Marsh & McLennan Companies Inc. (MMC) reported its fourth quarter adjusted operating earnings of 41 cents per share, a couple of pennies more than the Zacks Consensus Estimate of 39 cents, and also higher than 38 cents reported in the year-ago quarter. Adjusted operating earnings per share, which excludes one-time items in both the periods, increased 22% year over year to $379 million.

With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of top line growth in all lines of businesses, reduced expenses, partially offset by lower investment income along with increased tax expenses.

On a reported basis, Marsh & McLennan witnessed net income of $203.0 million or 37 cents per share in the reported quarter, dramatically up from $23.0 million or 4 cents per share in prior year quarter.

Consolidated revenues were $2.79 billion, up 8.6% year over year and 6% on an underlying basis. This also exceeded the Zacks Consensus Estimate of $2.73 billion.

However, investment income of $19 million declined from $23 million in the year-ago quarter. Besides, total expenses decreased 5.1% year over year to $2.46 billion. Particularly, tax expenses were $106 million against a tax benefit of $57 million in the year-ago quarter.

Segment Results

Revenues for the Risk and Insurance Services segment were $1.5 billion, up 11% year over year and 5% on an underlying basis. However, operating income was significantly higher by 22% year over year at $259 million, reflecting improved performance at Marsh and Guy Carpenter.

Marsh’s revenues were $1.3 billion, up 12% year over year and 6% on an underlying basis. Guy Carpenter’s revenues during the reported quarter were $184 million, up 3% year over year and 3% on an underlying basis. Both Marsh and Guy Carpenter drove the top line on strong new businesses and growth across geography in the quarter.

The Consulting segment’s revenues increased 6% year over year to $1.3 billion. The segment increased 6% on an underlying basis. Besides, adjusted operating income increased 17% year over year to $166 million.

Mercer‘s revenues increased 6% year over year to $910 million and 5% on an underlying basis. Mercer’s consulting operations had revenues of $633 million, up 3% on an underlying basis. Outsourcing revenues grew 5% year over year to $180 million, whereas, investment consulting and management revenues increased 14% year over year to $97 million.

Oliver Wyman’s revenues increased 6% to $399 million in the reported quarter and increased 8% on an underlying basis.

Full Year 2010 Highlights

For full year 2010, Marsh & McLennan reported adjusted operating earnings of $1.64 per share, well ahead of the Zacks Consensus Estimate of $1.61 and the same in 2009.

Adjusted operating income grew 14% year over year to $1.5 billion in 2010. On a reported basis, net income increased to $855 million or $1.55 per share as compared with $227 million or 42 cents per share in 2009.

Consolidated revenues were $10.55 billion, up 7.3% year over year and 6% on an underlying basis. This, however, came in below than the Zacks Consensus Estimate of $10.68 billion. Besides, total expenses increased 6.2% year over year to $9.61 billion.

Financial Update

Marsh & McLennan exited 2010 with cash and cash equivalents of $1.90 billion and long-term debt of $3.03 billion. As of December 31, 2010, Marsh & McLennan had total assets of $15.31 billion and total shareholders’ equity of $6.42 billion.

In December 2010, Marsh Inc. announced that its subsidiary, Marsh & McLennan Agency LLC (MMA) has acquired US-based Trion Group Inc. With about $74 million in annual revenues and Strategic Benefit Solutions, Trion enjoys the 30th position as a privately held employee benefits specialist in the US.

In January 2011, MMA acquired RJF Agencies, one of the largest independent insurance agencies in the upper Midwest. Further, last month, Mercer completed the acquisition of Hammond Associates as decided in November 2010. The acquisition of Hammond will significantly strengthen Mercer’s US investment consulting position in endowments and foundations.

The board of Marsh & McLennan had authorized a $500 million share repurchase program during the third quarter. Out of this, the company repurchased 3.4 million shares for $86 million during the reported quarter.

Dividend Update

On January 20, the board of Marsh & McLennan declared a quarterly dividend of 21 cents per share on its common stock, which is payable on February 15, 2010 to the shareholders of record as on January 28, 2011.

Our Take

The recent acquisitions are crucial for new business generation and client retention, which has been facing substantial declines due to the company’s antitrust litigation charges coupled with a soft pricing environment.

Overall, as a leading global broker, Marsh & McLennan has a history of outperforming its peers due to its size, diverse product offering, global presence and technical expertise. Despite sluggish organic growth, the company is still a dominant player in its industry, quite next to the leading Aon Corp. (AON).

While the Guy Carpenter brand, holding a quarter of the market share, has been improving through cross-selling opportunities, new business production and high retention rates; Mercer’s investment consulting and management wing continues to generate robust growth, contributing to the fundamental strength of the company. We believe a stable economy and improvement in the insurance cycle should help boost both the insurance brokerage and consulting business.

Nevertheless, management aims toproduce long-term growth by maintaining low capital requirements, generate high levels of cash and reduce the company’s risk profile. Moreover, the company continues to deploy capital through dividend payments and share buyback program, thereby injecting confidence among the investors. These factors bode well for growth through 2011.

Currently, Marsh & McLennan carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.

 
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