威達信集團 (MMC) 2006 Q1 法說會逐字稿

Welcome to MMC's conference call.

First quarter 2006 financial results and supplemental information were issued earlier this morning.

They are available on MMC's website at www.MMC.com.

Before we begin, I would like to remind you that remarks made today may include statements relating to future events or results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to inherent risks and uncertainties.

In particular, references during this conference call to anticipated or expected results of operations for the remainder of 2006 and 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 cost actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Today's conference is being recorded.

I will now turn this call over to the Michael Cherkasky, President and CEO of MMC.

Welcome, everyone.

Thank you for joining us for MMC's first quarter 2006 conference call.

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

Today we're happy to have with us our new CFO, Michele Burns;

Brian Storms, Chairman and CEO of Marsh Inc.; and Michael Bischoff, our Head of Investor Relations.

We're delighted to have Michele Burns at MMC.

Prior to joining us in March, Michele was Executive Vice President and Chief Financial Officer and Chief Restructuring Officer of Mirant, an international energy company.

Michele also spent five years at Delta Air Lines, last serving as Executive Vice President and CFO.

Before Delta, Michele was a senior tax partner at Arthur Andersen, where she started her professional career.

In just a few weeks, Michele has already made a real contribution towards making MMC a better, more disciplined company.

Brian Storms has more than 25 years of experience in a variety of executive management roles in the financial services industry, both in the United States and overseas, and has extensive experience in business development, client relations, marketing, operations, product development and international management.

Brian joined MMC from UBS, where he served as President and Chief Executive Officer of UBS Global Asset Management for the Americas before joining MMC in August of 2004 as Vice Chairman of Mercer Human Resource Consulting.

I promoted Brian to CEO of Mercer in January of 2005, and then asked Brian to become Chairman and CEO of Marsh in September 2005.

In the eight months as Marsh's leader, Brian's drive and vision have had a tremendously positive impact on Marsh.

I'll discuss the key elements of our operations and then Michele will follow with specific financial information.

Brian will give an update on Marsh, and then we will take questions.

Looking at the quarter overall, there's a great deal to be pleased about as we continue to build for the future.

Most significantly in the first quarter we are seeing continued widespread signs of Marsh's recovery.

In 2004 and 2005, we had to implement extraordinary measures to make our business simpler, more effective, more efficient, and more client-centric.

Those efforts are working.

Profitability increased markedly in the first quarter at Marsh, as the savings from last year's restructuring were realized.

Client revenue trends have substantially improved since the fall of 2005.

We have clearly seen it in the United States, where new business increased to the highest levels since the beginning of last year.

Furthermore, some of our "new clients" were clients that left us during the peak of our troubles, only to return this year simply because, as they put it, Marsh is the best.

And our Marsh employees have seen the future, and they like it.

The mood is so much better at Marsh.

The voluntary departure rate has slowed significantly from what it was a year ago.

Brian will have much more to say about Marsh shortly.

Guy Carpenter is a terrific company with great prospects.

We expect to invest in Guy Carpenter, building on their already strong platform.

In the first quarter, property catastrophe rates in the U.S. were up sharply, while other lines remained flat to down.

The effect of the increase in the rates on the revenues in the U.S. was offset by clients who increased retention substantially, holding onto more risk on a net basis.

We expect the U.S. property catastrophe market to continue to harden throughout the year, but we also see strong underwriter balance sheets, allowing for a continuation of the increase in risk retention.

In terms of new business, Carpenter reported double-digit growth in the first quarter.

This new business is a reflection of Guy Carpenter's best-in-class offerings of risk advisory services, program analytics and placement capabilities, its investment in reinsurance capacity analysis and risk transfer and its specialized technical market and qualitative expertise.

In looking at the totality of the risk and insurance segment, excluding noteworthy items and stock option expense, our margin is 3 percentage points better than it was a year ago; and this despite a $44 million reduction of operating income from lost MSAs and reductions in Risk Capital Holdings.

That makes has us very optimistic about the future.

Turning now to Kroll, its results in the first quarter were mixed.

And quite frankly, I am not used to mixed Kroll results;

I'm used to outperform.

But revenues from Ontrack, our legal technology and electronic discovery business, failed to exceed its expected performance for the first time in 18 quarters, and its revenues were down 17%.

This was due to pricing pressure from competitors and resulted in significant declines in profitability.

We believe we have responded appropriately to today's market reality and that results of Ontrack's business will improve going forward.

Other operations within Kroll performed well in the quarter.

Revenue growth in background screening was double-digit.

Domestic trends continued to be favorable, benefiting from higher volume.

Corporate advisory and restructuring had a very strong quarter, also reporting double-digit revenue growth.

It continues to report solid utilization, driven by a major global assignment.

We still expect Kroll to have a good year.

We will continue to invest in Kroll to realize its potential.

Turning to Mercer, as I've been saying, Mercer is a company with great growth potential, and we're seeing the potential begin to be realized.

We're seeing global mega-trends in the workplace environment -- an aging workforce, rapidly rising health care costs, business process outsourcing and managing a mobile workforce -- that present significant opportunities for us.

Retirement, health care, outsourcing and talent are dynamic markets in which our brand is the gold standard.

We made the decision in early 2005 to invest in Mercer HR.

We'll continue to do so in 2006.

This has led to improved revenue returns that we started to see in the fourth quarter of last year.

This revenue momentum continued through the first quarter and accelerated.

This can clearly be seen in retirement, Mercer HR's largest practice, which generated double-digit underlying revenue growth.

Growth was particularly strong in its international operations.

This momentum also was evident in human capital, which has also achieved double-digit underlying revenue growth.

Global Investments showed good growth, as assets under management reached $10 billion at the end of the first quarter, compared with $7 billion a year ago.

If there's a negative at Mercer, it's that the revenues for our Health & Benefits decreased slightly, as the integration of Marsh’s employee benefits business continues to be a struggle for us.

But as we invest tens of millions of dollars in Mercer HR, our costs are also rising, lowering our margin in 2006.

We believe the medium and the long-range returns are worth that investment.

Mercer Specialty Consulting is one of the world's premier corporate strategy and operations firms, and a leader in financial services and risk management consulting.

Mercer Specialty has generated very strong revenue growth over the last three years, and this performance continued in the first quarter.

Strategy and operations was up 20%.

Mercer Oliver Wyman was up 25%.

Looking throughout our consulting segment, we're real pleased with the first-quarter results and see very encouraging trends.

The outlook for consulting is bright.

Looking at Putnam, its long-term strategic focus remains on course.

That's to improve investment performance, to expand distribution channels geographically and through retail platforms -- for example, more advisers are doing a greater volume of business with Putnam -- and to maintain expense discipline.

In the first quarter, Putnam delivered its anticipated margin of 20%, excluding stock option expense.

However, Putnam continues to suffer from net outflows of $6.6 billion in the first quarter.

We expect net outflows to continue in the second quarter and to be approximately $5 billion, partially due to our ending of an alliance with our Australian partner.

However, we still expect net outflows will reverse by the end of this year.

Why?

Why do we still expect flows to reverse?

First, we expect that institutional flows will turn positive in the third quarter.

Our RFP activity is up and we're winning more as the rest of our institutional portfolio becomes more stable.

Secondly, in the mutual fund area, our sales are steadily rising as we add a broad range of high-performing products, like our Global Asset Allocation Funds, Diversified Income Trust, and Investor Fund, across multiple retail platforms.

Finally, we are optimistic about new alliances and opportunities being pursued in Europe, Japan and Australia.

We continue to be confident in the future of Putnam.

Finally, it is also important to understand the continued improvement our integration of MMC as one company.

Both on the revenue and cost side, we are making steady improvements.

In our operational excellence initiative, we are co-locating our businesses, sharing back offices, making joint purchases and installing new technology, all of which will make us more efficient.

At the same time, we are providing bundled solutions in the risk space that no one else can do.

Whether it's restructuring pensions, analyzing and mitigating strategic risk, planning for business continuity and contemplation of a pandemic or terrorist attack, or finding off-balance sheet solutions to esoteric risks, no one can do what the family of MMC companies can do, and are doing.

Running MMC as one company allows us to be more efficient and effective with the appropriate level of oversight.

This benefits our clients and our shareholders.

This management team believes in active management to improve our bottom line in the short-term and grow our revenues in the medium and long-term.

We are confident that we're on course.

With that, I'd like to turn it over to Michele to more fully discuss our first quarter.

Thank you, Mike.

Good morning, everyone.

Before I begin, let me say how pleased I am to be part of the management team at MMC.

I look forward to building relationships with many of you as we move ahead.

As you can see from looking at this morning's press release, there were a number of items that affected first-quarter earnings in both 2006 and 2005.

Within GAAP earnings, we had discontinued operations.

Additionally, there were also noteworthy items and stock option expense, all of which I will walk you through.

GAAP EPS in the first quarter of '06 was $0.75, compared with $0.25 in the first quarter of '05.

The current quarter included a gain from discontinued operations of $0.32.

This gain was due to the sale of our majority interest in Sedgwick Claims Management Services.

MMC's ownership position in this company included both a direct investment as well as an investment through Trident II, a private equity fund.

These gains are both reflected in discontinued operations.

As a result of this sale, in MMC's 2005 10-K filing we reclassified our results for 2005 and 2004 to reflect Sedgwick Claims Management Services as a discontinued operation.

EPS from continuing operations in the current quarter was $0.43, compared with $0.24 last year.

The current quarter includes $0.06 of net expenses from noteworthy items, as well as $0.05 in stock option expense under FAS 123R, for a total expense impact of $0.11 a share.

Excluding noteworthy items and stock option expense, EPS in the first quarter of 2006 was $0.54, compared with $0.51 in Q1 of '05.

Please note that this quarter's EPS includes a onetime tax benefit of $0.03 per share.

MMC's consolidated effective tax rate was 28.6%, a decrease from 34.8 % in the first quarter of 2005.

The decrease in the effective tax rate was largely due to the favorable resolution of tax issues in certain jurisdictions and the higher net tax benefit on restructuring and other charges than the 35% effective tax rate on ongoing operations.

Now I'd like to update you on Marsh's 2005 restructuring plan, which is substantially complete.

Through the end of Q1, we spent approximately $360 million.

We expect the remaining $10 million to $20 million of expenditures, relating primarily to real estate, will occur over the next two quarters.

Since we began implementing the plan in last year's second quarter, we targeted total annualized savings of $375 million.

We will hit this target.

Marsh received $160 million of savings in 2005 and experienced a $90 million run-rate in the first quarter of 2006.

We will receive the remaining $125 million in savings over the next three quarters.

Now let's turn to expensing of stock options.

Following MMC's adoption of FAS 123R last July, expensing of stock options was reflected in the corporate line in last year's Q3 and Q4.

This is the reason we're choosing to highlight this quarter's expense, as it was not included in last year's first or second quarters.

Our current thinking is that once we reach a level of comparability in Q3, we will continue to provide this information, although it will no longer be highlighted.

This quarter, stock option expense of $40 million was reflected in the results of the operating segments, the details of which can be seen in the supplemental schedules included with today's press release.

For the full year we expect that stock option expense will be about $115 million.

The remaining $75 million should be evenly spread through the last three quarters of '06.

First quarter expense was higher than the run rate for the rest of the year, due to the requirement that options for retiree-eligible individuals must be expensed fully upon grant, which occurred in March.

Finally, I'd like to make a few comments about MMC's financial position.

It's strengthened substantially over the past year, and our liquidity position and cash flow remains strong.

Total net debt, which is total debt less cash and cash equivalents, was $3.84 billion at March 31st, a reduction of more than $500 million from $4.36 billion at the end of the first quarter of 2005.

Now I'd like to turn it over to Brian, who will give us an update on Marsh.

Thank you, Michele.

Good morning, everyone.

As Mike discussed, we have seen real progress at Marsh over the last six to nine months, and needless to say, are quite upbeat about the way we have rallied to protect our franchise.

We feel that we've passed the crucial inflection point, and we are now on our front foot, playing offense rather than defense.

I want to be very clear, though.

We are in fact driving significant change here, and it goes well beyond our response to the challenges of the past 18 months.

We have used this experience as a catalyst for deep introspection, and we are retooling and repositioning ourselves to compete, win, and grow in a very different environment than we had in the past.

There are strong forces at work in the industry today, and they are quite important in terms of how we drive our organization:

Clients are increasingly sophisticated and their demands are evolving well beyond traditional risk transfer, as they focus on the total cost of risk as a truly strategic issue.

Globalization trends are adding significant complexity to client risk profiles, while simultaneously requiring a globally integrated client service approach for Marsh.

New categories of mega-trend risk continue to evolve, including terrorism, pandemic and climate change, as examples.

The bottom line is that risk, broadly defined, is indeed a growth industry.

In response to these evolving dynamics, we have taken a variety of rational, proactive steps to lay the foundations for sustainable, long-term growth and profitability.

First, of course, we conducted a very comprehensive review of the Company.

We assessed our global business portfolio, we evaluated our competitive strengths, prioritized our capital investments, and managed the essential trade-offs that are the essence of good strategy.

In addition, we have listened intently to what our clients and markets have had to say.

Personally, I have traveled around the world to speak with innumerable clients -- in fact, over 100 a month since I joined Marsh last September; met with the major carriers and industry leaders, paying particular attention to their constructive criticism, and importantly, their evolving demands.

Based upon this valuable feedback and our own in-depth self-assessment, we have embarked on a new strategic course.

The next 12 to 18 months, and indeed the past five months, are about embracing this new course and executing across two fundamental dimensions.

The first dimension is the optimization of our global platform for maximum operating leverage and growth.

We use the words “one Marsh” around here today to describe that optimization.

Beyond the roughly $650 million of costs that we've already taken out of Marsh, we are doing the difficult, and frankly long-deferred, work of global integration across our risk practices and specialties, as well as our functions and core processes.

We are eliminating vertical barriers, flattening management structures and reigning in P&L autonomy to drive true collaboration and enhance the leverage of our scale.

In fact, in the U.S. alone in the last several months, we've gone from 65 independent P&L's to just nine, which is, obviously, resulting in far more client-driven metrics in our local offices.

And that's just one real example of that collaboration.

The organizing principle for this integration is really quite simple -- we are placing our clients at the center of all that we do.

We are removing artificial internal impediments, freeing up our client-facing talent from administrative and bureaucratic burden, putting our best resources in front of our clients regardless of where they access us, and re-calibrating our performance metrics to reward collaborative client-focused behaviors.

The second dimension of our plan lies in our vision to be the preeminent broker and risk adviser.

These are distinct yet complementary value propositions that enable us to engage our clients with a consultative dialogue about their total cost of risk across the full spectrum of the risk lifecycle.

The depth and breadth of our brokerage capability is core to who we are.

Our challenge today, however, is to do it even better, smarter and faster.

To get there, we are investing in and enhancing all of our fundamental brokerage processes, workflows and analytical tools, and we are institutionalizing our approach to innovation and product development.

And based upon very clear direction from our clients, we are rewiring our internal placement engine, so we can aggregate the power of our knowledge, size and global reach, and bring it to bear for the benefit of our clients.

Building off the intellectual capital inherent in our brokerage business, we are enhancing our risk advisory capabilities.

We are broadening the purview of our existing risk consulting business, we are training and equipping our client relationship teams to expand their conversations with clients, and we are investing in our thought leadership.

We are also developing systematic approaches to monetizing our content and insights.

Those are the broad strokes of our game plan: global integration and a total cost-of-risk value proposition.

But, of course, it's all about execution.

We are beginning to see signs of progress that give us confidence that we're on the right path.

Our financial results continue to encourage us, both from a revenue and profitability standpoint.

The positive revenue trend that we saw in the fourth quarter of 2005 continued to the first quarter, with year-over-year revenue essentially flat on an underlying basis after taking into account nonrecurring revenue from the unprofitable accounts that we resigned over the last 12 months, and also recognizing the reduction of $27 million in MSA revenue.

This top-line performance was driven by our revenue retention, which increased 6 points from the first quarter of 2005.

And while we're not yet back where we want to be vis-a-vis our historical retention rate, we are seeing increased stability in our business.

The U.S. as a matter of fact experienced the strongest rebound of all of our geographies as it relates to retention.

In terms of profitability, excluding noteworthy items and stock option expense, first-quarter operating margins improved significantly, with more than a 4 percentage point increase over the first quarter of '05, driven in large part by disciplined and ongoing expense management.

On the client front, the majority of our requests for proposals activity is now in response to offensive RFPs rather than defensive, which is a marked improvement.

And Marsh has won over two-thirds of those RFPs that have closed, both in dollar terms and number of accounts.

In terms of new business opportunities, or as we say internally, the pipeline, the dollar volume we are actively pursuing is back in its historical pre-October 2004 range.

We are seeing significant momentum in new and expanded engagements, with a litany of meaningful wins in the U.S. alone in the first quarter, many of which are what we call “sold not booked,” thus they don't appear in Q1 results.

Let me just offer a couple of examples of those wins.

A Fortune 50 company selected Marsh as its strategic risk adviser, with new consulting mandates totaling over $4.5 million of revenue in 2006.

A global technology and telecom provider consolidated from three brokers to one, choosing Marsh to manage all lines of coverage, representing over $1 million of revenue.

A prominent supplier of industrial products awarded us their business across multiple lines of plus risk consulting, representing over $600,000 of revenue.

We're also winning back large accounts that have left us over the past 18 months, taking them away from global competitors, regional players and niche specialists alike.

Examples include a major real estate developer who returned to us after leaving us just 11 months ago, bringing back over $1 million in revenue.

A leading construction firm returned to us after leaving just nine months ago, bringing back over $600,000 of revenue.

And a large entertainment company retained us as the broker of record recently, without requiring a new RFP, after leaving us just last year.

In short, clients are clearly endorsing Marsh with their wallets.

They are choosing us for many reasons, including our global reach, our industry expertise, our high levels of service excellence, our risk advisory skills and our specialty capabilities, including very importantly, our sister MMC companies that are increasingly becoming a major part of our Marsh value proposition, and in my view, truly differentiates us in the marketplace.

On the colleague front, on the employee front, we are seeing positive signs as well.

While the proverbial war for talent is indeed real, and while we have lost some people over the past year that we would have liked to retain, we feel that the ebb and flow of talent is now normalizing.

In fact, across all of Marsh, year-to-date voluntary turnover has now returned to a rate consistent with the normal rate experienced from 2001 to 2004, obviously significantly lower than 2005.

Not only are we retaining our own people, but we have attracted a variety of outstanding new players and we have a resurgent pipeline of strong talent proactively reaching out to join us.

We are also selectively welcoming back former Marsh colleagues who went on, shall we say, a “sabbatical” with our competitors.

In the U.S. we have attracted several hundred new front-line colleagues to our client development and risk practices alone.

They're coming from our competitors, they're coming from insurance carriers, and they're coming from risk management positions in major corporations.

We believe that Marsh is steadily resuming its position as the firm of choice for the industry's top talent.

I want to talk just for a moment about the functional side of our business.

I'd like to just highlight technology and operations, which serves as a very good proxy for the hard work we're doing across all of our functional areas.

We feel strongly that technology and operations must be core competencies for Marsh, delivering innovative solutions to our clients and providing an efficiency maximizing backbone for our global integration agenda.

Over the past six months, we have commenced what we are calling internally a “quantum leap” in this area, aided by the industry-leading expertise of our newly reintegrated CS STARS risk management information systems business.

Let me briefly highlight just a few key initiatives that are so critical to our ongoing success.

We have rationalized and integrated our global technology organization, which will deliver both direct savings and a run rate reduction in our application development spend.

We are implementing a unified global data management strategy, which will be the foundation for all of our global applications.

Our technology challenge is not about massive computational or transactional complexity, as it is in other financial services companies, but it's really about how we effectively and efficiently aggregate, analyze and act upon this data.

We've established a professional global operations group, which is leading the centralization of our key processing capabilities in Marsh centers of excellence in Austin, Texas;

Des Moines;

Norwich in the UK; and Pune, India.

We're delivering new and innovative client-facing tools as well.

In fact, one global client -- global consumer company recently returned to Marsh explicitly because of the responsiveness and creativity we were able to demonstrate with a new client-facing technology solution that will become fundamental to all of our client relationships by year end 2006.

We are globalizing our core applications and leveraging across MMC platforms for maximum cost efficiencies, scalability and client responsiveness.

For example, we are migrating to a single global technology platform for placement, as opposed to numerous regional and practice-specific transaction systems.

We are migrating to a single billing and fiduciary accounting system, rather than the five systems we have around the world today.

We are developing a global client profitability system which will enable us to manage the profitability of our global book of business far more proactively.

Suffice it to say we have a lot going on in IT and operations.

However, I don't want to leave anyone with the impression that we're pouring money incrementally into this technology infrastructure.

On the contrary, this re-engineering will free up resources and costs, which in turn we will partially redeploy into our forward-looking technology agenda.

Whether in technology or in our other vital functional areas, much of the current work is unglamorous, it's behind-the-scenes stuff, but it's essential foundation building that will serve us well in the long run in terms of cost efficiency, client responsiveness and overall productivity.

I'm going to stop there.

I hope this gives you all a flavor of where we are, where we are going, and most importantly, the progress we're beginning to see.

We have a clear plan and we have the will to execute.

So, thank you all very much, and I'll turn it back to Mike.

Thank you, Brian.

Thank you, Michele.

We will now stop and take questions.

(OPERATOR INSTRUCTIONS).

Alain Karaoglan, Deutsche Bank.

We're looking at the proxy and the compensation of management.

I didn't see any financial metrics that either management or the Board is looking for in terms of either rewarding management or to shoot for in 2006.

Last year was a transition year, so you were on your way on figuring out what it should be.

Where are you in that process?

What are the financial metrics that management is looking for in 2006 and 2007?

Number one, obviously, the proxy, I think, restates our commitment to being a variable-compensation company, and having its key executives in that same position, so that for me and for the other key managers, our compensation, except for our salaries, is all variable.

Our bonus, our options are obviously variable, and our options are, as you know, performance-based.

And you have to hit a performance of over 15% before they actually can be vested.

The same thing with our restricted performance shares.

So, they all are performance-based.

With the performance -- obviously, options performance is in the stock market.

On the restricted shares the performance is based, and for me specifically, based on EPS.

The Board hired an outside consultant who came in, took a look at it and said that EPS for me and other very, very high-level MMC executives was in fact the best predictor, the best coordinate between shareholder value and performance of the Company.

So, it is EPS.

It's EPS over three years, so it is a cumulative EPS.

We, with the help of this outside consultant, have set targets for where we expect it to be over three years.

If we hit those targets, then it is what was disclosed in the proxy.

If we're superior to those targets, it can be double that.

If it's inferior to those targets it could be nothing.

We could have no value of restricted shares; we wouldn't issue any.

So, that's the overall premise, and it is EPS.

Now, there are different measures for individuals in the company.

For Brian Storms, for instance, yes, there is some of it that is tied to MMC.

But then also, a number -- a substantial percentage of it is also tied to the performance in Marsh.

And there it's more complicated.

We're looking at revenue, we're looking at profitability, we're looking at margin, retention, and compliance.

So, there are a number of other factors as we start to move into different areas of the Company.

As we go down into other levels, again, it varies, to being much, much more individually focused.

Mike, are you willing to share with us what these EPS targets are?

I couldn't, because it really has to do with targeting plans about where we're taking the Company over the next three years.

So, that would be inappropriate.

Just a follow-up on -- Brian, you mentioned retention was up 6 points.

Could you tell us from where?

No.

Actually, we don't break those numbers out in that fashion, so I couldn't give you a starting or an ending point on that.

But in absolute terms, there's been, as we said, a substantial improvement in retention across all of our business.

On Kroll, Mike, this is now the second quarter -- it's really not just the revenue line that is lower, but the earnings are probably less than half of what we were expecting, and less than half of what they were running.

What is happening there, and when do you expect it to get back to earning the margins and profits on Kroll that you were earning before?

It certainly is down.

Year-to-year it's down from $37 million to the lower 20s.

There are a number of different factors.

I think most starkly it is the electronic discovery business, which represents a very material fall-off there.

There are other timing issues with security, losing some of a group of FAS people.

We believe that the second quarter, this quarter that we're in, we'll see more of a return to what we would expect from Kroll, and we think we will build from that for the rest of the year.

So, we think the next three quarters we will be more typical of what we would have expected.

Ron Frank.

Two questions relating to the brokerage operation.

One, the insurance services organic growth down 2% was about the same as -- really exactly the same as fourth quarter.

I want to make sure I'm doing an apples-to-apples comparison.

You're no longer reporting it on an ex-MSA basis, and I gather that was worth about a point.

So, would we be talking more like 3% versus the 2%, or rather a 1% decline versus the 2% decline in fourth quarter?

And is there anything else I am missing that we would want to factor in in looking at that otherwise -- that organic growth rate that looks like it didn't improve sequentially?

It's about a minus 5% to a minus 2%, and it is exactly right that it’s the MSAs, but it's also lost business or business that we jettisoned, that we intentionally exited.

And in relationship to the first quarter, which, as you are aware, is in some areas a larger quarter, particularly in Europe, that's an area where we exited larger pieces of business.

It's really a minus 5 to a minus 2.

The trend--

--insurance services in particular, not the reinsurance business?

Just in insurance services it has been a five-quarter trend that the last three quarters have been very much better.

I just would add to that, when you factor in all of the things that Mike just suggested, and then look at the underlying health of our business in terms of the opportunities that are coming into the marketplace now, the wins versus loss ratio in the first quarter, which was substantially in our favor, everything is pointing to a real improvement in the underlying strength of our business and revenue growth.

So, we've got to get past this period where we're adjusting for MSAs and we're adjusting for this and that.

But we have a great deal of confidence that the underlying strength of revenue right now is really moving in a positive direction.

My follow-up question relates to -- it may sound somewhat cynical.

But it seems to me that every time revenue gets tough to find, brokers start talking to us about enterprise risk.

And I noted in your plan that one component of it is you didn't pull an enterprise risk but global cost of risk, integrated risk -- it seems to revolve (technical difficulty)

Hello?

One moment please.

You got me again?

We got you again.

I think I got the gist of the question.

Let me just answer it.

In our company, enterprise risk, which is a big business and growing business -- and I will tell you we're virtually sold out for the year with our capacity -- is not in Marsh; it's in Mercer.

So, we're not using that.

Listen, I think there are competitors who very much have that inside of their businesses; it's not inside of our business, it's in Mercer.

It's one of the reasons we had a really strong Mercer Specialty performance.

But it's not in our business and we're not suggesting it.

I think Brian is suggesting something else.

Yes.

I'm saying beyond the category of enterprise risk is the whole category we're seeing in what we call Marsh Risk Consulting.

That doesn't deal with the topic of enterprise risk, but it deals with a whole range of consulting around pandemics, around the issues of climatic change that we're dealing with, terrorist change.

This notion that that's what you feature when the brokerage revenues are down is really a misstatement, because we're seeing substantial -- one of our largest wins in the first quarter was a traditional brokerage client, a multinational company that awarded us nearly $5 million in advisory revenues, all to do with helping them create a structure, a risk management structure, and helping them mitigate and plan against some of these major catastrophes.

So, this is a substantial change, and it's fundamental to the way we're going to manage Marsh going forward.

David Small.

Could you just give us some sense of the decreased pricing in Europe in terms of a decline in casualty pricing?

What was the overall impact on the Marsh revenues for the quarter?

I think Mike said earlier that the January month in Europe, and particularly in the U.K., is a disproportionate month for the year.

And the reality is the market was -- we really didn't feel the softening in the market in that renewal period.

So, in January particularly, there really wasn't any impact to the softening.

The softening has really occurred post-January, and it's continuing to be a phenomenon for us across all our businesses outside of the U.S.

We're just beginning now to see a hardening in the market on the cat side, on property in the U.S., which we think will positively affect us for the remainder of this year.

But the softening of the market in Europe really wasn't a factor in the first quarter.

It could become a factor in the second and third.

And in the U.S. it wasn't a factor either?

No.

You guys talked on the last conference call about improving disclosure around these issues of retentions and new business, and you did give us some more statistics this time.

But are you -- how far have you gotten on that?

Mike, last time you said you didn't feel comfortable with the data that you had internally.

Are you getting closer?

Yes, I think we are getting closer.

And we will try to continue to increase that.

I think, as you've heard from Brian, the increasing automatization of our processes, will in fact allow us to have more reliable data.

We can't possibly give you data which we don't think is absolutely not clearly reliable.

And that's why in some ways we’re being vague about some of this stuff, because it's not apples-to-apples.

A retention rate is different inside of our company, and certainly different from other companies, from company to company.

So, we're getting better at that.

I think as we turn the year we'll get better.

I know Michele is going to be looking at these kinds of issues.

So, we want to be transparent as much as we can.

I would just add to that.

Make no mistake that from an internal standpoint, in terms of how we're driving Marsh, expanded business, retention of business and new business being the three major categories, components of revenue in our core business, are the day-to-day focus of this organization, far more than they've been in the past.

On the systems upgrade that you have discussed on this call in the past in terms of moving from multiple systems to one, is that -- are the cost saves from that included in the $120 million run rate that was discussed earlier?

They are not.

Brian Meredith.

One clarification here.

On the underlying revenue growth in the RIS, risk and insurance services business, do you have a number on what the year-over-year underlying revenues were ex the MSAs?

Because I believe there was $32 million in last year's first quarter, and I don't know if there's any in this quarter.

There's $5 million this quarter.

There are $5 million this quarter.

Terrific.

So, it looks like it's roughly flat, ex MSAs.

That's right.

Terrific.

Could you talk a little bit, Brian, about what's happening on the pricing front in the risk and insurance services business.

You talked about clients coming back to you; are they coming back to you at the same price, or are you getting price increases anywhere?

This whole topic of pricing is one we could spend two days on.

But, it’s interesting, I've been doing an analysis on this just in the last few weeks, and going back as far as 2003, and looking at our revenue, our CSR revenue as a percentage of premiums, which is really, I think, an accurate way to look at our business.

And excluding MSAs -- so take MSAs out of this discussion -- we're actually seeing some pricing improvement in our business in the last several months.

And in fact, the first quarter of '06, we've seen it -- we've seen about 150% improvement in our overall pricing ability.

But the reality of it is, the marketplace, the buyer of our services is significantly more informed and involved in the pricing discussion post-transparency than pre-transparency.

And the competitive environment with our major global competitors is a significant issue for us as we go forward.

There is almost a frenzy out there to try to take business away from each other, and most of our competitors, as we see it around the world, are using price as a determinant.

We're not, and in fact are pleased with the direction we're going in there.

We also have ahead of us, which is what we're excited about, as we continue to learn to value price our consulting and advisory services, we see a lot of upside in terms of our pricing power.

And that's what we're looking forward to.

You talked about you're winning two-thirds of business opportunities.

Is that all-inclusive?

That includes business defensive RFPs and offensive RFPs?

And I wonder if you kind of break that down as far as what's happening with defensive RFPs versus offensive RFPs.

First of all, the numbers have completely inverted year-over-year.

So, it's now almost entirely the opposite, if you will.

So, it's all about offensive RFPs, and we're tracking those very closely.

And as I said, we're winning about two-thirds of those in the first quarter.

I don't have the number in front of me in terms of what we retained on the defensive side, but we have had a lot of success there as well.

Mike and I personally are involved in every one of the major defensive RFPs, and I think our success rate has been very, very good;

I just don't have that specific number in front of me.

I honestly cannot think of a major client in the first quarter that we lost.

Maybe there is one, but I can't off the top of my head.

And that was not so for 2005.

So, the two-thirds number is new business?

New business.

That's fantastic.

Thanks.

Jay Cohen, Merrill Lynch.

Putnam's revenues as a percent of average assets fell to, I think it was about 72 basis points.

It had been running about 76.

I'm wondering if there's anything unusual there or why that occurred.

I'll have to get back to you on that.

Don't know.

Secondly, Brian, you shared an example where there was one account where they moved from three brokers to one.

Is that an exception rather than the rule?

We seem to hear about the opposite happening, where they're using more brokers.

Obviously, you're hearing that and I'm reading that, and the rhetoric in the marketplace is pretty loud.

I can only tell you from my seven-plus months of experience, and spending significant amounts of time with our clients in this process, I'm seeing it sort of mixed in the marketplace.

There are in fact clients that are spreading their business out to multiple brokers.

But for every client I'm seeing doing that, I'm seeing clients consolidate.

We had a number of significant wins in the first quarter where a client was in fact consolidating.

And the other thing that's happening, which we haven't alluded to, which I’ve been experiencing quite a bit of, in fact yesterday included, is long-term clients of Marsh who feel from a fiduciary point of view, or from any other point of view, are putting us out to bid, are giving us the opportunity to come in and re-win the business.

And we're seeing substantial success at that.

It's turning into a real positive for us, when they ask us to come in and re-look at the business a year or two later.

And we're winning that business and reconfirming their faith in this company.

And I'd love to be able to name some names, because they're pretty significant, but we've had a lot of traction in that regard.

And as we look at the pipeline for the remainder of this year, we're pretty encouraged about that phenomenon.

So, I would say it's mixed, but I see just as many clients consolidating to one or two than those that are expanding.

And I think there's a lot of mix out there about that, but our experience is quite different.

Larry Greenberg, Langen McAlenney.

(inaudible) Kroll for a moment.

Can you talk about how you've responded to some of these pressures?

Have you gone out and replaced some of the people that have left you?

Are you talking about rationalizing expenses?

Just what gives you confidence that we're going to see a more normal margin or revenue pattern going forward?

Specifically in the fourth quarter, we started to understand that it was, one, a technological change, and two, really a pricing change in the electronic discovery business.

And that team, it's all about doing it faster and better and cheaper.

So, they went back and they re-engineered their operation.

They cut the prices 25%.

They've already gotten volume back up to where we need volume to be.

Always could take more, but we have confidence that that business, we re-engineered over the last 90 days of the end of '05 and the beginning of '06.

And we think we're in great shape.

Where we lost some people, and it was in the FAS group, the forensic accounting group, we absolutely have gone out and we think we have hired a series of people who are actually longer-term better positioned for us.

And it will drag a little bit, because we've gotten some of those people in, but it will take a little time to get them all up to billing, it generally takes about 90 days.

But we've been doing that through the first quarter.

More of it will happen in the second quarter.

But just looking at the second quarter, Kroll is a business that generally you have some foreseeability in large segments of it.

We can see the changes we've already made in our security business.

So we're pretty confident about where the second quarter is going to be and what the trend should be in the third and fourth.

Great, that's helpful.

Can you quantify for us what the marked-to-market gains were at Risk Capital Holdings?

In this quarter, the entire gain in Risk Capital Holdings is mark-to-market.

So, the entire $46 million was marked-to-market.

And that would compare with what you would consider a normalized number of what?

We have typically, and confirm, an estimate of $100 million for the quarter, but the unrealized portion is a bit of an unusual item this quarter.

I think it's $100 million for the year.

For the year;

I'm sorry.

For the year.

But the unrealized portion is something that has occurred in this quarter that is different than typical.

Typically, the unrealized portion is quite minor.

And I think you realize that that is down $17 million from what was recognized in the first quarter of 2005.

As I pointed out, that $17 million plus the MSAs are $44 million of what looks very much like operating income we don't have, and yet we're still performing very well.

Jon Balkind, Fox-Pitt Kelton.

I guess my first question is on Mercer.

The margins were weaker than expected this quarter.

I know you're spending in the HR business.

Is this a good run rate for the margin going forward, and is there any onetime retention cost going in the numbers in that business?

The one-time retention costs are small; they're very, very small, if there's any.

I think that in the Mercer HR space, in MGI, and in retirement, we're hiring.

We in fact made the decision that, first thing, one size doesn't fit all.

In Marsh and Putnam, we in fact had to manage those companies with detail, because we were going to have a challenging short period of time.

I think Marsh is coming out of that, and now we'll be more interested in some of the revenue plays.

In Mercer, we think there's so much opportunity that our strategy is to build that franchise, build out that franchise, start taking advantage of what we think is a dynamic change in that space, capture market share.

And we think that that investment will do well for us in the years to come.

I would expect that those relative margins that you're seeing are probably about right for the margins in the rest of '06.

I think if you'll go back and look at my comments in '05, I wasn't talking about margins in Mercer, because margins in Mercer are -- we're going to in fact invest in that business, even if it causes some margin degradation.

A quick follow-up in the brokerage segment, and I'm just trying to reconcile previous comments, Mike, that you've made, saying that retention was at historical levels.

And then I believe Brian made a comment that you're progressing, but not at historical levels.

Can you just clarify where we are at and where we may be going?

I would just tell you that the fourth quarter started seeing us being at historical levels.

In the first quarter, I think we're slightly off of what we were historically, but we're up six points from what we were a year ago.

So, I think that's the difference.

And again, one of the reasons that we're not giving as precise numbers as we might in other areas is because it's a little bit fuzzier than we like, and so we give you relative numbers.

Meyer Shields, Stifel Nicolaus.

It's actually Matt Roswell.

A couple of numbers questions on -- especially on consulting.

It had the $13 million of option expense.

Where should we anticipate that going for the rest of the year?

For consulting specifically?

For consulting specifically.

You mentioned, Michele, that it was up in the first quarter.

And I was just trying to get a handle for was it disproportionately in consulting with the retirees, etcetera?

This is Mike Bischoff.

We're looking at $115 million for the year.

It was $40 million in the first quarter, as Michele said.

So, obviously, you're dropping down to $25 million for the subsequent three quarters.

And by the way, I think that caused a little bit of confusion with regard to Street estimates in the first quarter that did not include that entire $40 million.

They had a number quite less than that.

So, as a result, proportionally I would scale back Mercer the way that you would the overall company from $40 million to $25 million.

Okay.

So, just kind of look at the first-quarter breakdown of the option expense and assume proportionally that runs through the rest of the year?

That’s correct.

Matt Roswell.

Okay.

Reimbursed revenue at consulting -- are they going to be folded back in, or are they going to be broken out in the Q?

Folded back in.

Historically at Kroll, what percentage is that electronic discovery business?

The electronic discovery business is (multiple speakers) in the '20s, percentage of the business.

Okay.

A couple of quarters ago you gave the performance of the Putnam funds, what percentile they ranked based on relative performance.

Can you update those figures?

We will.

We can give them to you.

I don't happen to have them at hand, but we'll put them out.

Mark Lane, William Blair & Co.

Brian, just to make sure that I understand what you're saying -- number one, you're saying that you haven't had to lower fees at all in order to write new business or hold on to any new business in the Fortune 1000, Fortune 2000 business?

No, I didn't say that we haven't in any instance.

There have been instances where, in a very competitive bid with a premier franchise-type client, we've done what I think has been the thoughtful thing to do, which is to retain that client.

In some cases we have been able to sharpen our pencil and eliminate some of the services.

Several accounts come to mind where they required less service of us, and as a result we could rationally reduce our price.

I take the view, and I know Mike takes the view, when it comes to our premier clients around the world, in the competitive environment that we've been in, with some of the predatory pricing that's being done, we're being very focused on that.

But by and large, as I said, if you look at the aggregate of our business through the first quarter -- and I'm doing now a forecast out to the remainder of the year -- on an annualized basis we actually see improvement in the overall percentage of the premium being placed.

What does that mean, 150%?

You said that the ability to price is 150% greater than it was before (indiscernible) the comment you made.

I don't understand what that means.

That means if you look at either a commission or a fee -- because as in our large risk business, for example, over 50% of our pricing is fee-related as opposed to commission-related, which is more indicative of, let's say, the middle market -- if you take an aggregate of our fees and commissions, and you put those against the premiums being placed, as a percentage of revenue to premium, and you go back as I did to 2003 -- and you can pick any other period -- we're actually seeing that improvement as the revenue percentage of premium.

So, it tends to be indicative of the fact that -- despite the loss of MSA revenue -- the core revenue, if you will, has actually been strengthening.

I'm going to take one more question.

Mr. Lane, do you have anything further?

No.

Sackett Cook, Menemsha Capital.

I'm trying to understand the seasonality of the insurance broker margins.

I used to cover Marsh a long time ago, and I used to remember that the first quarter tended to be -- to have margins that could be 5 or 6% above what the full-year was.

And given that the business has changed, and you guys have done all this stuff, and contingents are gone, I'm just hoping you can give me some guidance on how seasonality should look.

There still is seasonality, but it's not as severe as that.

I think that the first quarter, particularly in Europe, has a higher percentage of our business placement.

There is much more seasonality in the reinsurance market.

So, I think the first quarter is a little bit heavier.

The third quarter tends to be a little bit lighter.

But other than that, it's really not as pronounced as it was 10 years ago, or even five years ago.

Just in terms of the shares outstanding -- if the average shares diluted is 555 million, what is the actual shares that are outstanding on a fully diluted basis?

Fully diluted ending shares outstanding is 549 million.

Okay.

So, to get the 555 million, how does that work?

It means the share count decreased throughout, and the average is less.

And just in terms of is there any help you can give us as far as thinking about options or other things that are going to come into the numbers?

Is 555 million the number we should use for full year '06, or is there something else that you might want us to consider?

There is nothing on the board.

We've issued our options.

There's nothing on the board which apparently should change that count.

So, there's nothing that we can foresee at this moment that would change that count.

That's probably a number that you should use until and unless something else changes.

Lastly, just on the tax rate;

I'm sorry if you covered this.

But the tax rate in the quarter was good.

And I guess last quarter you -- I think you guys have always kind of said it's a 35% tax rate.

Is that still the way to go, or what should we think there?

I would resume the 35% rate; the difference this quarter was merely a couple of special items.

Thank you all very much.

Thank you, Michele.

Thank you, Brian.

We will see you in a quarter.

That does conclude today's conference call.