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Executives

Brian Duperreault - President and CEO

Vanessa Wittman - CFO

Dan Glaser - Chairman and CEO of Marsh

Michele Burns - Chairman and CEO of Mercer

Peter Zaffino - President and CEO of Guy Carpenter

Mike Bischoff - Head, IR

Analysts

Keith Walsh - Citi

Larry Greenberg - Langen McAlenney

Brian Meredith - UBS

Meyer Shields - Stifel Nicolaus

Matt Heimermann - J.P. Morgan

Thomas Mitchell - Miller Tabak

Marsh & McLennan Companies, Inc. (MMC) Q2 2009 Earnings Call Transcript August 5, 2009 8:30 AM ET

Operator

Good day, everyone, and welcome to the MMC’s conference call. Today’s call is being recorded. The second quarter 2009 financial results and supplemental information were issued earlier this morning. They are available on the MMC’s Web site at www.mmc.com.

Before we begin, I would like to remind you that remarks made today may include statements relating to future events or results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to inherent risks and uncertainties. In particular, references during this call to anticipated or expected results of operations for 2009 or subsequent periods are forward-looking statements, and MMC’s actual results may be affected by a variety of factors. Please refer to MMC’s most recent SEC filings as well as the company’s earnings release, which are available on the MMC Web site for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

At this time, I would now turn the conference over to Brian Duperreault, President and CEO of MMC. Please go ahead, sir.

Brian Duperreault

Thank you. Good morning, and thanks for joining us to discuss our second quarter results reported earlier today. I’m Brian Duperreault, President and CEO of MMC. Joining me in presenting on the call today is Vanessa Wittman, our CFO.

I’d also like to welcome our operating companies CEOs to today’s call, Dan Glaser of Marsh; Peter Zaffino of Guy Carpenter; Michele Burns of Mercer; John Drzik of Oliver Wyman; and, Ben Allen of Kroll. Also with us is Mike Bischoff, our Head of Investor Relations.

First, I’ll make some brief comments on each of our businesses and then turn it over to Vanessa to provide additional information regarding our financial results. Then, we’d be more than happy to take the questions.

Overall, we had a great quarter in light of the difficult economic environment. Most notably, we saw another significant improvement in profitability in the risk and insurance services segment. This has been a continuing trend since the first quarter of 2008. The main driver for the segment’s increase and profitability is continued improvement at Marsh.

In the current quarter, Marsh’s underlying revenue was flat, which we consider a reasonable outcome in this environment. In certain countries where the economic slowdown was not as severe, we saw double-digit revenue growth. And other markets’ revenue was flat or slightly down due to the economic climate. Overall, we are pleased with the revenue levels we saw in the second quarter. That, coupled with expense discipline, led to a marked improvement in Marsh’s profitability. And this was achieved despite the continuing soft insurance marketplace.

Not only is Marsh more profitable today, but it is a stronger company. As we have discussed in previous quarter, Dan and his team have re-engineered the Marsh business over the past 18 months, streamlining the organizational structure while keeping a sharp eye on expenses.

Today’s Marsh has been organized, with stronger management both at the senior leadership level as well as in the field. In the second quarter, Marsh continued to produce substantial amounts of new business. In the US, new placement hubs are leading to improve transactional capabilities. And by segmenting clients, Marsh is now delivering improved service more efficiently.

Marsh is also balancing expense management with the opportunity to bring in talent at appropriate levels and for new initiatives such as the Marsh & McLennan Agency. While reducing staff levels since the start of 2008, Marsh also hired about 150 client-facing managing directors and senior vice presidents. This redeployment of resources is another element of Marsh’s re-engineering. Going forward, continued operation improvements and initiatives have positioned Marsh for further profitability growth in Marsh and expansion.

Guy Carpenter also had an excellent quarter. Underlying revenue increase 11% fueled by increased new business. We have seen strong new business at Carpenter at each of the last four quarters. As a result of strong revenue growth and cost reduction, Carpenter saw significant increase in profitability.

During the quarter, Carpenter made significant hires to its executive and sales teams. These new colleagues bring a wealth of skills to the firm in the areas of analytics, business development, and international experience.

Finally, we’re extremely pleased with the acquisition and integration of Collins, which further strengthens Carpenter’s specialty capabilities and diversifies its position in North America.

The improved margin for the risk and insurance services segment over the past year is a clear indicator of the significant improvement in profitability. Over the trailing four quarters, adjusted operating margin for the segment increased to 16.6% from 10.3% a year ago.

On our last earnings call, we indicated our adjusted operating margin target for this year was 17%. Now, recognizing Marsh and Carpenter’s excellent performance in the quarter, combined with our outlook for the remainder of the year, we’re raising our target margin for the risk and insurance services segment to 18% for 2009. Obviously, this is a marked improvement from a margin of 13.3% in 2008 and represents the 300 basis point margin expansion for the second half of the year.

Turning to our consulting segment, recessionary continue -- conditions continue to affect both Mercer and Oliver Wyman, but to varying degrees. Mercer delivered a respectable performance in the current environment, with strong expense control offset by a modest revenue decline. Profitability was negatively impacted by foreign exchange as well as an increase in professional liability costs.

Given the deteriorating economy at the end of last year, Mercer’s management team started 2009 knowing the road ahead would be a difficult one. Accordingly, they increased expense reductions to protect profitability. They calibrated their operations to the environment and implemented increasingly aggressive expense reduction initiatives in each of the last three quarters.

For the first six months, Mercer has held its ground on revenue in its two largest practices, retirement and health and benefits. Revenue was flat and up 1% in these areas, respectively. Investment business -- the investment business has also grew 4% during the first half.

For Oliver Wyman, the operating environment continues to be the most challenging one they have faced in years. The softness in demand has varied by industry group. Financial services, Oliver Wyman’s largest practice, saw double-digit decline in revenue in the second half of 2008 due to the financial crisis.

In the first half of this year, the year-over-year decline moderated the middle single digits. Conversely, demand for our manufacturing, transportation, and energy group held up well through 2008, but is down over the last two quarters. Where appropriate and necessary, John and his team have reduced consultant capacity and discretionary expenses since the beginning of the year. As a result, Oliver Wyman’s profitability in the second quarter significantly improved compared with the first quarter. Therefore, we feel the first quarter represented the bottom of the cycle for Oliver Wyman’s profitability.

And finally, Kroll, a year ago, we determined that there were several distances that did not fit in into Kroll’s long term business strategy. Late last year, we divested the corporate advisory and restructuring business. And in May of this year, we sold Kroll’s government services business. This simplifies Kroll’s business in keeping with the strategy we announced a year ago.

In closing, let me say that I am pleased and is encouraged by the progress that the senior leadership team has made at MMC. In 2008, we focused on correcting several internal issues. This took considerable time and effort to repair, and are now largely behind us.

In 2009, we are contending with a challenging external operating environment that has tested us for nearly a year. Throughout MMC, we have made the changes necessary to deal with a recession and on a whole, we are not only weathering the storm, but in many areas, performing well. We have implemented initiatives in each of our businesses that have increased efficiencies and a led that’s well positioned for future growth. And we are excited about MMC’s long term prospects.

With that, I’ll turn it over to Vanessa.

Vanessa Wittman

Thank you, Brian, and good morning, everyone. In the second quarter, we continue to face significant economic headwinds, including declines in short term interest rates, continued investment losses, and the impact of foreign exchange. Before I move to our operating results, let me cover the Kroll goodwill impairment.

In the second quarter, the sale of Kroll’s government services business triggered evaluation review of Kroll. This review resulted in a non-cash charge of $315 million or $0.60 per share. We’ll be completing the step two phase of the assessment in the third quarter, which is also when we routinely evaluate the goodwill of all of MMC’s operations. There’s no tax benefit relating to this charge nor any impact at MMC’s cash flows or tangible equity, nor is there any consequence to outstanding debt covenants.

Now, let’s turn to MMC’s results on an adjusted basis, which we believe are more indicative of our core operating performance this quarter. In the second quarter, MMC’s adjusted EPS was $0.33. This compares with $0.39 last year. Kroll government services, which is now reflected as a discontinued operation, is excluded from adjusted earnings in both periods.

Before turning to the operating segments, I’ll touch on corporate interest expense and investment income. Not only did we overcome the impact of lower interest rates on fiduciary interest income, net corporate interest expense reduced EPS by $0.02. Separately, investment losses reduced the EPS by an additional $0.02. This was due to declines in our private equity portfolio, which I recorded on our one-quarter lag.

Looking ahead to the third quarter, we anticipate investment income of about $20 million, compared with a loss of $23 million in the third quarter of 2008.

Now, I’d like to move to a segment review. As I discuss the financial performance of our operating companies, all my references will be to underlying revenue, underlying expenses, and adjusted operating income. Excluding fiduciary interest income, revenue for risk and insurance services increased 2% to $1.3 billion. More importantly, despite a $23 million reduction in fiduciary interest income, operating income rose from $207 million to $271 million, an increase of 31%.

Both Marsh and Guy Carpenter had strong percentage growth in operating income, resulting in a 560-basis point margin improvement for this segment for the second quarter of last year. Now that we are (inaudible) expense reduction initiatives from last year, our year-over-year improvement in margins is moderating.

As you heard from Brian, we still expect to see a fairly significant improvement in margin in the second half of the year on a year-over-year basis. Therefore, we have raised our margin target for the risk and insurance services segment to 18% for 2009. This represents a 470 basis point improvement from 2008. This also will more than double the operating margin within a two-year period.

Looking at Marsh’s second quarter results, revenue was flat, a slight improvement from the first quarter. The client revenue retention rate rose 100 basis points on a sequential basis, reflecting a marked improvement in the US and Canada. Revenue retention was unchanged year-over-year.

Reduced general insurance activity as a result of the global economic downturn and a continuing soft market for commercial property casualty insurance reduced the level of new business in the second quarter on a year-over-year basis, but was consistent with what we saw in the first quarter.

Revenue for international operations, which accounted for 48% of Marsh’s second quarter revenue was flat, as a 1% decline in EMEA was offset by growth of 9% in Latin America and 1% in Asia Pacific. Revenue in the US and Canada was flat, a solid improvement from the first quarter. Ongoing across the board expense reduction initiatives drove Marsh’s operating expenses down 6% in the second quarter.

Guy Carpenter’s revenue growth was 11%, marking the first time in more than five years that Carpenter has achieved double-digit revenue growth in consecutive quarters. As it has over the past year, Carpenter produced strong new business in the quarter, a testament to the approach taken by Peter and his team to re-shape operations since the spring of last year. And I’m pleased to say Carpenter -- Carpenter’s retention rate returned to the historically high level we enjoyed prior to 2008.

At the same time, effective expense controls have remained in place, resulting in expenses being held back in the quarter. As a result, Guy Carpenter achieved excellent growth and profitability for the fourth consecutive quarter.

Turning to our consulting segment, let’s start with our third headwind, foreign exchange. Foreign exchange negatively impacted the consulting segment by $26 million or $0.03 in a quarter, with over $19 million at Mercer. We expect foreign exchange to negatively impact Mercer for one more quarter.

Turning to Mercer, in the first six of two -- first six months of 2009, revenue at Mercer’s two largest practices held up well, even in the most difficult operating environment in many years.

Retirement revenue declined just 2% in the second quarter, but was flat year-to-date. Health and benefits also declined 2% in the quarter, but increased 1% year-to-date. Outsourcing declined 5% in the second quarter and 8% for the first six months. This was primarily due to the sharp year-over-year decline in the securities market, which affected revenue tied to assets under administration.

Investment consulting and management grew 2% in the quarter and 4% for the six months. Michele and her team continue to do an excellent job of dealing with very difficult market conditions. On a year-over-year basis, second quarter operating expenses decrease 3% and excluding the $30 million increase in professional liability costs, Mercer's expenses would have declined 6%.

At Oliver Wyman second quarter revenue of $311 million decrease 19%, similar to the first quarter. Oliver Wyman implemented significant staff reductions in the first six months of the year. As we described last quarter, Oliver Wyman's severance cost, which are capacity related are included in operating results, not restructuring. In the second quarter, even including $8 million of severance cost, operating expenses decrease 17% on a year-over-year basis.

Now, let me move to risk consulting and technology. In May, we completed the sale of our US government security clearance screening business for all government services. MMC's prior results have been restated to reflect Kroll government services as discontinued operations. Information for the past five quarters is included in the supplemental schedules in our press release.

To varying degrees, Kroll continues to feel the effects of the recession in each of its businesses, revenue with $161 million, a decrease of 24% from the second quarter of 2008. Excluding the Goodwill impairment, expenses were down 14% compared with 7% in the first quarter, reflecting management's continuing efforts to deal with these extremely harsh conditions.

Now looking at MMC's capital structure, our balance sheet remains strong. We made a discretionary pension contribution in the second quarter to our UK defined benefit plan of about $70 million, a similar amount to the January contribution. These contributions are in addition to the scheduled contributions we mix with the plans throughout the year. We do not currently anticipate additional discretionary contributions this year.

In June, we repaid our $400 million senior debt maturity with proceeds from the March debt issuance. Our next bond maturity is in September 2010 for $550 million. MMC has no outstanding commercial paper or bank loans. Our $1.2 billion revolving credit facility remains un-drawn. Net debt decreased $278 million from the end of the first quarter to $2.3 billion at June 30th. And we ended the second quarter with $1.3 billion of cash.

With that, let me turn it back to Brian.

Brian Duperreault

Thanks, Vanessa. We're ready to begin our Q&A session and just a reminder, we have our operating companies’ CEOs here, and Vanessa, to help to answer any questions. There you have it. So operator, we're ready to begin.

Question-and-Answer Session

Operator

(Operator instructions) We'll take our first question from Keith Walsh.

Keith Walsh - Citi

Hey, good morning, everybody.

Brian Duperreault

Good morning, Keith.

Keith Walsh - Citi

Hi. How are you? First question I guess for Dan, with the significant improvement we've seen especially year-to-date in the margins, has there been any change, and I think you partially answered this with the margin guidance for the year, but any change in the seasonality that we will see with the margin throughout the year in risk and insurance services?

Dan Glaser

Yes. Hi, Keith. No, there's no change in the seasonality. If you look back to last year over the four quarters and you look at the first, second, and fourth, and then compare the third, the average revenue for the three quarters, and I mentioned the first, second, and fourth at $1.16 billion, and it was $1.04 billion in the third, so there's a $112 million difference in revenue in the third quarter.

And if you just look at the dates of key renewal dates, there's only one key renewal date on the third quarter and that's July 1st. So while we look at most of our expenses as being straight lined across the year, so our expenses are very stable already adjusted in the third quarter.

Keith Walsh - Citi

Okay, very helpful. And then just for Brian, a follow-up, Brian or Dan. Just on contingent commissions, I'm sure you've seen the Illinois Attorney General allowing Arthur Gallagher to accept them back. Is this essentially -- I know the NYAG is your regulator here, but is this essentially a non-event or is it inevitable? Do you think that the NYAG moves in that direction? Thanks.

Brian Duperreault

Right, I think we executed a question. Well, I would say the first part of this and I think Dan might want to comment too, but I think, in general, the commissioner has been quite clear -- the superintendent in New York has been quite clear about his feelings on it. And we're encouraged by that. But I know Dan wanted to say something else.

Dan Glaser

Sure. I mean, Keith, you know we've been consistently and publicly advocating for a level playing field and transparency. We're all brokers or subject to the same set of rules. In two-tiered markets that have existed for the last five years, it did not sound public policy in our view.

We look at the recent action by the Attorney General in Illinois and we think it's an important step in fixing a broken system. We also commend New York. I mean New York has been working over the past year to draft a balanced producer compensation regulation. We believe our settlement agreement should be sunset and we look forward to competing on the same terms as other intermediaries at some point of the future.

Keith Walsh - Citi

Great. Thank you.

Brian Duperreault

Okay, Keith.

Operator

Thank you. We now move on to Larry Greenberg.

Larry Greenberg - Langen McAlenney

Thanks and good morning. Two questions, one, can you discuss how potential health care reform could impact your businesses? And then secondly, would you say that you’re a beneficiary of some of the consolidation that's taking place in the re-insurance brokerage sector?

Brian Duperreault

Ah, okay. Well, those are two different operating company questions. So Michele, why don't you do the health care, and we'll have Peter talk about re-insurance.

Michele Burns

Obviously, in our business, first of all, generally, change in any of our businesses signals some good times, if you will, for Mercer. Those changes result in client tending to react and respond.

We're watching the health care legislation in this country obviously very, very closely, and over the longer term, certain aspects of that legislation that's being bandaged about could have some negative impact on our business. But it’d be a very long term issue and in the short to mid term, all the energy that's going into health care reform and the most likely outcomes from the legislation would likely fuel our business for sometime to come.

So we're quite comfortable with where we sit with regard to that and watch it with great interest.

Larry Greenberg - Langen McAlenney

What would be the negative issues?

Michele Burns

Well, for example, if we were to go completely to a socialized medicine system where there was one big payor [ph], it would significantly change how we think about it. We would still have a business in the United States very much akin to how it’s conducted in several of the countries in Europe, but it would be a significant change in one that is not exactly what the commerce is considering now at any rate.

Brian Duperreault

Okay. Larry, let me have Peter talk about the reinsurance consolidation.

Larry Greenberg - Langen McAlenney

Okay.

Peter Zaffino

The consolidation, we think will have benefits for Guy Carpenter in the future. If we look at our current quarter, we had excellent retention from clients measured by number of clients or revenue, and saw about a 20% increase in new business. The new business came predominantly from current clients and that was really driven by the value that we have brought to our clients, and focus around capital. But believe that Guy Carpenter is very well positioned as a very strong choice as we look to future quarters of next year.

Brian Duperreault

Okay, now?

Larry Greenberg - Langen McAlenney

Yes and then just to follow-up. The trend, you mentioned 150 new senior hires, can you give us some sense on how that's developed, maybe Q1, Q2?

Brian Duperreault

Yes. Those were in March -- I think Dan can give you that.

Larry Greenberg - Langen McAlenney

I’m sorry --

Brian Duperreault

That’s all right. Dan will answer anyway.

Larry Greenberg - Langen McAlenney

Okay.

Dan Glaser

And that kind of Q1 and Q2 thing, that's really starting from really the second quarter of 2008.

Larry Greenberg - Langen McAlenney

Right.

Dan Glaser

Now those more than 150 managing directors and SVPs, more than 80% are in client facing roles.

Brian Duperreault

Peter, we did mention that you brought some people on. You might give some color on that too?

Peter Zaffino

Sure, we add, as Brian said in his opening remarks, we had a three senior executives that will each position us for future growth, in particular, Henry Keeling in our international business. We believe that that's the strongest opportunity for Guy Carpenter going forward. And we're going to invest a lot of the resources that we put into the organization and focus growth in the international space.

We're very excited. We have over 30 strategic hires that we put on board since the beginning of the year, all really playing an important role in our growth strategies so we're very excited about the future.

Brian Duperreault

Okay.

Larry Greenberg - Langen McAlenney

Thank you.

Brian Duperreault

Next question, please.

Operator

Thank you. Our next question will come from Brian Meredith. Please state your company name.

Brian Meredith - UBS

Yes, UBS. A couple of questions -- good morning, everybody. The first one, Brian, can you talk a little about what your plans are to do with all this cash that you're accumulating and historically, typically, you got a lot of cash accumulate in the second half of the year also.

Brian Duperreault

Okay, I’ll start with that, Brian. Yes, thanks, it's interesting, but given the economic conditions you almost can't have too much cash. We are very focused on liquidity issues and I mentioned that we are interested in growing too. We feel there's been a lot of time in the last 18 months and the last six months trying to get our company in good order to go from defense to offense. And I think we're in a position to do that. So it's a nice position to be in and we'll see what happens to that cash.

Brian Meredith - UBS

Great. And then two other just quick ones here, private equity going forward, should we expect that to stabilize here going forward?

Brian Duperreault

The private equity piece --

Brian Meredith - UBS

Yes.

Brian Duperreault

Vanessa?

Vanessa Wittman

Yes, as you know, Brian, we report on a one quarter leg, so we can give you visibility into next quarter. And really, given the volatility, we would be reluctant to comment beyond that, but we are indeed hoping for stabilization over the future quarters.

Brian Meredith - UBS

Okay. And then last quick question for Michele, so I have everybody here -- mostly everybody. In the quarter, did we -- was there any impact from a slow down in maybe client buying because of what’s going on with health care reform and this uncertainty as far as what's going on?

Michele Burns

No, I’d say that the opposite was true. That we had, in terms of our high end business, much more volume analyzing the perspective legislation as well as frankly, us being a vehicle to interpret moves that are made. We hosted several webcast for example and we actually broke a couple of servers with the volume of clients that were falling into our webcast, and that is a serious comment, Brian. So, no, at this stage, the volatility in the industry, if you will, as opposed to economic volatility is called opportunity from us in a high-end business. 

 

Brian Meredith - UBS

Thank you.

Brian Duperreault

Good. Next question, please.

Operator

Thank you. We move to our next question from Meyer Shields. Please state your company name.

Meyer Shields - Stifel Nicolaus

Thanks, Stifel Nicolaus. Good morning, everyone. As I understand it, the margin lines you gave last quarter did not include Collins? I’m assuming the 18% does?

Brian Duperreault

The 18% does and I think by default, the one before did too. So I'm not sure that we said it wasn’t in, but anyway, let’s say the 18% definitely includes Collins.

Meyer Shields - Stifel Nicolaus

Okay. That's fine. When we look at -- I want to play off of Brian's question, within reinsurance, because of the consolidation, I guess there would be a couple of impacts. One would be the temporary uncertainty or unusual movements that typically follow that sort of thing. And the second would be improving pricing capabilities because they are now in the free global reinsurance broker. Is there anyway of ball parking the different impacts of those two phenomena?

Brian Duperreault

You want me to do it, Peter? You might -- Peter says please do it, yes.

I think pricing, it's a competitive market and I don't think that frankly, the pricing is going to be affected by that. We get paid because of the services we provide and I think these are very sophisticated buyers. They know the insurance business well and you got to earn every penny you make. So I would put that aside.

There are fewer competitors, fewer choices -- companies want to have balance, so I think those are things that will affect it. We're subject to market conditions and those have been slightly positive this year but not overwhelmingly so. So I think that probably has much more to do with the future revenue.

And I think expansions, so for us, you heard what Peter said, we are a very global company in general. But in Guy Carpenter we have been less so, very, very strong in the US and less outside the US, and its -- If you look at the trends in insurance the activity is predominantly outside the US. And so, for us it’s almost like a green field. So we’re very positive about Henry’s entrance and our ability to add around him people who have a market presence. And that’s where we expect to grow.

Meyer Shields - Stifel Nicolaus

The one point I think, Brian, that you brought up which is key, the consolidation is going to force the reinsurance intermediary offering to be more complex. And we’re talking more about capital today; we’re getting in and giving more advice or services. So what the offering is today compared to what it was a couple of years ago is much broader.

And the general rate and structure is starting to level off. It had a neutral impact on our portfolio in the second quarter, and even though we saw some property tax increases, there’s plenty of headwinds still with subject premium basis and also some of the casualty lines have not moved in a positive direction. So it’s really been driven for us through new business.

Meyer Shields - Stifel Nicolaus

Does the--

Brian Duperreault

Okay. Meyer?

Meyer Shields - Stifel Nicolaus

I’m sorry, yes.

Brian Duperreault

Okay. Next question, please.

Operator

Thank you. Our next question will come from Matt Heimermann. Please state your company name.

Matt Heimermann - J.P. Morgan

Hi, J.P. Morgan. Good morning everybody.

Brian Duperreault

Good morning, Matt.

Matt Heimermann - J.P. Morgan

Brian or Dan, on the whole contention commission issue, I guess the one thing I’m struggling with and thinking about this is in fact, superintendent New York AG, due sunset, the agreements you’re subject to is, the whole issue of RIMS stands against contingent commissions as well as just, I think, what are probably higher transparency standards for you in disclosing total payments from brokers and underwriters. And so, can you talk about if this does go away from a practical standpoint what it really means in terms of incremental compensation or recapture of compensation from the past?

Dan Glaser

Yes. (inaudible), sure. Let me address it this way, our focus is on achieving a level playing field. I will say that from our perspective, the issue of contingent compensation is a bit of a red herring. The real issue is carrier revenue streams, transparency, and disclosure practices, and internal systems and controls which are designed to manage conflict of interest. There are several carrier revenue streams today. The brokers including Marsh are permitted to accept basic commissions and supplemental, enhanced fee for services, work transfer, and more.

So really, I would approach it this way. All carrier revenue streams represent a potential conflict of interests. Therefore, for us, the real issues are transparency, what disclosure practice that each company has, what the internal controls are to manage potential conflicts. I don’t want to speak for RIMS, but I think RIMS’ principal issue -- well, they’ve been consistently against contingent commissions for quite some time. But I think they would be vehemently against the notion of contingent commission which is not paired with full and transparent disclosure.

Matthew Heimermann - J.P. Morgan

In just following up on that, let’s say that there was full disclosure and contingents were allowed, is that something that we should expect to suddenly be a tail end for you from a revenue perspective? Or if you get full and complete transparence, is it, is it -- are clients necessarily going to be willing to pay bigger sticker?

Dan Glaser

Yes, Matt, I follow. I don’t want to speculate specifically about contingent commissions right now. But I have talked in previous quarters about our enhanced commission initiatives, which are fully disclosed and they don’t -- they’re not variable. So they’re fixed and they’re not influenced by volume or profit. And so I think enhanced commission for Marsh is really the staple of where we look at enhancing our carrier revenue stream based upon the value that we provide the carriers.

We’ve been very successful over the past several quarters in getting more and more carriers to accept the notion of our value creation in developing agreements. In fact, we have more than 30 agreements to date on the enhanced commission front. And we do disclose enhance commissions to our clients, and we require the client to agree to the level of enhanced commission before we sign off. And frankly, I’ve been more than satisfied with our level of client acceptance.

Matthew Heimermann - J.P. Morgan

Okay. That’s helpful. Thank you for that. And then just maybe a big picture, I don’t know if this is Michele or Brian, but I think it was your comment, Brian that you think you’re at the bottom of the earnings cycle within that consulting segment. And the question I have is, is that a function of your visibility with respect to expenses or do you actually feel like, from a revenue perspective, you’re seeing some signs, but then the organization had actually the worst of the revenue declines that we’ve seen at this point?

Brian Duperreault

Yes, there’s obviously parts -- different parts to the consulting. When I started the comments, I made particular note of the expenses because we had to adjust our expenses to our revenue. So in a significantly -- this year our ability to hold margins at reasonable levels has to do with that.

So going forward, when I mentioned the -- out of the Wyman’s situation, it was that we got to that point. And I mentioned that we had -- it’s a little bit than we expect, so we had financial services dragging us down, but now, coming back. And with the shifted -- as the economy has shifted to difficulties more than manufacturing sectors.

So I think for us, we see maybe a little bit of stability overall in the revenues and in Oliver Wyman. And that, coupled with the improvement and the expense posture that led me to believe that that’s why we’re at the bottom for them. Michele’s a slightly different situation, but her revenues weren’t as severely affected as they were at Oliver Wyman.

We mentioned the fact we are up in a couple of other segments. And the big business retirement, and health and benefits actually over the year flat and slightly up 1% over six months, and I think the six months are representative of that. So, that’s why we’re feeling a little bit more optimistic with respect to both of those pieces of the consulting business.

Matthew Heimermann - J.P. Morgan

That’s helpful. Just one numbers question, is -- was there any other severance reported in the consulting segment this quarter besides the $8 million? And is that something that, by the time we’re through the third quarter, that severance impact can pretty much work its way out unless there’s new announcements?

Brian Duperreault

Vanessa?

Vanessa Wittman

Yes, I’ll take it in two pieces. There was a portion -- there was some severance that ran through Mercer’s P&L, about $4 million. And as to future quarters, I think it’s really going to depend on how the revenue is coming in. All of these units will continue to look hard at expenses matching that revenue.

Matthew Heimermann - J.P. Morgan

Okay. Thank you.

Brian Duperreault

Okay, Matt? Next question, please.

Operator

Thank you. We’ll move on to Thomas Mitchell. Please state your company name.

Thomas Mitchell - Miller Tabak

Miller Tabak. First of all, I just want to double check if there has been any reclassification of expenses away from insurance brokerage and to the parent company over the last thee or four quarters? I just want to double check that first.

Brian Duperreault

No, Tom. No.

Thomas Mitchell - Miller Tabak

Okay.

Brian Duperreault

All right.

Thomas Mitchell - Miller Tabak

So--

Brian Duperreault

They did it on their own. They did it on their own, Tom.

Thomas Mitchell - Miller Tabak

Okay, a real margin improvement and then--

Brian Duperreault

Real margin improvement.

Thomas Mitchell - Miller Tabak

The second factor is -- other brokers are talking about the fact that even though you’re very large, they tell you about the fact that there seems to be an opportune time to approach -- it’s probably wrong to call them the mom and pops, but to approach a smaller agencies and other brokers, particularly in the United States with the kind of value proposal to join your team. And I’m wondering if you’re seeing any uptake in the ease and ability with which you may be able to approach tuck-under acquisitions?

Brian Duperreault

Yes, Tom, we have an issue of -- that we called Marsh McLennan Agency, very much in that stage you’re talking to, and then Mike might give us an update on that.

Mike Bischoff

Yes, absolutely. Well the US market in particular is very fragmented in the mom and pop, and above into small and middle market space. And we formed the Marsh & McLennan Agency in higher divestment, like the former CEO of US side, to led our initiative in that area. And we’re talking to a lot of people.

I’m actually very pleased with what our pipeline looks like. Though we’re not compelled to do anything, but we’re having a lot of interesting conversations with quality firms led by quality individuals. The one thing that I would create any misperception that -- in acquisition in that space or series of acquisitions would be us talking them into Marsh. I’m very comfortable with running separate businesses and the Marsh & McLennan Agency will be run as a separate business within the Marsh Inc. family, obviously, but this will not be an integration of these agencies into Marsh in the US.

Brian Duperreault

Okay, Tom?

Thomas Mitchell - Miller Tabak

That’s very good, thank you very much.

Brian Duperreault

Okay, good. Next question, please.

Operator

Our next question will be a follow up form Meyer Shields.

Meyer Shields - Stifel Nicolaus

Thanks. Two really good questions, one, Vanessa what was the overall impact of foreign exchange to adjusted operated income?

Vanessa Wittman

About $0.03, it was largely in the consulting -- it was, actually all of the $0.03 was in the consulting businesses whore risk and insurance services were neutral to FX in the period.

Meyer Shields - Stifel Nicolaus

Okay. Thanks. And to just sort of delving into reinsurance again, and I think Peter talked a little bit about how the client demand more flat. Traditionally, reinsurance has seen higher margins. Does this more complex consulting change that at all?

Brian Duperreault

Peter?

Peter Zaffino

I’m sorry, I didn’t hear.

Brian Duperreault

Well, the question is now we have a more complex offering. Reinsurance is a high margin business. Has the complexity changed that level of margin?

Peter Zaffino

I don’t think it will impact the margin. What it’s going to do is require companies to have scale. It’s going to require companies to make investments to be able to have that broader product offering, and that’s going to be focusing around key strategies of our clients, but focusing around capital because we are seeing retentions are moving up, as recent survey said that trend will continue.

Of insurance companies asked, over 80% had issues retentions continue to go up helping manage that volatility to value-added services, which are modeling and working closely with them on their capital structure is going to be crippled, so you need scale and you need to make investments and reorganization in order to able to pull that off.

Meyer Shields - Stifel Nicolaus

Are you expecting more consolidation on your competitors because of that?

Brian Duperreault

I don’t expect much more consolidation. There are really three large reinsurance brokers and there’s several other brokers that have boutique offerings. It would surprise me if one or two perhaps were acquired, but I don’t see anything in the foreseeable future that would be strategic in terms of acquisitions.

Meyer Shields - Stifel Nicolaus

Okay, great. Thanks so much.

Brian Duperreault

Okay. Meyer, next question.

Operator

Our next question will be a follow-up from Keith Walsh.

Keith Walsh - Citi

Okay. Thanks,, guys. Brian just for you, two quick follow ups, just on M&A here. Would you consider buying something outside of brokerage? And then I got a follow up.

Brian Duperreault

Buying something out of brokerage?

Keith Walsh - Citi

Like in consulting, would you redeploy--

Brian Duperreault

Yes, the answer’s yes. And in fact, we have been acquiring. And that we haven’t really done anything in the last three months, but since I arrived, there’s been several acquisitions and we think it’s a worthy place to put our money.

Keith Walsh - Citi

And then, just my last question and with your stock at one time revenue, which is the lowest it’s been at 30 years, your margins are clearly on the path to being fixed. Wouldn’t a best return on your investment instead of buying something in a soft market, in the consulting side be from buying back your stock right here?

Brian Duperreault

Buying back your stock. Well, I’m -- my opinions on stock buy backs have been well-documented, and look, it’s a question of what is the best value for the funds we have? And my preference is to find business that grows our business, that’s strategic in value that returns over a long period of time. And so, that’s my priority.

Now, if you can’t find those and there are circumstances that might prevent that, you’d have to consider stock buy back. But it’s a question of priority, and think that’s the right priority, it’s my priority. Okay, Keith?

Keith Walsh - Citi

Yes, thank you.

Brian Duperreault

Okay, next question.

Operator

There are no further questions at this time. I’ll turn it back to our speakers for any additional or closing remarks.

Brian Duperreault

Well, I thank everybody for participating and I thank my colleagues who are doing a great job. And I look forward to talk to you next quarter. Thank you. Bye.

Operator

Thank you, ladies and gentleman. That does conclude today’s conference call. We thank you for your participation.

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Source: Marsh & McLennan Companies, Inc. Q2 2009 Earnings Call Transcript
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