Analysts Mixed On MMC Future

Despite the reported loss of $676 million in the fourth quarter of 2004 at Marsh & McLennan Companies, investors seemed to take the news in stride since it was accompanied by cost-cutting announcements, but analysts gave the companys recovery program mixed reviews.

Last week, the New York-based parent company of Marsh, the world’s largest insurance broker, laid out its plans to return to profitability, announcing a new commission schedule and greater corporate efficiency that will result in the layoff of an additional 2,500 employees.

Investors shrugged off the huge loss and bid MMC’s share value up a little bit on the day of the announcement, with its stock closing up 35 cents to $33 a share. However, investment analysts gave mixed opinions.

Brian Meredith, with Banc of America Securities Equity Research, maintained his “buy” recommendation on MMC. He said it appears the company by 2006 will be able to recoup its lost revenue from cancelled contingency fee agreements and that it has kept the loss of business after the scandal over alleged bid-rigging at the firm to a minimum.

Morgan Stanley reduced its 2005 earnings estimate on MMC to $1.80 from $2 a share due to higher pension costs and retention bonuses. It believes 2006 will see more improvement, provided MMC can realize its expense savings and recover a portion of lost contingency fees. “With the stock having bounced off its post-Spitzer announcement lows, we think the upside is limited,” wrote Vinay Saqi, a Morgan Stanley analyst.

Jay Gelb with Prudential Equity Group said in his report he is optimistic about 2006. Prudential was giving MMC an “underweight” rating, meaning total returns would be below average in 2005. He noted continued legal costs, pension expenses and employee retention bonuses would affect earnings in 2005. These costs, he added, would more than offset savings the company would see from its structural changes.

Jay Cohen at Merrill Lynch put a neutral rating on MMC, with high volatility risk. “Marsh is a company where change has largely occurred at a measured pace in the past, and while we cannot quantify the risk associated with a significantly faster pace of change, we acknowledge that the restructuring efforts, while appropriate and necessary, pose a material risk [to] the operation,” he wrote.

He went on to say that competitors would use the higher commission fees Marsh will charge to woo customers away from the firm. “We cannot say how successful these competitors may be,” he continued, “but the changed commission structure will at least be another arrow in the quiver of the other intermediaries.”

He predicted growth would likely be negative in 2005 and limited in 2006. “MMC has long been considered a growth company, and with no growth in the company’s largest unitand only slowly emerging growth at Putnam, [MMC's investment subsidiary]the growth moniker may not apply to MMC, at least during the next several years,” he said.

Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.