Welcome to Marsh & McLennan Companies conference call. Today's call is being recorded. Fourth quarter and full year 2010 financial results and supplemental information were issued earlier this morning. They are available on the Marsh & McLennan Companies' website at www.mmc.com. Before we begin, I would like to remind you that the remarks made 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 2011 or subsequent periods are forward-looking statements, and Marsh & McLennan Companies actual results may be affected by a variety of factors.
Please refer to Marsh & McLennan Companies most recent SEC filings, as well as the company's earnings release, which are available on the Marsh & McLennan Companies 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 would now like to turn the conference over to Mr. Brian Duperreault, President and CEO of Marsh & McLennan Companies.
Good morning. Thank you for joining us to discuss our fourth quarter and full year results as reported earlier today. I'm Brian Duperreault, President and CEO of Marsh & McLennan Companies. Joining me in presenting on the call today is Vanessa Wittman, our CFO. I'd also like to welcome our operating company CEOs to today's call, Dan Glaser of Marsh, Peter Zaffino of Guy Carpenter, Michele Burns of Mercer, and John Drzik of Oliver Wyman. Also with us is Mike Bischoff, our Head of Investor Relations. Let's get right to it. I'm very pleased with our performance, not only in the fourth quarter, but for the full year as well. When we reported our results a year ago, we indicated that our primary goal for the year ahead was to drive top and bottom-line growth across the enterprise.
Our plan was to grow revenue organically and through strategic acquisitions. A year later, I'm delighted to be able to say we've met both our objectives. Let's start with the fourth quarter. We produced very strong revenue growth in the fourth quarter with reported growth of 9%. On an underlying basis, the overall increase for the company was 6%, including 6% growth at Marsh, 3% at Guy Carpenter, 5% at Mercer, and 8% at Oliver Wyman. We are also very pleased with our level of revenue growth for the full year, which was 7% as reported and 3% on an underlying basis. Additionally, we are encouraged that revenue performance got stronger as the year progressed. In both the third and fourth quarters, all our operating companies produced revenue growth on both a reported and an underlying basis. Importantly, we achieved this solid revenue growth while effectively managing expenses.
Overall adjusted underlying expenses grew only 2% last year, despite having to absorb a significant increase in pension costs. While we continue to manage our business efficiently, we have also been actively reinvesting in our future. Major investments, not only in 2010 but over the last three years, include key strategic hires, value-added technology for clients, product development, and expanded analytical capabilities within each of our operating companies. By combining revenue growth with expense management, we produced excellent earnings growth in 2010. For example, adjusted operating income increased from $1.3 billion in 2009 to $1.5 billion in 2010, an increase of 14%. As you are aware, we decided after a thorough strategic review to divest Kroll, a transaction we completed last August at a very satisfactory price. Aggregate cash proceeds, including the prior divestment of selected Kroll business units and related tax benefits, will be $1.6 billion.
Overall, Marsh & McLennan Companies delivered a very impressive performance last year, both from a financial and a strategic perspective. Now let's turn to our operating segments. Both Risk and Insurance Services and Consulting produced good underlying revenue growth in 2010. Adjusted operating income increased 10% at Risk and Insurance Services and 16% at Consulting. Both segments also increased adjusted operating margins for the year. We were pleased that Marsh's underlying revenue growth rate increased each quarter during the year. This growth was fueled by new business development. Guy Carpenter also had an excellent year with good underlying revenue growth, a continued focus on expense control, and strong growth in adjusted operating income. We are especially pleased with the expansion of its international operations, reflecting one of Guy Carpenter's strategic initiatives. Our consulting operations also performed well in 2010.
Mercer reported underlying revenue growth of mid-single digits in both the third and fourth quarters, and Oliver Wyman's underlying revenue growth of 8% in the fourth quarter capped a very good year. Importantly, both companies grew adjusted operating income in 2010, and the segment margin rose 110 basis points. Prudent and effective capital management, including disciplined redeployment of excess cash into accretive acquisitions and share repurchase, will also contribute to long-term earnings growth and increasing shareholder value. We continue the development of the Marsh & McLennan Agency with nine acquisitions over the past 15 months. These acquisitions are expected to add annualized revenue approaching $300 million. Additionally, in 2010, Mercer completed several acquisitions to broaden its client capabilities. The most recent acquisition of Hammond Associates, which established Mercer as a leader in investment consulting for endowments and foundations.
It's also worth noting that we initiated our share repurchase program in the fourth quarter. As we indicated at Investor Day, our goal is to reestablish Marsh & McLennan Companies as an elite global growth company, not just in relation to our direct competitors, but with respect to other leading global companies. Our strategy focuses on the characteristics that create exceptional value and superior return for investors, long-term growth, low capital requirements, high cash generation with disciplined capital management, and a low-risk profile. Emphasizing these four pillars should produce 10% organic growth in operating income over the long term. We view 2010 as a very successful year for the company, and we are confident about our prospects for the coming year. Let me turn it over to Vanessa to review our fourth quarter and full-year results in more detail.
Thank you, Brian, and good morning, everyone. I'll begin with an overview of Marsh & McLennan's results for the quarter. I'll discuss the results of each operating company. I'll close with some observations regarding our financial position, including pensions. On a GAAP basis, earnings per share in the fourth quarter was $0.37, which included $0.34 from continuing operations. The $0.03 from discontinued operations was primarily insurance recoveries related to Putnam. On an adjusted basis, EPS in the fourth quarter of 2010 increased 8% to $0.41 from $0.38 in the fourth quarter of 2009. In September, we funded a $550 million debt maturity. This reduced our interest expense in the fourth quarter to $53 million from the prior run rate of $60 million per quarter. We have no debt maturing in 2011.
Investment income was $19 million in the fourth quarter, largely due to gains in our private equity portfolio, which are recorded on a one-quarter lag. In the fourth quarter of 2009, investment income was $23 million. Looking ahead to this year's first quarter, we anticipate investment income of approximately $15 million. Let's turn to the results of our operations. Unless specifically indicated, my references will be to underlying revenue, underlying expenses, and adjusted operating income. As Brian discussed, the financial performance of Marsh & McLennan was impressive in 2010. We achieved growth in both revenue and operating income in every one of our operating companies, not only in the quarter, but for the full year. On a consolidated basis, operating income in the fourth quarter rose 22% to $379 million compared with the prior year. For the full year, operating income increased 14%, from $1.3 billion to $1.5 billion.
In Risk and Insurance Services, revenue in the fourth quarter rose 5% to $1.5 billion. Operating income increased 22% to $259 million from $213 million in the prior year, reflecting higher margins at both Marsh and Guy Carpenter. For the year, Risk and Insurance Services growth in operating income was 10%, increasing from $985 million to $1.1 billion. Despite continuing soft market conditions, Marsh had another great quarter. Reflecting sequential improvement throughout the year, revenue rose a strong 6% in the fourth quarter to $1.3 billion. All geographic operations experienced revenue growth in the quarter, with particularly strong growth in EMEA, Asia Pacific, and Latin America. The positive momentum in Marsh's new business generation through the first nine months continued in the fourth quarter. This resulted in global new business growth of 8% for the year.
Despite a significant increase in pension expense, Marsh increased its profitability as well as its margin in the fourth quarter. Turning to reinsurance broking, Guy Carpenter continued its excellent performance led by its international operations. Revenue was $184 million, growing 3% over last year's fourth quarter. This is especially notable considering current market conditions. In fact, this quarter marked Carpenter's eighth consecutive quarter of revenue growth, reflecting continuing strong new business and high client retention over the past two years. Ongoing expense discipline produced improved operating income for both the fourth quarter and the year. In our consulting segment, revenue in the fourth quarter rose 6% to $1.3 billion. Growth in operating expenses, including higher pension expense, was held to 4% for the quarter and was only 2% for the entire year. In the fourth quarter, operating income rose 17%, from $142 million to $166 million.
For the year, operating income increased 16%, from $477 million to $553 million, with margin improvement of 110 basis points. Mercer's revenue increased 5% in the fourth quarter to $910 million, similar to the growth in the third quarter, highlighting the balanced portfolio Mercer has built over the past several years. Within retirement consulting, revenue growth in Canada and Latin America was more than offset by declines in the U.S. and EMEA. Health and benefits consulting continued its strong performance, matching its 8% growth in the third quarter. All regions around the world showed strength, with the U.S. and Europe's growth improving and impressive growth in Canada, Latin America, and Asia Pacific. This performance reflects the recent investments made by Mercer, as well as a stabilizing global economy and employment market.
Rewards, talent, and communications produced double-digit revenue growth for the second consecutive quarter, partly due to a resurgence in demand for Mercer's compensation surveys across all major geographic regions. Outsourcing revenue was up 5% in the quarter. Investment consulting and management increased 14%, affirming Mercer's strategy to provide enhanced investment solutions for their clients' retirement plans. Even with higher pension expense, Mercer's operating income increased in both the fourth quarter and for the year. Oliver Wyman also generated strong revenue growth in the fourth quarter, which continues the positive performance that we saw throughout the year. Revenue increased 8% to $399 million, reflecting a broad-based growth in the business. Oliver Wyman's practices in the healthcare, transportation, consumer, and communication sectors all generated double-digit increases. For the year, revenue increased 7%, including double-digit growth in the financial services sector, Oliver Wyman's largest industry specialty.
Oliver Wyman also produced excellent growth in operating income for the fourth quarter and full year. Turning to the cost of our defined benefit plans. As you know, higher pension expense impacted earnings per share in 2010 by slightly more than $0.10. We are projecting that pension expense will increase modestly in 2011, impacting earnings per share by $0.05. This increase reflects lower discount rates at December 31st, 2010, compared with the end of 2009. Despite this increase, we expect to generate double-digit growth in earnings. From a funding perspective, we made a tax-efficient $200 million discretionary contribution to our U.S. retirement plan last September. Combined with ongoing contributions to our worldwide plans, total cash contributions to our pension plans in 2010 was approximately $450 million. For 2011, we expect contributions to our global pension plans to be approximately $300 million.
In looking at our balance sheet, cash at the end of the year was $1.9 billion, compared with $1.7 billion at the end of the third quarter. The major uses of our cash in the fourth quarter included approximately $245 million for acquisitions, $119 million for our fourth quarter dividend payment to shareholders, which reflects a 5% increase on a per share basis, and $86 million for the start of our $500 million share repurchase program. By year-end, we purchased 3.4 million shares. In addition to our year-end cash position of $1.9 billion, we expect to receive $230 million in the first half of this year from tax credits related to the Kroll disposition. For modeling purposes, you should continue to use a 31% adjusted tax rate for the year. With that, let me turn it back to Brian.
Thanks, Vanessa. Candice, I think we can go to questions now.
Thank you. If you would like to ask a question, please do so by pressing the star key, followed by the digit one. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, please press star one to ask your question. We will pause for a moment to assemble our queue. We will take our first question from Keith Walsh with Citi.
Hey, good morning, everyone. I have two questions. First for Dan. Just thinking about you guys are more of primarily a fee business, Marsh in the U.S. Can you talk a little bit about the leverage to improving exposures in a fee business versus maybe your competitors a little more commission-based? Then the second piece of that, it seems every broker is facing expense inflation. What do you think about that to make sure shareholders are getting the leverage of a better top line?
Okay. Let me take your first question. One, our overall business, as you know, is now majority outside of the United States. When I look at my global business, I am about 50/50 between fee and commission, and it is more like 60/40 in the U.S. and 40/60 in the rest of the world. I feel very well-balanced. In terms of your question on leverage, I think that the commission business is slightly more leveraged to a hard market than the fee business. Having said that, fees are based upon value, and I think we demonstrate increased value in a hard market, and I feel that there would be upward momentum on the fee side as well, as the market tightens and as our jobs serving clients become more complicated. You saw the reverse of that in the soft market.
There was some downward pressure on fees through the soft market. It gives you some insulation, but I really like the way that we're positioned 50/50, and I feel levered enough to the market. In terms of expansion possibilities and leverage as we grow, we manage our expenses very carefully. I think some of our expansion is being masked right now. If I just look at the fourth quarter, half of our expense growth in the fourth quarter within Marsh was based on a pension increase and some severance expenses that did not run through the restructuring line, that ran through our operating line. The other thing I would say is all throughout the downturn and over the last couple of years, we've continued to invest in the business.
I don't feel any pent-up requirement to have some sort of rebound in expense to get us back to some sort of a trajectory in investing in the business. We've been steady throughout, so I feel quite good about that.
Okay, great. Just for Vanessa, thinking about, you mentioned the pension expense. I think you guys are the only ones out there that still have an active pension plan, if I'm correct. Why not freeze the plan at this point? If you could just talk to that.
Hey, Keith, let me do this one.
Yep.
Let me do this one. It's Brian. We do constantly look at all our benefit plans, pension in particular. What pension does for us is add a bit of volatility to our income, bottom line. Expense movements, positive and negative. There's a bit of volatility to it. Overall, so far from what I can see, it is a reasonable approach for our employees and for our shareholders. It does have this volatility to it. What we did in the last year, and it was considerably volatile last year, the swing was considerable, was that we were able to manage that and still produce excellent growth and control of our expenses. As we pointed out, it's going to be a bit of a drag this year coming. We gave you the number. I think still, long term, it is reasonable for us to maintain now.
We'll constantly look at that. You never say never, but I think the volatility question is something we have been able to address, and I expect that we will continue to address it, and therefore long term, I like the position we're in.
Thanks a lot.
Okay.
We'll go now to Brian Meredith with UBS.
Good morning. Two questions for y'all. The first one on the consulting side. Can you dig in a little bit on the outsourcing revenue growth in the quarter? Was it new business, or was it growth from just exposures, payrolls? Can you give us a little more detail on that?
Michele will do that.
Certainly. This is Michele. The outsourcing growth was sales of new business that had occurred both in 2009 and into 2010. As a matter of fact, in the outsourcing business, we have about $50 million of added wins during 2010 that will also affect our results in the future. As we said and promised, that business was built and is built to be a scale business. What you're seeing is the impact of that scale as we sell the service across all our product lines and bundle with other pieces of Mercer's offering.
Are you seeing any benefit from the other large merger in the industry?
There's a lot of activity in the industry. The large merger in the industry is a little bit still recent, but there are certainly transfers of talent moving around, and lots of activity in the marketplace with regard to our clients as they take a look at how services will be provided. We feel well-positioned with regard to that combination.
Great. Then, for Dan, we know what the organic revenue growth and obviously know what the revenues look like from the recent acquisitions. What was the earnings contribution like from some of the recent acquisitions? Are they still a pretty big drag on margins?
A couple of things. One, when I look overall at the acquisitions within Marsh over the last couple of years, it adds about $475 million of revenue. In terms of contribution on an earnings basis, it was very negligible in 2010 and will be a more meaningful contributor in 2011. In terms of margin, it was a bit of a drag in 2010. In 2011, as our agency gets broader, it should perform very similarly to the overall U.S. business. Over time, it will perform with a better margin than the core U.S. business, but for 2011, it will be very similar.
Okay. I was thinking specifically also on the HSBC acquisition, whether, because I know there was some of the restructuring charges coming through on that one.
Sure.
Is that positive from an earnings perspective yet?
Yeah. It was not positive in 2010. It will certainly be positive in 2011.
Excellent. Thank you.
Okay, Brian. Next question, please.
We'll go now to Matthew Heimermann with J.P. Morgan.
Hi, good morning. Two questions. First, for Dan, just on the agency acquisitions, could you give us a sense of what inning we are in terms of building a platform? Also, I guess for John, can you just give us a sense of where the pipeline is in Oliver Wyman today and how that maybe compares to 12 months ago?
Okay. I'll take the agency question first. We're still in the early stages in my mind. Right now, the agency is nearing $300 million of revenue. I've said before, I think that this business could be a $750 million-$1 billion business. I'm very satisfied with where we are. I'm very satisfied with the pipeline that we have and the type of agencies that we're having conversations with. We are building out the capability, and had several acquisitions right around year-end and in the early part of 2011. I would characterize this as still the early stages.
Is the delta between the $750 million-$1 billion and the $300 million today all going to be acquisitions, or what role will organic growth play in getting you there?
Well, certainly organic growth within the agencies will occur. As you've seen, you can look through the CIAB type of information and look at what growth rates have been occurring in those kind of businesses. Certainly, some of those businesses, and to Keith Walsh's question earlier, are more highly levered because they're commission-based businesses and they're in the small commercial and middle market. When I look at, I would see there'd be a combination of organic growth combined with, in certain Marsh offices, we're handling some small business not as efficiently as the agency is. Over time, we would probably move some of the business around as we build out our platform, and acquisitions. Acquisitions would be the principal source.
Okay. Thank you.
Okay. Should we get John Drzik to answer the pipeline question? John?
The Oliver Wyman pipeline's very healthy today, consistent with us staying on the rough top-line trajectory we established in 2010. A year ago, we looked at 2010 and expected to see a relatively weak recovery in economic conditions in the U.S. and Europe. A little better than that, obviously, in emerging markets, and that was consistent with the revenue growth that we established in 2010. I think as we enter 2011, our broad sense of the macro environment is similar. Continuation of the weak recovery in the developed markets, better than that in terms of emerging markets, and that's what our pipeline's showing today. I think pretty consistent with where we were a year ago.
Okay. Thank you very much.
Okay. Next question, please.
We'll go to Larry Greenberg with Langen McAlenney.
Hi, good morning. I might have misheard this, but it almost sounded as if in your opening comments and Vanessa's comments that you were kind of emphasizing the competitive conditions in the reinsurance business. I'm just wondering if you are all sensing that perhaps reinsurance competition is taking a ratchet up a little bit, and maybe you could just, maybe Dan and Peter and Brian, certainly, if you want to chime in just on what pricing looks like out there on the underwriting side.
Let me start. I'm not sure we emphasized some kind of ratcheting up of competition in the reinsurance. Reinsurance remains competitive, and Peter can give you the numbers. It's an area that continues to show rate declines, yet we had good organic growth, I think particularly compared to others, I think that was what we were trying to emphasize. Peter, do you want to say something?
Yeah. The market has remained pretty stable. We've seen rate decreases on average of 5%-10% for property cat. Some of the areas that are more localized, we actually saw some stabilization of rates. Chile, I think we'll anticipate that in Australia. Casualty pricing has remained modest to slightly down. We really haven't seen any different trends. When you look at reinsurance broker as well, it's really driven by the first quarter because more than 50% of the portfolio is renewed in the first quarter. Even when you see rate deterioration in a fourth quarter, it doesn't really impact that quarter that much. You're really looking at a very stable, modest decrease. As we look into 2011, believe it'll be the same.
Okay, Larry.
Great, thanks. Just a follow-up. We could play around with the numbers, do you have what the underlying growth in the business units would've been excluding pension in 2010?
Do we have it? Yeah, sure.
Larry, I think the easiest way to look at it is to say that the margin expansion would have been, for RIS, it would've been about 120 basis points, and for consulting, it would've moved from 110 to 160 basis points. That's probably the easiest way to get at it.
Great. That's helpful. Thank you.
Okay. Next question, please.
We'll go next to Meyer Shields with Stifel Nicolaus.
Thanks. Good morning, all. Brian, I saw you quoted at a conference saying that you don't necessarily need a macro event to change pricing. Sometimes carriers just get exhausted by the fact that their business is unprofitable. Is there any actual sign of that yet?
Any sign of that? Yeah. I'm glad you read it.
The psyche of the market that drives hard and soft markets. We always keep talking about if we have this catastrophe, things will change. I tried to point out that in 2001, before 9/11, the rates started going up. There was no catastrophe. It was just exhaustion. In 2008, we had a cataclysm. What, $100 billion of capital disappeared overnight almost, and the rates didn't change. There's a couple of cases in point where it wasn't a catastrophe, one way or the other. What I was trying to emphasize is that one needs to see or understand what the psyche of the market is and how people are feeling, and is there exhaustion in the market. I said we didn't see it in 2009. We didn't see it in 2010. We don't see it so far in 2011.
I'm not sure that the catastrophe itself would do something. Of course, I was bold enough to say it's probably sooner than later, remember, we had very long cycles. Anyway. That's what I was trying to point out. No, I think at this point, I haven't seen exhaustion hit the market yet.
No, I'm sorry to hear that.
That's all right. We're supposed to be able to perform in all weathers what I tried to explain to the underwriting community, what we think of ourselves here is, look, most trading conditions are soft. If you can't perform in soft markets, you can't perform. For us, this is the time to put the company right, get the place in the best shape possible, so that when that hard market occurs, you maximize. That's what we're doing with what Dan and Peter have done in their respective companies, with the acquisitions we've done, particularly in agency. That's our plan. Okay, Meyer?
Yeah. No, that's very helpful. One quick question for Vanessa. I might have missed it, the tax rate was higher than we anticipated in the quarter, I was hoping you could explain that.
Sure. If you look at the adjusted tax rate for the full year, Meyer, it was at 31%, which is similar to the guidance I gave last year for the full year, and also similar to what we're saying for 2011. In the fourth quarter, we go through a reconciliation of the estimates for the first three quarters to make final end-of-year adjustments to take into account the geographic mix of our profitability, as well as any impact of state and local taxes. That's what you're seeing in that higher rate for the fourth quarter.
Okay, great. Thanks so much.
We'll go now to Yaron Kinar with Deutsche Bank.
Good morning. I was wondering if you could maybe give a little more color on what I would say is robust underlying revenue growth in both RIS and consulting. Are you achieving that through improved pricing, more discretionary spending, exposure growth, taking market share?
I guess the answer is yes. Maybe Dan and Michele in particular could answer.
Sure. Several factors contributed to our growth in the quarter. I would say our new business generation would be first and foremost. We had $276 million of new business in the quarter, which is the highest quarter of new business since all the way back in 2007. Our past and present hiring of top-tier talent, our success in generating enhanced commission and fee for services agreements with carriers, all of those contributed to our overall performance. I've been in the business a long time, so I don't get overly excited about growth in any one quarter. I look at it for the year. In 2009, we were -1%, so our real focus in 2010 was to get growth going again. For the year, we were at +2% on an underlying basis. Looking forward, I would think we will do better than that.
I wouldn't necessarily extrapolate the fourth quarter and say that would be continuing. I hope so, and we're out there plugging away. It was a terrific quarter, and a lot of things broke our way. Michele?
Yes. From Mercer's perspective, I think it's a direct reflection of our strategy and the strategy that we've been executing on for, frankly, the past several years. We made decisions to expand our core consulting unit and to continue to invest in it, and several of the organic and inorganic investments that we've made at Mercer were into core consulting. In addition, we made a decision to expand in our next generation businesses, and those businesses are outsourcing, the outsourcing pillar, and the investment pillar, and we've consistently done that. This quarter and last quarter, as a matter of fact, as Dan said, the full year reflects that strategy. You see growth in the consulting care pillar, which was hardest hit by the recessionary period, but with good growth in outsourcing, outstanding growth in investments.
The blend is really giving our clients two things, giving our clients a lot of stability with regard to how we service them, new product offerings that they are finding to be innovative, especially in the DB space. As well as, for the investor, you get that same sense of stability, ability to perform in different areas at different times, and bundle products to produce this kind of revenue growth. From our perspective, we believe that the strategy has been confirmed, and we expect that this will continue into the future as a good, balanced portfolio with which to serve our human resource clients.
Yaron, our operating companies are all a little different. Maybe I should have John and Peter talk about it. John?
Yes. I think at Oliver Wyman, the growth reflects a couple of different things. One is the general strengthening of the economy. Consulting demand tends to follow economic conditions. Obviously 2010 was a stronger year than 2009, and that's part of it. I think also Oliver Wyman has particular strength in the financial services segment, and our fastest-growing segment is in healthcare. Each of those are industries that are undergoing significant restructuring and where there's a greater demand for advice in that type of segment. We experienced particularly strong growth in those segments in 2010. Peter?
Our growth has really been driven by increased new business. Our new business year-over-year in the fourth quarter is up over 25%. We've had very strong client retention, well over 90%. Our expansion within new business has been driving new clients. Roughly 20% of the new business that we've generated is from new clients. As Vanessa said in our opening, a real significant top-line performance from our international operations, specifically in Asia Pacific. Where we've been making investments and focusing on top-line growth, we've been able to execute.
Okay, thank you.
Got it.
Next question, please.
We'll go to Jay Gelb with Barclays Capital.
Thanks, good morning. First, a detailed question. The double-digit earnings growth outlook for 2011, is the baseline for 2010 the $1.64 of adjusted earnings?
Yes.
Okay. Brian, maybe you can give some insight in terms of where you expect the majority of the growth to come from. Is it both Risk and Insurance Services and consulting, or should one grow faster than the other earnings-wise?
Yeah, that's great. We're blessed to have a nice balanced portfolio between consulting and insurance. Consulting was growing faster this year than insurance, although the Risk and Insurance, I think, showed great performance, particularly relative to peers. What would you expect next year? I think the same. We're still in a soft market, that limits to some degree what we can do on the insurance side. Consulting will, I think, continue to take advantages of the things that Michele and John pointed out. The economy is improving, that should benefit us. Consulting is more of a late-stage buy in emerging markets, our international footprint will help in that regard. I would say, if it's a horse race, maybe consulting wins by a nose. Anyway.
I see. All right. On a separate issue, we've been hearing more from our conversations with risk managers that there's increased interest in multi-year deals in terms of fee arrangements with the major brokers. Can you comment on that? Also, if there are multi-year deals written, is all that revenue recognized in the initial year?
I think Dan will answer.
Okay. Couple of things. One, if there's a multi-year deal done, the income is not all recognized in the first year. That's point number one. There is not any kind of structural change amongst risk managers to multi-year deals. The reality is most multi-year deals have cancellation provisions. So, if you look in the large account space, I think the movement is more toward risk managers identifying two or three insurance companies who they want a broader, more strategic global relationship. They're building those relationships, and they recognize that those relationships, contractual or not, will tend to go across many, many years. We help them with those choices. In the tail end of every soft market, you tend to get some additional multi-year deals, and there's a little bit of that out there, but I wouldn't say it's a rush to that level.
Frankly, many multi-year deals have certain levels of cancellation provisions within them, either based upon loss ratios or market factors.
Dan, I should have clarified. I meant multi-year fee arrangements with the brokers.
Yeah. When we do a multi-year fee arrangement, first of all, we have very few clients that are pure fee. Most of our clients are a combination of fee and commission. We get a fee for certain services, but we may get brokerage on some of the transactions that take place in London and Bermuda, as an example. There's very few where it's a global fee without any brokerage element on the transactional side. In terms of multi-year agreements on fees, we actually encourage that because it enables us to plan better, but we also negotiate with risk managers, and we tend not to keep a flat line over multiple years, right? Because our expense base grows, our fee income needs to grow with the expense base, and our clients recognize that.
Are those fees earned over the course of the arrangement?
Correct.
Great. Thank you.
Okay.
We'll go now to Thomas Mitchell with Miller Tabak.
I'm wondering if, looking at your prospects, you certainly have a lot of cash. How do you view today as compared to three months ago or six months ago to go through acquisition, either on the consulting side or through organic growth that might take some additional investment? What are the best kinds of opportunities out there today?
Okay, Tom, I'll see if I can summarize that. Relative to three months ago, probably not a huge difference in that timeframe. A year ago or more might be different. I think certainly as things improve economically, values start to change, and so one would expect that valuations would be slightly higher going forward than they have been, certainly on the consulting side. I think to me, it's more important what we're buying, and does it fit in our strategic positioning. In that regard, I think we've done quite well so far, certainly in consulting, some very interesting acquisitions.
I think the company is recognized as one to join again, and so we have that extra added benefit of being a place that would be a good home for a company that has limitations as to where they go, but they're great people, and they've got a great capability, and when they look around for what's the next step in their evolution, we're a good home for it. I think our prospects actually are improving, not going the other way, even with the economy changing. In insurance, we've committed to the agency development as our primary place for acquisitions. It's not exclusive. We're certainly looking internationally all the time as well. The HSBC is a good example of that. In that regard, I think, again, it's kind of an interesting issue. Do people expect this as the seller?
Do they expect that the economy is going to improve or the market's going to improve? In that case, maybe they'd be less interested. Again, what I said about consulting is probably true in spades with respect to the agency, because we have now, I think, established a structure, a position in the marketplace that is attractive to those independent agency companies who are, again, looking for some next move, a way to grow. What they're seeing is an organization that has the kind of qualities they're looking for. That's why Dan pointed out the pipeline is very good. That's a long-winded way of saying I certainly feel better this year than I did last year with our prospects, and I think we're going to continue to find good acquisitions. Organic growth acquisitions internally, they're always a little bit more difficult.
We can do it through teams, we can do it through products and everything, it doesn't get the same kind of big bang press that another acquisition does. We tried to point that out in the earlier remarks that when we look at, we're in this for the long haul, expense reduction alone, it doesn't get you anywhere. You've got to invest, we've been investing. Investing in technology and investing in product, investing in people. That's going to continue. My conversion to share buyback will also play a role. Okay? Thanks.
Thanks very much.
We'll go next to Scott Heleniak with RBC Capital Markets.
Mercer, if you saw any improvement on organic growth trends in retirement over the past few months, I know it was down 6% for the fourth quarter. I'm just wondering if you saw any improvement toward the end of the year and the beginning into 2011 at all. Obviously, there's a pretty big upside if that gets turned around relative to consulting.
Absolutely. I think we will continue, frankly, to see retirement struggle, if you will, through this environment as people readjust their pension plans. I think the focal point for Mercer is slightly different, which is we have taken intentionally, and with great intention, the portfolio of services we have and aligned them to this DB market, this defined benefit market. While you may see that there are other places where we're seeing significant growth where we bundle these retirement services along with our investment services and our outsourcing services. I don't expect that you will see the raw demand change dramatically in the retirement business per se, in other words, the traditional business.
The segments that we are pursuing quite heavily and the changes that we're making in our retirement business allow us to capture business across the demands that the clients have currently in the same space, but for different kinds of services.
Okay. Makes sense. One last question. I know you haven't talked about it specifically, but the hub strategy you talked about a couple of years ago, have you filled out all the hubs? Are you at the point where you have all those completed, and you're sort of going to, I think you termed it as spoke acquisitions. Are you to the point where most of those are going to be those type of acquisitions, or is there still more left for the kind of big focal point hubs?
Okay. There's certainly more hubs that will be required as we fill out the geographic footprint of the agency. The hubs that have been acquired are seeking spoke and fold-in acquisitions. You'll see that two of the acquisitions that we've made recently are actually spoke and fold-in operations for Rutherfoord, as an example. You'll see us doing spoke and fold-ins for existing hubs, but we are still seeking additional hubs as we fill out our geographic footprint. Okay.
Thanks.
Good. I think we should take maybe one last question and then wrap it up. One last question, please.
There are no further questions at this time.
All right. Very good. Well, let me end by thanking everyone on the phone for their attention and interest in the stock, and more importantly, sorry to you guys, but more importantly, to all the employees who are listening out there, thanks for a great year. Thanks for a great year. Bye, everybody.