Marsh & McLennan Companies, Inc.
Q4 2007 Earnings Call Transcript

Published: 12 Feb 2008

[Operator:]

Welcome to MMC's Conference Call. Fourth quarter year-end 2007 financial results and supplemental information were issued earlier this morning. They are available on MMC's website 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 conference call to anticipated or expected results of operations for 2008 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 website 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. I'll now turn this over to Brian Duperreault, President and CEO of MMC.

[Brian Duperreault:]

Good morning and thank you for joining us on today's call. I am Brian Duperreault, President and CEO of MMC. Earlier today, we reported financial results for the fourth quarter of 2007. As many of you know, I was named CEO less than two weeks ago. So the report and discussion of these results is part of my process of learning about the state of the company as well as serving to inform you. On today's call I'll make some brief remarks about the opportunity I see here at MMC before turning it over to two of my new colleagues. First, our CFO, Matt Bartley, will present the results for the quarter and the full year. Second, we'll hear from Dan Glaser, the new CEO of Marsh Inc. Dan joined us on December 10th, so compared to me he is a veteran. Dan will talk about his initial assessment of Marsh and the plan he is developing for the turnaround of the Marsh business. In addition to Matt and Dan, also on the call are Michele Burns, CEO of Mercer, and John Drzik, CEO of Oliver Wyman. Also with us is Mike Bischoff, Head of Investor Relations for MMC. I'd like to start off with a few personal comments. One question many people have asked me is, Brian, why did you take this job? MMC is a company that's faced and continues to face a lot of challenges. Well, frankly, that's exactly the reason I took the job. As soon as I was contacted about this opportunity, I knew I was interested in it. It wasn't because I had retired from ACE and was open to taking on new challenges. I was excited about it because I know this company, I know what it has been and I know what it can be again. MMC and I have been around each other for decades in various ways. I worked with Marsh and Guy Carpenter, and I've been a client of Mercer. I have admired what this company has done. MMC is a company that has brought together a unique set of assets and performs very important and worthwhile functions for enterprises and people around the world. But MMC is also a company that's been hit with a lot challenges and gone through some very tough times. Mistakes were made. And while many individual businesses and many people and teams have done outstanding jobs, as a whole, as a corporation, we failed to perform for our shareholders as we needed to. Despite this reality, the company is still strong. It has outstanding people, great intellectual capital, tremendous services, unparalleled relationships, and despite everything, a great spirit and sense of commitment. And that's what made this such a compelling opportunity for me. I know we can do better. Frankly, one of the first steps in doing better was the hiring of Dan Glaser to be the CEO of Marsh. I highly knew Dan by reputation. He is highly regarded by industry leaders whom I respect. Dan and I met before I accepted the job. I liked him immediately, and more importantly, I liked what he is doing and will do. It made my decision very easy. In the final analysis, it was my admiration for this company and my recognition of its tremendous unrealized potential that attracted me. I hope that what I've just said helps you understand why I am here, but I also understand that ultimately it's performance, not potential that counts. So, let's start today by looking directly and critically at our performance, and for that I will turn it over to Matt.

[Matthew B. Bartley:]

Thank you, Brian. Good morning, everyone. I will begin by summarizing our fourth quarter 2007 earnings as reported and with reference to noteworthy and specific items followed by a brief discussion of the results of each of our operating segments and companies, and concluding with an overview of our capital management activities and our increasing capital flexibility. Let's begin with earnings. Reported earnings per share from continuing operations were $0.17 for the quarter. Significantly, some discrete items affected our results. First, noteworthy items, which are highlighted on page 11 of the press release, primarily restructuring charges from ongoing cost reduction initiatives totaled $59 million or about $0.07 of EPS in the fourth quarter. In the prior year period, noteworthy items netted to a $5 million credit, almost a penny of EPS. Second, in addition to noteworthy items, there were $14 million of incremental costs associated with the departure of MMC's former CEO reducing EPS in the fourth quarter by an incremental $0.02. As adjusted for these discrete items, we look at our results from operations for the fourth quarter of 2007 to be $0.26. This compares with $0.39 in the fourth quarter of 2006 on a similarly adjusted basis. To be clear, these numbers should be viewed as non-GAAP. Now let me briefly summarize the consolidated revenue story before turning to the individual operating segments and businesses. In the fourth quarter, MMC's overall revenue rose 8% to $2.9 billion, driven by strong growth in our consulting operations. This segment, which made up approximately 45% of consolidated revenue, grew 19% on a reported basis and 13% on an underlying basis in the quarter. Underlying basis measures the change in revenue before the impact of acquisitions and dispositions using consistent currency exchange rates. For the full year, the increase in revenue was also 8% from $10.5 billion to $11.4 billion, again, this growth was fueled by strong growth across consulting operations, which grew 16% on a reported basis and 10% on an underlying basis. Now let me briefly discuss our reporting segments and operations. Risk and Insurance Services revenue of $1.4 billion in the fourth quarter of 2007 was essentially unchanged from the same period of 2006, reflecting significantly soft market conditions in both the primary and reinsurance markets, as well as the fall-off in revenue from the investment portfolio that we report as Risk Capital Holdings, or RCH, on the revenue analysis schedules, pages 8 and 9 of the press release. Let's take a closer look at the component parts of Risk and Insurance Services. Beginning with primary insurance broking, Marsh's fourth quarter revenue increased 6% to $1.2 billion compared with the fourth quarter of 2006. On an underlying basis, growth was 1% positive. Marsh generated very strong new business in the quarter. Growth in new business excluding foreign exchange fluctuations was 8%, driven by strong performance in the United States. This solid performance in new business generation was on top of very strong new business production in the fourth quarter of 2006. And to give you some perspective on the amount of new business generated in the most recent quarter, it was similar to the level of Marsh's best new business production in any quarter since Q1 of 2003, an especially impressive performance considering that 2003 was very much a hard insurance market. Note that insurance market conditions continued to soften as 2007 progressed. Property and casualty commercial insurance premium rates were down approximately 10% at the beginning of 2007 and continued to worsen to soften during the course of the year. Marsh was able to overcome these market conditions and improve client revenue retention by one full percentage point from the third quarter of 2007. For the full year, our client revenue retention rate declined one percentage point compared with 2006. Now, let me make one note here. When we talk about client revenue retention, we are not talking about the number of clients retained. We are talking about the amount of all prior year client revenue, the pool of all prior client year revenue that we retain or replace in the following year. And that is a metric that we look at very closely to see the strength of the business. Dan will offer a few more comments on Marsh in the following segment. Turning now to our reinsurance operations of Guy Carpenter, fourth quarter revenue declined 2%, again, market conditions significantly affecting this, from $171 million to $167 million. The fourth quarter is historically Carpenter's lightest with the most significant annual client renewal periods in January and July. This revenue decline was overwhelmingly due to weakness in the facultative business, which accounts for less than 10% of Carpenter's revenue. Market conditions and some senior U.K. facultative departures that occurred earlier in the year led to the revenue shortfall. At the same time, Carpenter's U.S. Treaty business was particularly strong, seeing revenue growth of over 5% in Q4 on an underlying basis. This despite the fact that in the fourth quarter reinsurance rates continued to soften across most P&C lines globally. Since pricing peaked for most U.S. coastal property catastrophe coverages back at the 2006 mid-year renewals, we have seen the trend in price declines continue through the January 2008 renewals across virtually all lines of businesses. Two years of benign wind storms in the U.S. combined with strong underwriting results by insurers and reinsures have led to higher risk retention by Carpenter's clients and continued pressure on reinsurance premium pricing. Nonetheless, for the full year 2007, Carpenter produced positive underlying revenue growth of 1%. In full year 2007, U.S. Treaty business showed strong underlying growth of 5%, equal to the Q4 growth rate. The market continues to be difficult. January renewals reflected global price declines in property catastrophe rates of 7% to 12%, while decreases across casualty lines were seen on the order of 5% to 10%. Turning to Risk Capital Holdings, RCH had substantially lower revenue in the fourth quarter of 2007, as I suggested would be the case during last quarter's call. Revenue at RCH went from $74 million in the fourth quarter of 2006 to $8 million in the most recent period. This $66 million decline negatively affected EPS by about $0.08. RCH's revenue this quarter derived primarily from mark-to-market adjustments. For the full year, revenue decreased 16% to $163 million in 2007 from $193 million in '06. Looking forward, we expect that revenue from RCH will continue to be volatile on a quarter-to-quarter basis and will be significantly lower in aggregate than the revenue shown in 2007. A quick note on operating income for this segment, looking at Risk and Insurance Services in total, operating income, excluding noteworthy items, was $100 million in the quarter compared with $180 million last year, primarily a consequence of the revenue decrease at RCH. Marsh's NOI showed significant improvement from the third quarter of 2007, as well as an increase from the fourth quarter of 2006, with increases in margins both sequentially and year-over-year. As I previously mentioned, the fourth quarter is Carpenter's lightest of the year and generally produces roughly breakeven results. Difficult market conditions and shortfalls in facultative business in Q4 '07 caused results that were somewhat worse than this. Now let's turn to Consulting. Revenue for this segment approached $5 billion in 2007. Both Mercer and Oliver Wyman had very strong fourth quarter performances, which resulted in growth for the overall Consulting segment of 19% in revenue and 38% in operating income. While some moderation in these stellar growth rates will occur, we still expect meaningful growth from our consulting businesses going forward. On a GAAP basis, note that the operating margin improved 170 basis points from 10.5% in the fourth quarter of 2006 to 12.2% in the most recent quarter. For the full year 2007, the GAAP margin improvement was 140 basis points. Excluding noteworthy items, the margin improvement was about 1 percentage point for both the fourth quarter and the full year. Now, on Mercer's specifically, fourth quarter revenue performance was strong, 14% growth on a reported basis and 8% underlying. This impressive performance was achieved throughout the organization with reported revenue increasing significantly in the fourth quarter for each of Mercer's four major practice areas. Retirement and investment revenue rose 16% driven by increased demand for retirement valuation services in Continental Europe and strong results for investment consulting. Health and Benefits revenue increased 10%, largely resulting from strong new business and a higher retention rates on existing business. Outsourcing revenue increased 17%, reflecting increased and increasing activities... activity in Mercer's total benefits outsourcing offering. And the Talent segment showed revenue increasing 14% in the quarter, driven in large measure by increased survey sales. Data on work phase data... data and information on workforce databases and global mobility are good examples. Oliver Wyman, the strong demand for the range of Oliver Wyman Consulting Services continued in the fourth quarter resulting in annual revenue exceeding $1.5 billion. Reported revenue growth was 28% in Q4 with double-digit increases achieved by both its management and economic consulting operations. Financial services consulting was particularly strong in the quarter. Revenue growth was enhanced by performance fees related to certain engagements where a portion of Oliver Wyman's compensation was tied to benefits immediately received and realized by the clients. [Technical Difficulty]. Hold on a second while we sort out what is impeding your ability to hear my remarks. Revenue growth at Oliver Wyman was enhanced... let's try once more. Let me start again with Oliver Wyman. Strong demand for the range of Oliver Wyman Consulting Services in the quarter, aggregate revenue for the year $1.5 billion. Reported revenue growth was 28% in Q4, double-digit increases in both management and economic consulting services, and financial services particularly strong. Revenue growth significantly was enhanced by performance fees related to certain engagements where a potion of Oliver Wyman's compensation was tied to the benefits immediately realized by clients. These performance fees, which are generally received at the end of consulting assignments, contributed about 8 percentage points to underlying revenue growth, which was a strong 22% in the fourth quarter. Now, turning to Kroll. In the fourth quarter, Kroll's reported revenue was up 3% to $249 million. On an underlying basis, revenue declined 3%. Revenue from Kroll's technology businesses rose 18% to $149 million, partially due to a recent acquisition at Ontrack, the data recovery and legal technology business. Also within technology, background screening performed very well, driven by its identity theft prevision and recovery services. One unit of the technology practice area that was particularly challenged was Kroll's mortgage screening operation, Factual Data, which experienced a decline in volume reflecting current credit market conditions. Over in the consulting area of Kroll's operations, revenue decreased 13% to $100 million. The corporate restructuring practice continues to operate in a very challenging environment. Kroll's security practice saw a revenue decline as it works through the backlog associated with federal government contracts. There was, however, strong growth in the business intelligence and investigations operation, which saw revenue increase by 30% over the fourth quarter of 2006. This improvement was driven by notable growth in European and Asian markets, accompanied by strong growth in profitability. Kroll's operating income in the fourth quarter of 2007 was a disappointing $17 million, down from $45 million recorded in the fourth quarter of 2006. The reduced levels of profitability reflect volume reductions experienced in the restructuring, mortgage screening, and security businesses, together with an unfavorable year-over-year comparison resulting from a gain on the early termination of a licensing agreement that Kroll recorded in the fourth quarter of 2006. Just a quick word on corporate expenses. Excluding noteworthy items and the incremental expense associated with the departure of MMC's former CEO, corporate expenses in Q4 were $41 million, in line with our recent run rate levels. We are taking immediate actions to reduce corporate expenses. We have terminated spending on various initiatives and have either eliminated certain shared services or move them into the operating companies where they can be managed more effectively. We expect that these actions will start to improve profitability in the second quarter of 2008 and it will have an increasing impact on profitability as the year progresses. Finally, a little bit on capital management and our flexibility. In August 2007, we initiated an $800 million accelerated share repurchase program that delivered 21 million shares that month. Based on the final average share price during the buying period, we expect approximately 10.5 million additional shares to be delivered this March. This transaction followed a $500 million accelerated share repurchase program that was completed in July '07 and resulted in the repurchase of 16 million shares. As a result, we expect the share count at the end of the first quarter of 2008 to be approximately 510 million shares. On cash, in the fourth quarter, our cash balance... and this all relates to our capital flexibility. Cash balance decreased from 2.1... to $2.1 billion from $2.8 billion at the end of the third quarter. Excluding the tax payment on the Putnam transaction, cash increased by approximately $300 million in the quarter. Consequently, our debt balance was $3.9 billion at the end of 2007, a substantial decrease from our year-end 2006 debt of $5 billion. We will be utilizing cash on hand to repay $250 million in debt that matures later this week. And looking a bit out... out a bit further in 2008, in June, we will be funding the final installment of our payments to the compensation fund in the amount of $170 million. Net debt, which best represents our capital position and flexibility, was down to $1.7 billion at the end of 2007, a significant decrease from $3 billion at the end of 2006. The capital management activities we have completed over the last three years represent a significant de-leveraging of MMC's balance sheet. Net debt to capitalization ratios have decreased to 18% at the end of 2007, down significantly from 34% at the end of '06 and even higher in '05 and '04. In addition, due to the improvement in the funded status of our global defined benefit plan at year-end '07, the MMC's equity balance increased almost $1 billion at the end of last year. Finally, pardon me, for those if you may have missed it, in January, the Board announced a 5% increase in the dividend from $0.19 to $0.20 a share effective with the first quarter of 2008. And with that, let me turn it over to Dan for some information on Marsh.

[Daniel S. Glaser:]

Thank you, Matt. The first thing I would like to say it how thrilled I am to return to Marsh. I am excited about the opportunity of working with Brian and the team to significantly improve Marsh. Let me tell everyone a little about myself. I have been in the business for over 25 years, 18 year's on the brokerage side, and eight years on the underwriting side. I have run global specialties and I have run geographic regions as a broker and as an insurer. I am in international list. I have spent 50% of my career working outside of the Untied States. I began my insurance career right out of college joining Marsh as a broker in 1982. I worked at Marsh for a decade focusing on the energy sectors servicing top oil, chemical and energy accounts in New York, Saudi Arabia, and London. I have been a placement broker and the client executive. I dealt with some of the most complex issues faced by Marsh's major multinational client. I spent the next eight years at Willis, where I eventually served as President and Chief Operating Officer of Willis Risk Solutions, the large accounts practice of the Willis Group. Then in 2000, I joined AIG as the President of the Global Energy Division. I transferred to London in May 2002 as Managing Director of AIG Europe (UK) and became a Senior Vice President of AIG, Inc. in early 2007. So on coming back to Marsh I have come full circle. I have always had great affection for Marsh and its people and I truly understand its heritage and culture, its strength and its qualities. I relish the challenge of bringing Marsh back to the prominence and prestige it knew for decades and this desire is shared by my entire senior operating staff. When I first arrived I wanted to establish my senior management team and I proceeded to do that quickly, which was announced six weeks ago. I hired Joe McSweeney to be President of U.S./Canada. Joe worked at Marsh for more than 18 years from the mid-70s to the early 90s where he led the global utilities practice. His most recent position at Willis was as Chairman of Willis Risk Solutions. I chose Alex Moczarski to be President of our newly formed international division. He joined Marsh in 1993 from AIG. Alex advanced from being the Region Head for the Latin America and Caribbean operation to Head of International Specialty Operations to his most recent position as Chief Executive Officer of EMEA, our largest international region. I hired Sandy Vietor to be President of Marsh's Global Specialties. Sandy began his Marsh career in 1975 and spent the next 16 years here including as President of Marine and Energy. Most recently, he was Executive Vice President of Aon Risk Services Americas. I selected Tim Mahoney to lead the Global Risk Management unit, and to which our industry practices now report. He has been with Marsh since 1989 in a wide variety of senior executive positions dealing directly with clients. And I asked Hank Allen to continue as President of Global Consumer, which includes the firm's affinity and program management businesses as well as its private client services division. This management team has vast industry experience, both in the U.S. and abroad. We have experience running global geographies and global specialties, and have served clients both as brokers and as insures. And most importantly, we share the same passion and vision for what Marsh can be in the future. Our vision is to be the best insurance broker, intermediary, and risk advisor. I am currently in the process of assessing Marsh from many different angles. Let me give you some of my thoughts from my initial findings. Let's start with some good news, our clients list is very strong and I wouldn't switch our client base with any competitor. We have an excellent global footprint from which to service our multinational clients. We will certainly capture more value from this advantage in the near to mid-term. We have a talented and dedicated colleague base and in my view, noise around morale is way overdone. Staff morale is improving, a sign of this is voluntary turnover. Colleague turnover in 2007 improved to 12%, which is close to our historical level. Turnover among Managing Directors and Senior Vice Presidents also represented a return to historical levels at 6% in 2007. In 2007, we hired a significantly larger number of people at the senior ranks from competitors than we lost. We hired more than 300 officer positions from competitors and we lost approximately 200 for a net gain of more than 100. Our new business results are strong. We produced close to $900 million of new business in 2007. Our new business figure for 2007 on its own is equivalent to the size of the number 6 global broker. Many parts of our business, Continental Europe, Asia-Pacific, Canada, Latin America, Middle East and Africa, and Consumer are performing well with double-digit margins. So in my view we have a terrific client base, the right global footprint, and high quality colleagues. The issue is we don't make enough money, which brings me to my near-term plans. It's back to basics. In 1982, when I first started working at Marsh, my dad who ran a small art supply business gave me one important piece of advice. He said I should always think and behave like an owner. I have carried this advice through my career and this approach will take hold at Marsh. The purpose of Marsh is to serve clients; therefore, our strategies will be geared to those things which benefit clients and the colleagues that serve clients. Of course, we must do this profitably. I am moving swiftly to simplify the organizational structure, streamline reporting lines and drive profitability. Let's talk about profitability. The principal challenges relate to the U.S. and to a lesser extent the UK, although we will ultimately improve margins everywhere. We are focusing on both revenues and expenses. I believe that we can create additional revenue from better segmentation strategies, particularly in the smaller lower middle-market segment, and revenue initiatives such as reviewing our pricing of services approach, improving client retention, and our enhanced commission initiative, as well as evaluating placement hubs in the U.S. We are also focused on reducing costs and expense management. We continue to implement the cost savings initiatives identified in the fourth quarter of 2007. As previously discussed, these are overwhelmingly corporate costs and the savings are expected to be approximately $125 million. In addition, we still expect to see substantial year-over-year savings in pension, benefits, and other one-time costs, which together with the $125 million in initiatives will result in over $200 million of savings on a year-over-year basis. Keep in mind, as previously discussed, these savings will be offset to some extent by increased salary and compensation costs as we continue to compete for talent. These and other expense controls we plan to put into place target the nice to haves rather than the need to haves. We will make changes to organizational alignment, processes, standards, and technology in a thoughtful manner. While that will take me and my management team time to achieve improvements in all of these areas, we are already operating as a cohesive management team, speaking as one voice on a global basis with a very simple message. Working together, we will successfully increase the focus on clients, reduce operating expenses, reward superior performance for all... for our colleagues, and improve profitability to shareholders. We are already moving to improve profitability by aligning and simplifying the organization, establishing P&Ls on a more decentralized basis, empowering our best P&L managers to make decisions with accountability for results, and instilling disciplined expense management and fostering a culture where we all think like an owner. These improvements will allow us to invest in our colleagues, our core strength, and to increase returns for shareholders. In summary, I am confident that we will deliver exceptional client value and drive profitability and growth by capitalizing on our global reach, market expertise, and outstanding people. These are just my initial observations in the two months I have been here, but I can tell you I am very optimistic that we will be a firm of formidable strength in the future. With that, I will turn it back to Brian.

[Brian Duperreault:]

Thanks, Dan. Before we get into responding to your questions, I want to make a few remarks about the company, the results, and the priorities I see shaping up as MMC's new CEO. It's obvious that the company on a whole is underperforming and there are problems that must be addressed. If that weren't the case, I wouldn't be here today. At the same time, the problems are not systemic; many parts of MMC are working quite well. As a new CEO, I am in the assessment phase. I need time to assess our businesses, our people, and make what I believe to be appropriate decisions to ensure improvement over time. While I want to fully understand the task before me, I also intend to move as quickly as feasible to gather the information and knowledge I need, working with the business leaders and then take action. That said, there are some obvious issues that need to be addressed. These are areas that have been raised as concerns by our larger shareholders as well and as such they should be our first priorities for 2008. The first priority is to ensure the recovery of Marsh in a sustainable manner over a reasonable period of time. As I said before, we're very fortunate to have Dan at the helm of Marsh. He too is in the process of evaluation of building his plan as you already heard. As Dan said, there are fundamental issues that need to be addressed in Marsh. We need to dramatically improve the cost structure and we need to simplify how we work. While I will be there to help, it's not my job to lead Marsh, it's Dan's job. My job is to support Dan and the Marsh leadership team he is building and to support the Marsh professionals around the world. The second priority for me is Kroll. It's a business that has shown both volatility and overall disappointing performance. I am digging into Kroll to understand its parts and how they relate to each other. My objective is to have a clear decision about the future of Kroll soon. The third priority is MMC's corporate organization. There can be a value-added role for a corporate center in MMC, but I see that role as a relatively focused and limited one. The primary role for corporate is to support the operating companies and to enable the corporation to function. I am going to see that this balance is achieved. As I said, this is a first cut at priorities with all the wisdom that two weeks provide, and I will continue to access, learn, and identify what we need to do to improve our performance. Finally, I wanted to talk a bit about my broader philosophy. As you know, I am by nature a builder. And I want to grow MMC. I see growth and specifically profitable growth as good for our clients, to our colleagues, and our shareholders and we need to get back to growing both organically and otherwise. As we work on fixing the fundamentals of our individual businesses, we need to pay attention to the performance of the corporation as a whole. It means that we will continue to look at the portfolio. We should be building a set of businesses that fit strategically, we should not be holding on to things for the sake of holding on to them. And at the same time, we will look to add capabilities through acquisition or otherwise where it make sense. My objective is to build and lead a team that can provide true sustained, long-term value for the shareholders by having a vision, making decisions, and then executing well. Those of who you known me know my track record and I believe it can be done here and will be done here. I am excited about the opportunity, thrilled to be here and inpatient to get on with it. So now let's hear your questions. Go ahead operator. Question And Answer

[Operator:]

Thank you. [Operator Instructions]. Keith Walsh, Citigroup.

[Keith Walsh:]

Hi, good morning everybody.

[Brian Duperreault:]

Good morning, Keith.

[Keith Walsh:]

First question for Dan. Just kind of thinking about the rate of change on improving brokerage margins, we are seeing some real high margin revenues such as reinsurance and RCH on the decline and then on top of that you got PC prices declining as well and maybe if you could just comment on that? And I've got a follow-up for Matt.

[Brian Duperreault:]

Okay, Dan?

[Daniel S. Glaser:]

Okay. Well, I mean, you are right about PC rates declining and I don't really see anything on the horizon right now that will challenge that. But having said that, the basic business within Marsh, there are several revenue initiatives that we can take. For example, our segmentation strategies and marketing approach in these small and lower middle market segments, I think we can generate additional revenue from. I would like to consider placement hubs in the U.S. That would do several things. One, it would enable us to capture aggregate placement power for our clients, it would offer significant efficiency gains to insurers for which we would expect to receive revenue and it would reduce our E&O exposure. The other thing that we can do much better is getting back to basics in serving our clients, and I think that holding on to existing clients is always very important and the quickest way of building revenue, but having said that, we need to tighten up our pricing of services a bit to make sure that we are getting the right revenue for the quality work that we provide.

[Brian Duperreault:]

Keith, you had a question for Matt?

[Keith Walsh:]

Yes, and I just wanted to follow-up on... you mentioned the pension expense, maybe if you can just give us details on really what that was '07 over '06 and what do you think that's going to trend in '08? Thanks.

[Matthew B. Bartley:]

Well, Keith, we don't disclose the quantum of pension expense, but as you know, it has driven significantly by the size of the liability. I mean, it is a service cost based calculation, but the size of the liability bears directly on that and embedded within that of course is the discount rate. We benefited significantly in the U.S. and the UK at year-end as discount rates rose, which will play through to our pension expense in 2008.

[Brian Duperreault:]

Okay. Next question please.

[Operator:]

Thank you. We will hear from Charlie Gates next.

[Brian Duperreault:]

Hi, Charlie.

[Charles Gates:]

Hi. It's nice to hear your voice again, Brian.

[Brian Duperreault:]

Same here. Good to hear your voice.

[Charles Gates:]

In your prepared remarks, you indicated in the... I wasn't sure what period you'd be coming to a clear decision about the future of Kroll. You also later, I believe, made the comment you won't hold on to things for the sake of holding on to them. Could you speak to what you indicated in those remarks or elaborate on that?

[Brian Duperreault:]

Sure, Charlie, sure. In my remarks about holding onto things is that it was more of a general remark, it's my philosophy and I think that if you are looking at a portfolio of assets, you are constantly looking to see whether they collectively make sense and things might made sense in the past and they don't going forward. So you never should be hesitant to prune the portfolio. That's what I was talking about. And I wanted to further make sure everybody understands that you can add as well as subtract. It's... that's the process. Hopefully you add more than you subtract, right? A far as Kroll is concerned, you heard from Matt what the results were for the quarter. I am not trying to signal that Kroll is for sale, but I am saying that I am looking at Kroll and I am looking at it in depth and I am looking at the component parts of Kroll and how it's organized, and I will make a decision about the pieces in the hole as it fits all of Marsh in due coarse, but it clearly deserves my attention and that's what I was trying to tell everybody.

[Charles Gates:]

Thank you.

[Brian Duperreault:]

Okay, Charlie. Next question please.

[Operator:]

Thank you. And our next question will come from Jay Gelb with Lehman Brothers.

[Jay Gelb:]

Thanks and good morning.

[Brian Duperreault:]

Good morning, Jay.

[Jay Gelb:]

On a big picture view, taking into account you've only been there for a few weeks, what where the biggest surprises you have seen in the MMC franchise, both positive and negative?

[Brian Duperreault:]

Biggest surprises, this morale things and look at... it's tough to work in a situation where you are constantly hearing the negatives, but the situation here is actually I think coming around, and I think Dan and his group have a lot to do with it. So I think certainly that has been a pleasant surprise that there really is underlying strength, and I think the desire to move forward. I knew that there was a strong group, don't get me wrong. But an attitude issue was good to see that there is very strong positive attitude to move ahead and I think it's a great group of people. So that's a formidable combination. I do think that structurally... and I am speaking now again of Marsh and Dan talked about simplifying it, it really needs to be looked at in a new way, the world's change and I think these guys recognize that the world has changed, and therefore that structurally there has to be some changes made that really simplify the business and recognize the kind of world we live in today in the brokerage business. So a little bit of a surprise about the needs there, but, look at I am... first of all, I am an optimist by nature, but there is a lot of optimistic about here. Okay, Jay, anything else you want to ask?

[Jay Gelb:]

Yes, I guess, for Dan, in terms of margins within risk and insurance services, on an adjusted basis, they probably deteriorated about 400 bps down to about 11% adjusted for the full year 2007. Where do you think you can get risk and insurance margins over time taking into account the headwinds of a soft market?

[Daniel S. Glaser:]

Well, I would like to address it this way rather than give any kind of specific percentage. I would let you know, Jay, that I have absolutely no doubt that I will significantly improve the margins of the Marsh business and that is irrespective of the market environment and the headwinds that you referenced.

[Brian Duperreault:]

Okay, Jay. Why don't we take another question?

[Operator:]

Thank you. And our next question will come from Alain Karaoglan.

[Brian Duperreault:]

Alain?

[Alain Karaoglan:]

and gentlemen, we are very thrilled to have you as well, Brian and Dan. And my question is the following. And Dan, you have identified well that Marsh has tremendous attributes and great characteristics, but the problem was there is not a lot of profitability flowing to the bottom line. Do you have an idea on when you will be more comfortable in looking at the margin and being able to say this is an enterprise that should get margins of X relative to what it has been achieving because improving from very weak results is easy even improving significantly, but getting back to where we were historically is a big achievement and in order to do so, it seems to me that just arithmetically the revenue have to grow significant and gain market share.

[Brian Duperreault:]

Yes, Al, I think you... it's simple. I mean, the execution is the hard part. And I assume you are asking me and not Dan, although Dan is probably better at answering this question, but I think as he pointed out, he can't do it simply by expense reduction, he can't do that. It's not going to work. There is only so much you can cut. And I think as I understand what Dan wants to do; there is a simplification of the business process. In other words, expenses ought to follow from how you organized, right? You just don't cut, slash, and burn. But most importantly, I think he has revenue generation initiatives that coupled with an appropriate organization structure gets you to where you want to go. Now, where the margins lead you is where the margins lead you. I think we want to be the best out there in terms of our margins and that's really the goal. Dan, do you want add anything to that?

[Daniel S. Glaser:]

I would just add that there are several parts of the business that are actually performing well and where we would intend to improve the margins still in those businesses. The fundamental issue that we have is the United States organization and to a lesser extent the UK. In large part, the U.S. organization has been somewhat rooted in the past and I think that with a new management team very much focused on what Marsh can be in the future and less concerned with what legacy looks like within Marsh. I'm very comfortable that we would able to grow top line as well as expense, but we shouldn't underestimate the expense impact. I mean, I think that this was an organization in large part that made decisions on a lot of nice to haves and there is not a day that goes by that we don't find additional savings that can be viewed as just clearly in the nice to have category. And so, I am quite comfortable that we will find additional areas of expense without touching the fundamental client facing areas of the business.

[Brian Duperreault:]

Okay, Alain. We will take another question.

[Operator:]

Thank you. And our next question will come from Brian Meredith.

[Brian Duperreault:]

Brian?

[Brian Meredith:]

Hi, Brian.

[Brian Duperreault:]

Hi, Brian.

[Brian Meredith:]

One quick numbers question just quickly, FX, any impact on earnings in the quarter?

[Brian Duperreault:]

Matt?

[Matthew B. Bartley:]

Yes, we had a bit of FX impact on earnings probably to some degree commensurate with what you saw on the revenue line, but that's only a trend because obviously the... both on revenue and expense, we had significant impact, as expected, with the weakness in the dollar.

[Brian Meredith:]

Right. So, bottom line there was an earnings impact, positive impact?

[Matthew B. Bartley:]

Yes, there was a marginal positive impact from FX on the earnings line, correct.

[Brian Meredith:]

Great. Thanks. And then Dan, you talked... mentioned a couple of times trying to get the right revenues of services, I guess on that comment, one, have you had any success getting additional commission rates that was something that was talked about in the last quarter? And in addition to that, you talked about trying to get revenue growth, are you willing actually to may be temporarily in the near-term lose revenues in order to get the right profitability for accounts?

[Daniel S. Glaser:]

Let me start with the second one first. Profitability is our key metric. We will drive profitability and we have no interest on working on business which is unprofitable. And so if we need to drop revenue in order to achieve profitability, that's a trade we would make every day. Now, in terms of the... specifically on the enhanced commission initiative, we're engaged in discussions with individual carriers now. The significance of the revenue I can't determine yet. I don't think it will be anything more than modest in 2008 although I do think in future years we could see some substantial benefit.

[Brian Meredith:]

Right. Thank you.

[Brian Duperreault:]

Okay, Brian. Next question?

[Operator:]

Thank you. And our next question comes from David Small with Bear Stearns.

[David Small:]

Good morning.

[Brian Duperreault:]

Good morning, David.

[David Small:]

Dan, when you talk about streamlining or simplifying the Marsh business, should we expect a more detailed restructuring plan in the coming quarters and also do you think the plan would have significant charges associated with it?

[Daniel S. Glaser:]

I think it's a little early for me to comment on that because I have really... even though I am a veteran according to Brian, it's been two months, but speaking frankly, we are going out to do an awful lot of things to get our margin back to a more acceptable levels, and I would fully expect as we move through this year we'll be talking about actions and potential realignments that will drive margin improvement in the future. We are working on things now, but our plans are way too preliminary, I think, to discuss in this forum.

[David Small:]

And then maybe I could just ask a follow-up to Michele, just quickly may be if you can discuss the consulting business and how it would respond in a weaker economic environment? Thank you.

[M. Michele Burns:]

Sure, be glad to. What I'll tell you is that as you heard, we finished 2007 very strong on the consulting segment. Practically in the first month or so we see some softening, particularly in the United State, and we are taking action against that, but we are also watching very closely because it's really not material and don't forget we have a very balanced portfolio. So at this stage, our US revenues are... we have a little bit over 50% of the business. So we are watching it closely, we know where our levers are, but at this stage I can't tell you that it's a bad... very bad answer. John, do you want to follow up on that too?

[John Drzik:]

Yes, sure. In Oliver Wyman, we also finished the year very strong. So right through December, demand for our services was very strong. And as you saw from the fourth quarter results, looking at 2008, we are seeing some weakening of demand for services, particularly in those segments tied to the financial markets crisis such as our North American financial services consulting business, but we are still not seeing any broad drop in demand, but as Michele indicated, just as in Mercer, in Oliver Wyman we're watching this very closely and monitoring to see if we need to make any adjustments as time moves forward.

[Brian Duperreault:]

Okay, David. Thank you. Next question please.

[Operator:]

Thank you. Our next question comes from Meyer Shields with Stifel Nicolaus.

[Meyer Shields:]

Good morning, all. Dan, let me start by thanking you for the extensive detail you provided. If we look at the brokerage segment and we adjust for the non-recurring expenses and we take out Risk Capital Holdings, we still saw margins drop a little bit on a year-over-year basis. Is there any unusual compensation built into the quarter?

[Brian Duperreault:]

Well, I am going to let Matt... I didn't hear your name, I am sorry.

[Meyer Shields:]

It's Meyer Shields.

[Brian Duperreault:]

Meyer, okay. Matt is going to take that one, okay?

[Matthew B. Bartley:]

No, the other piece that you should also recognize, Meyer, is the impact on the reinsurance side of the business. So, clearly the market conditions combined with the fact that seasonality applies to margins in the quarter does have an affect, which is just the other component that you need to recognize.

[Meyer Shields:]

Right, that would be in last...your fourth quarter also.

[Matthew B. Bartley:]

Right.

[Brian Duperreault:]

Okay, thank you. Next question please.

[Operator:]

Thank you. And our next question comes from William Wilt with Morgan Stanley.

[William Wilt:]

Hi, good morning and best of luck to the new management team.

[Brian Duperreault:]

Hey, thanks a lot. We are just not picking up the names. So I didn't pick --

[William Wilt:]

Sure, it's Bill Wilt from Morgan Stanley.

[Brian Duperreault:]

Oh, Bill, hey, hi.

[William Wilt:]

And best of luck.

[Brian Duperreault:]

Thanks. I wanted to know who is saying it, thank you very much. I appreciate it.

[William Wilt:]

Of course. It's a question for you, Brian. I guess, the Marsh margin have been talked about a lot. So, I will put that on the backburner. You mentioned at the outset that you have been a user of Marsh services throughout the career. What's your big-picture perspective on the portfolio of businesses from a cross-selling perspective as you think about now managing them, having been a user of many different facets over the years, is that a near-term opportunity, is it further out in your management plan, just kind of scoping that would be helpful.

[Brian Duperreault:]

Thanks Bill. As you pointed out, I have been a recipient of the fine services of Marsh and Carpenter. I've hired Mercer in the past. So I guess I've been cross-sold. And certainly cross-selling is there and something that we should work on. I guess I'd put it this way. To me the individual operating companies really need to develop their marketing plans, they have to have their approach to their customer base aggressively and intelligently developed. And then, if we can add to that cross-selling I think that's the way to go. I think that's terrific. But to me, the most important thing is the individuals' approach to their client base. Having said that, there is also kind of at MMC an interesting collection of capabilities. And so, there are not that many companies out there that can... if you got a problem to solve, and put the kind of expertise together to solve problems... problems... think about problems, they are always a little different than the past ones. So, unique combinations of assets apply to a problem usually wins the favor of the customers. So we have that ability. So that's another thing that needs to be worked on. But first things first. Let's get the individual guys working on there, on their own marketing. Okay?

[William Wilt:]

Thanks again. Best of luck.

[Brian Duperreault:]

Okay, thank you. Appreciate it. Next question please.

[Operator:]

Thank you. And our next question will come from Matthew Heimermann with J.P. Morgan.

[Matthew Heimermann:]

Hi, good morning everyone.

[Brian Duperreault:]

Good morning, Matt.

[Matthew Heimermann:]

Quick question. You talked about getting people think more like owner; does that imply that potentially we should think about employees getting a greater percentage of stock compensation going forward?

[Matthew B. Bartley:]

Matthew, I think Dan said that. So do you want to answer that, Dan?

[Daniel S. Glaser:]

Yes.

[Matthew Heimermann:]

Fair enough.

[Brian Duperreault:]

I believe it too, but we will let Dan answer.

[Daniel S. Glaser:]

Well, there is a couple of things. One, I do think that having colleagues owning stock makes for healthier corporate environment. So that is certainly true. But, hey, growing profitability is the quickest way to increase variable comp, whether that's stock-based or cash-based. And so the best way for us to create more pool to provide stock to employees is by growing profitability. And so that's what we will be focused on doing, but in an overall sense, I would love if we had a wide share of employee stock participation.

[Brian Duperreault:]

Yes, Matt, as you started with me, let me put my two cents into it and I think Dan hit it on the head, which is when you are thinking like an owner, yes, there's compensation involved, and stock ownership is principal way of looking at that. But it's a philosophical thing. It's believing in the company, it's believing when you come to work everyday that this is the... that it does good work and you are part of it and you believe in the leadership and you are winning, everybody wants to win. So, thinking like an owner is ensuring that everybody around you is operating in the same way. It's what owners do, it's to try to get their colleagues working. So it's more of a philosophical comment that Dan made, but there are some ramifications to it in terms of stock ownership. Is it okay?

[Matthew Heimermann:]

Yes, that fair. Jus a quick follow-up for Matt on the reinsurance side, you said fac is 10% of the business. I just was curious what the mix is in 4Q because if I let my mind wonder that would imply that you had a 50% decline there to drive basically 4% overall decline. So I just was curious... I am guessing it's maybe a bigger mix in 4Q, just wanted to put that in perspective.

[Matthew B. Bartley:]

I am sorry, your question is specifically in Q4?

[Matthew Heimermann:]

Well, you specific... well, I'd be curious, yes, specifically what was happening in 4Q and what the mix was there, so... because otherwise if I assume it's equal treaty and fac, then it implies kind of a 50% decline in fac.

[Matthew B. Bartley:]

Well, I think you have picked up on the point, which is why I was emphasizing the fact that Q4 is so light. The hit in facultative gets exacerbated in Q4 because it is of course such a light quarter. And... but the reference to the size of fac is more on a rolling annualized basis. So I am not going to give you... break out the Q4 numbers, but you can trust that there was exacerbation in Q4 as a consequence of the light seasonality in that quarter.

[Matthew Heimermann:]

Can you just give us order of magnitude?

[Matthew B. Bartley:]

I could, but I think I won't.

[Matthew Heimermann:]

All right. I just wanted to have people avoid from annualizing an unusual number, but if you can't quantify it for us, I guess we can help ourselves.

[Matthew B. Bartley:]

That's a good point Matt, yes, thanks.

[Matthew Heimermann:]

All right.

[Brian Duperreault:]

Thanks Matt. I think, operator, we will take two more questions. Next question please.

[Operator:]

Thank you. There are no further questions at this time.

[Brian Duperreault:]

Well, I take no more questions then, okay. Well, thank you very much for your attention and we will be talking to you. Thank you. Bye.

[Operator:]

That concludes today's conference, ladies and gentlemen. We appreciate your attendance and have a great day.