S&P Revises Marsh Mac Outlook to Negative; Ratings Affirmed

June 15, 2010

Standard & Poor’s Ratings Services has revised its outlook on Marsh & McLennan Cos. (MMC) to negative from stable. S&P has also affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term counterparty credit ratings on the company.

“The outlook revision follows MMC’s recent announcement that its Mercer (US) Inc. subsidiary has reached a $500 million settlement agreement with the Alaska Retirement Management Board, $100 million of which is expected to be recoverable by insurance, on behalf of two Alaska benefit plans relating to work in the 1992 to 2004 period,” explained credit analyst Laline Carvalho.

“The settlement removes significant uncertainty relative to this lawsuit, in which plaintiffs were seeking at least $2.8 billion in damages,” she added. “However, the settlement amount exceeded our expectations, and we believe that it raises potential concerns with regard to Mercer’s reputation and competitive position on a prospective basis.” Mercer is a core unit within MMC’s consulting segment, and it historically has been a relatively consistent performer for MMC.

S&P also noted that the $500 million settlement “follows several large extraordinary charges that MMC has taken in recent years, which, in our view, have contributed to marginal operating performance and have diminished MMC’s earnings quality. These charges have included restructuring actions at some of MMC’s operating units (particularly at its Marsh unit), goodwill write-downs (mostly related to its Kroll operations), and other charges resulting from divestitures or strategic changes as part of MMC’s efforts to realign its operations to address operating underperformance issues.

“Over the past five years (2005 to 2009), MMC’s EBIT fixed-charge coverage averaged 3.2x on an adjusted basis (excluding extraordinary items), which, in our opinion, is marginal relative to the current ratings. MMC’s first-quarter 2010 performance met our expectations. The group reported adjusted operating margins of 16.1 percent in the first three months of the year, compared with 14.7 percent during the same period in 2009.”

S&P also pointed out that the group’s risk and insurance services segment reported the “highest adjusted operating margin at 23.9 percent, followed by the consulting segment at 10 percent and Kroll at 9.3 percent. MMC’s adjusted EBIT fixed-charge coverage was an estimated 5x in the first quarter of 2010, which was an improvement over the 3.4x in full-year 2009.

“However, given the recent settlement at Mercer, we believe that legacy issues are still affecting MMC’s operating results. As a result, we are concerned about MMC’s ability to sustain its earnings improvements.

Source: Standard & Poor’s

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