Marsh Posts 4th Quarter Profit

February 14, 2006

Marsh & McLennan Companies reported a profit for its fourth quarter 2005, compared to a loss in 2004 when it paid $850 million to settle a lawsuit by New York Attorney General Eliot Spitzer over bid-rigging and account steering.

Net income for the fourth quarter 2005 totaled $35 million, (6 cents per share), compared to a loss of $680 million ($1.29 a share) in fourth quarter 2004.

Fourth quarter income rose 10 percent to $154 million, or 28 cents per share while revenue fell 2 percent to $2.83 billion.

The 2005 results reflect the 2004 settlement with Spitzer in which Marsh also agreed to stop accepting contingent fees.

Also, Marsh sold its U.S. wholesale broking operations, Crump, in October 2005 and its Sedgwick Claims Management Services in January 2006. The combined annualized revenues from Marsh’s U.S. wholesale broking operations, Crump Group, and Sedgwick Claims Management Services were approximately $470 million in 2005 and $400 million in 2004. The results of these operations, including the after-tax net gain on the sale of Crump, have been reflected as discontinued operations. The gain on the sale of Sedgwick Claims Management Services will be reflected in the first quarter of 2006.

In the fourth quarter, consolidated revenues were $2.8 billion, a 2 percent decline from the fourth quarter of 2004. Net income was $35 million, or $.06 per share, compared with a net loss of $680 million, or $1.29 per share, in the fourth quarter of 2004. Income from continuing operations was $17 million, or $.03 per share, compared with a net loss of $683 million, or $1.29 per share, in the fourth quarter of 2004. Earnings per share from net income in the fourth quarter of 2005 was $.28, compared with $.26 in the same period of 2004.

Full-year consolidated revenues were $11.7 billion, compared with $11.8 billion in 2004. Net income for the full year was $404 million, or $.74 per share, compared with $176 million, or $.33 per share, in 2004. Income from continuing operations was $369 million, or $.67 per share, compared with $154 million, or $.29 per share, in 2004. Excluding noteworthy items and stock option expense, earnings per share for the full year from net income was $1.57, compared with $2.38 in 2004. The accompanying supplemental schedules give effect to discontinued operations and segment reclassifications. Quarterly trends are shown on pages 13, 15, and 16.

Michael G. Cherkasky, president and chief executive officer of MMC, termed 2005 a “challenging year” for MMC. “We did what we critically needed to do. We stabilized MMC; we preserved our great brands — Marsh, Mercer, Putnam, Kroll, and Guy Carpenter; and we overwhelmingly retained our clients and employees. MMC is a much stronger company today than it was a year ago. Marsh had better client and staff retention and better profitability in the fourth quarter than in the previous quarters of 2005. We expect those trends to continue in 2006. Mercer Human Resource Consulting, Mercer Specialty Consulting, and Kroll grew revenues and are positioned for increased profitability in 2006, as is Guy Carpenter. Putnam continues to reduce its net outflows as it slowly but steadily completes its turnaround. MMC is headed in the right direction.”

A restructuring program in 2005 resulted in savings of $160 million in the year, with the remaining $215 million of the total annualized savings of $375 million to occur in 2006, all in risk and insurance services. Restructuring-related costs totaled $320 million in 2005, and the remaining $50 million is anticipated in the first half of 2006.
Fourth quarter results also include expenses of $40 million in connection with certain litigation and related matters.

In its segments, MMC reported:

Insurance and Risk Services
Guy Carpenter’s revenues in the fourth quarter were $155 million, unchanged from the same period of 2004. While not reflected in 2005 results, January 2006 renewals showed premium rate increases in property catastrophe coverage.

Revenues from Marsh & McLennan Risk Capital Holdings were $27 million, reflecting lower sales of equity investments. This was a marked decline not only from the $58 million of revenues in the fourth quarter of 2004 but also from the first three quarters of 2005.
Total risk and insurance services revenues declined 7 percent to $1.3 billion in the fourth quarter. The decline was primarily due to the year-over-year effect of market services revenues, the reduced sales of equity investments, and foreign currency translation. These results exclude strong revenue growth by Sedgwick Claims Management Services, which previously had been included in related insurance services but is now reflected in discontinued operations.

Risk Consulting and Technology
Kroll continued to produce strong revenue growth in the fourth quarter. Revenues increased 14 percent to $230 million from $201 million, or 18 percent on an underlying basis, led by strong growth in corporate advisory and restructuring, background screening, and technology services. In Kroll’s first full year of operations as part of MMC, revenues were $946 million, and operating income was $124 million.

Mercer’s total revenues increased 6 percent in the fourth quarter to $966 million. Specialty consulting produced excellent results, with revenues increasing 16 percent to $248 million, compared with the fourth quarter of 2004. Mercer Oliver Wyman and Mercer’s strategy and operations consulting businesses fueled this performance, continuing a pattern of strong growth throughout 2005. Mercer Human Resource Consulting reported a 2 percent increase in quarterly revenues to $664 million. Underlying growth of 3 percent reflected solid results in retirement and human capital consulting and overall strength in international operations.

Investment Management
Putnam’s revenues in the fourth quarter declined 12 percent to $360 million, in line with the year-over-year decline in average assets under management, which were $188 billion, compared with $211 billion in the fourth quarter of 2004. Net redemptions in the quarter were $6.4 billion. Total assets under management on December 31, 2005 were $189 billion, comprising $126 billion of mutual fund assets and $63 billion of institutional assets.

MMC’s net debt (total debt less cash and cash equivalents) was $3.5 billion at year-end, reflecting a decline of approximately $250 million in the fourth quarter and $430 million for the full year, driven primarily by strong operating cash flows. In addition, the company made discretionary cash contributions of $235 million to its U.K. pension plans, bringing aggregate discretionary pension contributions in the United States and the United Kingdom to $440 million for the full year.

In the fourth quarter of 2005, MMC entered into a new five-year revolving credit agreement in the amount of $1.2 billion. MMC also repatriated $585 million of accumulated international earnings at a favorable tax rate pursuant to the American Jobs Creation Act of 2004. To fund the repatriation, certain MMC international subsidiaries incurred borrowings under the new credit facility, which increased both cash and debt levels at the end of 2005.

Source: Marsh

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