Analysts were mostly positive in response to Marsh & McLennan's first-quarter financial results, in which the company began to put regulatory troubles behind them, seeing net income more than triple over the same period in 2005 despite a 7 percent drop in brokerage revenues.
For the first quarter of 2006, New York-based MMC reported net income increased $282 million, from $134 million (25 cents a share) to $416 million (75 cents a share). Revenues declined slightly–by $45 million to $3.03 billion.
First-quarter 2005 results were impacted by regulatory and restructuring expenses along with the loss of contingent commissions starting with that period.
The dropping of contingency fees was part of a settlement with New York Attorney General Eliot Spitzer and the state's insurance department after allegations that the fees served as hidden kickbacks for steering certain insurance contracts to select insurers as part of a bid-rigging scheme.
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 an 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 CEO of MMC's Marsh unit–the world's biggest insurance brokerage–said the company is winning back clients it lost during the past year and is retaining more accounts. Mr. Cherkasky said he could not think of a single major client the firm has lost, unlike the first quarter of last year, when the settlement was first announced.
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, he added.
On the negative side, MMC's insurance brokerage (Marsh), risk technology and consulting (Kroll), and investment services (Putnam) did not perform as well as expected, he added.
Overall, Bank of America said MMC's margins and business fundamentals both showed improvement.
David Small, an analyst at Bear Sterns, said while the company showed mixed results, investors would probably be pleased with MMC's improved outlook on profitability–although "top-line weakness would nag investors."
In a follow-up note, Mr. Small said that analysis of MMC's results suggests the insurance brokerage division is "beginning to turn the corner" and "is back on track–and its value proposition continues to be compelling to customers."
In summary:
o MMC reported risk and insurance services revenues dropped 7 percent, from $1.58 billion to $1.47 billion.
o Marsh revenues fell 7 percent, from $1.23 billion to $1.15 billion.
o Guy Carpenter revenue was almost flat at about $280 million.
o Kroll revenue increased 4 percent, from $233 million to $243 million.
o Mercer showed an 8 percent gain, from $924 million to $1 billion.
o Putnam revenue declined 13 percent, from $398 million to $345 million.
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