威達信集團 (MMC) 2006 Q3 法說會逐字稿

Welcome to MMC's conference call.

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

They are available on MMC's Web site at www.MMC.com.

Today's call is being recorded.

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 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 Web site, for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

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

Good morning, and welcome, everyone.

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

I am Mike Cherkasky, President and CEO of MMC.

Joining us today is our new CFO, Matt Bartley and Mike Bischoff, our Head of Investor Relations.

I'm delighted that Matt Bartley has assumed a new leadership role as our CFO.

Matt had previously been MMC Treasurer for the past five years, where he was instrumental in raising our financial profile in the debt markets, marshaling our financial resources, and adjusting our capital structure to meet the changing requirements of the operating companies.

He has an intimate knowledge of the financial dynamics of MMC's operating companies and will be a significant contributor to MMC's continuing financial recovery and growth.

I'm very pleased to have Matt on my executive team.

Welcome, Matt.

I will discuss the key elements of our results in the quarter.

Matt will follow with specific financial information, and then we will take questions.

Before we begin, I want to remind you that we're holding an Investor Day in New York City on Thursday, December 7.

MMC's senior management, including the heads of our six operating companies, will provide insight into our financial performance and metrics, growth initiatives and strategic outlook.

We hope you can join us.

MMC had a good third quarter.

As a company we saw revenue growth of 4%, the highest in the past two years.

We also saw a nearly threefold increase in profitability.

That tells us that the initiatives we have talked about over the last year are working.

Favorable trends in the second quarter continued.

Areas of concern were addressed and have rebounded nicely.

Starting with Marsh, we made real progress in the third quarter.

This year we have been focused on stabilizing our quality revenue and improving our margin.

The third quarter shows clear evidence of success on both fronts.

First, we saw a significant improvement in our revenue trends.

Every major geography improved, reflecting increases in new business and retention levels.

Underlying revenue was flat with prior year, the first time this has occurred in over two years.

This was achieved in a continuing environment of price declines in the property and casualty market.

We had previously indicated that we expected Marsh to move from underlying revenue being slightly down in the first half of the year, to flat to modest revenue growth in the second half.

We are encouraged that the third quarter was consistent with our expectations.

While underlying revenue was flat in the quarter, we saw revenue growth in each of August and September.

If you look at our improving trends on revenue over the last two years, our expectations for modest revenue growth for Marsh in 2007 look reasonable.

New business development is a very important indicator of recovery at Marsh.

After struggling for over a year, Marsh began to realize a resurgence in new business in the second quarter of this year.

In the third quarter, we saw an even greater increase in global new business growth.

We feel we're doing a better job of communicating to our clients the value of Marsh and MMC.

Marsh has now had a full year of stabilization in client retention levels.

This quarter saw a measurable improvement in retention levels from the third quarter of last year.

We're just a few percentage points shy of retention levels we would normally expect in a soft market.

At the same time, Marsh has materially improved its margins, both for the quarter and the year.

On the same revenue base, Marsh has swung from an operating loss in the third quarter of 2005, including restructuring costs, to a meaningful profit.

That was something we needed to accomplish this year, and we have succeeded.

Anyone in this industry can buy short-term revenue growth by acquisition or hires.

The obvious challenge is to have revenue growth and at the same time to expand your margin and net profit.

We believe we will achieve such quality revenue growth next year.

Brian Storms and the leadership team at Marsh are making dynamic changes that will continue to improve the Company's competitive position, enhance growth opportunities, and energize our colleagues.

These include changes in organizational structure, expanded products and services to clients and staff investments.

Brian will talk more about these developments on December 7.

Turning to reinsurance, Guy Carpenter had a solid quarter, in which we grew our revenue in a market where U.S. property catastrophe rates continue to be favorable, but limited reinsurance capacity and higher risk retention by clients reduced revenue opportunities.

Rates on most other lines of business were flat to down.

These market conditions meant that Guy Carpenter's revenue growth came from strong new business.

That, of course, is encouraging.

This new business growth in the third quarter continues the trend that Guy Carpenter has produced throughout 2006.

Dave Spiller believes this third quarter performance of higher revenue and more profit year-over-year reflects the exceptional value Guy Carpenter delivers to clients, and its leadership position in the marketplace.

Guy Carpenter is well-positioned for growth over the next three years.

Overall, we are pleased with the progress we made in the risk and insurance segment.

It remains our goal to have a segment operating margin, excluding noteworthy items and stock options, in the upper teens for 2006.

On this basis, the margins through the first three quarters exceeded 17%.

Turning now to Kroll, the third-quarter results were solid, with good profitability.

The technology business which represents approximately half of Kroll's revenues had solid revenue growth.

Within technology, background screening continued the strong revenue growth that we had seen through the entire year.

In Kroll's consulting services group, our business intelligence and investigation unit also performed particularly well.

After a strong second quarter, corporate advisory and restructuring experienced, as expected, a sequential revenue decline due to the absence of success fees from major restructuring assignments in this quarter, the third quarter.

Turning to Kroll Security, we concluded earlier in the year that despite the high quality of our people and operations, certain of our security activities in high-risk areas such as Iraq and Afghanistan no longer fit our long-term business model.

Therefore, we began an orderly exit from this business.

While all this has negatively impacted our revenue for the year, it had limited impact on our profitability in this quarter.

Kroll remains committed to the delivery of security advice, training, and consulting to governments, corporate clients and high net worth individuals globally.

As we look toward the fourth quarter and 2007, we're confident that Simon Freakley and his Kroll team will maintain their strong operating performance and continue to grow revenue, inside MMC.

Moving on to consulting, Mercer HR made good progress this quarter, experiencing double-digit revenue growth across a broad range of businesses and geographies.

This growth drove increased profits, which Matt will talk more about.

Revenue growth was particularly robust across human capital and investment.

Of special significance, the health and benefits group reported solid revenue growth and is going into the fourth quarter with a strong pipeline.

The U.S. retirement business is beginning to see increased demand as a result of the Pension Protection Act, which we expect will positively impact revenues for the remainder of this year and early 2007 at least.

During the third quarter, Mercer HR took a number of actions to control expenses and increase efficiency, the benefit of which will be realized beginning in the fourth quarter.

We expect these actions to be self funding within a year.

Finally, the transition to Michele Burns has gone very well.

Michele and her team are optimistic about Mercer HR's future prospects of growth and profitability, and so am I.

Mercer Specialty Consulting had another very strong quarter of revenue growth, a continuation of what we have seen over the last three years.

Mercer Oliver Wyman and strategy and operations turned in particularly strong revenue performance.

Mercer Specialty enters the last quarter of the year with a strong backlog in all lines of business.

John Drzik and his team believe the group's operations will continue to grow and perform strongly in the future.

Mercer Specialty has become increasingly important to MMC, as it provides thought leadership to all of our clients and profitable growth opportunities for the corporation.

Now turning to investment management.

Putnam had areas that encouraged us in the third quarter.

Net outflows were approximately $3 billion, about half of the outflows of the second quarter.

Institutional net flows were positive in the quarter, the first time we've experienced that since the third quarter of 2003.

As I mentioned over the past year, and as recently as the second-quarter conference call, we believed Putnam's net redemptions would end by this year-end.

I'm pleased to report that Putnam saw modest, positive net flows for the month of October, and ended the month with assets under management of $187 billion.

This marks the first time in three years monthly flows have been positive.

These results are due in part to better investment performance in a number of asset classes.

As you might expect, sales have slowed in the last weeks as potential customers wait for us to complete our market check.

In conclusion, we said coming into the year MMC would grow its revenue, margin and profit.

Through nine months, we have done that.

We expect to continue those trends in 2007 in a material way.

With that, I will now turn it over to Matt to give you some more detail about the third quarter.

Matt.

Thank you, Mike.

Good morning, everyone.

I hope this is the first of many conversations we have together on MMC and its improving financial performance.

I look forward to building relationships with many of you as we discuss that performance going forward.

Before getting into the specifics of third-quarter results, I would like to offer a general observation.

During the last couple of years, I was well placed to see at close hand just how strong and resilient an enterprise MMC is.

While our financial recovery has been, and continues to be, proof of this strength and resilience, it is not the primary source.

The most important contributors are MMC's exceptional operating franchises and more specifically, the immensely talented and tremendously dedicated front-line and support professionals who know our markets and serve our clients so well.

I am flat out proud to be associated with these businesses and with the people who operate them.

With that as backdrop, I will begin by discussing our third-quarter results, then update you on our current restructuring activities and end with an overview of our financial position.

As Mike just discussed, MMC had a good third quarter across businesses.

Earnings per share from continuing operations were $0.32.

This included $0.06 of net expenses from noteworthy items, which were largely related to restructuring activities.

Looking at last year's third quarter in the same manner, EPS from continuing ops was $0.11, including $0.19 of net expenses from noteworthy items.

Excluding noteworthy items from each period, non-GAAP EPS increased 27% quarter-over-quarter from $0.30 last year to $0.38 this year.

By either measure, whether looking at GAAP or non-GAAP results, MMC's profitability substantially improved this quarter.

Now let me try to add a little bit of color to Mike's comments on the results of our operations, beginning appropriately with Marsh.

In the third quarter, Marsh saw significant improvement in two important drivers of its growth -- new business generation and client revenue retention.

First, new business.

You will recall that Marsh new business in the second quarter increased 8% year-over-year on a global basis.

Because new business is an important component of revenue recovery at Marsh, we are pleased to report that this growth not only continued, but as Mike indicated, accelerated in Q3 with the rate of global new business growth increasing to 11%.

Equally important, strong new business generation was seen across all major geographic regions.

Second, client revenue retention.

We previously noted that on a year-over-year basis beginning with the fourth quarter of 2005, Marsh retention rates have shown measurable improvement.

That trend continued to this quarter with a strong 5 percentage point increase in the year-over-year retention rate.

As Mike noted, Marsh's retention rates have now had a full year of stabilization and are within a few percentage points of the revenue retention levels we would normally expect in a soft market.

Moreover, as with new business, every major geographic region improved its retention rate this quarter, compared with last year.

These positive trends in new business and revenue retention rate enabled Marsh to overcome a softer pricing environment across markets and show flat underlying revenues in the third quarter.

Additionally, it should be noted that MSA revenue in the quarter was only $4 million and year-to-date revenue from MSAs was only $43 million, significantly less than the amounts recorded last year.

If we exclude the effect of MSA revenues on year-over-year comparison, Marsh showed underlying revenue growth of 1% in the third quarter.

Importantly, these encouraging revenue trends were accompanied by increased profitability.

Revenue growth must be profitable, and Marsh has done a very good job this year in that regard.

Excluding noteworthy items and stock option expense, Marsh's third-quarter operating margin expanded by over 400 basis points when measured against prior year.

And year-to-date, Marsh has produced a like measure of margin improvement.

All-in, solid and encouraging results.

For Guy Carpenter, underlying revenue growth in the quarter was 3%, which was primarily driven by double-digit new business growth, continuing a reinsurance broking trend we've seen throughout the year.

This growth was achieved against a backdrop, as Mike mentioned, of limited underwriting capacity and higher client risk retentions, factors that mitigated the revenue benefit of higher rates -- I was going to say in certain insurance lines, but actually it is only higher rates in the U.S. coastal property catastrophe line.

As noted, most other lines are flat to down.

Turning to the last component of our risk and insurance services segment, Risk Capital Holdings revenue of $45 million was unchanged from last year's third quarter.

This was higher than anticipated due to unrealized mark-to-market gains from our Trident investments.

Through the first nine months of 2006, revenues of $119 million compared with $162 million for the same period of 2005, a decline of $43 million or 27%.

We expect and we would caution you to note, that Risk Capital's revenues will likely continue to show some variability quarter to quarter, due to the uncertain timing of private equity returns as well as mark-to-market accounting for unrealized gains or losses.

Where we can, we will look to realize gains opportunistically from this portfolio.

Now stepping back, the overall risk and insurance services segment showed flat underlying revenue in the quarter.

Excluding MSA revenue, underlying grew 1% and as to profitability, because again, revenue must be matched by profitability, operating margin for the first nine months of 2006, excluding noteworthy items and stock option expense was 17.3%, in line with our full-year target for the segment.

This represents an increase of more than 300 basis points from the nine months of 2005 and was wholly attributable to ongoing margin improvement at Marsh.

Even more impressive, this increase was achieved in spite of the fact that the segment had to overcome an unfavorable revenue comparison with 2005 on the order of $85 million -- $43 million from Risk Capital Holdings, and another $42 million in MSA revenue.

Turning to Kroll, our risk consulting and technology segment.

Their revenues rose 4% to $251 million, including double-digit underlying growth in the consulting services group.

Mike provided a fair amount of color on the Kroll operations, so I will only add that segment operating income increased to $37 million, with operating margin holding in the range of 15%.

As Mike indicated, Kroll, having addressed competitive challenges it faced earlier in the year, appears well-positioned for future revenue and profitability growth across its lines of business.

Our consulting segment, which includes the practice groups of Mercer Human Resource Consulting and of Mercer Specialty Consulting, also made good progress this quarter.

Aggregate revenues showed strong underlying growth of 10% quarter over quarter.

On top of solid revenue growth generated during the first half of the year, this produced 9% underlying growth year-to-date.

Breaking this down further, Mercer Human Resource Consulting, which represents roughly three-quarters of segment revenues, generated revenue growth of 10% for the quarter or 7% on an underlying basis, which continued solid year-to-date underlying growth, which was also up 7%.

Growth in the quarter was achieved across the Mercer HR businesses and across geographies led by Europe and Asia-Pacific.

Moreover, as Mike noted, the health and benefits business produced solid revenue growth in the quarter, up 5% on an underlying basis, an improvement which reflects the stabilization of this group inside Mercer HR.

The business has gone through a period of significant change and with the integration process now well completed and a revenue turnaround this quarter, we are encouraged about its future growth prospects.

This strong revenue performance led to improved profitability at Mercer HR.

Excluding noteworthy items and stock option expense, Mercer HR generated double-digit growth in operating income in the third quarter, with expanded operating margins.

At the same time, Mercer's Specialty Consulting, representing something more than one-quarter of the consulting segment, produced double-digit revenue growth in the quarter, which continues the strong growth these businesses have produced over each of the past three years.

Here too, revenues increased across all major lines of business.

In particular, Mercer Oliver Wyman, a leader in financial services and risk management consulting, and in my view, the qualitative leader, grew 21% while the Mercer strategy and operations unit was up 19%.

Turning to operating margins for the overall consulting segment, I should note that investments we have been making to grow these businesses, along with focused restructuring actions taken in this quarter, did reduce year-over-year reported operating margin.

As you will remember, we began selectively investing across these businesses last year, to take advantage of market and competitive opportunities.

As evidenced by the double-digit underlying revenue growth generated by the broad consulting segment in the third quarter, we are seeing the benefits of that strategy.

Turning next to our investment management segment.

Putnam's performance met our expectations for the quarter with some encouraging indicators.

Despite a decline in average assets under management from $195 billion in the third quarter of 2005 to $179 billion in the third quarter of 2006, operating margins improved.

And net redemptions improved from $6 billion in the second quarter of this year to $3 billion in the third quarter.

There was also some improvement in net flows for mutual funds and institutional flows were positive for the first time since the third quarter of 2003.

These encouraging results are due in part to positive investment performance over multiple periods in a number of asset classes.

These include fixed income, some international equity, global asset allocation, certain funds that compete with the S&P 500 and a range of quantitative PanAgora offerings.

We are particularly encouraged by the positive turn in institutional net flows, which reflects recognition of the improvement in Putnam's investment performance by a sophisticated investor base.

Institutional equity assets grew from $32 billion at June 30 to $34 billion at the end of September, while institutional fixed income assets rose from $29 billion to $30 billion over the same period.

In total, institutional assets under management grew from $61 billion at the end of the second quarter to $64 billion by the end of the third quarter.

Now stepping away from operations, let me briefly discuss our tax rate.

The change in our tax rate for the quarter compared with last year reduced EPS by a penny.

For the nine-month period, our tax rate was effectively the same as last year.

Going forward, we do expect continued quarter-to-quarter rate fluctuation as we have seen in the recent past.

We will continue to focus attention on the tax line, where we believe we have the opportunity over time to reduce expense.

Now let me update you on our restructuring activities.

As you know, we announced in September a series of actions to enhance operational efficiencies across MMC and improve profitability.

These actions, identified through a comprehensive review of infrastructure functions -- IT, real estate, HR, finance, legal and compliance -- and operating company business processes, are expected to yield annualized savings of about $350 million by the end of 2008.

To achieve these run rate savings, we expect onetime charges of about $225 million.

These actions will improve the coordination and efficiency of MMC's infrastructure and support functions, will reduce ongoing costs, and most importantly, will enhance the ability of MMC's operating companies to continue to provide exceptional client service.

As a first step, MMC recorded restructuring charges of $41 million in the third quarter.

We will begin to see the savings from these actions in the fourth quarter and will update you each quarter on our progress.

The next item I have to discuss is one that Mike Bischoff has suggested to me and quite a number of investors are interested in.

I find that gratifying because I've spent a lot of time working with this and it's interesting to know that anyone is interested in the difficulties of pension accounting.

But in September, the Financial Accounting Standards Board released Statement No. 158, “Employers Accounting for Defined Benefit Pension and Other Post-Retirement Plans, the most significant element of which is a new going-forward requirement that corporations recognize on the balance sheet, rather than disclose in a retirement's benefit footnote, the aggregate funded status of all pension and post-retirement benefit plans.

And funded status here is measured against an actuarial estimate of the current value of those projected future benefit payments.

MMC will adopt this provision effective for our year-end 2006 financial statements.

The actual impact will of course depend on the value of plan assets and the actuarial estimate of future liabilities as of this year end, and is, you should note, highly dependent on actuarial and economic assumptions.

Fortunately, however estimated, the funded status of MMC plans has improved quite substantially over the past couple of years, which should produce a much smaller year-end reduction in balance sheet equity from this change than we estimated even last year.

Based on current conservative estimates, MMC could see a reduction in prepaid pension asset on the balance sheet of approximately $1.2 billion and an increase in pension liabilities of approximately $300 million, with these adjustments partly offset by deferred tax benefits of about $500 million.

The net of these changes would result in a book equity reduction in the range of $900 million to $1 billion.

Importantly, to give you some context, this accounting change will not have any effect on MMC's cash flow, liquidity, or financial flexibility.

Our bank facility covenants do not require any specific book equity levels.

This accounting change was fully contemplated back when we negotiated those facilities.

Nor does the change -- the accounting change -- affect our public debt.

The credit rating agencies have long considered the funded status of MMC's plans in their ratings evaluation.

And this accounting change certainly does not affect the key credit metrics -- interest, fixed charge and cash flow coverage -- that we and the rating agencies use to assess our credit worthiness.

And those, of course, continued to improve.

Before turning it back to Mike, let me say a few words about MMC's financial position.

MMC's liquidity and cash flow remain strong and continue to improve.

During the third quarter, we paid down approximately $150 million of debt, while cash increased by $300 million -- a bit more than $300 million.

Total net debt, which is total debt less cash and cash equivalents, decreased by more than $450 million during the third quarter to about $3.4 billion.

And we have more than sufficient financial resources to meet debt maturities coming due next year.

I should note that net interest expense declined quarter over quarter from $98 million to $59 million in the current period, primarily due to a $34 million prepayment charge last year that related to the mortgage refinancing of our New York headquarters building.

Finally, I look forward to meeting many of you at MMC's investor day on December 7.

Since invitations have already been sent out, please contact Mike Bischoff or me if you are interested in attending, and have not received an invitation.

With that, I'll turn it back to Mike.

Thank you.

Matt, good job.

Good job for a rookie.

Good job even if you weren't a rookie.

So good job.

Thanks, Mike.

Two concluding points.

First, let me give you an update on Putnam.

Why are we now conducting a market check for Putnam when I previously said it was not for sale?

For two major reasons.

First, in the past several months, we have received serious inquiries from parties interested in acquiring or partnering with Putnam.

Second, MMC is in a more stable operating and financial position, as Matt just discussed, than we were several quarters ago, which gives us more flexibility in looking at Putnam now than we had last year.

That market check is proceeding well so far, and we hope to conclude it by the end of this year.

Second, there have been a number of reports and speculation regarding deals involving MMC and MMC operating companies.

MMC does not comment on such matters.

My perspective is that the value of MMC has been depressed by well-known but solvable problems.

Over the last two years, we have navigated the most challenging times for our great franchise and did the hard work of managing the crisis and then stabilizing the Company.

We believe the road ahead, while not easy, gets progressively smoother.

We have an attractive collection of businesses in great industries and with terrific client relationships.

I firmly believe that our longer-term value will become more evident each quarter.

We like the direction we're headed.

We do not intend to speak further on these two topics today, but we would be pleased to answer any other questions.

With that, I will open it up to questions.

Thank you.

(OPERATOR INSTRUCTIONS).

In the interest of fairness, we ask that you limit yourself to one question and perhaps a follow-up. (OPERATOR INSTRUCTIONS).

Keith Walsh, Citigroup.

Just a couple of questions.

If at first you could just remind us, what are the specific synergies between the brokerage and the consulting unit and if you could quantify those as far as revenues are concerned.

And then, Matt, I apologize if you did mention this -- but if you can just give us some color on the tax rate this quarter, it seems a little light.

Thanks.

Mike, if you want me to take the tax rate question?

Sure.

You will recognize that the tax rate actually, although it was a little bit lower than we have seen historically, it was heavier this quarter than it was last.

We took some restructuring actions that permitted us to release valuation allowances this quarter.

As you know the accounting requires us to take that in immediately.

So that was the reason for the preponderance of the move this quarter.

On your question about the synergies, first, I will start to say that this is a company that has been together for a long time.

And it has been a great historic owner of both companies in the human resource space and companies in the risk space.

That ownership has, but for the last couple of years, has actually done very, very well for our shareholders.

We believe that the two markets that these two companies are in, are in high-demand markets, that have great growth potential in both of those markets.

We also believe, and we see it every day, that we're selling into those same great clients.

The fact that you're selling into a client, even if it is not exactly for the same purpose, is a positive.

The fact that they know MMC from Marsh is absolutely an entree and a positive for our Mercer company and it's absolutely a positive for our Specialty company, and as it is for Kroll.

Those are positives that you can trust this group of people to in fact have the same quality that they have in Marsh in some of our other businesses.

More specifically, in some of our businesses, like in the Health and Benefits business, it is absolutely complementary.

In fact, it is critical that one has enormous content while the other has enormous pipeline.

Also, in the areas of specific risk.

The ability to have high-end risk consulting with the Oliver Wyman people, with very stylized, very sophisticated risk modeling, is in fact helpful to have for the Marsh colleagues.

In so many different ways, they are already present, those kinds of things.

I think that we're also focusing on the future.

We believe that the opportunity that is there because our client needs more sophisticated advice and solutions, makes it even more important in the future than it has been in the past.

Finally, we think that there are, and we just demonstrated it, some real infrastructure efficiencies to be gotten by, in fact, operating these companies together.

As far as measuring it, obviously, having specific measurements of a cross-sell are important.

We have a very terrific team in our IT area, with Joe Varnas in Marsh and Dave Fike in MMC, who are working very, very hard, and I think doing a terrific job of getting us better.

It will take some time though.

It is not done overnight, but we have made enormous progress in that and we're very optimistic about the future.

David Small, Bear Stearns.

If I could just ask a few questions around profitability.

First, could you just tell us what the margin impact of the mark-to-market in the risk and insurance business was for the quarter?

Obviously, all of that profitability is relatively high margin, but we're not going to break it out by particular component.

What is important about that is that there is going to be fluctuation about how much of those earnings actually flow in quarter to quarter.

We saw in this past quarter a little bit more revenue from Risk Capital Holdings than we expected.

But that will probably even out over the quarters as we move forward.

Then the second question, around profitability as well, is, Mike, I think you mentioned during your prepared remarks you're still expecting a high teens margin for the year.

Yet historically, margins have declined seasonally in the fourth quarter.

Should we not be expecting that same seasonal decline for the fourth quarter of '06 given some of the restructurings because I think you said year-to-date you're at a 17% margin the way you're calculating it.

I think there probably has been a historic slight decline, but I don't think it is that material and we're still optimistic that we will be in the upper teens.

We have done it for three quarters.

We kind of talked about that a year ago.

We have done it for three quarters.

We're still optimistic that we will relatively be in the same space.

The last one --

Let me just -- Mike Bischoff is waving his hand at me.

Let me just kind of clarify that for you.

When you say historically, before we made the acquisitions of Johnson & Higgins and Sedgwick, you were absolutely right.

The margins for Risk and Insurance Services in the fourth quarter were the smallest of any quarter, significantly smaller than the first quarter.

However, since those acquisitions, that has not been the case, and the profitability in the fourth quarter would be actually the second-highest of the year in times equal to or slightly higher than the second and the third quarter.

Obviously, over the last two years, we have gone through a lot of changes, but you would not necessarily look to the pattern that you had mentioned on the question.

The last thing was you had mentioned for consulting that you were -- that there were some changes being made there in terms of a focus on expenses.

From about the last year and a half, revenues have -- excuse me, expenses have grown faster than revenues for that division.

Is that something that is going to change in the fourth quarter?

We expect it to change in the fourth quarter.

It was something that obviously was disappointing in the second quarter.

It came to a head there.

We clearly were making investments and we understood we were making investments.

As I’ve said, Matt also said, revenue without profitability is vanity.

We are really focused on that.

And we needed to make some changes.

We have.

We think that we will start to see those changes reflected in the fourth quarter and certainly in 2007.

Tom Cholnoky, Goldman Sachs.

I know, Mike, you don't want to talk about what is going on with Putnam, however, if something were to happen with Putnam, can you give us some idea of what you would do with the proceeds?

No.

To be polite, no.

We really don't think at this particular point it is worth speculating about.

We're doing a market check.

Obviously we have smart people here.

We're going to look at all the different alternatives.

We think we have ideas before we go into these things about “what if” scenarios.

But we're not going to talk about it.

Secondly, investment income in Putnam seemed to jump up in the quarter.

Can you explain what is driving that relative to what it was in the first and second quarters?

Matt, can you explain that?

Let me take that.

There was a bit of an increase in investment income in Putnam, which does come from some of the subsidiary holdings that Putnam has.

Obviously, there are times when we dispose of those interests.

That is what happened in the quarter.

Is that a onetime item?

No, these do recur.

Just as we make seed capital investments periodically, we sometimes take money out of those seed capital investments.

There is quarter-to-quarter fluctuation, but it is ongoing, line of business, not out of the ordinary.

Then I'm sorry, just one last one.

I know I'm breaking the rules a little bit.

Just on the restructuring charges, can you give us kind of a timeline of how those are going to emerge over the next several quarters?

We hope to move as quickly as we can.

Obviously, the actions that we took very, very quickly were ones that had been tee'd up and could be taken with speed.

Some of them just take time.

We do have an expectation that they will be paced through the next couple of quarters.

More than that I couldn't tell you right now or would prefer not to, but we're going to report out to you quarter by quarter.

And again to footnote that we have a December 7th conference, so to the extent that we have more visibility and we will -- we will give it to you, Tom.

Jay Cohen, Merrill Lynch.

Just a couple of questions.

The margin at Putnam looked like it improved quite a bit from the second quarter.

The second quarter, ex items, looked like, I think it was about 19.5%.

Now we're talking 22.5%.

Can you explain why the margins were up so much?

Well, again, part of that does relate to the fact that we did have some additional investment income in the quarter, but generally it's driven by cost containment there in Putnam.

Putnam has been rigorous and attentive and focused on assuring that in an environment when assets under management are declining, it needs to control expenses.

I think what we are seeing is just laser-like focus on that here.

Second question on the tax rate, can you give us some sense of what kind of tax rate we should expect to see going forward?

You mean quarter to quarter?

Yes, because it was 35%.

In the second quarter here it is down to 29%.

And what is a normalized number we should be thinking about going forward?

Because of accounting rules, I'm not really sure you're going to see a normalized number going forward any longer, quite frankly.

We do expect to see volatility or fluctuations in that line.

Obviously, 29.4% or what we had last year, 27%, those are exceptionally low so we would not expect to see those recurring quarter to quarter.

But I also don't believe that we can't be very -- we are going to take actions against the tax line.

We have creative people who work against that line and I think we've got opportunity over time to bring the historical tax rate down.

Was the second quarter -- I don't recall if that was impacted by anything unusual?

The second quarter --?

Of this year, I think it was like 35%, as I recall.

I can't recall offhand if we had anything in there that was unusual going one way or the other.

Jon Balkind, Fox-Pitt Kelton.

Just a quick question on the top line in brokerage and specifically sort of how you think about your over the cycle new business trends versus retention.

Just based on what you said, it seems like the historical retention rates in a soft market are sort of 90, 91 percentage points.

Is that correct, and is that the same across all geographies?

We don't give out those kind of numbers.

We're really not going to comment about that.

We would say to you that they are historically lower than they are in hard markets.

In terms of the new business trends, I know you mentioned that they look pretty good geographically, or broadly, geographically.

Any differences within that sort of general commentary?

I think that they were a little bit stronger in Europe in this quarter than they had been the second quarter.

And accordingly, while they were still up in the United States, they were a little bit weaker in the United States comparatively, but still up over what they had been.

As we said, we're so focused on this for 2005 and into 2006 because it is one of the critical indicators of the rebound.

And so we're real pleased with it.

Lastly, do you characterize the rate environment now as soft or just heading into a softening environment?

We would characterize it with one very noted exception as soft.

Larry Greenberg, Langen McAlenney.

Just following up on that last question, is it possible to quantify what pricing -- industry insurance pricing did to your revenues in the quarter?

Mike.

Generally, we feel about half the level of pricing on our revenue and looking at all the information that Marsh puts together on a quarterly basis, which is very exhaustive, it would be hard to summarize.

But having said that, pricing is down probably mid to high single digits.

So it probably affected our revenues in the neighborhood of 3 to 4 percentage points.

But that is just a general observation.

It is also the case, clearly, as you recognize, this varies geography to geography.

To put some precision around it gets to be very difficult.

Matt is correct.

I think what we have seen over the last year is that pricing in Europe has been quite a bit softer in commercial lines than in the United States.

Can you talk a little bit about your ability in the future, perhaps now, to collect MSAs on agency generated business?

Is that going to turn into any sort of material number?

The MGA business is a business that obviously we asked for and were granted a little bit of a reprieve from our agreement.

We did that because it was important to us.

It is really early to talk about that.

I think that in December you'll have Brian there, and you'll have an opportunity to talk to Brian.

Our business, the Victor O. Schinnerer business is the number one MGA in the U.S. so it is important to us.

But I think I'll let Brian give you the clarity on that in December.

That's fair.

I think Putnam has pretty much been covered.

But it looks like Putnam's revenues as a percentage of average assets went up in the quarter.

And I see the investment income having an impact there.

Is it fair to say there's not any other issues really going on there to help explain that?

Or is there any seasonality in the third quarter for Putnam on that metric?

No, there really isn't, no.

It is the investment income which had some variability quarter to quarter.

Alain Karaoglan, Deutsche Bank.

In the second quarter, the European insurance -- Marsh European business retention was disappointing.

Could you tell us how is it doing now in the third quarter and what you have done to fix it and then I have a follow-up.

It is doing much better.

We had thought and hoped it was a shorter-term problem.

Brian Storms had made a determination to change management in a number of those areas -- we did.

And we had specific issues in France and Italy.

And we made changes that we think were meaningful.

Brian put in a new manager, Alex Moczarski, who is a very, very strong manager.

And that, and I think other hard work that we did, has substantially improved it back to where it really is not an issue anymore.

So we have rebounded.

In terms -- you've done a very good job in focusing on costs and making the operation leaner and with your latest cost reduction to make the organization more productive, more efficient.

But the key going forward, there is going to be revenue growth in order to get back to margins that are as good as Marsh can be and returns on equity that are commensurate with its historical record.

Do you think you can gain market share over the next year or two?

What are you doing to focus on that, on the revenue line, specifically with respect to Marsh?

You're absolutely right, Alain.

We do think we have done a good job of controlling our cost.

I'm going to say something I probably shouldn't say, and people are going to get mad at me around here, but I kind of analogize the cost to hygiene.

We expect that people are going to brush their teeth and take baths.

So I expect our managers to manage the cost structure every day.

It is not an exceptional effort.

This Company is going to get back to the normal managing of cost.

Where the talent has to come in, what people should get paid for, is growing their company.

We think we've done a pretty good job in a number of companies.

Mercer HR is up 10%.

Mercer Specialty is up more than that.

Kroll is up.

We're having substantial up and Marsh has come back, and as Matt said, if you take out MSAs, it's up 1%.

But that is the key, is to continue those trends of growth in Mercer and Kroll and Guy Carpenter and Specialty and now, get Marsh humming.

Brian and his team are absolutely focused on that.

This is something that we're not going to sit still and say, neutral is good enough.

That is not what you're going to see from this Company.

That's not the initiative you're going to see coming out of Brian.

I think that a lot of time is going to be spent in December talking about the specific actions that we have been working to put in place over the last year, six months, that will in fact drive the top-line growth of the Marsh business.

So, again, I'm going to defer to the December date, but you can expect that the things that we have talked about, the things that Brian talked about on the first quarter, the middle market, the broader-based, deeper consulting and advice business in our large clients, the Asian markets.

Those are some of the things that you're going to hear specific plans and benchmarks for us to grow.

Can I add one thing?

And on the consulting side, just to be clear, the consulting businesses have done a very strong job on the top line.

That is both in the specialty businesses and also on HR.

There you see demonstrated revenue growth.

Meyer Shields, Stifel Nicolaus.

Just to clarify, were there -- did the $4 million in MSA revenues include the MGA business?

No.

Okay, so that was not in the quarter.

Can you talk a little bit about how retention has changed over the course of the year?

You gave some information on a year-over-year basis but I'm wondering how it is trending over the course of '06?

Over the course of '06, it is close to 5 percentage points up.

I meant quarter by quarter.

I don't have it quarter by quarter.

We can ask you to call Mike on it.

I just know that over the nine months it's about 5 percentage points.

Sorry I can't give you that detail at the moment.

It does change a bit quarter to quarter but we have seen consistent improvement on a year-over-year basis in client retention rates, which has been a very, very encouraging sign.

That is good.

I will follow up with Mike.

If I can throw another question out -- can you talk -- I guess I'm trying to get a handle on the unwelcome employee departures that you have seen and how that is changing over time?

I think that first, they are better than they were in 2005.

Certainly in the most senior levels, specifically about Marsh, we have a lower rate of people leaving and where people are going are -- less people are going to our competitors.

That is materially.

Those are both good trend lines.

I believe they are actually relatively at historic rates.

Secondly, and I think it is something that has to be said, we're now aggressively hiring in Marsh specifically.

We will have a number of announcements tomorrow about certain hires into Marsh.

The market has turned.

We always were the choice employer.

We think that we're now the choice employer again, and we think that those trend lines -- with really all the other things in the Marsh business.

And that is what I pay attention to.

Trend lines -- our trend lines about retention of clients and retention of our key people are both better.

Is there any chance we can get some numbers for that?

Again, I'm going to defer that to December because we're trying to come up with a package of information that Brian is going to present.

I don't want to put too much -- I don't know that we will give that to you, but let's just hold that till December.

Marc Serafin, Morgan Stanley.

In your prepared remarks, you had -- you noticed some expectations for revenue growth looked reasonable at the brokerage.

Can you quantify that at all for us or can you clarify that you do indeed look for -- are expecting year-over-year revenue growth?

We are expecting year-over-year revenue growth in 2007 -- we are.

Brian, again, will talk about that specifically on December 7.

Just one more if I may, on just cash flow.

Whether the Company comes into cash via some type of transaction or just generates cash organically and over the next year, wouldn't it be fair to maybe set some expectations on what you would expect to do with that cash, be it pay down debt, buy back stock or reinvest it in the business?

Obviously, from what you heard from Matt, and it's a good problem to have -- it is not a problem, obviously.

It is something that is an obligation of ours.

That is again something that we note it.

You note it.

It puts, as I said about, looking at Putnam, the financial performance of the Company, which is better, and the ability to generate cash gives us flexibility.

And I am a cautious person.

Until we saw it, we weren't going to do anything.

We will definitely talk about that in December.

Josh Smith, TIAA CREF.

I guess you got through all the sell-siders.

Congratulations on a stabilizing quarter.

I did want to ask you about your premium projections.

I guess you just said you expect them to be up.

If you've got the headwinds from pricing, it is costing you mid single digits now.

Is that going to come from wins from other competition or just general growth in the economy or how do you position yourself to grow in a softening -- as you would characterize -- a softening insurance environment?

I think it is all those things.

I think that as you said, we think it is a good quarter but you said it's stabilizing.

Certainly in Marsh, it was first stabilize the business.

Look at our trends.

Look at where we were.

We were down 21%, down 21%, starting to come back, down 8%, down 4%, down 2%, down 4%, finally, finally you get even.

So we have stabilized the business.

You had to get there first.

But then it is now looking at what new segments that we have the ability to sell into.

We think that there are enormous opportunities in different segments.

It is the risk consulting business at Marsh that we think there are enormous opportunities in that consulting space.

And absolutely there are takeaways for others who are not as well positioned and cannot do the things that we can do in as seamless and thoughtful a way as we can do it.

So it's a combination of things.

Again, we're going to spend some substantial time in December about that but that is the fast vision.

Matt.

One other thing, Josh, as Mike indicated in his remarks, we're still a couple of percentage points shy of retention rates that we would like to be at in a soft market.

So, even if the market continues to be as soft as it has been, we would expect to see that retention rate improvement, which would give us revenue growth.

Thomas Mitchell, Miller Tabak.

I have been sort of playing with this risk capital, venture capital line that you include in your margin analysis of the insurance brokerage business.

I've got to tell you, you're going to make it a lot easier for yourselves -- for people to understand what you're doing in the business, if you just take it out and separate it, so that you look at the margins without the risk capital.

Have you guys even thought about that?

Historically Risk Capital Holdings has always been a component part of the segment.

We think it is wholly appropriate from an accounting perspective that it is.

We separate it out to give you the clarity around how much that is contributing to the revenue line.

We will continue to be, I suspect, as we go forward in a position where we help to seed investments that assure that there is insurance capacity.

That is what we have historically done and I would not expect us not to do that going forward.

This is a component part of our overall Risk and Insurance Services segment.

We don't want to break it out or treat it as if it is not.

We're going to take two more questions.

David Havens, UBS.

There's been -- with all the news that has been going on recently around the Company, there's been a fairly significant debate in the fixed-income community about how important ratings are to your company.

Could you maybe just enunciate why the investment-grade ratings on your senior debt are so important?

I think that one clearly falls to me, and we have spent a lot of time thinking about this both before and after the events of October 2004.

Our belief is that an investment-grade rating is critical to these businesses.

It provides us with the underlying financial flexibility to grow these businesses and to invest against them when there are market and competitive opportunities.

These businesses, strong as they are today, need to continue to rest on the financial flexibility and support of an investment-grade credit rating in order to continue to grow in their markets.

That is the short answer.

It is also the case that the diversification of our businesses works to help maintain that investment-grade rating.

There's a little bit of a virtuous circle that goes on here because we've got a number of businesses that when they are performing well bolster the credit rating, and the diversification helps us when one or another is struggling.

You have seen that over the past two years.

It is in a way very remarkable that we were able to maintain the investment-grade rating, a true testament to the diversification of our earnings and cash flow, having taken the significant hit that we did in the Marsh segment.

Just a quick follow-up.

Do you think that there are revenues that would leak away if you were to lose that rating?

Again, we have looked at this all different ways.

There are potentially some.

It is hard, a little soft, to actually understand how substantial they are.

But there are some that we think potentially could leak away.

Certainly our experiences of the fall of 2004 when there was a question about what our rating was going to be, caused some clients to the skittish about doing business with us.

So there are some soft and some hard issues here.

Peter Monaco, Tudor.

Thanks for your time.

Could you remind me, please, you said $342 million of saves on a run rate by the end of '08.

As far as I can remember, there have been three separate sort of restructuring our cost save announcements, the first two totaling several hundred million and then the follow-on one announced a couple of months ago.

Where are we in the process of the first two?

Or put more simply, from the current expense run rate, should we expect you to be $342 in saves further by the end of '08?

Let me address the prior restructuring actions first because those are now complete.

The first was the 2004 restructuring plan where we took onetime costs of $340 million and achieved run rate savings of $400 million.

The second was a restructuring plan announced in 2005.

Onetime costs of $400 million, with like savings, run rate savings, which have been achieved, of another $400 million.

The September restructuring that we announced, which is really infrastructure and business operations -- I'm sorry if I said $342 million.

I don't have that level of precision, I'm afraid to say.

We said around $350 million of run rate savings we expect to achieve on onetime costs of about $225 million.

We're part of the way there and are going to continue to report that out to you.

But you're right, that $350 million is by the end of 2008.

By way of follow-up, is any of that going to be reinvested such that the net expense reduction is less than the sum of the three figures that you just gave me?

The answer is yes.

Certainly in talking about that $350 million, and that $350 million in fact has potential to expand some, but some of that is absolutely going to be something that we're going to reduce in one area and invest it in other areas of our Company, both in personnel but also in infrastructure and things that make us better.

So specifically, that one, the answer is yes.

Finally, just switching gears for a moment, understand that you don't want to talk in the hypothetical with respect to use of cash proceeds from possible asset sales.

You did say, however, Mike, that you saw the value of the Company as depressed.

The Company is very cash generative.

You've paid down a fair amount of debt.

The investment-grade rating seems secure.

Why not be buying back some stock here?

We will talk about those issues in December.

Thank you very much, all, for your time.

We appreciate it.

We will see you hopefully all in December.

Have a good day.

That does conclude our conference.

Again, thank you all for your participation.

We hope you enjoy the rest of your day.