Tickers in this Article: MMC, TRV, ACGL, ALL, WSH, BRO, AJG
There is a lot of money at stake when you try to figure out whether a company is just in a temporary rut or on a greased slide down the mountainside. Now I really do not think that any serious investors believe that insurance broker and risk consultant Marsh & McLennan (NYSE:MMC) is in any danger of sliding into irrelevance, but the stock price today does not seem to build in much of a recovery in the future.

The Quarter That Was
MMC's results reflect a simple, ugly reality - the commercial non-life insurance business is pretty lousy right now. Whether you look at Travelers (NYSE:TRV), Arch Capital (Nasdaq:ACGL), Allstate (NYSE:ALL) or pretty much any other player in property/casualty and reinsurance, you see the same theme - weak premiums due to a combination of low demand and ready supply. (For a quick refresher, check out Intro To Property And Casualty Insurance.)

MMC reported that overall revenue rose 6% in the quarter, but underlying (organic) revenue growth was more like 1%, with consulting revenue up about 2%. What growth the company did manage to find was overseas; the U.S./Canada side of the business was down about 4%.

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Looking Ahead To Better Days
Longer term, I am not really that bothered by the soft insurance market. Sooner or later, rates will go back up; insurance is a cyclical business and there is no reason to think that there will not be another upswing eventually. Moreover, MMC provides real value to its clients - not only do they help clients aggregate their insurance spending, but they help customers manage their overall risk exposure and work with them to develop customized solutions.

That is a service that, simply put, the insurance companies cannot or do not want to do. Even if they (the insurance companies) could do it, would the clients trust them? MMC provides a more or less impartial assessment of how to manage and insure risk and I do not believe clients are as concerned about MMC steering them towards products that benefit the seller as they might be in dealing directly with the insurance companies themselves.

On top of that, MMC has strong share in its markets - roughly 30% or so by my calculations. True, it is a competitive industry and rival Willis Group (NYSE:WSH) has been posting better organic growth of late, but I think Marsh has a solid position vis a vis other rivals like Brown & Brown (NYSE:BRO) and Arthur Gallagher (NYSE:AJG). Given that Marsh has agreed to sell its Kroll business, there will be more cash hitting the balance sheet and more opportunities for the company do to strategic deals to further separate itself from its rivals.

The Bottom Line
Now, the company has certainly had problems over the last five years or so - problems stemming not only from cyclical insurance markets and rivals, but from their own fiduciary and regulatory failings. Those mistakes, though, do not seem to have damaged the company's core business, nor have they fundamentally changed what is an attractive market for risk consulting and insurance brokerage. Marsh's customer pool is large and the stakes are sizable.

If you are willing to assume that Marsh can get back to something close to its historical returns on equity over the next five years, the shares are undervalued today and worth a look for patient investors. I, for one, am more inclined to believe that Marsh is on the path back to the performance we saw in the early 2000's, as opposed to the last few years being the "new normal". (For more, see Stock-Picking Strategies: Value Investing.)

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