Marsh Mac Reports 4th Quarter Loss; Says Restructuring Plan Could Affect 2,500

March 1, 2005

Marsh & McLennan Companies, Inc. (MMC) in New York reported financial results for the quarter and year ended Dec. 31, 2004, citing a big loss in the fourth quarter due to the settlement with New York Attorney General Eliot Spitzer, a halving of its dividend and a plan to cut expenses by $375 million that could mean 2,500 additional layoffs.

The broker also said it thinks its new commisison structure will allow it to recoup lost revenues within the next year.

In the fourth quarter, consolidated revenues declined 1 percent to $3 billion. After restructuring, regulatory settlements, and related expenses, the company reported a net loss of $676 million in the fourth quarter, or a loss of $1.28 per share.

Last year for the same period, the firm reported net income of $375 million, or 69 cents per share.

Full-year consolidated revenues were $12.2 billion, up 5 percent over the prior year. Net income for the full year was $180 million, or earnings per share of $.34.

MMC’s board of directors has declared a first quarter 2005 dividend of 17 cents, a 50 percent decline. The dividend will be paid on March 30, 2005 to shareholders of record on March 15, 2005. Last year the dividend was 34 cents.

“Clearly, 2004 was the most difficult year in MMC’s financial history,” stated Michael G. Cherkasky, president and chief executive officer of MMC. “We confronted major regulatory issues at both Marsh and Putnam. The settlements we have announced are important steps forward for the company. As a result, we are ready to put these matters behind us and move ahead in 2005 to restore the trust our clients have placed in us and to rebuild shareholder value.

“We do not underestimate the task ahead. Achieving our objectives will not be quick or easy. Our employees are our greatest asset; they are resilient and determined to set the industry standards to allow MMC to live up to its history of dedicated client service. We have already introduced new leadership, instituted new compliance procedures, and initiated new ways of interacting with clients that will enable us to remain the leader in the businesses in which we participate.

“Marsh has begun to implement significant business reforms to ensure complete transparency in its dealings with clients. It is restructuring its operations, improving efficiencies, eliminating unprofitable accounts, and simplifying its management structure while maintaining its commitment to being a full-service leader in insurance broking. We believe that in 2006, Marsh will be a stronger, more streamlined company, delivering profitable growth with an operating margin in the upper-teens, and with the opportunity for further margin expansion.”

Among the significant items in the firm’s year-end report:

* Marsh Inc. continues to restructure its operations to improve efficiencies and eliminate unprofitable accounts. This could affect approximately 2,500 people throughout its global operations and, when fully implemented, should lead to annual expense savings exceeding $375 million. This is in addition to MMC’s fourth quarter restructuring expenses totaling $337 million, with anticipated annual savings of $400 million. That restructuring resulted in about 3,000 layoffs.

* Market service revenues in risk and insurance services declined $220 million in the fourth quarter and $304 million for 2004.

* Through its new standardized commission structure, Marsh expects to recover a meaningful portion of its lost revenues within the next year.

* The $850 million settlement with New York regulators for restitution comprises a $618 million pretax charge in the fourth quarter and $232 million provided in the third quarter.

* Putnam incurred a charge of $80 million for restitution relative to prior regulatory settlements.

* Marsh changed its estimated cost for future claims handling and certain administrative services in connection with guidance issued by The Institute of Chartered Accountants in the U.K. This resulted in a $65 million charge with no incremental cash outflow.

Financial results
MMC’s consolidated revenues of $3 billion for the quarter ended Dec. 31, 2004 declined 1 percent. MMC incurred a loss in the fourth quarter of $1.28 per share. Fourth quarter expenses were affected significantly by regulatory issues and the restructuring of MMC’s operations (see attached supplemental information schedules). Underlying expenses, adjusted for these items, were down 1 percent compared with the prior year fourth quarter. The effect of foreign exchange on consolidated operating income was not material.

For the year, consolidated revenues rose 5 percent to $12.2 billion. Operating income declined to $652 million, reflecting costs of regulatory settlements at Marsh and Putnam and costs related to restructuring MMC’s businesses. Results in risk and insurance services include the $850 million charge related to the settlement agreement reached with the New York State Attorney General and the Superintendent of Insurance as well as the impact of a $304 million decrease in market service revenues. Results at Putnam reflect $220 million of expenses associated with settlements with the Securities and Exchange Commission and the Commonwealth of Massachusetts. Additional legal and audit costs for Marsh and Putnam totaled $60 million. Net income for the full year declined to $180 million, and earnings per share decreased to $.34 from $2.81.

Risk and insurance services
Risk and insurance services revenues grew 2 percent in the fourth quarter, reflecting the acquisition of Kroll and the decline of market service revenues. Insurance marketplace conditions were more competitive in the quarter, with rate decreases across most lines of commercial property and casualty insurance. Underlying revenues, excluding the effect of market service revenues, acquisitions, and foreign exchange, declined 1 percent. Risk management and insurance broking declined 6 percent. Due to the pricing environment, retention and new business activity were down slightly year-over-year, compared with a strong 2003 fourth quarter. Reinsurance broking and services grew 2 percent on a reported basis and 1 percent on an underlying basis. Kroll reported excellent results in the quarter, with particularly strong demand continuing for technology services, such as electronic discovery, data recovery, and background screening.

For the year, risk and insurance services revenues rose to $7.4 billion, an increase of 8 percent. Marsh’s risk management and insurance broking operations reported solid revenue growth in Europe, Asia Pacific, and Latin America. Guy Carpenter’s revenue growth was due to new business development as demand for analytical and placement services remained high. Related insurance services results reflect growth in claims management and at MMC Capital.

Mercer performed well in 2004. Revenues increased 13 percent to $3.1 billion from $2.7 billion. Underlying revenues grew 3 percent for the quarter and the year.

Mercer has made a number of leadership and organizational changes that reflect the strategic direction and execution of its businesses around key revenue growth areas. Mercer is now being managed as two broad businesses, each under separate leadership-Mercer Human Resource Consulting and Mercer’s specialty consulting operations.

Mercer Human Resource Consulting delivers solutions to its global client base, encompassing retirement and benefits consulting and administration, the full array of human capital advice, and investment solutions, such as funds of managers products. Retirement consulting revenues were flat overall in 2004 as declines in the large markets of the United States and United Kingdom were offset by good growth throughout the rest of the world. Health care and group benefits and human capital consulting showed modest growth.

Putnam’s defined contribution business was combined with the newly formed Mercer HR Services to create a unified, full-service global leader in human resources outsourcing. In addition, Mercer’s health care and group benefits and Marsh’s employee benefits practices were brought together to leverage the distribution capability and intellectual capital of both businesses.

Mercer’s specialty consulting businesses, which include management, organizational change, and economic consulting, produced excellent results for both periods and continued to report strong new business in early 2005. For the full year, underlying revenues for management and organizational change consulting grew 13 percent, and economic consulting rose 9 percent.

Investment management
Putnam’s revenues in the fourth quarter declined to $421 million. Average assets under management in the fourth quarter of 2004 were $211 billion, compared with $209 billion in the third quarter. Assets under management at the end of 2004 were $213 billion, compared with $209 billion at the end of the third quarter. Mutual fund assets were $143 billion and institutional assets were $70 billion at year end, compared with $140 billion and $69 billion, respectively, at the end of the third quarter. Mutual fund and institutional sales improved in the quarter. Net redemptions were higher due to decisions made earlier in the year by defined contribution plan sponsors. For the 12 months ended Jan. 31, 2005, 10 out of 12 of Putnam’s flagship mutual funds, including six equity and four fixed income funds, were above median for investment performance in their respective Lipper categories.

MMC generated $2.1 billion of cash from operations in 2004, compared with $1.9 billion in 2003. These amounts reflect net income earned by MMC during those periods adjusted for non-cash charges and changes in working capital. Although net income declined significantly from the prior year, a number of charges recorded in 2004 have not yet been paid by MMC, such as costs for restructuring and regulatory settlements. In the fourth quarter, MMC completed $3 billion in medium-term bank financing, including a new $1.3 billion term loan and the amendment of $1.7 billion of existing revolving credit facilities. After making total pension contributions of $286 million, including discretionary payments of $115 million, net debt (total debt less cash and cash equivalents) was $3.9 billion at year-end 2004, compared with $2.7 billion at year-end 2003. The increase in net debt is due primarily to the $1.9 billion acquisition of Kroll in July 2004.

MMC’s effective tax rate in the fourth quarter was 28.5 percent and 57 percent for the full year 2004, primarily reflecting the impact of regulatory settlements and a shift in the geographic mix of profits. The effective tax rate for ongoing operations is 35 percent.

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