MMC Posts 100% Drop In Quarterly Income

Marsh & McLennan Companies' income dropped 100 percent after reporting an $8 million third-quarter income loss, but the company's chief executive said the company is on track for a turnaround.

During a call with financial analysts today, Brian Duperreault, president and chief executive officer of the New York-based services company, said, "I am very pleased with the amount of progress we have made at MMC over the past nine months. Although a great deal of effort is still required, we remain on track with our plans to improve profitability across the company."

MMC, the parent company of insurance broker Marsh and reinsurance broker Guy Carpenter, reported third-quarter income dropped $1.95 billion from net income of $1.95 billion, or $3.60 a share last year, to income loss of $8 billion, or loss per share of 2 cents.

Revenues increased 4.5 percent, or $122 million, to $2.84 billion in the period.

For the nine months, income has dropped 106 percent, or $2.54 billion, from net income last year of $2.39 billion, or $4.39 a share, to income loss of $153 million, or loss per share of 30 cents.

Revenues for the nine-month period rose 8 percent, or $663 million, to $8.93 billion.

In an analyst's note Alain Karaoglan with Bank of American Equity Research said the company did not meet margins as some segments, such as consulting, did not perform as expected. He did say the company's turnaround "is well underway" and that "we continue to have faith in the underlying earnings potential of the company's various operations."

The income loss was significantly affected by a $33 million increase in the company's professional liability reserve.

A company spokeswoman said the reserve stemmed from a recent legal decision in Los Angeles.

In that decision, a federal court jury found Marsh was negligent in failing to properly place a political risk policy for San Diego-based Sempra Energy. The jury awarded Sempra $48.5 million in the decision that was handed down in late October. Marsh said it plans to appeal the decision.

Despite the challenges the company is facing from the current economic turmoil and the loss in income, Mr. Duperreault was upbeat about MMC's results, pointing to positive operating income results of $70 million for the third quarter (a drop of 40 percent, or $46 million, from the previous quarter) and increases in revenues in its divisions, especially the insurance brokerage business.

Total insurance segment revenues increased by 1 percent, or $12 million, going from $1.26 billion to $1.28 billion for the quarter.

For the nine months, revenues were up 4 percent, or $152 million, from $4.04 billion to $4.19 billion.

However, organic growth in the segment showed a loss of 1 percent for the quarter and was flat for the nine months.

Marsh reported a revenue increase of 3 percent, or $33 million, going from $1.04 billion to $1.07 billion. Organic growth rose 1 percent.

For the nine months, the broker reported revenues rose 6 percent, or $205 million, going from $3.3 billion to $3.51 billion. Organic growth rose 2 percent.

The reinsurance brokerage business did not fare as well, with Guy Carpenter reporting a revenue decrease of 9 percent, or $21 million, going from $226 million last year to $205 million. Organic growth recorded a loss of 10 percent.

For the nine months, Guy Carpenter's revenue reported a loss of 7 percent, or $53 million, going from $735 million to $682 million. Organic growth stood at negative 9 percent.

Concerning restructuring, MMC Chief Financial Officer Vanessa Wittman said the company reduced its headcount by 640 in the third quarter, bringing the total to 1,150 staff reductions for the year. Approximately, 250 reductions remain.

The personnel reductions translated into $50 million in severance charges in the quarter with an anticipated annual savings of $66 million. The reductions are in addition to 600 back-office positions that were transferred to Capita Group Plc., a United Kingdom services firm.

Mr. Duperreault and other executives on the call pointed to the fact that the third quarter is traditionally the worst reporting quarter and they expect to see significant improvement when they make the fourth-quarter, full-year report.

Due to economic conditions and the lack of new capital flowing into the insurance industry, he said insurance pricing will begin to see a turnaround, by implication, improving commission revenues.

There are also indications that there will be a push for more reinsurance coverage, meaning more positive results for Guy Carpenter.

When asked about the company's new unit Marsh & McLennan Agency, LLC, Dan Glaser, Marsh chairman and CEO, said he expected the new unit to become one of the largest agencies in the United States "in a very short time," and that it will act as an agency, representing companies for lower corporate segment, small commercial and personal lines accounts.

When asked about making acquisitions in this space, he said there are a considerable number of independent agencies available with $5 million or less in revenue, and that Marsh & McLennan Agency could "be a consolidator in that space."