Marsh to Lay Off 3,000 in Cost-Cutting Move

Marsh & McLennan Companies Inc. (MMC) today revealed it would lay off about 3,000 employees to reduce annual expenses by $400 million.

About three-quarters of the layoffs will occur in the insurance and risk management sectors, the company said in reporting third quarter results.

The company also reported the near-term effect of the elimination of market service agreements (MSAs) that have become the target of investigations by New York Attorney General Eliot Spitzer and state officials across the country. Market services revenues declined to $46 million in the third quarter of 2004 from $177 million in the prior year.

In addition, in its third quarter report, MMC announced:

* Initiatives that it says will lead to annual cost savings of approximately $400 million
* MMC established a $232 million reserve to be used in connection with any settlement agreement that may be reached with the New York Attorney General
* A $40 million settlement agreement in principle reached with the SEC concerning Putnam’s disclosure of brokerage allocation practices prior to
2004
* Third quarter 2004 consolidated revenues increased 5 percent to $3 billion; net income was $21 million or $.04 per share
* Operating cash flow was strong in the third quarter

Since the New York Attorney General filed a civil lawsuit on Oct. 14, MMC said it has “acted quickly and decisively” to address legal and regulatory issues and restore confidence in the company. New leadership was installed.

Michael Cherkasky was named president and chief executive officer of MMC upon the resignation of Jeffrey Greenberg, former chairman and chief executive officer. Cherkasky was also named chairman and chief executive officer of Marsh Inc., MMC’s risk and insurance services subsidiary.

Previously, Cherkasky was chief executive officer of the company’s Kroll business unit.

Robert Erburu, former chairman of The Times Mirror Company, was named lead director of the MMC Board of Directors and chairs a special committee of outside MMC directors working to resolve the company’s legal and regulatory matters.

“This has been a difficult time for the company,” Cherkasky said. “We are determined to address the issues at hand and committed to regaining the trust and confidence of our clients, employees, and shareholders. We recognize the seriousness of the problems we are facing and are moving quickly to correct them. This will require the effort and dedication of our people throughout the organization. We are fortunate to have the talent, strength, and capabilities to move forward.”

Cherkasky addressed the issue of employee morale. “Employees are the lifeblood of our organization, and we know they have been hurt by the situation at Marsh. As a result, we are in the process of developing compensation programs to retain, motivate, and reward employees.”

He said MMC is examining all parts of the company’s cost structure to identify areas where expenses can be reduced appropriately. Discretionary expenses are under review as are ways to increase efficiencies through technology and other methods such as consolidating facilities.

“Unfortunately, we must also adjust staff levels based on the realities of the marketplace and our current situation. On a global basis, we are reducing staff by five percent, or approximately 3,000 positions, with three quarters coming from risk and insurance services. This is a difficult but necessary step, and we are committed to carrying out these reductions fairly.”

He said the 3,000 jobs to be cut include those tied to the previously announced combination of the defined contribution administration business of Putnam with Mercer’s human resources outsourcing operations as well as the integration of Kroll.

MMC expects expect this latest round of decisions to result in pretax restructuring charges of approximately $325 million over the next six months. The elimination of certain discretionary expenses and the effect of the restructuring should result in annual cost savings of approximately $400 million when fully implemented.

Third quarter results

MMC’s consolidated revenues for the quarter ended Sept. 30, 2004 increased 5 percent to $3 billion. Net income declined to $21 million from $357 million in the third quarter of 2003. Earnings per share declined to $.04 from $.65 last year. In the quarter, earnings per share was reduced by $.27 as a result of the reserve for Marsh’s possible regulatory settlements, $.16 due to the decline in market services revenues, $.07 because of the Putnam SEC settlement in principle, and $.05 by the increase in MMC’s tax rate. For the nine months of 2004, consolidated revenues rose 8 percent to $9.2 billion. Net income declined to $856 million from $1.2 billion, and earnings per share declined to $1.60 from $2.12.

Risk and insurance services

Risk and insurance services revenues in the third quarter rose 8 percent to $1.8 billion. Insurance marketplace conditions were competitive during the quarter, with rate decreases across most lines of commercial property and casualty insurance. Underlying revenues for risk and insurance services, including the impact of market services agreements, declined 7 percent, reflecting a 13 percent decline in risk management and insurance broking and a 3 percent decline in reinsurance broking and services.

Excluding the effect of market services agreements, underlying growth in risk and insurance services revenues would have been 1 percent compared with last year’s third quarter. New business in insurance and reinsurance broking largely offset the effect of the declines in insurance premium rates. Kroll, acquired in July 2004, is contributing to Marsh’s risk services offerings, producing strong revenue and earnings growth in the quarter. Excluding the effect of Kroll, underlying revenue growth in risk consulting and technology was 6 percent. Related insurance services revenues increased 13 percent resulting from strong growth in claims management operations as well as MMC Capital.

Market services revenues declined to $46 million in the third quarter of
2004 from $177 million in the prior year. Due to the filing of the New York Attorney General’s civil complaint, MMC was unable to complete the normal process to verify amounts earned or determine that the collection of these amounts was reasonably assured for certain contracts.

As a result, MMC did not accrue a significant portion of market services revenues expected from placement activity in the third quarter. Almost all the decline in market services revenues in the third quarter is due to the above factors and not to a decline in the amount of business placed. Although some insurance companies have indicated they may delay payments until the issues concerning market services agreements are clarified, MMC intends to collect all market services revenues earned prior to Oct. 1, 2004. Any such amounts not accrued at Sept. 30, 2004 will be recognized in revenues when collected.

No market services revenues will be earned for placements made after Sept. 30, 2004. A reserve of $232 million was established as the minimum potential liability in connection with any settlement agreement that may be reached with the New York Attorney General.

Mercer
Mercer performed well in the quarter. Revenues increased 11 percent to $766 million from $690 million, and operating income rose 11 percent to $106 million from $96 million. Underlying revenue growth was 3 percent, reflecting growth of 17 percent in management and organizational change consulting, 6 percent in human capital consulting, and 7 percent in economic consulting. Retirement services revenues were essentially flat.

Putnam
Putnam’s revenues in the third quarter declined 16 percent to $429 million.

Average assets under management during the third quarter were $209 billion, a decline of 23 percent from the third quarter of 2003. Total assets under management on Sept. 30, 2004 were also $209 billion, comprising $140 billion of mutual fund assets and $69 billion of institutional assets.

Putnam reached a $40 million settlement agreement in principle with the Securities and Exchange Commission concerning its disclosure of brokerage allocation practices prior to 2004. This entire amount will be distributed to Putnam’s mutual funds. The settlement remains subject to final documentation and approval by the Commissioners of the SEC. Including the effect of the settlement, operating income declined 60 percent to $55 million.

Other
Cash flow continued to be strong in the quarter. Cash flow from operations was approximately $660 million in the third quarter of 2004 and $1.4 billion for the nine months. During the third quarter, MMC did not repurchase any of its common shares.

MMC’s effective tax rate of 65.8 percent in the third quarter reflects the impact of Putnam’s nondeductible settlement of $40 million, changes in the geographic mix of MMC’s income, and the establishment of the $232 million reserve for any possible settlement agreement for Marsh. The effective tax rate for ongoing operations is 34.5 percent.

The effective tax rate of 37.8 percent for the nine months of 2004 also includes the first quarter impact of Putnam’s regulatory settlements of $100 million and the World Trade Center settlement gain of $105 million.