(The following statement was released by the rating agency) Overview
-- New York-based Marsh & McLennan Cos.
(MMC) has reported material improvement in both its business and financial profiles in recent years.
-- As a result of these improvements, we are raising our counterparty credit rating on MMC by one notch to 'BBB' from 'BBB-'.
-- The stable outlook reflects our view that MMC will be able to sustain the improvements in operating results in the coming years.
Rating Action On Oct. 12, 2012, Standard & Poor's Ratings Services raised its counterparty credit rating on Marsh & McLennan Cos. (MMC) to 'BBB' from 'BBB-'. At the same time, we raised the company's short-term rating by one notch to 'A-2' and its senior unsecured debt rating by one notch to 'BBB'. The outlook is stable.
The rating upgrade reflects our improved view of MMC's business and financial profile. In recent years, MMC has made substantial efforts in refining the group's strategy and lowering its operational and financial risks. Among these efforts were the material reduction in debt at the organization, streamlining operations, the divestiture of the underperforming Kroll unit, and an improved operating strategy at Marsh. We believe management's operational and strategic changes have been positive for the organization and are now translating into greater competitive sustainability and tangible performance improvements.
MMC reported robust consolidated organic revenue growth of 6% through the first six months of 2012 and 5% for full-year 2011, supported by favorable new business and retention trends in addition to overall insurance rate stabilization. Although economic weakness has persisted in some of MMC's markets--particularly Europe, the company has notably reported positive organic growth at each of its operating divisions for the past eight consecutive quarters. We believe this achievement speaks to the strength and sustainability of MMC's competitive position and the global diversification present in its respective market segments.
MMC's bottom-line operating results have also displayed material improvement in recent years, fostered by a lack of material charges since the Alaska litigation settlement in second-quarter 2010 and improved operational efficiencies in addition to its favorable revenue growth. Reported pretax operating income showed a significant positive trend at $1 billion for the six months ended June 30, 2012 (a 12% growth rate from the same prior year period), $1.6 billion in 2011, and $939 million in 2010. Its adjusted EBITDA margin has been improved steadily each year, reaching 22% for the first half of 2012. Credit protection measures have similarly strengthened, reflecting a combination of the earnings growth and reduced debt levels. Specifically, Standard & Poor's adjusted total obligations-to-adjusted EBITDA improved to 2.5x as of June 30, 2012 from 3.4x in 2010 and EBITDA fixed-charge coverage increased to 7.7x for the first six months of 2012 from 4.2x in 2010.
MMC's reputation and earnings were pressured in the past decade following a number of legal and regulatory settlements and various restructuring initiatives to streamline operations; and MMC's legacy issues took longer than we had expected to resolve. But we believe the company has successfully retooled its business model and these competitive threats are largely behind the firm. MMC's favorable recent top- and bottom-line results support this view. We also believe the more-conservative operating and financial strategy that MMC has put in place should help it sustain the improvements in operating results.
The counterparty credit rating on MMC reflects its strong competitive position in its risk and insurance services and consulting segments. MMC's competitive strengths are supported by its dominant position as the world's largest insurance broker (according to Business Insurance magazine, based on 2011 brokerage revenues), a well-established and diversified global platform, and extensive and sophisticated product and servicing capabilities. Also supporting the rating, MMC has demonstrated significant improvements in operating performance, with robust growth in revenues, earnings, and margins over the past three years. The company also benefits from good liquidity supported by healthy cash flow generation, a strong cash balance, significant untapped revolver availability, and a favorable maturity schedule.
MMC's rating strengths are offset by its moderately leveraged financial profile. While credit protection measures have been improving in recent periods, its overall capital structure remains a rating weakness. MMC is also susceptible to operating performance volatility, stemming from exposure to global macroeconomic conditions and cyclical insurance pricing. MMC's history of poor results--including significant restructuring, goodwill, and legal/regulatory settlement charges--remains a rating weakness.
The stable outlook reflects our view of MMC's ability to maintain its strong competitive positioning and favorable operating trends in both its brokerage and consulting markets. We expect low- to mid-single digit organic growth for full-year 2012 and 2013 on a continuation of favorable new business and retention trends, helped by rate improvement in certain segments. We also expect the company to maintain EBITDA margins above 20%, bolstered by our belief that MMC will no longer report any further material restructuring or legal settlement charges over the next couple of years. We expect adjusted total obligations to adjusted EBITDA will remain below 3x and EBITDA fixed-charge coverage above 5x.
We would consider lowering the rating over the next 12-24 months if MMC does not meet our performance expectations--particularly if leverage rises above 3x or coverage falls below 5x. Any rising legal or regulatory risk, unsuccessful execution of strategic initiatives, or liquidity erosion would also likely result in a rating downgrade. While another rating upgrade is unlikely in the next 12-24 months, our view could be positively influenced by consistent improvement in MMC's operating and financial profile, favorable organic growth and margins relative to peers and the market cycle, and stability of strategy and staff.
Related Criteria And Research U.S. Insurance Broker Criteria, April 22, 2008 Ratings List Upgraded To From Marsh & McLennan Cos. Counterparty Credit Rating Local Currency BBB/Stable/A-2 BBB-/Stable/A-3 Marsh & McLennan Cos. Senior Unsecured BBB BBB-
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