Good day everyone. Welcome to today's 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'll 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 am 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 operation company 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'll make some brief comments on the quarter overall before turning it over to Vanessa to provide additional information regarding our financial results. Then we'd 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 drives at Marsh, and Peter and his team have significantly strengthened Carpenter.
The main drive 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 re-engineering 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 1,000 basis points from the end of 2007 or a little less than two years.
This is tremendous progress. It's 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's clear that we've been successful in achieving two important objectives we set for ourselves in January of 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 continue to reflect 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 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 had been working to remake Guy Carpenter into a firm widely regarded by the industry as the preeminent insurance 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've 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 Limited and New Castle Reinsurance Company. Previously, he was CEO of ACE Tempest Reinsurance Company Limited 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've 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 U.K., 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 on to our consulting segment, both Mercer and Oliver Wyman continued 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 so our year-over-year growth in the quarter in financial services, its largest businesses. 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're 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 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 Limited, a specialty reinsurance broker. This deal is consistent with Carpenter's strategy to supplement organic growth with targeted acquisitions.
Finally, I'd like to discuss Marsh & McLennan Agency. As you'll remember, we announced a year ago that we would launch a new U.S. 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. Over the course of 2009, Dave and his team have built a pipeline of potential acquisition candidates.
That we've gone this long with announcing any deals speaks to the measured approach we've taken to build Marsh & McLennan Agency. We have moved 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 personal line products that customers at the local level through a dedicated sales and service force. So our approach to acquisition is thoughtful and 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've made at MMC, most recently illustrated by third quarter results and we remain excited about MMC's long-term prospects.
Now let me turn it over to Vanessa.
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'd like to review the performance of our operating segment. 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 remained stable and new business generation remained 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've invested in our front line capabilities, training programs for our colleagues and value-added technology. We've also continued to increase the levels of variable compensation and response to better operating performance. While Marsh will continue to enhance the efficiency of its operations, its formal restructuring plans should be substantially completed by the end of this year.
Moving to reinsurance broking, Guy Carpenter continued its strong revenue performance this quarter. Its continued year-over-year growth in 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. Any way 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 and benefits and outsourcing.
For the first three quarters, revenue at its two largest practices, retirement and health and benefits, held up reasonably well, each decreasing by only 2%. Outsourcing declined 9% and investment consulting and 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's 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 part 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 margin 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%. On track, Kroll's largest business had revenue growth of 1%, its best performance in the past four quarters. And we saw a revenue stabilization on a sequential basis for Kroll's other two business units, risk mitigation and 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 MMCs 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 30th. MMC has no outstanding commercial paper or bank loans, and we recently closed a new, $1 billion, multi currency, three-year revolving credit facility that replaced our previous $1.2 billion revolver.
With that, let me turn it back to Brian.
I'd 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). Your first question comes from Keith Walsh – Citi.
Keith Walsh – Citi
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 doing this for several more years than you, as far as the turnaround is concerned. 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?
Well, let's talk about Q4 and then talk a little bit about beyond. Clearly we're beginning to lap some of the major initiatives that we've 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 in not an expense story. It's a turnaround story. We have focused on expenses over the past couple of years and I'm 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 haven't been investing in the business. We've 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. So actually, since early 2008, we've hired 186 managing directors and senior vice presidents, all focused on ways to grow the business.
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 top line growth. We've made, as Brian said in his opening comments, significant investments in senior executives, but a focus on top line growth, which we've been able to achieve.
If you look at the third quarter we had strong new business, but that's on top of having a strong new business for the third quarter in 2008. We believe there's 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 top line growth while managing expenses to maximize margins.
Keith Walsh – Citi
Dan, just to follow up specifically on your answer, you know, I appreciate you said 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've 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 can just answer that, thanks.
A couple of things, one, in a down revenue environment, it's always more difficult right 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've made this year and I expect some delivery of an improvement. One thing to bear in mind, I mean, the economic impact of – it's pretty tremendous, but where there's growth we're capturing that level of growth. So I mean 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're capturing it.
And so I do think that we're well positioned. I expect 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.
(Operator Instructions) Your next question comes from Brian Meredith – UBS.
Brian Meredith – UBS
A couple of questions here, the first one, can 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've done over 90% or the U.S. business has flowed through hubs. So they're working very well and as you recall, the hubs do a lot of different things for us. One, first and foremost, for clients, it enables us to negotiate better terms and conditions and have a much better crack at contract certainty and s, 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. I mean, 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-in]-to-quote ratios and make them more competitive. And so in my view it's 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's really between us and carriers and it's variable, but I would say you know 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.
Brian Meredith – UBS
Quick follow-up, can I get you also to comment on your views on the market conditions, commercialized pricing and you know 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, some parts of trade credit. The overall bulk of the property and casualty market is soft and I fear it's getting softer. And so from that standpoint I'm not counting on any tailwind, be it, to help us next year with regard to market pricing.
We'll here from Cliff Gallant – Keefe, Bruyette & Woods.
Clifford Gallant – Keefe, Bruyette & Woods
Just had 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, and I realized 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?
Well, share repurchases, I've gotten this question before and as I've said to me you take – you have to decide what your priorities are and what is the best use. 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 wouldn't have been available in prior times or if available would've been much pricier.
So and we wouldn't have been able to take advantage of them anyway as I mentioned earlier because we weren't ready to take on additional issues, but today that's changed. And so I think for us the best use of our capital resources is to build this business in a strategic way and so that's what I'm going to do. We always evaluate the best use, and frankly, if share repurchases was the best use of capital we would do that but I don't think that's the case right now.
These acquisitions, I think particularly the ones in the Marsh McLennan agency space individually, yes, they'll be relatively small. Of course the guy selling to us won't think that way but they're relatively small, and collectively I think they'll be mighty. Now, in the beginning one or two it's like a drop by drop but eventually it's going to be quite large. And 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're going to find that eventually it's going to be a significant part of the business. And that may take us a couple of years, two, three years. But this is a very important initiative for us and we're going to do it right and it is no – it's a marathon in a way, so we want to make sure that they're the right ones for us, compatibility is important. But I think you'll see before you know it they'll be a very, very important part of who we are.
Our next question will come from Meyer Shields – Stifel Nicolaus & Co.
Meyer Shields – Stifel Nicolaus & Co.
Two quick questions, one, on the reinsurance business is there any way of either quantifying or estimating the impact of the Aon Benfield merger in terms of driving revenues to competitors like Guy Carpenter?
Well, when we look at and analyze our new business each quarter, for us, we were successful in many facets. We were successful of 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 in expanding reinsurance opportunities through discussing more around capital structure and how they're going to position themselves for 2010. So there's no specific trend in terms of where we're winning our new business but we've been successful in all areas.
Meyer Shields – Stifel Nicolaus &Co.
Yes, 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 quantify – does that affect, I should say, revenue growth at all? Is that tailwind at some point expect to avert?
Yes, 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 can't 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 flow or backwards flow that would otherwise go to wholesalers.
We'll hear from Matthew Heimermann – JP Morgan.
Matthew Heimermann – JP Morgan
Couple big picture question if I may, just on the acquisition can you talk a little bit about what return hurdles or strategic hurdles you're using when you analyze these and maybe kind of the timeframe over which you think about these potential acquisitions?
Well, the number side, yes, I would say – I'm not going to give you a list of hurdles but there are quite a few we actually go through. Yes, obviously they have to be accretive and all that and they have to have good return on the investment. And we're disciplined about that so they really do need to match those. So that's the, I guess that's the beginning of it because you mentioned the strategic part and the quality of the people in that organization to me are always the most important.
It's the creed of nature from a personnel point of view that will ultimately win the day. It doesn't – you can overpay for something that's terrific and you'll 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. And so but if you do both, now you got a winning combination and that's what – that's the way we're going about it. So the timing is – well acquisitions and timing they're – it's always very, very difficult.
I will tell you that on the agency side which is our biggest initiative we have an excellent pipeline and we've 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's okay, they're quality companies. But I think the timing is going to be good but it's as I said we're 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 – they were coming up before with just – I love to talk to you but I can't 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.
Matthew Heimermann – JP Morgan
Yes, no trouble, just 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's 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'd like to see that pretty fast, first year.
Matthew Heimermann – JP Morgan
Then the other question I had was your comments, particularly on the consulting, feeling like you were seeing some stabilization and the worst was behind you. I guess could you clarify is that just you're talking about stabilization in terms of the trends aren't getting any worse or you're 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's kind of what we're talking about with stabilization and comparisons. But I think John, who's with us in Dubai might give you a little bit more color on what he's seeing in terms of stabilization, so John, can you help us out?
I'm sorry Brian, am I on? Yes, so I think what we're seeing is that the bottom for us in terms of consulting demands was really in the first quarter of 2009 and it's since then there's been a gradual improvement, so it's still a decline versus 2008 but there's 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're 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's 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'll 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.
And 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's the [H&B] business or whether it's the 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 businesses because we do have a business that's stratified across, if you will, three, we call them pillars, but basically consulting, outsourcing and investments.
This quarter our investments pillar was quite strong, 8% growth in this quarter over strong comps actually and the assets under management – 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, if you could just fill in what you see in Kroll?
Yes, I think similar kind of circumstance, so if you look at the last three quarters we've seen stabilization and revenue on a sequential basis, a bit of a rise in Q3 and obviously with the expense reductions better profitability. We're starting to see stabilization in the employment markets. Obviously we're not a proxy for the broader one, but in the ones that we play heavily in their stabilizing.
Litigation seems to be returning to normal. I don't think you're going to see that there was 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, more normal environment, and M&A seems to be returning a bit. So that kind of lines up what you're hearing from the others.
Your next question comes from Jay Cohen – Bank of America Merrill Lynch.
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?
Sure Jay. We're 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%.
Your next question comes from Jay Gelb – Barclays Capital
Jay Gelb – Barclays Capital
I have three questions; they're all on risk 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'd be helpful?
So Dan and Peter, you want to do an organic revenue growth back to zero? Well, that would be a decline for you Peter, but anyway let's.
So to me a lot of our focus within Marsh is right now on organic growth. In fact I've got Joe McSweeney and [Alex Macharsky], 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 strategic hiring 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're implementing that now and we'll continue to do that through next year.
I've taken one of my senior executives, Hank Allen, and asked him to lead our multi-national 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're 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'll continue to do that. Now, that's all saying what we're doing in order to drive organic growth within the firm.
Obviously, we don't control the macro environment. We're a part of that macro environment. Where there is GDP growth we're capturing it. In fact we're doing better than that and I think that we're performing very well in many parts of the world in terms of growth.
Just to give you an idea, I mean 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 with growth of more than 20%. So the organization is positioned to grow and so therefore I think that we're poised – my own nose tells me that there's growth to be had.
Now we're 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 minus one. So on the continued run rate to all the way from flat to plus one, plus two, plus three and one of 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's my view with regard to organic.
Maybe I'll touch on the contingencies and then I'll hand over to Peter for his views on organic growth within this segment. In terms of contingent income, we've 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're forced to play by different rules which puts us at a disadvantage from a revenue, margin and a cost perspective relative to most of the brokerage companies out there.
So, we're – 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 haven't 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've been pretty successful in doing that.
And so I don't look at, as I've said before, we're 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 haven't made those determinations where we're operating in the environment that we are held to via the settlement agreements and that's where we'll continue to operate.
In the reinsurance market in 2010 there will be more headwinds. You're 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 over all we're underweight in the international business. We've made significant strides in 2009, have had 20 plus percent organic growth in our Asia-Pacific region.
But in the U.K. and Europe there's still a ways to go and that's going to be a huge focus for us in 2010 we've transferred [Britt Newhouse] over to the U.K. on a full time basis. He's been with Guy Carpenter for 30 plus years; he's 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 U.K. 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.
I was just going to say you asked us about the expenses, too, so we've had a positive relationship between organic growth and expense growth. I don't know if you guys want to comment any more about that? Yes, I would just say you can call me an old fashion P&L guy. I think that expenses are aligned with revenue. If you don't see our revenue grow you're not going to see our expenses grow. Period.
Your next question comes from Larry Greenberg – Langen McAlenney.
Larry Greenberg – Langen McAlenney
It's 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 break even fourth quarter. Do those rules of thumb still apply?
The answer's yes. The answer is yes Larry.
Our next question comes from Thomas Mitchell – Miller Tabak & Co.
Thomas Mitchell – Miller Tabak & Co.
I just want to try to clarify what I thought I heard was a kind of warning on 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 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 sort of want to double check that, is that right?
Yes, I mean, we had a tremendous improvement in the third quarter over the year before so we're not predicting that change in the fourth quarter Thomas but we are continuing the process of improving this margin and getting it up at least to our peer levels and then we'll go from there to beat them.
So no it's not a warning here. It's just a recognition that you've got to look at it sequentially. You got to recognize seasonality and with those caveats we're expecting improvement.
Thomas Mitchell – Miller Tabak & Co.
And then also on the – sort of in the whole group of consulting businesses if we put them together it looks like you've really gotten your costs lined up with the revenue trends. Can we expect again going forward do we think that we pretty much seen the low in operating income if we include Kroll in the whole group?
Yes, I think throwing Kroll in or taking them out the – to me, what we've done here – I know we've said okay we're going to go into this economic downturn. We have to pare our expenses to match our revenues much like Dan said.
But what we didn't want to do was destroy the company in the process. We not only didn't destroy the company but as we pointed out Michele and John have and Ben have actually added. We haven't stopped investing, so we're better company today coming out of this thing than when we went into. So for us that's a great story. We think our margin improvement will be very, very good as revenues return. So yes, next year is feeling better for me frankly.
Your next question comes from [Teri Shoe].
You were addressing the issues of margins. Was it – were you talking specifically, Brian, about the consulting margins in answer to Tom Mitchell's questions?
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.
Business insurance. Now on the consulting side if we looked at the aggregate margin you have third quarter versus the first half was much improved but it still on a nine month's 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 seasonality will – its fourth quarter is lighter.
Right but both for consulting and Kroll because the last couple of quarter from '08 on it's been, I mean, it's been challenging. It's hard to know what's 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 and so that the full year will be much better?
I'm not sure what – whether, I mean, what's 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?
All right. So I won't quantify it [Teri], but what I would tell you is looking at this year and what they've had to do to get their margins down as revenue improves the margins will improve. Now – and I think it'll be there will be some leverage in 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 doesn't improve and if revenue improves it will improve.
It's 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 a huge head winds that they've had to overcome this year.
Okay, so as we look into just for consulting for fourth Q it will be at least as good as third Q and then going into 2010 as well is that a correct comment?
Teri, no, well, I was talking about 2010. Fourth quarter we have to let this year play out. I mean we're lapping some issues. As Michele said her – the impact on Mercer was a little late relative to the others. So there's a little bit of timing issue here, so don't hold me to a single quarter.
And then a question on investment income I think Michele you gave guidance for the fourth quarter. How should we look at like into 2010 if you can refresh our memory as to what's the investment base and what would be kind of a normalized return if there is such a thing?
That's all right. 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.
Teri, let me move on if that's okay. Thanks, [Teri].
Your next question comes from Keith Walsh – Citi.
Keith Walsh – Citi
Just two quick ones, for Peter, Guy Carpenter the revenue's at plus six. 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've got a follow-up.
Yes, 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 probably doesn't equate to what you saw in the first and second quarter is just a little bit more headwinds on retentions and then some [race]. And so we started to see some fall off from the third quarter, although not significant.
Keith Walsh – Citi
Okay, so renewals actually were a big driver of that plus – a bigger driver of the plus six in new business. Is that what you're saying?
No. 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 retentions.
There was less pressure from retention, right, so your new business actually shows the growth and that's the point. Yes.
Keith Walsh – Citi
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 break down between units and pricing growth on both of those components?
That's one of those multi-variable questions that – but let me address it this way. When we're looking at the, or when we – when we're looking at the growth in the components of growth within new business versus retention, our new business rates for any organization are actually very strong. I've looked and obviously we've been looking at other companies over the course of the last year or so, looking at what new business has generated as a percentage of their base.
And then I look at what we do at Marsh and we produce an awful lot of new business. That's 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, right? So that is an awful lot of new business and so where we've been I would say, winning in the marketplace.
Now, having said that, and 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've ignored the – I don't ignore it – but I discount the period in March of five, six and seven in terms of where the account retention levels were and I look to 1002, 2002, 2003, and we're back to those levels. So our account retention levels are very strong and in most parts of our business in most geographies they're in the mid-90s.
I think we should take one more question and then draw this to a close. Is there another question?
Your final question comes from Meyer Shields – Stifel Nicolaus & Co.
Meyer Shields – Stifel Nicolaus & Co.
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 million for the quarter in foreign exchange.
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.
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