Marsh & McLennan Companies Q4 2022 Earnings Call Transcript

Presentation

[Operator]

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 included 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. [Operator Instructions]

I'll now turn this over to John Doyle, President and CEO of Marsh McLennan.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Good morning, and thank you for joining us to discuss our fourth quarter results reported earlier today. I'm John Doyle, 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 and 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 twp 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 T&E. 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 also added to our talent and capabilities, both organically and through attractive acquisitions. MMA acquired two Top 100 agencies in 2022 and has now surpassed 100 acquisitions since its inception in 2009. Oliver Wyman expanded its capabilities and geographic reach with the acquisitions of Specialty Consultant Avascent and Booz Allen Hamilton's MENA practice. And Mercer expects to close its transactions from Westpac in Australia in the first half of this year.

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 their 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 skill sets with evolving needs, rationalize technology and reduce 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 provide an update on P&C insurance and reinsurance market conditions. The January 1 reinsurance renewals proved to be the most challenging in nearly 2 decades. The property cat reinsurance market was stressed with pricing and attachment points increasing significantly, reflecting several years of higher-than-expected cat losses, macroeconomic factors and supply and demand imbalances.

Global property cat reinsurance rate increases range from 25% to 60% with loss impacted clients often seeing higher pricing. In the U.S., property cat reinsurance rate increases were the highest in 17 years, generally in a range of 40% to 60%. It is important to note that ceded premiums were tempered by higher retentions in most cases. Meanwhile, commercial P&C insurance pricing continues to rise on average across many lines and geographies. While the pace of price increases continue to moderate after rising for 21 consecutive quarters, the tight reinsurance market could have knock-on effects, particularly for property insurance rates. We are focused on helping our clients navigate these difficult insurance and reinsurance markets and the evolving risk landscape.

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 RIS 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. P&C 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, cyber crime and geoeconomic 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, continue 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.

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

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 continue 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, 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 RIS and specifically Marsh is where the India gain affected our revenue comparisons. On an underlying basis, revenue in RIS increased 8%, a 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 in 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 a 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, I will 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 on 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 through 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 repurchase 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.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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

Questions and Answers

[Operator]

[Operator Instructions] And our first question comes from the line of David Motemaden with Evercore ISI.

[David Motemaden, Analyst at Evercore ISI]

Hi, good morning. I had a question first just on the restructuring actions. And sort of wanted to just take a step back and just ask is this a -- are you instituting a downturn playbook just based on something you're seeing in the revenue environment that it 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 from picking up some low-hanging fruit that you see just sort of improving your efficiency throughout the organization?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Good morning, David. There's nothing defensive about the move, right? 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 Risks Report, those client challenges and opportunities are constantly evolving and dynamic. 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.

[David Motemaden, Analyst at Evercore ISI]

Got it. Thanks. And then maybe just -- if you could just talk about some of the 3 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?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

It's a mix. It's fairly balanced between the 3 different areas. I mean, 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 way and a more efficient way.

[David Motemaden, Analyst at Evercore ISI]

Great. Thank you.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Thanks, David. Operator, next question?

[Operator]

Thank you. And our next question comes from the line of Jimmy Bhullar with JPMorgan.

[Jamminder Bhullar, Analyst at JPMorgan Chase & Co.]

Hey, good morning, So John, you mentioned a little bit in your comments on just 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?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Sure. Thanks, Jimmy, for the question. As I noted in my comments, it was a very challenging January 1st property cat renewal. We expected it to be a challenging renewal season prior to Ian, and then 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, I commented on the higher cat losses over the last several years. Reinsurers, of course, now have a higher cost of capital, inflation, mark-to-market losses on the asset side of their balance sheet, just -- Fx as well. A number of the big reinsurers and a lot of the cat programs in the United States created some Fx challenges as well.

So just a number of different factors led to really reevaluation of pricing and capacity deployment from some of the bigger capital providers. But Dean, maybe you can go first and give an overview.

[Dean Klisura, President & Chief Executive Officer at Marsh & McLennan Companies]

Yeah. Sure. Thanks, John. I think in terms of client guiding patterns, at January 1 in reinsurance, I mean, you mentioned increased retentions attachment points. I mean, that was reinsured-driven, right? Attachment points were up substantially for many of our clients not only in the United States but in all geographies with January 1 cat renewals. So our clients were forced to take more risk, more volatility on their balance sheets. In terms of buying patterns, that inflation-driven demand for additional limit everybody talked about all fall didn't really materialize.

Clients mostly bought the same amount of cat limit they bought last year, maybe up incrementally, maybe our global clients bought a little bit more. But in terms of limit, some of that limit that was eliminated at the bottom end of cat programs was put on top of programs, right? So clients made that up.

But in terms of buying more, I think for many clients it was cost prohibitive given the rate increases that John outlined around property cat, very challenging terms and conditions. Really, reinsurers have the upper hand in this marketplace around pricing, attachment point and very challenging terms and conditions.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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

[Martin South, President & Chief Executive Officer at Marsh & McLennan Companies]

Yes. Thank you, John, and thanks, Dean. I'll just comment. The rate increase, which we've been measuring going back a number of years was still positive for the quarter. We're in the 21st quarter of rate increases, about 4%, which is tough for our clients. And, of course, that is going to impact on their behaviors, casualties leveling off at 3.

Property accelerated slightly to 7% in the last quarter. We anticipate that that's going to continue through Q1 of next year as they absorb the cost of the high cat losses, which -- and reinsurance costs that Dean described.

D&O softened a little bit, and we saw that trend going on there. The overall D&O rates were down 6%. As a combination of things, one less SPAC activity which tended to be higher rated. The new entrants into the marketplace globally about 20 new carriers came into the market, deployed capital, which enabled some of our clients to increase their limits actually and take opportunities that they saw in that market. And the cyber rates continued to accelerate at 28%, although that is a deceleration in rate increase, in the last quarter we saw 53%.

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.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

So Jimmy, it remains a dynamic and challenging market for our clients, higher cat 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?

[Jamminder Bhullar, Analyst at JPMorgan Chase & Co.]

Yes, just for Mark on fiduciary investment income, it's obviously gone up a lot and even sequentially up over 50% from 3Q and 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?

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

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. And 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.

[Jamminder Bhullar, Analyst at JPMorgan Chase & Co.]

Thank you.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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

[Operator]

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

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Hi, thanks. Good morning. My first question I guess combines the expense program in 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?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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 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 have strong adjusted EPS growth this year.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Thanks. And then my second question, 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 Guy Carpenter would see pretty strong growth over the coming year. I mean, we haven't been in an environment, right, with 40-plus percent price increases. How does that triangulate into organic growth within Guy Carpenter?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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, as our insurance company clients retain more risk or had their cat 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 cat commission agreements that we have with our clients. But again, we expect it to be a good year for Guy Carpenter.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

And any change in the commission structure?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

So 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.

[Elyse Greenspan, Analyst at Wells Fargo & Company]

Thank you.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Andrew, next question please?

[Operator]

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

[Mike Ward, Analyst at Smith Barney Citigroup]

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

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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, 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, right? Some of our clients -- there are winners and losers in any economy, of course. And some of those distinctions might be more stark in an economy like we're in today.

And so 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 is more indicative of demand for our revenue and our services than real GDP.

[Mike Ward, Analyst at Smith Barney Citigroup]

Awesome, thank you.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Do you have a follow-up, Mike?

[Mike Ward, Analyst at Smith Barney Citigroup]

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 slowdown or just kind of anticipating businesses reducing their consulting appetite?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Sure, Mike. So let me start by just saying that Oliver Wyman is just a really important part of our value proposition for our clients and a critical part of our company. They advise the C-suite on the critical issues of the day and it really help us differentiate our value proposition.

We had an outstanding year of growth in 2022 on top of 21% growth in 2021 and over the midterm, medium term, we expect higher growth out of Oliver Wyman than our other businesses. So having said that, we do expect some moderation of growth. So Nick, maybe I'll ask you to share an outlook with Mike.

[Nick Studer, President & Chief Executive Officer at Marsh & McLennan Companies]

Yes. Thanks, John. 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 of the business in that time, and we're confident that we gained market share in what is a pretty fragmented market. And that growth was very well balanced. We grew across all our regions, across all of our capability practices and across most of our industries in 2022. But having said that, this is my 7th call, and it's the first one that I've reported on something below double-digit growth in the quarter. That 8% does reflect 2 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 and we pause and digest after several pretty turbulent years.

We remain optimistic in the longer-term revenue plans. There was a pretty heavy surge in the last 2 years, but we'll likely revert closer to our medium-term expectations of mid- to high single-digit underlying growth through the cycle.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Thanks, Nick. Mike, maybe I'll ask Martine as well to comment on Career, Mercer. And I would point out, Mercer had its best year of growth since 2008. So we feel absolutely terrific about it. Excellent growth in health, excellent growth in Career. But Martine, maybe you could share a little bit more color?

[Martine Ferland, President & Chief Executive Officer at Marsh & McLennan Companies]

Yes. Thanks, John and Mike as well for the question. Yes, of course, and you're right to say that our Career business is the one that has most discretionary projects. So, of course, we are looking at all indicators in a cautionary way. But what I want to say here is we've had a tremendous 2 years in Career. Q4 was a 12% growth. The whole of 2022 was 14% growth. The demand here is really related to change in the world of work.

We've added to that in '22 wage and high inflation. We have the labor shortages issue. So we're looking at rewards strategies, workforce analytics, future of work, skills gap, talent engagement, assessment of skills. It's all on top of our clients' agenda.

So overall at this point, we've entered 2023 with very solid growth momentum, strong sales, strong pipeline. And, of course, we're confident in this year, we are monitoring developments on sales pipeline and client sentiment, given the macroeconomic conditions that are foreseen. But the question remains that as the people agenda stays such an elevated point for our clients that what we're seeing right now is that demand stays strong.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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

[Operator]

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

[Robert Cox, Analyst at The Goldman Sachs Group]

Hey, thanks for taking my question. I think previously, maybe not for a while, but you guys had talked about a 3% to 5% organic growth outlook longer-term. Just curious if your view on that has changed at all?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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

[Robert Cox, Analyst at The Goldman Sachs Group]

Got it. And maybe just a follow-up. Yes, how big of a deal are wage pressures in the business today and into 2023? I think the Consulting segment perhaps is 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?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Yes. It's been manageable for us for sure. As I said, we work really, really hard on our culture and becoming an employer of choice in the markets that we operate in. I think we attract outstanding talent because of that culture, because of the strength of the brands. And it really enables talented individuals who want to devote their career in the areas of risk strategy and people to be their best when they work here, and that's how we think about it. And as I said earlier, it's a privilege to do the work that we do, trying to tackle the issues of the day.

We're a collaborative environment. So you do it with some really talented people who are very, very focused on client impact. And our client engagement -- our colleague engagement, excuse me, remains very, very high. So we saw some elevated voluntary turnover in the early part of the year, but that moderated in the second half of the year. I think that elevated turnover was really a bounce back from very abnormally low voluntary turnover. But wage pressure has been manageable for us. We're being thoughtful about merit pools and how we allocate those pools. But we feel very, very well positioned from a talent perspective.

Thank you, Robert. Andrew, next question please?

[Operator]

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

[Meyer Shields, Analyst at 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?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

We're trying to balance, obviously, the near-term and the mid-term. The growth in fiduciary income may or may not be correlated to client demand or opportunities that we see. It's obviously connected to other macro factors. But I think part of the steps -- the steps that we took in the fourth quarter, the actions that we took in the fourth quarter, create capacity for us to make investments and to become a stronger business going forward.

[Meyer Shields, Analyst at KBW]

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

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

It was a stressful period. Our colleagues were tested, and I would say I don't want to mitigate the impact on our insurance company clients. It was a challenging outcome.

Again, we expected a difficult market as well. But, no, it doesn't impact our cost base in any meaningful way. And as I said, the overall outlook is supportive of a good growth environment for Guy Carpenter.

Thank you Meyer. Andrew, next question please?

[Operator]

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

[Andrew Kligerman, Analyst at Credit Suisse Group]

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

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

No. It would not be negative, Andrew, and thank you for your question. It is a very strong year of growth at both Marsh and at Guy Carpenter. I would note Guy Carpenter is a very, very small quarter. And so again, we're quite pleased with the revenue growth. And as I've said a number of times this morning, Guy Carpenter is very well positioned for good strong growth in 2023. At Marsh, it was an outstanding year, 8% for the year, 6% in the quarter.

As we noted -- and I'll ask Martin to comment on this in a second, Marsh in the U.S. had some headwinds related to the capital markets, right? And Martin mentioned earlier the impact of pricing. We had fewer M&A with less M&A activity, less IPO activity. So as Martin pointed out, had an impact on pricing there, but it was more of a volume issue.

We expected that entering into the fourth quarter. It's also a headwind for us into the first quarter as well. But we expect a good growth year in 2023. Martin, maybe you can provide a little bit more color and share your thoughts on 2023 and our growth at the end of 2022.

[Martin South, President & Chief Executive Officer at Marsh & McLennan Companies]

Yes, of course, delighted to, thank you. As you said, we had a growth of 6% in the quarter. It's on top of 9% in the prior quarter of '21. Strong balance of growth across the portfolio. International in the quarter grew 8%, APAC at 12%, EMEA at 7%, Latin America at 5% -- at 4% I beg your pardon. You mentioned U.S. and Canada at 5%.

I'd say that the U.S. and Canada was actually impacted by headwinds in our business. So we had tough comps in the prior year from elevated M&A and SPAC activity and capital markets activity in the back half of '21. We think after that, we would have been posting underlying growth in the region of 8% for the U.S. and Canada. So very strong results there, and we feel bullish that as that normalizes in the first quarter of next year, we're going to see an uptick.

The full year growth, International was 10%, APAC 13%, Latin America 12%, which is a much better representation of what they're likely to -- it's the smallest part of International Latin America. So you should look at the full year as a better indicator rather than just a discrete quarter. EMEA was up 8%, and the U.S. and Canada, up 7%. And then when we look at what's driven the growth and what we think are likely to grow in the future, construction growth was double-digit, energy and power dealing with the transition up double percent, our trade credit business up double digits.

Our advisory business, which helps our clients mitigate changes in risk grew double digits throughout the year. So we feel very good about how we're positioned, about the geographies that we're in, about our position in the value proposition and feeling good about growth.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

So Andrew, we're working our way through some headwinds in the capital markets. But again, I feel terrific about the growth in 2022, and we believe we're well positioned in '23 as well. Do you have a follow-up?

[Andrew Kligerman, Analyst at Credit Suisse Group]

Yes. One quick follow-up. Just curious about the JLT integration costs of $91 million in the quarter, just given that it's been -- I think the deal was 2019. So I was just curious what that was?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

It was 2019. Mark, you can share with Andrew --

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

Andrew, that pretty much was the final step of integration with the JLT, and it related to basically the provisions for shutting down and abandoning their headquarters in London as we were able to finally consolidate all of our headcount into our location in Tower Place. That is an action that was planned at the very early stages of the integration. It just took us that long to refit Tower Place to accommodate all the headcount.

[Andrew Kligerman, Analyst at Credit Suisse Group]

Got it. Thanks so much.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Thank you. Andrew, we're ready for our next question.

[Operator]

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

[Yaron Kinar, Analyst at Jefferies Financial Group]

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

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Yaron, our commission levels have been fairly constant for a number of years. As I said, with some of our larger clients at Guy Carpenter, we've had cat commission agreements that have been in place for many, many years.

And so we work with those clients to be fairly remunerated for the work that we do over the course of the year. And so we have good healthy relationships with those clients and work our way through them. So I don't think there's really anything more to share than that.

[Yaron Kinar, Analyst at Jefferies Financial Group]

Okay. And my other question is with regards to the restructuring. So the workforce action that you identified, does that implicate or impact any of the hires that you had back in 2021?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

No. We feel terrific about the strategic talent that we brought into the organization over the course of the last couple of years. We invested in talent last year as well. The returns on those investments have been absolutely terrific and driving a meaningful amount of our growth in 2022. And we expect it to drive growth for us in '23 as well.

So as I said, the actions that we took were more about aligning our workforce and skill sets with evolving needs. And it also is connected in some part with how we challenge ourselves to operate more efficiently, more simply and bringing our businesses closer together.

[Yaron Kinar, Analyst at Jefferies Financial Group]

Thanks and nice year ahead.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Thanks, Yaron. Appreciate it. Andrew, next question please?

[Operator]

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

[Brian Meredith, Analyst at UBS Group]

Yes and thanks. Two of them for you. First one, Mark, I'm just curious, the $4 billion of kind of planned capital deployment this year, how does that necessarily -- how does that relate to kind of what your expectations are on free cash flow? Because I think you actually had $4 billion of capital you expected to deploy last year.

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

Sure. So Brian, we do plan to deploy about $4 billion of capital. The largest source of that capital deployment will be free cash flow that we expect to generate.

We also entered -- if you saw our balance sheet, we entered the year with a little bit of cash from the debt raise we did late last year. So that will provide some additional capital as well.

[Brian Meredith, Analyst at UBS Group]

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

[Mark McGivney, Chief Financial Officer at Marsh & McLennan Companies]

Well, free cash flow for us has been a great story as you know over a long period of time and over time tends to track pretty well with our strong earnings growth. And our outlook is for solid earnings growth, but cash flow can be volatile. So we generally stay away from predicting free cash flow with precision. But as I said, the biggest source of capital underpinning our projected deployment is going to be the free cash flow we generate.

[Brian Meredith, Analyst at UBS Group]

Great. That's helpful. And then, John, I'm just curious, a lot of big corporations out there are tightening belts right now in preparation for what they see as a challenging 2023. And I appreciate you're looking for still a pretty good strong 2023.

Maybe you can just remind us, what's the lag effect that you see with your revenues vis-a-vis kind of a slowdown in business activity out there? I always remember there's like some lag effect.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Well, it's hard to talk about lag with any precision. And my comments earlier about the broader environment really carry the day. I mean, yes, it's an uncertain environment. It's maybe modestly more positive when you think about the reopening of China and how Europe has at least so far successfully managed energy-related risks and the impact on the economy in Europe.

Having said that, there's still meaningful geopolitical risks out there. But for us, again, nominal GDP is more indicative than real GDP, and demand remains strong for us in our businesses.

So as I said, we expect a bit of a moderation of demand at Oliver Wyman. But broadly speaking, our businesses overall, including strong growth prospects for Guy Carpenter, remain quite healthy. And if things get more difficult, we know how to perform in a more challenging environment. We have a playbook, and we're ready to execute on that playbook. We're a resilient business, and so we'll navigate whatever comes in front of us.

[Brian Meredith, Analyst at UBS Group]

Great. Tanks for the answer.

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Thanks, Brian. Andrew?

[Operator]

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

[Ryan Tunis, Analyst at Autonomous Research]

Hey, good morning. First question, just looking at the margins this quarter, fiduciary investment income was a pretty big contributor it looked like to the margin expansion. And the comp ratio actually looked relatively flat with 4Q '21.

I guess that just surprised me a bit, given there was so much hiring a year ago with not much revenue attached to it. So, yes, how should we be thinking about, I guess, the operating leverage or the lack thereof of that on that comp ratio in the fourth quarter?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Thanks, Ryan, for the question. As I said, last year was our 15th consecutive year of margin expansion, and we expect 2023 to be our 16th consecutive year. I was pleased with the margin improvement, particularly in light of the investments that we've made in talent. So there was a modest improvement, slight improvement in the comp event [Phonetic] ratio. But, again, margin is an outcome for us. We're focused on growing earnings, growing the free cash flow of the business.

And we're going to invest where we think it makes sense, where we think it can make us stronger as a business and accelerate client impact. But at the same time, what's not going to change here is our focus on continuous improvement and our commitment to excellent financial performance.

[Ryan Tunis, Analyst at Autonomous Research]

Got it. And then, I guess, as a follow-up, John,, obviously, early days in the new seat but just curious, what you've been focusing on or where you're spending your time?

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

Sure. My voice has been in our strategy for nearly 7 years now. As I said in my prepared remarks, we're in the right businesses. We've got market-leading brands. We're well positioned, just outstanding talent. It's a real privilege to get to work with the folks that I get to work with every day.

And as I said, our focus on continuous improvement and our commitment to excellent financial performance are not going to change here. Having said that, I see some real opportunities at the intersections of our businesses.

Client needs are dynamic as we talked about, and those needs don't fit neatly into the boxes on our org chart. We're a big company. We need to be organized in certain ways, but those needs don't necessarily fit again against -- not all of them anyway don't fit neatly into how we're organized.

And so we're going to be more deliberate about how we collaborate. We've got a unique collection of capabilities. We're going to go to market together where we think it makes sense. And where it makes sense is where we can accelerate client impact and enable our clients' success. And our colleagues are passionate about client success and the work that they do on behalf of clients.

So they're excited about the possibilities. I'm excited about the possibilities. We're also going to work more closely together to drive some efficiencies across our business. So I see a lot of opportunity. Again, I think we're in terrific businesses and a terrific team here, and I'm excited about the days ahead. Thank you, Ryan. Andrew, that was the last question, we'll wrap it up now.

[Operator]

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

[John Doyle, President & Chief Executive Officer at Marsh & McLennan Companies]

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.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• John Doyle, President & Chief Executive Officer
• Mark McGivney, Chief Financial Officer
• Dean Klisura, President & Chief Executive Officer
• Martin South, President & Chief Executive Officer
• Nick Studer, President & Chief Executive Officer
• Martine Ferland, President & Chief Executive Officer

Analysts

• David Motemaden, Evercore ISI
• Jamminder Bhullar, JPMorgan Chase & Co.
• Elyse Greenspan, Wells Fargo & Company
• Mike Ward, Smith Barney Citigroup
• Robert Cox, The Goldman Sachs Group, Inc.
• Meyer Shields, KBW
• Andrew Kligerman, Credit Suisse Group AG
• Yaron Kinar, Jefferies Financial Group Inc.
• Brian Meredith, UBS Group AG
• Ryan Tunis, Autonomous Research