威達信集團 (MMC) 2009 Q3 法說會逐字稿

Good day, everyone.

Welcome to MMC's conference call.

Today's call is being recorded.

Third-quarter 2009 financial results and supplemental information were issued earlier this morning.

They are available on MMC's website at www.mmc.com.

Before we begin, I would like to remind you that remarks made today may include statements relating to future events or results which are forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to inherent risks and uncertainties.

In particular, references during this conference call to anticipated or expected results of operations for 2009 or subsequent periods are forward-looking statements, and MMC's actual results may be affected by a variety of factors.

Please refer to MMC's most recent SEC filings, as well as the Company's earnings release, which are available on the MMC website, for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

I will now turn this call over to Mr.

Brian Duperreault, President and CEO of MMC.

Good morning and thank you for joining us to discuss our third-quarter results reported earlier today.

I'm Brian Duperreault, President and CEO of MMC.

Joining me in presenting on the call today is Vanessa Wittman, our CFO.

I would also like to welcome our operating companies' CEOs to today's call -- Dan Glaser of Marsh; Peter Zaffino of Guy Carpenter; Michele Burns of Mercer; Ben Allen of Kroll; John Drzik of Oliver Wyman is joining us by phone from Dubai; also with us is Mike Bischoff, our Head of Investor Relations.

I will make some brief comments on the quarter overall before turning it over to Vanessa to provide additional information regarding our financial results.

Then we would be happy to take your questions.

Let me begin by saying how pleased I am to report that MMC's third-quarter earnings performance was very strong.

To give you some context, when I joined MMC in January 2008, we faced two significant challenges.

First, we needed to correct the inner workings of Marsh to enable the business to once again operate at peak performance.

And second, we needed to improve the financial performance in the overall Risk and Insurance Services segment, which includes both Marsh and Guy Carpenter.

In particular, we needed to boost our segment margin to a level competitive with other large insurance brokers.

Well, Dan and his team have made tremendous strides at Marsh, and Peter and his team have significantly strengthened Carpenter.

The main driver of our strong earnings growth in the quarter was another significant improvement in profitability at Marsh, a trend that began in early 2008.

In the third quarter, senior management continued to execute a reengineering of Marsh that has resulted in tremendous operational efficiencies, strong new business and improved colleague morale.

The improvement in Marsh's operating results, with a strong contribution from Carpenter, should allow us to reach our adjusted operating margin target for Risk and Insurance Services of 18%.

In fact, over the past four quarters the Risk and Insurance Services margin was 18.4%.

That represents an increase of more than 1000 basis points from the end of 2007 or a little less than two years.

This is tremendous progress.

It is even more impressive when you consider the current operating environment, which includes lower short-term interest rates that have substantially reduced fiduciary interest income.

So it is clear that we have been successful in achieving two important objectives we set for ourselves in January 2008.

These excellent results at Marsh are a testament to everything Dan and the Marsh team have done over the past two years to improve financial results.

At the same time, they have dramatically improved the capabilities of Marsh in ways large and small that serve the client better.

Like any global firm in the process of transformative change, Marsh will continue to face challenges, but their performance thus far has proven that this team has the ability to manage effectively in very difficult conditions.

Guy Carpenter's results in the third quarter continued to reflect the positive themes we have talked about for the past year -- increased new business, improved client retention, and a disciplined approach to expense management.

Together this resulted in an increase in operating income that made a strong contribution to MMC's year-over-year growth.

At the same time and just as importantly, Peter has been working to remake Guy Carpenter into a firm widely regarded by the industry as the preeminent reinsurance intermediary.

As part of that effort, Carpenter made several significant additions to its senior management team this year, further enhancing the depth and breadth of Carpenter's research platform and capabilities.

First, Richard Booth joined as Vice Chairman in July.

Richard has more than 30 years of experience in senior roles, most recently at AIG and Hartford Steam Boiler.

His deep knowledge and insurance industry expertise are helping set the overall strategic direction of Guy Carpenter.

He is also advising on ways to further improve operational performance.

Also in July we made a second key addition to senior management, another industry veteran I have known for years.

Chris McKeown was named CEO of Carpenter's Global Analytical and Specialty Practices.

Chris was most recently President and CEO of CIG Reinsurance Ltd.

and New Castle Reinsurance Company.

Previously he was CEO of Ace Tempest Reinsurance Co.

Ltd.

in Bermuda.

At Carpenter Chris will play a critical role as we expand and enhance our global analytical and advisory functions to generate even greater value for clients.

In August we also welcomed Henry Keeling as President and CEO of International Operations.

I have also known Henry for many years, and Peter and I both feel very fortunate to be able to add someone of his caliber to Carpenter's management team.

Henry began his career in London and was both an underwriter and a broker for nearly 20 years before moving to Bermuda in 1993.

There he held senior positions at Mid Ocean and XL Capital.

In his new role Henry is responsible for Carpenter's operations in the UK, continental Europe, Asia-Pacific, Australia and Bermuda.

This is just a sampling of how Carpenter recently has strengthened its human capital, which should enhance its revenue growth.

Moving onto our Consulting segment.

Both Mercer and Oliver Wyman continue to face difficult conditions in the third quarter.

However, we are seeing signs that the worst of the year over year revenue comparisons are behind both companies.

At Mercer management's close eye on expenses allowed the Company to keep its adjusted operating margin in line with the past several years.

Even while navigating difficult headwinds, Michele and her team have focused on retaining capabilities in terms of people and offerings.

Additionally Mercer continued to invest in its business throughout the year, improving core infrastructure, transforming certain of its businesses, and developing greenfield offerings.

Oliver Wyman is seeing signs of revenue stabilization in most areas and saw year-over-year growth in the quarter in financial services, its largest business.

Expense management also enabled Oliver Wyman to grow sequential operating income and margin for the second quarter in a row.

At Kroll we saw a solid quarter.

Despite year-over-year revenue declines, the result of challenging markets, Kroll was able to improve profitability, primarily due to expense discipline and modest revenue growth at Ontrack, its largest business unit.

We are also seeing evidence of revenue stabilization in many of Kroll's other lines of business.

Kroll produced significant growth in operating income in the third quarter compared with recent periods.

Now let me spend a few minutes updating you on our acquisition strategy.

Another goal I had when I joined MMC was to grow the Company through acquisitions when appropriate opportunities presented themselves.

It was important, however, that we do deals only when we're ready to take them on.

By the beginning of 2009, we felt we had successfully positioned MMC so as to be able to consider acquisitions to further enhance the capabilities of our five operating companies.

In January we acquired the remaining stake -- 49%-- of DeLima Marsh in Colombia, allowing Marsh, Guy Carpenter and Mercer to continue expanding their business in that country.

In April Carpenter acquired Collins, formerly the fifth largest reinsurance intermediary in the United States, and the seventh largest in the world.

The integration of Collins is proceeding extremely well and further strengthens Carpenter's specialty capabilities and diversifies its position in North America.

In September Marsh announced the acquisition of International Advisory Services, the largest independent manager of captive and third-party insurance companies in Bermuda.

By adding IAS Marsh has solidified its position as a global leader in managing captive insurance companies.

In October Guy Carpenter acquired Rattner Mackenzie Ltd., a specialty reinsurance broker.

This deal is consistent with Carpenter's strategy to supplement organic growth with targeted acquisitions.

Finally, I would like to discuss Marsh & McLennan Agency.

As you will remember, we announced a year ago that we would launch a new US initiative in Marsh dedicated to serving the insurance needs of middle-market clients below national brokerage accounts.

The agency took a major step forward in January when David Eslick was named CEO.

I'm sure most of you know Dave was most recently CEO of USI.

And over the course of 2009, Dave and his team have built a pipeline of potential acquisition candidates.

That we have gone this long without announcing any deals speaks to the measured approach we have taken to build Marsh & McLennan Agency.

We have moved to deliberately to be sure we are prudent in our approach to acquisitions and that each firm we identify meets our requirements with respect to quality, cultural compatibility, consistent business approach, and lastly, pricing.

As we approach year-end, we are likely to announce several acquisitions, which will allow Marsh & McLennan Agency to operate in select geographic areas across the United States.

This approach will adopt a hub and spoke system to provide commercial property-casualty, directors and officers liability, surety, employee benefits and personalized products to customers at the local level through a dedicated sales and service force.

So, our approach to acquisition is thoughtful, an appropriate use of capital, and another way in which MMC can create long-term value for our shareholders.

In summary, let me say that we really feel very good about the enormous strides we have made at MMC, most recently illustrated by our third-quarter results, and we remain excited about MMC's long-term prospects.

Now let me turn it over to Vanessa.

Thank you, Brian, and good morning, everyone.

In the third quarter, MMC's earnings were very strong.

EPS from continuing operations rose from $0.03 in the third quarter of 2008 to $0.40 in the current quarter and adjusted EPS more than doubled from $0.20 to $0.48.

Both GAAP and adjusted EPS in the third quarter include a net tax benefit primarily related to the resolution of tax matters from prior periods totaling $0.18 per share.

If you exclude this tax benefit and focus on our core operating performance, adjusted EPS in the third quarter was $0.30, an increase of 50% from last year's $0.20.

Investment income increased to $21 million, in line with the guidance we gave you on last quarter's call.

This performance was primarily due to increases in our private equity portfolio.

Looking ahead to the fourth quarter, we anticipate that investment income will be close to the $19 million we reported in last year's fourth quarter.

Now I would like to review the performance of our operating segments.

All references will be to underlying revenue, underlying expenses, and adjusted operating income.

Beginning with Risk and Insurance Services, revenue excluding fiduciary interest income, decreased 1% to $1.2 billion.

Although we are in an environment where revenue growth is hard to find, within Marsh we saw increased brokerage revenue in many places, with strong growth in our Asia Pacific and Latin American regions.

Guy Carpenter also reported continued growth in revenues with 6% growth in the quarter.

More importantly, Risk and Insurance Services had strong growth in operating income in spite of a $24 million reduction in fiduciary interest income.

Even including the decrease in fiduciary interest income, operating income more than doubled, increasing from $69 million to $158 million.

This was the major driver of MMC's strong earnings performance in the quarter.

Both Marsh and Guy Carpenter contributed to this increase, although the predominance of the increase was produced by Marsh.

Compared with the first nine months of last year, the operating margin at Risk and Insurance Services increased more than 600 basis points, rising from 12.9% to 19.6%.

We are extremely pleased with the outstanding growth in profitability and margins produced by Risk and Insurance Services over the first nine months of the year.

The operating income growth we expect Risk and Insurance Services to produce in the fourth quarter will not be to the same degree as the previous quarters.

First, we continue to operate in an environment where revenue growth remains extremely difficult to achieve.

Second, Guy Carpenter historically operates at essentially breakeven in the fourth quarter.

And finally, the year-over-year margin improvement of the segment will moderate as we lap major expense reduction initiatives from last year.

Now looking specifically at Marsh, third-quarter revenue decreased 2% excluding fiduciary interest income, to just under $1 billion.

This decline reflects the continuing challenging economic environment in many parts of the world, as well as the overall pressure on insurance premium levels, commissions and fees.

Our revenue retention rate remains stable, and new business generation remains strong.

Marsh's new business in the third quarter was at its highest level of the year.

Additionally new business as a percent of current client revenue remains strong throughout the world.

Prudent expense control drove Marsh's operating expenses down 11% in the third quarter, resulting in substantial growth in operating income.

Dan and his team have done an excellent job, not just this quarter but over the past two years, in reducing overall expenses while building a stronger, more efficient organization.

And Marsh was able to accomplish all of this while continuing to invest for the future.

We have invested in our front-line capabilities, training programs for our colleagues and value-added technologies.

We have also continued to increase the levels of variable compensation in response to better operating performance.

While Marsh will continue to enhance the efficiency of its operations, its formal restructuring plan should be substantially completed by the end of this year.

Moving to reinsurance broking, Guy Carpenter continued its strong revenue performance this quarter.

The continued year-over-year growth of new business in the third quarter was impressive, considering the very strong level of new business production in last year's third quarter, and Carpenter's retention rate showed improvement on a year-over-year basis for the third consecutive quarter.

Over the course of the year, Carpenter's retention rate has increased, returning to historically high levels.

While Carpenter has been growing revenue, there also has been an ongoing focus on expense management.

Year-to-date expenses were down 2%, a credit to Peter and his team, especially given the investments Carpenter has made for growth.

Anyway you look at it, Guy Carpenter delivered superb performance this quarter.

Now let's turn to our Consulting segment, which continued to face challenging economic conditions in the third quarter.

Consulting revenue declined 10%, including 8% at Mercer and 14% at Oliver Wyman.

Looking first at Mercer, revenue in the third quarter decreased due to several factors, including a reduction in discretionary consulting assignments and a decrease in payroll levels that affected Health & Benefits and Outsourcing.

For the first three quarters, revenue at its two largest practices, Retirement and Health & Benefits, held up reasonably well, each decreasing by only 2%.

Outsourcing declined 9%, and Investment Consulting & Management increased 5%.

We believe the third quarter will be Mercer's most difficult year-over-year revenue comparison.

With thoughtful planning in advance of the economic downturn, Mercer has been able to reduce expenses in each quarter of 2009 on a year-over-year basis.

In the third quarter, expenses decreased 8%, matching the decline in revenue.

Because Michele and her team have done an excellent job of pulling the levers of expense management in this difficult operating environment, Mercer was able to hold its operating margin in the quarter in line with the past several years, in spite of the headwinds from the effects of foreign currency translation.

For the nine months of 2009, the reduction of Mercer's operating income from foreign exchange was $54 million, including $9 million this quarter.

Given where the dollar is today, it is reasonable to assume that foreign exchange may be a slight benefit to operating income in the fourth quarter as opposed to the headwind that Mercer has faced over the past year.

Oliver Wyman's third-quarter revenue decline was an improvement from the first half of 2009.

Although weak economic conditions continue, we are seeing signs of stabilization in many parts of its business.

Financial Services, which is Oliver Wyman's largest practice and saw the earliest declines, grew in the third quarter on a year-over-year basis.

However, some practices saw continued weakness, particularly those serving the automotive and other industrial sectors.

In aggregate, the leading indicators across this business portfolio suggest the stabilization in demand seen by Oliver Wyman in the third quarter should continue into the fourth quarter.

Oliver Wyman continues to target expense management as a high priority, which is evidenced by a 14% reduction in third-quarter operating expenses.

This strict focus on expenses resulted in Oliver Wyman achieving a sequential improvement in operating income and margins for the second consecutive quarter.

And as conditions gradually improve, Oliver Wyman can react quickly to recovering client demand by expanding capacity, which had been reduced over the course of this year to manage expenses.

For example, management is now reducing its use of temporary leave of absence programs and bringing forward employment start dates that have been previously pushed off into 2010.

So overall if economic conditions continue on their current course, Oliver Wyman is well positioned for future growth.

Now let me move to Risk Consulting and Technology.

At Kroll, signs of stabilization are also evident.

Revenue was $170 million, a decline of 9%.

Ontrack, Kroll's largest business, had revenue growth of 1%, its best performance in the past four quarters.

And we saw revenue stabilization on a sequential basis for Kroll's other two business units -- Risk Mitigation & Response and Background Screening.

Overall revenue increased 6% sequentially.

Additionally Kroll has done an excellent job controlling expenses with a decrease of 10% for both the third quarter and year-to-date.

And although operating income was down slightly on a year-over-year basis, Kroll produced a substantial increase compared with its operating income in the past three quarters.

Please remember that the fourth quarter is Kroll's lightest period due to seasonality in some of its businesses.

So we do not expect its operating income to match the level of the third quarter.

Now turning to MMC's capital structure.

Our balance sheet remains strong.

Net debt decreased $500 million from the end of the second quarter to $1.8 billion at September 30.

MMC has no outstanding commercial paper or bank loans, and we recently closed a new $1 billion multicurrency three-year revolving credit facility that replaced our previous $1.2 billion revolver.

With that, let me turn it back to Brian.

Thank you, Vanessa.

I would like to begin our question and answer session, and as a reminder, our operating companies' CEOs are also available to answer your questions.

So operator, Vicky, let's start.

(Operator Instructions).

Keith Walsh.

First question, if I could just get Dan, as well as Peter to comment on it, just thinking about future margin gains.

Year-to-date you guys at 19.6% have matched your biggest rival who have been doing this for several more years than you as far as the turnaround concern.

Thinking about a difficult 2010 revenue environment, can you talk specifically about what levers both in Guy Carpenter, as well as within Marsh retail, are left to drive earnings and margins as we go forward?

Dan, do you want to start and then Peter can go?

Sure.

Well, let's talk about Q4 and then talk a little bit about beyond.

Clearly we are beginning to lap some of the major initiatives that we have done over the last couple of years.

I still expect to see margin improvement in Q4.

I also expect to see margin improvement within Marsh next year, but not at the same pace that we have been going at over the last couple of years.

The Marsh story is not an expense story; it is a turnaround story.

We have focused on expenses over the past couple of years, and I am really thrilled with my management team to over the last few months be able to turn all of our energy to how do we grow this business both organically and by acquisition.

So I think over the course of the next several years you will see levels of growth both by acquisition and organic.

While we have been focused on improving the margin and reducing expense, don't get the wrong impression that even though a lot of that has dropped to the bottom line we have not been investing in the business.

We have been actively investing in the business.

Just to give you a couple of things in this people business, we hired 300 sales professionals this year around the world, and year-to-date, or actually since early 2008, we have hired 186 managing directors and senior vice presidents, all focused on ways to grow the business.

To echo what Dan said at the beginning, a lot of our expense initiatives have been lapped as you look at 2009 and as we look forward to 2010.

But the Guy Carpenter story is about topline growth.

We have made, as Brian said in his opening comments, significant investments in senior executives, but a focus on topline growth which we have been able to achieve.

If you look at the third quarter, we had strong new business, but that is on top of having a strong new business for the third quarter in 2008.

We believe there is excellent opportunities for expansion in our portfolio in the international segment in addition to repositioning our analytical and advisory services.

So we will be focusing heavily on topline growth while managing expenses to maximize margin.

Dan, just to follow-up specifically on your answer, I appreciate you think you can grow next year as far as the margin is concerned.

But what are the specific levers besides headcount reduction if you can just maybe point to a couple?

It seems like you have had some very, very strong upside to the margin.

I'm just not certain in a down revenue environment or flat how you can continue to even get any gains at all, if you could just answer that.

A couple of things.

One, in a down revenue environment, it is always more difficult obviously.

And so when I look through our strategic plans and our budget process, we look across the spectrum of growing the business to declining the business and what kind of contingencies we would be able to exercise across that spectrum in order to deliver more value and more margin to shareholders.

When I'm looking at going into next year, I am considering the investments that we have made this year and I expect some delivery of an improvement.

One thing to bear in mind, the economic impact is pretty tremendous, but where there is growth, we are capturing that level of growth.

Just to give you an idea in the quarter, greater China, which includes Hong Kong and Taiwan, grew 13%.

We grew 28% in the Middle East.

Argentina we grew 20%, Brazil 10%, India 17%.

So on the ground, where there is growth around the world we are capturing it.

And so I do think that we are well-positioned.

I expect that the large-scale restructuring efforts are drawing to a close, and that I feel is very good news for Marsh, and it allows us to really focus on growing the business.

Brian Meredith.

UBS.

A couple of questions here.

The first one, could I ask how successful have any of you been at monetizing on the placement hub so far as far as getting additional commission?

Well, one, our placement hubs are doing very well, and in fact, in the quarter we have done over 90% of the US business that flowed through hubs.

So they are working very well, and as you recall, the hubs do a lot of different things for us.

One, first and foremost, I think for clients it enables us to negotiate better terms and conditions and have a much better crack at contract certainty.

And so from that perspective, that was a main driver of organizing the hubs.

I also think because reducing the level of variability in terms of placement activities and focusing our placement activities in more limited places with people who do placement day in and day out, will reduce our E&O exposure over time.

And obviously the hubs in our view create a lot of value for carriers.

At the end carriers will be more efficient, and it will reduce carrier costs in addition to increasing the competition that I mentioned before.

And so our system, Marsh Market Connect, is designed to help underwriters target business, increase their quote-to-submission ratios, and buy-into-quote ratios, and make them more competitive.

So in my view it is very fair that we seek to monetize some of that value creation.

I don't intend to disclose specific numbers as we go forward on that because I think that is really between us and carriers and it is variable.

But I would say in terms of agreements that we have, we have more than 30 agreements with carriers with regard to additional compensation related to our placement hub.

So over time I would expect to be a good contributor to our bottom line.

Just a quick follow-up.

Can I get you to also comment on your views on the market conditions of commercial lines pricing and what happened this quarter versus the last couple of quarters and what you expect here going forward?

Sure.

Apart from a few lines like some property cat exposures, aviation, D&O for financial institutions, a little -- some parts of trade credit, the overall bulk of the property and casualty market is soft, and I fear it is getting softer.

And so from that standpoint, I'm not counting on any tailwind to help us next year with regard to market pricing.

Cliff Gallant.

KBW.

Just two questions.

First, you talked a bit about the financial strength of the Company.

Could you revisit the question of share repurchases?

And then secondly, it seemed like you guys have done a number of what appears to be attractive deals in the quarter, and you said that there are more coming up.

I realize that individually they might be a small part of the whole, but collectively how meaningful should we think of them, particularly when we think of earnings for next year and 2011?

Okay.

Thanks.

Well, share repurchases, I have gotten this question before.

And, as I have said, to me you take -- you have to decide what your priorities are and what is the best use, and you have to decide what creates the most shareholder value.

And right now when I look at the landscape, I think there are acquisitions available that maybe would not have been available in prior times or if available would have been much pricier.

And we would not have been able to take advantage of them anyway, as I mentioned earlier, because we were not ready to take on additional issues.

But today that has changed.

So I think for us the best use of our capital resources is to build this business in a strategic way, and so that is what I'm going to do.

We always evaluate the best use, and if, frankly, share repurchases was the best use of capital, we would do that.

But I don't think that is the case right now.

These acquisitions I think particularly the ones in the Marsh & McLennan Agency space, individually yes, they will be relatively, relatively small.

Of course, the guy selling to us won't think that way, but they are relatively small, and collectively I think they will be mighty.

Now in the beginning, one or two it is like drop by drop.

But eventually it is going to be quite large.

So I think certainly in the beginning parts of 2010 they won't be significant.

But, as the momentum builds and we add one to another and we fill them out with the spokes, I think you are going to find that eventually it is going to be a significant part of the business.

And that may take us a couple of years, two or three years.

But this is a very important initiative for us, and we are going to do it right, and it is a marathon in a way.

So we want to make sure that they are the right ones for us.

Compatibility is important.

But I think you will see that before you know it, they will be a very, very important part of who we are.

Meyer Shields.

Two quick questions.

On the reinsurance business, is there any way of either quantifying or estimating the impact of the Aon/Benfield merger in terms of driving revenue through competitors like Guy Carpenter?

Okay.

Peter?

Well, when we look at and we analyze our new business each quarter, for us we were successful in many facets.

We were successful in competing against our competitors in the reinsurance broker segment.

We were successful against the directs.

But we were also very successful with our health portfolio and expanding reinsurance opportunities through discussing more around capital structure and how they are going to position themselves for 2010.

So there is no specific trend in terms of where we are winning our new business, but we have been successful in all areas.

And if I can follow up, sort of on the retail side, I guess the only tailwind right now in retail brokerage is the fact that, as the market softens further, business that used to be wholesale is now retail.

Does that affect us?

I should say revenue growth at all, is that a tailwind that we should at some point expect to reverse?

I don't think so in respect to our case.

The brokers who use wholesalers heavily do so because they have to access the placement talent that the wholesaler offers.

So our business flow to wholesalers is not tremendously significant.

We use wholesalers when we have to get to markets that we cannot otherwise get to.

So there's a few markets where we have to use wholesalers to get to.

But the vast bulk of our placement activity we handle ourselves.

And so from that standpoint, we don't have flow or backward flow that would otherwise go to wholesalers.

Matthew Heimermann.

JPMorgan.

A couple of big picture questions, if I may.

Just on the acquisition, can you talk a little bit about what return hurdles or strategic hurdles you are using when you analyze these and maybe kind of the timeframe over what you think about these potential acquisitions?

Well, the number side, yes, I would say that I'm not going to give you a list of hurdles, but there are quite a few we actually go through.

Obviously they have to be accretive and all that, and they have to have good return on investment.

And we are disciplined about that, so they really do need to match those.

But that is the beginning of it because you mentioned the strategic part.

The quality of the people in that organization to me are always the most important.

It is the accretive nature from a personnel point of view that will ultimately win the day.

You can overpay for something that is terrific, and you will never ask me what the price was.

If I get a great deal on a mediocre property, you should ask me what the price was.

But if you do both, now you have got a winning combination, and that is the way we are going about it.

So the timing -- and acquisitions and timing, it is always very, very difficult.

(multiple speakers) I can tell you that -- I will tell you that on the agency side, which is our biggest initiative, we have an excellent pipeline, and we have been very encouraged by the reception we received in the market from companies who we would love to have part of the group.

So some will join and some we won't be able to meet their expectations, and that is okay.

They are quality companies.

But I think the timing is going to be good, but, as I said, we are not in a rush here.

We want to make sure we do it right.

The rest of acquisitions, actually as much as you can plan for them, they come when you least expect them.

And so the great thing about us right now is now we can take advantage of that.

When they were coming -- and they were coming up before -- I would love to talk to you, but I cannot imagine trying to take that on at this point.

So I think we are in a position where those wonderful opportunities now can be taken advantage of.

I hope that answers the question.

Yes, no, that is helpful.

Just a clarification on the timing.

I guess I was thinking more the timeframe over which you might measure return on capital or accretion because obviously if you're comparing the buybacks, buybacks are instant gratification, acquisitions sometimes take a little bit longer.

So that is what I was looking for there.

Instant gratification, I love that.

Well, I think we would say maybe five years would be a good reasonable period of time.

But in terms of accretion, we like to see that pretty fast.

Then the other question I had is (multiple speakers) yes.

The other question I have was, your comments, particularly on the consulting and feeling like you were seeing some stabilization and the worst was behind you, I guess could you clarify, is that just you are talking about stabilization in terms of the trends are not getting any worse, or you are actually feeling optimistic that perhaps, well, maybe growth is a little too high a bar to shoot for, but actually you're moving towards actually flat revenue growth in some of those businesses?

Well, that is kind of what we were talking about with stabilization and comparisons.

But I think, John, who is with us in Dubai might give you a little bit more color on what he is seeing in terms of stabilization.

So, John, can you help us out?

Sure, Brian.

So I think what we are seeing is that the bottom for us in terms of consulting demand was really in the first quarter of 2009, and since then there has been a gradual improvement.

So it is still a decline versus 2008, but there has been sequential improvement in absolute revenues in Q2 and Q3, and in Q3 we were down 14% relative to '08 versus 19% in the first half of the year.

So we are expecting that sequential improvement in revenue and profitability to continue through the fourth quarter.

And then going into 2010, I think it will depend on the pace of the economic recovery.

If it is a more rapid recovery, we could see a faster recovery and even growth in our business.

If you see a slower recovery, I think we will still be stable and improving, but perhaps not at quite the pace that we could if there was a more substantial rebound.

Okay, John.

Let me ask Michele then to just talk about Mercer.

I would agree with most of what John said.

For our business we do lag a bit, so we actually went into more of the downturn much later.

We did not see a downturn in our business until the fourth quarter of 2008.

We are still lapping very strong comps from 2008, and practically I think the business takes a little bit longer to recover.

For example, a significant amount of our revenue is impacted by employee headcount.

So whether it is the H&B business or whether it is our outsourcing business, a number of employees on payroll is a relevant metric with regard to how our business will recover as we all believe that number is not likely to jump dramatically unless we have a more robust recovery than anyone is predicting.

So I think we may lag a bit.

Having said that, I think if you look at where we are in the third quarter, given the very strong comps we had in the third quarter of 2008, I would echo what Vanessa said, which is that you could expect us to look a bit more like the full nine months as we go forward as opposed to expecting quite the same thing.

One bright spot I would call out with regard to our business is because we do have a business that is stratified across, if you will, three we call them pillars, but basically consulting, outsourcing and investments.

This quarter our investment pillar was quite strong, 8% growth in this quarter over strong comps actually.

And the assets under administration -- our assets under management in our investment management business hit an all-time high in the third quarter of 2009 at $26.1 billion of assets under management.

So again, as you look at our business, it is a portfolio of services, and we see different indications across them.

Ben, you could just fill in what you are seeing at Kroll.

Yes, I think similar kind of circumstances.

So if you look at the last three quarters, we have seen stabilization in revenue on a sequential basis, a bit of a rise in Q3 and obviously with the expense reductions better profitability.

We are starting to see stabilization in the employment markets.

Obviously we are not a proxy for the broader one, but in the ones that we play heavily in and they are stabilizing.

Litigation seems to be returning to normal.

I don't think you're going to see that there were significant changes in volume, but you saw big changes in litigant behavior, which can only -- they can only hold out for so long, right.

So the settlement activity was higher.

That seems to be abating a bit, a more normal environment, and M&A seems to be returning a bit.

So it kind of lines up with what you hearing from the others.

Jay Cohen.

Bank of America/Merrill Lynch.

Just a quick numbers question.

What kind of tax rate should we be assuming going forward for the Company?

We are continuing to give guidance on that in the 30% to 31% range going forward.

It was a little lumpy this quarter because of the change in the mix of business over the quarter and the true-ups the first nine months.

But you should continue to plan on 30% to 31%.

Jay Gelb.

Barclays Capital.

I have three questions.

They are all on Risk and Insurance Services.

The first is, when should we anticipate that organic revenue growth in Risk and Insurance Services can get back to zero?

The second is, should we anticipate that we should see a decline in Risk and Insurance Services expenses on an organic basis in 2010?

And third, if you can update us on contingent commissions, that would be helpful.

Okay.

So, Dan and Peter, do you want to do organic revenue growth back to zero?

That would be a decline for you, Peter.

But anyway --

Okay.

To me a lot of our focus within Marsh is right now on organic growth.

In fact, I have got Joe McSweeney and Alex Moczarski, my two major geographic leaders, driving a global sales vision that we call winning at Marsh.

That involves not only creating specific sales executives with responsibilities in each region and each segment, but it also is a strategic hiring as well in certain areas.

We have contracted with salesforce.com to drive a global CRM system.

So all of the Marsh activity with regard to prospecting and client relationship management will be done via salesforce, and we are implementing that now, and we will continue to do that through next year.

I have taken one of my senior executives, Hank Allen, and asked him to lead our multinational effort.

I believe that Marsh has the most cohesive global network in the world, and I want to capture full competitive advantage from that network.

And so Hank is diving in and leading that.

We are also investing in employee benefits.

Within the Marsh organization, our share of employee benefits is much smaller than our peer brokerage companies, and we have been investing fairly extensively this year, and we will continue to do that.

Now that is all saying what we are doing in order to drive organic growth within the firm.

Obviously we don't control the macro environment.

We are part of that macro environment.

Where there is GDP growth, we are capturing it.

In fact, we are doing better than that, and I think that we are performing very well in many parts of the world in terms of growth.

Just to give you an idea, I mentioned some territories before, but we had double-digit growth in 13 countries or operating territories within Marsh in the quarter, and more than half of that was growth of more than 20%.

So the organization is positioned to grow, and so, therefore, I think that we are poised.

My own nose tells me that there is growth to be had.

Now we are planning all the way from what would be the impact of our business from our continued run-rate, in the segment, as you know, through nine months is I think is minus 1.

So on the continued run-rate to all the way from flat to plus 1, plus 2, plus 3, and what are the things and the levers that we can pull to make sure that we drive value for shareholders in all of those scenarios.

So that is my view with regard to organic.

Maybe I will touch on the contingencies, and then I will hand over to Peter for his views on organic growth within the segment.

In terms of contingent income, we have been very consistent.

Our view is that there should be a level playing field, and we're focused on achieving a level playing field.

Right now we are forced to play by different rules, which puts us at a disadvantage from a revenue, a margin and a cost perspective relative to most of the brokerage companies out there.

So, one, a level playing field combined with transparency with clearer and more consistent disclosure for all brokers we think would result in a more competitive brokerage industry and would be sounder public policy.

Having said that, for the last couple of years, we have not been sitting on our hands in terms of carrier revenue streams.

We have our enhanced commission initiative.

In addition to that, we have been doing our best to negotiate higher commission rates with carriers on our commission portfolios, and we have been pretty successful in doing that.

And so I don't look at, as I have said before, we are not pining for the return of contingencies, and I don't want to speculate on what impact that could have on different segments of our business because we have not made those determinations, where we are operating in the environment that we are held to via the settlement agreements, and that is where we will continue to operate.

In the reinsurance market, in 2010 there will be more headwinds.

You are going to have reduced exposures for primary companies.

The pricing should flatten out and retentions will increase relative to what you saw during 2009.

Having said that, we still believe there are excellent opportunities for us to push organic growth.

If you look at Guy Carpenter, overall we are underweight in the international business.

We have made significant strides in 2009.

I have had 20% plus organic growth in our Asia-Pacific region.

But in the UK and Europe, there is still a ways to go, and that's going to be a huge focus for us in 2010.

We have transferred Britt Newhouse over to the UK on a full-time basis.

He's been with Guy Carpenter for 30 plus years -- he is our Chairman -- to help focus on organic growth.

Henry Keeling, as Brian mentioned in the opening, has a very strong strategic plan of how we grow the UK and Europe.

So we feel that we can continue to grow organically in 2010.

But we will have a little bit more headwinds than we faced in 2009.

(multiple speakers).

You also asked about the -- (multiple speakers).

I'm sorry.

(multiple speakers).

I was just saying you asked us about the expenses, too.

So we have had a positive relationship between organic growth and expense growth.

I don't know if you guys want to comment anymore about that.

Yes, I would just say you can call me an old-fashioned P&L guy.

I think that expenses are aligned with revenue.

If you don't see our revenue grow, you are not going to see our expenses grow, period.

Larry Greenberg.

Langen McAlenney.

I'm sorry if you elaborated on margins earlier.

I was on another call.

But it has always been my perception that for Marsh first-quarter margins were generally the highest, and fourth quarter were generally second.

And in the fourth quarter for Guy Carpenter, it was generally a breakeven fourth quarter.

Do those rule of thumbs still apply?

The answer is yes.

The answer is yes, Larry.

Thomas Mitchell.

Miller Tabak.

I just want to try to clarify what I thought I heard was a kind of warning on fourth quarter.

Fourth-quarter margin improvement not likely to be as strong as third quarter.

But, of course, third quarter was really terrific.

My impression is that typically your fourth quarter in insurance brokerage and risk services is stronger anyway than in the third quarter and that we should still be looking for some margin improvement and some improvement over fourth-quarter 2008 levels.

But I want to doublecheck that.

Is that right?

Yes.

Yes, I mean we had a tremendous improvement in the third quarter over the year before.

So we are not predicting that change in the fourth quarter.

But we are continuing the process of improving this margin and getting it up to -- getting it up to at least our peer levels, and then we will go from there to beat them.

So no, it is not a warning; it is just a recognition that you got to look at it sequentially.

You got to recognize seasonality, and with those caveats we are expecting improvement.

And then also in the whole group of consulting businesses, if we put them together, it looks you have really gotten your costs lined up with the revenue trends.

Can we expect again going forward do we think that we have pretty much seen the low in operating income if we include Kroll in the whole group?

Yes, I think throwing Kroll in, we are taking them out.

To me what we have done here -- we said, okay, we are going to go into this economic downturn.

We have to pay our expenses to match our revenues, much like Dan said.

But what we did not want to do was destroy the Company in the process.

We not only did not destroy the Company, but, as we've pointed out, Michele and John and Ben have actually added.

We have not stopped investing.

So we are a better Company today coming out of this thing than when we went into it.

So for us that is a great story.

We think that our margin improvement will be very, very good as revenues return.

So yes, next year is feeling better for me, frankly.

Terry Shu.

Sorry about that.

I stepped aside for a moment.

You were addressing the issue of margins.

Were you talking specifically, Brian, about the consulting margins in answer to Tom Mitchell's question?

Well, Tom was actually referring to the insurance piece, I believe, because he was afraid of whether we were sending a warning, and I think we answered that question.

So no, it was -- his question was insurance.

His question was insurance.

Now, on the consulting side, if we look at the aggregate margin, third quarter versus the first half was much improved, but it is still on a nine-month basis lagging by quite a bit.

When you commented earlier, I think that the fourth-quarter margins may not be quite as high.

I think you were talking about Kroll.

Am I right?

Yes, because Kroll's (multiple speakers) seasonality will (multiple speakers) its fourth quarter is like.

Right, right.

But both for consulting and Kroll, because the last couple of quarters from '08 on, it has been challenging, it is hard to know what is normalized.

So, as we go forward for fourth quarter and into 2010 for both consulting and for Kroll, do we see a meaningful year over year improvement in the first half so that the full year will be much better?

I'm not sure what is normalized and next year with maybe the recovery not fully in place yet something lower.

So maybe a bit of guidance as to what one should look for in terms of normalized margins.

Guidance.

I will not quantify it, but what I would tell you is looking at this year and what they have had to do to get their margins down, as revenue improves, the margins will improve.

Now and I think it will be, there will be some leverage to that.

Now we have to see the revenue improve.

But what we have done I think is demonstrated the ability to hold the margins if revenue does not improve, and if revenue improves, it will improve.

(multiple speakers).

It is also important to remember that that consulting segment will have overcome $70 million of FX impact on their NOI.

So, as you look at the lumpiness, etc., that's huge headwinds they have had to overcome this year.

Okay.

So, as we look into -- just for consulting for 4Q, it will be at least as good as 3Q and then going into 2010 as well?

Is that a correct comment?

Well, I was talking about 2010.

The fourth quarter--we have to let this year play out.

We are lapping some issues, as Michele said.

The impact on Mercer was a little late relative to the others.

And so this is -- there is a little bit of timing issue here.

But don't hold me to a single quarter, okay?

Okay.

Fair enough.

And then a question on investment income.

I think, Michele, you gave guidance for the fourth quarter.

How should we look at it like into 2010 if you can refresh our memory as to what is the investment base and what would be a normalized return if there is such a thing?

Vanessa actually.

Michele is running Mercer.

I am the CFO.

(multiple speakers)

We teased them all the time about that.

(multiple speakers).

I do the same thing.

We generally because we report our investment income on a lag, we only go out one quarter, so I won't give you guidance for 2010, and we expect the fourth quarter of this year to roughly look like the fourth quarter of last year at about $19 million of investment income.

Let me move on if that is okay.

Thanks, Terry.

Keith Walsh.

Citi.

For Peter, just two quick ones.

For Peter, Guy Carpenter, the revenues at plus 6.

If you can specifically -- what drove this growth?

Was it new clients, or was it renewal on your existing business?

If you could specifically talk to that, and I have got a follow-up.

We had increased new business which continued a very positive trend for us.

Our renewal retentions increased, and so that had a 30% plus benefit for us in the quarter when we looked year over year.

And why that does not probably equate to what you saw in the first end second quarter is just a little bit more headwinds on retentions and then some rates.

So we started to see some fall-off in the third quarter although not significant.

Okay.

So renewals were actually a big driver of that plus -- a bigger driver of the plus 6 than new business.

Is that what you are saying?

No, what I'm saying is, from a percentage standpoint, we had our renewal retentions went up, and therefore, when you look at it year over year, that was a benefit.

But the new business was a larger contributor than the renewal retention.

Less pressure from retention, right?

So your new business actually shows the growth, and that is the point.

Okay and then just last one for Dan.

If you could just comment on new business and retention at Marsh and then when we think about organic growth, sort of the breakdown between units and pricing growth on both of those components.

Okay.

That is one of those multivariable questions, but let me address it this way.

When we are looking at the -- when we are looking at the growth and the components of growth within new business versus retention, our new business rates for any organization are actually very strong.

I have looked and obviously we have been looking at other companies over the course of the last year or so, looking at what new business is generated as a percentage of their base.

And then I look at what we do in Marsh, and we produce an awful lot of new business.

That is both from new new and what we call expanded business.

So both of that is very strong.

In fact, in the quarter our new business was over $190 million.

So that is an awful lot of new business.

And so where we have been -- I would say winning in the marketplace.

Now having said that, as I talked about economic activity and the like, that new business of $190 million is not as strong just on an absolute dollar basis as the third quarter of '08, right?

But it was in our view a strong quarter.

When I look at what in terms of account retention, our account retention levels are at historical high levels.

I have ignored -- well, I don't ignore it -- but I discount the period in Marsh of 2005, 2006 and 2007 in terms of where the account retention levels were, and I look to 2001, 2002, 2003, and we are back to those levels.

So our account retention levels are very strong, and in most parts of our business and most geographies, they are in the mid-90s.

I think we should take one more question and then draw this to a close.

Is there another question?

Meyer Shields.

Really quickly can we get the net income impact by segment from foreign exchange in the quarter?

In the quarter it was $9 million at Mercer, which I mentioned in my comments; $12 million total negative for Consulting; $10 million positive for Risk and Insurance Services; and nothing at Kroll.

So overall minus 2 for the quarter in foreign exchange.

Alright.

Well, then I'm going to draw this to a close, and I want to thank everybody for your attention and for the questions, and look forward to talking to you next quarter.

Thank you.

And that does conclude today's teleconference.

Thank you all for joining.