MRSH

Business Context and Reporting Period

Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Overview: MMC is a global professional services firm operating through four segments: Risk and Insurance Services (Marsh, Guy Carpenter), Risk Consulting and Technology (Kroll), Consulting (Mercer), and Investment Management (Putnam). The 2005 fiscal year was characterized by a significant transition in business models, particularly the elimination of contingent compensation ("market services") agreements in the insurance brokerage business, extensive restructuring, and ongoing legal and regulatory settlements.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 1% to $11.65 billion. Underlying revenue (excluding acquisitions/dispositions and currency) decreased 6%. The Risk and Insurance Services segment saw a 10% revenue decline, primarily due to a $402 million reduction in market services revenue following the elimination of contingent compensation agreements.
• Profitability Improvement: Operating income increased 43% to $856 million, and Net Income more than doubled to $404 million. This improvement was driven by significantly lower regulatory settlement costs compared to 2004 (which included an $850 million charge) and savings from restructuring initiatives.
• Restructuring Costs: MMC incurred $317 million in net restructuring expenses in 2005, primarily related to the 2005 plan involving staff reductions and facility consolidations. This compares to $337 million in 2004.
• Accounting Changes: MMC adopted SFAS 123(R) effective July 1, 2005, resulting in an incremental compensation expense of $64 million recorded in corporate expenses.
• Discontinued Operations: MMC sold its wholesale broking business (Crump Group) and its majority interest in Sedgwick Claims Management Services (SCMS). These are reported as discontinued operations.

Guidance, Outlook, Risks, and Contingencies

• Business Model Transition: MMC is transitioning to a transparent fee-based model. Management expects incremental revenue from higher disclosed commissions and fees to impact results in 2006, though timing and amounts are uncertain due to competitive challenges.
• Restructuring Outlook: The 2005 restructuring plan is expected to yield annualized savings of $375 million once fully implemented in 2006. Approximately $160 million of savings were realized in 2005.
• Legal and Regulatory Risks:
  • NYAG Settlement: MMC established an $850 million fund for policyholders. The first payment of $255 million was made in June 2005; a second payment of $255 million is due June 1, 2006. Numerous class actions and regulatory investigations remain pending.
  • Putnam Market-Timing: Ongoing litigation and regulatory inquiries regarding market-timing and late trading at Putnam Investments. Putnam recorded a $37 million charge in 2005 for estimated costs related to transfer agent service fee calculations.
• Investment Management: Putnam's assets under management declined to $189 billion at year-end 2005 (from $213 billion in 2004) due to net redemptions of $31.7 billion. Management expects average assets to decline in 2006.
• Debt and Liquidity: MMC refinanced its headquarters mortgage ($475 million) and issued $1.3 billion in senior notes in 2005. Credit ratings remain Baa2/BBB with a negative outlook from rating agencies.

Investor Verification Checklist

• Revenue Replacement: Verify the progress of MMC's initiative to replace lost market services revenue with disclosed fees and commissions in 2006.
• Legal Exposure: Monitor the status of the $850 million policyholder fund payments and the outcome of pending class action lawsuits and regulatory investigations (NYAG, SEC, Putnam market-timing).
• Putnam Assets: Track Putnam's ability to reverse net redemptions and stabilize assets under management, which directly impacts Investment Management segment revenue.
• Restructuring Savings: Confirm the realization of the projected $375 million in annualized cost savings from the 2005 restructuring plan.
• Market Services Receivables: Assess the collectability of the $130 million in accounts receivable related to market services revenue earned prior to October 2004.