Inside Value recommendation Marsh & McLennan (NYSE: MMC) had a fourth quarter that wasn't much to write home about. However, new CEO Brian Duperreault, formerly of ACE Ltd. (NYSE: ACE), who took over the helm from former CEO Michael Cherkasky a couple weeks ago, gets a free pass as investors focus on the year ahead.
In the fourth quarter, on an underlying basis (which excludes acquisitions/dispositions and currency fluctuations), total revenue increased a not-too-exciting 2%. Looking at individual business units, risk and insurance revenue was flat at $1.4 billion, and operating income fell to $58 million from $127 million. Revenue in the insurance services unit was a flat 1% on an underlying basis. Insurance markets continue to soften, leading to softer commercial and reinsurance premiums (which we saw when RenaissanceRe (NYSE: RNR) reported) and effectively reducing Marsh's cut of the premiums.
On a more positive note, Marsh's consulting revenues powered ahead 13% on an underlying basis for the quarter versus last year. Mercer and the Oliver Wyman group grew revenues 8% and 22% for the quarter on an underlying basis, which helped boost margins and operating income. Results were boosted by strong performance fees.
In the risk consulting and technology division, weak demand in corporate restructuring hurt Kroll's sales, which showed a 3% drop in underlying sales growth in the fourth quarter. Kroll's sales were hurt by slumping mortgage screening and security consulting sales.
Overall fourth-quarter operating income fell to $165 million from $311 million a year ago, and income from continuing operations fell to $90 million from $168 million, partly because of $59 million worth of restructuring charges.
However, the market shouldn't be surprised that Marsh had a bad year. That's old news, and part of the reason why there's a new CEO in place. Instead, all eyes are on the new CEO. Duperreault said many of the right things during the earnings call. He acknowledged the disappointment Marsh has been to shareholders, and talked about how he joined up because he saw how much latent and unlocked potential the firm has.
Looking forward, Duperrealt has focused Marsh on eliminating duplicate expenses, and using cash to pay down debt and buy back shares. The new CEO of the Marsh unit, Dan Glaser, formerly of AIG (NYSE: AIG) and Willis Group (NYSE: WSH), also spoke of restoring Marsh to its former glory. Dan mentioned that Marsh still has perhaps the strongest client base of all its competitors, and that employee morale and turnover have improved recently.
During the call, the management team spent a lot of time talking about basic blocking and tackling issues, such as customer service, pricing segmentation, and basic cost cutting. In 2008, the name of the game will be margins and organic sales growth. Hopefully, new management will breathe some life into this sleeping giant.
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