Marsh & McLennan Companies, Inc.

Welcome to Marcia MacLennan Company's conference call. Today's call is being recorded. Fourth quarter 2018 financial results and supplemental information were issued earlier this morning. They are available on the company's website at www.mmc.com. Please note that remarks made today may include forward-looking statements. Forward-looking statements are subject to risk and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated by such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, including our most recent Form 10-K. all of which are available on the MMC website. During the call today, we may also discuss certain non-GAAP financial measures. For a reconciliation of these measures to the most closely comparable GAAP measures, please refer to the schedule in today's earnings release. I'll now turn this over to Mr. Dan Klaser, President and CEO of Marsh & McLennan Companies.

Thank you, Elaine, and good morning, everybody. Thank you for joining us this morning to discuss our fourth quarter results reported earlier today. I'm Dan Glazer, President and CEO of Marsh & McLennan. Joining me on the call today is Mark McGivney, our CFO, and the CEOs of our businesses, John Doyle of Marsh, Peter Hearn of Guy Carpenter, Julio Portolatine of Mercer, and Scott McDonald of Oliver Wyman. Also with us this morning is Dan Farrell, Head of Investor Relations. Dan has had two successful years leading the IR team and will soon be transitioning to a new role. We are pleased that Sarah DeWitt has recently joined us and will take over as Head of IR. On behalf of the Executive Committee, I want to thank Dan for his contributions. Our fourth quarter represented an outstanding finish to the year. Our overall revenue growth in the quarter was strong, with 5% underlying growth and all of our businesses contributing. Marsh grew 6% in the quarter on an underlying basis, the strongest quarter of underlying growth since the second quarter of 2012. Guy Carpenter also finished strong, posting 5% underlying revenue growth, the eighth consecutive quarter of 4% or better underlying growth. These results combined to lift our underlying growth in RIS to 6% for the quarter, the third consecutive quarter of underlying growth of 5% or more in RIS. Our consulting segment grew 3% on an underlying basis in the quarter due to a solid finish to the year in Oliver Wyman and improvement in DB Consulting in Mercer. The fourth quarter, as expected, saw a strong adjusted operating margin expansion of 180 basis points, and adjusted operating income growth of 15 percent, excluding the impact of the new revenue standard. For the full year, we generated 7 percent overall revenue growth with 4 percent underlying growth. By segment, we saw underlying growth of 5 percent in RIS, the best full-year growth we have seen since 2012, and 3 percent underlying growth in consulting. We demonstrated top-line strength across our businesses. Marsh delivered 4% underlying growth for the year, the best result since 2014. Guy Carpenter had a terrific year with 7% underlying growth, the strongest result since 2009. Mercer achieved 3% underlying growth despite a 4% decline in the DBA business. And Oliver Wyman grew 5% for the year, overcoming headwinds from declining bank regulatory work. Our adjusted NOI grew 8% with overall margin expansion of 30 basis points for the year, marking the 11th consecutive year we have reported margin expansion. Adjusted EPS grew 11% for the year, another year of double-digit growth that came on top of 15% growth in 2017. Since 2009, our adjusted EPS growth has averaged 13%. We balanced delivering today with positioning for tomorrow, and 2018 was a great example of strong overall execution. In addition to our strong 2018 financial performance, we made several meaningful decisions to position us for continued long-term growth. Outside of JLT, which we will discuss shortly, we deployed $1.1 billion of capital across 23 transactions, representing another year of significant reinvestment in building our business through acquisitions. I'd like to highlight some of the transactions from the past year. In Mercer, we closed the acquisitions of Pavilion and Summit in the fourth quarter. These transactions add to our capabilities and scale in investments. Earlier in the year, we announced Marsh's acquisition of Wortham, combining one of the largest and best independent brokerage firms in the U.S. with our already strong position in Texas. MMA also had an active year, adding seven new firms in 2018. And just last week, we announced the acquisition of Bouchard Insurance. Bouchard, based in Florida, has $42 million in revenue and roughly 260 employees. As I said last quarter, we will continue to invest in Marshall McLennan Agency, one of the finest insurance brokerage firms operating in the middle market in the US. In addition to continuing to execute our M&A strategy, we made meaningful progress in planting seeds in digital, data, and analytics. Each of our businesses continues to invest in building our capabilities. I won't go through all the initiatives, but will highlight a few examples of our progress. In March, we launched Bluestream, a digital broking platform initially focused on affinity and sharing economy businesses. Bluestream has the potential to be leveraged more broadly to seamlessly match risk and capital in the small commercial and consumer segment. It also complements other digital and small commercial strategies, including Dovetail, ICAT, Torrent, and the rebranding of our managing general underwriter as Victor. Guy Carpenter launched GC Genesis, a proprietary advisory offering on InsurTech. The new services identify InsurTech companies that will offer our clients innovative capabilities and enhance their operations and technology strategies. At Mercer, we announced a strategic alliance with Morningstar, which gives clients digital subscription access to Mercer's proprietary investment manager research, opening up a new distribution outlet for Mercer. And in Oliver Wyman, we continue to build our capabilities in digital consulting and business development throughout DTA, digital technology and analytics practice, including Oliver Wyman Labs. We have a deep bench of talent throughout our firm and take succession planning seriously. We recently announced that Martin Furlan will become President and CEO of Mercer as of March 1st and will join the MMC Executive Committee. Martin has a wealth of experience across Mercer's businesses and is a proven global leader. Julio has done a great job at Mercer, successfully leading the business since 2012. Over that time, Mercer has nearly doubled its adjusted operating income and expanded assets under delegated management by fivefold. I am pleased the company will continue to benefit from Julio's advice and counsel as a vice chairman of MMC. In recent months, Julio and Martine have continued reshaping Mercer's operating model, and in the fourth quarter, we took restructuring actions with associated charges totaling $51 million. We simplified Mercer's organization by consolidating the three geographic regions into two, U.S.-Canada and international. This aligns more closely with the regional structures in place across other businesses of Barsh and McLennan. The actions resulted in structural changes in Mercer that streamline its operating model, creating more efficiency and enabling better execution. Now, let's take a moment to update you on the progress we have made on JLT. As we have said from the beginning, this is a combination of strength and strength, and the primary focus is growth, growth in talent, capabilities, revenue, and earnings. We said our approach to integration would be from the perspective of best of both, and we have been true to this ideal. We have made important announcements about the leadership teams of Marsh, Mercer, and Guy Carpenter after closing. And it is important to note that we will have meaningful representation of senior JLT colleagues at the executive committee level. Our leadership team recently visited JLT's major locations around the world, including stops in Australia, Hong Kong, Singapore, many cities in the US, and of course, London. Through town halls and other interactions, we have had the opportunity to engage with colleagues representing 80% of JLT's global revenue base. The real upside for value creation is combining two successful organizations into an even more innovative and talented professional services firm. I am encouraged by our early organizational decisions and the level of engagement and commitment we are seeing throughout Marshall McLennan and JLT. In terms of closing, we are still in the regulatory approval process. At this time, we continue to expect closing in the spring of 2019. Our strong performance in 2018 positions us well for the future. Our purpose is to make a difference in the moments that matter and create value for our clients, our colleagues, our shareholders, and the broader community. As we look to 2019 and beyond, our future is bright. Our revenue base continues to shift toward faster growing areas. We expect to see benefits from our investments in digital and technology and we are confident in our ability to complete and successfully integrate JLT. Without any impact from JLT, in 2019, we expect underlying revenue growth in the 3% to 5% range, margin expansion, and strong adjusted EPS growth. Additionally, in 2019, we expect to reduce our share count and deliver double-digit increase in our dividends. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, Danny. Good morning. Our fourth quarter performance represented an outstanding finish to 2018. We delivered 5% underlying revenue growth, highlighted by 6% growth in RIS and 3% in consulting. Consolidated revenue of $3.7 billion was up 1% or 4%, excluding the impact of the new revenue standard, ASC 606. Operating income in the quarter was $621 million, while adjusted operating income increased 7% to $731 million. Excluding the impact of the new revenue standard, adjusted operating income increased 15%. Our adjusted operating margin expanded by 180 basis points, excluding the impact of the new revenue standard, with significant expansion in both segments. Adjusted EPS increased 4% to $1.09. Excluding an $0.08 per share reduction from adopting the new revenue standard, adjusted EPS grew 11% in the quarter. For the year, consolidated revenue increased 7% to $15 billion, driven by strong underlying growth of 4% and a meaningful contribution from acquisition. Adjusted operating income increased 8% to $2.9 billion, while the adjusted operating margin increased 30 basis points to 19.7%. GAAP EPS increased 13% for the year, while our adjusted EPS increased 11% to $4.35. Looking at risk and insurance services, fourth quarter revenue was 1.9 billion, a decrease of 2%. Excluding the impact of the new revenue standard, revenue was up 5% and underlying revenue growth 6%. Adjusted operating income for the quarter decreased 1% to $418 million. Excluding the impact of the new revenue standard, adjusted operating income grew 16%, and the adjusted operating margin rose 200 basis points. For the year, revenue was $8.2 billion, an increase of 8%, with strong underlying growth of 5%. Adjusted operating income for the year was up 11%, and our adjusted operating margin increased 90 basis points to 23.9%. At March, revenue in the quarter rose 5% to $1.8 billion, increasing 6% on an underlying basis. Growth in the quarter was driven by strong new business and retention. The U.S. and Canada division continued its trend of strong growth, delivering 7% underlying revenue growth in the quarter. International was up 5%, with Asia Pacific and Latin America up 8%, and EMEA up 3%. For the year, revenue at Marsh was $6.9 billion, with 4% underlying growth. In the quarter, Marsh incurred an additional $12 million of restructuring charges, bringing the total to $99 million for the year. Guy Carpenter's revenue was $102 million in the quarter, with underlying growth of 5%. a strong finish to another outstanding year for Guy Carpenter. For the year, revenue was 1.3 billion, with 7% underlying growth. In the consulting segment, fourth quarter revenue increased 4% to 1.8 billion, or 3%, excluding the impact of the new revenue standard. Underlying revenue growth was 3%. Adjusted operating income increased 16% to 359 million, Excluding the impact of the new revenue standard, adjusted operating income increased 9%, and the adjusted operating margin increased 110 basis points. For the year, revenue was $6.8 billion, an increase of 5%, with underlying revenue growth of 3%. Adjusted operating income was up 3%, and the adjusted operating margin declined 40 basis points to 17.2%. Mercer's revenue increased 3% in the quarter to $1.2 billion, with underlying growth of 2%. Wealth was down 1% on an underlying basis, with investment management and related services up 1%, and defined benefit consulting and administration down 2%. Our revenue and investment management was affected by the market volatility in the fourth quarter. Despite the volatility, Our overall assets under delegated management ended the year at $241 billion, up 6% from year-end 2017, reflecting continued strong asset inflows. Health increased 4% on an underlying basis in the quarter, driven by solid growth in most geographies. And career grew 5% with continued strong growth in our strategic consulting and survey businesses. For the year, revenue at Mercer was 4.7 billion, with 3% underlying growth. As Dan noted, Mercer's fourth quarter results included a restructuring charge of 51 million, which we have excluded from our adjusted results. We expect additional restructuring charges under this program of approximately 20 to 30 million in the first half of 2019. Oliver Wyman's revenue was 577 million in the quarter, with an underlying increase of 7%. This result was due to strong growth in North America across all business sectors. For the year, revenue was $2 billion, with 5% underlying growth. We continue to make good progress as we work toward closing the JLT transaction. As Dan mentioned, we expect to close in the spring, and we'll then be in a position to update our guidance. As part of the planned financing for the acquisition, earlier this month we issued $5 billion of senior notes across six tranches of various maturities. In the fourth quarter, we entered into contracts to hedge a portion of the risk associated with changes in interest rates. As a result, we recorded a charge of $116 million related to the change in fair value of these hedges, which were settled as part of our January issuance. With the issuance of these notes, we have completed a substantial portion of the financing required for the JLT acquisition and currently plan to enter the markets later this quarter for the remainder. We began incurring interest expense on this new debt as of January 15th and will treat this expense as a noteworthy item, net of interest income earned until the closing of the transaction. As we mentioned last quarter, in order to protect us from exchange rate volatility between announcement and closing, we entered into a deal contingent foreign exchange hedging contract. As a result of entering into this contract, we recorded a non-cash charge of $225 million, reflecting the change in the fair value of the hedge instrument at the end of the quarter. The amount of this item will change as we progress toward closing due to exchange rate volatility. Despite the volatility we will see from fair value accounting under GAAP, The cost of this hedge was contemplated in our estimate of overall transaction-related expenses. We also incurred $27 million of interest expense in the quarter, representing the amortization of fees related to our bridge facility. This $27 million is included in interest expense in our GAAP income statement. All of these costs associated with the JLT acquisition have been treated as noteworthy items. As we typically do on our fourth quarter calls, I will give you a brief update on our global retirement plans. Cash contributions to our global defined benefit plans were 112 million in 2018, down from 314 million in 2017. We expect cash contributions in 2019 will be roughly in line with the level in 2018. In the fourth quarter, we recorded a $42 million settlement charge resulting from distribution elections made by participants in our UK plans. This expense, which is similar to a charge in the fourth quarter of last year, is reflected as a noteworthy item. Excluding this charge, our other net benefit credit was $63 million in the quarter. For 2019, we anticipate our other net benefit credit will be essentially the same as in 2018, excluding the settlement charge. Turning to investment income, on a GAAP basis, investment income was $12 million in the fourth quarter and a $12 million loss for the full year 2018. As we have seen throughout 2018, our GAAP investment income includes mark-to-market gains on certain equity investments as required by recent accounting changes. Because we do not view the volatility caused by these adjustments as reflective of our underlying performance, we have excluded them from our adjusted results and shown them as noteworthy items. On an adjusted basis, we have $4 million of investment income in the quarter and $18 million for the full year 2018. For 2019, we expect only modest investment income on an adjusted basis. Foreign exchange was a slight headwind to EPS in the quarter. Assuming exchange rates remain at current levels, we expect FX to be a modest headwind to adjusted EPS for 2019, excluding any impact from JLT. We expect the majority of this impact in the first quarter. Our effective adjusted tax rate in the fourth quarter was 23.6%, compared with 23.4% in the fourth quarter last year. Excluding discrete items, our effective adjusted tax rate was approximately 27%. For the full year 2018, our adjusted tax rate was 24.3%. Excluding discrete items, our adjusted tax rate was approximately 26%. When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative. Based on the current environment, it is reasonable to assume a tax rate between 25% and 26% for 2019, excluding any impact from JLT. In 2018, we repurchased 8.2 million shares for $675 million. As part of the capital planning related to the JLT transaction, it is unlikely we will repurchase any stock ahead of the close of the acquisition. However, in 2019, we anticipate repurchasing enough stock to satisfy our commitment to reduce our share count each year. Total debt at the end of 2018 was $5.8 billion, compared with $5.5 billion at the end of 2017. Our next debt maturity is in September 2019 when $300 million of senior notes will mature. Our cash position at the end of the fourth quarter was $1.1 billion. Uses of cash in the fourth quarter totaled $591 million and included $213 million for dividends and $378 million for acquisitions. For the full year 2018, uses of cash totaled $2.6 billion and included $675 million for share repurchases, $807 million for dividends, and $1.1 billion for acquisitions. In 2018, we delivered on our capital return commitments. We reduced our share count by 4.9 million shares, or 1%, and increased our dividends per share by 10%. Before I wrap up, I want to spend a minute on our financial disclosures. Last quarter, we were asked if we were considering changing how we report adjusted earnings per share, specifically the treatment of deal amortization. After carefully considering our current disclosures, we have decided that we will not change how we report adjusted earnings per share. We have always included transaction amortization in our earnings and have consistently challenged ourselves to overcome that cost through value creation in our acquisitions. JLT doesn't change our perspective. That said, the integration of JLT will likely involve more adjustments to our numbers over the next two or three years than we have seen historically. So we've decided to include a full cash flow statement with our press release to provide additional information to the investment community as early as possible. As you see in the statement of cash flows, which appears on page 19 of our press release schedule, We had significant growth in operating cash flow in 2018. This is reflective of our strong operating performance and a reduction in pension contributions, among other factors, and came despite the restructuring charges at Marsh and Mercer during the year. We are also planning to change our calculation of adjusted operating margins to exclude transaction amortization so investors can get a better sense of core margin performance. We envision making this change starting with our first quarter reporting. In summary, we're proud of what we accomplished in 2018. 7% revenue growth, 4% underlying revenue growth, 8% adjusted operating income growth, 30 basis points of adjusted margin expansion, and 11% adjusted EPS growth, all while enhancing our position for long-term growth with the acquisition of JLT. With that, I'm happy to turn it back to Dan.