator

Welcome to Marsh & McLennan Companies Conference Call. Today's call is being recorded. First quarter 2012 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 subsequent 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'll now turn this 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 Mike Bischoff, our CFO.

Before I continue, I'd like to thank Mike for serving as CFO as we search for a permanent replacement. With Mike's vast knowledge and experience, we have not missed a beat.

Also I'd like to welcome 3 of our operating companies' CEOs: Alex Moczarski of Guy Carpenter; Julio Portalatin of Mercer; and John Drzik of Oliver Wyman. Unfortunately, Peter Zaffino of Marsh could not be with us today due to a death in his family.

Following my comments, Dan will discuss our operating results in more detail. Mike will then update you on our financial position.

Our strong first quarter results are a terrific start to the year. Across all our businesses, we saw revenue growth and higher levels of profitability. Underlying revenue growth of 6%, combined with ongoing control of expenses, resulted in growth of 12% in adjusted operating income and 13% growth in adjusted earnings per share. This performance is consistent with our long-term plan to produce double-digit earnings growth.

Risk and Insurance Services had an excellent revenue growth. Revenue increased 7% on both a reported and underlying basis.

Marsh produced another strong quarter, generating underlying revenue growth of 7% with all major geographies contributing. This growth was driven by both higher client retention, revenue retention rates and new business development. Guy Carpenter also produced 7% underlying revenue growth, driven by its international operations.

The Consulting segment delivered excellent performance in the quarter as well, producing solid revenue growth on both a reported and underlying basis. Mercer generated underlying revenue growth of 4% and Oliver Wyman's growth was 6%. Importantly, Consulting's adjusted operating income increased 24%, reflecting double-digit growth at both Mercer and Oliver Wyman.

We're pleased with our first quarter results. Our performance demonstrates that we are fulfilling the strategic priority of generating consistent long-term growth in both revenue and earnings that we articulated at Investor Day some 20 months ago. Our long-term growth allows us to continuously improve performance while investing back in our businesses to enhance our competitive position. These investments include value-added products and technology for clients, cutting-edge analytical capabilities and innovative processes, which allow us to become more efficient.

Even more important, as a professional services firm, growth allows us to invest in our colleagues, the foundation of our success. As we grow the company, the opportunities for our colleagues grow as well. The work becomes more intellectually stimulating, the environment more vibrant and there's pride in working for the company. And as our strong performance continues, growth becomes a virtuous circle that builds on itself. Growth becomes a powerful force that's good for clients, good for colleagues and good for our shareholders. It's an exciting place to be.

And with that, let me turn it over to Dan to review our first quarter results.

Daniel S. Glaser

Thank you, Brian, and good morning, everyone. In the first quarter, Marsh & McLennan's excellent performance continued. We generated significant growth in underlying revenues, which, combined with effective expense control, produced double-digit growth in both adjusted operating income and earnings per share. The first quarter sets the stage for the rest of the year, so we are pleased that each of our operating companies generated strong results and are off to a good start.

Risk and Insurance Services revenue increased 7%, a very strong performance. In fact, 7% is the highest underlying revenue growth rate we have generated in a decade. Profitability increased at both Marsh and Guy Carpenter. Adjusted operating income increased to $415 million and the adjusted operating margin for the segment improved 40 basis points in the first quarter.

As I've said in the past, we are continuously investing in our businesses. We seek high-value initiatives that support growth and have effectiveness and efficiency and ultimately strengthen our competitive position.

Marsh produced another strong quarter. Revenue increased 8% to $1.4 billion. Underlying revenue rose 7%. This growth was across the board with all geographies contributing, including notable growth in the U.S./Canada division of 6%.

And in Marsh's International division, growth was 18% in Latin America, 10% in Asia Pacific and 5% in EMEA. We are pleased with the growth in the International division considering the very strong results in Latin America and Asia Pacific in last year's first quarter.

Marsh's excellent growth reflects the continuation of outstanding new business development. We are very pleased that client revenue retention rates improved across the board, reaching the highest level since the first quarter of 2003.

Guy Carpenter continued to produce strong results. Revenue in the first quarter increased 5% to $357 million. Underlying revenue growth of 7% was driven by Carpenter's international operations, including strong growth from global specialties, Continental Europe and Asia Pacific. Carpenter's revenue growth reflects its highest level of first quarter new business development since 2003.

This strong growth now extends the trend of Guy Carpenter’s quarterly underlying revenue growth into the fourth consecutive year.

Turning to our Consulting segment. Revenue was $1.3 billion, a 4% increase on both the reported and underlying basis. One of our strategic initiatives is to increase the level of profitability within Consulting. Our first quarter results indicate that we're off to an excellent start. By creating greater linkage between underlying revenue growth and expense growth, both Mercer and Oliver Wyman contributed to Consulting's double-digit growth in earnings and a higher operating margin.

Adjusted operating income rose 24% to $162 million. The adjusted operating margin increased 200 basis points to 12.4%.

Mercer’s first quarter revenue was $957 million, an increase of 4% on both a reported and underlying basis. We had particularly strong growth in Latin America, Asia Pacific and Canada.

Looking at Mercer's underlying revenue by line of business: Investments grew 7%; Health & Benefits increased 6%; Talent, Rewards & Communications rose 5%; Outsourcing increased 4% and Retirement was flat.

Julio Portalatin joined us as Mercer’s CEO in February and he hit the ground running, bringing a new vitality, business acumen and expense discipline to Mercer.

Oliver Wyman's revenue increased 5% to $356 million. The timing of revenue from contracts with acceptance provisions occurred earlier than last year, primarily within Financial Services. This represented slightly less than 1/2 of Oliver Wyman's 6% underlying revenue growth in the quarter. Oliver Wyman saw strong revenue growth in the Consumer and the Health & Life Sciences sectors.

Health & Life Sciences is an important long-term growth sector for Oliver Wyman as health care companies face enormous challenges. Changes impact payers, providers and pharmaceutical companies alike. Over each of the past 2 years, revenue from Health & Life Sciences has grown double digits and is Oliver Wyman's fastest-growing sector.

In conclusion, we are very pleased with the growth throughout each of our operating companies. This is an excellent start to the year.

With that, let me turn it over to Mike.

J. Michael Bischoff

Thank you, Dan, and good morning, everyone. As Brian and Dan have discussed, the company has continued to deliver excellent financial performance.

Consolidated revenue was $3.1 billion in the first quarter, an increase of 6% on both a reported and underlying basis. Adjusted operating income grew 12% to $530 million, and the adjusted operating margin increased 100 basis points to 17.4%.

On a GAAP basis, net income was $347 million or $0.63 per share. Adjusted earnings per share was also $0.63. This represents growth of 13% from the prior year.

Since Dan has already covered the details of our results by operating segment, let's move on to a few other areas. During the quarter, we refinanced a $250 million 6 1/4% senior note that was maturing. We took advantage of low interest rates to secure a rate of 2.3% for the new $250 million 5-year senior note.

Our next debt maturity, also $250 million, is in February of next year and we have taken additional steps over the past year to improve the financial performance of the company. Last July, we successfully completed a $600 million tender and refinancing that extended our debt maturity ladder and reduced interest expense.

In November, we closed a $1 billion 5-year revolving credit facility with lower rates that replaced our 3-year credit facility, which was scheduled to mature later this year. These transactions increased our financial flexibility, refined our capital structure, lowered our refinancing risk, extended maturities of our debt portfolio, slightly delevered our balance sheet and lowered interest expense.

Corporate expense in the first quarter was $48 million, which is higher than normal. The primary reason for this is that certain members of our senior management team became eligible for retirement this year. As a result, their equity grants and stock options, including those granted this year, must be expensed over several months instead of over the normal 3- or 4-year time period.

This will have an even greater impact to corporate expense in the second quarter. But after that, corporate expense should return to a more normalized level.

Investment income this quarter was $20 million compared with $19 million in the first quarter last year. In the second quarter, we anticipate that investment income will be approximately $5 million, compared with an investment loss of $6 million in the second quarter of last year.

Now turning to capital management. Cash utilization is typically the greatest in the first quarter, primarily due to the payment of incentive compensation awards. Our cash position at the end of March exceeded $1.4 billion compared with $1.3 billion a year ago.

Other uses of cash in the quarter included discretionary pension contributions of $100 million into our U.S. plan and $100 million into our U.K. plan. Dividends were $121 million in the first quarter. And for acquisitions, we spent $73 million, the largest of which was Alexander Forbes.

At the end of the first quarter, net debt was $1.5 billion compared with $1.7 billion a year ago.

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

Brian Duperreault

Thank you, Mike. Operator, we are ready for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Keith Walsh with Citi.

Keith F. Walsh - Citigroup Inc, Research Division

No question the top line looks exceptional, but I guess the question is if I think about the organic growth, the implied expense growth is pretty substantial as well. And why is that, especially with higher-margin Guy Carpenter up, you're pretty much up across the board especially in some of the international businesses where it's higher-margin, I would have expected the margin to be a lot higher. If you could just talk to that.

Brian Duperreault

Okay, I think Dan ought to take that. Dan?

Daniel S. Glaser

Sure. First of all, I'd start with the overall company. And the overall company's margin improved by 100 basis points in the quarter, so it's a good quarter from a margin perspective. In RIS, we had over 9% growth in adjusted operating income, and as you stated, margins were up 40 basis points. Now the important thing is a couple of things: one, we're confident that we will continue to improve margins in that we are on a path over time to continue to improve RIS' margins as well as Consulting's margins. Now you can always squeeze out a bit more margin in any one quarter, but our leadership team is very much focused on investing consistently and really constantly to not only invest for the future but deliver good results today. It's important to remember, though, that investing while it's a constant, it's not necessarily consistent quarter-to-quarter. It impacts us in different ways and there's moving parts along there. And I'll just give you a little bit of background on some of the things we're doing in the RIS segment. I mean, right off the bat, we've been investing pretty actively in both Guy Carpenter and Marsh in strategic recruitment over the past several years. In March alone, since 2008, we've added almost 450 senior vice presidents and managing directors to the firm and 115 in 2011. So that is rolling in. Also, we're laying the groundwork in our RIS segment for some pretty strong operational improvement, which would help us improve client service while capturing some of our scale, so we really do think that we're investing for better efficiency in the future. That will take multiple quarters, really even 2 or 3 years before we fully manifest the benefits of that. We've created several centers of excellence for Marsh recently around analytics. So for cat modeling, for risk economics, for benchmarking, some of the things that Peter really learned at Guy Carpenter and built at Guy Carpenter, we're building some of the things within Marsh and obviously that costs some money.

Keith F. Walsh - Citigroup Inc, Research Division

And then just the second question. The top line just significantly higher than what I had in the model and I would have thought, thinking about you guys as a fee -- primarily a fee business, especially in the U.S., why are you seeing that kind of growth? Can you -- are you getting lift on fees that you're charging customers? Can you just give a little more color around that because it seems like it's a lot higher than I would have thought.

Daniel S. Glaser

Okay, so there's really 4 factors that are generating our good growth in RIS and in Marsh, in particular. So the #1 factor is improved client revenue retention, which, as we mentioned in the script, is at its highest level since 2003. Now client revenue retention, there's a lot of things that go into client revenue retention, including the outcome of fee discussions or commission discussions with carriers. It's all in the revenue retention line and so that is the leading reason behind the growth. The second leading reason is new business. New business was up 9% in Marsh. As we mentioned on -- in the script, Guy Carpenter had its highest new business first quarter since 2003. The third reason is pricing trends. So pricing trends are complicated. We could probably spend the whole hour talking about pricing, so I don't want to do that. But I would say that property rates are being impacted more than casualty rates. And if you look at the U.S. property, workers' comp, excess casualty are all up moderately. General liability and D&O are still slightly down. If you look at the National Brokerage segment, which is our upper middle market and middle market, it's all up moderately across the board. In International, EMEA is flat to down, Asia Pacific was up in cat property and flat to down in non-cat and Latin America is flat to down except in cat. So from a pricing standpoint, it's not a headwind, but I wouldn't call it a tailwind either. You have to really look at, well, what geography are you talking about, what line of business are you talking about. It's very segmented and since we participate across all of those segments, it's muted from our perspective. And the fourth area that underpinned our strong growth and it's in that sort of order in terms of the impact, the fourth area is exposure unit. So both from a total insurable value and from a payroll standpoint, both were mildly higher. So, overall, just talking about Marsh specifically for a second because I think it demonstrates the broad strength of the growth, it was very well distributed. Every region had a growth rate better than the fourth quarter and better than their run rate for the full year 2011. We had 22 countries with greater than 15% underlying growth and 30 countries with greater than 10% growth.

Operator

Our next question comes from Larry Greenberg with Langen McAlenney.

Larry Greenberg - Langen McAlenney

On the Consulting margin, my memory serves that you had been a bit more focused on improving the profitability in Europe; that, that was a priority. Is that perhaps what's driving the bigger part of the Consulting margin improvement? Then, secondly, Dan, you mentioned the revenue associated with, I can't remember exactly what you called it, early acceptances helping the Oliver Wyman number. Is that something that's going to negatively impact prospective quarters?

Brian Duperreault

Okay. Dan, why don't you take the first piece and John can talk about the...

Daniel S. Glaser

Perfect. So in terms of -- as we've mentioned before, we're committed to improving the Consulting segment margins over the next 2 to 3 years. So from that standpoint, we'll very much align expense growth to be lower than revenue growth and in that way we'll improve the margin. I'm not sure where the European focus came from, but it really doesn't stand out as a particular area that we have to improve the Consulting margins. I mean we're generally looking to do that across the board. Many of our Consulting businesses run as much on a line of business global basis as they do on a geographic basis so you can't fix one without the other. So we're doing both at this time.

Brian Duperreault

John, if you take the other piece.

John P. Drzik

Sure. So over the past few years, procurement departments for Oliver Wyman's larger clients have become more heavily involved in contract negotiations and this has led to general acceptance criteria being added into contracts for certain Oliver Wyman projects. These acceptance provisions create situations where revenue for work delivered in early parts of the year were reported as revenue in later quarters once those acceptance criteria were met. Based on an analysis of our experience with these acceptance provisions, we're now able to better align our reported revenue with the timing of project delivery. So as Dan noted, our reported results for Q1 includes the impact of this improved alignment, which did result in higher year-over-year growth in the first quarter and represented a little less than half of our underlying revenue growth in the quarter. And to your question, Larry, it would then play out that the growth later in the year would be lower because of the same effect and probably most principally in the fourth quarter.

Operator

Our next question comes from Brian Meredith with UBS.

Brian Meredith - UBS Investment Bank, Research Division

A couple of quick questions here. First, just quickly, back in the question from Larry. The Oliver Wyman revenues, was there any impact on margins also in the quarter in Consulting from that timing on revenues?

Brian Duperreault

John?

John P. Drzik

Yes, there was some impact, but it wasn't significant and the Consulting margin growth would have continued to be -- or the profit growth would have been 20% or more. But it did have a positive effect of some amount.

Brian Meredith - UBS Investment Bank, Research Division

Great. And then, Brian, I wonder if you could talk about just thoughts on Europe and impacting business. It doesn't seem like the weakness in Europe is having much of an impact on your business right now.

Brian Duperreault

I think it is having an impact, certainly it's having some impact on Oliver Wyman, particularly in the Financial Services component. It would have some impact -- we're in recession in parts of Europe so exposures will be down. So I wouldn't diminish it, but I think the interesting thing is, take Oliver Wyman, they're -- they've been able to really improve in the U.S., counterbalancing that. So I think it basically highlights the benefits of having a global structure and being able to take advantage of the areas where we have significant growth and Dan pointed them out. But, Julio, do you want to comment a little bit?

Julio A. Portalatin

Yes, I would love to. Thanks, Brian. We saw a low- to mid-single digit growth in the U.K. and the broader Europe and the continent and although the macros in Europe, of course, are challenging and you just have to read the newspapers to see that, our sales activity still remains pretty strong. And as you know, we have a pretty balanced portfolio at Mercer. It's a pretty global operation for us. We look at this as geographically and by line of business. And if you note that 70% of our revenue is pretty much reoccurring revenue in Retirement, Outsourcing and Benefits area, especially Investments as well, we've had a solid base of renewal business as well. So if Europe continues to worsen, of course it affects everybody, but that's why it's important for us to maximize our global footprint and ensure that all areas are really achieving their objectives and continuing to move on all cylinders.

Operator

Our next question comes from Yaron Kinar with Deutsche Bank.

Yaron Kinar - Deutsche Bank AG, Research Division

With regards to market conditions in the P&C space, what I've been hearing a lot is that it's an income statement-driven marketing transition. So first, do you agree with that? And then if you do, what do you think would the outcome be for the market if this turned out to be a benign year in terms of weather events?

Brian Duperreault

Well, I'll start by saying it's always great to try to characterize these. I mean they all have to have a name, I guess, what this market is. I mean the one thing is it's always a little different. Is it a hard market? I think not in the definitions we would apply. I think Dan pointed out that maybe there's some benefit in some areas for the carriers in terms of rate, but it's not across the board, and there are lines of business where rates are going down. Whole geographies where rates are down except for cat. So I don't know what you would call it. For us, it's just the market. That's the market we're in. But, Dan, you wanted to add anything?

Daniel S. Glaser

Yes, I would just -- we don't -- we've been in the business here a long time and market cycles, our brokerage and risk management advisors work through the cycles and the cycles tend to be more downward pressure than upward pressure and so we don't -- we build our business around that fact. When we look at this, generally, the market follows levels of losses and the levels of losses have been specific to geography and specific to lines of business, so it's a pretty targeted correction of rates in certain areas, but not a broad-based "blood in the eye" hard market where underwriters are, en masse, walking away from clients. I mean we don't see that. There's still competition for new business. There's still innovation in the insurance market. And so overall, it's a market which doesn't have a tremendous amount of conviction in either direction.

Yaron Kinar - Deutsche Bank AG, Research Division

Okay, and then looking ahead to the summer on the Consulting front, what would the impact, best case/worst case scenario, be of the Supreme Court decision regarding health care reform for Mercer?

Brian Duperreault

Julio?

Julio A. Portalatin

Yes, let me comment on that, if I may. The Health & Benefits business continues to be an evolving business in the U.S. and if you look at it, to a certain extent, also globally. Here, of course, with the Supreme Court's spending decision on individual mandate or maybe even more of an impact across the board, we're well positioned really for all types of outcomes depending on how the Supreme Court rules. And we've got significant amount of activity taking place, for example, in the private exchanges. We've got good activity taking place globally, again reminding everyone this -- we have a global business with our H&B where a lot of things are happening. And we're investing appropriately to make sure that whatever outcome comes out of the U.S. portion of that we're well positioned, and we believe we are.

Operator

We'll go next to Jay Gelb with Barclays.

Jay Gelb - Barclays Capital, Research Division

In the first quarter, we saw much faster earnings growth in the Consulting business than RIS and I'd like to get your directional thoughts as to whether you think that trend will continue.

Brian Duperreault

Dan?

Daniel S. Glaser

Yes. Well, one, we made up a lot of ground in RIS over a number of years and we've really expanded our margins, so the pace of margin improvement in Consulting is not a surprise to us because Consulting had reduced margins through the economic downturn and now is recovering from that. When we look at our overall focus is on long-term delivering 10% or better improvement in adjusted operating income and that's our first thing, is growing profitability. Secondarily, we focus on margin. But as I was saying before, margin can be a little bit of a fool's game. You can get the margin you want and it actually hurt your business over a mid- and long term, and so we're very much focused on continuing to invest in our business as we go forward. When I look at the Consulting business in general, when you look over the last few years, the adjusted margin in Consulting in 2009 was 10.3%, then 11.4%, then 11.8%, so I wouldn't get ahead of ourselves necessarily and say that 200 basis points is the new reality quarter-by-quarter. We look at expenses aligned with revenues so revenue grew by 4%, expenses grew by 2%. That's what gave the big lift. Obviously, our expense growth, when we factor in April 1 raises, will tick up a little bit, which would create a squeeze in that basis point improvement unless we grow the top line more. So our focus, though, in Consulting is growing the margins in a sustainable way and we believe that it will vary quarter-by-quarter, but we'll deliver that margin improvement over the next several years.

Jay Gelb - Barclays Capital, Research Division

Okay, then also just one follow-up. Dan, you gave a really complete overview on what the drivers of the RIS growth and Marsh, in particular. Were those in rank order? Improved client revenue retention, new business pricing, exposure, was that from the greatest benefit to the least?

Daniel S. Glaser

Absolutely.

Operator

Our next question comes from Dan Farrell with Sterne Agee.

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

First quarter obviously a big cash usage quarter for you, but you are sitting on a fair amount of cash in the balance sheet and obviously you'll be seeing that ramp as the year progresses. You've talked about the trade-off in the past of how you think about deploying cash either M&A or repurchase, but I was wondering if you can maybe refresh your thinking there in the trade-off given that we haven't seen repurchase in the last couple of quarters. And then also, maybe some commentary on your view of the M&A environment, pipeline in both Brokerage and Consulting in current deal -- pricing of deals in current environment.

Brian Duperreault

Okay, well, we’re happy to. Yes, we don't -- we have -- simply it's been to have an authorization to buy back shares. We haven't bought them back in the first quarter because, as you cited, it's a high-cash usage quarter. But we certainly have the intent to buy back shares through the year. As Dan, as you pointed out, my priority is always acquisitions, accretive acquisitions, would be the preference because of its growth aspects of that. But we did say that we certainly want to acquire at least enough shares to blunt the dilution from our equity grants that occur. So that runs -- pick a number, $150 million a year or something like that would be the equity grants levels. And so that certainly is something that you should expect us to do through the year. Past that, we certainly will weigh the choices and it’s what's the most accretive use of cash after that. In terms of the acquisition pipeline, we feel good about it. I think we have a lot of very interesting opportunities. Some come to fruition, some don't. We do take a look at a lot of things and I would not limit that to necessarily just the agency business of Marsh. That pipeline is good, but we are looking at some other things. We want to grow our business either by adding components that we don't have, which will enhance the capabilities, sort of our R&D approach, through acquisition or just to increase geography. In Marsh, with the HSBC acquisition and then the price -- the Forbes acquisition, we increased geography significantly. I hope we can find some more like that. We keep looking. So I think growth through acquisition is an important part of our long-term growth and you heard me talk about how we believe in that. So I hope that answers your question, Dan.

Operator

Our next question comes from Jay Cohen with Bank of America Merrill Lynch.

Jay A. Cohen - BofA Merrill Lynch, Research Division

Yes, most of my questions have been answered. Just a quick one for Mike Bischoff. Interest expense, just give us a sense, if you don't mind, for the balance of the year what the quarterly run rate’s going to look like, given the refinancing?

J. Michael Bischoff

Jay, that's a very good question. When we're looking at interest expense, it was about $46 million this quarter and the $250 million refinancing with 4 percentage points off will contribute an additional benefit of about $7 million to $8 million. Because we did that maturity in March, it really did not impact the first quarter, so you'll be looking at about a benefit of $1.5 million to $2 million a quarter.

Operator

Our next question comes from Ray Iardella with Macquarie.

Raymond Iardella - Macquarie Research

I guess maybe a broader question for Julio now that he's been at the company 90, 100 days. Maybe if you could talk about the strengths that you see of the Mercer organization and maybe some of the challenges, if you will, ahead for the near and intermediate term.

Julio A. Portalatin

Thanks for that question. I have been here, now today is actually my 3-month anniversary, so just to celebrate that. But over the past 3 months, I've traveled extensively, as you can imagine, and met with large numbers of clients and colleagues and I've been very impressed really with the deepness of the relationships we have with clients and the real added value that comes from our employees and colleagues around the world. I’ve also, as you can imagine, spent quite a lot of time immersing myself in the business itself and all of our financials and some of the things that may come out and pop out as potential opportunities. On balance, I'm very excited about what I've learned so far. Mercer's a strong global company. It has a solid position in all of our major businesses and at the same time, we're also very excited about the potential, notwithstanding our strong position, as I stated. In terms of early decisions, the things that I've been focused on most have been largely internal. However, at the same time, we’ve kicked off a strategic planning process and my goal is that by the end of the second quarter we have a clear perspective of where we want to take Mercer over the next 3 to 5 years. But I must tell you though, as I look at our global footprint, it's really terrific across 40 countries. Maximizing that footprint certainly will be one of the things that we'll be focusing on as we look at the strategic direction of Mercer going forward.

Raymond Iardella - Macquarie Research

That's helpful. And then I guess another question for Mike. I mean, stock option expense, I know you said it might tick up, I think, in the second quarter. Did you quantify that, or is there any way you could help us quantify that?

J. Michael Bischoff

If you look at our supplemental schedule on Page 9, you'll see a specific item with regard to stock option expense. And as you recall, this is information that we provide quarterly, so that people can get a better idea not only of the movement there, but some of our noncash items. And you can see in the quarter that it went up by $4 million. We certainly would expect that, while it's not just stock option, it also includes the restricted stock, the total equity awards. And you certainly would -- we expect it to go up an additional $4 million to $5 million in second quarter. And then after that, we will absorb the accelerated amortization and we'll go to a more normalized corporate expense run rate for the third and fourth quarter.

Operator

Our next question comes from Meyer Shields with Stifel, Nicolaus.

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

On ACE's quarterly call, Evan Greenberg noted that some of the data system monetization from the big 2 brokers had started taking root. I was wondering if you could sort of describe that, not necessarily a quantification, but what inning you're in, in terms of expecting revenues from that?

Brian Duperreault

Sure. Okay, well, Dan?

Daniel S. Glaser

A couple of things. One, we do provide market consulting and data analytics to insurers. And basically, those services make insurers more competitive on our clients' business. I mean they get more competitive because they set their appetites more clearly in the business that they want to see, and therefore, their quota submission ratios go up, making them more efficient. And also because they are targeting their submissions, they can have their buy-and-quote ratios improve as well and so that's something that they’re very interested in. Overall, we've described many times and we've been consistent in our approach, that we think that the real issue is carrier revenue streams from -- all carrier revenue streams. And as we've said before, we think that all carrier revenue streams create the potential for conflicts of interest, and so we're very in tune with that and we believe that all brokers receive carrier revenue in one form or another and each of those forms requires a good system of internal systems and controls to make sure that we're managing conflicts properly. At Marsh, we've got many different businesses, many geographies and so there's not a "one size fits all." So from our basis, the most important thing we're committed to is transparency and putting the interest of our clients first. In terms of amounts of money and what inning we're in, this is -- in the aggregate when you look at carrier revenue streams, you look at basic commissionable business as, by far, the biggest part in that will remain, by far, the biggest part. And we're not going to break out individual aspects of carrier revenue streams.

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

Okay, that was helpful. Is there anything analogous on the Consulting side?

Daniel S. Glaser

There is -- the only area that becomes analogous would be in Health & Benefits, and in some parts of the Employee Benefits business we're trying to create the same kind of big data insights to insurance carriers. But that's really where insurance carriers participate on the Consulting side is in EB.

Operator

Our next question comes from Mike Zaremski with Crédit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

In regards to margins, I believe certain geographies and this is alluded to in the first question on the call, overseas, have higher operating margins, is that correct? And if so, is that one of the main reasons you're confident about improving margin dynamics going forward?

Brian Duperreault

Well, the answer is yes. Different geographies, you have different margins. Particularly in Marsh's International operations, the margins are significantly higher than in the U.S. and so growth rates where margins are higher will always lift it. So no question about that. Is that where you're getting at, Mike?

Michael Zaremski - Crédit Suisse AG, Research Division

Yes, so if we expected growth in Lat Am and certain parts of Asia to continue at a healthy growth rate, then should we expect that dynamic to lift the margin going forward, or is there other underlying things? I know growth is picking up in the U.S. now.

Brian Duperreault

Yes, it's really a scale issue. The size of our U.S. business and our U.K. business, in particular, makes our other regions look fairly small. And so even though we've got better growth and very strong margins, ultimately, it will take quite a while. So you're right and maybe when we're sitting here in 5 and 10 years from now, we'll be able to really view it clearly. But it's going to take a long time to have an impact. The biggest impact is improving our U.K. and U.S. margins as we've done over the last several years and that would have more of an impact on our overall margins.

Michael Zaremski - Crédit Suisse AG, Research Division

Okay, that's helpful. And lastly in regards to fee versus commission income. In the recent past, Peter who I know is not present today, he's talked about pushing more fee-based business within the Insurance segment. I believe the term he used is a la carte. Does that mean the Insurance segment is less levered to insurance price increases in the current cycle versus the past?

Brian Duperreault

Dan?

Daniel S. Glaser

Sure, okay. So if you look broadly, first of all, Marsh is about 50-50 between fee and commissionable business. It's weighted toward the U.S. about 60-40 and weighted toward -- in favor of fee and weighted internationally, about 60-40 in favor of commission. What Peter was referring to, the a la carte nature, would be that some of the analytics and modeling and risk consulting that we do apart from the transaction within the Marsh world that we could create fee revenue from those streams as opposed to building it in as a bundled solution for our clients. And so it's not movement of commissionable business to fee business. It's actually just creating additional fee revenue.

Operator

Our next question comes from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So just following up on a question before, Brian, about capital deployment, should we think -- should we interpret your position on buybacks to offset dilution as a change in terms of the priority you're giving to buybacks in terms of capital deployment, or is that just kind of a nuance? And just one follow-up.

Brian Duperreault

Thanks. Yes -- no. Nuance might be a better description of it. I mean the priority is accretive acquisitions. That remains, and I hope it always remains that way. But I did want to clarify that we do have an authorization for stock buybacks. We intend to use it. We won't use it every quarter because it may be that an acquisition is there or in the first quarter because we have uses of cash for other -- for our compensation. But I just wanted to make sure everybody understood that there is this commitment to get at least the dilution neutralized and then from there we have to make decisions about accretion and which is a more accretive use of the cash. I suppose there could be a time where we would have a whole year go by because we’d made acquisitions and didn't buy back shares, but there is a desire long-term to do that. I hope that helps.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Sure, it does. And then just one question on the -- you mentioned -- someone on the call mentioned investments that you're making on the expense side. Just trying to think how much do revenues need to rise in order to allow Marsh to meet the overall earnings goal that you kind of outlined in Investor Day, and is the threshold for growth higher now than it was at Investor Day just given the investments you're making on the expense side?

Brian Duperreault

Well, I think Dan talked about that. And I think what we're trying to point out is our goals are long term. Our goals are double-digit growth in profitability. And you've got to be intelligent about how you deploy your resources to ensure that, that long-term goal can be met. And it sometimes means that you have to put monies in investments, which have long-term benefits. You have a return-on-investment criteria that we apply. So it's not that our goals changed. We outlined a pretty simple arithmetic around growth in expense and growth in revenue. And we are mindful of times when we have a higher growth rate, we've got 7% growth rates here. That's a wonderful thing because it gives us the opportunity to invest whereas if we have lower growth rates, like we had in '09 and '10, we have to be intelligent about the investments. Now we still invested, but the opportunities, the ability, the flexibility we have enhances dramatically. And so I thought it was a wonderful thing to be able to take that 7% growth rate and do something with it that will be in the long-term interest of the company. And so that's where we are with it. 10%-plus growth in our earnings is the goal and we are going to continue to do this over a very long period of time, that's the commitment.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And does that imply then that the growth of top line is sort of an enabler for the investing on the expense side and that you'll kind of look to that sort of 10% growth as a goal and hopefully increasing the quality of the earnings base, but kind of managing the expense side given how much room you have to do that and still meet your financial objectives given revenue growth? Is that how should we think about that sort of trade-off?

Brian Duperreault

Yes, that's the art of management. I mean that's the beauty of it. You said it in simple terms. I mean it is a pretty simple thing to do -- I mean to say, harder to execute. And so we're not just going to squeeze out margin and have it drop to the bottom line if instead we could make an investment that is in the best interest of the shareholder long term. So we're going to do the latter. And as I said, it's just flexibility and freedom, and our degrees of freedom are rising. Dan wants to add something.

Daniel S. Glaser

Yes, I would just point out that this is not a quarter-by-quarter thing. It's not that you can manage investments so clearly that you just have it wholly aligned. So you may see some quarters where you'll see bigger margin expansion, as an example, because it’s just not as consistently tied. But what we're painting is what our philosophy is over a mid- and long term and that's what you'll see as our investors stay with us over the 5-year period, 10-year period, they'll see an overall consistency, but it will vary quarter by quarter.

Operator

Our next question comes from Adam Klauber with William Blair.

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

Within Consulting, Health & Benefits and Reward, Talents continue to have relatively good growth rates. Is that more driven by new business or by growth at existing clients?

Brian Duperreault

Julio?

Julio A. Portalatin

Yes. As you can imagine, a good proportion of our business, overall 70%, is reoccurring revenue, okay? And balance, we really see that as being a strong driver. Now there's been obviously new opportunities. We’ve introduced new concepts to approach the markets, especially in the H&B business. You go around the world, you talk to CEOs about what's on their mind and obviously there's a lot of talent questions in their minds and we're providing solutions in those areas as well. We’ve recently launched the Mercer Marsh Benefits that we think really gives us a excellent foothold in client-facing activities in a common and constructive way. And it's proven to be in the early days pretty expansive in how it's working. So there's a lot of things that are going on that impacts our business positively also on the new business development side. But I'd like to remind again that 70% of our business is reoccurring and that's renewing at very good rate and very good opportunities.

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

Okay, and just one follow-up. Outsourcing also actually had a nice turnaround from the last quarter. Well, I guess, what's driving that?

Julio A. Portalatin

Well, we had some wins in the early part of last year that came on in this quarter. And as a result, we saw some good year-on-year improvement on top line. We continue to be focused on bringing new clients on that side of the business and have some good prospects as well.

Brian Duperreault

I think we're going to end the call at this point. But before I do, there's a couple of things. I want to, first of all, on behalf of all my colleagues, extend our best wishes to Peter Zaffino and his family. And lastly, I do want to end by thanking the 53,000 colleagues around the world for your hard work and dedication, which really makes this such a fun place to be and also thank the clients out there for continuing to support us. And thank you for your interest in the stock, and we'll talk to you next quarter.

Operator

This concludes today's conference. Thank you for your participation.

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