Welcome, thank you for standing by. At this time, all lines are in a listen-only mode. After the presentation, we will conduct a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your hosts, Ms. Kerry Calaiaro and Joe Plumeri. You may begin.
Thank you, welcome to our fourth quarter 2010 earnings conference call and webcast. Our call today is hosted by Joe Plumeri, Willis Group Holdings Chairman and Chief Executive Officer. A replay of the call will be available through March 10th, 2011, at 11:59 P.M. Eastern Time by calling 888-568-0648 from within the U.S. or 1-402-998-1531 from outside the U.S. No passcode is needed. Alternatively, the webcast replay can be accessed through the investor relations section of our website at www.willis.com. If you have any questions after the call, my direct line is 212-915-8084. As we begin our call, let me remind you that we may make certain statements relating to future results, which are forward-looking statements, that term is defined by the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those estimated or anticipated. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation. We undertake no obligation to revise or publicly update the results of any update to these forward-looking statements in light of new information or future events. Please refer to our SEC filings, including our annual reports on Form 10-K for the year ended December 31, 2009, and for the year ended December 31, 2010, which we expect to file by the end of February, as well as our earnings press release for a more detailed discussion of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the investor relations section of our website.
Please note that certain financial measures we use on the call are expressed on a non-GAAP basis. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release. I'll now turn the call over to Joe.
Thank you, Kerry Calaiaro. Appreciate it. Welcome, thank you for joining our call today. On the call with me are Grahame Millwater, our Group President, Vic Krauze, our new North America CEO, and Michael Neborak, our CFO. As usual, other members of the management team are also here and will be happy to answer any of your questions. 2010 was a great year for Willis, we finished strong. In the fourth quarter, we continued to report exceptional 4% organic growth, even as the external environment, as you all know, remains largely the same as the last time we spoke. We continued to win new business, with each segment reporting double-digit new business growth, which we concentrate on very much here. We continued to invest in our business to drive this growth, and we delivered significant bottom-line expansion with adjusted earnings per share up 21% to $0.57.
In fact, the story of the fourth quarter was really the story of the year. We also reported 4% organic growth for the full year. With our entrenched sales culture, each segment reported double-digit new business growth. Our associates have done a great job of winning new business in an economic and rate environment that has remained tough in many countries where we do business. Total productivity per FTE grew in each segment and rose 3% from last year to $193,000 for the whole company. We invested in the business and will continue to invest to ensure that we build for future growth, delivering adjusted operating margin of 23%. You'll see that the rest of the story today is how we grow on that 23%. We remain focused on actions that will allow us to return capital to shareholders.
2010 was a great year, we know, though, we know that we can do better. We have plans to further build business for 2011 and beyond, I'll talk about that shortly. First, I want to run through some of the achievements in our segments. First, North America. Not much has changed in terms of the external environment. The economic outlook remains uncertain, with the recovery slow and unemployment stubbornly high. The rate environment remains soft, there's little evidence of a turn. In fact, we delivered flat organic growth in the fourth quarter with 3% net new business growth and a -3% rate headwind that was a bit worse than the 2% that we saw in the third quarter. In this environment, flat organic growth for the quarter and for the year was a good result, again, we think we can do better.
Our producers are doing great. They continued to generate double-digit new business growth, client retention was up, both of which, as you know, we concentrate on a great deal. In terms of geographies, we saw particularly positive results from Canada and the Atlantic regions. Employee benefits, our largest practice, was up 4%, its third consecutive quarter of growth in an environment where unemployment is obviously a problem and a great result in a labor market that remains tough. Construction was down mid-single digits in an area of the economy that has still not seen much improvement. We also continued to see good results in a number of specialty practice areas, including healthcare and facultative reinsurance, among others. North America's operating margin was down slightly to 25.1% as the benefit from new business generation was offset by higher incentive compensation, which is what we'll talk about.
In both the fourth quarter and throughout 2010, our North America segment has delivered better client retention and strong producer retention. This is a great reflection of the success of our integration efforts and teamwork across our enhanced network. Productivity per FTE was up 5% to $238,000 for 2010. Up 5% in this environment, we think is outstanding. Let me turn to international now. International continues to deliver excellent growth with organic growth in commissions and fees of 8% in the quarter and 6% for the full year. New business generation remained in the double digits against a rate headwind of even worse than the U.S., of 4% in the quarter. The strength and diversity of our international network is reflected in these results, even as some of the economies in which we operate remain pressured.
Latin America and Asia again delivered double-digit growth with strong contributions from Brazil, Argentina, and Chile in Latin America, and China in Asia. Continental Europe grew high single digits, even as some of the economies in the region remained pressured. We were very proud of that because you know the eurozone has been under great economic pressure. Growth in the region was led by Denmark, Spain, and Germany. U.K. and Ireland business delivered positive organic growth in the mid-single digits, despite continuing to face challenging economic conditions, GDP growth in the U.K. turning negative in the fourth quarter. Key revenue drivers this quarter were major accounts, employee benefits, and personal risks, again, very proud of U.K. and Ireland, given the pressures of the economy. International operating margin was 32.8%, up from 31.3% in the year-ago quarter. Just outstanding.
We had strong organic revenue growth, which was partly offset by investments to support growth and unfavorable foreign currency movements. The productivity per FTE was up 3% to $160,000 for 2010. Let me now turn to Global. We continued to see good growth in what is a seasonally light quarter for Global business segment, I want to reinforce that. It's the lightest quarter for our Global business segment. Global delivered 6% organic growth in both the quarter and the year against 1% rate headwind in the quarter. Reinsurance had flat organic growth, continued strong new business generation, high double-digit growth, even as clients continue to retain more risk. Continued generally soft rate environment. January 1 renewal rates were down 5%-10%. In our global specialties, we had mid-single-digit organic growth led by energy, aerospace, and marine. Growth through strong new business and improved retention with continued rate softness.
In Faber & Dumas, we had a very good quarter, driven by new business generation and cross-selling success. However, this unit is still impacted by a soft wholesale market. As you know, that's our London-based wholesale market operation with continued pressure in the most economically sensitive lines, like bloodstock, jewelry, and fine arts. Willis Capital Markets & Advisory had a good quarter from recurring business and transactions, and we continue to build that pipeline and continue to be very excited about Willis Capital Markets. Global operating margin of 10.7% was down from 12.2% in the prior year period. Good organic growth was offset by unfavorable foreign currency movements and lower investment income. The productivity per FTE was up, again, 2% to $365,000 for 2010. That's the highlight of the quarter. It's the highlight of our businesses. Now let me turn to 2011.
We are always looking ahead, I'm excited about the future we are building. You're going to hear about a plan. You're going to hear about us aggressively going after significantly growing our margins and our earnings per share. That's what this is all about. Willis in the 21st century has been defined by three specific chapters. In large part, these prior chapters have been internally focused. In 2010, we developed the Willis Cause, which is our value proposition to our clients and rolled out internally. In 2011, we begin chapter four by evolving to deliver the Willis Cause, which is why we're doing the things that we are doing so that our value proposition, which is the Willis Cause, differentiates us and allows us to grow our business in an outsized way. I am pleased with what we have done in the past.
We know we can do better. 2011 presents us with some unique challenges that we're addressing head-on. They involve costs, and they involve the evolution of our business model. There are two challenges that we face in 2011, our costs, which are unique to 2011, and the evolution of our business model. Let me talk about the first challenge, which is our costs. Salary and Benefits expense will include an increase of approximately $100 million in 2011 compared with 2010 as a result of three things. All of these things premeditated, all of the things that we know we're doing because we need to grow our business, retain our people, do the right thing. One is the higher amortization of cash retention payments. It's the way we pay our people. We amortize it going forward.
There's a big payment in 2011. That is the reason that we have this unique experience that we have to deal with in 2011. The reinstatement of salary reviews for all employees after two years of no salary reviews, it's the right thing to do. We want to face that challenge head-on. The reinstatement of 401(k) match for our North American employees, again, is the right thing to do. All of these three things are unique to converging in 2011. About $20 million-$25 million will continue through 2012 as an incremental expense. In addition, obviously, to the normal cost growth. Most of that goes away in 2012. In addition, to support our growth strategy and continued execution of the Willis Cause through 2011 and beyond, we have to continue investing in technology, advanced analytics, product innovation, and industry talent and expertise.
That's the cost challenge of 2011 that we address head-on by virtue of our plan. The second piece is to evolve our business model, the Willis Cause, our value proposition, so that we can continue to grow our revenue at the pace that we do, continue to evolve that model, and invest in that business. The evolution of Willis brings a realignment of our business model to future-grow the company and deliver the value proposition to clients. It's a realignment of our resources against that model. We're instituting target operating models in our business units and corporate center. We are segmenting our business and focusing resources on client delivery. We are connecting the dots through our business to deliver the Cause to our clients. We are redefining our culture externally around the Cause and internally around new core values.
We will take better advantage of our service centers in Ipswich, Nashville, and Mumbai by relocating a number of roles where they can be performed more efficiently. We have also identified a number of revenue initiatives, all linked to Delivering the Cause. We're doing very well, but there's still great untapped potential in each of our businesses, and importantly, even more when we connect the dots and link our businesses together to better serve our clients. These investments are important for our future but must be supported. As a result, in order to fund the investments and the increase in salaries and benefits expense, we are undertaking a full operational review to be completed in the first quarter of 2011 of all the businesses to better align our resources with our growth strategies, which should generate meaningful savings.
In 2011, for example, we expect to deliver modest adjusted margin expansion and adjusted EPS growth, including estimated cost savings of between $65 million-$80 million. In 2012 and beyond, that should accelerate to significant adjusted margin expansion and adjusted EPS growth, including estimated cost savings of $90 million-$100 million. What's this all about? This is all about not growing moderately or modestly year-over-year. We have high margins. It's 23%. I'm constantly asked, "When are your margins going to catch up with your revenues?" You can't do that unless you take aggressive actions to do that in the years to come, because we don't want to be moderate. We don't want to be modest. We want to grow significantly in all areas. This isn't a company that likes modest. We're serious about accelerating our margin and our earnings growth.
Everything Grahame and I are outlining today will put us in better position to deliver this year and in the future, especially. Grahame?
Thank you, Joe. Good morning, everyone. Over the last five years, Willis has successfully executed a number of initiatives that have enabled us to navigate a very difficult environment. Just to remind you of some of those initiatives. We initiated a program in 2005 to replace lost contingent commission by increasing our original commissions. We achieved our goals. We outlined a program of change in 2007 called Shaping Our Future. This was a series of initiatives involving technology, process change, placement, and client profitability. We set a target of $100 million in net benefits to be achieved by the end of 2010, which we outlined to you. We delivered this one year ahead of plan, and cumulative net benefits at the end of 2010 from this program were over $150 million.
With the acquisition of HRH in the fourth quarter of 2008, we identified initial integration synergies of $100 million. In 2009, against the backdrop of economic and financial turmoil, we also implemented a rightsizing program. The combination of HRH integration synergies and rightsizing Willis generated cost savings of well over $200 million. With the HRH integration completed, we refocused on revenue growth. Our organic growth in commissions and fees doubled from 2% in 2009 to 4% in 2010. In 2010, as Joe outlined, each business segment grew new business by double digits. As you can see, we have a successful track record of planning, execution, and delivery. As Joe outlined, we're now embarking on a fundamental restructuring of the company to further drive our growth ambitions and deliver our future margin expansion aspirations. We have planned, we are executing, and we will deliver.
Most of the growth initiatives we have outlined to you on previous calls. For example, creating global solutions under Martin Sullivan to drive growth in the large account segment. Launching last year, our industry-focused middle market sales initiative. Rolling out our unique small commercial network franchise model that we developed in the U.K., internationally and globally. The appointment of sales professionals in all our major businesses to drive new business growth and retention through a relentless focus on metrics and process. Creating a global placement organization that is driving aggregation via facilities, optimization of our commission levels, technology development, and process to manage the $45 billion of premium we place into the global markets. As you know, this is all work in progress, and we're very satisfied with that progress.
We now believe we're at a stage where we're confident enough, and we have done enough foundation work, to look more radically at our business model. This business model is driven by how we deliver our value proposition to all our client segments in a differentiated, but also more consistent and more efficient manner. There are four core strands to this work. Firstly, the creation of Willis Global to bring both cost synergies, but much more importantly, enormous skill and knowledge synergies from a more formal integration of our global businesses. You will have seen a series of announcements we made this week regarding the next stage of this program. Secondly, a much closer alignment of our global retail network.
Frankly, 80% of what we do in each retail branch is virtually identical, and we can derive great synergies from a more consistent application of our business practices and our processes. Thirdly, a much more aggressive application of our target operating model to both our businesses and our corporate infrastructure. A key element of that, as Joe mentioned, is the optimum use of locations, including our regional service centers and our unique offshore locations such as Mumbai. We're also embarking on a program of associate engagement. We intend to retain and attract the top talent in the industry. This takes investment, as Joe outlined earlier. In order to nurture our top talent, this also requires us to continue to performance manage those who are not performing so well, and also ensure those roles or tasks no longer delivering the value we require are addressed.
This more radical approach to our business is entitled Delivering the Cause. Our leadership team globally is completely as one in their determination to execute on this program. The restructuring charge Joe has referred to enables us to aggressively initiate this program in 2011 right across the organization. We also believe this program will continue to enable us to deliver both industry-leading organic revenue growth, and yet still allow us to grow our margins over time. With that, I'll turn the call over to Michael Neborak, our CFO, to review the financial results. Michael.
Thank you, Grahame. We reported earnings in the fourth quarter 2010 of $98 million, or $0.57 per share, compared to $79 million or $0.47 per share in the same period a year ago. That's up 21%. Adjusted earnings for the quarter ended December 31st, 2010, was $98 million or $0.50 per share, compared to $80 million or $0.40 per share in the same period a year ago. Fourth quarter 2010 earnings per share were positively impacted by $0.04 from non-recurring tax credits, and negatively impacted by $0.07 from foreign exchange. The negative $0.07 per share impact from foreign exchange reduced the fourth quarter operating margin by 150 basis points year-over-year.
The principal drivers of the negative impact were, one, dollar strength against the euro, where we are overweight on the revenue side in hedging losses and revaluation of non-dollar denominated positions in our primary U.K. trading company, Willis Limited. For the full year 2010, FX had a positive impact of $0.04 per share on adjusted EPS and a positive 40 basis point impact on operating margin. On the revenue side, our revenues increased 1% to $835 million in the fourth quarter of 2010 compared with the year ago period, and increased 2% for the full year to $3.3 billion. Reported commissions and fees grew 2% in the fourth quarter to $825 million and were up 3% for the year to $3.3 billion.
It is important to note that the reported commissions and fee growth of 2% in the fourth quarter was negatively impacted by 200 basis points from foreign exchange movements. Organic growth was 4%. As we noted in our earnings release, a change in accounting treatment at an acquired specialty business in North America resulted in a $5 million favorable impact to commissions and fees in the fourth quarter, with a corresponding 1% favorable impact to North America's organic commissions and fee growth, and a 1% favorable impact to consolidated organic commissions and fee growth. Total investment income declined $6 million or 40% to $9 million versus the fourth quarter of 2009, with lower interest rates the principal driver. Full year 2010 investment income was $38 million. We currently estimate that investment income in 2011 will be closer to $30 million for the full year.
On the expense side, total operating expenses were up 1% to $658 million compared to the fourth quarter 2009. Salaries and benefits were $469 million, or 56.2% of total revenues in the current quarter, compared to $455 million, or 55.2% in the fourth quarter 2009. The 3% increase in salaries and benefits was primarily due to higher incentive compensation, moderated by favorable foreign exchange currency movements on the expense side of our income statement. In fourth quarter 2010, salaries and benefits included $31 million of expense related to the amortization of cash retention awards, compared to $22 million in the year ago quarter. Amortization of cash retention awards for full year 2010 was $119 million compared to $88 million in 2009, a $31 million increase.
Assuming a similar level of cash retention awards are paid in 2011, amortization will be approximately $184 million in 2011, or $65 million higher than in 2010. Other operating expenses were 0.4% to $153 million in the fourth quarter, compared to $167 million in the year ago quarter, reflecting disciplined cost management and the absence of approximately $13 million of integration and re-domicile expenses that we recorded in the fourth quarter of 2009. Depreciation and amortization of intangibles were each $18 million in the fourth quarter of 2010. We expect full year 2011 depreciation expense and intangibles amortization to be approximately $75 million and $65 million respectively. Our reported and adjusted operating margin for the fourth quarter was 21.2%, an increase of 20 and 10 basis points respectively over reported and adjusted operating margin in the year ago quarter.
Adjusted operating margin was positively impacted by continued organic growth in commissions and fees and rigorous expense management. These positives were partially offset by higher incentive producer compensation, unfavorable foreign currency movements, and lower investment income. On the tax side, our income tax expense for the year was $140 million, compared to $96 million in the prior year. The effective tax rate was 20.7% for the quarter and 23.9% for the full year 2010, favorably impacted by non-recurring tax credits. The underlying effective tax rate for both the quarter and the year was approximately 26%, the same as the full year 2009 rate. Our earnings from associates was a loss of $4 million in the fourth quarter, compared with a loss of $9 million in the year ago quarter, primarily due to our reduced ownership of Gras Savoye.
Please note that historically, we have recorded losses in the fourth quarter from our investment in associates. On the pension side, our U.K., U.S., and international defined benefit pension plans had a combined surplus of approximately $15 million at the end of 2010 on a U.S. GAAP basis, up from a deficit of approximately $120 million at year-end 2009, principally due to cash contributions that we made to the plan during 2010 and strong investment returns. Cash contributions to the pension plans were $42 million in the fourth quarter and $130 million for all of 2010. Pension expense was $8 million in the quarter and $35 million for all of 2010. Looking forward, we currently expect to make cash contributions to the pension plans of approximately $125 million during 2011.
In terms of our debt and capital management, total debt, including the revolver, was at $2.3 billion at the end of the fourth quarter, in line with where we were at the end of the third quarter. The leverage ratio at year end was 2.4 times, as calculated under the term loan covenants. Cash and cash equivalents were $316 million, and we generated approximately $230 million in cash from operating activities during the fourth quarter and approximately $510 million for the full year 2010. On the balance sheet, in terms of some of the disclosures that we made, we've enhanced those disclosures. In particular, I'd point you to our balance sheet, which is now classified where we have separated fiduciary assets and liabilities from the Willis-owned accounts receivables and payables. This will help facilitate the calculation of working capital changes in terms of the cash flows that the company generates.
I'll also point out that included in fiduciary assets is fiduciary cash of approximately $1.7 billion. Let me now turn to 2011. As we indicated in our press release, Salaries and Benefit expenses are expected to include an increase over and above normal cost growth of around $100 million in 2011 compared to 2010 as a result of higher amortization of cash retention payments, reinstatement of annual salary reviews for all employees, and reinstatement of the 401(k) match for North American employees. It is important to note that these items are expected to increase 2012 expenses by only $20 million-$25 million. Both the $100 million in 2011 and the $20 million-$25 million in 2012 are over and above normal growth in Salaries and Benefits.
As Joe and Grahame mentioned earlier, we are undertaking an operational review to be completed during the first quarter of 2011 of all our businesses to better align resources with our growth strategies. We estimate that this review will result in a pre-tax charge of approximately $100 million-$130 million, largely recorded in the first quarter of 2011. These actions are expected to generate cost savings of $65 million-$80 million during 2011, reaching annualized savings of approximately $90 million-$100 million in 2012. I'll talk a little bit about our capital management strategy. As we've stated previously, we are committed to debt reduction and returning capital to shareholders. Consistent with this strategy, we are reviewing our current debt profile, and subject to market conditions, we may take advantage of attractive financing rates to reduce the cost and extend the maturity profile of our debt.
Among the actions we are considering is the payment of a make-whole premium to redeem the $500 million in aggregate principal amount of 12.875% senior notes that are due in 2016. If those notes due in 2016 had been redeemed at the end of December 2010, a one-time pre-tax charge of approximately $180 million would have been incurred relating to the make whole and calculated under the terms that govern the indenture for those notes. With that, I'll turn it back to Joe.
Thank you, Mike. Let me conclude. We had a great 2010. Strong organic growth of 4% with an adjusted operating margin of 23%. Those are not easy accomplishments. It's not easy in this environment to grow significantly your margins from 23%. If it were easy, everybody would do it. What we've been talking about today is an ability to be able to significantly grow them higher than the 23%. We're not satisfied with that. We're not satisfied with moderately growing our earnings per share. We want to do better than that. To do better than that, you have to attack the problem aggressively, as we have outlined today. There's two issues, 2011's costs and the ability to be able to grow our operating model so that it creates more revenue and it creates more efficiency.
We're doing both of those things in tandem to aggressively grow our business and grow our business model. We feel very good about our ability to be able to do that and to be able to grow our business this year on a moderate basis, and then significantly be able to break out next year. The entire company is excited about doing that. We'll be glad to answer any questions that you have.
Thank you. We will now begin a question-and-answer session. To ask a question, press star one. The system will prompt you to record your name and company name. To withdraw your request, press star two. Once again, to ask your question, press star one. Our first question comes from Keith Walsh of Citi.
Hey, good morning, everyone.
Keith, how you doing?
Good. How are you, Joe? First question around the Goldman debt. I just want to clarify something. I think Mike had said it was an $80 million potential charge, and the release says $180 million. I just want to make sure which is the-
He meant $180 million, Keith.
Okay, $180 million. Great.
I didn't have enough coffee today.
Yeah. Then around the Goldman debt, I guess the question would be, I understand optically how it would be beneficial to remove that from your income statement and balance sheet, it seems like that would be a noneconomic move, right, versus, say, share repurchase. I want to just see your philosophy behind that.
Sure
why that's good for shareholders.
It's a good question. The rate environment today is pretty good. I don't know what the rate environment's going to be in 2013. We looked at it, and we looked at the delta in terms of doing it today versus doing it in 2013. When you look at the debt environment, and you look at deals that have been done, they've been done pretty favorably, and we think that that arbitrage between what we can maybe borrow at today and what we can borrow at in 2013 makes a lot of sense, if you believe rates are pretty low. That's the thinking behind it. It's not a question of just the optics, and it's not just a question of getting rid of the expense associated with it. It's a question of the timing seeming to be right now for that arbitrage to work.
Yes, Keith, as Joe's mentioned, we've looked at this quite a bit. We're still looking at it. What we've outlined here is just some of our thoughts. Our view right now, in the fall of 2013, when we can call these notes at a 6% premium, is that rates are going to be materially higher than where they are today. Based on that, is really what drives the economics.
Just regarding cash, I understand you're going to be incurring some charges to get expense saves, and we've seen that from all your competitors as well. Just thinking about how does that impact the buyback. I would assume that gets pushed back as a result of incurring cash charges on lowering costs.
As part of this entire plan, we have not said, "Let's just put buybacks in a box, and it'll come out another day." It's still part of the mix. We'll wait for the timing to be right. It has to do with the sequencing of events to take care of all these issues. That's still in our mind, Keith.
If I could just sneak one quick one, last one in for Mike. Just the margin, I heard you talk about it moved. What was the underlying movement excluding FX in the fourth quarter?
It was plus 150 basis points from what we reported. We reported 21.2, add 150 basis points to that.
Okay. FX helped your margin in the quarter?
Oh, it hurt our margin.
Hurt your margin. Okay, I just wanted to understand that. Thanks a lot.
Thanks, Keith.
Our next question comes from Thomas Mitchell from Miller Tabak + Co..
Just thinking about this a little bit in perspective. The last time your stock price was this high, or even maybe a little bit higher, we go back to the spring of 2007. My notes, which I admit is a little bit scribbled, say that, as I recall, your plans at that point were, by about this time, to get your operating margins to close to 30%. The math that went with the operating margins and what you expected to accomplish got us actually close to $3.50-$4 a share of earnings by now. As I look at the 76% increase in the incentive compensation, that is the cash rather than the amortization portion, I'm beginning to wonder how you expect to get the margins and the earnings up going forward in a way that becomes credible given the record since 2007.
Well, let me take you back to 2007, Thomas, and a little bit of a history lesson. Since 2007, when we reported we were going to grow our margins, and I'll tell you specifically what we said, 24%, 26%, and 28% in those three years, when we had an investor day. Since that time, a couple of things have happened to change the world a little bit. Number 1, you've had an exceedingly, and not necessarily in this order, an exceedingly softer market than everybody expected, number 1, and we still outperformed everybody in that environment. Number 2, you had an economic breakdown that most people compare to a great depression. Three, we did a major acquisition of Hilb Rogal & Hobbs in June that we announced in June of 2008.
Between June of 2008 and October of 2008, the credit markets fell apart, the world fell apart, and companies went out of business. I think it doesn't make for a good comparison to talk about what we're doing today versus what happened in 2007 and all of the events that transpired since then. It's a little bit different. If we were talking about apples to apples, then your point could be well made. We're talking about apples to pears, grapes, and everything else. What we're trying to do here is to take a very good performance. Our margins at 23% are high, relatively speaking to other people, especially in the global environment. We're not satisfied with that.
People ask me continuously and appropriately on this call, "When are your margins going to grow at the same rate that your revenue grows?" That's an appropriate question. They haven't grown because of the two issues that I'm making reference to, especially 2011 and growing the operating model, and we're trying to attack that rather than continually say on these calls that we're satisfied with margin improvement that is moderate. The actions that we are taking are actions that are required for 2011 and beyond to be able to grow this business, grow the margins, and make our shareholder returns even better than they have been in the past. The comparison between the two simply doesn't hold water.
Well, what about the difference between the growth in shareholder earnings and the growth in incentive compensation, which is light years above what your organic growth is?
The incentive compensation has to do with the methodology with which we pay our people. Because we amortize the retention payments going forward, we find that the amortization in 2011 finds its zenith at its greatest level in 2011, and we're trying to attack that. $5 million I referred to, it's the $65 million that Mike referred to. In 2012 and beyond, it abates. It starts to level out, and that's what I say by going away. It just simply goes down drastically from there. It's the way we've kept our people. It's the way our margins have stayed up there. It's the way our revenues grow at 4%. It's the reason why the business operates the way it does.
Okay, thanks.
You're welcome.
Our next question comes from Jay Gelb of Barclays Capital.
Thank you. On the guidance, I wanted to confirm that the baseline we should be using for earnings growth in 2011 is the $2.75. Is that right?
Yes, that's right.
Okay. I think you make mention in the release talking about accelerating operating margin and earnings growth in 2012. What's the driver there and what's the goal?
The driver there is obviously by the efficiencies that we get from the charge, not necessarily in this order. That drives it. You heard about the savings this year and next year. Additionally, the three things that drive the cost this year, the biggest of which is the amortization of retention, which is the $65 million, as Mike mentioned. That $65 million grows at a less pace If you will, in 2012, so that piece doesn't go away, but it grows drastically less in 2012, which also helps to significantly grow the margins and the earnings per share. The convergence of those factors, plus what we think will be more efficiencies that we add in the business because of the operational restructuring of the model in the Willis Cause, plus, I think, continuing to grow our revenue, which allows us to segment our business and be able to grow.
If you look at all of that as they converge together, we're looking very, very good as we continue to grow this business in 2011 and 2012, especially.
The margin or earnings growth goal there, Joe?
Yes. That's why I said that in 2011, you can expect moderate margin increase over 23%. As I said, that's not easy. 23% is high in a terrible environment, but we're still doing well. As I said, if it was easy, everybody would do it. We're not happy with that. We're not happy with saying that the environment is bad and the market is soft, et cetera, and we're going to grow by basis points. That's not what we do here. We're going to be moderate in 2011 in earnings per share growth and in margin growth, but significantly grow our margins in 2012 and significantly grow earnings per share in 2012 as well. That's what this is all about, is to make the next step forward irrespective of the market environment. If the market environment turns, God bless us all.
If it doesn't, it doesn't matter. We're going to significantly grow this business.
More broadly for the restructuring, is this an issue where there's increased competition for talent? Is that what's driving this, or is it something else?
No, at all. It's always increased competition for talent. It's the things that I outlined, Jay. It's the cost of challenge of 2011, and the amortization of the retention awards. It's again, taking our business and saying, how can we deliver a better model locally so that we offer our clients the best possible advice and consultation while we're doing the operational parts and the processing parts someplace else, which makes it more efficient? To do that, we got relocation issues. To do that, we have people issues. To do that, we have technology issues. To do that, we need to be able to attack the problem all at once. That's the reason for the charge, and that's the reason for when all of this is done, we believe significantly you'll have margin improvement and earnings improvement.
Our next question comes from Matthew Heimermann, J.P. Morgan.
Hi, good morning, everybody.
Hey, Matt.
Hi. A couple questions. I guess, first, with respect to the restructuring plan, could you just give us a sense of how much of that's going to benefit S&B versus the G&A, just percentage terms at completion?
I'll let Mike answer that before I do. It's too early because what we said was in our comments is that at the first quarter, we're going to look at all of the issues having to do with S&B, with people issues, and all that kind of stuff. We think we have an idea, obviously, because we've heard from our operating divisions as to what that might be. We won't know fully until the end of first quarter. That's what the first quarter is about.
That's right.
That's right, Matt. We're hard at work at that. During the first quarter, we'll obviously have the answers to all that when we report our earnings.
All right. That's fair. I'll follow up next quarter on that then. Healthcare reform, obviously, both pluses and minuses have been in the news. I would just be curious, could you just remind us how much of your business is related to the placing of traditional and employee benefits healthcare plans and just what the split is, large case versus small case and fee versus commission?
Well, in terms of percentage, it's 15% on a worldwide basis. It's a little bit more than that in the U.S. Basically, the business is almost totally middle market versus large accounts.
Okay.
By the way, that growth of 4% in the U.S., given the economy, which I said in my comments, we're very excited about. We have less jobs, and our business is the placement of healthcare for companies against the backdrop of less employment, we think is very, very good, and we're excited about that. As the economy improves, that's even going to get better.
Yeah. Is that predominantly then commission business?
It's predominantly commission business.
Okay.
Almost exclusively.
Okay. Thank you. That's helpful. I guess the last question I'd had is just specific to Global. I know that this is usually a weak quarter for Global. The margin was a little bit softer than I thought, and I may have misestimated. Does the amortization of the retention award disproportionately impact Global versus some of the other segments? Or could you give us a sense of how to think about that expense pressure in the quarter?
No, not at all.
2011.
It's evenly dispersed across the company.
Okay. All right. Much appreciated. Thanks.
Thank you.
Our next question comes from Mark Hughes of SunTrust.
Thank you. Good morning.
Hi, Mark.
Hi. Just to follow up on that, with healthcare reform, what's your assessment of what that'll do to commission rates? Are you seeing any movement or any rumblings yet?
No, not at all. Nothing's really happened yet as it relates to healthcare. There's just been a lot of discussion. We know what the law said. We don't know what the amendments may or may not be. All I can say is that I'm really heartened by the infrastructure that we have in the U.S., which where primarily we place healthcare benefits. Our employee benefits in the U.S. is defined, Mike, as healthcare. You can grow 4% or 5% in an environment where you got less employees. We have a great value proposition because what's happening now is that employees are looking for advice and consultation in terms of what to tell their employees, and using us to help them consult with their employees and advise them and give them the right direction as it relates to healthcare.
What we found is that the healthcare reform has gotten more complicated. They've had to turn more to people who understand how to help them do that with their employees. The business has been good. We think it'll get better as the economy gets better. As there's more employees, you're giving benefits on a per employee basis, which should get better. If you think the economy will get better, there'll be more jobs, and you think that healthcare continues to have to be uncomplicated by somebody and to be advised and consulted by somebody, then we think we're in a great spot, especially in North America. In the rest of the world, our business is mixed from healthcare to pensions, and a lot more pension mix as you go further east.
Right. The global business, I think you suggested there is a down 1 rate headwind. How did that break out kind of generally between reinsurance and the specialties business?
It's Grahame here. Generally speaking, across all the segments, we've seen rate pressure. As we mentioned in the script, in reinsurance, we saw first of January renewals 5%-10% down, and that's what we saw towards the end of the last year. In all reality, there's virtually every single segment we're seeing still continued downward pressure. It's across the board.
Okay. Thank you.
Our next question comes from Dan Farrell from Sterne Agee.
Hi. Good morning.
Dan, how you doing?
I'm good. I was wondering if you could talk a little bit more about the expense restructuring. I realize you're still in the midst of it, but when we think about what you've done so far, you've had great success and a track record, obviously, in the expense savings that you took out in HRH. You've also had really an ongoing effort, I think, on overall operational efficiency with Shaping Our Future. It seems like some of these things that you might be looking at, you've already had an ongoing process in looking at them. It seems like a tough task to take out even more expenses. I was wondering if you could just comment a little bit about that.
What's allowed us, Dan, to grow to 23% are all the things that we talked about in the past, the Shaping Our Future, the integration of HRH, the successful programs and projects that we've had. Okay. That has given us the ability in a very tough environment, in a soft market environment, to grow the revenues better than everybody else, it appears. I don't say that arrogantly, but it appears against everybody else's reporting, and 23% is high. That's what got us there. Now what do you do? I'm constantly asked by everybody, again, appropriately, what do you do now that you've done that? I'm going to expect that the environment is going to stay the same for quite some time. I don't know when it's going to change. You can't play casino with the economy or the market. What do you do about that?
What we've outlined today is an aggressive approach to do something about that. What we've done in the past got us to where we are, and then the question about what do you do next, we're trying to answer for you in an aggressive way.
I also think one of the key points about what we've done in Shaping Our Future, understand that an awful lot of the benefits we've derived from Shaping Our Future have surpassed our expectation in that period. An awful lot of that work has been foundation work and proof of concept to enable us to go to the next stage. If you look at what we did, we changed the platform in London, in terms of the process and technology. We then moved on to U.K. retail. We haven't actually really begun that in earnest in either the U.S. or the international businesses. The experience of what we've done has given us great confidence that we can do that. If you look at what we've done on placement, we've launched some technology that we were going to roll out across the world.
We piloted it in Italy at the tail end of last year. It was very successful. That's given us confidence to drive that forward. What Shaping Our Future has done, we've actually delivered the benefits or surpassed the benefits we set, but it's given us great experience and foundation work to know that we have the confidence and the proof of concept to take that on a much more aggressive basis.
Shaping Our Future, Dan, is basically a prelude to the cause. We've kind of done this in some places. Now we're just expanding it to huge parts of geography and very big parts of our business that we haven't done that with, plus other initiatives that we've outlined. That's why we feel so confident that we can do that. The result of all of that is going to be significantly higher margins in the face of a continuing environment that we suspect will stay the same for a long time. That's what's exciting about this. This is nothing new.
Okay, thank you very much.
Our next question comes from Cliff Gallant from KBW.
Good morning.
Good morning.
Just wanted to ask about the reinsurance segment and the growth that you're seeing in there. Is it just a small number of large accounts? Is it across the board? Are there certain geographies or lines of business that you're having particular success in?
Cliff, it's Peter Hearn. We've seen growth in our emerging markets, and in the United States, and it's a function of our entire portfolio, specialty, small, regional, and large accounts.
It's really just share gain then. Is that a fair comment?
Yes.
Thank you.
Our next question comes from Jay Cohen from Merrill Lynch.
Thank you.
Hey, Jay.
Hey, Joe. The first question is these added expenses in 2011, they feel a bit like a catch-up, almost as if that money probably should've been spent over the past several years, now you've got to step up and do things like match the 401(k). Is it fair to look at it and say the margins over the past several years may have been a little inflated because those expenses weren't spent?
I don't think the word's inflated. A lot of people froze their 401(k) match. A lot of people froze salaries. Not at all. We chose to pay a retention award to our people so we could continue to reward them and pay them. As a result, our productivity count, if you will, and the number of people who produce business, has stayed the same, if not grown. No, I wouldn't call it that at all. This is simply, it's time to reward our people. It's time to reinstate the 401(k). It's time to give salary reviews. They've worked hard. I don't think it's a catch-up at all. If that were the case, most people in the last couple of years did those things, I don't think that they inflated anything.
That's fair. Next question, pension expense. Can you talk about what it was, the actual expense in 2010, and what the expectation is for 2011?
For all of 2010, pension expense was $35 million. The estimate for 2011 is somewhere around $15 million.
Okay. That's a bit of an offset then to some of these added expenses.
Yes, that would be.
Great. Thank you.
Thanks, Jay.
Our next question comes from Brian Meredith from UBS.
Good morning. Most questions have been answered here. You guys did a great job walking through everything. Just quickly, capital markets business, could you give us a sense of kind of what the kind of year-over-year growth in that business was? How much did it contribute to the Global Specialties growth rate in the quarter?
As you know, first of all, I'll tell you we're ecstatic about our capital markets business. Last year was the first year out of the box. It was accretive first year out of the box. We hired a lot of people, began that business from scratch. Tony Ursano leads it. He's well-known in the insurance industry. All I can tell you is that we expect, given the pipeline and given our success in the first year, that, A, it was accretive in the first year, B, the pipeline is big. If you think there's going to be consolidations, people need advice, capital management, et cetera, in the insurance sector, we are poised to do that. We've been very successful in getting our cat bond operation off the ground. We've been on the cover of a couple of offerings.
I couldn't be more pleased at what we've done.
Great. Thank you.
Our next question comes from Vincent D'Agostino from Stifel Nicolaus.
Good morning. Just 2 questions.
Hi, Vince. How are you doing?
Good. Yourself?
Good. I can pronounce your name better than she did.
Thanks. Just curious, what's the normal expense growth that Michael had talked about earlier in the prepared comments?
I'm sorry, say that again, please, Vince. I couldn't hear.
Sure. Earlier, Michael had responded to just mention that there's a normal cost growth component. I was just curious what that normal growth and expenses would normally be.
Yeah. What we meant was is that $20 million-$25 million will continue, will be incremental in 2012. I told you that the $65 million will basically fall away because the rate of that growth will not continue like that because it's the height of the amortization retention cycle. You're looking at normal growth, and normal growth in this place is usually what we've been experiencing over the last couple of years.
Okay, great. Just getting back on the employee benefits side. One of the things that we've heard from a number of different competitors is they're seeing a shift with some carriers from a commission-based fee structure to that of a straight-up fee. I'm just curious if you're seeing any shift towards that. I know you'd mentioned earlier that you're mostly commission, but I guess what I'm most curious about is if we go to a fee-based compensation structure, do we lose the revenue ratcheting kind of component of a commission off of an increasing insurance premium rate environment?
It's a good question. There's been a lot of talk about shifting to fees from commissions, nothing's been done. It's been just a lot of talk, just like there was talk when I got in this business about whether or not people could go direct and not have a broker. It's that kind of thing. We've had no discussions with any carriers or clients about the way we get paid. Most of our business, 70% of our business worldwide, is commission-based. It's done with middle market, for the most part, clients, and SME-based kinds of clients. It'd be very difficult to come up with a fee structure that would change the world dramatically with that kind of a base. We've had no discussions at any point, other than maybe people mentioning it at a conference or something, but we have had no substantive conversations in that regard.
I imagine if you were to have a case where that would happen on year one, I'd imagine you guys would be pretty successful in negotiating a level fee if you did have to go from a commission to a fee. In year one, if it's flat, come year two, three, and four, is it harder to go back if you had to go to a fee to ask for more compensation, just in those future years off of the first one?
First of all, we don't even have it in a model because it's such a remote possibility that we even haven't thought about it, and I mean that sincerely. If your hypothetical question is, could you go back and get in fee what you get out of commission, which is, I guess, what you're asking me is, no, we don't know. All we can tell you is that part of Shaping Our Future, which Grahame mentioned that we've done successfully, had to do with client profitability, which gave us the ability to go back to our clients that we thought were not profitable, that we didn't charge enough to, and drastically increase our ability to get paid for the services that we provided, which was very successful when we did it.
If hypothetically, you're asking me, we could go back and get paid in fee what we got in commission, we have got a good track record of doing that. I think if that happened, it would not be a problem, but I don't think that that's anywhere near in the cards.
Great. Thanks so much.
Sure.
To ask a question, press star one. Our next question comes from Keith Walsh from Citi.
Hey, guys. I just had one follow-up. When you're thinking about, please correct me if I'm wrong, I think you said some modest growth off the $2.75 adjusted EPS for 2011. Are you including any gains from the potential retirement of the Goldman debt in that number? Or is this a pure EBIT number or?
Did you get that, Keith?
I didn't hear you. I'm sorry.
I said yes.
Okay. You're including the retirement of the Goldman debt potentially in growth over 2.75?
Growth from 2.75.
Okay. Thanks a lot.
Okay.
At this time, I have no further questions.
Okay. Thanks, everybody. Have a great day.