Marsh & McLennan Companies, Inc.
Q3 2008 Earnings Call Transcript

Published: 5 Nov 2008

[Operator:]

Welcome to MMC's Conference Call. Today's call is being recorded. Third 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. Looking-forward 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 call over to Mr. Brian Duperreault, President and CEO of MMC.

[Brian Duperreault:]

Good morning, and thank you for joining us to discuss our third quarter results reported earlier today. I am Brian Duperreault, President and CEO of MMC. I would like to welcome Vanessa Wittman, our new CFO who joined us in September. I'd also like to welcome our operating companies CEOs to today's call, Dan Glaser of Marsh, Michele Burns of Mercer, Peter Zaffino of Guy Carpenter, John Drzik of Oliver Wyman and Ben Allen of Kroll. Also joining us is Mike Bischoff, our Head of Investor Relations. After I make some brief remarks, Vanessa will present our financial results and then we will all take your questions. MMC's adjusted operating income in the quarter rose to $217 million, an increase of 50% from the third quarter of last year. This was all the more impressive given the current economic environment. I'm very pleased with the continued improvement in profitability at Marsh and with Mercer's overall strong results. And it is gratifying d to see Kroll continue to improve its profitability as well. Adjusting for noteworthy items, we have reestablished MMC's earnings growth. In the first nine months of 2008, adjusted operating income was $963 million, a 22% increase from the year ago period and a 9% increase from the 2006 period. Looking at Marsh's performance in the quarter, its clear the approach Dan and his team have taken is absolutely the right one for the company. They have undertaken a series of operational improvements and major initiatives that are geared toward better delivery of services through client segmentation and enhanced placement capabilities. Ultimately we believe this will also contribute to improved profitability. In the quarter, Marsh continued to produce revenue growth with an improved client revenue retention, something we have seen throughout the year. New business production remained strong. However, the main driver of Marsh's improved profitability has been expense reduction. In the quarter Marsh's underlying expense on an adjusted basis were down 4%. As a result, even as the soft insurance cycle persisted, Marsh was able to show significant margin improvement. While Dan and his team still have a lot of work in ahead of them, this is a solid start to a multi-year process that will enhance shareholder value. At Guy Carpenter difficult market conditions continue to affect results. Our previously announced restructuring at Guy Carpenter was in response to revenue declines earlier this year. The restructuring was well executed and we saw a full impact of expense savings in the third quarter. As a result Carpenter maintained its profitability at the same level as the prior year. This is in contrast with the first quarter of 2008, when we saw a meaningful decline in Carpenter's profitability as well as in the second quarter when the implementation of the restructuring plan resulted in only a modest decline in profitability. And as we look across at its fourth quarter, we anticipate an increase in operating income on a year-over-year basis. This is an impressive turn around managed by Peter, who was named CEO of Carpenter earlier this year. Now let me discuss our Consulting businesses. Mercer's third quarter results were excellent with the continuation of the strong revenue and earnings growth, the company produced in the first half of the year. Underlying revenue growth in the quarter was 10%, with strong results across all businesses. Mercer's consulting practices increased to 11%. Outsourcing increase 7% and investment consulting and management increased 12%. Growth and profitability was strong coupled with margin improvement, both for the quarter and for the nine months. Anyway you look at it, Mercer had an excellent quarter. As I mentioned last quarter, Michele and her team have been sensitive to the changing global economic conditions. As a result they began to implement cost containment measures earlier in the year. Although organic revenue growth remains strong in the quarter, Mercer continues to aggressively manage its expenses. This included a high degree of scrutiny over new hires and a concentrated focus on discretionary expenses. Mercer is also in the process of selectively reducing its headcount levels. Oliver Wyman makes up slightly less than 30% of our Consulting segment. As you would expect, given current conditions it has seen a weakening of demand for projects as the year has progressed, particularly in its Financial Services practice. While Oliver Wyman was able to produce modest revenue growth in the first half of the year, the rapidly deteriorating business conditions in the past few months resulted in revenue declining more quickly than anticipated. John and his team are looking for every opportunity to reduce expenses, to strike the right balance between near-term results and maintaining the capacity to serve clients when business conditions improve. Stepping back and viewing MMC's consulting operations as the whole, we are pleased that the strength at Mercer more than offset the weakness at Oliver Wyman. As a result, we reported an increase in operating income for our consulting segment. Year-to-date, the increase was 5% on an adjusted basis. Now turning to Risk Consulting and Technology; since Ben Allen was made CEO of Kroll in February, we have seen improvements in Kroll, particularly in profitability. Kroll has a range of businesses that are affected differently by economic conditions. Some businesses such as Corporate Investigations and Litigation Support are benefiting from the current economic environment. Conversely, we've seen pressure in other areas such as mortgage and employment related background screening. In the quarter, a number of Kroll businesses showed revenue growth, including Litigation Support and Data Recovery, Business Intelligence and Investigations and Government Services. Overall, profitability for Kroll, improved 14% in the third quarter. Corporate Advisor and Restructuring is also in this segment. Earlier this year we determined that this business did not fit with Kroll's strategy and segregated its operation. In the last week we sold Kroll to Zolfo Cooper, the U.S. restructuring business to several of its senior executives in a leveraged management buy-off. We are also very close to reaching agreements to sell the remaining international restructuring operations in similar transactions. Before I turn it over to Vanessa, to give you more detail on the quarter, I would like to take a moment to comment on the current operating environment our clients are facing. A fundamental transformation is occurring in the global financial system that is affecting multiple industries. There was an initial traumatic shock which is evolving in to a more chronic but nevertheless serious condition. Throughout the entire economic and business environment, there continues to be significant pressure. At MMC, we've been moving swiftly to bring our risk and human capital expertise to bear for clients as well as to capitalize on opportunities the current environment affords a company like ours. Mercer's launched a client content web portal entitled, Leading through unprecedented times. Using of variety of media the site demonstrates Mercer's thought leadership on the issues that matter most to its clients ranging from cost efficiency to employee engagement. Mercer is also developing a current line of integrated client out reach program to systematically identify and address issues raised by the current economic crises including the impact on pensions and healthcare. You can see more about this initiative on Mercer's website mercer.com. At Oliver Wyman although recent events have put significant pressure on it's business, our financial services clients will need top tier advice on risk management governance and approach strategic cost cutting and navigating the way of anticipated increased regulation. Other opportunities included advising private equity on investments strategy, increase corporate development and post merger integration work due to bank consolidation and working with the public sector as government involvement in the financial services sector increases. In Kroll, their Litigation Support and Data Recovery group is assisting clients who are facing governmental enquiries and an increase in litigation as a result of the crisis. Finally, both Marsh and Guy Carpenter have done an amazing job of helping clients during this unprecedented environment in the insurance industry. Marsh has been in constant communication with thousands of clients through conference calls and online update center, one-on-one meetings, and numerous industry events. Later this month, Marsh will host a summit in London with clients to discuss issues facing the industry. Similarly, Guy Carpenter has been working with clients to evaluate the changing market conditions. The reduction of surplus, due to equity market declines, asset impairment losses, and catastrophic events have made capital a precious commodity. In times like these clients typically look to reinsurance markets as a source of additional capital. Let me conclude by saying I am very pleased with amount of progress we have made throughout MMC in the past nine months. Although a great deal of effort is still required, we remain on track with our plans to improve profitability across the company. We are excited about the future and the many opportunities we have to offer our clients in the current difficult economic environment. Before I turn it over to Vanessa to present our financial results for the quarter, let me say how pleased we are that Vanessa has joined MMC. She is an experienced finance professional with a proven track record at large multifaceted organizations. I hope over the coming months you'll have an opportunity to spend some time with her. Vanessa?

[Vanessa A. Wittman:]

Thanks very much, Brian and good morning everyone. I am very pleased to join MMC and to be part of Brian's senior management team. I also look forward to building long term relationship to the investors and analysts who follow our Company. Just to frame my comments today; I want to cover three areas. First I'll walk through the series of items that impacted our third quarter results; especially compared with the third quarter of 2007. Next, I will turn to the operational results, including a few corporate items. Then I'll cover our cash position and liquidity and make some comments on pension. Let's start with the three items that made quarter-to-quarter comparisons difficult. First; investment income, then discontinued operations, and finally noteworthy items. Let's start with investment income; investment losses reduced GAAP earnings per share by $0.03 in the third quarter of 2008. MMC reported in investment loss of $23 million in the quarter which was primarily due to mark-to-market declines in investments within our private equity portfolio. This was slightly higher than anticipated when we held our second quarter call, because there was a write down on warrants received on a client engagement in the corporate, restructuring, and advisory group. The $23 million loss compared with investment income of $78 million in the third quarter of '07 results in a negative swing of $101 million or $0.13 per share on year-over-year basis. Looking ahead to the fourth quarter, investment income should approximate the $10 million of income we reported in the fourth quarter of 2007. Now let's just look at discontinued operations. Within GAAP earnings, we had discontinued operations in both periods, most significantly the sale of Putnam last year. As its customary, with most large transactions, contingent abilities including income taxes have been retained with the sale of Putnam, adjustment result in [ph] credits and charges that flow through discontinued operations. We have seen this in each quarter over the last year and expect to continue to see it in future period. In the quarter discontinued operation was a loss of $0.05 a share. This was primarily due to a tax adjustment pertaining to the sale of Putnam and to a lesser extent, a loss in the sale of small component of Kroll's Government Services operation. Finally, let's turn to noteworthy items. On a GAAP basis, EPS from continuing operations was $0.03 a share. Noteworthy items in the current quarter as described on page 10 of our supplemental schedules were $0.18 a share. This resulted in adjusted EPS in the third quarter totaling $0.21, flat with the prior year. Apart from these noteworthy items, the results saw an additional $33 million charge at Marsh resulting from an adverse legal decision rendered last week. This reduced adjusted EPS by $0.04. Now let's move on to results of operations. As Brian stated, adjusted operating income for MMC in the third quarter increased 50% primarily due to the significant improvement at Marsh. Within Risk and Insurance Services, Marsh's third quarter revenue increased 3% to $1.1 billion. Revenue growth on an underlying basis was 1%. If we exclude the fiduciary interest income as some of our peers do, Marsh's underlying revenue growth was 2% in the quarter. Marsh's client revenue retention rates, which measures the dollar amount of client revenue retained was three percentage points higher in the third quarter on a year-over-year basis. New business production was inline with last year's strong results. While Marsh has been successful in achieving organic revenue growth during very difficult market conditions, it's driving significant growth in operating income through on going expense reduction and cost discipline. For example when you exclude fiduciary interest income, Marsh generated revenue growth in the third quarter of 2% while underlying operating expenses on a adjusted basis were down 4%. Dan's been updating you on the restructuring activities that have been ongoing at Marsh throughout the year, but to briefly recap. Headcount reductions were 640 in the third quarter of total staff 1,150 staff reduction so far this year. Approximately 250 reductions remain. The staff reductions in the third quarter led to a severance charge of $50 million with anticipated annualized savings of $66 million. These reductions are in addition to the roughly 600 position that were transferred to Carpenter in July. Carpenter was part of the UK back office outsourcing initiatives that was discussed on our second quarter earnings call. Marsh's adjusted operating income in the third quarter increased by $65 million or $98 million excluding the charge to the adverse legal decision. As we indicated on last quarter's earnings call; Marsh's operating margin improvement on an adjusted basis for the first six months of this year was about 500 basis points. For the nine months, Marsh's margin improvement is now above 500 basis points. Meeting our goal of a 500 basis point margin improvement for the full year implies a year-over-year improvement of 350 basis points in the fourth quarter. We think this is a reasonable expectation. In conclusion not only the third quarter but the first nine months of the year have been very successful for Marsh. Now let's look at Guy Carpenter. The insurance rates continued to decline year-over-year. But Carpenter managed to do well in this difficult environment from a profitability standpoint. While third quarter underlying revenue declined 10%, adjusted operating expenses declined 12%, allowing Carpenter to maintain its profitability year-over-year. Our Consulting segment's growth in both revenue and operating income in the third quarter was led by Mercer. Mercer's revenue performance was excellent. 12% reported growth and 10% growth on an underlying basis. All of Mercer's businesses generated strong underlying revenue growth in the third quarter. Mercer's operating income rose 24% resulting in third quarter operating margin improving by more than a 100 basis points. We are very pleased with Mercer's performance in the third quarter. At Oliver Wyman continued uncertainty in the U.S. economic environment and difficulties in the financial services industry resulted in a 5% decline in underlying revenue in the quarter. For the nine months Oliver Wyman's underlying revenue growth was 1%. This has led to a decrease in profitability this year as revenue growth has declined more quickly than anticipated. As Brian, mentioned Oliver Wyman continued to look for opportunities to reduce expenses while protecting long term franchise value. Before we leave the Consulting segment, just to remind you that last year's fourth quarter results for Oliver Wyman included success fees of roughly $30 million. And we do not anticipate replicating these fees in this year's fourth quarter. Within our Risk Consulting and Technology segment, Kroll's 14% growth and operating income was more than offset by the decline at corporate advisory and restructuring. Kroll which represents 86% of this segment's revenue and all of the segments profitability have revenue of $218 million in the third quarter, an increase of 4% compared with last year. The Corporate Advisory and Restructuring group which we separated operationally from Kroll in the first quarter of this year had a revenue decline of 25%. Even though expenses are greatly reduced on a year-over-year basis, it reported a modest loss, similar to the first two quarters of 2008. Now let me briefly discuss several corporate items. The corporate restructuring charge of $49 million in the quarter reflects the near completion of an initiative MMC began two years ago to reduce occupancy costs in our headquarters building in New York. MMC sold five floors in the fourth quarter of 2006 realizing a gain of $74 million. MMC continues to own over half of this buildings. As planned an additional five leased floors have now been vacated resulting in the charge. The charge represents the future rent on non-cancelable leases, net of estimated sub lease income. As we have mentioned frequently you receive variability quarter-to-quarter in MMC tax rates. Based on the first three quarters the tax rate on adjusted operating income for the full year should be approximately 30%. Now let's turn to liquidity and pensions. Our liquidity position is strong. We ended the third quarter with a cash balance of $1.5 billion, an increase of $300 million since June 30. MMC typically generates strong operating cash flow in the fourth quarter. Net debt was $2.1 billion at the end of the third quarter compared with $2.4 billion at the end of the second quarter. We do not have any additional debt maturing until June 2009. MMC has no outstanding commercial paper or bank loans and we continue to maintain a $1.2 billion revolving credit facility that remains undrawn. Let me say a few words about pensions. On a global basis, MMC operate a defined benefit plan in approximately 25 countries, although the US and the UK plans account for the vast majority. Going into 2008, MMC's pension plans were over funded on a GAAP basis by $942 million. During 2008 we will contribute about $275 million for the full year. We monitor funded status for both GAAP and statutory purposes very closely. Every year we remeasure assets and liabilities in our defined benefit pension plans at year-end. A significant driver of our pension liabilities and expense is the discount rate, which we calculate using a proprietary bond model. An important input into the model is long-term AA rated bond trade. We won't have a firm view of next year's pension expense until we perform a re-measurement at year-end. Before I turn it back to Brian, I'd like to comment directly on our third quarter results in relation to the expectations of the investment community. The range of First Call estimates for the third quarter was $0.23 to $0.37 of adjusted EPS. We think this range is indicative of the difficulty analysts had in estimating this particular quarter, both because of last year's unusual third quarter and because of the very strong second quarter results this year. Based on the average First Call adjusted EPS estimate of $0.32 per share, we believe the components of the GAAP are $0.01 from Oliver Wyman, $0.02 from investment income, $0.04 from the adverse legal decision and $0.04 from Marsh's underlying results. While there was a range of estimates, Marsh's revenue in the quarter generally met street expectations. However, Marsh's operating margin was lower than the average expectation. We think this gap in expectations is due to the difficulty in estimating profitability in Marsh's seasonally smallest quarter. Going forward we don't think this will be an issue. And with that let me turn it back to Brian.

[Brian Duperreault:]

Okay, thank you, Vanessa. And... we're ready for questions. Question And Answer

[Operator:]

Thank you Mr. Duperreault. This question and answer session will be conducted electronically. In the interest of fairness we ask that you limit yourself to one question and perhaps a follow-up. [Operator Instructions]. Thank you. And we'll take our first question from Keith Walsh. Please state the name of your company before asking your question.

[Keith Walsh:]

Hi, good morning everyone. This is Keith Walsh at Citi.

[Brian Duperreault:]

Good morning, Keith.

[Brian Duperreault:]

Thanks. Two question for Dan. First on the hub strategy, if you could just give us a quick update there and just broader. It seems like it's easier for underwriters to do business with you guys with this hub strategy that you have been talking about. Is there an ability for you to extract some of those economics? And then, I have a follow-up.

[Daniel S. Glaser:]

Okay, just to recap the hub strategy, which is really predominantly a U.S. strategy. Because if you recall London sort of acts a natural hub in Europe and in other parts of the world. So, the creation of the hub, first of all is geared towards clients. So, the idea is to create concentrated placement and product expertise. So, we would be able to innovate and deliver more value for clients by creating more completion amongst insurers, negotiating better terms and conditions and having a better craft [ph] at achieving contract certainty. But as you mentioned Keith, there is also value for carriers in these hubs. It gives them greater efficiency, lower cost, the potential for things like standardized submission. And so, we definitely are in negotiations with carriers to extract some of the economics that you mentioned. We call that initiative within Marsh, the enhanced commission strategy. And it's too early to call right now. But I am hopeful with the discussions that we've been having with carriers that they recognize the value. Of course any value that we will be able to negotiate with carriers will be fully disclosed to clients and I would reiterate, it's not contingent on volume or profitability. It will be based upon the value that we create.

[Keith Walsh:]

That's great. And then, the second question, few weeks back you guys formed MMC agency to serve the smaller client segment. Is this going to be an outlook for your M&A dollars, since there is really, I guess, no longer any larger deals out there, it seems like. And you are going to be accepting additional forms of compensation such as supplementals from this new agencies business? Thanks.

[Daniel S. Glaser:]

Okay. I'm very excited about the Marsh & McLennan agency. And I love the rebirth of the name Marsh & McLennan in the agency broker space. And I can tell you that our colleague bases [ph] are enthusiastic about that as well around the world. So the Marsh & McLennan agency will be one of the largest agency in the United States within a very short period of time. It's geared to the notion of that in these small and lower corporate segment including some personal lines as well, that it's more likely to be a product solution than any kind of let's say the folk solution. You just can't economically develop the folk type of solutions in the lower corporate space. And so, our goal will be to negotiate with carriers to develop terrific Marsh & McLennan products which we will then market heavily into the lower corporate segment. We clearly within that because on that basis, we're as an agent we're more representing carriers than clients, actually our customer we will be marketing to customers throughout the United States. But we will be an agent of limited number of carriers. And clearly, we believe that we will be able to optimize commission income by adopting an agency strategy rather than a full brokerage strategy in that space. In terms of M&A, it's a highly fragmented market. I see different numbers around the numbers of agents that exist in United States and you see a big swing with regards to that but suffice to say that there are tens of thousands of agents in the U.S., who generally have revenues of $5 million, brokerage revenues $5 million and less. So, there is an awful lot of Mom & Pop shops. And we do believe that we can be a consolidator in that space.

[Keith Walsh:]

Thanks a lot.

[Brian Duperreault:]

Okay, Keith, next question please.

[Operator:]

And we'll take over next question from Meyer Shields. Please state the name of your company.

[Meyer Shields:]

Meyer Shields from Stifel Nicolaus. Good morning everyone.

[Brian Duperreault:]

Good morning.

[Vanessa A. Wittman:]

Good morning.

[Meyer Shields:]

Can you talk a little bit about the turmoil at AIG implies for revenues and expenses over the next 12 months?

[Brian Duperreault:]

Could you just repeat that again Meyer. I'm not sure, I heard that right?

[Meyer Shields:]

Sure, the turmoil at AIG, I'm wondering how you're looking at, what that implies in terms of incremental revenues and incremental expenses for the next quarter?

[Brian Duperreault:]

The AIG situation?

[Meyer Shields:]

Yes.

[Brian Duperreault:]

Yes. Okay. Well, I will give you my point of view and Dan and Peter may have a different one. Certainly the situation has been topical for our clients. We spend a great deal of time speaking to clients about it. And it basically is maybe a leading indicator of what's happening overall in the marketplace, which is, this decline in the capital. All market changes are different, this one is all asset driven. And AIG has had problems with its asset base. Not necessarily in its insurance companies but overall its ability to trade. But that has we see drops in assets across the entire industry taking, what I call the surplus outs. So, what I think it has it certainly changes a carrier's point of view about its own capital base. The price of risk starts to go up as a result. You can't avoid it. You can't raise capital in this current market. So you have to be much more careful about it. You have to preserve it. You still have event driven issues that could come across at any moment, that could take capital out of this industry without an ability to replace. And so you've got to protect yourself. You buy in more reinsurance. You start... you don't cut the prices like you did before. Where this goes, it's very difficult. This is as I said, all these changes are different, this in addition to be an asset driven change, it's happening in the middle of a global significant recession. Global recessions tend to keep volume down, because our prices in many classes of business are driven by sales or payrolls, things that are sensitive to economic activity. So, I think all of that is going to put some balance in this thing. But generally speaking it should stop the decline and start to change the market. But it's very difficult to predict the magnitude of it, when it really starts to appear and how long it goes.

[Meyer Shields:]

Thanks.

[Brian Duperreault:]

That all is mine. Thank you.

[Meyer Shields:]

If I can turn to the next really quickly. When you say, you gave us 350 basis point margin improvement numbers for the fourth quarter. Is there a reason to expect the year-over-year margin expansion to decline or is that just, why do we take that 500 basis point full year number?

[Brian Duperreault:]

Do you want to take this Vanessa.

[Vanessa A. Wittman:]

Sure, Meyer, I just want to make sure, the connection is a little bit rough. You're asking about the 350 basis points for the fourth quarter?

[Meyer Shields:]

Right.

[Vanessa A. Wittman:]

And then I couldn't quite hear the second piece of it.

[Brian Duperreault:]

Well, the question is why would it be less than say the 500 to--

[Vanessa A. Wittman:]

I apologize.

[Brian Duperreault:]

Well, maybe Dan could do that, Dan you want to take that?

[Daniel S. Glaser:]

Yes, sure. I think what you have to look at is when you look at last year, within Marsh, you'll recall that Marsh had a difficult second and third quarter. And the first quarters and the fourth quarters were actually not so rough. And so, we are beginning to lack some of the benefits through expense reductions and the like. So, we do fully expect to see substantial margin improvement in the fourth quarter. And on balance, the absolute margin will be significantly better than say the third quarter which is our lowest margin quarter. And I think the 350 is just an attempt to say, listen, when we started the year. And I think on our first quarter call we talked about getting to maybe 200, 250 basis points in the year. We were outperforming that very quickly in getting to about 500. And I think my team and I would view a 500 basis point improvement for the year is been a job well done.

[Meyer Shields:]

Okay, I got it. Thank you.

[Brian Duperreault:]

Thanks, Meyer. Next question please.

[Operator:]

And our next question is from Alain Karaoglan. Please state your company.

[Alain Karaoglan:]

Good morning, Alain Karaoglan with Banc of America. Just following up, Brian on the question regarding the environment and I don't know if Peter want to address it. Are you seeing increased demand for reinsurance from your customers at Guy Carpenter? And are you seeing sort of decreased capacity and tightening of terms by the reinsurance industry? Or is it just yet conjecture and par [ph]?

[Brian Duperreault:]

Yes, well Peter, over to you.

[Peter Zaffino:]

Yes.

[Brian Duperreault:]

That's yours.

[Peter Zaffino:]

For January 1, we are starting to see increased demand in exploring alternative reinsurance structures. As Brian mention in his opening statement, now that we have asset impairment with that catastrophe losses, there is rating agency implications. So, we think the supply will be less at January 1. And there is a lot of exploration for alternatives to come up with solutions for surplus enhancement through reinsurance as well as mitigating volatility in one's portfolio. How that will play out, we'll figure that out probably over the next 30 to 60 days. And we do think that there is going to be less supply because many reinsures are going to really look at the capital preservation very closely and want to be able to trade forward in the event of another major catastrophe. So, we'll learn more in the next 30 to 60 days where we expect to see supply down and pricing start to move in a band, but move upward.

[Alain Karaoglan:]

And if I could do with a numbers questions. Shareholders equity Vanessa declined in the quarter by around $600 million from the second quarter if I did the math right. What's causing that?

[Vanessa A. Wittman:]

Largely due to foreign exchange which should wash out over the course of the year.

[Alain Karaoglan:]

Okay. Well, thank you very much.

[Brian Duperreault:]

Thank you. Next question please.

[Operator:]

We'll take our next question from Matthew Heimermann. Please state your company name, sir.

[Matthew Heimermann:]

Sure, JPMorgan, good morning everybody.

[Brian Duperreault:]

Good morning Matt.

[Matthew Heimermann:]

Good morning. Couple of questions and hopefully these are quick. But first, Vanessa, could you just remind us with respect to FX, how much of that is hedged and then what isn't hedged is there proportional impact on revenue expenses or is there some arbitrage in there?

[Vanessa A. Wittman:]

Well, we don't hedge our FX because we have a natural hedge in our business. Both because it's an international business and it's because the international components have revenues coming in foreign currencies but expenses going out in those foreign currencies and dollars. And as we have said in prior calls over the course of the year, it may be up or down for a quarter. But over the course of the year, we have generally been flat as to impact on foreign exchange.

[Matthew Heimermann:]

So, if there was let's say a 500 basis point change in currency translation, '09 versus '08, you wouldn't expect any impact on your numbers?

[Mike Bishop:]

Matt, this is Mike Bishop. Really we've seen that over the last 20 years and over an entire year you will not see it. You may see it a little bit in one quarter and it may go in the other direction in other quarters. And in fact in this quarter, we already had a foreign exchange going against Mercer. So, Michele's results for Mercer were even stronger when you look at it. Foreign exchange in the quarter was the minimus [ph] for us. The other thing you have to take into account is there are a number of major currencies and actually they're starting to walk in different directions, the Sterling for example now it's weakening whereas the euro is stronger. Unlike some of our competitors they may be doing different things this has never really been an issue for MMC.

[Matthew Heimermann:]

Okay. Maybe I'll follow up Brian for a bit deeper discussion on that thing.

[Mike Bishop:]

Okay.

[Matthew Heimermann:]

The other question that I had is a follow up to Dan's comments earlier. But I mean, my question would be if there is a shortage of supply. How much do prices be derived before you would start to pull capital markets capacity back into the business which seems to whether it's independent of companies, aligned with companies or inter companies which seem to be the logical source of the supplies? What do you think the clearing price is going to be such that you start to incent people to the increased supply?

[Brian Duperreault:]

Well, it's really an interesting question. I don't know, as I said this one is a little different. At the moment it doesn't look like there is capital market supply available. It just doesn't seem that way. On the reinsurance side we see alternative style capital movements more than we see in the... on the primary, there we are not seeing... and we are seeing a basically decline. We don't see alternative capital market solutions coming into the markets. So if that goes away, then you are back to the classic straight investments in insurance companies and I'm not smart enough to predict when that comes back. Right now we don't see it.

[Matthew Heimermann:]

Okay. That's right. And then just one request as just historically you haven't put the depreciation and amortization in the press release, it'd just be helpful I'm going through numbers if you might do that going forward?

[Brian Duperreault:]

Okay.

[Matthew Heimermann:]

So my one request for Vanessa, if I may.

[Brian Duperreault:]

Yes we got it, made a note of it.

[Matthew Heimermann:]

Thank you.

[Brian Duperreault:]

Thank you. Next question please.

[Operator:]

Jay Cohen. Please go ahead sir with your company name.

[Jay Cohen:]

Thanks. Jay Cohen from Merrill Lynch.

[Brian Duperreault:]

Hi, Jay.

[Jay Cohen:]

Hey, Brian. Two questions, the first is, if you could talk a bit more about this seasonality issue. I guess, a lot of us were surprised that the margin fell so much from the second quarter. And if you could talk about that and why there won't be an issue going forward? And then separately, this is more of a picky one, but it was a $10 million credit for a payment received from U.S. investigation services. Could you just tell us what that was?

[Brian Duperreault:]

Okay, Dan will take the first one which is the seasonality issue and Vanessa will take the second.

[Daniel S. Glaser:]

Okay. And for years our third quarter at Marsh, the revenues are lower than the first, second and fourth. I mean, so if you look at our business the first second and fourth revenue are generally pretty consistent. The third quarter as I said for years is a bit lower and expenses as you would expect are pretty consistent throughout the year. And so it is not unusual for us at all to have the margin dip in the third quarter and in fact I think on the second quarter call, I alluded to that, that we didn't expect, that we expected a softer third quarter just because the revenues are lower in the third quarter. It's not a big renewal base in the third quarter. So that pattern you'll see going forward as well but and... but I would take the view that when in compared to last year we've had a very significant increase in actual profitability, when you take out the adjustments and the affect of the E&O [ph] claim.

[Vanessa A. Wittman:]

On your second question, Jay. I think we mentioned in the second quarter's call, we gave you a heads up that there was a pending agreement around Mike Cherkasky and we filed an 8-K on his agreement and that $10 million credit, that's where that 10 million is coming from.

[Jay Cohen:]

Okay, that's helpful. Thanks a lot.

[Brian Duperreault:]

You're welcome Jay, thanks. Next question please.

[Operator:]

Brian Meredith. Please go ahead with your company name.

[Brian Meredith:]

Yes, UBS. Good morning everybody.

[Brian Duperreault:]

Good morning, Brian.

[Brian Meredith:]

Brian, I wonder if you could talk a little bit about the economic slowdown we're seeing globally. And what impact or what headwind do you think it's going to have on your revenue growth here going forward in the next 12 months? And maybe break it down between Marsh and Mercer?

[Brian Duperreault:]

Okay, well, yes, break it I'll go through other ones in my analysis. As I said earlier about this change in market conditions, there is a bit of countervailing forces here. I would expect price change would be positive, not negative, that's my expectation. How much I don't know. That coupled with I think some of the initiatives should help the revenue side. Now the flip side of that is that is it's a recession and the clients are facing price cuts across many of their spends. So looking at the spend for insurance and the insurance, in Consulting, it's going to be pressurized going other way. But overall, I guess, I'm more positive than negative, put it that way. And throwing in Carpenter, we would expect Carpenter, certainly year-over-year has showed some improvement, just in general, because it was such a bad year. To start with... but in addition to that I think some of the initiatives that they have taken in terms of revenue, client retention, the client increase will start to see. So, overall I guess, I was generally positive about the insurance side of the business. Let's take consulting, its two parts, the Mercer dominating to some degree. 70, 30, Mercer I must say has done just a fabulous job this year under really difficult circumstances. Third quarter was a great quarter, it cannot be sustained, I'm not betting that it would be sustained, it's just unlikely given that market conditions whether we can keep going at that pace. But we still think we have some growth in Mercer. So we would expect positive revenue growth in Mercer, but not at the rates we've been seeing. Oliver Wyman; well it's just unlikely that all the Oliver Wyman is going to show positive growth rates, we're down to 1% and turning negative at Olive Wyman, that will run its course, it will come back a little bit as the year unfolds and as company starts to come to grips with the new world they are living in, they will reach out the Consultant side. I believe that and I think there will be a time when we will start to see that come back as it always has. Overall I think there will be positive growth in the Consulting segment, but Oliver Wyman will dampen this positiveness that's taking place in the other side. And that's brings me to Kroll and as I mentioned in the prepared remarks side, Kroll has a diversified portfolio interestingly enough. And where it touches litigation, investigation et cetera well, looking at litigation, that would seem to be recession proof. We would expect that they would see quite a bit of activity, anything having to do with mortgages or employment will probably go down. But overall I think given expense controls, we should see a positive growth in their volume on the top line and I think with expense controls we can manage through this. So those are three segments, each one of them for different reasons I feel reasonably positive about '09.

[Brian Meredith:]

Great. And then a quick question for Peter. Peter when you talked about the increase demand in the reinsurance market place, is that a cause for casualty and property or is it more focused on the property or the casualty given some of the capital issues we are seeing with primary companies.

[Peter Zaffino:]

Well, right now, the answer is both and I will tell you why. Property clearly retentions were higher with Hurricane Ike, we've taken a look at some of the model results and of course even RMS revised our estimate upward last week. So clients are taking a look at the property retentions and the amount of reinsurance we are purchasing at different return periods. But then again back to the original comments around capital, looking at different type of pro-rata, or surplus relief structures really across the entire portfolio which would include casualty, property will move first on any rate in casualty usually follows but we're starting to see more surplus relief structures as we look into January 1 and in 2009.

[Brian Meredith:]

Thank you.

[Brian Duperreault:]

Okay. Thank you. No other question?

[Operator:]

Dan Farrell, your company name please.

[Dan Farrell:]

Thank you, Fox-Pitt Kelton. Couple of questions, firstly can you just refresh us that the mix of revenue at Marsh fee versus Commission and then can you also just talk about all of your ongoing efforts to replace loss contingent revenue and tell us how that's going. And then finally can you talk a little about what your view is for expense leverage heading into 2009? You've taken out a lot of expense this year, broadly speaking how much more in that and do you think you have to go as we head into next year.

[Brian Duperreault:]

Okay. That might get us [ph] everything right. Yes, okay so Dan, you want to take it.

[Daniel S. Glaser:]

f let me make sure I get this in the right order. But if we start with your, the first premise, or maybe the second premise in terms of loss contingence, we are not going to be replacing $850 million dollars of contingent income. And that's the function of the past, it is different Marsh. Having said that we will grow our revenue will certainly grow our profitability in the short-term, and we will develop ways of growing this business but I am not finding for the days of contingencies or after loss contingency. In terms of fee versus commission the U.S. business and international business are sort of mirror images of each other that arrive at about 50-50 split in our total business. It's weighted towards fee in the US and it's weighted towards commission internationally but at the end result we arrive at about 50-50. And in terms of expense leverage, we have done an awful lot of things this year. There are the proper things to do, there is a lot more for us to do. So, when I look at what we've done through the course of this year, you will arrive at a figure of around $350 million between the reductions in corporate that happened or that were identified in late fourth quarter last year and the early first quarter of this year. We've eliminated as we've noted before about 1700 physicians year-to-date. And in addition, we've outsourced... within that we've outsourced the number of physicians about 700 positions. I do think that there are some additional reductions to go. As Vanessa, mentioned in the fourth quarter we would expect there be about another 250 headcount reductions. But where my management team and I are going through the business, some parts of the business with a scalpel and some parts of the business with an axe. We're not done and we have a philosophy of there's always a smarter way. And so I don't want to give you the impression that the expense reductions have run their course. I think there is a fair amount more that we can do on the expense side. To give you an example, we would think that this is a continual process, a long term process in improving the business. Just bear in mind we're only 10 months into what I think is a multi-year turnaround until this business is truly optimized. And just in the last couple of months, we've worked through some real estate efficiency savings, some IT savings. We've managed IT; we've managed T&E for example very aggressively it's here. And so, there is a significant amount of savings that goes out, I would say ultimately while we're hoping for some revenue growth in some list, we don't need revenue growth anything more than very modest revenue growth and will still be able to drive profitability for certainly another couple of years.

[Brian Duperreault:]

Thank you. Another question please.

[Operator:]

Our next question will come from Jay Gelb. Please state your company.

[Jay Gelb:]

Thanks. I had a question for Dan. Dan, how much does AIG account for the premium placement within Marsh?

[Daniel S. Glaser:]

Well, AIG is our largest trading partner and if you look at the entire segment of risk and insurance it equates to about 12 %.

[Jay Gelb:]

Okay, thanks. And as my sense is that many customers will be looking for alternatives. To what extent does that create a drag on the expense for Marsh and is there any potential revenue offset for that?

[Daniel S. Glaser:]

Yes, there is couple of things. One, I don't think it create a drag on expense because we're not hiring anymore people to take on the additional work when our customers seek alternatives. And I think it should be fair and at least in the initial couple of months while alternatives are been sort. There is not a huge movement. I think there is some diversification. And in fact that might be a smart way for companies to proceed. And I'm not talking about AIG specifically, I'm just talking about insurance capital in general of value to diversification. So, on the one hand yes, there is more work. And that will suck up some of the under utilization or the excess capacity that we have. But we don't need to hire anybody else. So, we won't see anything on the expense side. And on the other side in terms of revenue I think both I would hope that AIG would ultimately recognize that they're causing us to do more work. And therefore maybe we can negotiate some better commissions here and there. I think in the overall, the total business as it's commonly known in the industry has it tends to be on of the poorer payers on a commission basis. So, there would be natural and diversification to get a little bit of lift through diversification.

[Jay Gelb:]

Okay. Thanks. And then, couple of issues yes, quick question for Vanessa. I know you gave a comment on pensions directionally, basically you know today, would you expect pension expense to be directionally higher or lower or roughly in line for 2009?

[Vanessa A. Wittman:]

Well, as you know the remeasuring takes place at the end of the year and it's got so many variables in it that I wouldn't be comfortable commenting. But we would expect it to be roughly in line if we would redo it today.

[Jay Gelb:]

Thanks very much.

[Brian Duperreault:]

Okay, Jay. Thank you. Let me take maybe a last question or two more. Go ahead please.

[Operator:]

Terry Shu [ph] has the next question. Please state your company name.

[Unidentified Analyst:]

Terry Shu [ph] from Pioneer Investments. I want to go back to the question of margins. Brian, if you can talk about longer term margin expectations. If you look at Marsh now, your margins relative to your two large peer brokers, Aon and Willis. It's meaningfully lower and years ago with cycles, prior cycles Marsh, with contingent commissions had close to industry leading margins. So, should we... how should we think about it? Should broker margins given comparable mix, be similar over time or not? How should we look at it? You talked about having the opportunity to expand margins over a multi-year period. But do you reach some optimal level? Can you expand on that, please?

[Brian Duperreault:]

Hi, Terry. Well, first of all two low, I mean, historically, I think the trajectory is in the right direction. And what is... we should have medium terms loans term goals. Medium term goals is to be comparable, we're not yet. And that's where Dan's, work continues, that's why he said it was a multi-year process. I like the trajectory, you can't get there overnight. We have a model change; obviously, you go from a contingency dependent model to standard models. You have to adjust yourself. I think they've done a real good job of changing the company almost from top to bottom, the hubbing approach et cetera, are indications of that activity. So, in the near term the goal is to get the comparable levels and we believe that we should be the superior. We think with the brand name, the client activity that we have loyalty, et cetera. Our international spread and the quality of our people, all would tell me we should be superior. But we got to get there and we're not going to get there overnight but I like the trajectory.

[Unidentified Analyst:]

That means, though that you have many hundreds of points... basis points of improvements yet to come to be comparable because you lag by a meaningful margin now.

[Brian Duperreault:]

That is absolutely correct.

[Unidentified Analyst:]

Right. So

[Brian Duperreault:]

We have hundreds of basis points of improvement to do.

[Unidentified Analyst:]

So, can we see that in a two year period, three year period. Do you have kind of a time type of goal?

[Brian Duperreault:]

Well, a multi-year is more than one.

[Unidentified Analyst:]

Right.

[Brian Duperreault:]

No, it's not going to be a decade, it's some where... and it will be that long. But it will take us a couple of years and as you can imagine it's very difficult to predict this exactly. I mean if we move the 500 this year in a slower cycle. We're talking about at over an entire cycle of good and bad. So, there is got to be that part of it too. So market conditions have to allow some more rapid growth if that's possible. But, it's not an impossible task, there is no reason why our margins would be less than anybody else's. But we do have to get there and changing this company from top to bottom does creates a little bit of friction which we have to clear out. But there is no reason why we can't do it.

[Unidentified Analyst:]

One quick question on Guy Carpenter. Why are you not a bit more optimistic that revenues can turn off with, you said increased demand and reinsurance with? And all the Bermuda reinsures now saying that we are going to see a very strong market. And if you can also comment on the on Aon, Benfield combination, what does that do to the reinsurance brokerage landscape?

[Brian Duperreault:]

Well, it's... when I did my earlier talk about the two of... the company and I did say that we expect that Guy Carpenter to have a positive increase next year.

[Unidentified Analyst:]

Right.

[Brian Duperreault:]

I do. And so, I'm not saying anything else. And we would expect that Guy Carpenter would show improvement in its top line and certainly in its bottom line. No question about it.

[Unidentified Analyst:]

Right.

[Brian Duperreault:]

Aon Ben Field, well, look at we've lost a competitor, that's never a bad thing. And so, all that have to shake out but for us it should be positive in terms of clients looking to balance their portfolio between players, so it's a good thing.

[Unidentified Analyst:]

So, you wouldn't agree with some of the reinsure managements or Bermuda company management comment that we're going to see a super firm upside cycle and reinsurance would you?

[Brian Duperreault:]

From their list to guidance, yes, I said, look at this market; it's a different hard market than we have ever seen, harder market, right?

[Unidentified Analyst:]

Right.

[Brian Duperreault:]

And that's in [indiscernible] by the way but we would expect changes to take place. But its asset driven into piece of a recession, I can't predict that, I don't know what that means in terms of super hard or long-term or short-term. But all the signs point to a change. And so that's the one thing we know that there is a change in the wind that's taking place. And it remains to be seen how the economic events of this world whether capital comes back into the marketplace? Is there another event? All those things we'll have to play out for us to really know where it goes.

[Unidentified Analyst:]

Thank you.

[Brian Duperreault:]

Okay, Terry, thank you. And I think we probably should close the call. With that I want to thank everybody for your attention and appreciation. And look forward to talking to you again. Thank you.

[Operator:]

This concludes today's MMC Conference Call. Thank you for joining us and have a wonderful day. .