Q4 2020 Marsh & McLennan Companies Inc Earnings Call
Welcome to Marsh and Mclennan Conference call today's call is being recorded.
Fourth quarter 2020 financial results and supplemental information were issued earlier this morning.
They are available on the company's website at M C Dot com.
Please note that remarks made today may include forward looking statements, including certain expectations related to COVID-19, and other matters.
Forward looking statements are subject to risks 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 into 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 on <unk>.
Now I'll turn this over to Dan Glaser, President and CEO of Marsh <unk> Mclennan.
Good morning.
And thank you for joining us to discuss our fourth quarter results reported earlier today, I'm, Dan Glaser, President and CEO of Marsh <unk> Mclennan.
Joining me on the call today is mark Mcgivney, our CFO.
And the Ceos of our businesses John Doyle of Marsh.
On a guy Carpenter Martine per loan of Mercer and Scott Mcdonald of Oliver Wyman.
Also with US. This morning is Sarah Dewitt head of Investor Relations.
2020 was a year like no other and Marsh Mclennan response and performance was nothing short of remarkable in the circumstances.
The year was characterized by tough choices that we made as a business and on individuals.
Our colleagues rose to the occasion and demonstrated resilience courage agility.
Collaboration and empathy in the face of the global pandemic and social unrest.
Times like these validate our purpose to make a difference in the moments that matter for our clients colleagues and communities and we did exactly that.
Our 2020, adjusted EPS growth of 7% is impressive and one of the worst economic recessions ever.
Our strong financial performance also enabled us to continue to invest for the future. We continue to develop digital technologies to offer more robust client solutions. We made a number of strategic hires and achieved a record year of acquired revenue with MMA through eight acquisitions was approximately 200.
$35 million of annualized revenue.
Looking forward, while the global pandemic will most likely dominated at least the first half of 2021. There are brighter days ahead, our proprietary per head Dennis navigator model predict that as vaccines are rolled out and we moved closer to herd immunity through natural immunity infection.
Case counts and vaccinations, the U S and UK could see a return to more normal patterns sometime in the back half of the year.
As we emerge from the crisis clients around the world can rely on our expertise in the three areas that are critical for every organization risk strategy and people.
The World Economic Forum, Daniel Global risks report, which was released last week and prepared with the support of Marsh <unk> Mclennan and other partners highlight some of the most likely an impactful risks facing the world today, and we are working with clients to navigate these issues.
Marsh <unk> Mclennan has collaborated collaborated in the preparation of the annual global risk report for 16 years and its first edition in 2006, the report warrant against the risk of a lethal flu spread by global travel patterns.
And in 2015 Pandemics were identified as the number two global risk.
It also drew attention to the risks of global climate change and cyber threat many times over the past 10 years.
This year's report highlights infectious disease extreme weather and climate action failure as top impact risks, while social digital and economic inequality have ascended its major risks.
Marsh <unk> Mclennan continues to help clients adapt to an evolving risk landscape and navigate long term secular challenges while at the same time, providing advice and solutions for their most pressing issues of the day.
Let me spend a moment on current P&C insurance market conditions.
Fourth quarter marks the 13th consecutive quarter of rate increases in the commercial P&C insurance marketplace. The Marsh global insurance market index showed price increases of 22% year over year versus 20% in the third quarter.
Global property insurance was up 20% and global financial and professional lines were up 47%, while global casualty rates were up 7% on average in the U S workers' compensation pricing declined modestly.
Keep in mind, our index skews to large account business, However, U S small and middle market.
Insurance pricing continues to rise as well, although the magnitude of price increases is less than for large complex accounts.
At the January renewals commercial insurance market conditions remained challenging across products and regions risks are able to be placed although at higher prices and in some cases with less coverage and stricter terms.
<unk> carriers continue to push for rate increases in the face of losses low returns and interest rates.
At the January one reinsurance renewals, while pricing ultimately settles at the lower end of early predictions negotiations were lengthy and complex with a significant focus on coverage and structure.
Traditional dedicated reinsurance capital increased slightly as calculated by Guy Carpenter.
However, alternative capital was down marginally.
The willingness of providers to deploy capital improved over the very constrained at midyear 2020 conditions capacity was generally available in both property and casualty lines.
Non loss impacted property program cell price at a mid single digit to low teens in the U S and low single digits, and EMEA and Asia Pacific.
Significant recent loss activity drove pricing up in excess of 30% on some segments have impacted business.
Casualty renewals were subject to increased underwriting rigor due to ongoing pressures of social inflation and challenging experience.
Price increases continued to be pervasive in both the P&C insurance and reinsurance market's overall, while capital levels remain reasonable 2020 saw elevated loss activity, a historic pandemic and low interest rates.
Periods of rising P&C rates, changing risk environment, and uncertainty present challenges for our clients and the value of our advice and services becomes even more critical.
Now, let me turn to our fourth quarter financial performance.
We generated adjusted EPS of $1, 19, which capped a strong year for marsh <unk> mclennan, despite the ongoing global pandemic and economic recession.
Total revenue increased 4% versus a year ago and rose, 1% on an underlying basis.
Underlying revenue grew 3% in RIS or 4%, excluding the decline in fiduciary interest and declined two 1% and consulting.
Marsh grew 4% in the quarter on an underlying basis, finishing the year strong.
At Carpenter grew 5% on an underlying basis in the quarter Mercer underlying revenue declined 3% in the quarter and Oliver Wyman grew by 4% as new business picked up into the end of the year.
The overall fourth quarter saw adjusted operating income consistent with prior year with our adjusted operating margin down 60 basis points year over year.
As we mentioned on our last earnings call, we expected to see a sequential uptick in expenses in the fourth quarter. The increase reflects employee related actions that would have taken place over the course of the year, but were delayed in the thick of the pandemic and increase in variable compensation accruals due to Oliver Wyman is better than.
Expected performance as well as strategic hiring and other investments.
As we consistently say it is important not to overemphasize, a single quarter and rather look at performance over a longer period of time for the full year 2020, adjusted operating income increased 9% with 120 basis points of adjusted operating margin expansion.
<unk> achieved 170 basis points of adjusted operating margin expansion for the full year, while consulting gained 20 basis points.
For the full year adjusted EPS grew 7% overall revenue grew 3% or 1% on an underlying basis RIS underlying growth of 3% was driven by growth of 3% at marsh and 6% at Guy Carpenter, partially offset by a significant decline in fiduciary into.
Just.
Consulting revenue held up well, despite the more discretionary nature of revenue and higher economic sensitivity with Mercer as underlying revenue down, 1% and Oliver Wyman down 4% for the full year.
As we look to 2021, we are well positioned given the resilience of our business strong demand for our services and our expectation for a better economic backdrop for the full year 2021, we expect to deliver underlying revenue growth in the 3% to 5% range.
<unk> expansion and solid growth in adjusted EPS.
This is based on our outlook today, which as soon as the global economy recovers in 2021 with a return to positive economic growth in the second quarter.
2021 represents the 115 anniversary of Marsh <unk> Mclennan.
Enterprises and door, let alone prosper for a century and a half.
Our predecessors helped our clients navigate through World Wars, depressions and yes pandemics.
From our very beginning we develop unique solutions and markets to address complex issues. We helped enable the development of major industries by creating insurance solutions for the automobile telephone and electric power sectors. We.
We pioneered innovative pension products to enhance retirement security.
Decades ago, we developed some of the first space protection programs today.
Today, we are boldly working with governments around the world on a new type of public private partnership to help address systemic risk from Pandemics.
We were also at the forefront of tackling society challenges such as cyber security and the protection cap healthy societies, the retirement GAAP and climate resilience.
Our growth and financial performance over this period was also outstanding.
At the beginning of the 20th century, we had approximately 20 employees and less than $1 million of revenue fast forward to today, we have over 76000 employees and 130 countries and over $17 billion of revenue since.
Since going public from $19 62, our financial returns have been exceptional with significant earnings growth.
During this time on our revenues adjusted operating income and adjusted EPS, all have grown by a double digit CAGR with a share price return CAGR over 10% annually.
These stock returns meaningfully outpaced the S&P 500, and are testament to the value that marsh mclennan delivers for clients colleagues and shareholders.
We intend to use the occasion of our 150 <unk> anniversary to celebrate our history chart, our future and demonstrate indeed, our commitment to the community.
To that end, we announced earlier this month that we have committed to be carbon neutral as a company in 2021 and will reduce our carbon emissions by 15% by 2025.
Over the balance of the year, we will rollout other initiatives, including fellowships for racial and social justice.
As 2020 as powerfully demonstrated the age of risk has really just begun.
We want to preserve the best of what we have learned in 2020 about the importance of resilience flexibility and empathy and then build on that foundation with a relentless spirit of innovation to shape, the future and one thing as Marsh Mclennan will never change we put clients at the center of everything that.
We do.
With that let me turn it over to Mark for a more detailed review of our results.
Thank you Dan and good morning.
We're pleased with our fourth quarter and full year results, which were strong despite the challenges of 2020.
We grew our topline delivered solid earnings growth and enter 2021 with a strong balance sheet and liquidity position.
Consolidated revenue increased 4% from the fourth quarter to $4 4 billion, reflecting underlying growth of 1%.
Operating income was 571 million, while adjusted operating income was 855 zone.
Our adjusted operating margin decreased 60 basis points to 21, 3%.
GAAP EPS was <unk> 73.
And adjusted EPS was $1 19 per <unk>.
Looking at risk and insurance services fourth quarter revenue grew 6% to two 5 billion. It was up 3% on on underlying basis or 4%, excluding the impact of a decline in fiduciary interest.
We are pleased with the excellent finish to the year, which demonstrates the strength and resilience of our business in the face of the pandemic.
Adjusted operating income decreased 5% to $525 million and the adjusted margin contracted 220 basis points to 23, 5%, reflecting the expected increase in expense in the fourth quarter.
For the year revenue was $10 3 billion, an increase of 8% with solid underlying growth of 3%.
Adjusted operating income growth for the year with impressive at 14% and our adjusted operating margin in RIS increased 170 basis points to 28%.
At Marsh revenue in the quarter rose, 7% to $2 4 billion, increasing 4% on on underlying basis.
On the U S and Canada Division underlying growth was 7% for the quarter and 5% for the full year driven by strength across the portfolio.
2020 represents the third straight year of 5% from higher underlying growth U S and Canada.
The International Division underlying revenue was flat in the quarter with Latin America up, 3% Asia Pacific up, 1% and EMEA down 2%.
For the full year revenue at Marsh was $8 6 billion, an increase of 7% from 3% on on underlying basis.
Guy Carpenter's revenue was $162 million, an increase of 5% on on underlying basis for the quarter, representing a great finish to a strong year.
The performance in the quarter benefited from growth at GC securities as well as strength in new and renewal business across our region.
For the year revenue was $1 7 billion, an increase of 15% or 6% on on underlying basis.
The full year growth was well balanced with all businesses producing strong results.
In the consulting segment fourth quarter revenue increased 1% to $1 9 billion with an underlying revenue decline of 1%.
Consulting operating income was $179 million and adjusted operating income was $387 million up 8%.
The adjusted operating margin was 21, 4% an increase of 170 basis points versus a year ago.
For the year revenue was <unk> 7 billion, a decrease of 2% on an underlying basis.
Adjusted operating income for the year declined 2% to $1 2 billion, while our adjusted operating margin increased 20 basis points to 18, 8%.
<unk> revenue was $1 3 billion in the quarter, representing a decrease of 3% on on underlying basis.
Wealth decreased 1% on an underlying basis with an increase in investment management offset by a decline in DB.
Our overall assets under management continued to growth and at year end exceeded 357 billion up 11% sequentially and 17% year over year.
Health revenue declined 2% on on underlying basis in the fourth quarter, reflecting headwinds from higher unemployment levels, along with a tough comparison to a strong quarter for project work in the fourth quarter of 2019.
Career revenue declined 7% on an underlying basis.
For the year revenue at Mercer was $4 9 billion, a decrease of 1% on an underlying basis.
Oliver Wyman revenue in the fourth quarter was $590 million, an increase of 4% on an underlying basis.
The stronger than expected results were driven by increased client demand across most segments of the business.
We are pleased with the sequential improvement to positive underlying growth to finish out the year, although we recognize the environment remains uncertain.
For the full year Oliver Wyman revenue was 2 billion a decrease of 4% on on underlying basis.
Adjusted corporate expense was $57 million in the quarter.
In the fourth quarter, we reported $284 million of noteworthy items, the majority of which are related to J L. P.
Included in this total are $70 million of J L. T integration cost $13 million on <unk> acquisition related costs.
$46 million of other restructuring costs and $161 million related to a legacy J LTE you know in the U K.
This relates to an industry wide review commenced by the FCA in 2014.
The FDA focused on the suitability of financial advice provided to individuals by a number of companies, including J L. T relating to enhance transfer value exercises and in some cases date back to 2001.
At the time of the <unk> acquisition, a gross liability of approximately $77 million had already been recorded.
This latest update reflects our best estimate of the ultimate liability.
We expect this gross liability to be partially offset by insurance recoveries from <unk> insurers and indemnification claims.
As we typically do on our fourth quarter call I will give a brief update on our global retirement plans.
Cash contributions to our global defined benefit plans were $143 million in 2020 compared to $122 million in 2019.
We expect cash contributions in 2021 will be roughly $124 million.
For 2021 based on our current expectations, we anticipate our other net benefit credit will increase modestly year over year.
Investment income was 25 million in the fourth quarter on a GAAP basis was $11 million on on adjusted basis.
For the full year 2020, our GAAP investment income was a loss of $22 million.
And adjusted investment income was a gain of approximately $6 million.
The differences between GAAP and adjusted primarily related to Mark to market adjustments on our remaining investment in Alexander Forbes, which we exclude from our adjusted results.
For 2021, we expect only modest investment income on on adjusted basis.
Our effective adjusted tax rate in the fourth quarter was 24% compared with 23, 4% in the fourth quarter last year.
For the full year 2020, our adjusted tax rate was 24, 4% as compared to 24, 1% for the full year 2019.
Excluding discrete items, our adjusted tax rate for the full year was approximately 25, 3%.
When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative based.
Based on the current environment. It is reasonable to assume a tax rate between 25% 26% for 2021.
We've made great progress from 2020 on our integration of J L. T and have exceeded the key milestones we laid out when we announced the transaction.
We incurred $70 million of J L T integration and restructuring costs in the fourth quarter, bringing the total to date to $586 million.
The remaining work to be done in 2021 consists primarily of ongoing technology application migration and the further consolidation of real estate.
Through year end 2020, we have exceeded the estimated savings of $350 million. We now expect to achieve approximately $425 million of savings by the timely integration is completed in 2021.
We expect to incur approximately $650 million of cash cost to generate these savings. In addition, we continue to expect approximately 75 million of noncash charges.
We ended the year with $2 1 billion of cash due to the strength of our cash flow from operations and efforts made during the crisis to improve working cap.
Our strong cash generation during the year enabled us to raise our dividend complete a record level of acquisition activity at Marsh <unk> Mclennan agency and stay on pace with our deleveraging plan with one 5 billion of total debt repaid in the fourth quarter.
Total debt at the end of the year was $11 3 billion down from $12 7 billion at the end of the third quarter, reflecting the repayment of $700 million of senior notes. The prepayment of 300 million floating rate notes due in December 2021, and repayment of the remaining $500 million due on our term loan.
Our next scheduled debt maturities in July when $500 million of senior notes mature.
Interest expense in the fourth quarter was $128 million based on our current forecast, we expect approximately $119 million of interest expense in the first quarter of 2021.
In line with our prior commentary, we did not repurchase any shares in the fourth quarter of 2020.
As we look to 2021, while uncertainty remains high the combination of our available cash and expected cash generation positions us well for a year of significant capital deployment.
Based on our outlook today, we currently expect to deploy approximately $3 5 billion of capital in 2021 across dividend debt reduction acquisitions and share repurchases.
Due to our debt reduction in Q4, we expect only a modest amount of debt pay down in 2021, which will complete our deleveraging.
We have consistent consistently stated that we favor attractive acquisitions over share repurchases as we do high quality acquisitions as the better value creator for shareholders and the company over the long term.
Our track record is good as evidenced by a high teens return on invested capital over the past three years.
We expect to resume share repurchases in 2021, and the ultimate level of share repurchases will depend on how the M&A pipeline development.
Uses of cash from the fourth quarter totaled 365 million and included 124 million per acquisition and $241 million per dividend.
For the full year 2020 uses of cash totaled $1 8 billion and included $877 million per acquisitions and 943 million for dividend.
In summary, we are proud of the resilience courage and agility of our colleagues in a year that presented unique challenges as we look forward to 2021, our outlook is for another year of strong performance and with that I'm happy to turn it back to Dan.
Thank you Mark and operator, we're ready to go to the Q&A.
Certainly.
Ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
And in the interest of addressing questions from as many participants as possible. We would ask that participants limit themselves to one question and one follow up question.
Please standby, while we compile the Q&A roster.
And our first question comes from the line of Elyse Greenspan with Wells Fargo.
Hi, Thanks. Good morning, My first question was.
On the outlook on 2021, you guys pointed to three to five per cent.
Organic revenue growth.
Good day and embedded in that is fair.
Consulting and then Kevin on that.
You guys, obviously right.
On the economy to start to rebound.
I think you've said that in the second quarter, what do we should we assume that the.
Growth is better in the back three quarters.
The Q1.
Yeah, no. It's a good question on lease.
We were we were 3% to 5% growth on an underlying basis for 10 straight years before 2020 and so.
We feel that it's actually really positive that we're believing we will return to that 3% to 5% growth in 2021.
The difference between RIS and consulting has more to do with what's happening in the global economy, and the macro factors business confidence on.
Obviously as demonstrated this year.
On the RF business is a bit more resilient with higher levels of recurring revenue than the consulting business.
We're still hopeful actually that we will grow our consulting business in 2021 in both Mercer and Oliver Wyman and Thats actually our plan.
We do expect that there would be more strength.
From the second quarter onwards, because the first quarter Youre basically comparing a pre COVID-19 world with a COVID-19 world and so there'll be some challenges within that but but where we've got some pretty decent momentum.
Net we built throughout the year and so we're expecting a good year in 2021 as we mentioned on.
In the script.
We expect to have margin expansion for the year and we also expect.
Solid adjusted EPS growth.
Okay. That's helpful and then on.
My second question on I guess, it's also on the other component of guidance some margin improvement.
You guys did on like you said, a pretty good job of managing your expenses during the second and the third quarter sounds like there was a little bit more reinvestment.
Some stuff that got cut off I think you said in the fourth quarter. So I guess the same question I was thinking about on the margin side on it.
It sounds like maybe there could be some strains on the Q2 on the Q3, because those are pretty tough comps, but I guess, that's my part of the question and then the same thing are you implying Dan since you said potentially growth in both consulting and our asset book segments could see margin improvement in 2021.
Yes.
Our margin improvement in 2021 will in part be a function of where organic growth is.
When we look at it you say, where you wouldn't get a pretty good job on the second quarter. My God, We rattled back expenses fat expense growth was down five percentage in the second quarter four per cent and the third quarter. So I think it was a remarkable job not impacting the business itself continue.
Going to invest in that business, but managing our expenses aggressively and setting a very high bar from.
What was required in the midst of a real crisis, a real global crisis and so forth.
Fourth quarter represents to us.
Getting back not quite to normal, but looking at pacing the way we normally would do.
Is it low inside baseball in that.
Clearly, we did a number of strategic hiring in the fourth quarter were actually up 500, 500 or actually close to 500 head count in the fourth quarter and so we're positioned well for 2021.
I'm not worried about quarter by quarter comparisons looking at 2021 versus 2000, 22020, and a lot of ways is such a unique bizarre type of year.
So we're going to run our business the way we run on our business as we usually do where revenue growth exceeds expense growth and almost every quarter and certainly in every year as it has gone through the last 13 years, So I know that that the entire firm.
We're very interested in doing our best to turn the page on 2020 focus on 2021 and in the fourth quarter. We started really focusing on what that would mean, so I think we're positioned to grow.
Recently in bolt on whether or whether our margin goes up in both segments or not I'm not going to really talk about right now our expectation is that we will grow margins now.
On to grow margins to the extent that we did as an overall company in 2021 that would be a very tall last bearing in mind all of the expenses that were pulled back in the second.
Second and third quarter.
Thank you that interest.
Sure.
And our next question comes from the line of Mike Zaremski with Credit Suisse.
Hey, good morning, I guess.
I'll ask the expense question a little differently.
Now you said remarkable job kind of pulling back on the expenses. So I guess do you feel that.
Or any kind of lessons are things that you think that can expense wise or operating leverage wise can kind of persist permanently or are you, saying kind of relationship between revenues expenses kind of hopefully just goes back to the old relationship is as the as the world opens up and things get back to.
Normal.
I think that the.
Complicated question and I think the answer is both I do think we will return to a more normal pattern to where we look at revenue growth of 3% to 5% area. Our expense growth for a number of years four out of the last five years before 2020 was average.
It was not average was actually 2% growth.
Our expense growth normally.
It would be around 2% as it's been some years might be three from yours might be one, but ultimately I think that's moving more normal pattern, we do see the opportunity of certain things that we've learned during this during this year during the year 2020 to continue.
Clearly when you think about things like.
We're a business that is filled with knowledge workers and subject matter experts. So remote working is manageable for us. So our choice of returning to offices is just that it's a choice. We think it's better for the business. We expect our offices physical offices to remain really the hull of.
Of activity in Marsh, <unk> Mclennan, but having said that we also think that over a period of a few years that we would be able to reduce our footprint a bit and that would actually benefit shareholders, but it would also benefit colleagues by making their lives a bit more flexible in a bit easier.
Year, so so certain that that's an area of having a more agile real estate footprint. As an example, we also operated much faster and more connected.
During COVID-19 than we did previously and there is an efficiency gain with that that we absolutely want to keep.
I look at <unk>, I think it's going to be a while before travel snaps back to the levels that we had in late 2019, and maybe it will be quite a while I do expect people once once COVID-19 clears in the crisis zone.
Over to return to travel to see markets in to see clients, but maybe even low travel on quite as much impact like we used to and maybe we'll we won't jump on an airplane at a moment's notice.
It could be more like low.
Let's talk on zone, because everybody's used to that now so I do think that there is last thing efficiency gain which will benefit shareholders.
In the post Covid World.
Okay great.
And last a follow up.
Switching gears, a little bit to some of the more consulting.
On.
Centric businesses now I guess a lot of the questions we get are about.
Whether organic will.
So come to some <unk>.
Cost cutting actions some corporations are taking.
On the other hand, there seems to be.
A lot of uncertainty out there, which sometimes can lead to a new political administration, which could actually be a tailwind for parts of your consulting businesses. So maybe you can kind of talk through some of the pluses and minuses you're seeing thanks.
Sure.
I'll leave that off and then I'll.
Handoffs from our team and Scott, who can give you a little bit more detail I mean, our consulting businesses, yet they have less recurring revenue and parts of the career business and Oliver Wyman or project space, but having said that the resilient businesses and theres still plenty of activity as demonstrated by.
Merchant performance through the year, which was minus three but much stronger minus three the last three quarters and actually minus one for the year, which actually is much stronger than during the financial crisis.
In areas like health and investments retirement security.
Our our lasting and have and resilient in and of themselves on the.
Alignments pop on the fourth quarter was a bit unexpected for us.
But it's usually as I've mentioned before they tend to be a bit of our Canary in the coal mine as the business confidence and the thoughts and so so let me go to our team first and then Scott who can give you a little bit more flavor for how they see growth in their business in 2021, but Marty yeah, well, thanks, Dan and Mike for the <unk>.
<unk>.
No actually we were pleased as Dan said about the new business activity that we've seen in the current challenging circumstances.
And we look at what the world needs right now in terms of redefining the world of work addressing health challenges.
And also we've seen quite a lot of demand in the investment solution side of our portfolio and we closed the year at a record level of assets under management net $357 billion. So I'd say health has been resilient through the crisis the grew 2%.
We see bright spots there in terms of.
Digital solutions demand for virtual care mental health for example, or workforce communication.
And I said well.
Of course, we have the structural decline in the defined benefit but that has slowed down a bit during 2020.
We've seen a lot of project work related to market volatility so that could continue but definitively on business solutions are very.
Very much in demand and then for his career is our most discretionary project work business in particular on the service side of career, but.
Carriers, usually rebounds, with the economy and as Dan said.
In his remarks, we expect the economy to.
Recovery to come back.
And part of <unk> and therefore.
And we've seen we are seeing some strength in the pipeline.
And we've seen that in Q4, so all in all.
I think our services are very relevant for the times, we're watching of course, the agenda from debate in administration, but.
We think that we are well positioned there in particular, we are very strong in ESG like diversity and inclusion consulting and also on responsible investment and helping clients address the transition to a low carbon economy.
I think Tim as soon as the economy comes back I think we should see a good rebound.
Thank you Mark and Scott do you want to talk to us a little bit about how you see 2021.
Yes.
Sure, Dan and Mike from an over Wyman perspective, I mean, we had a very strong Q4.
And we had strong business activity across most segments of the business and real particular strength in areas like financial services health the public sector on our actuary on lifting cost businesses.
And the type of business. We were doing was really broad based in a range to all the way from growth strategies and digital transformation to the other end of restructuring and bankruptcy.
I think the lesson I'm drawing from that is that there is lots to do out there is as businesses recover after after the pandemic. They rebuild they grow they evolved transform Oliver Wyman also tends to focus on big companies.
Which have performed relatively better than small companies over the over the last period.
Looking into the new year, our new sales on the pipeline.
Are also strong.
But as you said in your question clients are facing significant uncertainty.
As they hopefully manage through the last legs of the pandemic.
But looking out to the whole year, I think the first quarter could be challenging but beyond that.
Beyond that I feel really good about our business our prospects on our ability to grow companies are certainly challenged and they've got at least another quarter or more of challenge and uncertainty, but they have a lot to do they need a lot of support and I think between Oliver Wyman and Mercer, we have many of the things.
They need.
Thanks, Scott next question please.
Our next question comes from the line of Phil Stefano with Deutsche Bank.
Yeah. Thanks, I wanted to go back to the expenses for a moment and I think last quarter. The commentary was that it would it would be up sequentially, but maybe not to the extent that we saw.
On a year over year basis, it feels like it was higher than that and I was hoping you could talk around that you know my suspicion is there was an opportunity.
For investment or hiring maybe you can better flush that out.
No. It's a good question.
Good question, Phil and it's a good cash my expectation on the call for our third quarter was that.
That expenses would uptick in the fourth quarter, but they would still be negative about a year over year basis and actually they are positive on a year over year basis. Our expenses grew one five or 2% in the fourth quarter. So it was a bit of a surprise.
There was two factors underneath that one.
Didn't expect Oliver alignment to grow in the fourth quarter and Oliver Wyman grew and as I've mentioned before they have the most variable compensation model and so when they are growing that's what we build in more on terms of variable comps. So that was that was something that we did and the hiring that we did in the fourth.
Quarter on the strategic recruitment side was higher than what we expected we see a lot of opportunities out there and as I mentioned were up nearly 500 head count on a net basis in the fourth quarter.
So that was a little bit more so those are the two factors that contributed to us having expenses. It is important to point out neither of those factors in and of themselves on a run rate I mean, certainly with the strategic recruitment, we expect revenue overtime as a result of building out our our head.
And as we've done.
For many years in a row and so on.
And the variable cost increase in <unk> to me is a good news story, because it's attached to growth and so I would love for that to continue because it would signify that we're growing the top line and in Oliver Wyman.
Okay and dialing in on day.
Our international businesses.
To what extent do the different regions within there have different organic growth profiles in the short run and I'm trying to think through the various regions ability to.
To manage vaccinations to.
Adopt stimulus programs and things like that.
Should we see significant difference in these regions.
And the very shortly.
Yes. It is.
Good question.
I'll start it off and then ill hand over to John who has got the biggest.
International footprint and also to Peter So he can weigh in on it.
What he is seeing in different parts of the world and expectation levels, let's bear in mind just to start our top six countries represent about 75% to 77% of our revenue. So you look at the United States, UK, Canada, Australia, France and Germany.
That's a big part of.
Of our company and so.
That's pretty developed economy stuff.
We always have some level of variability the variability as you mentioned and there's going to be different rollouts, and there's going to be different timing as to when.
On the.
Individual countries return to normal, but John how do you see.
Regional growth patterns as you go forward into 2021.
Sure.
You for the question look we are we expect to.
A better growth trajectory in the international business in 2021.
Of course.
The economic outlook matters.
Many parts of the world.
Struggled more from an economic perspective.
Byproduct of course of the pandemic.
Maybe less government intervention to support on the economies, what I would say two internationally at least in many markets maybe not the U K, maybe Australia or some other more developed markets.
A lot of premium spend can be quite discretionary right and so and you have liability environments that are very very different than the.
Countries that I mentioned earlier, and so and we also saw less price.
And less rate increase and many of those markets as well so.
Overall, I would expect less premium growth from.
From an insurer perspective internationally than what we saw in the U S where as you saw we had very very strong.
Revenue growth this year, but but again.
Optimistic about about 'twenty, one it should be a better year.
Thanks, John Peter you want to give us guy Carpenter's perspective of regional growth patterns.
Our 2020 regional business International business was fantastic, we had strong double digit growth.
In Latin America Asia Pacific EMEA operations, our U K operations.
Especially because we have not seen any any weakness in the underlying subject premium basis from our clients and quite frankly uncertainty creates demand in the reinsurance business the uncertainty created by Covid.
Pension loss magnitude as increased demand in all of our businesses, but for the first time on a long time on international businesses of all growing by strong double digits and we see the same thing for 2021.
Thank you.
Next question please.
Our next question comes from the line of Jimmy Buhler with J P. Morgan.
Hi, Good morning. So first just a question on capital deployment I think you mentioned three points from Ian.
And I guess about 1 billion of that will be used for dividends of about half a billion for debt retirement, so the remaining $2 billion.
Should we assume that buybacks will be consistent with what you've done in the past, which is sort of offset the or keep the share count constant or go down a little bit or or would you consider being more active either based on the stock price or just your deal pipeline.
Sure. Thanks, Jimmy.
Mark mentioned that we will deploy approximately $3 5 billion of capital in 2021, and Mark you want to take that question and give a little bit of our philosophy of how we're thinking about that.
Sure Jimmy.
Jimmy on your math is good to $3 5 billion 1 billion per dividend have billions of debt pay down and your remainder of 2 billion as I said earlier and as we've said consistently we favor acquisitions and so as we think about that that $2 billion bucket. The lien is going on.
M&A, our M&A pipeline is good but I would say, we do expect a meaningful amount of share repurchases. Just the exact amount is really going to depend on the strength of the M&A pipeline as we go through the year.
And how is the competition for deals and sort of availability of attractive properties, because there does seem to be a lot of interest.
There is ongoing consolidation in the market share.
Yeah, Jimmy we are the market leader.
Don't compete an awful lot for assets in the marketplace in any kind of competitive bidding on.
Processes at the end of the majority of the companies that we acquire we're in exclusive negotiations and their decision oftentimes is are they going to come with marsh mclennan or will they remain private.
How it works on the majority of ours. So we're not chasing we're not chasing deals and frankly, if a company is.
Debating whether they should sell to us.
A combination that would help them grow better and give better career pathing to their colleague base in there from there.
They are viewing that as to well what about private equity as an example, as an alternative.
They were not ready for really that conversation.
And we like doing transactions.
Which we're not.
Selling ourselves and they are not selling themselves were deciding in combination that working together will enable more growth for the combined operations on a go forward basis. So we're highly selective we're not doing dozens and dozens of deals as you see that takes place out there in the market.
And as I said most of our acquisitions were in some element of exclusive discussion.
Next question please.
Our next question comes from the line of Meyer Shields with K B W.
Thanks, Dan I don't know if you mentioned this before and I missed it but the nearly 500 head count increase in the fourth quarter was that more weighted towards our I guess our consulting.
Yes.
I don't have the precise number for you I mean, my my view.
It would be it would be our eyes weighted.
And so.
But consulting.
We intend, yes, if I look at our overall head count for the total company in 2020 is up slightly up slightly versus 2019, so it's not that we've emptied the cupboard.
Net.
<unk> achieved our margin expense expansion in 2020 in a way that's going to impact us negatively into the future. We are well prepared for a rebound.
And certainly <unk> had a very strong year.
And.
As the market leader and so we are the employer of choice in the industry and we have a lot of opportunities to build our head count with really quality subject matter experts and producing people as we go forward.
Okay No that's helpful.
On a different topic I guess use Marty had mentioned the record.
Under management can you give us a framework for how we should think about that impacting earnings.
Sure I mean, it's not a direct read through obviously with.
Rolling on.
As we earn more revenue generally from that it also creates a bit more volatility to us as we go forward, but it's very much a good news story I mean, I think the CAGR on AUR.
Mid twenty's over the last five years or so so Martin how should how should Meyer and others think about AUR on when it comes down to what does it mean from Mercury's business.
Yeah, well, it's definitely a very strong suit for us and also the demand through the Covid crisis of increase we've seen the same thing on.
On the global financial crisis, when the market becomes more uncertain the demand for improved governance and transaction agility really drive demand for us and we're seeing this so we had very very strong inflows in 2020.
Seeing very good pipeline for 2021 and of course there is.
Always the aspect of the capital market in that business that impacts.
Sure.
AUM itself, but also the revenue and then within the offering.
There is different types. So we have assets pension assets and we have non pension assets.
The client really decided on the asset mix, so the exposure to whether equity on bonds or.
Private market.
We think that actually the way that we deploy these assets.
There is a there's just mitigation of risk in itself because of the diversification of the portfolio. So I would say that the revenue flows it depends on when the funds.
Funds in the year.
But it's been.
Our success in growth story, so far.
Excellent.
Next question please.
Our next question comes from the line of David motivated with Evercore ISI.
Hi, Thanks, Good morning, I, just wanted to follow up a bit on.
On the underlying expenses.
And just how to think about it so.
Dan you mentioned earlier, it was a bit above what.
You had expected.
In <unk> or at least what you had expected in the third quarter.
I guess, how should we be thinking about it as we look forward into 'twenty one.
Based on how I calculated it looks like underlying expenses were up 1% in 2020.
Would you still expect it to be in that 2% to 3% range.
In 'twenty one or.
As some of the timing impact kind of would that maybe bring the underlying expense growth below that range as we look to 'twenty one.
It's an impossible question to answer without knowing the organic or underlying growth rate for 2021 and in each of our businesses because a fair amount of our expense growth is linkage with with very variable comp I mean, our bonus pool increased in 2020 in fact, the overall marsh <unk> mclennan.
Bonus pool has never been higher than in 2020.
Biggest profitability.
Was up considerably and so when I look forward to next year or 2021, rather I look at it and say.
Most certainly revenue is going to exceed expense growth.
As it has for the last 13 years it may not be in every quarter, but certainly that's how we run the business for a year I think a lot of our expense pop in the fourth quarter was was non run rate I mean, some of it was that but a lot of it wasn't and so I look at it.
Pretty simply for 10 years prior to Covid, we grew underlying revenue between 3% to 5% and we delivered an adjusted EPS EPS CAGR over that decade of close to 12%. So ultimately.
That's what we're playing for the idea that as well as the growth underlying revenue, we can run our business and the expense side of our business in a way to develop strong adjusted EPS growth and that's kind of how I think about 2021.
Okay, Great. That's helpful. Dan Thanks, and maybe just a quick question or maybe not so quick but a question for John just.
Just wondering what your thoughts are on the primary P&C market pricing environment.
And I guess.
How long do you think that this current hardening rate environment.
We will continue I think theres been some discussion out there that it may start to taper off at the end of the year.
And maybe be more in line with loss trend, but just just wanted to get your sense.
In terms of the direction of the market.
So the guidance I think that sure sure David.
Market remained very challenging for our clients in the quarter, Dan talked about the overall price increase of 22% versus 20 in the third quarter.
2020 was obviously, a really difficult year for insurers cat losses, Covid losses, social inflation low interest rates.
No.
It certainly accelerated COVID-19 certainly accelerated the trend from rising prices throughout throughout 2020.
U S UK and Australia are the most difficult markets generally speaking for our clients.
Looking forward.
Most concerned again from a client's perspective.
D&O pricing and excess liability pricing excess liability market really primarily here in the U S.
Just a lot of.
Ongoing discussion about.
Growing claim frequency growing claim severity in part again, driven by social inflation, but.
Just broad concerns in the underwriting community about rate adequacy there.
Work comp remains pricing remains down on the other hand.
Bend down candidly a bit longer on that had been at.
Spectrum, but good for our clients, we are seeing some lines of business, where the rate increase line kind of flattened out or began to moderate and that's not to say that prices were down but the average increase in the fourth quarter like in our property book.
For example wasn't up as much as it was in the third quarter. So.
So again overall from my clients on point of view on most concerned about D&O and excess liability pricing I do think.
As time wears on throughout the rest of 2021 other lines of business will likely moderate a bit.
Thank you.
I would like to turn the call back over to Dan Glaser, President and CEO of Marsh <unk> Mclennan for any closing remarks.
I'd like to thank everyone for joining us on the call. This morning in closing I'd also like to thank our colleagues for their hard work and dedication in 2020, which of course was a very challenging year I want to thank our clients for their continued support and look forward to speaking to all of you next quarter.
Be well.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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