Marsh & McLennan Companies, Inc.
Q1 2008 Earnings Call Transcript

Published: 8 May 2008

[Operator:]

Thank you for holding everyone and welcome to MMC's conference call. Today's call is being recorded. First Quarter 2008 Financial Results and Supplemental Information were issued early 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. Now at this time I'll turn the call over to Brian Duperreault, President and CEO of MMC. Please go ahead sir.

[Brian Duperreault:]

Good morning and thank you for joining us to discus our first quarter results reported earlier today. I am Brian Duperreault, President and CEO of MMC. Joining me in presenting on the call today are Matt Bartley our CFO, and Michele Burns, CEO of Mercer. After I make some brief remarks Matt will present our financial results and Michele will share with you her insights into Mercer's strong performance during the quarter. I'd also like to welcome our operating company's CEO's to today's call; Dan Glaser from Marsh, Peter Zeffino, from Guy Carpenter, John Drzik from Oliver Wyman, and Ben Allen from Kroll. Also with us is Mike Bischoff, our Head of Investor Relations. They will be available to you during the Q&A portion of our call. I'd like to start-off by saying it has been a very busy quarter for us at MMC. I'd been on the job just about 100 days and we have accomplished a lot in this short period of time. I'd like to walk you through some of the specific actions taken since our last earnings call in February. On that call I admitted MMC just two weeks, I gave you my initial impression of MMC's operating and financial performance, and I said that while there are businesses in MMC that are doing well, the company as a whole was not performing at acceptable levels. We acknowledge a serious work would be needed... needed to be done to fix the parts that aren't performing. These issues reside primarily in Marsh and Kroll and I would like to quickly touch on these two businesses now. In the first quarter, performance at Marsh began to show signs of improvement. Marsh's first quarter revenues increased 7% to $1.2 billion. On an underlying basis, growth was 1%, a continuation of the positive growth we saw in the fourth quarter. Global client revenue increased 2% on an underlying basis, and this was achieved in a pricing environment that shows significant declines in the P&C commercial insurance marketplace. The strong new business results seen over the last two years continued as Marsh achieved 10% increase in new business in the quarter on an underlying basis. This growth was experienced in the U.S and Canada 13%, in EMEA 2%, Asia-Pacific was 44%, and the Latin America 2%. Client revenue retention also improved over the first quarter of last year, especially in the U.S and UK, our two largest geographies. This was in spite of pricing declines in the insurance marketplace which were worse year-over-year and sequentially. Another positive from Marsh was that while revenue grew 7%, expenses grew only 3%. On an underlying basis revenue increase 1% while expenses declined 2%. This decline was achieved even though Marsh's variable compensation increased by $30 million on a year-over-year basis. The variable compensation increase primarily was due to a timing change of accrual, which began in the third quarter of last year, as well as an increase in the amount of Marsh's bonus pool. This increase essentially offset lower pension expense in the quarter. Overall market... Marsh achieved significant margin improvement as its GAAP operating margin increased 350 basis points and non-GAAP improved 250 basis points, compared with last year's first quarter. As you know the first quarter is typically the highest margin quarter of the year for Marsh, however, this type of margin improvement is what we are targeting for the remainder of the year. While I'm pleased to see evidence of cost containment, we are continuing to implement vigorous expense disciplined in Marsh in order to achieve even greater long-term margin improvement. So as we look at Marsh, we know there's still... we still have a lot of work ahead of us, but we are pleased that the actions we've taken today that are beginning to generate positive results. Turning to Kroll, when Kroll was acquired in July 2004, the plan was to combine it with other MMC operations and realize meaningful synergies. That envisioned integration was never completed. However... and certain businesses of Kroll have been underperforming since that time. As we reported this morning we incurred a non-cash impairment charge of $425 million related to Kroll goodwill. As I said in February, Kroll is a very complicated company. During the quarter I began to peel back the layers at Kroll and I have concluded that there are several lines of business that fit into the long-term MMC portfolio and others that simply do not. Examples of businesses with long-term potential in MMC are on track, which provides litigation support and data recovery services, background screening, which provides employments screening and identity theft services and the business intelligent... intelligence and investigations operation, which provides risks litigation and response services. These are the businesses I see as core Kroll, and in these businesses Kroll is a world leader. To increase our focus on these operations, I named Ben Allen, CEO of Kroll in March. He is charged with realizing the growth potential of these core Kroll businesses and maximizing their value to MMC. As part of my evaluation I also recognized early on corporate restructuring would benefit from separate management. As a result the Corporate Advisory and Restructuring Group was carved out as a separate group now headed by Simon Freakley. Therefore, for the first time this quarter corporate restructuring is disclosed as a separate business within the risk consulting and technology segment. This business has not been a strong performer in recent quarters. However, it is one that better in times of economy uncertainty, and given today's climate we want this business to be well positioned to capitalize on any increase in the Corporate Advisory and Restructuring sector. To that end, three distinct groups within this business are being combined into a single operation with global reach and scale. Now let me discuss the rest of Kroll. There are businesses in Kroll that do not necessarily fit into MMC's long-term growth plans. Some examples here include Factual Data Corp, which among other things provide services to mortgage lenders, and the government services business. These are businesses that we have determined are not a strong strategic fit, it may have greater value outside of MMC and which along with Corporate Advisory and Restructuring drove the impairment charge recorded this quarter. We will seek ways to divest these businesses in ways consistent with enchaining shareholder value. Finally, an overall atmosphere of cost discipline is being in still to improve profitability at Kroll including selective staff reductions. Now in addition to focusing on Marsh and Kroll, we are taking additional actions to appropriately position MMC both in the current operating environment and for greater success in the future. At Guy Carpenter, we face increasingly difficult market conditions. Performance in the quarter was weaker than expected with significant rate decreases across most classes of business and a decline in net new business. We therefore move quickly to take steps of repositioning Guy Carpenter in the current environment and to improve... to improve profitability. First, surely after I arrived in February I appointed Peter Zaffino, as CEO and Britt Newhouse as Chairman. Peter and Britt have significant history within not only the insurance industry, but also within Guy Carpenter. Second, under this new leadership team we move quickly to reduce costs. Over the past several weeks Carpenter's new management has taken actions to restructure its business across geographies. In the second quarter, Carpenter's reducing its global workforce by over 300 or more than 10%. The anticipated cost is approximately $30 million with annual savings of $40 million. These reductions are being done with great care and precision, so they do not effect Carpenter's strength and client capabilities. Michele will be discussing Mercer in detail in a few minutes. Overall Mercer continued its recent trend of strong revenue and operating income growth. With regards to Oliver Wyman, which makes up the rest of the consulting segment, underlined growth slow to 6% from the double-digit growth we've seen over the past four years. This slowdown primarily is due to a weakening of demand from U.S based clients adopting a cautious stance in the face of a weak U.S economic environment. Indeed, strong demand persist from clients outside the US. In light of continued macro economic uncertainty Oliver Wyman, is vigilantly managing its expense base to align it with the emerging revenue picture. And finally, at the corporate center, where we have seen marginal improvement in the run rate cost over the past several months, I've commissioned a review to examine all corporate functions and determine if they are appropriately sized and structured. These are some of the detailed actions that have taken place in MMC so far and during the short period of time this year. Our work is ongoing; I also continue to gather more information each day about MMC, I've traveled extensively in the United States, visiting with employees, our major shareholders, and with current and perspective clients to discuss what MMC can do for them. The intelligence and feedback I gleaned from all these meetings has been invaluable. While there is a lot of work ahead of us, I'm convinced that MMC has tremendous potential that can be realized to the benefit of our clients, our shareholders and our employees. And with that, I'll turn it over to Matt to present our financial results for the quarter.

[Matthew B. Bartley:]

Thank you, Brian. Good morning, everyone. Let me start by giving you some additional information regarding the Kroll goodwill, impairment, assessment, and charge that we announced in this mornings press release. The Q1 decision to make organizational changes within the risk consulting and technology segment to reorganize the reporting units within the segment was a triggering event under the accounting rules applicable to goodwill. We perform the interim assessment of the segment goodwill at quarter close determined that the goodwill was impaired and as a result recorded a non-cash impairment charge of $425 million or $0.81 per share. As noted in the release, this charge has no impact on tangible equity or on our debt covenants and of course as just indicated is non-cash. This amount represents our best estimate of the goodwill impairment at March 31. We will be completing the more comprehensive step two phase of the assessment in the second quarter to determine if any further adjustment is required. The second step will lightly result in some refinement in the goodwill impairment charge either an increase or a reduction in the level of goodwill impairment and we expect to reflect that any further adjustment in the second quarter results. Now let me take you through MMC's first quarter operating results excluding this charge. Earnings per share was $0.41 including income from discontinued operations of one penny reflecting the sale of a Marsh claims administration operation in Brazil. That compares with $0.47 in the first quarter of 2007. Noteworthy items, which are highlighted on page 9 of the press release, totaled $49 million in the quarter excluding the goodwill impairment charge. These expenses are primarily restructuring charges from previously disclosed and ongoing cost reduction initiatives at Marsh and at the parent company at Corporate. In total, we look at our results from operations for the first quarter of '08 on a non-GAAP basis to be $0.46. The difference from last year's first quarter can be largely attributed to a decline of $43 million in revenue at risk capital holdings or approximately $0.05 of earnings. Before I continue my discussion of segment results, let me make a few comments about a number of enhancements and additional disclosures that we show in this morning's press release and will show going forward. We have added information regarding the revenue breakdown of certain components of MMC's segments. For example, we have expanded Marsh's geographic breakdown reflecting the manner in which Marsh manages its global insurance broking operations. Similarly, we now breakout Mercer's revenues into consulting, outsourcing, and investment consulting and management, reflecting the way Mercer differentiates its client services in the marketplace. We also provide the component parts of Mercer consulting, retirement, health and benefits, and the other consulting lines. And within the risk and... risk consulting and technology segment we've expanded the revenue category's of Kroll to include litigation support and data recovery, background screening, and risk mitigations and response, as well as breaking out separately our Corporate Advisory and Restructuring Group. To help you with your modeling, we have reclassified 2007 quarterly revenue to match our current revenue reporting format as you can see on page 12 of the release. Also we now disclose the currency impact, the affective acquisitions and dispositions and underlying revenue growth for each of the categories I have just discussed. We have also broadened our disclosure on how we view the business through non-GAAP measures. We show the calculation of non-GAAP operating income and margin for each of MMC's segments and the reconciliation with N2 [ph] reported operating income and margins. Taken together, we believe these enchantments provide additional and helpful clarity to our... on our quarterly results. Now turning to the general financial picture and the segments in the first quarter of 2008, MMC's consolidated revenue rose 8% to $3 billion against varying marketplace conditions driven by solid growth at Marsh in the consulting segment and from parts of Kroll. On in underlying basis revenue growth in the first quarter was 2%, excluding risk capital holdings from each period underlying revenue growth year-over-year would have been 4%. Turning to our segments, risk and insurance services operating income was $240 million, a decline of $19 million or 7% compared with last year as profitability improvement at Marsh was offset by declines in operating income at Guy Carpenter and the falloff at risk capital holdings. The non-GAAP margin for risk and insurance services was 17.9% in the first quarter of '08 compared with 20.2% in Q1 of '07 reflecting again the minimal contribution from risk capital holdings in the current period. Excluding risk capital holdings, from both prior and current period, non-GAAP margins for risk and insurance services would have been 17.6% in Q1 '08 versus 17.4% in Q1 '07. Now let's turn to Marsh specifically. First quarter revenue at Marsh increased 7% to $1.2 billion on an underlying basis growth was 1% led by our international operations, which grew 3%. These growth rates include the effects of fiduciary interest income, which declined fairly significantly do to lower short-term interest rates. Consequently, client revenue not including fiduciary interest increased 2% on underlying basis. As Brian indicated Marsh also generated strong new business in the quarter, underlying growth in new business was 10% in aggregate and follows new business growth of 8% in the fourth quarter of 2007. This is the eight consecutive quarter of new business growth for Marsh. At the same time, the effects of cost discipline are also evident both in tighter control over discretionary spending and in tight controls on headcount. In fact in the period, there were about 150 headcount reductions at Marsh, and as discretionary spending, there were declined in the first quarter in T&E, meetings, marketing, advertising and facilities and equipment costs. Obviously this is the beginning of a process, but we're already started to see some of the benefits of that tighter control flowing through to margins. And we expect to see these savings continue through the course of the year. A lower level of expense was achieved in the quarter even though Marsh is variable compensation accrual increased by $30 million compared with prior year. This increase primarily was due to a change in the timing of the accounting accrual, which begin in the third quarter of last year, as well as including an increase in Marsh's overall bonus pool. A higher variable compensation accrual was essentially offset by lower pension expense this quarter. The combination of modest underlying revenue growth with stronger expense discipline improved Marsh's operating margin 350 basis points on a GAAP basis, and 250 basis points on a non-GAAP basis compared with last year's first quarter. This represents the strongest margin performance by Marsh, since the third quarter of 2004. Turning now to our reinsurance broking operations. As you know marketplace conditions continue to be very difficult. Reinsurance rates have continued to decline and we expect to see this trend continue through the rest of the year. Strong underwriting results by insurers and re-insurers have led to a higher risk retention by Carpenter's clients, on top of continued competitive pressure on reinsurance premium pricing. This environment was particularly aggressive in the U.S. for property catastrophe coverage where Guy Carpenter had a substantial market shares. These conditions coupled with a reduction in net new business contributed to reduced profitability at Guy Carpenter. Additionally Carpenter's results in Q1, include about $5 million associated with the departure of its former CEO. As Brian discussed, we are implementing a restructuring program, to improve the profitability picture at Guy Carpenter. As we look forward, we see significant improvement in Carpenter's new business pipeline. However, due to the seasonal nature of reinsurance renewals much of this new business development will not be realized until January next year. Briefly, on Risk Capital Holdings. The $43 million decline in the first quarter 2008 revenue, which is very high margin revenue, negatively effected EPS by about $0.05. In the second quarter, due to declines in the market value of publicly traded securities, in our Risk Capital Holdings investments, we expect to see revenue from RCH, potentially be negative. Now lets turn to Consulting. Consulting had a strong... had strong first quarter performance, with growth in both revenue and operating income. This was led by Mercer's Q1 revenue performance of 16% growth on a reported basis and 9% underlying, this is the highest quarterly growth rate in underlying revenue and Mercer has experienced since the fourth quarter of 2000, which is particularly impressive even in the current economic environment. At Oliver Wyman reported revenue was up 13%, underlying growth slowed from the performance we've seen over the past four years to 6%, reflecting client caution surrounding the U.S. economic environment in particular. So while our Consulting operations performed well on the top line given macroeconomic uncertainty, we are selectively implementing plans to reduce expenses in recognition of uncertain current economic conditions. Turning now to Risk Consulting & Technology, the non-cash goodwill impairment charge I discussed earlier affected only the Risk Consulting & Technology segment, I will now review the results of this segment excluding that charge. As Brian discussed our Risk Consulting & Technology segment includes both Kroll and now separately corporate advisory and restructuring. In Q1 total revenue for the segment increased 10% to $259 million underlying growth was 3%. Operating income decreased from $26 million in the first quarter of 2007 to $8 million in the current period excluding approximately $3 million of restructuring costs. In the first quarter, Kroll's reported revenue was up 14% to $220 million. On an underlying basis revenue increased 5%. Litigation, support and data recovery had good growth in the first quarter with revenue up 32% on a reported basis and 7% underlying. This increase was derived from its legal technology business both on an organic basis as well as aided by an acquisition in late 2007. Background screenings revenue decreased 2% in Q1, primarily attributable to the mortgage screening business. This was partially offset by growth in identity theft services. Risk mitigation and response had strong revenue growth in Q1, up 14% on a reported basis and 11% underlying. This was driven by the business intelligence unit, which had solid growth across all geographies. However, despite Kroll's revenue growth, its profitability was lower primarily due to the mortgage screening business. Briefly on the corporate advisory and restructuring group where revenue was down 7% in the first quarter. As economic conditions have become more challenging we have seen an increase in the demand for our services in the U.S. This was more than offset by declines in Europe, however, which has not yet seen the same ramp up in demand. In terms of operating income, the corporate advisory and restructuring group operated at a loss of approximately $1 million this year, compared with operating income of $5 million in last year's first quarter and a loss of approximately $3 million in the fourth quarter of last year. Quickly on corporate expenses. In the first quarter they ran at $61 million this includes approximately $9 million for rationalization of London real estate and $7 million in severance. Additionally, there were $8 million in items primarily associated with the change in CEOs that will not impact the company in subsequent periods. So on a normalized basis corporate expenses ran at about $37 million in the first quarter. Excluding the impairment charge which had no tax benefit MMC's consolidated effective tax rate was 30.6% in the first quarter of 2008. Primarily due to the geographic mix of our earnings. The effective tax rate on ongoing operations is projected to be in the range of 30% to 32% for the reminder of the year. As indicated in the press release, we received an additional 10.8 million shares of common stock in the first quarter, completing out $800 million accelerated share repurchase program, funded back in August of 2007. In total, we repurchased 32.1 million shares from this program, at an average price of $24.94, including our earlier $500 million ASR program; we have repurchased 48 million shares of common stock since last May. On the cash front, cash and debt, we ended the first quarter with $1.3 billion in cash, as you know our cash utilization is typically greatest in the first quarter primarily due to the funding of bonus payments. Additionally, we used cash to fund $250 million of debt that matured in February, our cash generation typically accelerates in the second half of the year, we expect that again this year and we do not have any additional debt maturing until June 2009 and one other coal on our cash that remains this year is our final New York Attorney General Settlement payment of a $170 million that will be made in June. Net debt which best represents our capital position was $2.3 billion at the end of Q1, a significant decrease from $3.5 billion in the corresponding period last year. The capital management activities we have completed over the last 3 years represent a significant deleveraging of MMC's balance sheet which leaves us at a current debt position that is a very comfortable and gives us excellent financial flexibility. With that let me turn over to Michelle for update an update on Mercer.

[M. Michele Burns:]

Thanks Matt. I am grateful for this opportunity to talk about Mercer today. I would like to use the time to cover our overall operating results, provide some insight into the businesses within the portfolio and share our positive view on the future. Since the last time I spoke to this Group, we've continued to make great strides at Mercer. Coming on the heels of a successful 2007, Q1 was another good quarter, in fact it marked the 10th straight quarter of year-over-year growth in revenue and the 6th straight quarter of bottom line growth, cash flow continued to be strong as well. Revenue grew 16% compared to prior with each of our businesses posting significant gains and all regions growing. Its particularly gratifying to see strong growth across the board which speaks directly to the health of our portfolio as individual businesses and in the aggregate. One question you are likely to raise is our sensitivity to overall economic and equity market conditions. Our results show that we can grow despite these challenges. This is due in part to the diversity of our revenue strength which include a blend of recurring consulting engagements and commissions. Project based fee arrangements, stable participant driven outsourcing arrangements and the increasing importance of revenue streams tied to assets under management. An example of the stabilizing effect of this diversity is that while equity market declines have a negative impact on our investment management and outsourcing revenue, market declines often create increased demand for investment consulting business. In fact, our clients evidenced an increase need for many of our services in challenging time. This is not to say that a prolonged or severe down turn won't impact us, but we see continued strength in our pipeline across our businesses and regions. As you would expect, we are carefully monitoring our revenue strengths and operating metrics to ensure we keep our cost base in line. But we remain cautiously optimistic that we can continue to post solid growth. As I've talked about before, one of Mercer's significant advantages is the portfolio of offerings, they gives us diversity. Diversity in the solutions we bring to market, diversity in business models and geographic diversity. That is why I would like to draw your attention to the change we've made and how we are reporting our revenue. Starting this quarter we will report along the same divisions we used to differentiate ourselves in the marketplace consulting, outsourcing and investments. This change will allow us to speak to the investment community, the same way we speak to our client, and we'll create clear distinction between the three pillars of our portfolio. It will also serve to highlight, the growing importance to both our strategy and our results of having outsourcing and investment capability, which we feel are integral to serving our clients and our shareholders needs. And the exciting growth you hear about when I discuss each of these pillars would bear out how well our unique portfolio is resonating in the marketplace. I'll start the review with our Consulting lines, which includes our traditional areas of retirement and health and benefit as well as a suite of businesses and business models, dedicated to areas outside our benefits core. Combined, these Consulting businesses account for 71% of our revenue and grew 14%. As the world's largest actuarial business, our retirement business continues to grow with $313 million of revenue in the quarter, or 34% of our total. We had a particularly strong quarter in the Americas. This is due in part to continued impact of the pension protection act, but like our other regions, we are also benefiting from the increasing diversity of our retirement offering, which address an evolving marketplace. Many of these new offerings are geared towards helping clients manage the shifts within the defined benefits landscape, or the increasing importance of defined contribution scheme. These are often delivered in tandem with our investments, or outsourcing capabilities, or both. This bundling is another indicator of the power of our portfolio. In addition in Europe, we showed our commitment to this business this quarter by acquiring Hoefer a leading German retirement firm. This acquisition builds on our strength in the important German market, and will allow us to bring our full range of services to Hoefer within Germany and around the world. Our health and benefits business posted revenues of $220 million in the quarter, 24% of our total. We all know that health care costs are and will remain a major business issue. This is true in both mature economies as well as in developing ones, as such we continue to grow around the world. Our largest market, the U.S. continues to show very good new business production and retention with an emphasis on sales beginning to pay off. Our other consulting lines represent a board mix of businesses and revenue models that go beyond our benefit pedigree, examples include our survey and data business, our human capital capabilities and our unparalleled ability to help clients navigate the broad employee related issues in the M&A arena. As a Group these business generated $126 million of revenue in the quarter, 13% of our total. As we continue to develop data, capabilities and expertise to meet our clients needs for solutions to their most complicated and strategic employee issue. We expect strong continued growth; following consulting outsourcing is the next biggest pillar in our portfolio with $188 million in revenue which represents 20% of our total. Growth for the quarter was 17% with largest contribution coming from the U.S. This excellent performance is directly linked to our success in the total benefits outsourcing or TBO market where we continue to land in the marketplace by combining and simplifying administration across the defined benefit, defined contribution and help in benefits areas. This growth translates to improving economics as we increase our operating efficiency and add scale. The investment pillar consist of our investment consulting and investment management businesses and accounted for 9% of our revenue. Year-over-year growth was 31% driven by increase to demand in investment consulting and growth in assets. Our assets under management grew from $14.7 billion on March 31, 2007 to $19.8 billion on March 31, 2008. Investment consulting achieved growth in excess of 20% in both the Americas and Europe continuing a longer trend of outstanding results. The main driver of the asset growth was the traction we have achieved in the U.S. market and increasingly in Europe, with the value proposition of compressive investment management services utilizing implemented consulting and multi-manager strategies. Together these two businesses allow us to bring a continuum of advice and solutions to meet our clients' needs within the retirement arena and beyond. Going forward we remain optimistic about the future for Mercer and see opportunities for success in both how we compete in the marketplace as well as within our own four walls. First as you've heard we believe our diverse ship complementary portfolio will continue to allow us to lead in the marketplace. We will continue to build our intellectual capital and bring these solutions to market organically because we believe there is continued opportunity for market share gains for players who can deliver best of breed global solution, where it makes sense for shareholders and clients we will also pursue external capabilities that further expand our solution set and global reach. We also see opportunity to invest in how we operate as a business. We are building more of a sales culture, by dedicated resources as well as firm wide tools and processes, we will extend our capability to deliver world-class operating metric so we can better understand our economics at a project and client level and we will continue to look for opportunities to seek operational efficiency with the retirement service centers and our broad new captive offshore capabilities based in India, serving as an example of our commitment. Because of these opportunities we believe that we can continue to grow and take market share over the next few years while improving our margins at the same time. The past year and a half has shown that Mercer is a gem within the MMC portfolio and we intend to continue to building on that success. Thanks for the time to speak with you today, I'll turn it over to Brian.

[Brian Duperreault:]

Thanks Michele, okay I think its time now for questions so we would like to hear from you. Question And Answer

[Operator:]

Thank you. [Operator Instructions]. We will take our first question from Larry Greenberg with Langen McAlenney.

[Larry Greenberg:]

Good morning and thank you. I was just wondering if you can talk about, a little bit about the seasonality in your business. Last year the first quarter margin was 20ish on an adjusted basis and second through fourth quarters fell of very significantly, and I know there was a lot of messy stuff in those numbers but given everything that's happened in the last couple of years, it's hard to really track what the true underlying seasonality in the business is and I was just wondering if you could chat about that a little bit. And then secondly can you just go through how foreign exchange impacted earnings and if possible margins in the various segments?

[Brian Duperreault:]

Okay. Larry listen we will do foreign exchange afterwards, do seasonality first and I assume you are really talking there about Marsh and Carpenter.

[Larry Greenberg:]

Yeah, exactly.

[Brian Duperreault:]

Okay, well Dan you are here.

[Daniel S. Glaser:]

Hi Larry, The way seasonality works at marsh our largest international region is Europe and a great deal of your Europe's renewal particularly in countries like France are in the first quarter and so we tend to see the revenue come in from those locations, early first quarter and the expenses live with us for the rest of the year and that's why you see a bit of a fall of as we go through the year.

[Brian Duperreault:]

And well Peter's here from Carpenter, Peter yours is even more seasonal so

[Peter Zaffino:]

Right and the treaty business typically tries to match with fiscal years of our clients insurance companies and the predominant amount more than 60% comes up for January 1 and will flow through the year.

[Brian Duperreault:]

Yeah, so, in Carpenter's case, if you missed the first the of the year you got a difficult year ahead of you so, that's what we faced although we looked like we are moving into a better year starting next year, okay Larry so now lets do foreign exchange.

[Matthew B. Bartley:]

Shall I take that one, Larry let me make a general observation first because we have obviously a fair amount of data with the diversification of the businesses and geographies we generally see that while there is some quarter-to-quarter variability, the impact of foreign exchange on our results and I mean just digression, obviously when you look at the revenue you see the impact pretty clearly in the of this year and you can assume that, that is matched, relatively, fairly with what is happening on the expense side. While we see the variability quarter-to-quarter the diversification of these businesses has historically resulted in not significant net impact either way from ForEx perspective on annual results, some up, some down and so we feel we got to bear that. Now obviously in a quarter like the last one... like this one, the first quarter, were the Euro strengthened is significantly again the dollar although interestingly the pound did not, we got a little bit of assistance in the quarter. But we expect to re-trade that, for that to fall out and dissipate over the balance of the year. So I would say the best way to look at these business is to accept the fact or recognize, that we are likely not to have substantial ForEx impact on a net basis hit us, pretty much washes out, that's been historically the case.

[Larry Greenberg:]

Okay

[Brian Duperreault:]

Next question?

[Operator:]

Thank you and our next question will come from Meyer Shields.

[Meyer Shields:]

Dated perspective, but Brian if you would look back to the 845 million of contingents or MSAs that were given up, immediately post spitzer. Do you have a sense now as to how much of that you've recovered and how much is still left?

[Brian Duperreault:]

How much is recovered you mean in terms of getting revenue in a different way?

[Meyer Shields:]

Yeah.

[Brian Duperreault:]

That's an interesting question. I am not sure I have the answer to that frankly, its pretty complicated because that was just one... that earning stream that disappears, and so how do make up that kind of earnings stream you have to get it through normal commission in fee income. You trace it back to 04, there was a significant drop of, our margins have suffered as a result of from that period, forward so its slowly building up but we clearly haven't made it back... we clearly have not made it back so that's one of our issues. If you look at this, Marsh in particular one of our biggest issues off course is our revenue and we have a... we have got to find ways to getting a better revenue, movement within the company... I know Dan you want to add any to that?

[Daniel S. Glaser:]

I think its sort of highlight's the un-level playing fields that we have in the insurance market place which is inherently unfair, you got one situation where certain players are helped to a standard in which there is full disclosure and no contingencies, where the rest of the market participants operate in a world of no disclosure and full contingencies, I would think that overtime that has to work itself out.

[Meyer Shields:]

Okay. Right and in terms of follow-up I think Brian you mentioned at Marsh head count was down 150 in the quarter, obviously go back a couple of years there's lot of involuntary departures from management perspective. Can you break down that 150 between how many people you want... you terminated and how many people left that you want to keep.

[Brian Duperreault:]

Yeah, okay what we are talking about terminations and Dan I think wants to take that if you don't mind that.

[Meyer Shields:]

No.

[Daniel S. Glaser:]

Sure, I mean one on an overall basis the 150 departure in the first quarter were all managed by us and so those, those were an actual reduction in force. When I look at turnover overall, actually we are at historic levels now so I don't view employee departures as an issue for Marsh and in fact I can't hire all the people who want to join, so on an overall stand point we have got the right base of colleagues to handle the business we have until winning the marketplace of play. Okay, let's go to another question, thank you.

[Operator:]

Thank you and our next question will come from David Small with Bear Stearns.

[David Small:]

Yeah hi, just two quick questions. Can you just clarify a little bit the guy... on the Guy Carpenter margin compression, you have kind of eluded to it in your commentary but maybe you could give us a little more meat their.

[Brian Duperreault:]

Okay, sure. I'll start and let Peter, Peter answer, the compression is really rate, we're talking about the declining rate level across the board and I would say internationally in particular so it's really a direct result of what we do as we take our commissions from our clients, but Peter you want to add in that?

[Peter Zaffino:]

We have a large property catastrophe book that is over-weighted in the U.S.. Rates are coming off stronger in United States and therefore its effected our overall result in the first quarter probably a little bit more then if there was an even weighted average rate reduction across the globe and we have had a little bit of a short fall in new business in the first quarter and that is really been the impact with the compression of margin.

[David Small:]

Can you just give us a magnitude of how much margin compressed and then just on the FX question from earlier, I just wasn't clear did FX impact the margin in the risks and insurance business? Thanks.

[Brian Duperreault:]

Okay, let's do the FX questions okay, go ahead Matt.

[Matthew B. Bartley:]

While there is variability quarter-to-quarter, and David I want to reemphasize the broader picture, so we will see some variability quarter-to-quarter and given the pretty significant move in the euro in this quarter, we got a little bit of assistance across our businesses in this quarter not from all currencies but in the euro jurisdiction, yes we got a little bit of help and we expect that to dissipate over the course of the year. And looking back over the last couple of years, what's giving us that sense is as I look back historically, I see that net-net again across businesses we pretty much wash out on the effects line.

[Brian Duperreault:]

Okay, so David... we don't close the margin but I do want to emphasize that because of the situation with this year we had to do something about the expense level and that's we want to restore our margins and that's the way we will restore them. Next question please.

[Operator:]

Thank you our next question will come from Bill Wilts with Morgan Stanley.

[Bill Wilts:]

Thanks, good morning.

[Brian Duperreault:]

Good morning.

[Bill Wilts:]

Good morning, question for Brian could you talk about the meetings you've had with clients, I guess I am thinking specifically of risk managers. What concerns have they raised? What have you... what's been the nature of the discussions, just some color and then related to that have you lost any significant clients since joining and what's been your analysis of any of those situations.

[Brian Duperreault:]

Well I'm just really glad you asked this client question, you know, because I had... I went to RIMS. Just got back, I assume everybody knows what it is, but just for clarification, it's where the risk mangers get together. There are our clients and they come from all over the world and I met them every half hour. Morning, noon and night. So it was really a lot fun and I never thought I would say I had a lot of fun at RIMS, but I actually had lot of fun at RIMS and Marsha I thought did an extraordinary job so my hats off to you guys listening, did an extraordinary job, but back to the clients. So yeah I sat down with them and you know, was an interesting theme, consistent theme, one, great loyalty, amazing loyalty. Through thick and thin, some of them had specific problems, you know I can't tell you... I can't think of one that was complaining about service, in fact it was other way around I mean they loved their service. They are little concerned about what we are going to do to the organization... they don't want to lose the level of service that we provide them and you know I think Dan will repeat this but almost to... almost everyone of them said look whatever you do, don't touch my team, the group that's taking care of me leave them alone they are great and said that's terrific and that's what I see, and I think we have got great people, so that's not our problem, and clearly our clients are not our problems, loyalty and service, what's our problem, we don't make enough money and that's where... I told them that's where you come in, we need to get more money from you guys, and they say it with the right... I think with the right attitude and I think its... so if I had to worry about things that we could fix around here I could have worse problems then that, we have great people, great service, great loyal clients, we just got to work a little bit on that, on that matching of expense, I am sure there's things that we do that they don't need, we have got to fix that and the level of service we'll have to work on to get it at the right level, then we need to work on our revenues but the clients concern is please keep up the quality of service you are providing me. That in the... and the other thing is that they are very happy, I think it was the happiest group I have run into. Dan, you want to add anything to that?

[Daniel S. Glaser:]

Sure, just in terms of a professional services business you link high and you lose some clients and that's a steady state of the business. We have not lost any clients recently of any materiality and in fact our new business resulted, last year we had very strong new business almost $900 million of new business throughout the year we have set ourselves a hearty target for this year and we are on track with similar or even above that level of performance, so our new business results prove that we are in the market place and we are gaining a lot more clients and then we are losing by a long stretch.

[Bill Wilts:]

Thanks

[Brian Duperreault:]

Okay.

[Bill Wilts:]

You feel like, you have the right internal data to make the decision on client profitability or is that a focus for you?

[Daniel S. Glaser:]

I mean, client profitability is an important measure but its almost like you need to be optimized to really run your business on a client profitability basis so I'm running the business based upon geographic profitability office-by-office and we used our end time system to evaluate within the round where we are on an individual account basis but I'm not using that as the way to drive the business I am actually using it as a pricing of services component and we're driving the business based of our geography.

[Brian Duperreault:]

Okay, we should go to another question, thanks.

[Operator:]

Our next question will come from Brian Meredith of UBS.

[Brian Meredith:]

Yeah, good morning. Two quick questions, first, Matt, the variable compensation, $30 million is it going to be similar in the second quarter as well that the kind of adverse year-over-year comparison?

[Brian Duperreault:]

No, the answer is no, because the adjustment as it plays through, there will be a little bit of that lingering because as we indicated on the call the adjustment for accounting purposed happened in the third quarter... third quarter Brian, we should be tracking relatively... there should be little to any real discrepancy, there will be a little bit in the second quarter but and actually we do... we will have a carryover of some recovery that we need to make in the second-quarter, so second quarter will have a little bit of the discrepancy that we will have to cover. Third quarter not.

[Brian Meredith:]

Okay great.

[Brian Duperreault:]

nd the balance obviously in the fourth quarter like the third.

[Brian Meredith:]

And then the second question is, Brian and Dan, I think I heard that you said that at Marsh right now with respect to people and headcount, you are kind of right sized so the question I have going forward is where are the margin improvements going to come from Marsh Inc., you obviously had a nice 250 basis point expansion, I am sure that margins aren't at an acceptable level, yet for your purposes, where you think they should be. Were else are they going to come form?

[Brian Duperreault:]

Well, that's a good question. I am not sure that Dan said that he was comfortable with the level of head count and both of us I think are saying the same thing which is there's more work to be done. Our margins are not nearer were they need to be, not even close and that's hard slogging and Dan's in the middle of that with his team. So now we don't feel comfortable yet with our levels.

[Operator:]

Thank you and our next question will come form Keith Walsh with Citi.

[Keith Walsh:]

Good morning everyone and thanks for the new disclosure, very helpful. First question for Peter. You know when I think about Guy Carpenter's revenue decline, and its very different than your competitors Aon and Willis. They are also experiencing tough pricing environment. What specifically you talked about new business, but what about retention, if you could talk about that year-over-year and then I have a follow up.

[Brian Duperreault:]

As I said before we feel like we have waited a little bit more when you compare our competitors to the U.S. and that's where we are down, because of pricing coming off in the U.S., our new business short fall has had an impact and for January 1st we did loose couple of clients, there were isolated instances but nonetheless, certainly had an impact on our first quarter results, and facultative which is an area were we had some turnover in 2007 had an impact on the first quarter, but believe we have the right strategy going forward on that.

[Keith Walsh:]

Okay, and then for Brian in past comments you have said you are a builder and you may make transactions. Can you effectively integrate acquisitions when Marsh still needs a great deal of management attention then why not use the excess cash you have right now to buyback stock especially if the earnings power is not showing through right now? Thanks.

[Brian Duperreault:]

Well Frank that's good question, I mean you have to get the company in the right position to accept a new company into it. It's no question about it I wouldn't contemplate making a major acquisition within Marsh at this point until then it feels comfortable with having the operation running at the right level. However, that doesn't mean that you can't bolt things on, its a big world out there is geography we want to continue to expand in. The operations internationally are actually pretty good and those integrations wouldn't affect by any measure but would be happening in other parts of Marsh. So we don't want to miss the opportunity to continuing to spill at our capabilities where the world's insurance market is growing that would be crazy. And there are other parts of MMC. So if we would say Marsh is not quite ready for an acquisition it doesn't mean that there aren't other parts of MMC that aren't ready for an acquisition. So, the use of our funds is something we work very heavily and what is the best use of that for shareholder value creation. And I prefer to build out the businesses and put money where we believe great success can be achieved, that would be my first priority clearly if there are no things that we can do then we use the capital management tools available to us primarily share buyback. Okay. Let's... why don't we take another question?

[Operator:]

Thank you. We'll now hear from Jay Cohen with Merrill Lynch.

[Jay Cohen:]

Yes, two questions, why were the consulting margins down from the year earlier quarter? And then secondly I guess back to the insurance services the margins at this unit are still significantly lower and than the major competitors, and I am wondering Brian and Dan I guess if you enable to pin point, the problem is we don't have a lot of disclosure from anyone. What the real expanse is are broken down and so its difficult to say, why are MMC's margins, insurance margins that much lower than the other. I'm wonder if you guys having a looked at it very carefully come up with two or three key factors in drive in that difference and in the consulting margin difference.

[Brian Duperreault:]

Okay, let's, margin question first on consulting, so we really have to break that down between Michele and John between Mercer and Oliver Wyman. So Michele you want to start and then maybe John can pickup?

[M. Michele Burns:]

Sure, I will just give general comment, generally in this segment the revenue flowed in the segment were quickly expenses could be taken out. In addition how I had highlighted in Mercer portfolio we had revenue decreases due to global market declines in the asset... under administration and asset under management, those kinds of revenue decreases dropped to margin directly dollar for dollar in the short run. John you want to take it up?

[John Drzik:]

Sure in Oliver Wyman the principle reason was the first one Michele mentioned which is that the revenue growth decelerated in the quarter relative to where we expect it to be. And so the expense didn't decelerate as fast. But we're taking measures now to align the expenses for our revenue projection for the rest of the year.

[Brian Duperreault:]

Okay. So let's move to the insurance side, which will be principally Marsh. So you want to do that Dan?

[Daniel S. Glaser:]

Sure, I mean, from the first I think, on the revenue side apart from some mild mix of business issues between whether employee benefits is in one of the competitors versus not and those kind of issues, or whether someone has more of a commission base because they are in smaller markets and larger markets. So there'll be some mild mix of business issues. But really on the revenue side, there's no real difference in the marketplace between how we are compensated. So it really points to expenses. Now I think there's few different things that Mike and I are driving toward, one we think that the centralized cost Marsh are significantly higher than what they should be, and we are very focused on that and I am quite comfortable that as we move through the year we will find ways of dramatically impacting the centralized cost without influencing or impacting client service at all. And so we are focused on that. I also think that when I look at our salary and benefit as a percentage of revenue and our technology spend as a percentage of revenue, I think those are about too high from where they need to be and so I would think that those are the primary factors and what we are focused on.

[Brian Duperreault:]

Okay. Another question please.

[Operator:]

Thank you, we'll hear from Alain Karaoglan.

[Alain Karaoglan:]

Two questions and essentially they're follow-ups on Jay's questions. Brian do you have a timing in terms of your vision or where you think the order be able to achieve margins that you would be happy with. And related to the comment by Dan, is it the question of cost cutting or do you have to take market share on the revenue side in order to get to where do you want get and do you think you can do that? And then I didn't understand the answer on the consulting margin fro Mercer. The revenues were up significantly but the operating income was up a lot less than that.

[Brian Duperreault:]

Okay we'll leave the Mercer question for last and Michael can do that. The timing on them margin improvement well you know... you and I both want this thing fixed as quickly as possible, and that is what we're trying to do. Time is not on our side we know that but I just don't want to give specific time frame and so we are not but I will tell you that it weights on us and we are working as quickly as possible trying to outline that we are... we been taking actions in this place and so it is not like we are sitting around. But so you know bare with us we are moving on this thing and we will get these margins in the right order as quickly as we can doing it the right way so we don't disrupt this company. Cost cutting etcetera versus getting market share Dan you want to?

[Daniel S. Glaser:]

I mean its really simple we have to improve our margins significantly you can grow revenue or you could... and you can cut expense and you can do that in different measures. I mean I definitely think there is a revenue story here and that we're beginning to grow again. Its tough in the market environment that we are in. we're in our commission businesses way to coming off significantly. But we can't really limit that, because that's good for our clients. And so I don't want to have our brokers of any sense of doing anything but getting the absolute best deal in terms of conditions they can and as they do for our clients. So, it is what it is. But I do think that there are many things in we can do on the revenue side. For example, with Brian in my insurance company background we look at it segmentation in a much different way than the typical brokerage firm. We are going through the firm right now looking at various segmentations strategy and I think there is revenue debt combine our existing business more than what it currently is. So it's not just increase in market share. I also think that as I mentioned before there is level plain field which I think over time will level its self out in one way or the other. Our end commission strategy is in early stages but its developing and it will lead to improve the revenue performances some point in time. We are looking at placement houses in the United States which will help us on t cost side, but it would also help us on the revenue side as well because the there will be pretty significant efficiency gain for certain insurance companies and we should be able to develop some sort of arrangements with them to share and some of the efficiency gain that they will see. So I do think that there is a revenue story to be had with which will marry with the hard look at expenses that will take throughout this year.

[Brian Duperreault:]

Okay. And then last Michele.

[M. Michele Burns:]

And in terms of margin, the margins your looking at are you referenced operating income for the segment. So in both of our businesses revenue still grow disproportionately grew this time in Mercer. The margin represent both of your us and I think we answered the question as to the revenue drop as opposed to the ability to take expense without in commensurate here to.

[Brian Duperreault:]

Okay, Lets do one more question.

[Operator:]

Thank you and our final question will come from Thomas Mitchell.

[Thomas Mitchell:]

If you look at... in the insurance brokerage business if you look at the broad picture of a continuing not vicious but sort of a gentle but relentless rate decline for the property in casualty companies and then lined that up with the values of things that your clients are ensuring in what's happening as a trend with those. What do you thin the outlook over in another next two or three months, but may be the next two or three years would be for the size of the pie, the total market for your insurance brokering services, growing stable at risk of going down, how do you see that picture?

[Daniel S. Glaser:]

There's a couple of things here, one I think you have to look at the rating environment for insurance company only impact our commission business. So, big chunk of our business, about a 50% chunk of our business is on a fee business and is not impact by the rating environment. And the rating environment is pretty clear. The insurance businesses is a supply and demand business and when in insurance company, make a lot of money, then they tend to attract additional capital and rates being to come down and once rates start coming down, they tend to keep going down until certain insurance company actually loose money and with raw capital. And so, we are in that part of the cycle, it's a cycle were repeat itself and I have been in this business 26 years, I have been through it several times, and what I can tell you is the factor will come down, the factor will go up. I wouldn't describe it as necessarily gentle, it's been quite aggressive in part and that's good news for our client that it actually probably good news in terms of the fast of the... the quicker of the asset. So ion terms of timing of that, it all depends on losses, if you tell me what the losses are going to be I will tell you when it happened.

[Brian Duperreault:]

The only other thing I would like to add to that Dan is just in terms of market share issues, it's a big world out there and if you look at our growth rates, our international growth rates in Marsh continue to be good on a organic basis, stronger outside he U.S. than in the U.S., and therefore we don't want to overlook the fact that this is a changing world, the global economy is a lie than well and we are in the middle of it. Any ways, thank you, I just could of wrap up here if I could operate or just say, just give a closing comment, we know we took initial steps as quarter to build the foundation for stand able growth, it's a start, its only that I didn't take the job to be a caretaker or oversee incremental improvements and results, we don't have any modest ambitions over, we say the simply objective is to build the premier professional service to determine risk strategy in human capital and generate a compelling return for all our stake orders. There's a lot of work we got to do, but the journey has begun and I look forward to reporting back to you in three months. So thank you everybody.

[Operator:]

Thank you ladies and gentlemen, that does conclude today's conference call. We appreciate your attendance and have a wonderful day.