Marsh & Mclennan Companies, Inc. (MRSH) Q4 2022 Earnings Call Transcript

Listed Participants: John Doyle - President and Chief Executive Officer, Marsh McLennan; Mark McGivney - Chief Financial Officer, Marsh McLennan; Martin South - President and CEO, Marsh; Dean Klisura - President and CEO, Guy Carpenter; Martine Ferland - President and CEO, Mercer; Nick Studer - President and CEO, Oliver Wyman; Sarah Dewitt - Head of Investor Relations.

Welcome to Marsh McLennan's Earnings Conference Call. Today's call is being recorded. Fourth quarter 2022 financial results and supplemental information were issued earlier this morning. They are available on the company's website at marshmclennan.com. Please note that remarks made today may include forward-looking statements. 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 and to our most recent SEC filings, including in our most recent Form 10-K, all of which are available on the Marsh McLennan 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 will now turn this over to John Doyle, President and CEO of Marsh McLennan.

Good morning and thank you for joining us to discuss our fourth quarter results reported earlier today. I'm John Doyle, the President and CEO of Marsh McLennan. Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses, Martin South of Marsh; Dean Klisura of Guy Carpenter; Martine Ferland of Mercer; and Nick Studer of Oliver Wyman. Also with us this morning is Sarah Dewitt, Head of Investor Relations. I am excited to be leading this call today for the first time as President and CEO. Marsh McLennan is an outstanding company with unique capabilities in the critical areas of risk, strategy and people. We help clients address their greatest challenges and find new possibilities as they navigate dynamic environments. We have exceptional talent, a wide range of solutions and a track record of execution in financial performance. Our leadership team is focused on delivering the full capabilities of Marsh McLennan to our clients, continuously improving the client and colleague experience, efficiently managing capital and driving growth and value for shareholders. Over the past year, I've been meeting with colleagues and clients to exchange ideas about how we can accelerate impact for clients and enable their success. These conversations reinforce my conviction that we are in the right businesses with strong brands and deep client relationships. I am confident that we have meaningful opportunity at the intersections of our businesses, where together our scale, data, insights and solutions are highly valued by clients. The strength of our unique value proposition has us well positioned for the years ahead. Today, we are focused, aligned, and succeeding together as our results demonstrate. 2022 was an outstanding year for Marsh McLennan. We generated 9% underlying revenue growth, continuing our best period of growth in more than two decades with each of our businesses delivering strong results. Our total revenue surpassed $20 billion and adjusted operating income grew 11% to $4.8 billion. This was on top of 18% growth in 2021. We reported adjusted margin expansion for the 15th consecutive year. Adjusted EPS growth was 11%. I am particularly pleased with this performance as our results included costs related to our strategic investments in talent and the continued normalization of travel and entertainment. These results also came on top of 24% growth in 2021, and we delivered significant capital return to shareholders raising our dividend by 10% and completing $1.9 billion of share repurchases, the largest annual amount in our history. We overcame significant foreign exchange and capital market headwinds to generate these results through execution, growth and exceptional client engagement. I'm particularly proud of these achievements amid a year of seamless leadership transitions at Marsh and Guy Carpenter. Our purpose and strategy underpin our performance. Marsh McLennan makes a difference in the moments that matter for our clients, colleagues, and our communities. Turning purpose into practice, our strategy focuses on several core elements: promoting a culture that attracts and retains top talent in our business; investing to strengthen our capabilities organically and inorganically; positioning ourselves in segments and geographies with attractive fundamentals; leveraging data and insights to help clients become more resilient and find new opportunities; and delivering Marsh McLennan's full value proposition to enable client success. We complement our colleague and client-facing strategy with our approach to expense and capital management. We focus on growing revenue faster than expenses, which contributes to annual margin expansion and adjusted EPS growth, and we manage capital allocation to balance performance in the near-term with investing for the long term. We are accelerating collaboration across our business to drive greater growth and efficiency. We are implementing new ways to operate, reduce complexity and organize for impact. In this regard, we took actions in the fourth quarter to align our workforce and skillsets with evolving needs, rationalized technology, and reduced our real estate footprint. Together, these actions resulted in approximately $230 million of charges. Based on our outlook today, we expect they will drive $125 million to $150 million of savings in 2023. Overall, they reflect an opportunity to accelerate impact for clients, reinvest in our capabilities, and to be more efficient and connected. Now, let me turn to our fourth quarter financial performance. We generated adjusted EPS of $1.47 which is up 8% versus a year ago or 12%, excluding the impact of foreign exchange. On an underlying basis, revenue grew 7%. Underlying revenue grew 8% in Risk & Insurance Services and 6% in Consulting. Marsh grew 6%. Guy Carpenter grew 5%. Mercer grew 5%, and Oliver Wyman grew 8%. Overall the fourth quarter saw adjusted operating income growth of 13%, and our adjusted operating margin expanded 160 basis points year-over-year. As we look ahead to 2023, we see a mixed economic picture. While there is a risk of recession for major economies, we also believe there are many factors that remain supportive of growth for our business. Softer real GDP growth is offset by elevated inflation, which drives higher insured values and loss costs. Property & casualty insurance rates continue to increase as insurers account for rising frequency and severity of catastrophe losses, the risks of social inflation and higher reinsurance costs. Healthcare costs continue to rise due to higher wages and labor shortages in the healthcare sector. The U.S. labor market continues to remain among the tightest employment environments of the past half century with 3.5% unemployment and over 10 million unfilled jobs and short-term interest rates are at the highest level since the financial crisis increasing our fiduciary income. When the world is volatile and uncertain, demand for our services typically rises. This year's global risks report, which we just published in collaboration with the World Economic Forum, highlights that risks confronting our clients extend well beyond economic and insurance cycle concerns. The report identified the cost of living crisis, failure to mitigate and adapt to climate change, extreme weather, natural resource crises, the erosion of social cohesion, cybercrime and geo-economic confrontation among the top risks facing society over the near-term and next decade. In these areas and many others, we are working with clients to meet these challenges, build resilience and capture new opportunities. Our colleagues are inspired by the opportunity to work on these critical issues and to make a difference in the moments that matter. Looking forward, we are well positioned for 2023 and beyond. We expect mid-single-digit or better underlying revenue growth in 2023, another year of margin expansion and strong growth in adjusted EPS. Our outlook assumes current macro conditions persist, but meaningful uncertainty exists and the economic backdrop could be materially different than our assumptions. However, we have a track record of resilience across economic cycles. In summary, 2022 was an outstanding year for Marsh McLennan, one in which all of our businesses delivered strong performance. We generated record revenues and earnings, saw the benefit of recent investments in growth, continued to execute on our acquisition strategy and made record share repurchases. We are proud of the focus and determination of our colleagues and the value they deliver to our clients and shareholders. We closed the year on a high note and look forward to another year of strong performance in 2023. With that, let me turn it over to Mark for a more detailed review of our results.

Thank you, John, and good morning. We are pleased with our strong fourth quarter results, which capped another terrific year. We delivered strength on strength from a financial performance perspective and continued to invest organically and inorganically. These investments combined with the actions we took in the fourth quarter position us well for another good year in 2023. Consolidated revenue decreased 2% in the fourth quarter to $5 billion. As a reminder, the fourth quarter last year included a large gain related to Marsh India. Foreign exchange was also a meaningful headwind to GAAP revenue growth. However, on an underlying basis, revenue increased 7%. Operating income in the fourth quarter was $680 million and adjusted operating income increased 13% to $1 billion. Our adjusted operating margin increased 160 basis points to 22%. GAAP EPS was $0.93 and adjusted EPS was $1.47. Our full year 2022 results were outstanding. Operating income for the year was $4.3 billion and adjusted operating income was $4.8 billion, an increase of 11% over 2021. Adjusted EPS grew 11% to $6.85 and our adjusted operating margin expanded 80 basis points marking our 15th consecutive year of reported margin expansion. 2022 was also a strong year for capital management. We deployed $3.9 billion of capital, enhanced our short-term liquidity, raised our dividend 10% and saw Moody's lift our rating outlook to positive. Looking at Risk & Insurance Services, fourth quarter revenue decreased 3% to $2.9 billion. Note that Marsh is where the India gain affected our revenue comparisons. On an underlying basis, revenue in RIS increased 8%, the strong result reflecting the momentum in our business and our resilience in the face of macro headwinds and economic uncertainty. RIS operating income was $472 million in the fourth quarter. Adjusted operating income increased 23% to $685 million. The adjusted margin expanded 290 basis points to 25.6%. For the year, revenue in RIS was $12.6 billion, an increase of 5% with underlying growth of 9%. Adjusted operating income growth for the year was impressive at 15%, our adjusted operating margin in RIS increased 130 basis points to 29.8%. At Marsh revenue in the quarter decreased 6% to $2.7 billion, but was up 6% on an underlying basis. This comes on top of a tough comparison to the fourth quarter of last year, which saw strong M&A and SPAC related activity. For the full year revenue at Marsh was $10.5 billion, an increase of 3% or 8% on an underlying basis. In U.S. and Canada, underlying growth was 5% for the quarter, a solid result given the headwind from lower M&A and capital markets activity. We expect this headwind to persist into the first quarter, but normalize as we enter the second quarter. For the full year underlying growth in U.S. and Canada was excellent at 7%. In international, underlying growth was 8% in the quarter with Asia Pacific up 12%, EMEA up 7%, and Latin America up 4%. For the full year underlying growth in international was strong at 10%. Guy Carpenter's revenue was $171 million, up 5% on an underlying basis. For the year revenue was $2 billion, an increase of 8% or 9% on an underlying basis. Based on our current outlook, we expect Guy Carpenter's growth in 2023 to benefit from a tightening reinsurance market. In the Consulting segment, fourth quarter revenue was $2.1 billion flat versus the prior year. Revenue grew 6% on an underlying basis. Consulting operating income was $336 million, and adjusted operating income was $407 million, down 1% reflecting continued foreign exchange and capital markets headwinds. The adjusted operating margin was 20% in the fourth quarter, a decrease of 20 basis points. For the full year Consulting revenue was $8.1 billion, an increase of 8% on an underlying basis. Adjusted operating income for the year increased 4% to $1.5 billion, while our adjusted operating margin decreased 10 basis points to 19.7%. Mercer's revenue was $1.3 billion in the quarter, up 5% on an underlying basis. This is a good result considering the impact of capital markets on our investments business. Wealth was flat on an underlying basis due to year-over-year declines in both equity and fixed income markets. Solid growth in defined benefits helped mitigate the drop in investments. Our assets under management were $345 billion at the end of the fourth quarter, up 9% sequentially, but down 17% from the fourth quarter of last year due to market declines and foreign exchange, which more than offset strong positive net flows. Health revenue grew 8% on an underlying basis in the fourth quarter, reflecting strength in employer and government segments and momentum across all regions. Career revenue increased 12% on an underlying basis, reflecting continued demand in rewards, talent strategy, and workforce transformation. For the year revenue at Mercer was $5.3 billion, an increase of 6% on an underlying basis, the highest result since 2008. Oliver Wyman's revenue in the fourth quarter was $765 million, an increase of 8% on an underlying basis, a solid result considering a tough comparison to 22% growth in the fourth quarter of 2021. For the full year, Oliver Wyman's revenue was $2.8 billion, an increase of 13% on an underlying basis, building on the 21% growth in 2021. As we look to 2023, we expect growth at Oliver Wyman to slow given rising economic uncertainty. Adjusted corporate expense was $68 million in the quarter. Foreign exchange was a $0.05 headwind in the fourth quarter, and for the full year was a $0.12 headwind. Assuming exchange rates remain at current levels, we expect FX to be a $0.03 headwind in 2023 with $0.05 in the first quarter and $0.02 in the second quarter, reversing to a modest tailwind in the second half. I want to spend a minute on the $344 million of noteworthy items in the quarter, the majority of which related to actions we initiated last year, as well as the final exit of JLT's headquarters in London. The largest category of noteworthy items in the quarter was $233 million relating to restructuring activities which are focused on workforce actions, rationalizing technology, and reducing our overall real estate footprint. The charges included severance associated with headcount reductions, as well as provisions related to real estate actions. Although we expect some reinvestment of the savings from these actions, the majority will flow to earnings. Based on our outlook today, we expect the benefit to earnings in 2023 could be $125 million to $150 million. We anticipate further actions under this program, which will continue through 2023 and possibly into 2024. We are still refining estimates of future opportunities, but at this point, we don't see additional charges in 2023 or 2024 exceeding the amounts taken in 2022. As we typically do on our fourth quarter calls, we'll give a brief update on our global retirement plans. Our other net benefit credit was $57 million in the quarter and $235 million for the full year. For 2023, based on our current expectations, we anticipate our other net benefit credit will be about $235 million. Cash contributions to our global defined benefit plans were $169 million in 2022. We expect cash contributions will be roughly $107 million in 2023. Investment income was a loss of $6 million in the fourth quarter on a GAAP basis and a loss of $5 million on an adjusted basis, and mainly reflects losses in our private equity portfolio. Given current market conditions, we anticipate negligible investment income in the first quarter of 2023. This compares to $17 million of investment income in the first quarter of 2022 on an adjusted basis. Interest expense in the fourth quarter was $127 million. Based on our current forecast, we expect interest expense for the full year of 2023 of approximately $565 million. This reflects an increase in long-term debt and higher interest rates on commercial paper, which we use for efficient working capital management. Our adjusted effective tax rate in the fourth quarter was 22.9%. This compares with 20.6% in the fourth quarter last year. Both periods benefited from favorable discrete items. For the full year 2022 our adjusted effective tax rate was 23.5% compared with 23.6% in 2021. Excluding discrete items, our adjusted effective tax rate for the full year was approximately 25%. 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 of 25% to 26% for 2023. Turning to capital management and our balance sheet, we ended the year with total debt of $11.5 billion. This includes the $1 billion of senior notes we issued in October. We used a portion of the proceeds from this offering to redeem $350 million of senior notes that were scheduled to mature in March 2023. Our next scheduled debt maturity is in October 2023 when $250 million of senior notes mature. Our cash position at the end of the fourth quarter was $1.4 billion. Uses of cash in the quarter totaled $1 billion and included $298 million for dividends, $395 million for acquisitions, and $350 million for share repurchases. For the year uses of cash totaled $3.9 billion and included $1.1 billion for dividends, $806 million for acquisitions, and $1.9 billion for share repurchases. As a reminder, we have a balanced capital management strategy that supports our consistent focus on delivering solid performance in the near-term while investing for sustained growth over the long-term. We prioritize reinvestment in the business, both for organic investments and acquisitions. We favor attractive acquisitions over share repurchases and believe they are the better value creator for shareholders and the company over the long-term. However, we also recognize that returning capital to shareholders generates meaningful returns for investors over time, and each year we target raising our dividend and reducing our share count. Looking ahead to 2023, based on our outlook today, we expect to deploy approximately $4 billion of capital across dividends, acquisitions, and share repurchases. The ultimate level of share repurchases will depend on how the M&A pipeline develops. As John noted, there is significant uncertainty in the outlook for the global economy. However, we feel good about our momentum and position, and despite the uncertainty, there are factors that remain supportive of growth in our business. Based on our outlook today for 2023, we expect mid-single-digit or better underlying revenue growth, margin expansion, and strong growth in adjusted EPS. And with that, I'm happy to turn it back to John.

Thank you, Mark. Andrew, we are ready to begin Q&A.

Certainly. And our first question comes from the line of David Motemaden with Evercore ISI.

Hi, good morning. I had a question first just on the restructuring actions and I sort of wanted to just take a step back and ask, are you instituting a downturn playbook just based on something you are seeing in the revenue environment that hasn't shown up in results yet, but is that something that you're seeing and this is a defensive move or should I think of this as more of an offensive move, just picking up some low hanging fruit that you see offering improved efficiency throughout the organization?

Good morning, David. There's nothing defensive about the move. We took steps to align our workforce and skill sets with the evolving needs of our clients. As I noted, when I outlined some of the highlights of the global risk report, those client challenges and opportunities are constantly evolving and we've also identified some opportunities to create some greater efficiencies across our businesses. We're working more closely together. We've rationalized some technology, reduced our real estate footprint. So it's not an indication of what we think the economic outlook is.

Got it, thanks. And then maybe just if you could just talk about some of the three drivers that you spoke of, I guess it was real estate, technology and workforce. Any way to size how much of that benefit is coming from each of those buckets and how we should think about some of the future actions that you might be taking?

Yes, it's a mix. It's fairly balanced between the three different areas. And, as Mark noted, we're still doing some work and we see some further opportunities. However, I think it's likely that further charges would be less than what we took in the fourth quarter here. But again we're challenging ourselves, looking at where we've got talent, how it comes together, matching that against evolving needs in the marketplace and then pushing ourselves to operate in a different and more efficient way.

Great. Thank you.

Thank you. And our next question comes from the line of Jamminder Bhullar with JP Morgan.

Hey, good morning. So John, you mentioned a little bit in your comments on the hard market in reinsurance and also the firm market in commercial lines. Can you talk a little bit more about what you're seeing, if you're seeing any changes in client behavior, whether more sort of self-insurance or higher retention rates at both Marsh and Guy Carpenter?

Sure, thanks Jimmy for the question. As I noted in my comments, it was a very challenging January 1st property catastrophe renewal. We expected it to be a challenging renewal season prior to Ian, and then Hurricane Ian of course exacerbated it. I did mention that some of the higher costs are offset a bit by higher retentions. My comments there were primarily about reinsurance and not insurance. But I'll ask Dean and Martin to comment a bit in a second, but what I would say is I commented on the higher catastrophe losses over the last several years. Reinsurers of course now have a higher cost to capital, inflation, mark-to-market losses on the asset side of their balance sheet, and foreign exchange impacts as well. A number of the big reinsurers and a lot of other catastrophe programs in the United States created some foreign exchange challenges. So just a number of different factors led to a really reevaluation of pricing and capacity deployment from some of the bigger capital providers. But Dean, maybe you'll, you can go first and give an overview.

Yes, sure. Thanks John. I think in terms of client buying patterns, at January 1 in reinsurance, there were increased retentions and attachment points. That was reinsurer-driven. Attachment points were up substantially for many of our clients, not only in the United States, but in all geographies with January 1 catastrophe renewals. So our clients were forced to take more risk, more volatility on their balance sheets. In terms of buying patterns, the inflation-driven demand for additional limit that many expected didn't really materialize. Clients mostly bought the same amount of catastrophe limit they bought last year—maybe up incrementally—and some of our global clients bought a little bit more. In terms of limit, some of that limit that was eliminated at the bottom end of catastrophe programs was put on top of programs, so clients made that up. But buying more coverage was often cost-prohibitive given the rate increases that John outlined around property catastrophe and the very challenging terms and conditions. Reinsurers had the upper hand in this marketplace around pricing, attachment points and very challenging terms and conditions.

Thanks, Dean. Martin, do you want to share some observations about the insurance market?

In terms of behavior, our clients are constantly looking at the optimization of their programs. Our captive management business grew nearly double digits in the quarter and for the year as clients retained some more of their risk and we have a wide range of value propositions to help our clients for the risks which they retain and they manage. And so we feel bullish that the changing market is not going to dampen our growth.

So Jimmy, it remains a dynamic and challenging market for our clients. Higher catastrophe losses, risks of core inflation, social inflation. So we continue to observe underwriting discipline broadly speaking across the market. Do you have a follow up?

Yes, just for Mark on fiduciary investment income, it's obviously gone up a lot and even sequentially up to over 50% from 3Q to 4Q. Do you expect—should we expect a further increase in that over time? Because what we've seen recently is in some of the regions rates are actually flattish over the past several months. So is there more of sort of a lag effect of what's happened with rates in fiduciary investment income or has the portfolio mostly reset higher?

Thanks Jimmy. Good morning. We certainly see continued upside in fiduciary income as we look to this year. Rates really didn't start to move till the back half of the year, as you know. And even though it seems like a little bit of slowdown in a lot of places, the expectation is rates have not peaked. Also remember even for the fourth quarter, that's an average rate over the course of the quarter and rates moved even in the quarter. So it is something that we expect to continue to give us benefit into this year.

Thank you.

Thanks Jimmy. Andrew, can we have the next question please?

Certainly. And our next question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, thanks. Good morning. My first question I guess combines the expense program and some of your fiduciary investment income comments. So the expense program seems like it could be around a 70 basis point tailwind to your margins in 2023. And then I would assume you would get incremental uplift from fiduciary investment income rising per Mark's prior comments. So should we think of those two components as a pretty good tailwind to your margin when we think about 2023 margin improvement?

Yes, we're—I'm not going to give margin guidance on the call, Elyse, and thanks for your question. Again, I think we're well positioned. We're in terrific businesses, just outstanding talent. And while there's some macro uncertainty, of course, that's out there, we expect strong revenue growth this year and we expect to increase our margins over the course of the year. Mark and I both shared a bit of what we expect to flow to the bottom line from the program this year. But we expect to maintain that discipline, that financial discipline that we've had for many years and to expand margin and to have strong adjusted EPS growth this year.

Thanks. And then my second question on, you guys talked about some pretty robust reinsurance rate increases at January 1. Have you guys seen any changes on your commission structure just given the strong pricing? Are you making any changes to help your clients in the face of that pricing? And then Mark did say that you guys, that Guy Carpenter would see pretty strong growth over the coming year. I mean, we've never been in an environment, right, with 40% plus price increases. How does that triangulate into organic growth within Guy Carpenter?

We have been in that environment before. We've been around a long time, but it's been close to 20 years since we've operated in that kind of environment. We expect a good year of revenue growth at Guy Carpenter. As I noted in my prepared remarks ceded premiums won't track that rate increase, right? Our insurance company clients retained more risk or have their catastrophe programs attached at a higher level. We work with our clients, of course, to manage our compensation. We're very transparent about that. In some cases, there are catastrophe commission agreements that we have with our clients, but again, we expect it to be a good year for Guy Carpenter.

And any change in the commission structure?

As I said, we work through that with our clients. We have agreements with them and a very transparent dialogue about how we're remunerated.

Thank you.

And our next question comes from the line of Michael Ward with Citi.

Thanks, guys. Good morning. I was wondering if you could give a sense maybe of how much more of a tail wind could be left from inflation or exposures that you can see as we sit here today?

Thanks Mike for the question. As I noted in my prepared remarks, while we're not immune to the macro economy, of course, there are some real factors that support growth of Marsh McLennan. In the risk side of our business inflation is one of those areas. So whether it's wage inflation, core inflation, higher insured values—all of course inflation leads to higher losses and more discipline in the pricing environment. All of those issues are supportive of growth. It's a client-by-client outcome though. Some of our clients are winners and losers in any economy, and some of those distinctions might be more stark in an economy like we're in today. Some are operating from a position of strength and others of course will need to be more defensive. So we work through that with them, client by client, but broadly speaking, inflation and nominal GDP are more indicative of demand for our services than real GDP.

Awesome, thank you.

Do you have a follow-up, Mike?

Yes. Actually maybe on Oliver Wyman and Mercer Career, I know you mentioned a possible slowdown in Wyman, but can you talk about the pipeline and whether you're seeing that slow down or just kind of anticipating businesses reducing their consulting appetite?

Sure, Mike. Let me start by saying Oliver Wyman is an important part of our value proposition and a critical part of our company. They advise the C-suite on critical issues and help differentiate our value proposition. We had an outstanding year of growth in 2022 on top of 21% growth in 2021 and over the medium term we expect higher growth out of Oliver Wyman than our other businesses. Having said that, we do expect some moderation of growth. Nick, maybe I'll ask you to share an outlook with Mike.

Yes, thanks John and thank you, Mike. As John just started to do, let me put Oliver Wyman into context. We're very happy with a second consecutive year of double-digit growth. I think it's 15 years since we've achieved that. We've added over a third to the business in that time, and we're confident that we gained market share in what is a pretty fragmented market. That growth was well balanced across regions, capability practices and most industries in 2022. But having said that, this is my seventh call, and it's the first one that I've reported something below double-digit growth in the quarter. That 8% does reflect two things. We're certainly lapping a high-growth quarter, but at the same time we did see a slowing in the pipeline as our major clients pause and digest after several turbulent years. We remain optimistic in the longer-term revenue plans. Yes, there was a heavy surge in the last two years, but we'll likely revert closer to our medium-term expectations of mid-to-high single-digit underlying growth through the cycle.

Thanks, Nick. Mike, maybe I'll ask Martine as well to comment on Career at Mercer. Mercer had its best year of growth since 2008, so we feel terrific about it. Martine, could you share more color?

Yes, of course. Thanks John and Mike. Our Career business is the one that has the most discretionary projects, so of course we are cautious. But we've had a tremendous two years in Career—Q4 was 12% growth and 2022 was 14% growth. Demand is related to change in the world of work: wage inflation, labor shortages, reward strategies, workforce analytics, future of work skills, talent engagement, assessment of skills—it's all on clients' agendas. We've entered 2023 with solid growth momentum, strong sales and a strong pipeline. We're monitoring developments in sales pipeline and client sentiment given the macroeconomic conditions, but the people agenda remains elevated and demand stays strong.

Terrific. Thank you, Martine. Thanks Mike. Andrew, can we have our next question please?

Certainly. And our next question comes from the line of Robert Cox with Goldman Sachs.

Hey, thanks for taking my question. I think previously you had talked about a 3% to 5% organic growth outlook longer term. Just curious if your view on that has changed at all?

Well, as I shared we expect mid-single-digit underlying revenue growth or better for this year; that's the guidance we're sharing. We're in terrific businesses, we're well positioned, we have outstanding talent and a culture that makes us an employer of choice. So we feel good about our growth prospects for the near term.

Got it. And maybe just a follow up, how big of a deal are wage pressures in the business today and into 2023? I think the consulting segment is perhaps a little bit more susceptible to that and we saw margins decline year-over-year, so just wondering how big of an impact that is?

It's been manageable for us. We worked hard on our culture and becoming an employer of choice in the markets we operate in. I think we attract outstanding talent because of that culture, because of the strength of the brands, and it enables talented individuals to devote their careers here. Our colleague engagement remains very high. We saw some elevated voluntary turnover in the early part of the year that moderated in the second half, which I think was a bounce back from very abnormally low voluntary turnover. Wage pressure has been manageable. We're being thoughtful about merit pools and how we allocate those pools, but we feel well positioned from a talent perspective. Andrew, next question please?

And our next question comes from the line of Meyer Shields with KBW.

Thanks. Good morning. A couple of quick questions. First, John, strategically, when you can anticipate higher fiduciary income, does that translate into more latitude for longer-term investments?

We're trying to balance the near term and the mid term. Growth in fiduciary income may or may not be correlated to client demand or opportunities we see—it's connected to other macro factors. The steps we took in the fourth quarter create capacity for us to make investments and to become a stronger business going forward.

Okay, that's helpful. Second question, when we've heard a lot of comments about the difficult reinsurance renewal season, does that actually impact the expenses that Guy Carpenter incurs? I mean, obviously a stressful period, but I'm wondering about the financial impact.

It was a stressful period and our colleagues were tested. I don't want to mitigate the impact on our insurance company clients—it was a challenging outcome. We expected a difficult market as well. But no, it doesn't impact our cost base in any meaningful way. The overall outlook is supportive of a good growth environment for Guy Carpenter.

Okay, thank you.

Our next question comes from the line of Andrew Kligerman with Credit Suisse.

Hey, good morning. First question is around underlying revenue growth. Marsh is up 6%, Guy Carpenter up 5%. Given the strong exposure growth and the strong rate increases, if you netted that out, would the underlying growth be negative?

No, it would not be negative, Andrew, and thank you for your question. It was a very strong year of growth at both Marsh and Guy Carpenter. I would note Guy Carpenter is a small quarter and we're pleased with the revenue growth. At Marsh, it was an outstanding year—8% for the year and 6% in the quarter. Marsh in the U.S. had some headwinds related to capital markets, with fewer M&A and ITO activity. That was more a volume issue and we expected it entering the fourth quarter. It's also a headwind into the first quarter, but we expect a good growth year in 2023. Martin, maybe you could provide a little more color on Marsh's results.

Yes, delighted to. We had growth of 6% in the quarter on top of 9% in 2021, with a strong balance of growth across the portfolio. International in the quarter grew 8%, Asia Pacific 12%, EMEA 7%, Latin America 4%. U.S. and Canada was impacted by headwinds—tough comps from elevated M&A and SPAC activity in the prior year. But but for that, we would have posted underlying growth of around 8% in U.S. and Canada for the quarter. Full year growth internationally was 10% with Asia Pacific 13% and Latin America 12%. When we look at drivers, construction growth was double-digit, energy and power dealing with the transition was up double digits, trade credit business up double digits, and our advisory business that helps clients mitigate risk grew double digits throughout the year. We feel very good about our positioning across geographies and our value proposition and are bullish about growth.

So Andrew, we're working our way through some headwinds in the capital markets, but again feel terrific about growth in 2022 and we believe we're well positioned in 2023 as well. Do you have a follow up?

Yes, one quick follow up, just curious about the JLT integration cost of $91 million in the quarter, given that the deal was in 2019—what was that related to?

It was related to final steps of the integration with JLT, specifically the provisions for shutting down and abandoning their headquarters in London as we were able to finally consolidate headcount into our location in Tower Place. That action was planned early in the integration and took that long to refit Tower Place to accommodate the headcount.

Got it. Thanks so much.

And our next question comes from the line of Yaron Kinar with Jefferies.

Good morning. First question, you had talked about the potential for maybe some compensation structure changes in this environment. Given that you've been in this market before, can you give some reflections of how this played out in previous hard markets? How much did compensation or commission rates change in hard markets?

Our commission levels have been fairly constant for a number of years. With some of our larger clients at Guy Carpenter, we've had capped commission agreements in place for many years. We work with those clients to be fairly remunerated for the work that we do. We have good, healthy relationships and work through those arrangements. I don't think there's much more to add beyond that.

Okay. My other question is regarding the restructuring workforce actions—does that impact any of the hires you made back in 2021?

No. We feel terrific about the strategic talent we brought into the organization over the last couple of years. The returns on those investments have been terrific and drove a meaningful amount of our growth in 2022 and we expect they will drive growth in 2023 as well. The actions we took were about aligning workforce and skillsets with evolving needs and about operating more efficiently and bringing our businesses closer together.

Thanks and nice year ahead.

And our next question comes from the line of Brian Meredith with UBS.

Yes, thanks. Two questions. First, Mark, I'm curious about the $4 billion of planned capital deployment this year—how does that relate to your expectations on free cash flow? I think you expected to deploy $4 billion last year too?

Sure, Brian. We do plan to deploy about $4 billion of capital. The largest source of that deployment will be free cash flow we expect to generate. We also entered the year with some cash from the debt raise we did late last year, which provides additional capital. Free cash flow for us has been a great story over time and tends to track pretty well with earnings growth. However, cash flow can be volatile so we generally avoid precision in predicting free cash flow. But the biggest source of capital underpinning our projected deployment is the free cash flow we generate.

I guess my point is you don't expect free cash flow will be flat year-over-year, do you?

Our outlook is for solid earnings growth which generally supports free cash flow, but again cash flow can vary year to year and we don't give precise free cash flow guidance.

Great, that's helpful. And John, many big corporations are tightening belts for 2023. Can you remind us what's the lag effect that you see with your revenues vis-à-vis a slowdown in business activity? I remember there's some lag effect.

It's hard to talk about lag with precision. My comments earlier about the broader environment stand: it may be modestly more positive with China's reopening and Europe's management of energy risks, but geopolitical risks remain. Nominal GDP is more indicative than real GDP and demand remains strong for our services. We expect a bit of moderation at Oliver Wyman, but broadly our businesses, including Guy Carpenter, remain healthy. If things get more difficult, we have a playbook for performance in a challenging environment and we're ready to execute.

Great, thanks for the answer.

And our next question comes from the line of Ryan Tunis with Autonomous Research.

Hey, good morning. First question, looking at margins this quarter, fiduciary investment income was a pretty big contributor to margin expansion, and the comp ratio looked relatively flat with 4Q 2021. That surprised me a bit given there was a lot of hiring a year ago without much revenue attached. How should we think about operating leverage or the lack thereof in the quarter?

We achieved our 15th consecutive year of margin expansion and expect 2023 to be the 16th. I was pleased with margin improvement, particularly in light of investments in talent. The comp ratio moved slightly. We focus on margin as an outcome—growing earnings and free cash flow. We'll invest where it makes sense to accelerate client impact, while maintaining continuous improvement and strong financial performance.

Got it. And a follow-up, John—obviously early days in the new role, but what have you been focusing on or where are you spending your time?

I've been engaged with our strategy for nearly seven years and believe we're in the right businesses with market-leading brands. It's a privilege to work with our teams. I'm focused on accelerating collaboration at the intersections of our businesses because client needs don't always fit neatly into organizational boxes. We're going to be more deliberate about going to market together where it accelerates client impact. We're also driving efficiencies across the business. I see a lot of opportunity and I'm excited about the days ahead. Andrew, that was the last question; we'll wrap it up now.

I would now like to turn the call back over to John Doyle, President and CEO of Marsh McLennan for any closing remarks.

Thanks, Andrew. And thank you all for joining us on the call this morning. In closing, I want to thank our over 85,000 colleagues for their hard work and dedication in a challenging year. And I also want to thank our clients for their continued confidence in Marsh McLennan. Thank you all very much and I look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.