Marsh & McLennan Companies Earnings Call Nuggets: Organic U.S. Growth and Health Exchange
Organic U.S. Growth
Greg Locraft – Morgan Stanley: Another good quarter, congrats. I wanted to ask about the U.S. growth, the organic there. What are the trends you are seeing in the U.S. risk business at this point in time maybe from a units and pricing perspective and how do you think that the organic there will look going forward for you?
Daniel S. Glaser – President and CEO: Sure. I mean – first, I would just say that from an overall basis if you look at how Marsh has performed over the last several quarters, they’ve generally been in an area of somewhere like 4%, 5% and 3% growth, so call it, 3% to 5% growth organic. And Guy Carpenter has pretty much been a 5%, 6% and 5%, so call it more around a 5% growth over the last several quarters. Why don’t I turn to both Peter and Alex to give you some specific commentary as to how they see the P&C environment in both retail and reinsurance. So Peter?
Peter Zaffino – President and CEO, Marsh: Thanks Dan. Mentioning pricing, let me talk about overall Marsh and then specifically highlight the U.S. Overall, we saw a bit of slowdown when we compare the prior quarter in 2012 about 40 basis points. U.S. was the only major region that we saw increases in pricing, albeit, modest, so when that compare year-over-year. The casualty lines, more of our clients saw rate increases than the prior year, but the average was a little bit less. And the one segment that did not see as much in terms of price increasing was the property. So I feel that it’s a very stable environment. There is a couple of peaks that are being, as I mentioned in public D&O, workers’ compensation, some excess umbrella. But generally speaking, it’s modest increases for us in terms of pricing.
Daniel S. Glaser – President and CEO: Thanks Peter. Alex?
Alexander S. Moczarski – President and CEO, Guy Carpenter: Yeah, so we were pleased with the growth in the U.S. Clearly, there is no tailwinds coming from rates. So it’s really about just doing things better. It’s about higher retentions. We’ve had good solid new business. Our blend of broking, analytics and strategic advisory is working well. So, no help from the rates but just doing things better, concentrating on what we need to do to keep our clients and essentially that’s it.
Daniel S. Glaser – President and CEO: Yeah. So, in summary, I would say you look at the U.S., and on the reinsurance side, there’d be more downward pressure on rates, so more softening activity on reinsurance. On the retail side, it’s more flattish, but relative to the rest of the world, a bit better than the rest of the world in the U.S. We’ve been at this game a long time, and in years past when you see softening in reinsurance, unless you have loss activity, it’s pretty hard to prevent that from shifting into primary six months, 12 months, 18 months down the road.
Greg Locraft – Morgan Stanley: One other one is just on capital deployment. Good to see the buybacks and the higher dividend. If I was to step back though and go back to the 2010 Investor Day when you sort of laid out the game plan for the Corporation. You guys have actually beat your guidance and beat your numbers since then. The only component of that that I think is behind is maybe, I feel like back then you mentioned that capital deployment would be contributing 300 basis points to the plan. I’m sort of wondering has capital – where do you think capital deployment will be from here. It seems like it’s picking up. So can you sort of compare what you were thinking back in 2010 to where you are at today? There’s a lot of optionality there.
Daniel S. Glaser – President and CEO: Sure. I would say when you look at capital deployment, to begin with, our feeling is that we have rising free cash flow. So, number one, that’s a good new story. And then when we look at how we would deploy that cash, we would probably look at dividends first. And we would look from here to keep our payout ratios in a similar area to where they are today. So you’d likely see us improving our dividend as we improve our earnings. Then we look at acquisitions, and we don’t budget for acquisitions. We look at a lot of things, and ultimately, that’s a variable. And share repurchase, we’re committed to share repurchase. And if you look at the last five quarters, we’ve had five quarters in a row of share repurchase. So I think as you go forward, you’ll see us both looking at a balanced basis in terms of deployment, dividend, acquisitions and share repurchase. But Mike, do you want to add some color to that?
J. Michael Bischoff – CFO: Yes, thank you, Dan. And Greg, you’re absolutely spot on looking at us historically. Not only have we been reinvesting in our business, but we’ve really been paying down our debt and, essentially, deleveraging our balance sheet. In addition to that, we had pension obligations that we put quite a bit of our cash flow into pension obligations. So that’s the story. If you look going forward, we do not plan to delever our balance sheet actively. We think the natural earnings that you’re seeing, not just this quarter but the past few years, will naturally deleverage our balance sheet. So we don’t have to do any more debt pay-down, and we feel that the bulk of our contributions to our global pension plans are behind us. So as Dan said, we’ve looked at the deployment of our capital on a balanced fashion going forward, and we feel very good about it.
Dan Farrell – Sterne, Agee & Leach: I was wondering if you could update us on your efforts in the health exchange. I know you had some announcements on that and maybe talk a little bit more detail about what’s going on there and then also how we should think about maybe revenue and earnings impact as we had through the rest of the year?
Daniel S. Glaser – President and CEO: Sure. Your question, Dan, on revenue and earnings impact, is that specific to the health exchange or…
Dan Farrell – Sterne, Agee & Leach: Yeah, yeah, yeah, how to think about how that will play through the rest of the year?
Daniel S. Glaser – President and CEO: Okay, terrific. So, Julio?
Julio A. Portalatin – President and CEO, Mercer: Thank you, Dan. I want to put some light on what we considered to be a pretty good milestone for us in the quarter as it relates to Mercer Marketplace. So, the press release came out announcing that we have five company employers now already signed up to Mercer Marketplace and we’ve signed an additional nine employers and there are significant amount of potential opportunities for 2014 and 2015 still pending. Those nine employers represent about 35,000 lives. And why we think it’s such a milestone is because it really validates several key things about Mercer Marketplace. One is that it’s very attractive to a lot of additional across the board industries and employers for as little as a couple of hundred employees to several thousand. And that’s been something that we’ve seen as a distinction based on our offer and it’s beginning to hold true. While we’ve always been kind of cautious about what 2014 was going to give us and we still are, we certainly are seeing a lot of activity. So, it demonstrates that we have a very viable option for our clients. In addition to that, we continue to see activity, we continue to see more interest, and we’ll see how that builds for ’14 and ’15. As far as revenue is concerned, as we have stated in the past, there’ll be no material revenue recognized in 2013. This is for enrollment for those that are effective on January 1, 2014 and beyond, and then of course through ’15, we’ll see how that develops, and thus, the earnings will be the same, there will be no significant impact on earnings in 2013. Now in the early years, as you can think about this, we of course will continue to invest, and I believe we’ll see that as this thing pans out that earnings will be similar to the type of business that we have that’s not in the Mercer Marketplace, so it’ll be very consistent…
Daniel S. Glaser – President and CEO: So, Julio, just to confirm, you’ve got nine companies signed up now?
Julio A. Portalatin – President and CEO, Mercer: Nine companies signed up for about 35,000 lives.
Daniel S. Glaser – President and CEO: Okay. Thank you.
Dan Farrell – Sterne, Agee & Leach: Just to follow-up, there is some expense flowing through now that’s already being absorbed within your margins, correct?
Julio A. Portalatin – President and CEO, Mercer: That is correct. I mean, we are taking all expense right to the operating results for the Mercer Marketplace.
Dan Farrell – Sterne, Agee & Leach: One other quick question. The revenues had some modest FX headwind. Was there any meaningful or any FX impact to earnings in the quarter?
Daniel S. Glaser – President and CEO: So just one thing in terms of the expenses that we are rolling through on the health exchange, one of the ways you have to look at that is, with regard to health, there may be some downward margin pressure on – specifically around the health exchange because of the investments. However, we are selling more product, and so there are – typically, companies now buying up additional product like voluntary products through Mercer Marketplace, and so it looks pretty much the same to us from a margin perspective. Mike, do you want to take the question on FX?
J. Michael Bischoff – CFO: Yeah. Dan, you’re absolutely right. Not only in this quarter, but in almost every quarter over the last six quarters foreign exchange has worked against us from the standpoint of profitability because of the strengthening of the dollar against not all but most of our major currencies, but it’s been something that we’ve been able to absorb in every quarter including this one.
A Closer Look: Marsh & McLennan Companies Earnings Cheat Sheet>>