威達信集團 (MMC) 2007 Q3 法說會逐字稿

Welcome to MMC's conference call.

Third-quarter 2007 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 2007 or subsequent periods are forward-looking statements, and MMC's actual results may be affected by a variety of factors.

Please refer to MMC's most recent SEC filings as well as the Company's earnings release, which are available on the MMC website for additional information on factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

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

Please go ahead, sir.

Welcome, everyone.

Thank you for joining us for MMC's third-quarter 2007 conference call.

I am Mike Cherkasky, CEO of MMC.

Joining us today is our Chief Financial Officer Matt Bartley and Mike Bischoff, our Head of Investor Relations.

Also joining us are Alex Moczarski, who runs the Marsh Europe, Middle East and Africa practices, and Phil Moyles, who runs the Americas for Marsh.

Before we begin, I want to outline how we've structured this call because we are approaching it differently this quarter given all that has happened in the last few weeks.

First, I'm going to ask Matt to discuss MMC's overall financial performance and highlight a few items from the quarter for some of the operating companies other than Marsh.

I will then focus my review on Marsh exclusively.

We recognize that until Marsh performs at an acceptable level, we can not create the value that our shareholders deserve.

We will then take questions on all subjects.

With that, I will turn it over to Matt.

Thank you, Mike, and good morning, everyone.

I plan to begin by summarizing our earnings in the third quarter, then discuss our cash and capital structure, including the proceeds from the sale of Putnam.

I will then turn to the results from our diverse and diversified operating units before handing the call back to Mike for a full discussion of Marsh.

On earnings, EPS on net income was $3.60 in the third quarter.

This includes significantly $3.45 from discontinued operations, primarily the gain on the sale of Putnam.

EPS from continuing operations was $0.15.

There were several discrete items affecting our results for the third quarter and how we view the operating earnings picture.

Let me turn to those.

First, one more item from Putnam.

Putnam's operating results for July amounted to $0.02, which amount is reported in discontinued operations.

Second, noteworthy items, which are highlighted on page 12 of the press release, totaled $29 million in the quarter or about $0.04 EPS impact, which was about half of the impact that we saw last year.

On the tax line, within EPS from continuing operations is an incremental charge for taxes amounting to about another $0.04, reflecting the unfavorable impact of tax rate changes in the UK and Germany, primarily the UK.

This caused our tax rate for the quarter to rise to 47%.

The tax rate from our ongoing operations was 32% in the quarter, and that rate is a more appropriate benchmark for where we see the ongoing tax rate going forward.

Although as I have mentioned before and will caution again, we should expect some variability quarter to quarter on that line.

Noteworthy items do not include $13 million of incremental charges associated with the departure of Marsh's former CEO.

Those charges reduced EPS this quarter by approximately $0.02.

When you total these discrete items, we look at our results from operations for the third quarter of 2007 to be about $0.27.

This compares with $0.38 in the third quarter of 2006.

Obviously these numbers need to be designated as non-GAAP numbers.

Finally, as you saw from our press release, Risk Capital Holdings had incremental revenue of $29 million in Q3 compared with the same period of last year, contributing about $0.04 to EPS.

We expect revenue from Risk Capital Holdings to be substantially lower in the fourth quarter of this year based on recent equity market levels of our portfolio holdings, which, as you know, we report on a mark-to-market basis.

Now let me turn to our financial condition.

First, the Putnam proceeds.

MMC received almost $3.5 billion in proceeds from the sale of Putnam, representing our share of the $3.9 billion aggregate purchase price.

From these proceeds, we paid down more than $1 billion of debt in the quarter as we had indicated we would.

We initiated in the quarter an $800 million accelerated share repurchase program on August 24 when 21.3 million shares were delivered to MMC.

Based on the final average share price during the buying period, we expect between 10 and 12 million additional shares to be delivered to us by the first quarter of next year.

The timing could be a little bit earlier, but our expectation now is in the first quarter.

This transaction followed a separate $500 million transaction that was completed on July 26 also in the quarter, pursuant to which we repurchased 16 million shares in total.

Average diluted shares declined by 18 million from 558 million in Q2 to 540 million in Q3 due to the impact of the two accelerated share repurchase programs.

Let's talk about cash.

At the end of the third quarter, our cash balances increased by $1.7 billion to $2.8 billion as a result of the Putnam transaction and net of the ASR.

Of this amount, approximately $1 billion is earmarked for taxes associated with the gain on the Putnam sale and is expected to be paid out in December.

What does the debt picture look like?

At the end of Q3, total debt was just under $3.9 billion, compared with $4.9 billion at the end of June.

As a result, our debt to capitalization ratio was 36% at the end of the third quarter.

This compares with 46% at the end of 2006 and 51% at the end of each of the prior two years, '05 and '04.

Net debt, perhaps an even better proxy for our capital position, excluding the $1 billion of cash earmarked for Putnam's tax payment, was $2.1 billion at the end of the third quarter.

This results in a net-debt-to-capitalization ratio of 23% at the end of the third quarter compared with 34% at the end of 2006 and 40% at the end of 2005 and 44% at the end of 2004.

These numbers, which are illustrative and proxies, demonstrate a significant and continuing deleveraging of our balance sheet even as we have funded regulatory settlements, restructuring costs, pension contributions and as we have repaid our debt maturities and, in addition, as we have increased our returns of capital to shareholders.

All this is a testament to the strength and predictability and sustainability of our operating cash flows.

That said, we will continue to calibrate and adjust our capital structure to our demonstrated earnings power, and that is the earnings power from our portfolio of diversified businesses and for the component parts.

I did mention pension plans, and I should say in passing that the funded status of those plans, the DB plans primarily in the US and the UK, has increased since the end of 2006.

So, at the end of the third quarter, we were in a position where from on a PBO basis, we were in a surplus position, and that surplus we estimate continues to the current date.

Now let me turn to an operations overview.

Overall revenue growth was strong, growing 10% in the quarter.

This was led by our consulting operations, which reported 14% revenue growth.

Kroll's reported revenue growth was 9%, and our Risk and Insurance Services segment reported 6% growth.

Even factoring out the effects of foreign exchange, underlying revenue growth for all of MMC totaled 6% with the strongest results coming from Mercer, Oliver Wyman and Kroll.

Risk and Insurance Services underlying revenue growth was 2%, and factoring out Risk Capital Holdings and the effect of market service revenues, our combined revenue from insurance and reinsurance broking was flat on a year-over-year basis.

The quarter showed a sequential decline of 2 percentage points from the second quarter with revenue clearly affected by difficult premium rate and competitive conditions across commercial insurance and reinsurance markets.

Now let me focus on the particular units.

Mercer.

Third-quarter revenue growth was strong, 11% on a reported basis and 7% on an underlying basis bringing year-to-date growth for the Mercer businesses to 10% on a reported and 6% on an underlying basis.

These impressive results were achieved across practices and lines of business and across geographies.

The largest practice, Retirement and Investment, with revenue in the quarter of $307 million, or 36% of Mercer's total, had 13% growth.

While the Retirement and Investment operations clearly continued to benefit from increased demand for services as a result of last year's pension reform act in the US, growth was, in fact, achieved encouragingly across all major geographies.

A 13% increase in outsourcing revenue for the quarter to $187 million and a 4% growth in health and benefits revenue to $197 million were led by strong performances, particularly in the Americas.

And the 11% increase in talent revenue, talent encompassing Mercer's human capital practices, to $128 million for the quarter was led by European operations.

In the balance of the consulting reporting segment, strong demand for the specialized consulting services offered by Oliver Wyman continue to pace, even as macroeconomic conditions across the major developed economies showed signs of weakening.

Reported revenue growth was 23% compared with last year's third quarter.

On an underlying basis, revenue growth was 17%.

Year-to-date 25% reported, 17% underlying.

And we are pleased to report that Oliver Wyman continued to improve profitability even as it invests methodically into that revenue growth.

Let's talk just quickly about the consulting segment across the board in summary.

The strong third-quarter results of Mercer and Oliver Wyman led to 14% growth in revenue, 9% underlying, and a 32% increase in operating income for the consulting segment.

This on businesses with more than $3.5 billion of revenue year-to-date headed to $5 billion on an annual basis, which grew 11% on a reported basis last year, 9% underlying.

While some moderation in this stellar revenue growth rate may occur as macroeconomic conditions change, we still expect meaningful growth going forward, and operating margins for the consulting segment improved from 10.5% in the third quarter of last year encouragingly to 12.2% in this year's Q3.

Turning to the Risk Consulting and Technology segment, Kroll.

Underlying revenue growth was a strong 11% in the third quarter, bringing the underlying growth rate for the year to date, which was challenged in the first two quarters, up to 2%.

Revenue growth was led by the Technology segment --Kroll Ontrack, in particular, which represents approximately 25% of Kroll's total revenue.

This increased revenue was driven in particular by strong growth in the legal technology business.

Revenue growth was also encouraging in the background screening area.

Results at Kroll's corporate restructuring business typically lag general economic activity.

And with a robust economic environment in recent years, demand for these services has declined.

However, with the recent difficulties experienced by the credit markets and a softening macroeconomic environment, Kroll anticipates that it will see an increase in demand for corporate restructuring materialize within the next 12 months.

Therefore, Kroll's strategy is to retain and augment key staff.

As a consequence, corporate restructuring's profitability in the short-term has been adversely affected.

We do expect profitability to improve as growth in demand for these services becomes evident.

Finally, turning to Guy Carpenter.

Market softening continued in the reinsurance markets in the third quarter.

US coastal property catastrophe premium rates appeared to peak at the midyear renewals last year.

January renewals of this year saw softening from these peak levels, and July renewals saw an acceleration of this trend.

Additionally the trend towards higher risk retention by our clients continued through the third quarter.

In spite of these extremely difficult market conditions, Guy Carpenter's underlying revenue growth was 4%.

We were very pleased with this performance.

And Guy Carpenter's revenue growth continues to be driven by strong new business development, which is very encouraging.

With that, let me turn it back to Mike.

Thanks, Matt.

Now let's talk about Marsh.

Marsh's third quarter was disappointing and unsatisfactory.

We vividly understand that.

Over the past seven weeks, we have urgently but purposely responded to the issues we face.

We will tell you today how we have begun to design and implement the changes that will return Marsh to acceptable margins and growth.

But let me start with the numbers.

Marsh's reported revenue increased 3% in the third quarter with underlying revenue declining 1%.

New business remains strong with 9% global growth, excluding the effect of foreign exchange.

This was the sixth consecutive quarter of positive new business growth for Marsh.

Geographically, new business increased 14% in the Americas, 7% in Asia-Pacific and 8% in EMEA.

Client retention levels in the quarter declined sequentially from the second quarter, driven by the decline in the retention in the United States and the UK.

Our retention rates through nine months were essentially flat, compared to those in the first nine months of last year.

At the same time, our expenses in Marsh increased substantially year-over-year.

While there are a few material onetime items such as the incremental costs associated with the departure of Brian Storms and others, and what I believe is a necessary increase in bonus accruals, a significant portion of the increase in Marsh was Marsh's centralized corporate costs.

I will discuss that in detail later.

At this point I want to take a step back, give you a better sense of where Marsh was in '05 and '06 and what happened in '07 leading up to my decision to ask Brian Storms to step down as CEO of Marsh.

After the events of late 2004, we took a number of steps to stabilize Marsh, including two major restructurings that were implemented quickly and successfully.

These and other actions we took were the right steps, and by mid-2006 we stabilized Marsh's core business and established a firm foundation on which to grow.

By the second quarter of 2006, our new business picked up and, as I indicated earlier, continued to grow for six quarters.

In addition, during 2006 we saw significant improvement in our retention levels, which increased 5 percentage points over multiple quarters.

Over the last six months of 2006, we also saw organic revenue growth improve, up 1% in the third quarter of 2006 and up 3% in the fourth quarter of 2006, excluding MSAs.

During this period we also saw improvements in the staff turnover levels and that improvement continued through 2007, particularly with client-facing colleagues and key executives.

We also began to be able to attract significant hirers from industry competitors.

So going into 2007, we had both quantitative and qualitative evidence that Marsh's strategy was working and we were executing.

So what happened?

What happened in 2007?

As a result of the positive momentum we thought we had in Marsh, Marsh believed it could implement a series of initiatives aimed at further transforming and growing Marsh.

Focusing first on the United States, this transformation called for investment in state-of-the-art technology, significant marketing campaigns, a comprehensive reorganization of management and office structures, and significant leadership changes in order to capitalize on the momentum we believed we were building.

In hindsight, it is clear that these initiatives, while all individually worthwhile, were too many, too soon for what was still a fragile organization.

Instead of improving performance, the net effect of this total set of initiatives was a significant disruption to our workforce, particularly in the United States, that had significant incremental costs.

To a certain extent, we began to see these negative impacts of these initiatives in the first quarter of 2007 where revenue was below our expectations and even more so in the second quarter of 2007.

In the past few months, it has become increasingly clear that our client-facing colleagues and support staff, particularly in the United States, were distracted from doing their jobs of servicing and selling and had lost faith in Brian Storms' leadership and direction.

At the same time, Marsh's management proved itself to lack discipline when it came to centralized corporate spending.

As these facts became clear to me, I determined Brian needed to be removed from Marsh's leadership job.

Having said that, I must take ultimate responsibility for the failures of Marsh.

I appointed Brian, I supported him, I assessed the initiatives Brian was implementing and then reassessed them as 2007 unfolded.

I have now stepped into Marsh on an interim basis as CEO.

Together with a team of experienced Marsh insurance professionals that Marsh has faith in, we're making key decisions that will get Marsh back on track in short order while we search for a new Marsh CEO.

So, specifically, what are we doing?

First, we identified what was a problem in Marsh and what were not problems.

Many large areas of Marsh are experiencing success.

In Asia-Pacific we have a business with nearly $380 million in revenues over the last 12 months in a region in which we achieved significant growth.

In Latin America we have an industry-leading business which grew 12% to date and had revenues of $225 million over the last 12 months.

In Canada we have a leading presence with $270 million in business.

In Continental Europe, the Middle East and Africa, we have a business with revenues of $930 million over the last 12 months that is producing organic growth in spite of soft market conditions.

Collectively, these businesses had revenues over $1.8 billion, are growing with solid margins.

In addition, our Consumer and Affinity business has nearly 4000 employees, serves more than 7 million customers worldwide, processes nearly 4 million claims and 4.5 million calls.

Revenues are approaching $600 million this year, which we expect to grow close to double-digits in the second half of this year and which we expect to grow to a $1 billion run-rate by the end of 2010 at approximately 20% margin.

And we have a number of other businesses in our Insurance Services sector which are strong and growing.

So much of Marsh is very healthy with acceptable and improving margins and good growth.

So what is the problem in Marsh?

The problems are the performance in the United States risk management and middle market business and to a lesser extent the UK.

These are the businesses that have historically been our greatest strength.

But they are also the businesses that were most dependent on MSAs, the businesses that had to change their business model after the Spitzer issues, and the businesses that were subject to all the recent initiatives.

Secondarily, our problem is Marsh corporate cost.

The most complex and difficult problem is our United States business.

There are some obvious short-term internal issues that are under our control that we will fix this year.

The past management team in Marsh unintentionally made it hard for our professional brokers in the United States to focus on servicing and selling the clients by asking them to operate an overly complex matrix structure and to spend countless hours on all the change initiatives of 2007.

Our brokers need to be allowed to focus on clients, not process.

Where they are focused on clients and not over-managed, like in Latin America, Canada, Asia-Pacific, the Middle East and Continental Europe, we are performing well.

We can and are quickly fixing this problem.

We are doing it now.

Fixing this problem will go a long way to improving revenue retention.

I do want to caution that we see a more fundamental long-term issue, and that has to do with our staffing model.

In today's environment how much will our risk management clients pay for our differentiated expertise?

The answer to that question determines how you staff client assignments.

We need to get that right to return margins to what they historically have been.

This is not a few weeks project, but one we are working on furiously to get right for us and our clients.

So what specific steps have we taken that we believe will begin to fix Marsh's immediate problems?

Over the past several weeks, the Marsh management team has developed a revitalization plan that we will be communicating to our organization starting tomorrow.

The plan has been developed after very intense work and research, including listening to colleagues, clients and our insurance markets.

There are five areas in which we are taking immediate action.

First, leadership and management.

Five weeks ago we restructured the leadership team that is partnered with me to run Marsh.

We worked to put the right people in the right jobs.

They are largely insurance brokers and proud of it.

The three geographic leaders, two of whom are with me today, have over 70 years of insurance experience between them.

They are working together, messaging together and aligned together.

Their roles and responsibilities are clear, and they are accountable.

It sounds simple, but it was not so seven weeks ago.

Second, we're simplifying how we do business.

We will sell, service and count our P&L through our geographies.

Our frontline colleagues will determine how best to service clients, supported by close coordination across our global network to ensure we are bringing the best of Marsh to our clients everyday.

We will move away from having too many people focused on running internally defined businesses and move toward all of our talented client-facing colleagues having direct accountability for generating revenue and servicing clients.

This is what our colleagues and our clients want, and we have listened to that.

As part of making it simpler to do business in and with Marsh, we are optimizing our compliance practices.

Marsh has been very successful in implementing the reforms of 2004.

No one is more committed to the idea than I am personally.

But in some areas, we need to make it easier to do legitimate ethical brokerage.

We will lead the industry in our professional compliance, but it will be simpler, it will be easier and it will be cheaper to navigate for our professionals.

Third, we have decided to concentrate on a narrow set of operational and IT initiatives that will help us focus on driving revenue, improving service to clients and freeing up time for our frontline colleagues to make us more externally focused.

As we focus on initiatives that have the most immediate return, we're turning off and delaying other initiatives.

The fourth area of actions we're taking has significantly reduced the cost of our Marsh central operations.

We have effectively eliminated the corporate marketing and communications group within Marsh, combining it with MMC.

At the same time, we have decided to significantly reduce the amount of investment we made this year in branding and in advertising.

We have combined certain aspects of MMC HR group under the head of Marsh's HR and are reducing our HR costs.

Further, we're turning off initiatives, and they will, in fact, save money.

We have also significantly reduced the amount of other corporate expenses within Marsh and have identified other areas of cost-saving opportunities that we are executing on.

All told, these actions combine $125 million in savings next year.

The costs we are taking out overwhelming are corporate costs and will not impact 2008 revenue generation.

In addition, we expect to have substantial year-over-year savings in pension, benefits and other onetime items.

All-in, including the $125 million mentioned above, we expect to have over $200 million of savings in Marsh year-over-year.

This will be offset to some extent by increased salary and compensation costs as we continue to compete for talent.

But, as I mentioned, we're not stopping here.

We're in the process of reevaluating other aspects of our operating model to improve our ability to service clients but also to improve our cost structure.

We're looking at operational platforms in the US and the UK, as well as reevaluating how we face-off against clients as we simplify our structure.

The fifth action area has to do with how Marsh is compensated for its service.

Since 2004 we have not accepted contingent commissions.

In addition, we're committed to complete transparency and disclosing to our clients all compensation we have received.

Most other brokers, other than Aon, Willis and Gallagher, accept contingent commissions.

This has led to an inequitable and unlevel playing field.

Marsh experienced the impact of that imbalance most acutely in the small commercial and middle market segments where we are competing against midsized and regional brokers that have accepted -- that are accepting contingent commissions.

We're taking appropriate actions to restore Marsh's ability to compete.

In the United Kingdom, Marsh recently instituted a brokerage fee on UK business of approximately 2.5%.

In the United States, we are engaged in discussions with insurance carriers in the middle market and small commercial segments to begin to level the playing field.

Similar to the approach in the UK, we expect to be paid an enhanced commission in these segments of the marketplace.

This enhanced commission will be fixed and will not be contingent or variable in volume, profitability or any other factor.

None of our risk management clients, our Fortune 1000 clients will be impacted by this initiative.

A couple of carriers have agreed in principle with our enhanced commission approach, and we expect them to begin to pay them to us in early 2008.

As in the UK, we're committed to complete transparency.

Thus, the enhanced commission will be disclosed to clients upfront at the time of placement and will be subject to their approval.

At this point we are not in the position to estimate the potential revenue impact from this initiative in the small commercial and middle market in the United States.

These compensation initiatives in the UK and US are consistent with our agreements with regulatory authorities.

We believe it is not only in our interest but in the interest of our clients in the small commercial and middle market segments to ensure that all market participants are able to compete on a level playing field.

In summary, we believe the five actions we're taking -- align new leadership, reducing the number of initiatives, simplifying the organization, targeting cost reductions, and compensation initiatives -- are steps that will make Marsh a better company in 2008.

These changes will not only cut our operating costs, but our alignment and simplification will help us grow revenue as we free up our colleagues' time to service and sell.

We think that the fourth quarter will be better as some of the cost controls begin to take effect.

We believe we can achieve modest revenue growth in 2008 in Marsh led by international and consumer business.

We believe our net expenses will be lower in 2008.

All of that should result in significant margin improvement in 2008 over 2007.

Finally, before we open the call to questions, I want to comment on the Marsh CEO search.

I'm not the permanent solution for Marsh, and we're committed to finding the best leader to move Marsh forward.

Marsh is a great company and deserves the best person we can find.

We have undertaken a comprehensive search and were pleased with the level of interest we have seen.

We're moving forward as quickly as we can to find the right leader for Marsh.

With that, I will open it up to questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Keith Walsh, Citigroup.

Mike, as we are finishing the third year of your tenure here, the key metrics that I think your Company is evaluated on -- brokerage margins, revenues and stock price -- have all taken a step back over that time period.

My first question is, why have we not seen progress on these specific metrics for Marsh while your global broker peers show material progress?

And then secondly, just to be clear, Storms was at Marsh for half your tenure.

If you and your team are unable to show progress over the prior three years, why are you the right person to lead this Company going forward?

And if you ask Brian to step down, why has not the board asked you to step down?

Keith, the margin question I think is -- I think we have kind of talked about the issues that we have.

We have issues in Marsh in the United States business and to a lesser extent the UK business.

Those were our gemstones of this Company, and those were the businesses that were clearly most affected by the MSA issues.

We had to change the business model.

And it is the areas that we put most effort into putting in the new initiatives to get it back to where we needed it to be.

It did not work.

The simple fact is we have had a lot of success in this Company.

When you look across the Company, you have a $5 billion business that is growing double digits and its margin is growing in the '20s.

This quarter 32%.

Enormous success in that.

But we have not had success -- we have some success in other areas of Marsh.

So four of our five businesses are either really, really good or okay.

Our one business, half of that is good, but the other half is not.

And that is absolutely what we have to get right and we have not.

It was Brian's task, and it was my task.

My role as CEO is to look at the business and put the right leaders in the place and then try to help them perform and be successful.

I will tell you, I got it wrong.

I did not help in the critical areas of Marsh in the US and the UK to get that right.

I believe that we are now -- we can get that right.

I think that there is enormous upside for this Company.

The value creation when we get Marsh right in the United States and the UK is tremendous.

I think that that is what our board understands and what I understand.

I think that professional services, change is hard in professional services.

Multiple changes are hard.

You only do it when you need to do it.

I obviously felt at the end of September that we needed to do it.

Now I made that decision.

The board makes the other decision.

I don't make that decision.

The board makes the other decision.

I make the decisions that I need to make the right decisions, and I will tell you also there were certain things that I wanted to be the CEO of Marsh to do.

I wanted to be the CEO to change the compensation model.

I wanted to do some of the, I think hard things that we have done on some of the cost structures.

That was what I owed whoever the new person is who comes into Marsh.

So I think it was appropriate for me who understood the issues with a team working with a group of people, in fact, to do those hard things.

I am confident about going forward, and our board will make the determinations about how it feels about the CEO.

David Small, Bear Stearns.

I just have a quick question about the profitability within risk and insurance.

If I take your adjusted operating income of $81 million, so I take out the restructuring and then add back Mr.

Storms' -- the expense associated with his leaving, that was $94 million.

But then if I take out the related insurance services revenue, which comes in essentially at 100% profit but let's assume 90% profit, that brings down your -- that brings operating income down to about $27 million in the quarter, which means the rest of the business is generating about a 2% margin.

I guess could you help us understand the profitability of Marsh and Guy Carpenter separately?

Well, I can say that Marsh lost money in the quarter, and historically the third quarter is our weakest quarter because of the seasonality of it.

But it lost money without reference to the Brian Storms severance, without reference to some of the other actions that we have taken to put the Company in an appropriate place going forward.

We lost money.

It is not -- Guy Carpenter's profitability is really where we would expect it to be.

Okay.

And then just as a follow-up to that, the middle market initiative that you guys have talked to us about in the past, you have obviously hired quite a few people there over the past year.

Is that one of the initiatives that you will continue to focus on, or is that one of the places where you spent a lot of money and you are going to pare back?

No, I think we're going to continue to focus on it.

I'm going to let Phil Moyles talk a little bit about that.

Good morning.

I'm Phil Moyles.

I have been in the insurance business for 21 years, 20 of that with Marsh.

I have run various operations for the Company, including North America client development and products and services.

I recently took over the Americas about six weeks ago.

As respects the middle market, we intend to continue our dedication to that segment.

We have hired over 40 producers this year.

Obviously when you hire new people, there is a lag effect to the revenue growth you expect to generate.

But we anticipate that in '08 and into '09 that will happen.

So when we take a look at the investments we will make in '08 and '09, middle market is one of the places where we intend to keep our commitments and grow that segment as well as small commercial.

Okay.

Let me just add one last quick question.

Mike, you said over the last few quarters that we should not expect the trend from '04 and '05 where margins declined sequentially quarter after quarter during the year.

I guess in Q4 should the trends we saw in '05 and '06 not happen where margins actually go lower sequentially?

I guess given the stuff you have talked about, you have cut the advertising spending.

You have done some things.

Yes, I will ask Matt to answer that.

No, David, what will happen here clearly the seasonality affects this to some degree and then, on top of that, the onetime items that Mike has referenced.

So sequentially we should certainly see margin improvement in the Risk and Insurance Services segment.

Alain Karaoglan, BofA Securities.

This is David Ho on behalf of Alain.

Could you comment on the Marsh restructuring?

How has that affected your Fortune 1000 larger clients, if any effect?

Also, is that new management team basically internal or coming from outside hires?

Well, the management team, as we commented, we are doing a search that includes everyone for the CEO of Marsh.

The management team that we have pulled together is internal.

They are largely brokers.

So I'm going to let Alex introduce himself just so you get a flavor.

Thank you, Mike.

Good morning.

By way of introduction, I have been in this business for 28 years of which 14 have been with Marsh.

Over the last seven years, I have run the Latin American Caribbean region, ISO which covered Asia-Pacific, Africa, Latin America and Caribbean, and since June of last year Europe, Middle East and Africa.

I don't think that and do not believe that the 1000 top companies that work with us are going to be affected negatively at all by this restructuring.

What we have done is we have simplified the matrix.

And what that allows us to do is to be one, more accountable and two, have a stronger control over our expense line.

By having the three geographic heads who have as Mike said 70 plus years of insurance broking and insurance industry experience, we have it pretty clear as to what insurance clients want from us, what they are prepared to pay for and how to give it to them.

So I am optimistic about and encouraged by the future.

Brian Meredith, UBS.

Two questions here.

First, I wonder if you can talk a little bit more about this enhanced commission approach.

Exactly what is it?

And is there any risk here that by going through with this enhanced commission, that it is going to hurt new business or hurt business retention here going forward?

First, the enhanced commission just again to emphasize, it is not contingent.

It is not variable in any factors.

For example, they are not variable on volume or carrier or profitability.

It is not tiered in any way.

They are fixed.

They are fixed upfront, and we are fully disclosed and subject to approval of our client upfront.

As a result, we think they are consistent with what our standards are in regulatory standards.

But as to the possible effect, what I would actually like to do is talk -- let the two people in the two geographies talk.

Alex?

Well, thank you, Mike.

If I could just go back, at the beginning of the year in the UK in particular, we were beginning to get information that our revenue -- our remuneration was less than our competitors were receiving anecdotally.

So we commissioned an independent study that looked into broker remuneration, and effectively our average returns were lower than the competitors were receiving.

So we looked to see what was the best way to increase our revenues, and we just simply came up with a price raise, which is that 2.5%.

So in all slips to retail business going into the UK market, we are charging that 2.5%.

Now this began as of September 30.

Early signs are that there is very good pickup in the middle market space, and there is less of a pickup right now in the risk management space, which is understandable as they are, first of all, the sums involved are larger, and there's more negotiation with the clients.

However, the general feedback from our clients is an understanding that our results are not up to par and that they need us to have enough revenue to be able to bring in talent, keep talent and motivate talent.

And so I have been encouraged by the signs so far.

Just clearly, are you willing to let accounts go if they are unwilling to expect the enhanced commission?

As we tie this initiative together with our pricing and services, we are prepared to let unprofitable accounts go if there is no chance of making them profitable.

Because clearly the client is not prepared to pay for the type of talents and services that we offer.

Phil, about the United States?

From an United States perspective as Mike mentioned, this will be a fixed base commission.

It will be disclosed.

It should also be noted that this fixed base commission will be only applied to commission-only clients.

So all fee business will not apply, and our Fortune 1000 business will not apply.

The reason for that is simple.

As I mentioned before, we want to make an investment in the middle market and small commercial where we have the best opportunities for growth.

At the present time in the United States, there is not a level playing field.

We have to level that playing field to be successful, and this fixed base commission will be our investment capital so that we can bring in the right talent to grow these two segments, which we will do.

Great and then a follow-up.

Can we talk a little bit about employee retention?

I know that was improving, and you talked about improvement last quarter.

How do things look today?

And obviously it sounds like you're having increased salaries and comp.

Is that just to try to keep people here?

If you could talk about some of the employee morale issues right now and just employee retention issues.

Phil, do you want to talk about employee morale?

I would.

The retention issues in Marsh have been improving over the last year and a half.

That being said, from an employee morale perspective, I would say that the last six weeks it has changed immensely because we are re-empowering our employees to serve clients.

The fact of the matter is our employees felt that the Company had become too centralized, and they could not be as entrepreneurial as they needed to be to meet the needs of their clients.

By re-empowering our people, by lessening the administrative burden of what they need to do day to day, by simplifying the matrix and redeploying management people back to our clients, we believe that our employee morale will continue to improve.

I'm very heartened by what has gone on in this institution over the last six weeks.

I have 20 years of experience within this firm, and I believe we have what it takes to continue to improve that morale and serve clients better and be as competitive as anyone in the marketplace.

Okay.

And on the compensation issue, is that one of the ways to improve morale?

Well, it was clear that we were going to have -- our performance has been sub-par obviously.

And we could not -- this is, we have kind of moved intentionally to a performance culture.

And what should have been the bonus accruals when you performed the way we performed were not acceptable to, in fact, retain people.

So I made the decision in the third quarter to fix a certain amount of bonus accrual that I thought we needed to have to retain our people, to pay in February/March to retain our key Marsh people.

So we, as I said, bit the bullet, and that is part of the difficult third quarter that we have had.

Alex, do you want to add something?

I would just like to add that in the region that I run, as of probably about 12 months ago, we have seen more interest in people calling us up and wanting to join us because they are excited about what is happening than people leaving.

Just quick, on the bonus accrual, was there a catchup in the quarter?

(multiple speakers) -- it really had to do with the -- Matt, do you want to --?

Sorry, Brian, not a catchup but an adjustment to reflect the fact that Mike felt that there was a certain level of bonus that needed to be accrued this year to retain employees, and to account for that, we made the adjustment here in Q3.

Okay.

But normally you would have had that over a four-quarter period, right?

Yes, there is a seasonality to it.

When the bonuses are purely based on performance, our accounting convention is to tie that to the seasonality of our income.

But here once Mike had decided that there was a minimum that was required to be paid to hold people here, the key employees, then we were required and decided to make an adjustment in the third quarter to reflect that.

William Wilt, Morgan Stanley.

Just a series of mostly numbers questions.

Hopefully I can sneak in a few.

Matt, the tax rate in the quarter, is there an ongoing element to that?

I guess you guided to 32% as more normalized.

But it sounded like the tax issues in the UK and Germany could be higher going forward.

Actually, no.

A fair question, but the answer is no.

The tax rate in those jurisdictions came down.

We have deferred tax assets in those jurisdictions, and as a consequence to reflect the now current value of those assets given the lower tax rate, we had to make an adjustment to those balance sheet categories.

But generally because we have other businesses in those jurisdictions that are growing and actually across our businesses, we know our profitability is growing, it is a good fact to see the tax rate in those jurisdictions come down.

It just hit us this one timer.

Got it.

Thank you.

In Kroll, corporate restructuring, that business within Kroll, about what percentage of that does that represent of the total revenue?

Right now it is about 15%.

Obviously that has suffered pretty dramatically as that business has just not been able to pull revenue.

Again macroeconomic conditions have put them in a position where it has been very, very difficult to find the business.

So we expect -- I mean point in time, there is a number, but obviously the expectation is as the macroeconomic conditions change and we are certainly beginning to see RFPs for Kroll that the CARG business will increase as a percentage of the total Kroll portfolio.

That is helpful.

And third in client retention rates, will you disclose your client retention rates?

Your peers do.

I'm sorry.

Are you talking about client revenue retention in Marsh?

Correct.

Well, what we have done in the past and what we will continue to do is talk about where they are relative to what we have seen historically in hard or soft markets, assuming we ever get to a hard market again.

But for soft market conditions, we had indicated that we had last year gottento client revenue retention levels that were within a couple of percentage points of what we had achieved in prior soft market conditions.

As Mike has indicated, we have seen a bit of erosion there.

I would not say material erosion, but we have seen some meaningful erosion '06 to '07 in client retention levels, client revenue retention levels, for all of the reasons that we talked about here today.

That is the determinate.

That is what is driving our revenue disappointment.

We can keep you informed about where we are versus what we have seen historically, but the short answer is we are disappointed with where those levels are today.

Okay.

Then you will not disclose the absolute levels?

We do not talk about that number, no.

Okay.

Great.

How much did you spend on advertising year-to-date '07?

That is the last one.

Thank you.

The last one on Marsh?

I think -- what was it, all-in $30 million of people associated with it, and --

35 is the right number there, and --

Hold on.

We do have a new CFO at Marsh who came about five months, Mark?

Five months, Mark McGivney and one of the things I will tell you is one of the reasons I will have greater confidence is, Mark is directly involved in controlling costs and making sure we understand our expenses.

But it was $35 million for the year.

Chris Neczypor, Goldman Sachs.

I have a question about Guy Carpenter, and then I have a follow-up.

In regards to Guy Carpenter, I was wondering if you could help us understand where you are seeing the growth in that segment, whether you are gaining share, or if it is being driven by Capital Markets type products or something else?

The first thing I think is, do you want to do it?

I'm happy to do it.

You can do everything.

Thanks, Mike.

I appreciate that.

The answer to that question is we are taking share.

Now remember part of the share take is from the directs.

So that is a market where we have got both the brokered market and the direct market, and it is the case that primarily the share that we are gaining is against the directs but also against some of our competitors.

The Capital Markets activity, as you know, has fallen off pretty dramatically in the last year, and so that has not been a driver of new business growth for Guy Carpenter this year at all.

Okay.

Thanks.

And then, Mike, from the picture you are painting, it sounds like the disappointing results in Marsh have in part been due to call it a series of cumbersome initiatives that basically distracted your brokers from keeping their eye on the ball.

I think you mentioned the necessary adherence to matrix structures and other similar burdens that were placed on the client-facing employees.

So I'm wondering how much of these so-called burdensome initiatives were part of the restructuring programs and the changes made in '04, '05 and '06?

And to what extent Brian was able to simply implement these initiatives on his own given the multibillion dollar magnitude of these programs?

I think it really had to do with things that, you know, that we decided to do in the end of '06 and into '07.

It is really overwhelmingly there.

One of the things that has been so disappointing is that this time last year we really were very comfortable about where we were and the fact that we did have momentum.

Because it looked like it.

And yet we were not performing where we needed to perform.

And a decision was made to aggressively make some changes and to put in place some process and IT initiatives and other changes, and it was too much for the organization.

It is a hard judgment to make.

How much you can change and when you have to stop.

And we got it wrong.

But I think that a number of those are relatively quickly able to be fixed, that you can turn them off.

And that is what we're doing.

We're trying not to throw the baby out with the bathwater, because there are a number of things that really are very helpful and will be helpful to our clients.

So we are sorting out those things that we need to do and can afford to do and have our return on investment, are very real-time, and those things that we really cannot.

So I think we have been more thoughtful now in the last seven weeks about what this organization can withstand and what it can do and still perform.

We had gotten that wrong.

May I add something here, Mike.

Yes, because you reference the 2004/2005 restructuring initiatives, it is fair to point out those restructuring initiatives were very successful, and we got the cost takeouts in Marsh on the order of 650, $660 million.

They did not require that the follow-on initiatives that Brian was pushing so hard necessarily followed.

In fact, Brian's perception was it was important to institute these initiatives across the board to grow revenue, which is critically important but not related to the cost takeouts from those '04 and '05 restructurings.

We're trying to get back to -- the reason I'm making this point -- is we're trying to get back to -- we're taking out the incremental expenses that were built up earlier this year and at the end of '06 as Mike indicated, which were completely incremental to the cost base that we had effectively battened down the hatches to in the aftermath of those two restructurings.

We were very disciplined about those costs.

We made a decision to add costs at the end of '06 and into '07, which on reflection was a misjudgment.

And now what we want to do is pull those out and get back to the base which we think is a base that can work with our current revenue line.

Meyer Shields, Stifel Nicolaus.

I guess in the press release and in Michael Cherkasky's comments, you mentioned that declining rate levels are hurting client retention.

I'm not sure I really follow that process.

It is just a revenue issue.

We do not actually count clients per se.

It is the amount of revenue associated with those clients.

So if you have a client X that has $1000 of revenue and the rate goes down 10% and it is $900, that is a 10% decline in revenue associated with those clients.

So that is how I think the industry -- I don't know if it is also uniform -- but that is certainly how we do it and I think generally the industry does it.

Okay.

Could you talk about --?

Excuse me, part of the problem with that is we have a very clear defined -- we have a very clear definition of client revenue, which is exactly that, the revenue year-over-year that we take from our clients across whether it is broking, whether it is risk consulting, but not all of our competitors do that.

Some of them talk about client retention, which is purely the number of clients.

That is a meaningless statistic.

Okay.

If I can turn to employee retention I guess, you talked in the second quarter about how you had actually turned the corner and more client-facing colleagues had joined the firm rather than left.

I'm wondering if you can give us an update specifically following Brian Storms' departure?

I don't think -- I think we're tracking similarly statistically where we were.

I think the key issue will be where are we in February and March honestly.

What happens then when people -- when we pay bonuses.

That is a kind of critical issue.

We feel again -- I think we feel pretty good about what we're doing to make sure that this is a better place to work.

If I can follow up quickly, to the extent that colleagues in, let's say, Oliver Wyman or Mercer or Kroll are compensated through share-based compensation and the stock has not done well, do you have to pay more in cash to keep retention there?

Well, I think we have to look at those things, and that is an issue across the board.

You pay compensation and you think it is a certain -- but what they get is really what you have to look at.

Not what you pay, but what they get.

And we're looking at that hard, and we're trying to be thoughtful and creative.

You know, there are two schools of thought.

One is that MMC has enormous upside, and we want to have compensation in that.

Another thought that it has not performed over the last six years and we really don't.

But we have to be sensitive to that, and we're looking at those issues currently.

But nothing in the third-quarter results?

No, it is not.

And by the way, those businesses they do have cash components, which are healthy enough that it is not that it is not an issue, but the issue is not as great as it might otherwise appear.

Right now we are having very strong retention in Oliver Wyman and in Mercer, client-I mean employee retention.

Thomas Mitchell, Miller Tabak.

When we -- a small exercise that we did before, I will register once again.

I'm urging you to take your venture capital or capital gains or Risk Capital number out of the insurance brokerage margins so that people can understand it more easily.

But when we take the venture capital mark-to-market out and we take out Brian Storms and so forth, and we come up with a number that is about $100 million less in operating profit from the insurance brokerage operations, including Guy Carpenter than it was a year ago.

So what we would like to understand here is, coming up in the fourth quarter, can we expect $50 million less, $60 million less than the year before or more like $20 million less?

I mean is there some way you can quantify this impact of bonus accruals and other things to give us an idea of whether this is a business that on the face of it has gone from making 100 to $150 million a quarter to not making any money all in one quarter?

I mean what -- everything you have said so far sort of does not -- it does not encapsulate the quantity of the decline.

And I think it would be very helpful to investors to get some idea of what is reasonable to expect going forward.

Maybe just in hard dollar terms.

You know this is a business that will make at least $40 million a quarter say.

So I would appreciate any light you could shed on that.

First of all, I hear your comment, and you have made it before and I appreciate it.

I will also tell you obviously you're able to go through the numbers and come out to what I think is the right conclusion, which is that there was a substantial delta change.

We think that is uniquely in the third quarter.

We have done a series of things that have -- like the bonus.

Certainly Brian.

There are other costs that are associated with that.

And there were the costs that were running naturally that will not be there in the fourth quarter and certainly not be there in 2008.

So we think there will be a materially improved performance in Marsh in the fourth quarter.

If I can add something to this.

I do think it -- it is -- we have tried to be clear that the deterioration in operating profit in the quarter, and Mike has made it very clear and I would like to reiterate, this is a quarter issue, is explained by the items that we lay out in the press release.

So Forex was a large component.

The adjustment to the bonus that Mike discussed was a large component.

The particular piece that related to the termination of Brian Storms, those in total account for the deterioration year-over-year that you have identified.

They are specific to this quarter, and they are, therefore, identified.

So let me pull this back into the question that you and David had raised earlier.

What should you expect going forward sequentially?

Well, obviously these are one-timers.

They will fall away.

We will see some continued pressure from Forex, but we understand that and obviously we get the revenue benefit of that.

So this is an isolated issue.

The one issue that will recur going forward and that we need to adjust for, of course, is Risk Capital Holdings.

I do note your point that you would like to see it out of there, but at least it is identified in a way that you can segregate it.

And we also indicated here on the call that we fully expect -- and this will have an impact on the margin.

So the all-in Risk and Insurance Services margin does need to be adjusted by what comes through on the RCH line.

RCH will be significantly down in the fourth quarter from this quarter and probably also from the prior year.

Okay.

So that is very helpful.

So essentially if I were to tell my clients that there is something like $100 million or more in adjustments that are specific to this quarter, I would not be wrong?

You know, I don't think we're going to say anything more than what we said in the press release.

But we certainly think you're on the right track.

Thank you.

I think we will take one more question.

Keith Alexander, JPMorgan.

Just a couple of questions.

Could you tell us the size of the middle and small market business that you have in the brokerage segment?

I am going to turn to the gentlemen in EMEA and the US.

Estimations?

In the United States, the revenue around those two segments is approximately 450 to $500 million.

We will not be able to get a firm number on that until we complete the year.

In the UK it is around $180 million, and in the EMEA, we have a slightly different way of segmenting given both foreign exchange rates and the type of buying style of clients, but I would say it is close to $500 million.

Okay.

And also, could you give us an indication of the size of the UK and the US Marsh business that would be impacted by the plan that you guys are enacting?

(multiple speakers)

Are we talking about the 2.5%?

Yes.

At this moment in time, it is very hard to say because we have not had -- we started on September 30.

We know what we're trying to do this on, but I think it is too early days for us to be able to talk about a success rate.

We will know better.

December is a big month, and January is a big month, and we will be in a better state to see how things happen then.

And I would just tell you that we are going to be cautious on this.

Rightly we have been criticized in some of the areas.

I remember back to 2005 when we had a rate card initiative and we got -- we were not able to do it.

So we are going to report it as it goes.

As it comes in, we will try to tell you how successful we are.

But we're going to do this cautiously.

This is the beginning of something we think levels the playing field, but we're not going to try to estimate how impactful that is.

I do want to thank you all for the time, and we appreciate it.

I obviously did not get to talk about some of the wonderful things that are going on in this Company.

Matt went through them.

This is a strong Company.

It has never been more financially secure I don't think, and it has an absolutely committed management team to creating value for shareholders.

So I look forward to talking to you again.

Thank you very much.

That does conclude our call.

We would like to thank everyone for their participation.

Have a great day.