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Marsh drags MMC profits

Marsh & McLennan Companies (MMC), the parent of world’s largest broker Marsh, today (3 May) reported first quarter net income of $134mn, or $0.25 a share, well down on the $446mn or $0.83 a share booked in the first three months of 2004.

The company, which has been at the centre of a number of high profile regulatory investigations involving its subsidiaries, booked total revenues marginally down from $3.20bn to $3.18bn for the quarter.

Net profit included the impact of $225mn expenses arising from restructuring, regulatory and compliance costs in its broking operations, and potential reimbursements in its Putnam fund management arm.

The group’s new president and CEO Michael Cherkasky, who replaced axed Jeffrey Greenberg last October, commented: “We continue to take steps across MMC to make it a stronger, more streamlined company. Marsh is executing its plan to simplify its management structure, improve efficiencies and account profitability, and increase transparency. These changes should enable Marsh to deliver profitable growth and margin expansion next year.”

As expected, the abolition of so-called Market Service Arrangements (MSAs) in the aftermath of the inquiry by New York attorney general Eliot Spitzer, contributed to revenues in MMC’s risk and insurance services operation dropping by 11 percent to $1.7bn, or 13 percent excluding acquisitions and foreign exchange influences.

Revenues derived from MSAs themselves fell from $179mn to $32mn for the quarter.

Marsh, MMC’s insurance broking arm, saw revenues decline by 19 percent to $1.2bn “due to the termination of market service agreements, the effect of reduced insurance premium rates, and a lower volume of net new business”.

Revenues dropped off most in the US, said MMC, with falls in the rest of the world in line with the softening insurance market.

MMC’s reinsurance broking subsidiary Guy Carpenter reported revenues of $282mn in the quarter, matching the figure for 2004.

New business grew at a faster rate than in the comparable period of 2004, said MMC, but this was counteracted by higher risk retentions and softening rates in the reinsurance market.

Savings associated with the fourth quarter restructuring MMC put in place in its risk and insurance services division were outweighed by $96mn in additional restructuring costs, $43mn in incremental regulatory and compliance costs, and $15mn for employee retention programmes. The company warned further charges are expected during the course of 2005.

As a result of these costs, and the abolition of MSAs, operating income from MMC’s risk and insurance services division plunged from $633mn to just $171mn.

MMC agreed a settlement with regulators on 31 January to pay $850mn into a client restitution fund in instalments over the next four years. The first payment is due 1 June this year.

Elsewhere, revenues in MMC’s risk consulting and technology operation Kroll were up from $26mn to $264mn, with operating income leaping from just $4mn to $37mn.

Mercers, MMC’s human resources consulting and specialty consulting division, saw total revenues rise from $804mn to $837mn, with operating income slipping from $87mn to $84mn.

Investment arm Putnam Fund Management – also the subject of regulatory scrutiny – reported revenues down 12 percent to $398mn. Funds under management suffered heavy outflows in the last 18 months following a regulatory investigation into management practices.

Nonetheless, the division turned a $24mn loss for the first quarter of 2004 into operating income of $49mn this time around.

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