S&P Affirms Marsh and McLennan Cos. Ratings

December 5, 2001

Standard & Poor’s affirmed its ratings on Marsh & McLennan Companies (MMC). The outlook has been revised to stable from negative.

The rating actions reflect the diversity and strength of MMC’s various operating businesses, excellent operating performance, and above-average debt service capabilities. The revised outlook reflects S&P’s reduced concern about quality of capital issues associated with about $5.3 billion of goodwill on MMC’s balance sheet as of Sept. 30, 2001.

Major Rating Factors:

• Diverse and well-positioned operating businesses. MMC, through its subsidiaries of Marsh, Putnam and Mercer, has an excellent reputation and leading market positions in insurance and reinsurance brokerage, asset management, and consulting businesses, respectively. The strength of this organization lies not only in its diversity but also in its global infrastructure, extensive client base, and well-rounded portfolio of products and services. Collectively, these fee-based businesses provide the company with a steady and reliable source of cash flow to finance the parent’s fairly aggressive acquisition appetite, share repurchase, and dividend strategy.
• Excellent operating performance. Excluding the $173 million in special charges related to restructuring and the World Trade Center terrorist attacks, MMC’s operating margins remain very strong. As of the first nine months of 2001, MMC’s operating margin grew to 22.9 percent compared with 20.3 percent for the same period a year ago.
• Above-average debt servicing capabilities. As of Sept. 30, 2001, outstanding debt obligations comprised almost 40 percent of MMC’s capital structure, which is in line with Standard & Poor’s expectations given the diversity and strength of MMC’s fee-based businesses. These businesses each generate a stable and fairly predictable source of cash flow, which allows MMC to effectively service more than $3 billion of debt obligations. For the first nine months of 2001, interest coverage (EBITDA to fixed charges) was slightly above 10 times (x) and the ratio of EBITDA to debt was .62x. These outcomes are in line with Standard & Poor’s expectations.

The outlook is stable.

The stable outlook reflects the successful integration of the cultures and brokerage operations of Johnson & Higgins and Sedgwick James into MMC. S&P believes management’s progress in this area should limit any future material impairment or write-down of goodwill associated with these two acquisitions. In the short-term, operating margins are expected to remain strong (in the low 20 percent range), with MMC’s brokerage operations driving the majority of growth in earnings and revenues. Conversely, MMC’s asset management and consulting businesses are likely to be challenged by the difficult economic environment, which may retard earnings and revenue growth in each of these segments.

In the long run, the company’s debt tolerance is expected to remain at about 40 percent of its capital structure, but may vary for short periods as acquisition opportunities are presented. Nevertheless, interest coverage is expected to remain above 10.0x with net operating margins for the group in the low 20 percent range.

Topics Marsh McLennan

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