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Rating Action on Marsh & McLennan

MMC EHTH

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Fitch Ratings affirmed Marsh & McLennan Companies, Inc.’s (MMC - Analyst Report) issuer default ratings (“IDR”) of “BBB” and senior unsecured debt rating of “BBB” on June 5. The outlook for all ratings remains stable.

The rating affirmation came on the back of strong balance sheet figures, improved operating performance, sound cash position and its efficiency in meeting its debt obligations. The company has been registering good operating numbers and strengthening its credit worthiness since last year.

As of March 31, 2012, the company had cash and cash equivalents of $1.4 billion. It also sustains a multicurrency unsecured revolving credit facility of $1 billion until its expiration in October 2016. Also, there was no further borrowing of funds under this facility until the first quarter of 2012.

For the first quarter ended 2012, the company registered a pre-tax profit margin of 17.4%, up 80 basis points (bps) from the year-ago quarter. Its debt-to-annualized EBITDA ratio and EBITDA-to interest coverage stands at 1.2x and 13.4x, respectively. These impressive numbers helped it gain the rating affirmation from Fitch. The numbers signify the company’s financial flexibility and adroitness in meeting interest payments and other debt obligations.

For the year ended 2011, pre-tax profit margin improved 530 bps year over year to 14.4%. The company’s debt-to-EBITDA ratio was at 1.5x and EBITDA-to-interest-coverage ratio was at 10x.

In 2011, the company paid $400 million towards litigation settlements. It is still recovering from the overhang of large expenses incurred towards business restructuring in an unfavorable operating environment.

The ratings agency expects the financials of the company to remain at its reported level in the short run. If the company continues to perform well in the upcoming quarters, the rating agency may upgrade its ratings.

However, if the debt-to-EBITDA ratio exceeds 3.0x along with EBITDA-to-interest-coverage ratio declining to the low single digits, or if there is an increase in expenditure arising out of litigation or regulatory issues, the ratings would be downgraded by the agency.

Marsh & McLennan pioneers its operational sector with various services offered in the field of insurance brokerage and consulting. The company has a trailing 12-month return on equity (ROE) of 15.44%, almost double compared with the sector average of 7.77% and way ahead of 4.37% for its closest peer Ehealth Inc. (EHTH - Snapshot Report).

The company’s stock prices have been exhibiting an increasing trend over the last four days and now with the ratings affirmation, we expect its share price to increase further.

Marsh & McLennan retains a quantitative Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain a long term Neutral recommendation on the stock.

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