Marsh & McLennan Companies Management Discusses Q3 2012 Results - Earnings Call Transcript

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Marsh & McLennan Companies (NYSE:MMC)

Q3 2012 Earnings Call

November 06, 2012 8:30 am ET

Executives

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

Daniel S. Glaser - Group President and Chief Operating Officer

J. Michael Bischoff - Chief Financial Officer

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

Alexander S. Moczarski - Chairman of Marsh & Mclennan Cos. International, Chief Executive Officer of Guy Carpenter and President of Guy Carpenter

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

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

Analysts

Gregory Locraft - Morgan Stanley, Research Division

Larry Greenberg - Langen McAlenney

Brian Meredith - UBS Investment Bank, Research Division

Jay Gelb - Barclays Capital, Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Raymond Iardella - Macquarie Research

Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Operator

Welcome to Marsh & McLennan Companies Conference Call. Today's call is being recorded. Third 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, 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 risk 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 the call over to 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. Also, I'd like to welcome our operating companies' CEOs: Peter Zaffino of Marsh; Alex Moczarski of Guy Carpenter; Julio Portalatin of Mercer; and John Drzik of Oliver Wyman. Following my comments, Dan and Mike will discuss our operating and financial results in more detail.

As you all know, I'll be retiring at the end of the year, so today is my last time that I will have the pleasure of leading our earnings call. I'll say a little more about that later after we review our results. First, I would like to take a minute to discuss the effects of Sandy, a storm of historic proportions. As you're all aware, recovery efforts are underway and the sense of normalcy is returning to impacted areas. Full recovery in parts of New York, New Jersey, Pennsylvania and Connecticut may take months, if not years. The safety of our colleagues has been our first priority, and we are grateful that we have received no reports of serious injuries.

From a business perspective, we are fortunate that our offices have not sustained any significant damage. Our colleagues are working diligently to assist clients who have been affected by this disaster. We also commend our colleagues for the compassion and concern they have shown each other and for doing everything they can for their communities. The storm underscores the critical nature of insurance and the crucial services we provide to clients. While the market impact of Sandy is yet to be determined, generally, there is sufficient capital in the market. However, we do expect the Northeast and Mid-Atlantic regions will be under more scrutiny from underwriters on the heels of 2 major storms within 14 months.

Moving to our financial results. I'm pleased with our third quarter results, which reflect our ongoing strong performance this year. We continue to deliver growth in underlying revenue and earnings in both of our operating segments. This reflects our continuing progress in establishing Marsh & McLennan Companies as an elite enterprise. In the third quarter, consolidated underlying revenue growth was 3%. Combined with ongoing control of expenses and effective capital management, we produced double-digit growth in adjusted operating income and earnings per share, an excellent performance.

Risk and Insurance Services produced another strong quarter. Underlying revenue growth was 4%, with both Marsh and Guy Carpenter contributing. Adjusted operating income rose 13% with Marsh, an expansion of 130 basis points. The Consulting segment also delivered solid underlying revenue growth in the third quarter. Adjusted operating income increased 15%, reflecting double-digit growth at both Mercer and Oliver Wyman. The adjusted operating margin expanded 180 basis points. We've seen higher margins for the Consulting segment each quarter this year. Both segments produced excellent results for the year-to-date as well, with solid underlying revenue growth, double-digit earnings growth and substantial margin improvement. We are pleased with this performance.

And with that, let me turn it over to Dan to review our third quarter results in more detail.

Daniel S. Glaser

Thank you, Brian and good morning, everyone. In the third quarter, Marsh & McLennan delivered strong financial performance. We achieved increased underlying revenue growth at each operating company, which extends this trend of growth into the third consecutive year. Continued top line growth, combined with prudent expense management, produced a 12% increase in adjusted operating income. Risk and Insurance Services revenue rose 2% in the third quarter, which is our seasonally lightest quarter. Underlying revenue growth was 4%. Adjusted operating income increased 13% to $213 million, and the adjusted operating margin improved 130 basis points in the quarter and 150 basis points year-to-date.

While producing these excellent results, we continued to make investments to enhance client service and improve operational efficiencies. Marsh produced another strong quarter. Underlying revenue rose 4% with all geographies contributing. Asia Pacific increased 7%; EMEA grew 5%; Latin America rose 5%; and the U.S./Canada division increased 3%. Marsh continued to generate strong levels of new business of $260 million in the quarter.

Guy Carpenter produced another quarter of underlying revenue growth, a trend we have seen each of the last 15 quarters. On last quarter's earnings call, we indicated that Guy Carpenter would likely see only modest revenue growth in the second half of this year, since July renewal pricing stabilized for property catastrophe coverage and several key clients increased their risk retention levels. And we saw this in the third quarter, with Guy Carpenter's underlying revenue growth of 1%.

Turning to our Consulting segment, underlying revenue increased 3%. Coupled with expense discipline, Consulting's third quarter results demonstrate substantial progress in the execution of our strategy to increase profitability. Both Mercer and Oliver Wyman contributed to the segment's double-digit growth in earnings and a significantly higher operating margin. Adjusted operating income rose 15% to $192 million. The adjusted operating margin increased 180 basis points to 14.3%, which is the segment's highest margin in 7 years.

At Oliver Wyman, underlying revenue growth in the quarter was 3%. Financial Services, Oliver Wyman's largest sector, was the primary driver of this growth. Geographically, Oliver Wyman's revenue increase was driven by the North American region as we have seen throughout the year. We are expecting a modest decline in underlying revenue for Oliver Wyman in the fourth quarter due to 2 factors. In Europe, Oliver Wyman continues to feel the impact of slower economic growth and declining business confidence and as we discussed previously, the timing of revenue from contracts with acceptance criteria improved Oliver Wyman's underlying revenue growth by 3 percentage points in the first quarter, and will reduce revenue by the same amount in the fourth quarter.

Mercer’s third quarter underlying revenue grew 3%. This increase reflected higher revenue across all regions, with the strongest growth in Latin America and Asia Pacific. Looking at Mercer’s underlying revenue by line of business, Investments grew 10%; Health & Benefits increased 7%; Outsourcing rose 2%; Talent, Rewards & Communications was up 1%; and Retirement was flat.

In conclusion, we are very pleased with the company's growth and profitability in the third quarter. Our leadership team and our colleagues have continued to deliver exceptional performance consistent with our long-term goals to produce adjusted operating income growth of at least 10%, adjusted EPS growth approaching 13% and total shareholder return of 16%. As we have said before, while we may not achieve double-digit earnings growth every year, we remain confident that we can produce this level of growth over the long term.

Before I turn it over to Mike, I'd like to say a few words about Brian. To say we are a very different company today than we were 5 years ago is an understatement. Under his leadership, we restructured and repaired our Risk and Insurance business, successfully navigated the Great Recession, settled legacy issues that were impeding our ability to grow and invest, streamlined and strengthened our portfolio and dramatically improved our financial results. Today, we are a growing, thriving organization built for long-term success. Our financial performance speaks for itself. What isn't captured on our income statement is the sense of pride Brian restored to the organization, the belief that we truly belong among the world's elite companies. We owe him a debt of gratitude. So on behalf of our leadership team, our colleagues and our shareholders, I thank Brian for his unparalleled leadership.

With that, let me turn it over to Mike.

J. Michael Bischoff

Thank you, Dan, and good morning, everyone. I think we all feel the same way about Brian.

Our consolidated revenue was $2.8 billion in the third quarter, an increase of 3% on an underlying basis. Adjusted operating income rose 12% to $358 million, and the adjusted operating margin increased 120 basis points to 12.6%. GAAP earnings per share was $0.44 and $0.43 from continuing operations. Adjusted earnings per share grew from $0.24 in the third quarter of last year to $0.39 this quarter. But last year's third quarter results included a cost of $72 million or approximately $0.09 per share related to the early extinguishment of debt. So we feel the true growth of EPS on an adjusted basis in the third quarter was 18%, a very strong performance.

For the 9 months, consolidated underlying revenue growth was 5%. Adjusted operating income rose 13% to $1.4 billion and the adjusted operating margin increased 130 basis points to 15.8%. GAAP earnings per share from continuing operations was $1.66. Adjusted earnings per share increased 25%. But excluding the early extinguishment of debt, the growth in adjusted EPS was 17%.

In looking at year-to-date profitability by segment, adjusted operating income for Risk and Insurance Services increased 13% to $1 billion with a margin of 20.9%, reflecting an increase on a year-over-year basis of 150 basis points. For our Consulting segment, adjusted operating income increased 17% to $528 million with a year-to-date margin of 13.2% or an improvement of 160 basis points.

We recently closed 2 Marsh & McLennan agency acquisitions, representing approximately $30 million of revenue. Over the past 3 years, Marsh & McLennan Agency has acquired 24 companies, with annualized revenue now totaling over $400 million. Many of these acquisitions include contingent consideration or earn outs. These balance sheet liabilities are adjusted quarterly to reflect changes to the company's projections of revenue and earnings. We believe it is appropriate to exclude these adjustments from our adjusted earnings as shown in our supplemental schedules on Pages 9 and 10.

Interest expense was $44 million in the third quarter compared with $49 million last year, and the only debt maturity we have over the next 18 months is the $250 million senior note due in February of 2013. With respect to investment income for the fourth quarter, we anticipate it to be de minimis, an improvement from the $4 million loss in the fourth quarter of last year.

Now turning to capital management. Our cash position at the end of September exceeded $2 billion and in deploying our excess cash in the third quarter, we used $127 million for dividends, $30 million for acquisitions and $80 million to repurchase 2.3 million shares in the quarter. In fact, over the last 2 years, we have repurchased 21 million shares for $627 million, leaving $373 million remaining under our current board authorization.

With that, I am happy to turn it back to Brian.

Brian Duperreault

Thank you, Mike. Well, this is my 20th call since I joined Marsh & McLennan Companies in January 2008, and during that time, we've been able to build on our progress each quarter. Extremely gratifying to think about how far we've come. I've said many times that joining this organization was a calling, and reestablishing the company to its preeminent position is truly one of the highlights of my career.

I am leaving this great company in extremely capable hands. The Board of Directors and I have every confidence that Dan will continue to capitalize on the strengths of Marsh & McLennan to deliver superior value to its clients, shareholders and colleagues.

In closing, I'd like to thank our colleagues for choosing to do business with -- our clients for choosing to do business with us, our shareholders for their continued confidence and most importantly, our colleagues, everything we have accomplished over the last 5 years is due to their efforts.

And with that operator, let's begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Greg Locraft with Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Wanted to just go into the organic growth side. It sounds like Oliver Wyman's slowing down into the fourth quarter and really, it's a world where the macro seems to be getting a bit slower. So how do you guys feel about the organic from here? And then very importantly, what is your ability or visibility on the margin side as organic comes in perhaps a little slower than what we've enjoyed in previous -- in the previous couple of years.

Brian Duperreault

Okay, Greg. I think Dan may start this, but we might hear from the other guys. Dan?

Daniel S. Glaser

Okay. So overall, I think you're right in saying that the macro factors probably have more of a immediate influence on Oliver Wyman than other operating companies because more of their revenue is project work as opposed to annuitized or productized types of capabilities that reoccur each year. We separate out the view of organic growth from really where we're going to expand our margin. We look at our revenue and our expenses as being very much aligned, and we look at how we'll do on the revenue side as we think about what kind of inflation we could accept within the expense side. You can grow your margin really in any environment. Sometimes, it doesn't make sense to grow your margin in certain environments, but each of our operating companies are different. And when we look forward, we're quite comfortable that both of our segments will be able to continue to grow their margins over a pretty long stretch of time and both segments have different needs in terms of what revenue growth that they would need in order to comfortably expand their margins. So why don't -- why doesn't John expand a little bit just specifically on what Oliver Wyman's facing?

John P. Drzik

So I think on last quarter's call, we had indicated that we had seen some weakening in business conditions in our pipeline for the second half of the year. So you saw the pace of our growth dropped in the third quarter, and we're now, as Dan highlighted in his comments, expecting to see some further weakening in fourth quarter next year tied to business conditions, principally the weaker business conditions that we're seeing in Europe, but even in North America, we're seeing some weakening. So that is affecting us, so that is the planning context that we're using for the future as well. And as Dan highlighted, I think that we can continue to build the business and grow our margin even in some weakened business conditions.

Gregory Locraft - Morgan Stanley, Research Division

Is that a commentary just for Oliver Wyman or is that more for the overall Consulting segment?

Daniel S. Glaser

We don't disclose margin specifically for Mercer or Oliver Wyman separately, so it is for the overall Consulting segment.

Gregory Locraft - Morgan Stanley, Research Division

Okay, great. But you guys are feeling very confident that the margin trajectory can continue even in a world where the organic were to slow? And we don't know what it's going to do several quarters out, but that's a world which you guys can navigate and hit the 10% up income guidance.

Daniel S. Glaser

Yes. But I wouldn't make a blanket statement quite that broadly. I mean, because as I was saying before, there would be certain market environments where it surely would be poor for the business' midterm and long-term aspects if we drove for margin improvement in that time. If we're in a world like we are today, let's say, where all of our operating companies are within 3% or 4% organic growth, then we're quite comfortable we would be able to expand margins on that basis.

Gregory Locraft - Morgan Stanley, Research Division

Okay, great. Last one for me is just, Dan, you're going to inherit a pristine balance sheet from Brian. Any thoughts on capital management or change in appetite for buybacks or anything?

Daniel S. Glaser

Yes, I think that kind of question's a little premature. But I would say that in general, whether we're talking about the actual business strategies or strategies around capital management, you have to bear in mind that our overall leadership group is a closely knit team. And so the strategies that we've developed, it won't be my strategies and it weren't particularly Brian's strategies, this was the team of Marsh & McLennan strategies and I would think you'll see some real consistency over long stretches of time.

Operator

Next we'll go to Larry Greenberg with Langen McAlenney.

Larry Greenberg - Langen McAlenney

Two questions. Just wondering if you would comment on whether foreign exchange had a larger than normal impact on earnings in the quarter? And then just wondering if you could elaborate a little bit on the -- that adjustment in the RIS section for the re-measurement of contingent acquisitions and just what went into that?

Brian Duperreault

Sure, sure, sure. FX, all right, well, Michael, that's yours.

J. Michael Bischoff

Thank you. As you can see from what we disclosed, Larry, on the revenue, you can see that overall, the currency impact on revenue was minus 3% for the quarter. But your question was specifically addressed, I think, to how it affected earnings. And I would say there was a slight headwind for us on an earnings side in the quarter, both for Risk and Insurance Services and Consulting, fairly similar to what we had seen in the first and second quarter as well.

Brian Duperreault

Okay. So Mike, why don't you elaborate on the RIS adjustment?

J. Michael Bischoff

Yes. The bulk of the adjustment that we had on contingent considerations was in RIS. I think there's $1 million in our Consulting segment. And Larry, what this really has to do is really what we would view as purchase price adjustments. When we do the acquisitions, predominantly in Marsh & McLennan Agency, but not just for them, it could include other acquisitions. In many cases, we would have earn outs and the earn outs are predicated with regard to what the projections over a 2- or 4-year period may be between us and the sellers with regard to revenue and more importantly, earnings growth and capabilities. And so we put that on our balance sheet at the time of the acquisition and we look at those every quarter to see if the adjustments need to be moved up or down. And we have disclosed that information every quarter. This is the largest adjustment that we've seen. And you can see that this quarter, we made an adjustment essentially of $26 million, the bulk of it in Risk and Insurance Services, just to refine those adjustments. So we view it mainly as a balance sheet item and for that reason, we put it in the adjusted schedules and lay it out, so that every analyst and investor can see the actual impact in the quarter.

Larry Greenberg - Langen McAlenney

And so is the conclusion that the -- given that this was a positive adjustment, is the conclusion the revenue is not coming in -- the revenue and/or profits are not coming in as originally targeted?

J. Michael Bischoff

That would be the conclusion if you were very specific, but you have to look at the magnitude of the deals that we've done and put this into context. So if you look at the considerations that we have and you're basically looking at deals over a 3-year period, that ballpark are $800 million and in one particular quarter, based upon what the projections maybe going forward over the next 2 or 3 years is in the neighborhood of $25 million, you can see that it's fairly de minimis. And by the way, these adjustments do occur every quarter and they move up and down. Within that, that's aggregate of all the deals that we've had and we've actually had some of the deals that have been exceeding our expectations. So this refinement, you'll see every quarter. We'll present it to you and we're excluding it from our adjusted earnings. I would say, by the way, you're right, it was a positive in the quarter and so it increased GAAP earnings by $0.04 and we felt that probably wasn't appropriate for an adjusted basis.

Operator

And next, we're going to go to Brian Meredith with UBS.

Brian Meredith - UBS Investment Bank, Research Division

First question, Mike, CapEx really popped up in the quarter. Anything unusual in the CapEx line? Is that kind of the run rate we should expect here going forward?

J. Michael Bischoff

Brian, that's a good observation. We noticed it ourselves. It actually occurred in the second quarter as well. It moved up to about $100 million in the second quarter, and $100 million roughly in the third quarter. So we're tracking roughly around $300 million to $350 million of CapEx expenditures. And I think this speaks to what Dan had articulated in his remarks, where we were making investments -- continuing to make investments in our businesses. And over the last 2 quarters, some of that CapEx expenditure was specifically for Mercer. Some of it was specifically at Marsh and some of it was also at the parent company. So that would be a fairly decent run rate, I would think, that you could use, Brian, going forward even though it may move around quarter-to-quarter.

Brian Meredith - UBS Investment Bank, Research Division

Great. And then next question, is it possible to get a sense of what the recent acquisitions over the last 12 months, how they kind of impacted earnings in the quarter and then maybe just what the M&A pipeline looks like?

J. Michael Bischoff

I can say from the standpoint of the acquisition, the impact in the quarter, we do lay that out in our supplemental schedules, and you can see it was 1%. I would also say that, that acquisition disposition schedule also uses adjustments or transfers that we would have between our businesses just to make sure that it's consistent within the operating segments and for the operating companies. So actually, the impact on acquisitions for us in this quarter was fairly de minimis.

Brian Meredith - UBS Investment Bank, Research Division

So the impact -- okay, great. And then MMA outlook?

Daniel S. Glaser

The pipeline is actually very strong for, really, for both segments. When we look in terms of RIS specifically, it's not just the MMA segment, the Marsh & McLennan Agency, but really, we're well positioned as a leader around the world and we are an attractive buyer to many companies. And so we're -- we have conversations often. We don't do many deals, but we're certainly looking at a lot of things.

Operator

And next, from Barclays, we have Jay Gelb.

Jay Gelb - Barclays Capital, Research Division

This question is for Alex. On the Guy Carpenter organic revenue growth, should we -- I know that could be depressed in 4Q as well. What are your expectations in terms of the potential uplift as a result of Sandy headed into 2013?

Alexander S. Moczarski

Okay. It's early days at the moment. We've seen a number of estimates ranging from $20 billion for 2012 or to $50 billion as regards the economic or even insured losses. There's enough global capacity for that to be swallowed, so we don't expect to see rates increasing across the globe. If we look at the Northeast, as Brian said, there's going to be some more attention, you would think, to the Northeast, more, both on the modeling side as well as on the underwriting side. And we would expect that it could be tough for an underwriter to say that they're going to reduce rates in the Northeast going forward. So there might be some tailwind there, but globally, we don't expect to see tailwinds.

Jay Gelb - Barclays Capital, Research Division

I see. Okay. And then switching gears to Dan on the Risk and Insurance Services margin. There continues to be sustained improvement there and I'm just wondering if that will help offset some of the headwinds we're seeing in the Consulting businesses, specifically Oliver Wyman.

Daniel S. Glaser

Well, I think in -- if you look at our margin expansion through the year in each of the segments, it's pretty consistent. And we outlined, as part of our strategy, the notion that we thought our Consulting margins, which had really hit a trough right after the Great Recession. So in 2009, they were down to 10.3%, that we were on a path to improve those margins, not only to reach our historical performance levels, but really to optimize the use of our scale and our global footprint to deliver really good Consulting margins. And so we've been on that path: 10.3% in '09; 11.4% in 2010; 11.8% in 2011; and 13.2% year-to-date. And so we don't believe we're getting off of that path, even with what we're seeing today, with some macro weakness affecting Oliver Wyman. So if you put it into context as well in terms of size, Mercer’s quite a bit larger than Oliver Wyman in terms of its impact on the overall Consulting segment. So as we look at -- if we're in a world like we look at today, which is sort of uncertain but grinding it out, we feel that we'll remain on that path of improving margins in both in RIS and our Consulting segment.

J. Michael Bischoff

This is Mike Bischoff. Let me just give a little bit more color to the background of your question and then throw it over to John to elaborate. The environment that we're seeing in Europe, Oliver Wyman has faced actually the last 4 quarters, where we've really seen declines in revenue with regard to their European Consulting practices. What offset that was very strong growth in North America and we continue to see that through the third quarter as well. But I think what John is indicating that, that very strong growth is just going down to very good growth and that with the continuation of what we're seeing with regard to Europe really gets us a little bit more of a balance in the fourth quarter, and not feeling terrible about going into next year, but John?

John P. Drzik

Yes, I think the last couple of years, we've been in a weak recovery environment in North America and pretty much a 0 growth plus or minus environment in Europe. So as we're looking into 2013, we expect to see a broad continuation of that environment. As Mike said, our very rapid growth in the U.S. has tapered a bit in the second half and that's been one of the contributors to the weakening growth overall and we had relatively challenging conditions throughout the year in Europe. And we don't, at this juncture, see those as getting worse, just more of a continuation of that going into next year, but perhaps not offset as much by the strong growth in the U.S. that we had in the first half of the year.

Jay Gelb - Barclays Capital, Research Division

And then, Mike, just a separate one. On the tax rate, was it depressed by anything in 3Q and should we use a 30% effective tax rate going forward?

J. Michael Bischoff

No, a very good question. As we look through the first 3 quarters of the last year, the adjusted tax rate was 30%. As we look through, not only this quarter but the year-to-date, the adjusted tax rate was 30%. So it's comparable year-to-year but, Jay, there always is discrete items in every quarter. So modeling going forward, anywhere in the 30% to 31% range, I think is very appropriate for a tax rate.

Operator

Next, we'll go to Jay Cohen with Bank of America Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Two questions. First one, the investment income, that number obviously jumps around, it's very hard to predict. Can you give us any sense of what you would view as a normalized number for that line item?

Brian Duperreault

Michael?

J. Michael Bischoff

Yes, Jay, very good question. I would say that roughly 75% of the investments that we have in that line are tied to Trident II, and Trident II was created as an investment fund back in 1999. It really had a 10-year life and so we're kind of wondering why it still is continuing now into 2012. But if you look at it, and because in Trident II, which we do not control or manage, the main investment that they have is a public company, they have to mark it to market on a quarterly basis. And we pull that on a quarter lag basis into our results, which is thus the movement up and down of their portfolio is what causes the movement up and down in our investment income. To get really to the heart of your question though, you're asking how should you look at it. Our investments in this space are roughly $100 million and you would look in a normalized basis that we should be producing a couple million a quarter out of a real long-term investment strategy. So we would be happy when the volatility ends and when Trident II is basically closed down.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

That's very helpful, Mike. The other one is the adjustments to the acquisition-related accounts, the $25 million. Where is that in the P&L? Where is the adjustment being made?

J. Michael Bischoff

If you look at it from the standpoint -- and by the way, if you want more information on that, we do put it in our financials footnotes. I think it's Footnote 11 and when you see the Q every quarter, you can track and look at it. And essentially, on that fair value measurement, you will see how we go through it and the contingent consideration can include both the consideration that's just deferred and will be paid, as well as the balance sheet adjustments that we make. And because we are doing acquisitions, you'll see additions to that typically every quarter and you'll see payments every quarter and then you'll see the adjustments to fair value. To give you an idea of where that balance is at the end of the third quarter, it's $78 million. So essentially, what we've been dealing with is about $100 million with regard to the results. So it just basically flows through the different segments and the operating income that we have and you would essentially just be reversing the liabilities, so it would flow through, in that regard, through our P&L.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

But it's a bunch of different line items, there's no one quick adjustment. So if I wanted adjust your P&L for this quarter based on the information I have for that number, I really couldn't do it.

J. Michael Bischoff

No, Jay, you could. We give out that information every quarter and it is one line and you can see and you can see it by segment. And if you need some help in it, Scott, Douglas or I will give it to you.

Operator

Next, we'll go to Matthew Heimermann with JPMorgan.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

I guess I had 2 questions. One was just can you talk a little bit -- I mean, obviously acquisitions are one way of growing your business. Can you talk a little bit about maybe how headcount is changing in the company this year and maybe how much -- especially maybe more on the client facing side and maybe what your plans are in that regard as you look into next year? And then also I'd just be curious, obviously with health care reform and the like, we've had questions on this call about exchanges for a while, but I guess, should we expect to see an announcement from Mercer or the company at large on exchanges anytime soon? And if so, are we more likely to see those coming through on the healthcare side or retirement side or both?

Brian Duperreault

Well, you can expect to hear something from Julio in a minute. But before that occurs, maybe Dan can talk about the headcount.

Daniel S. Glaser

Sure. So on an -- first thing about the company on an overall basis, the headcount has been pretty consistent over a long stretch of time. There's been movement in the parts of it as we've gone through early stage restructurings 4 or 5 years ago, which sort of reduced the non-client facing parts of the business and pushed more toward the client and the RIS segment in particular. But if you look over the course of say, 2008, at the end of the year, we were about 54,000 all in, and now we're very close to 54,000 all in. So over many years, we've been pretty consistent on the client side -- on the overall colleague side. Much of our colleague growth has been via acquisitions. So as an example, within Marsh & McLennan Agency, we have about 1,500 people within that. We added 700 or 800 people with the Alexander Forbes acquisition. So ultimately, the headcount growth has largely been around acquisitions as opposed to any kind of organic growth within the headcount.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Is that likely to change anytime soon? Or is that -- we should expect more of the same amount?

Daniel S. Glaser

No, I think you'll see more of the same in that the -- if you factor out acquisitions for a second, you'll find us becoming more and more efficient in how we run our business, but the headcount line staying largely the same because we're taking headcount that we find more efficient ways to run the business and we reallocate that headcount toward the client-facing roles.

Brian Duperreault

Okay. So Julio, exchanges.

Julio A. Portalatin

Thank you, Brian, and thank you, Matthew, for the question. As you know, this is a big topic for the industry and for our business right now. In fact, I just got back from D.C. where we had a chance to host a panel discussion on health care reform, among leading experts and many of them who advise the current administration on health care reform and of course, exchanges in particular. Private exchange is generally considered to be an easy access through a marketplace approach for a better employee choice options and of course, cost control. And we spend a lot of time at our clients educating them on the concept and of course, you see some of the growth that we're seeing in our Health & Benefits line because of some of that extra work that's coming our way as a result of the Affordable Care Act. We have lots of options already that are before our clients that we're actually using to address some of the choice and cost control. One of them is Mercer Health Advantage and that is actually an opportunity for people to participate and for clients to participate with their employees to take advantage of scale and discounts that we give through Mercer Health Advantage. And in fact, we have about 14 employers that are already participating on this. We anticipate to sign up somewhere between 400,000 and 500,000 employees and their families through this vehicle that will, of course, go through 2014 and 2013 as well. So Mercer -- we also have Mercer Marsh benefits, which of course is a great way internationally of facing the market to give additional choice options and cost control and we will be announcing soon a partnership in the Medicare retirement space that will also have us actively involved. And I'd like to also mention that it is our full intention to have an active exchange in place for 2013 enrollment. And so as you mentioned earlier, stay tuned as things continue to develop.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Okay. That advantage product, is that -- that's a scale program for multiple employers, but is that one carrier supported?

Julio A. Portalatin

No, it's actually multi-carrier supported and will continue to be an option for those that are looking purely for the discount side, right? There's different types of active exchanges will give different types of affordable options and certainly, the marketplace option is being considered for private exchange would be a little bit more expansive than what we offer Mercer Health Advantage, but nonetheless very attractive. Keep in mind that employees are at different stages of trying to figure out what they're actually going to do with private exchanges. And during this stage, they are very receptive to an option like Mercer Health Advantage, as demonstrated by 14 employers and 400,000 employee and families who are choosing that option.

Operator

Next we'll go to Ray Iardella with Macquarie.

Raymond Iardella - Macquarie Research

Just a quick question, I guess, maybe sticking with Julio for a second. I know -- I think Dan, in his prepared remarks, mentioned some growth in Latin America and Asia. Just curious kind of where the growth within Mercer overall, where it's coming from right now relative to the U.S. versus just broadly international. I know you guys don't disclose that, but can you give a sense of the growth trajectory there?

Julio A. Portalatin

Yes, let me comment, if I may, for a second on the third quarter that incorporates some of what you're asking here. We had a pretty solid performance for Mercer in the quarter and so I'm pretty pleased. And even though we've had continued softness, as many have mentioned, in the global economy, we continue to manage tightly our expenses and of course, invest in things that we think are going to give us good growth. And one of the overall objectives, of course, is to continue to become more significant in what we call our growth markets and growth economies because we see them as being able to come out of some of the global challenges a little bit quicker than perhaps some of the mature ones and thus, that's an important emphasis for us. Overall, our underlying growth for the quarter was 3%, it's consistent with what we've been running in the quarter and last quarter and of course, on our year-to-date basis. So as far as revenue, what we disclosed, as you know, is by our line of businesses. And our Health & Benefits business, as I mentioned earlier, is 7% up and Investment's a strong 10% up and those 2 are carrying the day and you can imagine that those 2 are also playing very well in some of the growth economies. So it's not -- it wouldn't be surprising to see that we are really doing very well in our growth economies and well into the double digits, I think, is fair to say. And we continue to want to invest there and see more type of profitable revenue growth from those areas of the world.

Raymond Iardella - Macquarie Research

Okay. That's certainly helpful. And then maybe moving on, similar question to Peter, if he's there in the room, just given I guess the organic growth, what we've seen over the past few quarters out of Latin America and Asia, it looked like it slowed down a little bit. I know the comps are getting difficult given the double-digit growth, but how should we think about that going forward?

Peter Zaffino

Thanks, Ray. Overall, for Marsh, we had very strong revenue growth with our renewal book, as stated in opening comments, over $260 million of new business and it was spread out across the world, which is very comforting for us as we look at overall Marsh. One of the things, again, when we look at this globally is number of offensive RFPs we've been competing on is now over 75%. So we're winning a lot of business and that's building the organic growth over several quarters. When we you look at the emerging economies, and so you had said about Latin America, we have to keep in mind it's one their smallest quarters, so any volatility in the renewal line will skew it in terms of its organic growth. They actually did produce more new business year-over-year and we're comfortable with the year-to-date growth rate around 12% and look at the third quarter as not consistent with how we expect them to perform but overall, we're pleased with our growth in Latin America and in Asia.

Raymond Iardella - Macquarie Research

And if I can squeeze one more in a similar topic for Mike in terms of cash U.S. versus offshore.

J. Michael Bischoff

That's a very good question. We're actually -- well, let me say that the second half of the year, we have really strong cash generation from our operating companies and you see that reflected in the $2,044,000,000 of cash that we have at the end of the third quarter, and that strong cash flow should continue through the fourth quarter. So what we typically do is start to bring money back that's not permanently invested outside the United States during the third and fourth quarter. So actually, I'm going to defer the answer to your question until we end up in the fourth quarter, and really have a definitive number with regard to how much of our cash is international versus in the U.S. And the reason that we're bringing that cash back into the U.S. over the third and fourth quarter is that you know that we have the dividend payments to shareholders. We have another return of capital in the form of share repurchase. And also, we want to look at the MMA acquisition strategy. So it's really in flux, but we started the year with almost all of our cash in international operations.

Operator

And next we'll go to Arash Soleimani with Stifel, Nicolaus.

Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division

Just a couple follow-ups on the exchanges. So I just wanted to confirm, the exchange in 2013, that's going to be an MMC-launched exchange, it's not going to be a partnership with a third party, is that correct?

Julio A. Portalatin

I'm sorry, I could not -- can you repeat the question please?

Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division

Yes. The exchange that you mentioned in 2013, that's not going to be a partnership, that's going to be an actual MMC-launched exchange?

Julio A. Portalatin

The -- okay, so there's the Mercer Health Advantage, which I already mentioned, which was already launched, right, and we do have more than one carry on that. And that was the 14 employers and 400,000 individuals, as well as family members that'll have access to that for this enrollment period that we speak of right now. And in addition to that, we will also have a Medicare partnership, so that will be a partnership, Medicare retirement partnership going soon. And then we will have an active exchange, where it'll be our exchange that we will also be announcing in the months to come.

Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then in terms of the active exchange, I guess, what will -- in terms of the economics of that, do you expect that to be, I guess, a more lucrative business model than the traditional health benefits model in terms of switching more to a commission-based model or do you expect it to be pretty similar in terms of the margins?

Julio A. Portalatin

I mean, the -- as you -- in the U.S., which is where particularly this applies, about 50% of our business, a bit more than that is commission, the other is consultancy and quite frankly, the margins there are quite handsome and we consider that to be very consistent with what we expect from the exchange option as well.

Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then lastly, we saw that Aon mentioned that about 44% of their survey, I guess, clients mentioned that they were interested in potentially joining an exchange over the next 5 years. Do you find when talking to your clients that, that number seems in line with what you're seeing or...

Julio A. Portalatin

I think it's ever evolving, quite frankly. I mentioned earlier that I was in D.C. and then we had a significant amount of opportunity to be able to kind of assess that and get a ground view on some of the clients' opinions about that and there are several different points. I think that anything that works in the area of providing increased choice and controlled costs is of great interest to our clients, and it could form many different ways and many different solutions in which one of those are exchanges.

Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division

Right. And do you think if the states are able, I think it's 2017, to open the exchanges to large employers, I guess greater than 100 employees, do you think in that situation they could pose a competitive threat or that would not even be an issue whatsoever if they open your doors to those?

Julio A. Portalatin

There's still a significant amount of unknowns as to how that'll all develop. It's kind of early in the game for us to really predict how that's going to turn out. So we'll leave it for the strategy that we have already articulated for the moment based on the opportunities that we see in the short and medium term.

Operator

And next, we'll go to Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Just I know we've talked a little bit about Europe and Oliver Wyman. Just is there a way to look at year-over-year revenue change adjusted for FX in Europe, specifically Oliver Wyman, and just to try to understand kind of what that looks like on a stand-alone?

Brian Duperreault

Well, I don't think we give that information out. So I guess, the answer is no, simple. But I think we've given you a pretty good idea of how we feel about Europe from an Oliver Wyman point of view and it's -- I think it is business as usual going forward into next year. So Dan, do you want to say something?

Daniel S. Glaser

Yes, I would just want to say that Oliver Wyman is our most fungible business model from a project-colleague engagement standpoint. So say it a different way, slowdowns in Europe can be picked up by opportunities in the United States and we can seamlessly move people to those assignments. So it's a line of -- it's a global line of business structure, so it's much more fungible than our other operating companies.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

I see. Are you seeing kind of the pipeline shift geographically to kind of facilitate or drive the resource movement from Europe to other areas?

Brian Duperreault

John?

John P. Drzik

Well, I think that is exactly what has been happening through 2012. And as he highlighted earlier, we've had very strong growth in North America this year and faced weakened conditions in Europe. So as Dan highlights, we have a global capacity model. So we're growing overall in Oliver Wyman, so we moved its Consulting capacity from Europe to the United States to help enable the growth here and also then improve the residual economics of the European business. So overall, we really look at the business on a global basis and we manage our capacity to the global growth of the business and we can deal with variation in regional growth, region by region growth by shifting capacity. So really, Oliver Wyman's economics really follow our global revenue growth more than any bifurcation in the revenue growth by region.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Great. And then just one quick one on the risk side. Can you talk a little bit about in the retail side, with North America exposures and kind of trend there, what are you seeing? I know in the release, you mentioned kind of rate on the reinsurance side, but if you could talk a little about business conditions in North America, specifically on the exposure side and maybe a little comment on the rate as well, that'd be great.

Brian Duperreault

Okay, Peter?

Peter Zaffino

Well, on the U.S. side for Marsh, again, this is the third quarter, we still saw more rate increase probably in several segments. So the property cat continued to start to trend up a little bit. You had professional lines, directors and officers focused on financial institutions started to move up. When you look at other segments like casualty, you need to break them down into different buckets, but for umbrella and lead layer casualty, we still saw some pressure on pricing. When you look at in its entirety, more of our clients experience rate increases than decreases in the third quarter when compared to the second quarter. So it was a modest increase but the trend was slightly up. In terms of the exposures, if you looked at payroll, sales, total insured values, I would say low single digits. Generally speaking, we started to see some more activity and increased payroll and start to see a little bit more in TIV, sales was modestly up, but it was low single digits.

Brian Duperreault

Okay. I think we got time for one question if there is one. Anybody?

Operator

Actually, I show we have no further questions.

Brian Duperreault

Well then, that's perfect. All right, well, I think I'm just going to say goodbye.

Operator

That concludes today's conference and we thank you for participating.

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