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Marsh and McLennan Companies (NYSE:MMC)

Q4 2009 Earnings Call

February 10, 2010 8:30 am ET

Executives

Brian Dueppereault – President, Chief Executive Officer & Director

Vanessa A. Wittman – Chief Financial Officer & Executive Vice President

Daniel S. Glaser – Chairman and Chief Executive Officer of Marsh

Peter Zaffino – Chief Executive Officer of Guy Carpenter

Michele Burns – Chief Executive Officer of Mercer

John P. Drzik – Chief Executive Officer of Oliver Wyman

Ben Allen – Chief Executive Officer Kroll

Mike Bischoff – President of Investor Relations

Analysts

Keith Walsh – Citi

Brian Meredith – UBS

Larry Greenberg – Langen McAlenney

Matthew Heimermann – JP Morgan

Meyer Shields – Stifel Nicolaus & Company, Inc.

Jay Cohen – Bank of America Merrill Lynch

Jay Gelb – Barclays Capital

Thomas Mitchell – Miller Tabak & Co., LLC.

Welcome to MMC’s conference call. Today’s call is being recorded. Both quarter and yearend 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 10K for the year ended December 31, 2009 which will be available on the MMC website by March 1, 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 will now turn this over to Brian Duperreault, President and CEO of MMC.

Brian Dueppereault

Thank you for joining us to discuss our fourth quarter results reported earlier today. I’m Brian Dupperreault, President and CEO of MMC. Joining me and presenting on the call today is Vanessa Wittman, our CFO. I’d also like to welcome our operating company’s 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 President 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 we 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. 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 bet at a level competitive with other larger 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 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 a 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 brokering 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 in profitability and a solid margin improvement in 2009. Management augment and underlined 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 savings 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 enterprise 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 has 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 in revenue. 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 and 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 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 reestablishing higher levels of profitability. They produced significant growth in operating income in both the third and fourth quarters compared with recent periods. Last week, we announced an agreement to sell Kroll Laboratory Specialist, Kroll’s substance abuse testing business for $110 million. We expect that transaction to close in the fourth quarter. Entering 2010 Kroll is 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 stronger complementary fit with Marsh both operationally and geographically. This transaction which is expected to close early in the second quarter will deepen Marsha’s presence in the UK, Hong Kong, Singapore, China and the Middle East.

As part of this agreement we also entered in to a strategic partnership with HSBC Bank that gives us preferred access to provide insurance brokering 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. In February of this year we acquired Haake Companies, based in Kansas. Haake has annual revenue of $11 million. Our strategy is to establish 10 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 the 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.

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.

Vanessa A. Wittman

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. 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 law suits, EPS in the fourth quarter was $0.07 compared to $0.15 in the fourth quarter of 2008. On an adjusted basis EPS was $0.38, 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 one, our strong fourth quarter of 2008 when operating income rose 28% over the fourth quarter of 2007 and two, the headwinds each of our operating companies faced on 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 on 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 law suit. 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 recoverable we received $163 million in 2009 which was included in our yearend cash position. The remaining $67 million was received in January. The net settlement paid by MMC of $205 million is tax deductable and will contribute to a sizeable 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 continued 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 brokering, 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. 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. 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 comparisons 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 and communication was offset by gains in other practices. The retirement and health and 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. 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.

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 business, we expect strong growth in profitability in 2010.

Now, I would like to make a few comments about our schedule of non-GAAP measure. MMC has undergone major restructuring actions over the past several years. Marsh implemented wide spread initiatives to improve profitability during the past 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 expenses will increase in 2010 reducing operating income by approximately $80 million year-over-year.

We estimate that the 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. 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 yearend, a reduction of $100 million from the end of 2008. The yearend figure includes the impact of funding the settlement of the securities lawsuits but as I said earlier does not include all of the insurance recoverable 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 remaining shares were used for employees’ stock plans.

With that, let me turn it back to Brian.

Brian Dueppereault

Well, we’re ready to begin our question and answer session. Just as a reminder we have our operating companies’ CEOs also on the call available for you. With that, operator let’s start the G&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Keith Walsh – Citi.

Keith Walsh – Citi

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

Vanessa A. Wittman

Starting with our normal position Keith is that currency overall was de minimis. Last year we gave guidance for Mercer specifically because of the anomalous movements in the currencies against each other at the beginning of the year. We gave you guidance early last year that over the first three quarters we expected the impact on Mercer alone to be between $60 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 Walsh – Citi

If you don’t mind, can you just quantify what that impact in the quarter was for Mercer?

Vanessa A. Wittman

We’re not going to quantify it.

Keith Walsh – Citi

Then for Dan, I think all of us on the line understand pricing and the impact on your revenues but maybe if you could talk a little bit about the leverage of the economies that your business has because I think that’s something maybe that we don’t understand quite as well.

Daniel S. Glaser

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 has been soft 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 defect 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 bounce back on them in 2010. The other impact the economy has is exposure units. I travel around the world meeting with clients and I’ve 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.

Operator

Your next question comes from Brian Meredith – UBS.

Brian Meredith – UBS

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

Daniel S. Glaser

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 the decision making in the company, etc.

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. Our mantra internally is 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. 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. We are in a much strong position now to compete for talent on a comp basis and the people who work at Marsh, it’s own pay packets have been improving along with our profitability improvements.

Brian Meredith – UBS

That was a great answer but I was also talking about as far as broker compensation and commission rates and fees.

Daniel S. Glaser

In terms of broker comp in general we haven’t been sitting on our hands over the past 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 were getting small increases generally across the portfolio in our fee based client. Now, the wind gets taken out of our sales every once in a while when we’re in competition in an RFP particularly a defensive RFP because there may be price pressure on an existing fee. So we’re getting increases in some parts of our portfolio but we have down drafts in other so we end up about the same.

With regard to our commissions portfolio we have been negotiating higher levels of commission and enhanced commission 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 Zaffino

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 relatively to value and that’s why we’ve positioned ourselves over the past 12 to 24 months of continue 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 renumeration 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 feel we’re well positioned to continue to grow that way.

Brian Meredith – UBS

Then can I ask a question on Mercer just quickly for Michele? The Alaska law suit is 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 companies getting clients at all?

Michele Burns

We have not seen any impact. We had a great quarter with revenue generation across all units. One of the things that is interesting about what happened this quarter is we saw literally every one of our lines a sequential improvement in terms of revenue generation so we don’t see any significant impact from Alaska on our business.

Operator

Your next question comes from Larry Greenberg – Langen McAlenney.

Larry Greenberg – Langen McAlenney

I was just wondering if you can give us some color on the allocation of the increased pension costs by segment?

Vanessa A. Wittman

Larry, think of it as roughly two thirds for risk and insurance services.

Larry Greenberg – Langen McAlenney

Is there any color you could provide on the Alaska law suit?

Brian Dueppereault

First of all we 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 the 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 to the client back in 2002 and 2003.

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. 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 is important, in ’02 and ’03, Mercer advised the plans to substantially increase their contribution rates and the plans did not adopt Mercer’s calculations.

Mercer believes it has substantial defenses to these claims and we’ll continue to defend ourselves. The trial is in July in Juno. 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.

Operator

Your next question comes from Matthew Heimermann – JP Morgan.

Matthew Heimermann – JP Morgan

A couple of questions, first on the comment that one thing that could help margins next year is the integration of acquisitions. Can you give us a little insight in to what the margin structure might look like for some of those businesses kind of before and after?

Brian Dueppereault

The ones that we’re referring to are primarily in the Marsh McLennan Agency, that initiative. I guess I could but Dan will do it.

Daniel S. Glaser

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 account 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 US margin and so over time as we build that strategy we will get margin lift in the US and overall within the segment as well.

It’s going to take some time because 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. 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.

Brian Dueppereault

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

Matthew Heimermann – JP Morgan

With your platform, those come with higher margins than you 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?

Brian Dueppereault

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 agency will be integrated with March McLennan Agency, the overall structure of March McLennan Agency and there will be savings but it’s not the savings that are generating the benefit for us 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 fold in and bolt on acquisitions to that which will be much smaller operations and 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.

Matthew Heimermann – JP Morgan

Then just a follow up on Kroll, can you talk about some of the trends driving the increase usage of your litigation services?

Ben Allen

A couple of things, one is we use a bill back early in the year. I think I mentioned this on our last call as well, you saw consistent with economic decisions some cautious behavior around litigation so while I don’t think the volume will have changed much, the behavior has changed so people were settling quicker, people were delaying activity and lawsuits which impacts our revenue but you can’t do that forever in litigation. So what we saw is the activity levels having to progress on these matters and return to normal levels. That and some of the good work that the Kroll Ontrack division did also contributed to it in terms of pricing and offerings. So we’re seeing a return back to what it’s normally been.

Matthew Heimermann – JP Morgan

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

Ben Allen

No.

Matthew Heimermann – JP Morgan

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

Ben Allen

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

Operator

Your next question comes from Meyer Shields – Stifel Nicolaus & Company, Inc.

Meyer Shields – Stifel Nicolaus & Company, Inc.

I was hoping to get Peter to talk a little bit about how much the 2009 increases in property catastrophe reinsurance rates impact had on you because I think that’s one of the few areas where we’re seeing rates actually get worse in 2010.

Peter Zaffino

It was an impact on what? You cut out on us.

Meyer Shields – Stifel Nicolaus & Company, Inc.

On revenues on reinsurance?

Peter Zaffino

Well, 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 in to 2010. With January first property CAT we saw a worldwide increased around a decreased 6%. But when we capture that information 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 businesses 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.

Meyer Shields – Stifel Nicolaus & Company, Inc.

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?

Daniel S. Glaser

It’s a great question actually and I think there’s variability agency by agency. I sort of look at it as Marsha 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 US does a great deal more business. You can 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 immediate 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 have 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 similarities between the Marsh standard rates and the agency standard rates.

Operator

Your next question comes from Jay Cohen – Bank of America Merrill Lynch.

Jay Cohen – Bank of America Merrill Lynch

Two questions, I guess first for Peter, can you talk about the trend of increasing retention among seating clients. Is that continuing in to 2010?

Peter Zaffino

Yes it is, when we saw such a strengthening of balance sheet both on the primary and reinsurance side that taking either large co participations or increasing net retentions was the trend we saw in the fourth quarter and it’s a trend we saw for January 1 as well so I would anticipate that will continue in 2010.

Jay Cohen – Bank of America Merrill Lynch

Then second question, more of a numbers question, as you talk about the adjustments to earnings, within risk and insurance services there was this $21 million of settlement, legal and regulatory and then the foot note 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?

Vanessa A. Wittman

Yes it is.

Operator

Your next question comes from Jay Gelb – Barclays Capital.

Jay Gelb – Barclays Capital

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?

Brian Dueppereault

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 is. We have to rise and fall with the market and so our strategy has been to grow both by acquisition and organically and so our emphasis is absolutely to get organic growth.

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 brokering business, we even did a couple in the reinsurance and we’re going to look for more and more opportunities to grow through acquisition particularly in this market.

Jay Gelb – Barclays Capital

On the margin profile, if RIS was 18.6 in 2009 adjusted where do you see that heading in 2010?

Brian Dueppereault

I made an exception and gave you guidance on margins but it was an exception so I don’t want to continue that. But, let me say it this way, 2010 would be you 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. I hope that helps.

Operator

Your next question comes from Thomas Mitchell – Miller Tabak & Co., LLC.

Thomas Mitchell – Miller Tabak & Co., LLC.

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 is earned in British Pounds? Not earnings revenues.

Brian Dueppereault

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 UK is the largest operation we have so it would be probably weighted to the UK pound than to Euro. I think that’s about the best that I can do.

Operator

Your next question comes from Matthew Heimermann – JP Morgan.

Matthew Heimermann – JP Morgan

Could you just give us the pension amortization expense in the fourth quarter?

Brian Dueppereault

Vanessa do we have that?

Vanessa A. Wittman

No, we don’t.

Matthew Heimermann – JP Morgan

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

Vanessa A. Wittman

That’s correct. Really, the way that we disclose it on our K is on a forward-looking basis and we said for ’09 that it was the roughly as ’08 and as you’ll see in the K and we talked about in the call, there will be an incremental increase for 2010 over 2009 and you can just put that ratably over the quarters.

Operator

Your next question comes from Keith Walsh – Citi.

Keith Walsh – Citi

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 [charters] renewal?

Peter Zaffino

We don’t break out specific client revenue but overall it was a de minimis impact from our large five clients who have remained fairly flat year-over-year if you look at the full calendar for 2009.

Keith Walsh – Citi

Then just on Mercer, maybe if you could talk just briefly on what 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. Then also, talk about the public pension and public health clientele, again 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?

Michele Burns

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 or 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 and specifically a piece that desired to work specifically [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 renumeration advice.

Some boards also desire to have the same consulting and where they are clear with the conflicts and we are clear with how we represent and disclose ourselves, we feel it is 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.

Operator

Your final question comes from Meyer Shields – Stifel Nicolaus & Company, Inc.

Meyer Shields – Stifel Nicolaus & Company, Inc.

Just really quickly I was hoping you could give us some indication for modeling purposes of the mix of stock and cash you use for acquisitions?

Vanessa A. Wittman

We maintained our flexibility through 2009 to be able to use – we filed the shelf and we used both stock and currency. We don’t really have a guideline. We access each acquisition individually and we’re not going to give guidance on whether we’re using stock or cash for the acquisitions.

Brian Dueppereault

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 for the idiosyncrasies of that particular company. We’re cognoscente of it, we have maintained our cash as we should have in difficult times. Now we have it, we would use it appropriately.

Thank you everybody. Let me just close by first of all thanks for the interest, I’d like to thank my colleagues for a great year and all the employees who are listening. Thanks to you too. We’ll talk to you next quarter. Thank you very much.

Operator

That does conclude our conference call. Thank you for your participation.

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Source: Marsha and McLennan Companies Q4 2009 Earnings Call Transcript
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