Marsh 3d Quarter Disappoints Cherkasky

November 8, 2007

In the third quarter for Marsh & McLennan Companies, Inc. (MMC), overall profits were up largely thanks to the sale of Putnam Investments and the consulting services performed well but the mood was dampened by disappointing results in the core business of insurance, where earnings fell and expenses rose.

“Despite continued strong performance in our consulting businesses, MMC’s third-quarter results were significantly impacted by unacceptable financial performance in our insurance broking business. We have changed the leadership at Marsh and are taking comprehensive actions to improve profitability,” said Michael G. Cherkasky, president and chief executive officer of MMC. “New business in insurance and reinsurance broking compensated for extremely soft market conditions. Mercer and Oliver Wyman continued to perform at exceptional levels, producing strong revenue and earnings growth, while Kroll’s underlying revenue growth was 11 percent.”

In the giant insurance broker’s quarter, Marsh’s revenue was $1 billion, up 3 percent from last year on a reported basis, and a decline of 1 percent on an underlying basis. Premium rate declines in the commercial insurance marketplace continued to accelerate in the third quarter, contributing to a sequential quarterly decline in client retention rates.

Risk and insurance services revenue in the third quarter was $1.3 billion, an increase of 6 percent from the third quarter of 2006 or 2 percent on an underlying basis. Operating income declined in the quarter to $65 million from $143 million a year ago. Expenses rose in the quarter due to the effects of foreign exchange; incentive compensation accruals for professional staff at Marsh and incremental expenses relating to the departure of Marsh’s former CEO Brian Storms; the effect of favorable professional liability experience in the third quarter of 2006; and costs associated with Marsh’s advertising campaign initiated in the spring of 2007.

MMC reported that consolidated revenue was $2.8 billion, up 10 percent from the third quarter of 2006, or 6 percent on an underlying basis.

MMC combined income from continuing operations was $80 million, or $.15 per share, compared with $133 million, or $.24 per share, last year. Discrete tax items negatively impacted earnings per share from continuing operations by $.04 in the current year quarter.

MMC income from discontinued operations, net of tax, was $1.9 billion, or $3.45 per share, compared with $43 million, or $.07 per share, last year. These results reflect the gain on the sale of Putnam Investments on August 3, 2007, as well as $.02 per share attributable to Putnam’s operations in July 2007.

Net income was $1.9 billion, or $3.60 per share, compared with $176 million, or $.31 per share, last year.

Guy Carpenter’s third quarter revenue was $226 million, representing 5 percent growth from the prior year’s quarter on a reported basis and 4 percent growth on an underlying basis. This growth, which was primarily due to continued strong new business, was achieved despite a significant decline in U.S. property catastrophe premium rates as well as higher risk retention by clients.

For the nine months ended September 30, 2007, revenue for the risk and insurance services segment was $4.2 billion, an increase of 3 percent from the year-ago period. Marsh’s revenue rose 1 percent from last year to $3.3 billion, and Guy Carpenter’s revenue rose 4 percent to $735 million. Underlying revenue for the segment was unchanged from the prior year.

MMC’s consulting segment revenue grew 14 percent to $1.2 billion in the third quarter on a reported basis, and 9 percent on an underlying basis. The segment’s operating income grew to $148 million from $112 million last year.

On August 3, 2007, Great-West Lifeco, a financial holding company controlled by Power Financial Corp., completed its purchase of Putnam for $3.9 billion in cash. Following the tax payments on the transaction that MMC expects to make in the fourth quarter of 2007, the cash proceeds to MMC after minority interest should approach $2.5 billion.

Source: MMC (Marsh & McLennan Companies)

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