威達信集團 (MMC) 0 Q0 法說會逐字稿

Welcome to MMC's conference call.

Today's call is being recorded.

Fourth quarter and year end 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 that 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 2010, 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 SEC filings which are available on the MMC website and specifically MMC's annual report on Form 10-K for the year ended December 31st, 2009, which will be available on the MMC website by March 1st, 2010, 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 now turn this over to Brian Brian Duperreault.

Good morning.

Thank you for joining us to discuss our fourth 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'd also like to welcome our operating Company CEOs to today's call; Dan Glaser of Marsh; Peter Zaffino of Guy Carpenter; Michele Burns of Mercer, John Drzik of Oliver Wyman; and Ben Allen of Kroll.

Also with us is Mike Bischoff, our Head of Investor Relations.

On today's call I will discuss the progress MMC made in 2009.

Then, Vanessa will review our results for the fourth quarter.

Afterwards, we'd be happy to take your questions.

Let me begin by saying that in 2009, we made great strides in strengthening Marsh & McLennan Companies as a preeminent global professional services firm.

MMC's performance in 2009 was outstanding, particularly in light of the substantial economic and market challenges presented by the global recession, which affected all of our operating segments.

We also faced soft market conditions in the global property and casualty insurance marketplace and were confronted with extremely low interest rates in 2009, which reduced interest income--including fiduciary and corporate--by nearly $120 million despite higher corporate cash levels.

And lastly, the effects of foreign currency translation lowered operating income by more than $50 million, which primarily affected our Consulting segment.

When I joined MMC two years ago one of our major objectives was to improve both the financial performance and the margins in the Risk and Insurance Services segment.

As I said at the time, our segment margin needed to be at a level competitive with other large insurance brokers.

Over the past two years, adjusted operating income in Risk and Insurance Services more than doubled to nearly $1 billion.

And the segment's adjusted operating margin increased 1,000 basis points, rising to 18.6% in 2009 from 8.6% in 2007.

This was done despite the worst economic downturn since World War II.

Looking just at 2009, earnings growth for the Risk and Insurance Services segment was robust.

Adjusted operating income increased 35%, and the adjusted operating margin rose by more than 500 basis points over 2008.

This was achieved thanks to the determined efforts of thousands of dedicated colleagues around the world, led by Dan and his management team at Marsh, and Peter and his team at Guy Carpenter.

The main driver of MMC's strong earnings growth was the significant improvement in profitability at Marsh, a trend that began in early 2008 when management initiated a strategy to improve operational efficiencies, strengthen financial results, and deliver superior risk and insurance capabilities to clients.

These excellent results at Marsh are a credit to everything Dan and his team has done over the past two years.

Marsh was able to accomplish all this while continuing to invest in the future, including making strategic hires in client facing positions, enhancing value-added technology for clients, and expanding colleague training programs with an emphasis on sales.

Guy Carpenter's results in 2009 reflected the positive themes we've talked about for the past year; increased new business, improved client retention and a disciplined approach to expense management.

Together, these factors resulted in strong growth in adjusted operating income.

Over the course of 2009, Carpenter continued to invest in its platform, enhancing its reputation as a preeminent reinsurance intermediary.

Recruitment of superior broking talent and additional enhancements to their analytical capabilities have further strengthened Guy Carpenter and contributed to a strong performance in the year.

New business generation was outstanding and retention returned to historically high levels.

Combined, this resulted in strong underlying revenue growth of 8%, double-digit growth and profitability and a solid margin improvement in 2009.

Management augmented underlying growth with the successful acquisition and integration of Collins and Rattner MacKenzie.

Moving on to our Consulting segment, signs at both Mercer and Oliver Wyman suggest we've seen the worst of the year-over-year comparisons.

Both companies felt the effect of the economy in 2009 but the management teams of Mercer and Oliver Wyman responded with thoughtful cost saving initiatives.

At Mercer the effects of the economic downturn were first felt in the fourth quarter of 2008.

Rather than making draconian cuts across the enterprise, Mercer reacted to the weakening environment by taking targeted measures to right size individual business lines.

As a result, on a year-over-year basis, Mercer was able to reduce expenses in each of the last four quarters, and achieved an increase in operating margin for the second half of 2009.

Over the past two years, Mercer's made improvements in its operating model to capitalize on the strength of its three pillars; Consulting, Outsourcing and Investments.

Recent initiatives included enhancing its sales organization, developing an integrated global infrastructure, streamlining the organization, and making selected strategic acquisitions.

In the fourth quarter, revenue overall was flat but grew sequentially from the third quarter.

Mercer saw signs of strength in several practices which Vanessa will cover in more detail.

At Oliver Wyman, 2009 was a difficult year.

But signs of revenue stabilization and in some cases growth are evident.

For example, Financial Services, which is Oliver Wyman's largest practice and saw the earliest declines, continued to be a bright spot among its industry specialties.

Leading indicators across Oliver Wyman's businesses suggest that the stabilization in demand we saw in the latter part of 2009 should continue.

Expense management actions taken early in the year enabled Oliver Wyman to grow sequential operating income and margin for the third consecutive quarter.

As Oliver Wyman enters 2010, we expect it will produce favorable comparisons to 2009.

Now, moving on to Risk Consulting and Technology, Kroll is a much stronger firm than it was a year ago.

Kroll Ontrack, its largest business unit, representing slightly less than half of its revenue, drove fourth quarter results with double-digit revenue growth.

Kroll's profitability in the second half of 2009 reflected management's aggressive actions to strengthen and refocus the Company and to reduce expenses.

As a result, Kroll is re-establishing higher levels of profitability.

It produced significant growth in operating income in both the third and fourth quarter, compared with recent periods.

Last week we announced an agreement to sell Kroll Laboratory Specialists, Kroll's substance abuse testing business, for $110 million.

We expect that transaction to close in the first quarter.

Entering 2010, Kroll's positioned for significant growth in operating income.

Now I'd like to briefly update you on our acquisition strategy that I discussed on last quarter's call.

Over the last three months, we have announced four transactions.

The largest was our agreement in December to acquire HSBC Insurance Brokers, based in London.

This business is a strong complementary fit with Marsh, both operationally and geographically.

This transaction, which is expected to close early in the second quarter, will deepen Marsh's presence in the UK, Hong Kong, Singapore, China, and the Middle East.

As part of this agreement, we also entered into a strategic partnership with HSBC Bank that gives us preferred access to provide insurance broking and risk management services to HSBC and their corporate and private clients.

The remaining three announced acquisitions are part of the ramping up of our Marsh & McLennan Agency initiative.

In November, we acquired Insurance Alliance, one of the largest insurance agencies in Texas.

Based in Houston, Insurance Alliance has annual revenue of $15 million.

In December, we acquired NIA group, based in New Jersey.

NIA group has approximately 400 employees, and annual revenue exceeding $60 million.

And in February of this year, we acquired Haake Companies, based in Kansas.

Haake has annual revenue of $11 million.

Our strategy is to establish ten hubs, and as you can see, we're making great progress towards this objective.

In summary, let me reiterate that 2009 was an outstanding year for MMC.

We feel good about what we've accomplished.

As we begin 2010, we believe each of our operating companies is well-positioned.

Let me briefly outline some of the goals we have for the coming year.

As you know, 2009 expense management was a key focus for MMC and for most companies, as we confronted worldwide recessionary conditions.

In 2010 our primary goal is to drive top and bottom line growth across the enterprise.

We plan to grow revenue organically and through strategic acquisitions.

Our operating companies also need to achieve the strategic and financial goals that they've set for themselves.

We also look to further unlock the value at MMC by better leveraging our infrastructure for additional cost savings and capitalizing on adjacencies across the operating companies to increase revenue generation and strengthen the corporation as a whole.

And we will continue to further reduce the risk profile of MMC through a robust Enterprise Risk Management and compliance program.

Finally, another key focus for 2010 is our employees, both current and future.

We will continue to focus on attraction, development and retention of professional and leadership talent, with an emphasis on leadership development and diversity/inclusion.

So with that, let me turn it over to Vanessa.

Thank you, Brian and good morning everyone.

There are four areas I'll discuss this morning.

First, I'll give you an overview of MMC's consolidated earnings for the quarter.

Next, I'll cover the recent settlements of securities and ERISA class action lawsuits.

Then I'll discuss the results of the individual operating companies with a focus on the fourth quarter.

And finally I'll close with some observations regarding MMC's future restructuring costs, pensions and capital structure.

Let's begin with earnings.

Including the settlement of the securities lawsuits, EPS in the fourth quarter was $0.07, compared with $0.15 in the fourth quarter of 2008.

On an adjusted basis, EPS was $0.38, a 6% increase from $0.36 in the prior year.

As usual, in discussing our results, all my references will be to underlying revenue, underlying expenses, and adjusted operating income.

In the fourth quarter, MMC's earnings growth was diversified and strong, with double-digit growth in the operating income of each of our three operating segments.

On a consolidated basis, MMC's operating income rose 20%, compared with last year's fourth quarter.

This is a solid performance, considering, (1) our strong fourth quarter of 2008, when operating income rose 28% over the fourth quarter of 2007; and (2) the headwinds each of our operating companies faced, not only in the fourth quarter, but throughout the year.

Investment income was $23 million, in line with the guidance we gave you on last quarter's call.

This performance was largely due to mark-to-market increases in our private equity portfolio.

Looking ahead to the first quarter--compared with the $15 million investment loss in the first quarter of 2009--there should be an improvement of $10 to $15 million on a year-over-year basis, leading to a minimal mark-to-market investment loss in the first quarter of 2010.

Corporate expenses decreased 6% for 2009 to $159 million.

We expect corporate expenses to decline further this year.

Now let me discuss the recent resolution of the securities lawsuits.

In December, the US district court approved a settlement regarding the securities class action lawsuit that was filed in 2004 related to the NYAG investigation.

96% of the eligible shares are bound by this settlement.

The related ERISA class action lawsuit was also settled.

MMC paid $435 million in the fourth quarter to settle these two lawsuits, of which $230 million was covered by insurance.

Of the insurance recoverables, we received $163 million in 2009, which was included in our year-end cash position.

The remaining $67 million was received in January.

The net settlement paid by MMC of $205 million is tax deductible and will contribute to a sizable refund, which we expect to receive this summer.

Next, I'd like to review the performance of our operating segments, beginning with Risk and Insurance Services.

Fourth quarter revenue excluding fiduciary interest, decreased 1% to $1.3 billion.

Risk and Insurance Services operating income rose 13% despite a drop in fiduciary interest income from $25 million to $12 million.

The operating margin in the fourth quarter increased 110 basis points, from 14.8% to 15.9%.

More importantly for the entire year, the segment margin increased 530 basis points, from 13.3% to 18.6%.

Looking specifically at insurance broking, Marsh's fourth quarter revenue decreased 1% to $1.2 billion, reflecting the economic environment as well as pressure on insurance premium levels, commissions and fees.

Despite these difficult conditions, Marsh increased revenue in many areas of the world, with more than 20 countries growing at least 5%.

Additionally, new business remains strong on a global basis.

New business generation had a positive progression throughout the year.

The second half of 2009 was stronger than the first half, with the fourth quarter being the highest level of the year.

Dan and his team continue to do an excellent job in reducing overall expenses, while at the same time building a stronger, more efficient organization.

The continuing focus on expense control drove Marsh's operating expenses down 6% in the fourth quarter.

This increased efficiency allowed Marsh to grow operating income more than 20% in the quarter.

Moving to reinsurance broking, Guy Carpenter continued its strong revenue performance in the fourth quarter.

Revenue increased 4%, a good performance, considering the difficult market conditions that include increased primary retentions as well as downward pressure on rates across many lines.

And for the year, Carpenter's revenue growth was 8%, led by excellent new business production, which, as Brian mentioned, was exceptionally strong.

As we have previously discussed, Carpenter's retention rate has also returned to its historical high level, contributing to the overall positive revenue performance.

Let's turn to our Consulting segment.

The revenue decline of 2% was a substantial improvement from the 10% decrease in the third quarter.

We believe the Consulting segment has weathered the worst of the harsh economic environment.

Management actions aligned expenses with revenue, producing a 2% decline in operating expenses in the quarter.

These efforts resulted in a 17% increase in operating income, from $121 million to $142 million.

This represents the segment's highest quarterly growth rate in two years.

And the operating margin for the Consulting segment increased 140 basis points, from 10.1% in the fourth quarter of 2008, to 11.5% in the fourth quarter of 2009.

As we said on our last call, we felt the third quarter for Mercer would likely represent its most difficult year-over-year revenue comparison.

And this appears to have been the case, as revenue in the fourth quarter was flat, representing a substantial improvement from the third quarter.

In the fourth quarter, the decline in Rewards, Talent & Communications, was offset by gains in other practices; The Retirement and Health & Benefits practices grew 2% on a year-over-year basis; Outsourcing rose 3%; and Investment Consulting and Management increased 9%.

Michele and her team also did an excellent job of expense management throughout the year.

In the fourth quarter, operating expenses decreased 2%.

As a result, Mercer experienced a substantial increase in operating income, exceeding 30%.

At Oliver Wyman, the rate of revenue declines has moderated over the last two quarters.

Although weak economic conditions persist, we saw signs of continued stabilization in the fourth quarter.

As Brian mentioned, Financial Services continued to be a bright spot among Oliver Wyman's industry specialties.

Revenue at Financial Services rose 8% in the fourth quarter and 2% for the year.

And the industry practice serving the retail sector was even stronger with double-digit revenue growth for both the fourth quarter and the year.

Other practices continued to experience weakness, though most had improved performance in the fourth quarter.

A strict focus on expenses resulted in Oliver Wyman achieving a sequential improvement in operating income and margin for the third consecutive quarter.

In the Risk Consulting and Technology segment, Kroll had another solid quarter, particularly as it related to improved profitability.

Revenue was flat year-over-year, but adjusted operating income increased three-fold.

Kroll Ontrack, Kroll's largest business, had revenue growth of 19%, the result of continued strong performance in its litigation support-related services.

Additionally, Ben Allen and his team have done an excellent job reducing Kroll's cost base with a 7% decrease in operating expenses in the fourth quarter.

This positive leverage resulted in substantial growth in operating income on a year-over-year basis.

Even with the economic sensitivity in many of Kroll's businesses, we expect strong growth and profitability in 2010.

Now I would like to make a few comments about our schedule of non-GAAP measures.

MMC has undergone major restructuring actions over the past several years.

Marsh implemented widespread initiatives to improve profitability during the past two years and each of our other operating companies took actions to varying degrees to deal with the recession and to improve their competitive position.

Looking forward, we believe future restructuring activities will be focused on the refinement of our support and back office functions, as well as the integration of acquisitions.

Before I discuss our pension plans, let me make a few observations regarding pension plans generally.

Defined benefit pension plans can create volatility in a Company's P&L, cash flow, and balance sheet.

A significant driver of this volatility is the movement of long-term corporate bond rates, which companies are required to use to measure pension obligations at the end of each year.

With respect to our pension plans, as a result of our preliminary measurement, we are currently projecting that MMC's pension expense will increase in 2010, reducing operating income by approximately $80 million year-over-year.

We estimate that declines in long-term corporate bond rates in the US and UK account for about two-thirds of our anticipated pension expense increase in 2010.

Looking beyond this year, with interest rates and borrowing spreads at relatively low levels today, it seems reasonable to assume that interest rates will increase over the next 12 to 24 months.

And looking at only the impact of this one factor, any increase in interest rates will reduce our future pension expense.

Regarding the funding of our pension plans, the aggregate level of contributions in 2009 approached $400 million.

We currently project that contributions in 2010 should slightly exceed $300 million.

Turning to MMC's capital structure, net debt was $1.8 billion at year-end, a reduction of $100 million from the end of 2008.

The year-end figure includes the impact of funding the settlement of the securities lawsuits, but as I said earlier, does not include all of the insurance recoverables or the tax refund.

Shares outstanding at December 31, 2009, were 530 million, an increase of 15.4 million shares from the end of 2008.

The use of stock in 2009 included about 11 million shares to fund the acquisitions in Risk and Insurance Services that we discussed, which we expect to be accretive to earnings going forward.

The remaining shares were used for employee stock plans.

With that, let me turn it back to Brian.

Thank you, Vanessa.

Well, we're ready to begin our question-and-answer session.

Just as a reminder, we have our operating company CEOs also on the call and available for you.

And with that, Operator, Let's start the Q&A.

Thank you very much.

(Operator Instructions).

We'll pause one moment as we assemble our roster.

Our first question today will come from Keith Walsh with Citi.

Hey, good morning everybody.

Good morning, Keith.

Good morning.

First question, I have one question for Vanessa and then one for Dan.

And the first question for Vanessa specifically regarding currency at Mercer, maybe you could just quantify what that impact was for the quarter, and I recall last year on the call, you actually gave us sort of a guidance number for the year based on the movement of the dollar relative to the other currencies, if you could update us on that.

Sure.

Starting with our normal position, Keith, is that currency overall is de minimus.

Last year, we gave guidance for Mercer specifically because of the an anomalous movements in the currencies against each other in the beginning of the year and we gave you guidance early last year that over the first three quarters, we expected the impact on Mercer alone to be between $60 million and $80 million, which was indeed the range of impact for the first three quarters.

For the fourth quarter, it turned to a slight positive and over the course of 2010, obviously we're not predicting where the currencies move right now, but we would expect it to be slightly positive impact on Mercer and the Company.

Keith, for Dan.

Could you quantify what that impact in the quarter was for Mercer.

We're not going to quantify it, Keith.

For Dan, just I think all of us on the line understand pricing and the impact on your revenues but maybe if you could talk a little about the economic -- the leverage of the economy that your business has, because I think that's something maybe that we don't understand quite as well.

Thanks.

Okay.

Thanks, Keith.

I think the economic impact is the single biggest factor.

I think it's much broader than the insurance cycle.

The insurance cycle over my career, over 30 years, most of it's been soft.

Right?

And so I think that Marsh can improve in any sort of insurance cycle and that has less of an impact.

The economic results are very considerable and you see them in a lot of different ways.

One, there's a cost consciousness in our client base that we have not experienced before.

I think that in a lot of the large account space worldwide you see a significant involvement of procurement rather than risk managers determining buying decisions.

We see a lot of conservatism and caution around project work and certainly project work with regard to areas where we have deep expertise.

Enterprise risk management, corporate governance, supply chain, those areas I would say are viewed as more discretionary, at least in the short term.

We expect some level of bounceback on them in 2010.

The other impact the economy has is exposure units.

I mean, I travel around the world, meeting with clients, and I met with certain clients who have literally told me that their performance is down 70% and levels like that.

So from that standpoint, while there might be a rate reduction of 5% or 7%, it's being applied against an exposure unit which might be down 25 or 30 or 40% and that has significant impact on us.

Okay.

Thanks.

Next question.

And our next question will come from Brian Meredith with UBS.

Yes, good morning everybody.

Two questions here.

First, in the risk and insurance services business, can you describe kind of what the current kind of competitive environment is with respect to broker compensation going on right now?

Dan and Peter, you want to do them both?

Sure, I'll start.

So this is Dan.

I mean, it's always a competitive environment with regard to broker compensation.

I feel very good about where we are at Marsh in terms of how we compensate our people and the clarity around rewards.

I've always believed, as a side note, that compensation is only one factor in terms of colleague satisfaction.

A lot has to do with the impact and influence that they have over decision making in the Company, et cetera, and so we're believers in as much decentralized decision making as possible and empowering people to do the jobs and do what's right for the client and our mantra internally is sort of, "If it meets our values as a Company, and if it's good for your client, it's virtually always the right course of action".

And so I think that makes people feel good about working at Marsh.

Our variable compensation that we pay as a proportion of overall comp and also just as an absolute number have both increased significantly over the last 24 months, as our profitability has improved.

So we are in a much stronger position now to compete for talent on a comp basis, and people who work at Marsh's own pay package have been improving along with our profitability improvements.

Great.

Dan, actually I probably misspoke a little bit.

That was a great answer.

But I also was talking about as far as broker compensation and commission rates and fees actually being --

I got you.

That was a great answer.

Brian, you get a two-for.

I guess you could see that on my desk is our book of year-end comp which we're now communicating to people, so -- I'm glad you're satisfied.

So, in terms of broker comp in general, we haven't been sitting on our hands over the last couple of years.

We have been negotiating, one, with clients, and also with carriers.

On the client front, we have made a lot of progress on pricing of services and where we're getting small increases, generally across the portfolio in our fee-based clients.

Now, the wind gets taken out of our sails every once in a while when we're in a competition in an RFP, particularly in a defensive RFP, because there might be price pressure on an existing fee.

There may be increases in some parts of our portfolio, but we have downdrafts in others so we end up about the same.

With regard to our commission portfolios, we have been negotiating higher levels of commission and enhanced commissions based upon services we provide to carriers and we've been doing that on a worldwide basis and that is one of the contributors to our financial performance.

Peter, do you want to add on on the reinsurance side?

Sure, we still see it being very competitive on compensation with our competitors.

More of our clients are asking for justification in terms of what we earn, relative to value, and that's why we positioned ourselves over the past 12 to 24 months of continuing to invest in our analytical capabilities and the value-added services that we can provide, because just receiving brokerage for reinsurance placement will not be enough in today's competitive environment and the additional services that Guy Carpenter provides, we believe position ourselves to receive the appropriate remuneration in the industry.

So it's shifted, a lot more justification as to how and why you get paid, what you've been paid historically and we feel we're well-positioned to be able continue to grow that way.

Then can I ask a question on Mercer, just quickly for Michele.

The Alaska lawsuit's getting a lot of press recently, not so much on what's going on there but is it having any impact on your business as far as getting companies getting clients at all?

We have not seen any impact.

Thanks for the question.

We had a great quarter, I think, in revenue generation across all units.

One of the things that's interesting about what happened this quarter is we saw literally every one of our lines of sequential improvement in terms of revenue generation so we don't see any significant impact from Alaska on our business.

Next question, please.

Next is Larry Greenberg, with Langen McAlenney.

Just wondering if you can give us some color object the allocation on the increased pension cost by segment?

Vanessa?

Yes, Larry, think of it as roughly two-thirds for Risk and Insurance Services.

Okay.

Thanks.

And --

Okay, Larry.

Is there any color you could provide on the Alaska lawsuit?

Well, Larry, first of all, appreciate the question and I guess I can understand your interest and others' interest in the matter.

And I would refer you to our public filings to start with.

But having said that, broadly speaking, it's a civil suit regarding Mercer.

First, that Mercer underestimated future healthcare costs for two of the Alaska pension plans and, two, that Mercer failed to disclose a data entry error to the client back in 2002 and 2003.

So on the first point, Mercer believes its estimate of future healthcare costs were reasonable and in line with the projections made at the time by competitors and other actuaries nationally.

And on the second point, Mercer has acknowledged that there was a data entry error that wasn't disclosed to the client in those two years, but Mercer believes the error had no impact on the actual funding of the plans.

That's important.

In 2002 and 2003 Mercer advised the plans to substantially increase their contribution rates and the plans did not adopt Mercer's calculations.

So Mercer believes it has substantial defenses to these claims and we'll continue to defend ourselves.

The trial's in July in Juneau.

We take it very seriously but I hope you can understand, this is a pending litigation matter and so I really can't comment any more on it.

I appreciate that and thanks for the color you could provide.

Okay.

Good.

Next question, please.

Matthew Heimermann, JPMorgan is next.

First, on the comment that one thing that could help margins next year is the integration of acquisitions.

Could you give us a little insight into what the margin structure might look like for some of those businesses kind of before and after?

Well, yes, Matthew, the ones we're referring to primarily are in the Marsh & McLennan Agency, that initiative, and I guess I could, but Dan, you want to do it?

Yes, sure.

A couple of things.

As we described our Marsh & McLennan Agency strategy, a big part of that was we wanted to expand our business in the middle market, in the small accounts space, in some specialty areas, and even in areas like employee benefits and personal lines.

Those businesses generally, and the agencies that we have acquired, generally have margins which are superior to Marsh's existing U.S.

margin, and so over time, as we build that strategy, we will get margin lift in the U.S.

and overall within the segment as well.

It's going to take some time because these are -- we've got a very big base of revenue and these acquisitions are relatively small, but this is our strategy and we're committed to it.

So I would think that what you would see is -- you won't see much over the next couple of years because of the size of the acquisitions relative to the base.

But I think by about year three, you'll start to see lift.

You'll see a cumulative effect as each one adds to the other.

And with your platform when you put those -- they come with higher margins than your consolidated business now, but are you, given your infrastructure, is it fair to assume that you're effectively able to eliminate a significant portion of their fixed cost structure structure?

One, we're not integrating Marsh & McLennan Agency with Marsh, Inc.

So we're running the agency business as a separate standalone business so what you'll find is the agencies will be integrated with the overall structure of Marsh & McLennan Agency and there will be savings but it's not the savings that are generating the benefits for us.

And so you wouldn't see dramatic levels.

I think where you see the benefit of margin improvement is in those agencies where we're establishing hubs, we will also do bolt-in and bolt-on acquisitions to that which would be much smaller operations in which we would rely on the hub location to provide all the finance, HR, legal, compliance, back office capabilities and those would be highly margin accretive.

Okay.

That's helpful.

Thanks.

I guess and then just a follow-up on Kroll, can you talk about some of the trends driving the increased usage of your litigation services?

Yes, I sure can.

This is Ben Allen from Kroll.

A couple of things.

One is if you go back early in the year.

And I mentioned this on our last call as well.

You saw, consistent with economic conditions, some cautious behavior around litigation.

So while I don't think the volume will have changed much, the behavior changed.

So people were settling quicker.

People were delaying activity in lawsuits which impacts our revenue.

But you can't do that forever in litigation so we saw the activity levels of having to progress in these matters return to normal levels, and that and some of the good work that the Kroll Ontrack division did also contributed in terms of pricing and offering, et cetera.

So we're seeing it return back to what it's normally been.

But we shouldn't think about there as being a pipeline that needs to effectively unwind?

No.

Okay.

And then sorry to sneak in a third question.

Last question.

Can you just give us the revenue associated with the substance business you're selling?

For 2009 it was between $35 million and $40 million.

Okay.

Thanks much.

You're welcome.

Next question, please.

Our next question will come from Meyer Shields with Stifel Nicolaus.

Thanks.

Good morning everyone.

Good morning, Meyer.

I was hoping Peter could talk a little about how much the 2009 decreases in property catastrophe reinsurance rates, how much impact they had on.

Because I think that's one of the few areas where we're seeing rates actually get acceleratingly worse in 2010.

Just it was an impact on what?

You cut out on us.

I'm sorry, on revenues within reinsurance.

Revenues with reinsurance.

Okay, thank you.

A year ago, when we looked at first quarter of 2009, we started to see some lift in property catastrophe rates and we're not seeing that as we look into 2010, with January 1st property cat we saw a worldwide index of around decreased 6%.

Throughout the entire calendar year, we look at rate and restructure of programs along with any retention increases and we did not have a positive quarter this year from rate and from restructure of programs.

So in quarter one, two, three and four, that was all negative to our beginning or held portfolio and so our new business is what outpaced that.

So while we did see some rate increase in the early part on property cat, the overall impact on our portfolio for the calendar year was negative.

Okay.

And I guess this is a question for Dan.

Can you give us any ballpark estimate of the difference in commission rates between legacy Marsh business and the companies you're acquiring in agency?

It's a great question, actually, and I think that there's variability agency by agency.

I sort of look at it as that Marsh as an organization wins either way.

On the one hand, if we are acquiring an agency and they have a commission standard rate structure which is higher than Marsh with markets with which Marsh overall in the U.S.

does a great deal more business, you could imagine our negotiating stance with those markets about lifting Marsh to the level that they're paying the agent.

And if the converse is true and we acquire an agency in which Marsh's commission structure is higher than the agent, then we would immediately go and negotiate with carriers to lift that agency to Marsh's overall level.

So really, we win either way.

But I would say that it varies agent by agent.

In the first few that we have done, and bear in mind, we have looked at a lot of agencies, we've done three transactions but we have looked at structures of a lot of agencies.

On the first three that we've done, there's been tremendous similarity between the Marsh standard rates and the agency standard rates.

Okay.

Thank you very much.

Next question, please.

And next is Jay Cohen, Bank of America-Merrill Lynch.

Yes, two questions.

I guess first for Peter.

Can you talk about the trend of increasing retention among ceding clients.

Is that continuing into 2010?

Yes, it is.

When we saw such a strengthening of balance sheets both on the primary and reinsurance side, that taking either larger co-participations or increasing net retentions was a trend we saw in the fourth quarter and was a trend we saw for January 1 as well.

So I anticipate that will continue in 2010.

Great.

And then second question, more of a numbers question, as you talk about the adjustments to earnings, within Risk and Insurance Services there was a $21 million of settlement, legal and regulatory.

And in the footnote it said these costs were offset by a credit of $34 million related to insurance recoveries of previous legal expenses.

I'm wondering, is it 21 net of the 34?

Yes, it is.

Okay.

That's great.

Thank you.

Okay.

Good.

Next question, please.

Next we'll hear from Jay Gelb, Barclays Capital.

Thanks.

You were able to give us an outlook directionally on some of the major businesses.

I was hoping you could talk about risk insurance services in more detail in terms of organic growth and margins for 2010?

Let me do that I guess.

So, I'd say that organically flat to modestly up.

It's kind of hard to project more than that with the economy coming out of its worst but not necessarily being robust itself.

And then of course the insurance market.

But we still think we can do flat to modestly up across the segment.

When you look at the insurance business, I think it tends to have the cyclicality that the consulting business doesn't have.

It's more steady than the consulting business.

We have to rise and fall with the market.

Our strategy has been to grow both by acquisition and organically and so our emphasis is absolutely to get organic growth but we're going to grow and we're going to grow both ways and we have an emphasis on acquisitions, particularly the Marsh & McLennan Agency.

I outlined four things that we did in the broking business, Peter did a couple in reinsurance and we're going to look for more and more opportunities to grow through acquisition, particularly in this market.

And on the margin profile, if -- RIS was 18.6 in 2009 adjusted.

Where do you see that heading in 2010?

I made an exception and gave you guidance on margins, but it was an exception.

So I don't want to continue that.

Let me say it this way.

2010, yes, 2010 would be -- you would have to consider it a difficult year for margins.

We talked about growth.

To me, margin is one measure and profit is another and we intend to grow the Company, top and bottom line, particularly in this segment.

So I hope that helps you, Jay.

It does.

Thank you.

Okay.

Next question, please.

And our next question comes from Thomas Mitchell, Miller Tabak.

If you look at your overall mix of business in insurance brokerage and risk services, could you give us just a general idea of how much of that is earned in Euros and how much of that it earned in British pounds?

Not earnings.

Revenues.

I don't know.

Do we break that out?

I'm not sure we do.

We do give you regional information for -- let me put it this way.

We give you regional information and in Europe the U.K.

is the largest operation we have.

So it would be probably weighted to the U.K.

pound, then the Euro.

I think that's about the best I can do.

Okay.

Thank you.

Any time.

Next question, please.

We have a follow-up question, Matthew Heimermann, JPMorgan.

Could you give us the pension amortization expense in the fourth quarter.

Vanessa, do you have that?

No, we don't.

It will be in...

Is it fair to assume, just for modeling purposes, probably not too inconsistent with the prior quarters?

That's correct.

Really, the way we disclose it in our K is on a forward-looking basis and we said for 2009 that it was roughly the same as 2008 and as we just -- as you'll see in the K and we talked about in the call, it will be -- there will be an incremental increase for 2010 over 2009 and you can just put that ratably over the quarters.

That's fair.

I just wanted to make sure I had the basis correct.

Thanks.

Next question, please.

And we also have a follow-up question from Keith Walsh with Citi.

Yes, hi.

Thanks.

Two questions.

One for Peter.

Just on the reinsurance side.

Can you quantify how much of the 2009 organic growth was attributed to the large Chartis renewal you had and then I've got a question for -- a Mercer question.

Can you repeat the last part, the large ?

Chartis renewal.

Chartis renewal.

We don't break out specific client revenue, but overall it was a de minimus impact from our large five clients.

It remained fairly flat year-over-year, if you look at the full calendar for 2009.

Okay.

Great.

That's helpful.

And then just on Mercer, maybe if you could talk just briefly on the strategic need to keep the executive comp business, for example.

We've seen recently one of your competitors is going to exit that with the current scrutiny.

And then also talk about the public pension and public health clientele, again, one of your clients, one of your competitors exited that business several years ago.

Why deal with these states if they're going to be a potential litigation risk?

Thanks.

Both good questions.

Let's take the second one first.

On the public business, we do intend to stay in that business.

We think we provide a good service to those clients.

That said, we will not be staying in that business as long as limits of liability are not agreed to and the relationship with the client isn't better defined.

So we are taking a strong look at that and looking across our client base.

But there are good services provided to good people in that business and we don't want to just exit it.

Similarly, executive comp, we've taken a similar step to what you've read about from our competitors.

We have divested or spun-off, if you will, a piece of our executive comp business.

Specifically, it's the piece that desired to work strictly with boards.

We believe that being in the executive compensation business is an important service for Mercer across all the different services that we provide.

Many of our clients desire for us to be in there to help management, for example, because management needs executive compensation and remuneration advice.

Some boards also desire to have the same consultant and where they are clear with the conflicts and we are clear with how we represent and disclose ourselves, we feel it's an appropriate service for us to offer.

So generally we think in both those situations we have good services to offer but they need to be properly structured, properly disclosed and properly protected.

I think we could maybe take one more -- let's take one more question, operator.

And that final question will be a follow-up from Meyer Shields, Stifel Nicolaus.

Thanks.

Just really quickly.

I was hoping you could give us some indication for modeling purposes of the mix of stock and cash that you used for acquisitions?

Yes, Meyer.

We maintained our flexibility through 2009 to be able to use -- we filed the shelf and we used both stock and currency and we don't really have a guideline.

We assess each acquisition individually and we're not going to give guidance on whether we're using stock or cash for the acquisitions.

We certainly want -- we want them all to be accretive and sometimes cash is the appropriate way to go.

Sometimes they have to be constructed in a stock offering, through the idiosyncrasies of that particular company.

We're cognizant of it.

We have maintained our cash as we should have in difficult times.

Now we have it.

We would use it appropriately.

Okay.

Thank you everybody.

Let me just close by -- first of all, thanks for the interest, thank my colleagues for a great year and all the employees who are listening, thanks to you too.

And we'll talk to you next quarter.

Thank you very much.

And that does conclude our conference call.

Thank you for your participation.