S&P Downgrades MMC’s Ratings to ‘BBB-‘ on Marsh Problems

December 6, 2007

Standard & Poor’s Ratings Services has lowered its counterparty credit rating on Marsh & McLennan Cos. (MMC) to ‘BBB-‘ from ‘BBB’ as well as its short-term debt rating on MMC to ‘A-3’ from ‘A-2’. S&P also removed the ratings from CreditWatch with negative implications and assigned a stable outlook.

“The rating action reflects the many challenges the Marsh Inc. subsidiary faces over the next two years as demonstrated by disappointing third-quarter 2007 operating results,” explained S&P credit analyst Steven Ader. “Marsh posted an operating loss resulting from the unsuccessful implementation of initiatives that, in addition to generating a substantial increase in operating expenses, posed a material distraction to servicing and selling to clients.” (See also IJ web site Nov. 12 – https://www.insurancejournal.com/news/national/2007/11/12/84973.htm)

While S&P recognized that MMC is addressing Marsh’s problems, the rating agency nonetheless indicated that “the current rating incorporates the expectation that prospective operating performance will continue to be adversely affected by the delay in modifying Marsh’s business model to account for the elimination of contingent commissions, which constituted $845 million of total Risk and Insurance segment operating income of $1.8 billion in 2003.”

S&P said its “counterparty credit rating on MMC reflects the company’s strong competitive position. Good liquidity borne from a substantive cash balance as of Sept. 30, 2007 and solid cash flows from non-risk-bearing business further support the rating. Marginal consolidated operating performance and financial flexibility, based on the balance between operating performance and debt, detract from the rating.”

In addition the stable outlook reflects S&P’s “belief that MMC will prudently balance operating performance and financial leverage through earnings improvement and debt reduction. In addition, the outlook incorporates the expectation that no materially adverse information will come to light from ongoing regulatory and legal actions, including litigation by the Connecticut Attorney General against a subsidiary of MMC.”

Ader added that if “MMC is successful in improving the balance between operating performance and debt,” S&P could, “after weighing the ongoing regulatory risk,” consider revising the outlook to positive.” However, he also indicated that if “MMC is unsuccessful in meeting our expectations, the outlook could be revised to negative.”

Source: Standard & Poor’s – www.standardandpoors.com

Topics Marsh McLennan

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