Analysts Say MMC Moving In Right Direction

Analysts appeared to react positively to Marsh & McLennan's first-quarter financial results where the company reported net income more than tripled over 2005, even though revenues dropped more than 1 percent during the period.

For the first quarter of 2006, New York-based MMC reported net income increased $282 million, going from $134 million, or 25 cents a share, to $416 million, or 75 cents a share. Revenues declined slightly–by $45 million–going from $3.07 billion in 2005 to $3.03 billion.

First-quarter 2005 results were impacted by regulatory and restructuring expenses along with the initial loss of contingent commissions during that period.

The loss of contingent commissions was part of a settlement with New York Attorney General Eliot Spitzer and the state's insurance department over allegations that the fees served as hidden kickbacks for steering insurance contracts to select insurers.

Brian Meredith of Bank of America, in an analyst's note, said the company's net operating earnings per share stood at 43 cents, well below the analyst's estimate of 56 cents and street consensus of 52 cents.

However, there were positive signs in revenue growth demonstrated by results in consulting (MMC's Mercer division), reinsurance (Guy Carpenter brokerage) and improved business production. On the negative side, insurance brokerage (Marsh), risk technology and consulting (Kroll), and investment services (Putnam) did not perform as well as expected.

Overall, Bank of America said margins and business fundamentals both showed improvement.

David Small at Bear Sterns said while the company showed mixed results, investors would probably be pleased with the company's improved outlook on profitability, but “top line weakness would nag investors.”

MMC reported risk and insurance services revenues dropped 7 percent, from $1.58 billion to $1.47 billion. Marsh's revenues dropped 7 percent, from $1.23 billion to $1.15 billion, while Guy Carpenter was almost flat at more than $280 million.

Kroll increased 4 percent, from $233 million to $243 million, and Mercer showed an 8 percent gain from $924 million to $1 billion. Putnam's revenue declined 13 percent, from $398 million to $345 million.

During an investor's conference call, Michael G. Cherkasky, president and chief executive officer of MMC, said the revenue declines at Marsh reflected the loss of volume-based contingent commissions and the shedding of unprofitable small accounts.

“We expect the U.S. catastrophe market to harden throughout the year, but we also expect to see strong underwriter balance sheets allowing for the increase in risk retention,” he said.

According to Mr. Cherkasky, a company restructuring plan was “substantially complete” and would realize annual savings of $375 million.

Brian Storms, chairman and chief executive officer of Marsh, said the company is winning back clients it lost during the past year and is retaining more client accounts.

Mr. Cherkasky said he could not think of a single major client the firm has lost, unlike the first quarter of last year.