Fitch Downgrades Marsh & McLennan’s Senior Debt, S-T Ratings Following Probe

October 18, 2004

Fitch Ratings has downgraded the senior debt and long-term ratings on Marsh & McLennan Companies Inc. (MMC) to ‘A-‘ from ‘A+’ and the short-term ratings on Marsh & McLennan to ‘F2’ from ‘F1’. Additionally, Fitch has downgraded the short-term rating to ‘F2’ on subsidiary Marsh USA Inc. (Marsh USA). All ratings remain on Rating Watch Negative.

Fitch’s rating actions follow additional analysis of the likely implications of the civil suit brought against Marsh & McLennan by New York Attorney General Elliot Spitzer and allegations of collusion and price rigging. Irregardless of the ultimate outcome of the suits, Fitch believes that Marsh & McLennan will suffer a material decline in its franchise value as a result of the allegations, especially given recent reputation issues suffered in its Putnam mutual fund unit, tied to improper trading practices.

Fitch believes that Marsh & McLennan will likely experience lost clients, margin compression in the company’s insurance brokerage operation, and reduced short-term financial flexibility as a result of these allegations. The rating action also anticipates potential shareholder and client lawsuits that could adversely affect the company’s operations, future earnings, cash flows, and capital base.

Factors that could lead Fitch to further lower the ratings in the near term include the filing of criminal charges against Marsh & McLennan or one of its operating subsidiaries, or indications that problems that alleged improper activities were more widespread than currently alleged and systemic in nature.

If Marsh & McLennan is able to work through these allegations without additional damage to its reputation, Fitch anticipates that it would ultimately affirm the companies’ ratings at their current levels. Fitch currently does not anticipate a return to the prior ratings levels in the near or intermediate term.

Fitch placed the ratings of Marsh & McLennan and Marsh USA on Rating Watch Negative on Oct. 14 following announcements that the New York State Attorney General had filed a lawsuit against Marsh & McLennan claiming it directed clients to unknowingly use insurers with whom Marsh & McLennan had lucrative contingent commission arrangements.

Additionally, the lawsuit claims Marsh & McLennan solicited predetermined ‘rigged’ bids for insurance contracts. This lawsuit stems from a broader investigation by the New York Attorney General of fraud and anticompetitive practices in the insurance industry.

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