Marsh & McLennan Companies (NYSE: MMC) is a global professional services holdings company, providing a diversified set of businesses in risk, strategy and human capital. Through its Marsh unit, MMC mainly helps broker insurance deals between insurance companies and their clients, negotiating for the best deal between both sides. The rest of MMC's business lines deal with various types of consulting and risk management services, whereby they provide advice and strategies to help companies achieve certain goals, and receive a fee in doing so. Over the last few years the company has been greatly affected by the stigma of a high-profile legal case regarding bid-rigging, and serious competition from other competitors which has cut into MMC's market share.  MMC generates most of its revenue from Marsh through serving as a middle-man between its clients and insurance providers. 
Net income for MMC over the past four years has been very variable, as the landscape of the insurance industry has been remodeled due to significant regulatory changes in addition to last year's sale of asset-management company Putnam Investments. This in addition to turnover in senior management has caused the returns for shareholders to be quite volatile. Rumors of the company selling off more of its component parts has sparked interest amongst investors when it comes to future prospects for the company. 
MMC is the largest insurance brokerage firm by market capitalization ($13.9 billion), dwarfing its biggest competitors Willis Group Holdings (NYSE:WSH), Brown & Brown Inc. (NYSE:BRO) and Arthur J. Gallagher & Co (NYSE:AJG). The companies' subsidiaries include Marsh, its risk manager and insurance broker, Guy Carpenter a risk and reinsurance specialist, Mercer a human capital consulting firm, Oliver Wyman a management consulting firm and Kroll its investigative and security consulting services arm. 
MMC brings in 49% of its revenue from its risk and insurance segment, 43% from its consulting segment and 8% from its niche risk consulting and technology venture.  Perhaps the biggest contributor to its revenues are risk premiums and regulations. In times of declining premiums in addition to significant settlement fees due to civil suits against insurance companies such as in recent years, this significantly hurts an otherwise relatively stable business.
Nevertheless, between 2006 and 2007, Marsh recording a 50% increase in net income, largely due to the sale of its profitable asset-management company Putnam Investments which sold for an after-tax gain of $1.5 billion. The below data is also significant in that in 2004, net income was so small relative to the following years largely because of settlement fees of $618 million.  These two data points are highly reflective of major drivers on revenues in the insurance brokerage industry of spinning off successful businesses and paying out litigation fees.
The risk and insurance services segment includes MMC's flagship insurance brokerage company Marsh, risk and reinsurance specialist Guy Carpenter, in addition to MMC's Risk Capital Holdings which owns investments in both private equity funds and financial services and insurance firms.
Marsh is composed of brokers, agents and consultants for various insurance players (such as underwriters and insureds) in the areas of risk management, brokering and insurance program management. Marsh's agents develop relationships with various clients and provide risk analysis when it comes to operations and assets, both in traditional areas such as property coverage and liability exposure and less plain-vanilla risk regarding financial, strategic and planning exposures dealing with employment practices, environmental issues, political risk, etc. These services are of course in addition to the traditional broking that Marsh does in trying to bring together clients and insurers. In 2007 Marsh contributed to 40% of MMC's revenues, making it by far the most materially significant part of the firm. Guy Carpenter employees are responsible for providing catastrophe financial modeling and advisory, and reinsurance brokering. Guy Carpenter provides reinsurance services in areas such as accident and health, agriculture, general casualty and investment banking, while also specifically focusing on treaty reinsurance involving the transfer of portfolio risk and facultative reinsurance which involves transferring part or all of the coverage by a single insurance policy. 
The revenue generated from these services is largely attributable to fees paid by clients and commissions paid out by insurance and reinsurance companies.
MMC's consulting businesses include its Mercer firm which deals with retirement and investments, outsourcing, health and benefits and talent. Oliver Wyman provides consulting in the areas of management, economic and brand consulting services.
Mercer provides services in four major areas. There first focus is on strategic options when it comes to building out a retirement plan for a firm. This wing also provides investment management consultation for clients. The second thrust of Mercer's activities deals with helping public and private sector clients develop and implement health and benefits plans. Third, Mercer provides consulting when it comes to talent development and retention. Finally, Mercer consults on administering outsourcing health and benefit plans. 
Oliver Wyman focuses on providing advisory services on operations, risk management, strategy, organizational development and finance and risk for firms in the automotive, financial services and retail and consumer products sectors. 
The consulting business like its risk and insurance counterpart generates revenue from fees paid out by clients for advice and services and commissions received from insurance companies for the placement of various group insurance contracts usually covering health or life insurance.
MMC's risk consulting and technology segment runs under Kroll and its subsidiaries. Kroll focuses on risk consulting in addition to advisory, restructuring and security services for corporations. Kroll also delivers technology-based security products for various firms. Kroll is unique in the business structure of MMC in that in down economies, the firm may provide advisory and assistance when it comes to restructuring or bond defaults. Further, while the restructuring business involves more typical financial advisory for example that an investment banker might provide, the security services business is a wholly different business in that Kroll provides security operations and management for executives, architectural security services, crisis and kidnap response as well as general intelligence and protective services. 
The success of companies in the insurance industry like Marsh is largely predicated on how well-capitalized the companies in the industry are. When companies are well-capitalized, this is an indication that they are collecting fees from premiums while not having to pay out cash due to coverage generally for disasters. This positive capitalization also means that insurance companies will be aggressively pursuing the sales of more plans. The competition to provide insurance coverage however drives down the price of premiums. Alternatively, when there are a series of disasters, or particularly devastating ones like September 11th, this may force companies to pay out significant amounts of their reserves, meaning that companies are less able to provide insurance coverage and thus driving up premiums.  To this end, over the last few years there have been relatively few disasters, even when one factors in the recent storms such as Gustav and Ike which have caused up to $10 billion of damage.  The lower insurance premiums in addition to the movement by many businesses to provide self insurance has further undercut the ability of these major insurance brokerages to generate revenues.
The insurance industry is a radically changing one when it comes to the regulatory framework under which brokerage firms can operate. One of the major areas where this can be seen is in the issue of pricing of insurance plans. During the crusade of Elliot Spitzer, one of the industries he went after was the insurance industry. Marsh was charged with committing fraud and violating certain antitrust agreements through its receiving of illicit payments in the form of market service agreements which supposedly led to the paying out of funds for services Marsh dispensed unjustly. Marsh suffered serious losses in both its share price, and materially in terms of the downgrading of its senior subordinated debt as a result of this, which hurt Marsh's ability to finance in the short term due to higher borrowing costs.  However, perhaps more significantly is the fact that Marsh was essentially forced not to pursue these contracts anymore, while other smaller competitors such as Hilb Rogal continued to be allowed to provide these types of contracts. Given that Marsh had generated $800 million based on these contracts during 2004, it is clear that the losses as a result of not using these contracts any more have been great reputationally and material, and have further hurt them competitively when other companies in the industry can still agree to these contracts. 
Due to the regulatory problems with market services agreements as mentioned earlier, major competitors of Marsh along with Marsh itself were largely at a competitive disadvantage to smaller firms. During June of this last year, firms Willis, Aon and Marsh came to an agreement with the New York Attorney General, Mario Cuomo allowing the major insurance brokers to acquire smaller firms which still used contingent agreements like the market service ones which Marsh used. The Willis Group shortly thereafter the announced settlement acquired one of the aforementioned smaller brokers, Hilb Rogal for $2.1 billion. While under the settlement, commissions from these contracts must be phased out within three years, there is speculation within the industry that this settlement may cause consolidation of the insurance brokerage firms.  In addition on October 9th, 2008, competitor Arthur J. Gallagher announced its acquisition of a smaller insurance broker Fuller & O'Brien Inc.  Given the current market conditions, it is questionable whether there will be significant M&A activity in the short to mid term, but nevertheless as indicated by recenty activity there may be acquisitions for Marsh and its competitors to be had.
Over the last three years, private equity has played an ever-increasing role in the area of the insurance brokers. Private equity has favored brokers for a handful of reasons: vulnerability of the industry due to the Spitzer probes, fragmentation, low capital expenditure requirements for the brokers and relatively stable cash flow for the industry when compared with other more mature industries. Last year for example, Willis through the assistance of KKR was rumored to have made an offer for MMC. Willis itself had been taken private by KKR in 1998, only to go public again in 2001 for a $2.6 billion gain for KKR. With private equity cash sitting on the sidelines given current market conditions, there may be ideal opportunities for private equity purchases of various companies which they can then make more profitable and take public again in the long term. 
Another major industry shift in recent years has dealt with how companies choose to deal with insuring their employees. Many companies have shifted their models by negotiating insurance plans for different types of coverages with different insurers. Since the insurance business is very much relationship-based, if companies like Marsh are not the sole insurance brokers for a company this can lead to significant losses in business. 
The insurance industry generates annual revenues of $85 billion annually. While companies such as MMC, Aon, Willis and Arthur J. Gallagher dominate the sector in size, nevertheless the industry remains highly stratified, with the top 50 companies in size only controlling 20% of the entire marketplace. 
The below comparison is reflective of how diverse this industry is. Even amongst these major brokers there is a significant amount of deviation between the averages of the insurance brokerage industry and these companies. One staggering total is the differences between the companies' on Return on Equity and the Profit Margin. ROE amongst insurance companies is largely predicated on cashflows from underwriting of plans. Equity is used as a cushion against risk which is inherent in the insurance business.  Clearly Marsh has had trouble generating big returns from equity over its last four quarters. In addition, we see great variability in terms of the profit margin of these companies, showing just how diverse the results of these competitors can be. Finally, the quarterly revenue growth and quarterly earnings growth on a year over year basis has shown how difficult the operating environment has been for insurance brokerage firms in recent years given the declining premiums and significant competition from smaller competitors.
|Description||Mkt. Cap||P/E||ROE %||Div. Yield %||Debt to Equity||Price to Book||Profit Margin||Qrtrly Rev Growth YoY %||Qrtrly Earnings Growth YoY % |
|Marsh & McLennan Companies, In||13.91B||7.5||0.2||2.8||0.5||1.8||2.1||9.4||(-60.0)|
|Willis Group Holdings Ltd.||3.42B||9.4||27.5||3.8||1.0||2.4||5.9||6.1||(-48.9)|
|Brown & Brown Inc.||2.54B||14.9||15.6||1.4||0.2||2.2||16.8||(-1.1)||(-22.4)|
|Arthur J Gallagher & Co.||2.22B||20.3||19.3||5.2||0.7||3.1||9.5||0.3||(-1.7)|