John Keeley bought 31,500 shares in the last quarter that ended in 2007. Also, Charles Brandes, Dodge & Cox, Tom Gayner , Brian Rogers, and Arnold Van Den Berg currently own MMC stock. As of the quarter that ended on 9/30/07, Ruane Cunniff and Robert Olstein sold out their MMC holdings.
Chairman & CEO, Marsh of Marsh & McLennan Companies Inc. Daniel S. Glaser bought 66,000 shares on 2/14/08 at $25.87. Director Adele Simmons sold a total of 21,298 shares at $25.16 to $26.32.
MMC is a global professional services firm. Through our subsidiaries, we provide clients with analysis, advice and transactional capabilities across four operating segments:
* Risk and Insurance Services, which includes risk management activities (risk advice, risk transfer and risk prevention and mitigation solutions) as well as insurance and reinsurance broking and services;
* Risk Consulting and Technology, which includes risk consulting and related investigative, quantitative, intelligence, financial, security and technology services;
* Consulting, which includes human resource consulting and related services, and specialized management and economic consulting services; and
* Investment Management, which includes investment management for both individual and institutional investors.
Our approximately 55,000 employees serve a diverse range of clients in more than 100 countries. In our Risk and Insurance Services, Risk Consulting and Technology, and Consulting segments, our worldwide client base includes corporations in numerous industries, small and mid-size businesses, governments and other public entities, not-for-profit organizations and individuals. Our Investment Management business serves both institutional and individual investors, primarily in the United States. We provide financial information about our segments in our consolidated financial statements included under Item 8 of this report.
Risk and Insurance Services
Risk and Insurance Services is MMCâ€™s largest business segment, generating approximately 45% of total operating segments revenue in 2006 and employing approximately 28,000 colleagues worldwide. In this segment, our subsidiaries and other affiliated entities act as brokers, agents, consultants, and advisors for insureds, insurance and reinsurance underwriters and other brokers in the areas of:
* risk management, insurance broking, consulting and insurance program management services, primarily under the name of Marsh ; and
* reinsurance broking, catastrophe and financial modeling services and related advisory functions, primarily under the name of Guy Carpenter .
Marsh and its subsidiaries, primarily organized under Marsh Inc., operate through a global network of approximately 400 offices in over 100 countries. The Marsh companies provide risk management, insurance broking, consulting and insurance program management services to a wide range of businesses, government entities and professional service organizations around the world. Marshâ€™s clients vary by size, industry, geography and risk exposure.
Client Relationships. In its main risk consulting and insurance broking practice, Marsh employs a team approach to address its clientsâ€™ individual risk management and insurance needs. Each client relationship is coordinated by a client executive who assembles the resources needed to analyze, measure and manage the clientâ€™s various risks. The client executive draws from colleagues who specialize in specific industries (e.g., financial services, telecom, life sciences, health care, construction, transportation) and/or risk specialty areas (e.g., property, casualty, workers compensation, environmental, aviation, marine & energy, political risk, financial and professional liability).
Risk Analysis. Marshâ€™s risk and insurance professionals identify, analyze and estimate risks that arise from client operations and assets. These client risks relate to physical damage to property, various liability exposures, and other factors that could result in financial loss, as well as large and complex risks that require access to world insurance and financial markets. Marsh professionals address traditional property and liability risks and a widening range of financial, strategic and operating exposures, including those relating to employment practices, the development and operation of technology resources, intellectual property, the remediation of environmental pollution, mergers and acquisitions, the interruption of revenue streams derived from leasing and credit operations and political risks.
Risk Advice. Marsh advises clients in structuring programs for retaining, mitigating, financing, and transferring risk in combinations that vary according to the clientâ€™s particular needs and circumstances. In addition to insurance, Marsh might help a client develop risk management strategies that include loss-control services (such as business continuity planning, ergonomic and workplace safety programs and loss information management), or alternative risk financing (such as the securitization of risk, the placement of risk with the capital markets and self-insured programs). Marshâ€™s professionals help clients implement their risk management and mitigation strategies by negotiating and executing transactions with the worldwide insurance and capital markets, establishing and managing specialized insurance companies owned by clients (sometimes known as â€ścaptive insurance companiesâ€ť) and implementing various loss-control programs.
Global Consumer Practice and Other Activities. In addition to its main risk management and broking practice described above, Marsh operates a global consumer practice that provides advice, broking and program management services to corporate and association clients globally and to individual and small business clients primarily in the United States. Marsh professionals in this practice design, market and administer a variety of insurance and insurance-related products and services, such as consumer property and casualty programs and life insurance, purchased by an associationâ€™s or professional groupâ€™s members or provided to employees of corporate clients as part of a voluntary payroll deduction program. Other areas of the consumer practice include: private client services, which provides specialized risk and insurance programs to high-net-worth individuals and family offices; Marsh financial services, which offers key-person and executive benefit programs, as well as planning and wealth preservation solutions to affluent individuals; and a small commercial practice, which offers standardized insurance programs to small businesses and franchise operations. Marsh subsidiaries also provide insurance support services such as claims collection, claims advocacy, injury management, claims administration, and other insurance- and risk- related services.
Subsidiaries in the Risk and Insurance Services segment, under various names apart from Marsh, also provide underwriting management services to insurers in the United States and Canada, primarily for professional liability coverages.
Guy Carpenterâ€™s approximately 2,600 professionals around the world provide their clients with reinsurance solutions that include:
* risk management modeling and advice;
* the placement of reinsurance coverage with reinsurance markets worldwide;
* risk-transfer financing in the capital markets;
* contract and claims management; and
* run-off services administration.
Reinsurance is a form of risk transfer that an insurance company or other risk assumption entity (such as a captive insurer or a governmental entity) purchases in order to reduce its exposure to liability on the insurance policies it has written. The purchaser of reinsurance spreads its risk by transferring (or â€ścedingâ€ť) a portion of its underwriting liability to another insurance provider, which is known as the â€śreinsurer.â€ť Reinsurance enables the ceding entity, among other things, to expand its underwriting capacity, stabilize its underwriting results, secure protection against large or unexpected losses, or withdraw from (â€śrun-offâ€ť) a class or line of business in an orderly fashion.
Acting as a broker or intermediary on all classes of reinsurance, Guy Carpenter places two main types of property and casualty reinsurance. Treaty reinsurance involves the transfer of a portfolio of risks. Facultative reinsurance entails the transfer of part or all of the coverage provided by a single insurance policy.
Guy Carpenter also provides reinsurance services in a broad range of specialty practice areas, including accident and health, agriculture, alternative risk transfer, environmental, general casualty, investment banking, life and annuity, marine and energy, professional liability, program manager solutions, property, retrocessional reinsurance (reinsurance between reinsurers), structured risk, surety, terror risk, and workers compensation. In addition, Guy Carpenter provides its clients with numerous reinsurance-related services, such as actuarial, enterprise risk management, financial and regulatory consulting and portfolio analysis. Guy Carpenterâ€™s Instrat Â® unit delivers advanced risk assessment analytics, catastrophe modeling and exposure management tools to assist clients in the reinsurance decision-making process.
Guy Carpenter offers run-off services for inactive clients in North America and elsewhere through Reinsurance Solutions International, LLC and ReSolutions International Limited, respectively. These subsidiaries also offer reinsurance and insurance administration solutions on a fee basis.
Marsh & McLennan Risk Capital Holdings
MMC owns investments in private equity funds and insurance and financial services firms through its subsidiary Marsh & McLennan Risk Capital Holdings (â€śRisk Capital Holdingsâ€ť).
Compensation for Services
Marsh and Guy Carpenter are compensated for brokerage and consulting services primarily through fees paid by clients and commissions paid out of premiums charged by insurance and reinsurance companies. Commission rates vary in amount depending upon the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer, the capacity in which the broker acts and negotiations with clients. For billing and other administrative services, Marsh and Guy Carpenter receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others.
We also receive certain investment-related revenues from Risk Capital Holdings. For a more detailed discussion of revenue sources and factors affecting revenue in our Risk and Insurance Services segment, see Item 7 (â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť) of this report.
Risk Consulting & Technology
MMCâ€™s Risk Consulting and Technology segment generated 8% of total operating segments revenue in 2006. This segment consists of Kroll, Inc . and its subsidiaries.
Kroll has approximately 3,900 colleagues in 27 countries, and also uses a worldwide network of consultants with specialized expertise. Kroll provides a broad range of investigative, intelligence, financial, security and technology services to corporate, government, institutional and individual clients. Kroll develops, markets and delivers consulting-based services and technology-enabled solutions through four business groups:
* Consulting Services;
* Corporate Advisory & Restructuring;
* Security; and
* Technology Services.
Three of Krollâ€™s four business groups, Consulting Services, Corporate Advisory & Restructuring and Security, provide consulting and related services. Krollâ€™s Consulting Services Group provides a wide range of services to help clients mitigate business, financial and physical risks and achieve their legal, operational and financial objectives. This group consists of two primary businesses which operate globally. Business Intelligence & Investigations provides the following services: information gathering and analysis to help clients identify business risks and make informed decisions; conducting investigations to help clients to uncover wrongdoing; litigation support; locating misappropriated assets; and managing programs to protect intellectual property, prevent money laundering and ensure the integrity of vendors. Financial Advisory Services provides a full range of forensic accounting, litigation consulting, and valuation services to help clients uncover fraud, comply with securities and corporate governance regulations, value businesses and assess financial damages for insurance claims and litigation.
The Corporate Advisory & Restructuring Group provides domestic and cross-border professional services with the objective of maximizing the value of financially-troubled companies for the benefit of their stakeholders. Working on behalf of companies or creditors in North America and Europe, this group provides interim and crisis management, operational turnaround, strategic advisory, corporate finance, recovery and restructuring, and liquidation services.
The Security Group serves clients operating in U.S. and non-U.S. locations, including high risk areas of the world, such as multinational corporations, government agencies, high-net-worth individuals, architectural firms, and private and public sector organizations. Services provided by this group include: security consulting; architectural security engineering; outsourced security operations and management; executive protection; high risk environment intelligence and protective services; crisis and kidnap response; travel safety training programs; and training programs for executives, security professionals and military personnel. The Security Group also includes Krollâ€™s U.S. government services business, which conducts security clearance investigations of government personnel and monitors law enforcement agencies and other public and private entitiesâ€™ compliance with federal consent decrees and other government mandates.
Krollâ€™s fourth business group, Technology Services , provides technology-enabled solutions through Kroll Ontrack and Kroll Factual Data, as well as Krollâ€™s Background Screening and Substance Abuse Testing businesses. Kroll Ontrack provides large-scale electronic and paper-based discovery, computer forensics, and data recovery solutions to help companies, law firms, and government agencies quickly and cost-effectively review, manage and produce relevant evidence. Its data recovery solutions are offered in North America, Europe and Asia-Pacific, and its legal technologies solutions are offered in the United States and Canada. Kroll Factual Data offers information services to mortgage and consumer lending businesses, landlords, employers and other business customers in the United States. Krollâ€™s Background Screening business provides employee and vendor background investigations and identity theft services to a wide range of business and non-profit clients worldwide. The Substance Abuse Testing business provides substance abuse testing to corporate, institutional and government clients in the United States, Canada and Europe.
Compensation for Services
Kroll receives compensation in the form of fees paid by clients. These fees are typically earned on an hourly, project, fixed fee or per unit basis. For a more detailed discussion of revenue sources and factors affecting revenue in our Risk Consulting and Technology segment, see Item 7 (â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť) of this report.
MMC conducts business in its Consulting segment through Mercer Inc. and its subsidiaries and affiliates. Consulting is MMCâ€™s second-largest business segment, generating 35% of total operating segments revenue in 2006 and employing approximately 19,800 colleagues worldwide. Mercer operates through two main business groups, each divided into lines of business, as follows:
l Mercer Human Resource Consulting , consisting of the following lines of business:
â€“ Retirement & Investments
â€“ Health & Benefits
l Mercer Specialty Consulting , consisting of the following lines of business:
â€“ Management Consulting
â€“ Organizational Design and Change Management
â€“ Economic Consulting
MANAGEMENT DISCUSSION FROM LATEST 10K
Marsh & McLennan Companies, Inc. and Subsidiaries (â€śMMCâ€ť) is a global professional services firm. MMCâ€™s subsidiaries include Marsh Inc. (â€śMarshâ€ť), which provides risk and insurance services; Guy Carpenter & Company, LLC (â€śGuy Carpenterâ€ť), which provides reinsurance services; Kroll Inc. (â€śKrollâ€ť), which provides risk consulting and technology services; Mercer Inc. (â€śMercerâ€ť), which provides human resource and specialty consulting services; and Putnam Investments (â€śPutnamâ€ť), which provides investment management services. MMCâ€™s approximately 55,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries.
MMC operates in four principal business segments based on the services provided. Risk and Insurance Services includes risk management and insurance and reinsurance broking and services, provided primarily by Marsh and Guy Carpenter. Risk Consulting & Technology, conducted through Kroll, includes risk consulting and related investigative, intelligence, financial, security and technology services. Consulting, which comprises the activities of Mercer Human Resource Consulting and Mercerâ€™s Specialty Consulting Businesses, includes human resource consulting and related services, and specialized management and economic consulting services. We conduct Investment Management through Putnam. Please see Note 18 to the consolidated financial statements, which discusses MMCâ€™s agreement to sell Putnam to Great-West Lifeco Inc. A fuller description of our segmentsâ€™ business activities is included in Part I, Item 1 of this report.
We describe the primary sources of revenue and categories of expense for each segment below, in our discussion of segment financial results. Management evaluates performance based on segment operating income, which reflects expenses directly related to segment operations, but not MMC corporate-level expenses. A reconciliation of segment operating income to total operating income is included in Note 17 to the consolidated financial statements included elsewhere in this report. The accounting policies used for each segment are the same as those used for the consolidated financial statements.
This MD&A contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See â€śInformation Concerning Forward-Looking Statementsâ€ť at the outset of this report.
Significant Developments in 2006
MMCâ€™s historical financial information should be viewed in light of the significant developments discussed below.
As described more fully below, results of operations in 2006 reflect, among other items:
stock option expense under SFAS 123(R) (â€śShare-Based Paymentâ€ť), which MMC adopted effective July 1, 2005. MMCâ€™s 2006 results include stock option expense in each segment for the full year. The 2005 results reflect a charge for six months (from the date of adoption on July 1, 2005) recorded in corporate expenses;
restructuring savings and charges under MMCâ€™s 2005 and 2006 restructuring plans;
the sale of Sedgwick Claims Management Services in the first quarter of 2006, the gain from which appears in discontinued operations;
the sale of Price Forbes, MMCâ€™s U.K.-based wholesale brokerage business in the third quarter of 2006, the loss from which, net of current year earnings, is included in discontinued operations;
* the sale of Kroll Security International (â€śKSIâ€ť), Krollâ€™s international high-risk asset and personal protection division in the fourth quarter of 2006, the gain from which, net of current year operating loss, is included in discontinued operations; and
* the continuing decline in market service revenues in the risk and insurance services segment.
Consolidated operating income in 2006 increased 71% to $1.5 billion, resulting from a 3% increase in operating revenue and a 2% decrease in operating expenses. Revenue increases in consulting and risk consulting & technology were partly offset by decreases in risk and insurance services and investment management. The decrease in operating expenses reflects cost savings from restructuring activities, reduced net restructuring and related charges as well as lower costs related to several significant expense items, discussed in more detail below under â€śConsolidated Revenue and Expenseâ€ť. These expense savings were partly offset by incremental costs, primarily related to stock options under SFAS 123(R).
Results from discontinued operations in 2006 were $172 million net of tax, primarily resulting from the gain on the sale of Sedgwick Claims Management Services in January 2006. In the third quarter of 2006, MMC completed the sale of Price Forbes, its U.K.-based wholesale insurance broker. The loss on the disposal of Price Forbes and net income associated with its 2006 results are included in discontinued operations. The results of Price Forbes were insignificant to MMCâ€™s 2005 results and, therefore, prior year amounts have not been restated. In the fourth quarter of 2006, Kroll completed the sale of Kroll Security International (â€śKSIâ€ť), its international high-risk asset and personal protection division. The gain on the disposal of KSI, and the financial results associated with 2006 and prior periods, are included in discontinued operations.
Consolidated Revenues and Expenses
Consolidated revenue for the year ended December 31, 2006 was $11.9 billion, a 3% increase over the prior year. Higher revenue in the consulting and risk consulting & technology segments was partly offset by lower revenue in the risk and insurance services and investment management segments. Consolidated revenue increased 3% on an underlying basis, which includes the impact of a $71 million reduction in market services revenue.
MMC does business in over 100 countries, as a result of which the impact of foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, the revenue impact of acquisitions and dispositions may affect period-over-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by identifying these impacts
In 2006, risk and insurance services revenue decreased 2% compared with 2005 and was flat on an underlying basis. A 5% increase in underlying revenue in reinsurance services was offset by a 2% decrease in insurance services, partly resulting from a $71 million decline in market service revenue. Risk consulting & technology revenue increased 12% due to growth in Krollâ€™s corporate advisory and restructuring, technology services and security businesses. Consulting revenue increased 11%, resulting from a 19% increase in Mercerâ€™s specialty consulting businesses and an 8% increase in Mercer HR consulting. Investment management revenue declined 8%, primarily due to a decrease in assets under management, partly offset by higher investment gains.
During 2005, revenue in the risk and insurance services segment decreased 10% from 2004. Underlying revenue declined 11%, resulting from a $407 million decline in market services revenue, lower levels of new business and renewals and the impact of lower insurance premium rates. These declines were partly offset by the impact of foreign currency exchange rates. Risk consulting & technology revenue increased $501 million. Due to the acquisition of Kroll in July 2004, results in 2005 include a full year of revenue for Kroll, compared with six months of revenue in 2004. Underlying growth in risk consulting & technology was 22%, due to growth in technology services, corporate advisory and restructuring, and background screening. Consulting revenue increased 4%, resulting from a 19% increase in Mercerâ€™s specialty consulting businesses. Investment management revenue declined 12% as a result of the decrease in assets under management and lower investment income.
Consolidated operating expenses in 2006 decreased 2% from 2005. The decrease in operating expenses reflects cost savings from restructuring activities; a decrease in net restructuring and related charges; lower settlement, legal and regulatory costs related to proceedings involving MMC and certain of its subsidiaries; and lower costs related to employee retention awards, partly offset by higher compensation costs, primarily in the consulting segment due to increased headcount and higher incentive compensation. Expenses in 2006 also reflect lower amortization of prepaid dealer commissions and lower costs related to professional liability claims. Expenses in 2005 include a charge of $37 million for Putnamâ€™s estimate of costs to address issues relating to the calculation of certain amounts previously paid to Putnam by the Putnam mutual funds in the form of cost reimbursements to Putnam for transfer agency services relating to defined contribution operations. These decreases in 2006 were partly offset by higher expenses related to stock options. Due to the adoption of SFAS 123(R) on July 1, 2005, the prior year includes expenses related to stock options for only six months while 2006 includes stock option expense for the full year. In 2006, the costs related to stock options are included in segment results. In 2005, the costs related to stock options are included in Corporate.
Consolidated operating expenses in 2005 decreased 4% from 2004. This was primarily due to savings from restructuring initiatives and lower regulatory and other settlement expenses, partly offset by employee retention costs, the impact of acquisitions, higher benefits costs, and incremental costs, primarily related to stock options, resulting from the implementation of SFAS 123 (R). In addition, Putnamâ€™s expenses in 2005 include a charge of $37 million for the estimated cost necessary to address issues relating to the calculation of certain amounts previously paid to Putnam by the Putnam mutual funds in the form of cost reimbursements to Putnam for transfer agency services relating to defined contribution operations. Expenses in 2004 include an $850 million charge related to the NYAG/NYSID settlement, costs of $224 million related to Putnamâ€™s settlement and agreements with the SEC and Office of the Secretary of the Commonwealth of Massachusetts and restructuring costs of $337 million, partly offset by a $105 million credit from the final insurance settlement related to World Trade Center losses.
Restructuring and Related Activities
MMC initiated restructuring activities in the first quarter of 2005 (the â€ś2005 Planâ€ť) and the third quarter of 2006 (the â€ś2006 Planâ€ť). In 2006 we incurred net restructuring costs of $87 million and related charges of $38 million from actions taken under these restructuring plans. The costs and annualized savings relating to the plans are discussed below.
MMCâ€™s actions under the 2005 Plan are complete. MMC is currently realizing annualized savings of approximately $400 million attributable to the 2005 Plan relating primarily to the risk and insurance services segment. In early 2006, MMC began implementing its plan to eliminate excess space in its corporate headquarters building in mid-town New York (â€śheadquarters buildingâ€ť). Costs related to its headquarters building incurred through June 30, 2006 (approximately $40 million) and savings generated from those actions (approximately $10 million) were recognized as part of the 2005 Plan.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Consolidated operating income in the third quarter of 2007 decreased 20% to $194 million, resulting from a 14% increase in operating expenses partly offset by a 10% increase in operating revenue. The increase in consolidated revenue reflects increases in all business segments, primarily in the consulting segment which increased 14%, reflecting a 9% increase in underlying revenue (as defined below) and the impact of foreign exchange translation. The increase in consolidated expenses reflects generally higher compensation and benefit costs throughout the organization, favorable professional liability experience in 2006, increased advertising, primarily in insurance services, and the impact of foreign exchange translation, partly offset by reduced costs related to restructuring activities.
Consolidated operating income for the first nine months of 2007 increased 1% to $854 million, resulting from a 7% increase in revenue, partly offset by an 8% increase in operating expenses. The increase in consolidated revenue was primarily due to a 14% increase in consulting revenue, reflecting a 9% increase in underlying revenue and the impact of foreign exchange translation. The increase in consolidated expenses reflects higher compensation
and benefit costs, favorable experiences in 2006 relate to professional liability costs, increased advertising, primarily in insurance services, plus the impact of foreign exchange translation, partly offset by reduced costs related to restructuring activities.
On August 3, 2007, Great-West Lifeco Inc. completed its purchase of Putnam, MMCâ€™s investment management segment. The gain on the disposal of Putnam and Putnamâ€™s results of operations through August 2, 2007 and results for prior year are included in discontinued operations in the accompanying consolidated statements of income. In 2006, MMC sold its majority interest in SCMS, Price Forbes and KSI. In 2006, the operating results for these companies, as well as the gain on disposal of SCMS and the charge to reduce the carrying value of Price Forbes to fair value, are included in discontinued operations in the accompanying consolidated statements of income.
Consolidated Revenue and Expense
MMC conducts business in many countries, as a result of which the impact of foreign exchange rate movements may distort period-to-period comparisons of revenue. Similarly, the revenue impact of acquisitions and dispositions may impact period-to-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by isolating these impacts
Consolidated revenue for the 2007 third quarter was $2.8 billion, a 10% increase compared with the same period in the prior year. Consolidated revenue increased 6% on an underlying basis.
Revenue in the risk and insurance services segment for the third quarter increased 6% from the same period in 2006. Underlying revenue increased 2% for the total risk and insurance services segment, reflecting a 4% increase in Reinsurance Services and a 1% decrease in Insurance Services. Consulting revenue increased 14%, resulting from a 11% increase in Mercerâ€™s businesses and 23% growth in Oliver Wyman businesses. On an underlying basis, revenue increased 7% in Mercer, 17% in Oliver Wyman and 9% for the consulting segment in total. Revenue increased 9% in risk consulting & technology, 11% on an underlying basis, primarily due to an increase in Krollâ€™s technology business.
For the first nine months of 2007, risk and insurance services revenue increased 3% from the same period in 2006. Underlying revenue for the segment was flat versus prior year, and excluding the year-over-year impact of market service revenue, underlying revenue increased 1%. Consulting revenue increased 14%, resulting from a 25% increase in Oliver Wyman and a 10% increase in Mercer. Underlying revenue in the consulting segment increased 9%, reflecting increases of 17% at Oliver Wyman and 6% in Mercer. Risk consulting & technology revenue increased 1%, and 2% on an underlying basis.
Consolidated operating expenses in the third quarter and nine months of 2007 increased 14% and 8%, respectively, from the same period in 2006. The increase in operating expenses is due to higher compensation and benefit costs across all operating companies, favorable professional liability experience in the 2006 third quarter, increased advertising, primarily in insurance services, and the impact of foreign exchange translation, partly offset by reduced cost related to restructuring initiatives.
Restructuring and Related Activities
2006 Cost-Savings Initiative
In September 2006, MMC announced a cost-savings initiative related to firm-wide infrastructure, organization structure and operating company business processes (the â€ś2006 Savings Initiativeâ€ť), expected to result in annualized savings of approximately $350 million when fully implemented by the end of 2008, and to entail restructuring and related costs of approximately $225 million. The discussion below identifies the areas impacted and the savings expected as MMC implements the 2006 Savings Initiative.
The first phase of the 2006 Savings Initiative began in September 2006 and is now substantially complete, except for certain actions related to MMC's headquarters building. The first phase is expected to result in cost savings of approximately $160 million, comprised of $70 million from operating company process improvements and $90 million from corporate infrastructure and process improvements in IT, real estate and corporate functions. Through September 30, 2007, MMC incurred total costs of $50 million related to the first phase of the 2006 Savings Initiative, consisting of $17 million of restructuring charges and related charges totaling $33 million. These restructuring charges are net of a $74 million gain on the sale of 5 floors of MMC's New York headquarters building recorded in the fourth quarter of 2006. In the first nine months of 2007, MMC incurred restructuring costs of $7 million and related charges of $19 million, primarily related to accelerated amortization of leasehold improvements. The actions completed under the first phase through September 30, 2007 have resulted in annualized savings of approximately $135 million. The remaining savings under this phase are expected to be realized when MMC leases or sub-leases six remaining floors of its headquarters building.
From now through the end of 2008, MMC expects to implement further cost-savings actions under the 2006 Savings Initiative, focused on infrastructure improvements in information technology, procurement, human resources, finance and real estate. MMC expects the completion of these further activities to result in the level of total gross savings announced in September 2006. Management may redeploy these gross savings within MMCâ€™s corporate infrastructure areas or the operating companies to achieve further infrastructure or processing improvements. MMC will disclose in its financial statements those activities that result in a restructuring plan or exit activity as defined under SFAS 146.
Separate from the 2006 Savings Initiative, Marsh has identified actions that it expects will result in the elimination of 170 employee positions through staff reductions and attrition. These actions are expected to result in annualized savings of approximately $40 million and result in additional charges of approximately $45 million related to severance and exit costs for facilities. Through September 30, 2007 these actions by Marsh have resulted in expected annualized savings of $30 million and charges of $41 million; $27 million of these charges were recorded for the first nine months of 2007.
On August 3, 2007, Great-West Lifeco Inc., a financial holding company controlled by Power Financial Corporation, completed its purchase of Putnam Investments Trust for $3.9 billion in cash. The purchase includes Putnamâ€™s interest in the T.H. Lee private equity business. After the payment of taxes in December 2007, the cash proceeds to MMC after minority interest will approach $2.5 billion. The transaction resulted in a pre-tax gain of $3.0 billion ($1.9 billion after tax), which is included in discontinued operations. Putnamâ€™s results of operations through August 2, 2007 and results for the prior year are included in discontinued operations in the accompanying consolidated statements of income. Putnamâ€™s assets and liabilities are reported as discontinued operations in the accompanying balance sheet at December 31, 2006.
Businesses Exited in 2006
In December 2006, Kroll completed the sale of KSI. The financial results of KSI are included in discontinued operations.
In the first quarter of 2006, MMC determined that Price Forbes, its U.K.-based insurance wholesale operation, met the criteria for classification as a discontinued operation. The 2006 results of Price Forbes, which included a charge to reduce the carrying amount of its assets to fair value less cost to sell, are included in discontinued operations in the accompanying consolidated statements of income. MMC completed the sale of Price Forbes in September 2006.
The sale of SCMS was completed on January 31, 2006, and the associated gain on the sale was recorded in the first quarter of 2006 and included in discontinued operations.
Revenue in the risk and insurance services segment increased 6% in the third quarter of 2007 compared with the same period in 2006, reflecting the positive impact of foreign currency translation and a 2% increase in underlying revenue.
In insurance services, revenue increased 3% from last year on a reported basis and decreased 1% on an underlying basis. Premium rate declines in the commercial insurance marketplace continued to accelerate in the third quarter, contributing to a sequential decline in client retention rates. On a geographic basis, Marsh revenue included $598 million in the Americas, $345 million in EMEA and $96 million in Asia Pacific, compared with $594 million, $329 million and $86 million in the respective geographies in the same quarter of 2006. New business increased for the sixth consecutive quarter.
Reinsurance services revenue increased 5% in the third quarter of 2007 compared to prior year and 4% on an underlying basis, primarily due to continued strong new business. These results were achieved despite a significant decline in U.S. property catastrophe rates as well as higher risk retentions by clients. Revenue increased 4% for the first nine months of 2007 compared to the same period last year, 2% on an underlying basis.
Risk Capital Holdings revenue was $74 million in the third quarter of 2007 compared with $45 million in the prior year. Risk Capital Holdings revenue in the third quarter of 2007 relates primarily to mark-to-market gains on private equity fund investments. No investments were sold in the 2007 third quarter. Based on recent security market levels, revenue for Risk Capital Holdings is expected to be substantially lower in the fourth quarter of 2007 compared with the fourth quarter of 2006 or the third quarter of 2007.
Revenue in the risk and insurance services segment increased 3% for the first nine months of 2007 compared with the same period in 2006. The impact of foreign exchange increased revenue by 3%, while underlying revenue was flat versus prior year. Excluding the year over year impact of market service revenue, underlying revenue for the segment increased 1% versus prior year.
Expenses in the risk and insurance services segment increased 13% in the third quarter of 2007, compared with the same period in the prior year. The increase in expenses reflects the impact of foreign currency translation; incentive compensation accruals for professional staff at Marsh and incremental expenses related to the departure of Marshâ€™s former CEO; the effect of favorable professional liability experience in the third quarter of 2006; and costs associated with Marshâ€™s advertising campaign initiated in the Spring of 2007.
Expenses for the nine- month period in 2007 increased 6% compared with the prior year.
In the first nine months of 2007, charges of $28 million related to the 2006 restructuring plan were incurred.