MRSH

Business Context and Reporting Period

Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: MMC is a global professional services firm organized into three primary operating segments: Risk and Insurance Services (Marsh, Guy Carpenter, Risk Capital Holdings), Consulting (Mercer HR, Oliver Wyman), and Risk Consulting & Technology (Kroll). The Investment Management segment (Putnam) was sold to Great-West Lifeco Inc. on August 3, 2007, and its results are reported as discontinued operations.

Key Financial Metrics

Note: Total Debt includes $1,341 million short-term and $3,608 million long-term as of June 30, 2007. Operating cash flow represents net cash used for operations.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 7% in Q2 2007 and 6% for the six-month period compared to 2006. Underlying revenue growth was 4% for Q2 and 3% for the six months, driven primarily by the Consulting segment.
• Segment Performance:
  • Consulting: Revenue increased 16% in Q2 (11% underlying) and 15% for six months (9% underlying), led by strong growth in Oliver Wyman Group and Mercer HR.
  • Risk and Insurance Services: Revenue increased 2% in Q2 but declined 1% on an underlying basis, impacted by the absence of $34 million in market services revenue recorded in Q2 2006.
  • Risk Consulting & Technology: Revenue decreased 6% in Q2 (4% underlying) due to lower client success fees.
• Profitability: Operating income rose 4% in Q2 and 10% for the six months. Operating margins improved in Consulting (13.1% in Q2 vs. 11.8% prior year) but declined in Risk and Insurance Services (9.1% vs. 10.3%) and Risk Consulting & Technology (12.7% vs. 15.8%).
• Discontinued Operations: Net income from discontinued operations was $37 million in Q2 2007 and $77 million for six months, compared to $41 million and $257 million in 2006. The 2006 six-month figure included a significant $176 million net gain on the disposal of Sedgwick CMS Holdings (SCMS).

Guidance, Outlook, and Risks

• Putnam Transaction: The sale of Putnam Investments Trust closed August 3, 2007, for $3.9 billion. MMC expects after-tax proceeds of approximately $2.5 billion. The gain will be recognized in Q3 2007.
• Capital Allocation: Following the Putnam sale, the Board authorized a new $1.5 billion share repurchase program. MMC also plans to reduce commercial paper borrowings by $1 billion using the proceeds.
• Restructuring: MMC continues to implement the 2006 restructuring plan. Phase 1 is substantially complete, with expected annualized savings of $135 million. Additional Marsh-specific actions are expected to yield $40 million in annualized savings.
• Tax Outlook: The effective tax rate on ongoing operations is expected to be approximately 32% for the remainder of 2007. A U.K. tax rate reduction (30% to 28%) enacted in July 2007 is expected to increase tax expense in Q3 2007 by approximately $20 million due to the re-measurement of deferred tax assets.
• Legal and Regulatory Risks:
  • Marsh Litigation: Significant ongoing litigation regarding "market service agreements" (NYAG settlement, class actions, state attorney general actions). MMC has established an $850 million fund for policyholders; $680 million paid through June 2007.
  • Putnam Litigation: MMC agreed to indemnify Great-West Lifeco for certain "market-timing" and "excessive fee" litigation related to Putnam. Numerous class actions and derivative suits remain pending.
  • Other: Ongoing regulatory inquiries regarding loss mitigation products and reinsurance facilities.

Investor Verification Checklist

• Putnam Proceeds Deployment: Verify the timing and execution of the planned $1 billion reduction in commercial paper and the $1.5 billion new share repurchase program.
• Legal Reserves: Monitor developments in the NYAG-related class actions and Putnam market-timing litigation, as management states it cannot currently estimate the range of possible losses for many pending matters.
• Restructuring Savings: Track the realization of the projected $350 million in annualized savings from the 2006 restructuring plan and the additional Marsh-specific initiatives.
• Foreign Exchange Impact: Assess the sensitivity of future earnings to currency fluctuations, which contributed 3% to revenue growth in the first half of 2007.
• Debt Maturities: Review the schedule of debt maturities, noting the recent repayment of $500 million senior notes and the reliance on commercial paper for liquidity management.