威達信集團 (MMC) 2005 Q4 法說會逐字稿

Good day everyone, and welcome to MMC's conference call.

Fourth quarter and full year 2005 financial results and supplemental information were issued earlier this morning.

They are able at MMC's website at www.MMC.com.

Before we begin, I'd 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 call to anticipated or expected results of operations for the remainder of 2006 and for 2007 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.

As a reminder, today's conference is being recorded.

And now I'd like to turn the call over to Mr. Michael Cherkasky, President and CEO of MMC.

Please go ahead sir.

Thank you for joining us for MMC's Fourth Quarter 2005 conference call.

I'm Mike Cherkasky, President and CEO of MMC.

Joining me in New York today are Sandra Wijnberg, the CFO of MMC, and Mike Bischoff, our Head of Investor Relations.

Looking at the information provided in our press release, there's a great deal of complexity in both the fourth quarter and 2005 as a whole.

In 2006 and 2007, we expect the financial disclosures to become progressively more straightforward.

Sandra will spend about 15 minutes walking you through the fourth quarter and full year 2005 numbers, so you can better analyze where we are today.

We will then take questions.

2005 was a challenging year for MMC.

We did what we critically needed to do.

We stabilized MMC, we preserved our great brands, Marsh, Mercer, Putnam, Kroll, Guy Carpenter.

We overwhelmingly retained our clients and employees in our various businesses.

In 2005, we made significant investment in our middle and long-term future by agreeing to settle the New York AG and the Insurance Superintendent proceedings for $850 million, which will be paid primarily to Marsh clients.

This was the right thing to do and was an investment in our future.

We paid out retention bonuses, expanded our long-term incentive plans, and did an option exchange for many of our employees.

We understand our employees are our future.

Our variable compensation plans are designed to make sure that as MMC does well, our employees will do well.

In the last 15 months we put our new leadership in place at MMC, Marsh, Mercer HR, Mercer Specialty, Kroll and Guy Carpenter.

At Marsh, we adopted a new business model.

We organized and rationalized our cost basis.

We strengthened our financial position by refinancing our debt, moving cash back to the United States in a tax-efficient matter, made significant contributions to our employee pension plans, and refinanced our mortgage on our headquarters building.

We sold or spun off businesses, most of which we determined were either not core to the business of MMC or, given the current regulatory environment, were better conducted outside of MMC.

We're enormously proud of what we accomplished in 2005.

MMC is a stronger company and a better-positioned company today than we were one year ago.

But it's now 2006.

We have new and different challenges.

The question is not can MMC survive, but can it prosper, and what will we look like in the future?

How quickly will Marsh and Putnam recover?

What are the expected normalized margins in those businesses?

What are the growth opportunities in MMC?

What direction should we take with Mercer HR?

And how fast can Kroll, Guy Carpenter and Mercer Specialty grow and at what margin?

These are questions we're dealing with every day.

And every day the answers become clearer.

It is also clear, while we are not where we want to be, we believe we are headed in the right direction at MMC and that 2006 will be a better year with higher revenues, higher margins, and more profit than 2005.

We expect 2007 to be better than 2006 with higher revenues, higher margin and more profit.

We have survived the crisis because of our terrific client service provided by terrific people.

We will succeed in the future by expanding our services to those same clients.

To give you some granularity into our business, I'd like to use the performance and trends in each of our businesses in 2005 and the fourth quarter as indicators, and look at each business.

Let me begin with risk and insurance services.

Although Marsh struggled throughout 2005, Marsh has proven to be resilient and performed well under circumstances.

This is due in large part to its position as a market leader in risk management, its global footprint, excellent staff committed to providing exceptional service, and the loyalty of our clients.

During 2005, we essentially completed two major staff restructurings at Marsh.

While Sandra will give you more specifics on the savings of the restructuring, suffice it to say, we are on track to realize the amounts we anticipated.

At the same time that we were restructuring, we were also introducing a new contingency-free business operating model, and we reorganized.

Our reorganization is driven to increase simplicity and standardization to achieve efficiency.

We've invested our time, money, and energy and technology to drive changes.

We will never be the old Marsh.

We can't afford to be.

While Marsh lost some market share over the course of 2005, there have been improving trends in retentions of clients.

In fact, client retention levels, while improving throughout the year, improved significantly in the fourth quarter.

If you exclude the effect of price declines, which continued in the commercial insurance market in the fourth quarter, Marsh delivered business growth for the first time in more than a year in the fourth quarter.

While we did not see an increase in reported new business development in 2005, we are cautiously optimistic, based on early 2006 reporting, that these new business trends will improve as the year progresses.

One of the metrics that is challenging us is our initiative to replace some MSA revenue with increased pricing.

It's too early for us to give a good evaluation of where we will come out, but the pace of improved pricing is slower than we expected, particularly in the United States.

In summary, we are confident that 2006 will be an improving year in Marsh, but still a transition year.

We're working hard to globalize, standardize, and become more efficient as we maintain our superb client service.

We will maintain our cost discipline and continue our focus on revenue growth.

We believe that Marsh's margins will continue to improve throughout 2006 and 2007, as the changes and investments of 2005 take hold.

Guy Carpenter had solid performance for 2005. in spite of declining premium rates in the reinsurance market and increased client risk retention.

Guy Carpenter new business was strong in this environment, although not at the record levels of new business as it had been the prior two years.

New business development is attributed to Guy Carpenter's breadth of service and ability to development sophisticated risk evaluation techniques and solutions for clients.

This ability has been enhanced by the addition of David Spiller, who joined Guy Carpenter as its president on January 1st of 2006.

As a result of the hurricane activity last year, there has been a reassessment of the overall frequency and severity, including in the impact of storm surge and demand surge.

Guy Carpenter's clients have seen increases in the January renewals in property catastrophe insurance and it is expected this will continue through mid-year.

Guy Carpenter is the world's premier quality reinsurance broker.

We're confident that 2006 will see increased revenues, margin, and profit.

We believe 2007 will be even a better year.

It's important to remind you of two issues that we have discussed in previous calls.

First, we recognized approximately $120 million of revenue from pre-existing MSAs in 2005.

This will not reoccur in 2006.

Second, the investment income gains that are included in insurance services will be reduced by approximately $80 million in 2006 and will continue to decline in 2007.

Having said that, Risk and Insurance Services is a margin recovery story, not only in 2006, but in the years to follow.

Excluding stock option expenses, we continue to believe that margins in this segment can recover to the high teens this year with further improvement in the long-term.

Turning to our other businesses, Kroll's revenues grew 14% in Q4, compared with prior year, with an underlying growth of 18%.

Kroll's corporate advisory and restructuring practice led the improved performance.

Technology services and background screening groups also had double digit revenue growth.

We believe that organic growth in the risk consulting and technology segment is sustainable in 2006 and beyond.

We did have a weakness in Kroll's margin in the fourth quarter.

We're confident that this relates to seasonality, timing and one-time issues that will not impact our growth projections for 2006.

Mercer HR is the leader in the HR advisory and services industry.

One of our goals in 2006 is to better explain the Mercer HR story, because it's a good one.

Mercer HR combines the premier consulting company in the retirement, health and benefit, and human capital space with one of the largest HR outsourcing businesses.

The combined business has over $2.7 billion of revenue, with $500 million of revenue from HR outsourcing.

It's a remarkable company with great growth potential and we intend to unlock that potential.

Mercer HR businesses include bundled retirement products such as frozen defined benefit plan solutions and global investment products.

Mercer has successfully implemented their worldwide business realignment from a geographic focus to an emphasis on lines of business including retirement, health care, HR services, and human capital.

All of these businesses show traction in revenue in the fourth quarter.

All of Mercer's HR's major consulting practices also showed improvement in revenues compared with the first nine months of the year.

Mercer HR will be a growth business that MMC will continue to invest in for future growth this year, 2006, and in 2007 in the future.

Now turning to Mercer Specialty.

Mercer Specialty Consulting is a premier player in many areas of business consulting.

Its revenues were over $900 million for 2005, with underlying revenue growth of 16% for the year, reflecting increasing demand for thought leadership and high-end experienced advice for senior executives in financial services and risk management, strategy and operations consulting, and economic consulting.

Mercer Specialty has become a global go-to solutions company in such diverse areas as financial services, aviation and space, and retail.

We believe Mercer Specialty will continue to experience strong organic growth in 2006 and we will continue to pursue fill-in acquisitions.

Putnam.

Where are we with Putnam?

How certain is the recovery?

As a brand, Putnam has shown enormous resilience over the last 5 years, weathering the bear equity market, the effects on its investment performance, and then reputational problems.

The last couple of years, under the leadership Ed Haldeman and his management team, it has performed better and done so in a client-focused, compliant manner.

The fourth quarter continues the improving trend.

Our outflows decreased slightly in the fourth quarter to the lowest number in two years.

We believe that net flows will turn around by the end of 2006.

We believe Putnam will become an increasingly good story for MMC shareholders.

But we expect that Putnam's contribution to MMC profit will decline this year, 2006.

This is based on a number of factors.

Most significantly are expectations that average AUM will likely decline in 2006.

Additionally, we believe that Putnam is now running on an efficient cost basis and any further material cuts would be damaging in the medium- and long-term.

That we will not do.

Finally, as I mentioned in the third quarter conference call, we have invested in the future of Putnam by giving equity in Putnam to our current management team.

Prior to the latest equity grant to the professional staff at Putnam, ownership constituted less than 9% of Putnam.

We raised the percentage to 14% ownership.

This will cost MMC approximately $26 million a year, including stock option expense, for the next 4 years starting in the fourth quarter of 2005.

Taking this all together, and based on conservative assumptions about securities markets' performance, we expect our margins at Putnam to be in the upper teens to low 20s in 2006.

We expect Putnam's performance to steadily improve in 2007 and 2008.

With respect to MMC's overall corporate initiatives, we need to move forward as one company--an advice and solutions company.

We will put our clients first, analyze their problems, and find the right resources among our 55,000 colleagues on a global basis who can provide the answer.

One MMC will mean standardization of commodity products and thought leadership in value added services.

As we accomplish this, we will produce revenue opportunities and cost efficiencies, which will improve the performance of every one of our companies and increase the value of MMC as a whole.

And we will generate company-wide savings opportunities as we implement service improvements, driven by standardization and a consistent delivery model.

Our MMC philosophy is to move more of our expenses to variable compensation, and to have this variable compensation depend on meeting performance criteria.

We're a company a year into the implementation of our one-company model, and we're excited about its short-term results and long-term potential.

In summary, MMC is recovering.

We have a clear vision, the organization is energized, and I am very optimistic about the future.

At this point, I'd like to turn the call over to Sandra.

But, first, I have to comment that this is her final conference call with us, and I have to thank her personally and for the company for her enormous dedication, hard work, and talent that she's exhibited.

I know it's been a hard stretch.

It stretched to the time in 2001, when this company suffered a terrible tragedy, much more significant than a financial tragedy, when almost 300 of our people lost their lives, and Sandra was there to help guide us through that.

She was there during the trials and tribulations with Putnam and most recently with Marsh.

She has been someone who I've relied on, who I've come to recognize the stability and the wisdom of her counsel.

So I'll miss her and I know this company will miss her.

And having said that, we'll have to look forward and we're excited about Michele Burns joining us as CFO.

She's someone we've done a very thorough examination of Michele Burn's background.

We've used the Kroll talents that I brought with me to do that.

We're convinced that this is someone who in fact will be in fact a business partner to our businesses, and will help us move forward as Sandra has done.

With that, I will turn it over to Sandra Wijnberg.

Thank you, Mike.

Good morning, everyone.

So that you can better understand the underlying operating trends in our business, we are again presenting our results using both GAAP and non-GAAP numbers.

The supplemental schedules in the press release reconcile the two, include detail and disclosure around all of the noteworthy items, and, after taking into consideration discontinued operations and some minor business realignments among our segments, provide revenue and operating income in our new reporting format by business segment for each quarter of the last two years.

Now for the earnings.

MMC reported GAAP EPS of $0.06 for the quarter.

These earnings included approximately $0.08 of restructuring cost, $0.05 of settlement and other related costs, $0.02 for regulatory and compliance, and $0.03 of other items.

The largest portion of other items relates to a claim against a letter of credit posted by MMC on behalf of English & American Insurance Company, an entity we acquired as a part of our 1980 acquisition of U.K brokers CT Bowring, and then divested in 1983.

In addition, stock option expense reduced EPS by $0.04 in the quarter.

Excluding noteworthy items in both years and the effect of FAS-123R, which is stock option accounting, EPS in Q4 with $0.28, compared with $0.26 in the same period of 2004.

The effective tax rate in the fourth quarter was 58%, bringing the full year effective rate to 33.7%.

Our rate on ongoing operations was 38% in Q4, bringing the full year tax rate on ongoing operations to 34.2%.

This higher tax rate in the fourth quarter reduced both GAAP and non-GAAP EPS by just over $0.01.

Going forward our historical tax rate of about 35% on ongoing operations is probably a reasonable estimate for you to use.

As you know, we previously announced the dispositions of the Crump Group, our U.S. wholesale broker, and our majority interest in Sedgwick Claims Management Services.

In our press release, MMC's results for 2005 and 2004 reflect the reclassification of these businesses as discontinued operations.

We sold Crump in October 2005.

Terms were not disclosed, but our after-tax gain, which is reflected in discontinued operations, was $14 million.

Crump's revenues for 2005 were running at an annualized rate of about $70 million.

SCMS had revenues of about $400 million in 2005, which was an increase of 23% over the prior year.

The company was sold for $635 million in January of this year and our share of the gain on the sale will be reflected in the first quarter.

As you know, MMC's ownership position in SCMS included both a direct investment as well as an investment through Trident II.

First quarter operating results then will include the gain from our investment via Trident, while the gain on our direct ownership will be in discontinued operations.

The $470 million of revenues associated with these discontinued operations will not recur in 2006 and the lost earnings, partially offset by the return on the after-tax proceeds, could reduce EPS by approximately $0.02 in 2006.

Now turning to results of operations.

In the fourth quarter, consolidated revenues were 2.8 billion, down 2% on a reported basis.

Foreign exchange took away a point of growth and the year-over-year decline in contingent commissions represented another full point of growth.

As Mike discussed, the fourth quarter revenue picture showed marked improvement at Marsh, particularly in North America, primarily driven by higher renewal volume.

European client revenue also showed a favorable trend and international specialty revenues continued to show low, single-digit increases over the prior year period.

Underlying revenue, excluding the impact of contingent commissions, was down 2% for the quarter.

Guy Carpenter Q4 revenue was essentially flat to prior year with strong retention rates and good new business, offset by the effect of primary insurance underwriters retaining more risk.

It should be noted that due to the seasonality of its business, Carpenter earns the majority of its revenue and operating income in the first and third quarters, and you can see the impact of this in the risk and insurance services fourth quarter margins.

With the majority of our related insurance services sold, namely our wholesale operations and claims management business, we are reporting revenues from our private equity activities as 'risk capital holdings,' which largely represents gains from our insurance related investments, both directly owned and through the Trident Funds.

You can see in the supplemental schedules the decline in fourth quarter revenues attributable to investment gains.

For the full year, investment income for risk and insurance services was $180 million.

As Mike said, although we will continue to be opportunistic relating to sales of our investment holdings, we estimate right now that investment gains will be about $100 million for the full year 2006, which includes the SCMS gain in the first quarter of 2006.

For the year, we have a new baseline for risk and insurance services.

This takes into account the loss of revenues attributable to discontinued operations, the continued revenue reduction related to contingent commission agreements prior to 2004, and the forecasted decline in investment income, which will negatively impact year-over-year comparisons.

As Mike said, Kroll had a strong quarter on the revenue line, with underlying growth of 18%.

Seasonality does have modest impact on Kroll's fourth quarter, particularly in background screening and corporate advisory and restructuring practices, two very high margin businesses.

Kroll's fourth quarter profits were also affected by a number of small one-time items, that taken together eroded quarterly margin by about 4 points.

For the full year, Kroll's margins of 13% include about 6 points of expense related to the amortization of intangibles.

Mercer HR posted the first quarter of revenue growth in a year, with improvements in all major practices.

Revenue growth in retirement consulting, Mercer's largest practice, had a particularly good rebound from three successive quarters of moderate decline.

Retirement consulting posted underlying revenue growth of 6% in the quarter.

Mercer Specialty had 18% underlying growth in the quarter on top of 15% growth last year.

Strategy and operations consulting, financial services risk management consulting drove these results, and they entered 2006 with a good backlog and momentum for another strong year.

Putnam revenues of $360 million in the quarter and $1.5 billion for the year were each down 12% from the comparable prior year levels, roughly in line with declines in average assets under management for the same period.

Flows continue to be negative, but in January, net redemptions of approximately $1.4 billion were the lowest monthly outflow in more than two years.

As Mike indicated, Putnam is optimistic they these flows will turn positive in the fourth quarter of this year.

We are seeing a shift of flows into structured lower fee products.

And as an additional point, the effect of the amortization of new equity compensation awards made at the end of the third quarter reduced Putnam's margin by 1.7 points.

Let's move now to an update on our restructuring.

Total consolidated operating expenses excluding the noteworthy items in the non-GAAP schedules, decreased 3% in Q4 as savings from the restructuring program more than offset rising compensation and benefits cost.

In a tough revenue environment in 2005, we worked hard to reduce expenses in a measured way, so as to protect our market position and our key businesses.

Our two big restructuring programs plus changes to our benefits plans, continued to focus on expense management, and careful prioritization of investment spending has begun to produce results that should continue to build in 2006.

Our '05 restructuring plan is successfully nearing completion.

For the year, we took net charges of about $320 million, approximately two-thirds of which related to severance activities, affecting about 2,600 colleagues.

As I said on our third quarter call, the total charge for the plan will approach $370 million.

Most of the remaining $50 million is expected to be charged in the first half of 2006.

We are on target to achieve annualized cost savings of $375 million, all of which is in risk and insurance services.

Savings associated with the 2005 plan were $70 million in the fourth quarter and $160 million for the full year.

These savings are in addition to the $400 million expense reductions from the 2004 program.

We expect to receive an incremental $215 million of savings in 2006, with approximately $90 million of this coming in the first quarter.

Most of our restructuring activity to date has been focused on downsizing headcount.

As we move forward, we are taking a hard look at our infrastructure costs, specifically around technology and facilities, with a goal of identifying opportunities to take actions that will increase both profitability and scalability.

As you know, we've experienced significant increases in our benefits costs over the last two years, largely related to steeply rising pension expense.

To address this, MMC announced in October and has begun to implement a number of changes to its benefit plans to reduce these costs.

The favorable effects of these plan changes and the expected return on pension contributions will be partially offset by normal increases in benefit costs.

We now expect the net change in year-over-year benefit costs to be a decrease of about $50 million in 2006.

About two-thirds of the savings applies to risk and insurance services and the remainder affects the consulting segment.

Following adoption of FAS-123R on July 1, expensing of stock options cost $31 million in Q3 and $33 million in Q4.

For 2005, stock option expense is reflected in the corporate line.

We expect that expenses related to the adoption of 123R will be about $110 million in 2006, though we'll have a better sense of this after the March equity award period.

Net interest expense was $65 million in the quarter, including a $7 million write-off of unamortized deferred debt expense relating to our 2004 revolving credit facility, which we replaced in December of last year.

Looking back over the past year, we substantially strengthened our financial position.

We reduced total net debt, which is total debt less cash and cash equivalents, at year end to $3.5 billion, a reduction of more than $400 million from $3.9 billion at the end of 2004.

We did this through strong operating cash flows, successful restructuring actions, and asset dispositions.

Net book leverage, which is net debt to capital, ended the year at 40%.

We executed an extremely successful $1.3 billion debt issuance in Q3 and refinanced our headquarters building, extending our maturities at attractive long-term fixed rates.

These actions together enabled us to increase our average debt maturity from about 5 years to over 7 years.

In Q4, we favorably renegotiated and extended our medium-term revolving bank credit facilities of $1.2 billion.

We removed operating subsidiary guarantees that had been necessary in 2004 and obtained less restrictive financial covenants.

In addition to that, we reduced both our undrawn and fully drawn pricing.

We repatriated $585 million of accumulated foreign earnings at a favorable tax rate in Q4, pursuant to the American Jobs Creation Act of 2004.

Higher borrowings offshore enabled the repatriation, causing both cash and debt balances to increase at the end of the year.

We made a discretionary cash contribution of $235 million to our U.K. defined benefit retirement plans at the end of 2005, substantially improving the funded status of those plans.

Total discretionary contributions to pension plans in the U.S. and the U.K. then totaled approximately $440 million for the full year.

And as of year end on an accumulated benefit obligation basis, the U.S. plan was in a surplus position and the U.K. plans were approximately 95% funded.

With that, I would like to turn it back to Mike.

Thank you, Sandra.

And I would like to open it up for questions.

[OPERATOR INSTRUCTIONS] We'll hear from Ron Frank, Citigroup.

Good morning, Ron.

One question and one follow-up as per the operator.

My question is if I approach it this way, if I take the $740 million in adjusted operating income you reported for the year, and I take out contingents from that number and from revenues for the risk and insurance services segment.

Again, that 740 is for that segment, of course, and I add back the $215 million in remaining anticipated cost saves, I come out with a run rate operating margin, if you will, of about 15% in terms of where we are today.

Is that a fair assessment?

And is it the technology initiatives and perhaps the incremental benefit savings etc., that get us to that upper-teens level that you're talking about?

We're always cautious as a lawyer with these kind of hypothetical questions that kind of puts it together.

Having said that, I think that there's a lot of logic to what you just did.

Well, and revenue growth.

And that's just the normal operating leverage attached to that.

Yes, we're expecting revenue growth and the incremental margin on that incremental revenue should be pretty high.

Okay.

Thanks.

And my follow-up question is this.

You, Aon, and Willis, have now all reported substantial consecutive quarter improvement in organic revenue comparisons, all obviously starting from a different place, from third to fourth quarter.

And it's left me and I would guess others scratching our heads as to who went the other way during the quarter since the three of you are collectively some 80% of the market.

Can you offer a view on that?

On where this improvement may be coming from or is there an issue of comparability of organic revenue numbers among the majors at this point?

80% of what market.

If you're talking about the large company market, that's right.

But if you're talking about the overall brokerage market, obviously the three of us are not 80% of the overall brokerage market.

I think it would be fair to say that we, and then Aon play in that larger market a disproportionate amount compared to Willis.

So, I think you are talking a little bit of apples and oranges.

One of the things that is very very difficult for us to do is, we're having, particularly in '05, enough trouble understanding where our company is going, to be honest with you.

To try to parse out what's going on with Willis and Aon is really impossible.

And we listen to it, we watch it, but we're going to focus to what's going on with Marsh and, you know, we're not jumping for joy, but we're pleased with what happened here and we're pleased with what happened in the fourth quarter.

Can I just ask then, do you think you, Aon, and Willis are reporting organic revenue growth on a similar enough basis to make the numbers we're getting comparable, or are there some serious basis risk issues there?

Again, we're parsing things, and some of the nuances that I'm unwilling to be involved with that.

But fundamentally these are companies that are in the fundamental same space.

So, it's the best measure you've got.

But I just would suggest that we have different market focuses and therefore those 2 or 3 point differences, 4 or 5 point differences are going to really kind of skew your results.

All I can do is look at what's going on in Marsh, our fourth quarter was much better.

OK, fair enough, thanks.

We'll now hear from Tom Cholnoky, Goldman Sachs.

Good morning.

I just wanted to follow-up on the comment you made, Mike, about disappointment in trying to recapture the MSAs.

Can you give us a little bit more color on what buyers are doing to perhaps try to keep their own costs down.

Because one of the things that we've heard, is that a lot of buyers of either reinsurance or insurance are unwilling to let brokers get the benefit of, or share in the higher prices they're paying with an offset in higher commission.

So, can you give a little more details on some of the issues you're facing there?

And I have a follow-up.

Tom, I first start out by saying it's very early for us.

This is really something we delayed the launch until the fourth quarter.

So it's early days for us.

Secondly, it's different markets and different places.

What's going on in Europe and our success in Europe is different from the visibility in the United States.

Our visibility in the United States is low, but what we have seen is a challenging price environment in the middle markets where we're really focused on this initiative.

What does that say?

It says it's very, very competitive.

There clearly is, going on right now, I think it's because of the unsettled or maybe the opportunities that people perceived in this marketplace from the weakness of Marsh, that there was an opportunity to grab some space here.

And so there is some very aggressive pricing going on.

It's not per se the individual clients are saying "no, we won't do that for you."

It is in the context of a competitive marketplace that we're having some challenges.

The extent of the challenges will be written in 2006.

So it's still too early to predict that because we talked about it a lot, I thought it was important to in fact tell you where we were.

But still saying it's too early to give you a clear picture.

So does that mean that, does that mean then that your forecast of high teens margins, does that incorporate a more positive view on this competitive environment changing or it's just staying the same way?

No, it's staying the same way.

It's actually saying that there's some uncertainty there, but despite that, we're confident about where we're going to end up.

Okay.

And then one last question, this is a numbers question.

Sandra, what should your -- your share count is obviously climbing pretty significantly.

What should we be using for '06 for share count?

It's obviously going, for fully diluted purposes, it's going to go up a bit because of --our ending shares were 546 million.

I think that's probably not a bad number to use, Tom.

So it will not go up a lot for the --

No, I don't -- well, it depends on -- on a fully diluted basis it obviously depends on what the share price is doing.

Okay.

Other than that, it shouldn't go up materially.

Okay.

Thank you.

And moving along, we'll now hear from Alain Karaoglan with Deutsche Bank.

Good morning.

In the past you believed there was nothing structurally wrong with Marsh that would prevent you from producing margins in line with what the Company had achieved historically.

Has that view changed at all and when would you think you would be able to get back to that sort of levels in terms of time?

It hasn't changed at all.

There is nothing structurally, from what we see in the United States market or across the world, that says we can't get back to the historic levels of Marsh.

I think that the question, and I think the focus of this call has been, what's the timing on this?

We've had a year in 2005 which, I think by anyone's measure, was as good as we should have -- maybe not hoped for, but expected, maybe even better.

But, we had a challenging time.

And some of the damage that was done is not damage that is cured overnight.

So it takes time and some of the things that we're doing and have done take time.

Putting in process, putting in standardization, making sure commodity is treated as a commodity, all of those things are things that this Company is well on the way to doing, but it will take time.

We think it will get there, the question is how soon will we get to the promised land?

We think that 2006 will be a better year than 2005.

We know it will be.

We're confident that 2007 will be a better year.

It's a little bit too far out to say when we will get to that margin where it's like the good old days, but there is nothing inherently in what we see in this marketplace that says we can't do that.

Related to that, one of the things you mentioned was giving employees and managers tools to understand the profitability of the business and to be able to distinguish between revenues that have a 30% margin verses 10% margin.

Where do you stand in giving these tools to your employees, do you expect they'll be able to have that in the first half of 2006?

And from a numbers point of view, you mentioned retention rates were better, is that client retention, revenue retention, and can you give us some numbers so that we can put it in perspective?

About the technology.

We have a number of initiatives, but you can only move so fast and in so many directions.

Our first primary initiative is in fact to improve our technology as it relates to client facing.

It's something that we didn't think we were doing as well as we should be, and it's a real focus and we're rolling it out right now.

We're in the process of now rolling out tools that allow our clients to talk with us more efficiently, to see information more efficiently, for us to be more efficient for them.

That's a process that will happen over the first half of this year or a little bit more.

We will not be able to roll out the tools that give us the metrics in 2006.

It just won't be able to happen.

Will we improve it in 2006?

Yes, we will improve it, but we won't be where we want to be in that aspect of it.

We think it's probably a three-year program where we're one year into it, and so it will take us some time.

We'll get better, but we won't be there.

As to the aspects of client retention, we don't give out that specific number on client retention, it has to do with revenue, that's really the measure.

And what we can say is that there is a material improvement.

We did better in 2005 from the first quarter, we did better in 2005 and that the fourth quarter was a materially better quarter for us, and it's reflected in every metric you would like to look for in Marsh, the profitability, the revenues in the quarter were better.

That is in fact the key turnaround for us.

Now we're waiting for new business to kick in and as I said we had January in and we have the first glimmer that new business has finally started to kick in, which is important to us.

So those things we think will improve through the year.

And we're excited about the future in Marsh.

Thank you.

Brian Meredith, Bank of America, has our next question or comment.

Thank you, good morning.

A couple questions here.

Sandra, do you have what the operating cash flow number was for 2005?

No, I'll have to get that to you.

And, I guess, going on to that one, if I look at the balance sheet here, obviously with the sale of a couple of businesses and even with some of the buying back the debt, you've got a fair amount of cash on your balance sheet.

I'm curious, intentions for the use of that cash, is there any thought of stock buy back here in 2005 or increase in the dividend.

It looks like cash flow from operations is pretty good still, also.

Yes, cash flow from operations is pretty good still.

And we will also have the after-tax proceeds from the sale of Sedgwick Claims Management Service, which will be a reasonably good number.

Well, if you just decompose the cash here, we have about $2 billion of cash on the balance sheet, about $600 million of that is really part of the repatriation of the foreign debt, so bank debt went up internationally $600 million corresponding with that, so I, in my mind, have $600 million of that pegged to pay down that debt.

Then we have about $600 - 800 million of cash that needs to permanently be out there for statutory capital purposes in all sorts of jurisdictions outside of the United States as well as up at Putnam.

So that's sort of permanent level of cash.

And then you've got about a $1.2 billion that is essentially prefunded 2007 obligation.

We have $1 billion debt coming due and our next settlement payment, combining those two.

That's kind of how I think about the cash and where it's going to go.

That leaves the operating cash flow in the course of the year.

And obviously the dividend and share repurchase are something that would have to be taken under consideration as we move through the year.

I'm sure that Mike and the Board will evaluate that every time they meet.

Great.

And then my second question, Mike, can you talk a little bit about employee retention and, you know, how is employee retention been, any programs in place?

Thinking about additional programs to put in place now that the retention bonuses are winding up to just keep people happy at the Company?

We put them in place.

First thing, the retention in the fourth quarter was better than it's been during my tenure here.

So we're pleased by that.

We put in place equity programs where we thought we needed to.

And now we're just operating as we normally operate with the exception that we're moving to a more performance-based performance review.

And that's something that is a transition for this company.

We really appreciate the team mentality of Marsh and Mercer and throughout MMC, but we also have to make sure that people who perform well, we have the funding to recognize their performance in a given year.

And so that's what we're doing in 2006.

So we think that we've put in place the things we need to do, and we don't expect that there will be any additional programs.

Are you happy with the employee retention?

It improved in the fourth quarter, but obviously, there have been some public announcements of some officers and stuff where significant producers left.

I'm not happy with it, but I wasn't when I looked at the historical levels of retention inside this Company.

I wasn't happy with that.

This is a premier company.

Premier companies shouldn't have a leakage of upper single digits for important people.

It shouldn't be that way.

So, I understand I'm new to this industry and I have to accept certain things, but I've always thought that thought leadership companies, premier companies, in fact, are places where everyone wants to go to.

So I'm not happy with how we've done it historically, I'm not happy with what happened in '05.

I think that for us it is to make sure that we understand our talent, we evaluate our talent.

Give them clarity about what their future is in our Company, make sure we have clarity about what they can earn in the Company, those are programs that we're working hard to put in place.

Someone asked me am I happy with anything we're doing at this Company, I would probably say no.

This Company is, it's just who I am, it's also where we are.

We need to do better.

I think we've come through a tough time but we need to do better.

Great.

Thank you.

And we'll now hear from David Small, Bear Stearns.

You know, in your prepared remarks, it sounded like you're committed to keeping the Company together and maybe could you just help us understand just why, as you've analyzed the situation, you think it makes sense to keep an asset manager and insurance broker together and what synergies you think you're getting there?

And when you think about it, how you look at the -- how do you think about it strategically in terms of the potential sale or spin of Putnam?

This is one I've gotten into trouble with.

We're keeping Putnam.

I want to make sure that I do say it clearly.

I think that Putnam is a great brand name company that has been wounded.

And it is this shareholder base that deserves to profit from the recovery of Putnam, which we have confidence is going occur.

And we think that as that occurs, the value that our current shareholder base will reap will be substantial.

Number one.

Number two, Putnam is a great company in a great industry that creates great cash flow, has great margins and it gives us great non-insurance cyclicality.

It's not on the same cycle, it's always been one of the great strengths.

Now other synergies, there are not.

There are not other synergies, but we're running that as an independent part of this enterprise.

They want to be run that way, the managers in this field are best run that way, at least historically, and we're running it that way.

But we haven't seen a compelling reason we should change that ownership.

And in fact we have a whole series of compelling reasons we don't think it's of the middle and long-term interest, even short-term interest of our shareholder base to change it.

The rest of the Company, strategically we think fits wonderfully together.

It's an, advice and solutions company in the risk space.

Our key is not to get necessarily more clients, you always want them, but sell more to the clients that we have in this risk solutions space.

And that's what we're going to do.

And then, just changing gears for one second, some of your competitors have given kind of retention figures and new business growth, and maybe, you know, you talk a little bit about your ability to win new businesses improving.

You indicated that was a bit of a problem.

Could you give us maybe -- and you also mentioned at the beginning of the call growth excluding price change had occurred.

Could you put some numbers on that for us, to help us understand, maybe over the quarters, how that has occurred?

It's a fair question, and the answer is I'm not going to, and there are two reasons why.

One is that we haven't historically done it and we're coming to the end of 2005.

Two is, honestly, I have to make sure that all of the numbers that we have are verifiable and accurate and we can reproduce and they can be meaningful in comparisons.

And this Company is working really hard and it's made real progress, but it's not there about its ability to measure things internally for both external reporting basis -- and I'm not talking SEC reporting, we do a really good job of that -- but for the kind of metrics you're talking about and for our own internal measurements so we can run our business better.

We think that's going to change, and as that changes, I'm absolutely committed to having more transparency in our numbers that we use to run this business.

We will in fact provide more as it changes.

Okay, thank you very much.

Thank you.

We'll now hear from Mark Lane, William Blair and Company.

Good morning.

One question.

A follow-up.

First of all, Mike, two quarters ago or a couple quarters ago, you stated you had a pretty strong opinion about where you thought contingent commissions were headed for the industry and potentially would be eliminated at some point and it's softened on that more recently.

What's your view on that right now?

We're watching the world too.

And opinions change.

We saw the AIG settlement.

We're looking at that.

What I will say to you is we don't think contingencies are a best practice.

And we're convinced that the clients that are our clients, and they are committed to best practices, that they're not going to accept them.

And we think that's where the world is going.

But we're in a competitive world, and this is business.

And if in fact, it turns out not to be that way, we'll adjust.

Not saying we're going to take contingents back because we're not.

We're certainly mindful of what the playing field is like and how it impacts us and what our arguments are when we go into clients.

We think we're the professionalized broker who has transparency, conflict-free, and process behind us that clients can rely on.

That is in fact, what we pitched as our new business model and we will see if that changes.

And, you know, just as a follow-up to Alain's earlier question about getting margins back to historical levels.

You've made the comment there's been no change in the structure of the business.

But you've lost nearly $1 billion of MSA revenue, disclosure is much higher, clients are much more sensitive to what they're paying, you mentioned it's a very competitive market, it's taken you longer to get your commission increases in and raising prices.

Why hasn't it changed?

Are you assuming this is all going to blow over in a year from now and you're going to be able to raise prices?

Why hasn't the structure changed that would allow you to get back to mid-20s margins?

Well, I think you're talking about market conditions, and I think it absolutely right, it's competitive, it's always been competitive.

At times people will go for revenue and try to make that argument that they're going to be on a revenue play, but that doesn't last.

What I think we're seeing is a marketplace where it still values this intermediary service.

The service that we provide is still enormously valued.

And that's proven time and time again.

And there is nothing about that value proposition that--historically, 10 years ago, there were contingencies but they weren't anything close to proportion what they were in recent years, and the margins were very, very healthy in this industry.

And specifically for a market leader.

So if, before contingencies had hit, we were at those kinds of margins, why can't we return to them?

We think there's nothing structurally unique.

We think it has to do with how well we perform.

How well we execute.

It's really up to us as opposed to being a tension in the marketplace with clients.

Clients will pay for value.

And we believe we have the ability to provide more value, clear and in a more executable way in the near future and that's in fact what our value proposition is going to be.

Okay.

Thank you.

Yes.

We'll now hear from Charlie Gates, Credit Suisse.

Good morning.

My first question, an historic one, somewhat.

What happened to the whole concept that you were proposing, the standardized rate cards?

You know, I think that we had some strong pushback from a couple of very, very significant carriers.

And that was something that with those carriers, they just were not going to accept that.

It wasn't going to be standardized across the industry and therefore, we weren't going to do it.

My second question.

You see in the press companies, like, I guess this M&I Bank and American Standard basically, pursuing litigation against the company.

Is there any way that the outsider, the investor, the observer can track that, or is there something like asbestos that's going to come up in the future?

Well, I certainly hope it's not like asbestos, I think it's much more defined and narrow than that.

You know, we and the insurance industry are obviously in an industry that's litigious, but this is a special circumstance, and I think the special circumstance will wind its way out through the normal process.

You know, it's hard for you to have visibility into what the expectation is of cost here, because it's hard for us to have visibility into it.

But you know, it won't happen overnight, but there is a traditional 2-3 year process here, and we're going to go through that and we think that our litigation will go down to normal levels for this industry.

Thank you.

We'll now hear Bill Wilt, Morgan Stanley.

Just a couple of quick ones.

Pension expense in 2005, do you have that number or -- and or the fourth quarter of '05?

I don't have the actual number.

I know what it was relative to '04.

It was $140 million higher verses what the number was in '04.

We can certainly get back to you on that.

We don't break that out specifically.

Okay, thanks.

Operating margin in the consulting business in the fourth quarter was, I think 10.6% was the number, seemed light compared to the trend in the previous quarters.

I wondered if you could add some color to that.

There is in a number of these people businesses some seasonality.

You tend to have a little bit of a down December because of number of hours people are working and both clients and hours, so that tends to a little bit of seasonality.

That may explain some of it.

Okay, very good.

Thank you.

Thank you.

And we'll now hear from Jay Gelb, Lehman Brothers.

Thanks, good morning.

Mike, I was hoping you could talk about the organic growth numbers in risk and insurance services.

I think it would be helpful if you could give us a sense on how much of the decline in organic growth was based on planned exiting of clients versus those lost to competitors.

And then I have a follow-up.

What I would tell you is that we have indicated we were going to exit somewhere close to $100 million and we're closing in on that.

Soyou can use that number as close to that number where we are with the exiting.

And now you can do the math about what the rest is.

Okay, that's helpful.

And then second, I wanted to clarify about your comment on Putnam, saying that the contributions to profits will decline, does that mean the profits are going to be lower than the $300 million of adjusted operating income that was reported for the full year of 2005 as a result of lower assets and margins?

That's exactly right.

Okay.

We tried to give -- because we have -- the market swings, but we have as much visibility in that as one can.

We try to give you real hard lines, because we expect the AUM, if things happen to be lower in 2006 and we expect accordingly, we're not going to be cutting costs because we think we've done that, and that means that our return is going to be lower, so the contribution to MMC is going to be lower for 2006.

We expect it to improve in 2007 and 2008.

Obviously, it always depends on what happens in the market, but just simple math.

They're ending the year at an AUM level that's below where they ended the year last year.

And then, Sandra, quickly if I could.

You talked about insurance brokerage margins in the high teens excluding the options expense.

How much options expense will be in the R&I segment?

Gosh, it should work out to be at least two-thirds of the total.

So it's $110 million in total for 2006 is what we think it will be, so risk and insurance should be at least two-thirds of that.

Do you intend to report earnings, when you print the number, do you intend to report including options expense of 2006 just so we can --

Yes, the reason why we have been separating it was because it wasn't in the prior year.

So it becomes yet another factor that reduces comparability.

Since we adopted early, beginning in the third and fourth quarter, we will do two things.

One, we'll still tell you what it is, obviously because it's a new item and particularly in the first half of the year, it won't be comparable to the prior year.

But in third and fourth quarters it will be very comparable year over year.

We will also break it out by operating business.

Great, thanks for the answers.

We'll now hear from Meyer Shields, Stifel Nicholaus.

Good morning, let me follow-up on Dave's issue first, can you explain why you anticipate AUM outflows to drag on for as long as you seem to?

That has been the trend and I think that we're expecting that trend to continue.

It also has to do with our analysis of where the performance is.

And our analysis of what inferior performance drops off in some of their 5-year ratings.

So it's looking at performance, it's looking at what performance drops off, looking at trends.

The bad news about this is we've been pretty accurate, I think about where this is.

We would love to have it change in the first quarter, but we don't expect it to happen.

Okay, that's helpful.

And second, in the press release you mentioned you've seen property catastrophe rates rise in the first quarter.

I guess that's not a surprise, but given the discussions that we're hearing from a lot of brokers and reinsurers about clients retaining more business, are you expecting the property catastrophe hard reinsurance market to translate into net higher revenues and margins?

Yes.

Typically yes.

It's what we saw in January.

Great, thank you.

We'll now hear from Larry Greenberg, Langen McAlenney.

Thank you.

Could you just update us on what appears to be an industry trend by clients towards unbundling, particularly in the large account market?

You're talking about the brokerage market?

Yes.

We certainly saw that historically over the last few years, and it accelerated, I think by this crisis which shown a light on this whole industry, so that there is both a challenge and an opportunity for us.

When you have an unbundling it allows us to compete for other business that we weren't, and certainly it's a challenge because our business is being competed for.

So I don't have a statistic on about how much that is occurring, it's really kind of talking in the hallways, but certainly we feel it's happening and it's certainly happening at a faster pace in 2005 than it had historically.

I can't give you any numbers to it.

Okay, and then earlier in response to Ron Frank's question.

Sandra said obviously growth in the business will help margins which is certainly understandable.

Is it fair to say you're expecting growth both at Marsh and Guy Carpenter?

Absolutely.

We're expecting growth in every one of our businesses but for Putnam in 2006.

Great.

Thank you.

I think we'll take two more questions.

Thank you.

That question will come from Sackett Cook, Monesha.

Hi, good morning.

Just going back to the share count, I see that you said the average diluted shares was 555 million.

I know that that's its average, so I'm just wondering what kind of the absolute, fully diluted shares are outstanding.

Is this the diluted one?

The ending diluted shares outstanding is 546 million, ending, not average.

The average -- in the press release you have the average, because that's what's used to calculate.

Right.

And the ending is 546 million.

Just wondering, how does the ending for a 3-month period be 555 million, for the 3-month period, the actual must be higher, is that correct?

The diluted has to be averaged.

Right.

The fourth quarter diluted is 555 million, for the full year it's 543 million.

I see.

So if I'm trying to look at how to look at this into 2006 then I should use the 555?

You can use the 555 million, but diluted is also going to be impacted during the course of the year by what happens with the share price in the calculation of a fully diluted shares.

All right.

Okay.

And just trying to understand on the -- I mean the corporate segment that you have here and I know you had given some numbers, I think you said $110 million of additional kind of ops and expensing, but I'm trying to get what you think a decent run rate is for that segment.

So what you call corporate, which was $287 million in 2005, what should we pencil in there?

I'd pencil in about $150 million for 2006.

And so -- does that --

Excluding stock options.

I see, so there's $150 million and then add back kind of the $110 million you mentioned before.

Yes, but as I said in 2006 we're going to take stock option expense and distribute it among the segments based on their participation in the stock option program.

I see, so this segment gets a bit cleaner and the $150 million is the best way of looking the a it.

Yes.

Thanks very much.

One more question.

That question will come from Dan Johnson, Citadel Investment Group.

Thanks a lot.

I want to take one more shot at the question that Ron originally set in motion.

And that was attempting to sort of normalize the '05 numbers so then we can talk about the incremental components to margin expansion for '06.

We've obviously highlighted $215 million of saves, you've highlighted loss contingents of I think $120 million.

Correct.

Approximately.

I honestly don't know what to do with the capital gains that won't be coming in, but I'm assuming some of that is, or a meaningful amount of that $80 million differential comes to the bottom line.

Right.

When I add in the $215 million and take out the contingents and take out some of these capital gains that won't recur, I kind of get a starting point of more like 14% for this year.

Is it the movement from this, call it mid-teens number to a high teens number that comes from other actions that we have haven't talked about yet in much detail like some, I think you talked about real estate and a few other things.

No.

It really doesn't.

It has to do with what we expect to be going on in the Marsh core business, retention in Marsh, the new business in Marsh, the Guy Carpenter core business, what's going on in the reinsurance market.

That is really what's driving this.

And the only other thing you missed was the change in our benefit plans.

That will reduce the benefits expense by about $50 million in 2006.

A large portion of which impacts risk and insurance services.

Okay.

So Mike, to get to that -- let's kind of adjust that number.

To get it to a high teens number, is that sort of ongoing business needs to generate several hundred million more in operating profit above and beyond the sort of items I've spiked out?

That's exactly right.

Okay.

Great.

And then last question in terms of wage inflation trends.

Others have highlighted it, it seems still be an interesting issue in the market.

What are you seeing within your own employee base now versus, you know, maybe sometime in the past year or two ago?

It depends on the, obviously, the industry.

I think that the reinsurance industry is very, very competitive.

Certainly highlight that as being very competitive, with people understanding that back at the end of 2005 that 2006 might be a better year.

So it is a competitive place there.

I think also it is competitive in the brokerage industry.

Not quite like it is in the reinsurance, but it's competitive there.

But we have our own discipline.

What we're pitching and I think people are buying is a longer term story.

It is not what can you do if you walked across the street tomorrow, it is what can you do tomorrow and how do you have a career?

And so we're trying to be very disciplined about this.

We've been pretty disciplined in the past, we think that, you know, the costs we've taken out, we've been really good at keeping those costs out.

And that is really important to us, we can't take charges and then have that cost reoccur.

Part of it is the discipline and making sure we cap what we're spending on our salaries and that as we have a better year, we pay it in variable compensations.

That's the philosophy here and that's what we're going to win with.

Great, thanks for taking my questions.

Thank you all for all of the questions.

We appreciate your time, talk to you soon.

and that concludes today's conference, we do appreciate your participation, have a great afternoon.