Edgar Filing: MARSH & MCLENNAN COMPANIES, INC.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

________________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006
Commission File No. 1-5998

Marsh & McLennan Companies, Inc.
(Exact name of registrant as specified in its charter)

Delaware	36-2668272
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1166 Avenue of the Americas New York, New York 10036-2774
(Address of principal executive offices; Zip Code)
(212) 345-5000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $1.00 per share	New York Stock Exchange
Preferred Stock Purchase Rights	Chicago Stock Exchange
	London Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o.

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o No x.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large accelerated filer x   Accelerated filer o Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x.

     As of June 30, 2006, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $14,805,115,605 based on the average of the high and low prices as reported on the New York Stock Exchange.

As of February 16, 2007, there were outstanding 552,775,515 shares of common stock, par value $1.00 per share, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Marsh & McLennan Companies, Inc.’s Notice of Annual Meeting and Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “intend,” “plan,” “project” and similar terms, and future or conditional tense verbs like “could,” “should,” “will” and “would.” For example, we may use forward-looking statements when addressing topics such as: the impact of acquisitions and dispositions; future actions by our management or regulators; the outcome of contingencies; changes in our business strategy; changes in our business practices and methods of generating revenue; the development and performance of our services and products; market and industry conditions, including competitive and pricing trends; changes in the composition or level of MMC’s revenues; our cost structure and the outcome of restructuring and other cost-saving initiatives; and MMC’s cash flow and liquidity.

Forward-looking statements are subject to inherent risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements include:

the economic and reputational impact of litigation and regulatory proceedings concerning our insurance and reinsurance brokerage and investment management operations;
the fact that MMC’s agreement to sell Putnam, announced on February 1, 2007, is subject to a number of closing conditions, some of which are outside of MMC’s control, and we cannot be certain that the transaction will close as planned or that the announced sale price will not be adjusted pursuant to the terms of the sale agreement;
Putnam’s performance between now and the closing of the announced sale later in 2007, including the actual and relative investment performance of Putnam’s mutual funds and institutional and other advisory accounts, Putnam’s net fund flows and the level of Putnam’s assets under management;
our ability to effectively deploy MMC’s proceeds from the sale of Putnam, and the timing of our use of those proceeds;
the fact that our estimate of the dilutive impact of the sale of Putnam on MMC’s future earnings per share is necessarily based on a set of current management assumptions, including assumptions about MMC’s use of sale proceeds and the operating results of Putnam and MMC’s other subsidiaries;
our ability to achieve profitable revenue growth in our risk and insurance services segment by providing both traditional insurance brokerage services and additional risk advisory services;
our ability to retain existing clients and attract new business, and our ability to retain key employees;
revenue fluctuations in risk and insurance services relating to the net effect of new and lost business production and the timing of policy inception dates;
the impact on risk and insurance services commission revenues of changes in the availability of, and the premiums insurance carriers charge for, insurance and reinsurance products, including the impact on premium rates and market capacity attributable to catastrophic events such as hurricanes;
the impact on renewals in our risk and insurance services segment of pricing trends in particular insurance markets, fluctuations in the general level of economic activity and decisions by insureds with respect to the level of risk they will self-insure;
the impact on our consulting segment of pricing trends, utilization rates, legislative changes affecting client demand, and the general economic environment;

our ability to implement our restructuring initiatives and otherwise reduce or control expenses and achieve operating efficiencies, including our ability to generate anticipated savings and operational improvements from the actions we announced in September 2006;
the impact of competition, including with respect to pricing and the emergence of new competitors;
fluctuations in the value of Risk Capital Holdings’ investments;
our ability to make strategic acquisitions and dispositions and to integrate, and realize expected synergies, savings or strategic benefits from, the businesses we acquire;
our exposure to potential liabilities arising from errors and omissions claims against us;
our ability to meet our financing needs by generating cash from operations and accessing external financing sources, including the potential impact of rating agency actions on our cost of financing or ability to borrow;
the impact on our operating results of foreign exchange fluctuations;
potential costs and difficulties in complying with a wide variety of foreign laws and regulations, particularly given the global scope of our operations; and
changes in the tax or accounting treatment of our operations, and the impact of other legislation and regulation, including as to licensing matters, in the jurisdictions in which we operate.

The factors identified above are not exhaustive. MMC and its subsidiaries operate in a dynamic business environment in which new risks may emerge frequently. Accordingly, MMC cautions readers not to place undue reliance on its forward-looking statements, which speak only as of the dates on which they are made. MMC undertakes no obligation to update any such statement to reflect events or circumstances after the date on which it is made.

Table of Contents

Information Concerning Forward-Looking Statements			i

PART I
	Item 1 —	Business	1
	Item 1A —	Risk Factors	17
	Item 1B —	Unresolved Staff Comments	24
	Item 2 —	Properties	24
	Item 3 —	Legal Proceedings	24
	Item 4 —	Submission of Matters to a Vote of Security Holders	24
PART II
	Item 5 —	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
		Purchases of Equity Securities	25
	Item 6 —	Selected Financial Data	26
	Item 7 —	Management’s Discussion and Analysis of Financial Condition and Results of
		Operations	27
	Item 7A —	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 8 —	Financial Statements and Supplementary Data	50
	Item 9 —	Changes in and Disagreements with Accountants on Accounting and Financial
		Disclosure	104
	Item 9A —	Controls and Procedures	104
	Item 9B —	Other Information	107
PART III
	Item 10 —	Directors and Executive Officers of the Registrant	107
	Item 11 —	Executive Compensation	107
	Item 12 —	Security Ownership of Certain Beneficial Owners and Management	107
	Item 13 —	Certain Relationships and Related Transactions, and Director Independence	110
	Item 14 —	Principal Accounting Fees and Services	110
PART IV
	Item 15 —	Exhibits, Financial Statement Schedules	110
Signatures			115

iii

MARSH & McLENNAN COMPANIES, INC.

__________________________

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2006
__________________________

PART I

ITEM 1. BUSINESS.

References in this report to “we”, “us” and “our” are to Marsh & McLennan Companies, Inc. (“MMC”) and one or more of its subsidiaries, as the context requires.

GENERAL

MMC is a global professional services firm. Through our subsidiaries, we provide clients with analysis, advice and transactional capabilities across four operating segments:

Risk and Insurance Services, which includes risk management activities (risk advice, risk transfer and risk prevention and mitigation solutions) as well as insurance and reinsurance broking and services;
Risk Consulting and Technology, which includes risk consulting and related investigative, quantitative, intelligence, financial, security and technology services;
Consulting, which includes human resource consulting and related services, and specialized management and economic consulting services; and
Investment Management, which includes investment management for both individual and institutional investors.

Our approximately 55,000 employees serve a diverse range of clients in more than 100 countries. In our Risk and Insurance Services, Risk Consulting and Technology, and Consulting segments, our worldwide client base includes corporations in numerous industries, small and mid-size businesses, governments and other public entities, not-for-profit organizations and individuals. Our Investment Management business serves both institutional and individual investors, primarily in the United States. We provide financial information about our segments in our consolidated financial statements included under Item 8 of this report.

OUR BUSINESSES

Risk and Insurance Services

Risk and Insurance Services is MMC’s largest business segment, generating approximately 45% of total operating segments revenue in 2006 and employing approximately 28,000 colleagues worldwide. In this segment, our subsidiaries and other affiliated entities act as brokers, agents, consultants, and advisors for insureds, insurance and reinsurance underwriters and other brokers in the areas of:

risk management, insurance broking, consulting and insurance program management services, primarily under the name of Marsh; and
reinsurance broking, catastrophe and financial modeling services and related advisory functions, primarily under the name of Guy Carpenter.

Marsh

Marsh and its subsidiaries, primarily organized under Marsh Inc., operate through a global network of approximately 400 offices in over 100 countries. The Marsh companies provide risk management, insurance broking, consulting and insurance program management services to a wide range of businesses, government entities and professional service organizations around the world. Marsh’s clients vary by size, industry, geography and risk exposure.

Client Relationships. In its main risk consulting and insurance broking practice, Marsh employs a team approach to address its clients’ individual risk management and insurance needs. Each client relationship is coordinated by a client executive who assembles the resources needed to analyze, measure and manage the client’s various risks. The client executive draws from colleagues who specialize in specific industries (e.g., financial services, telecom, life sciences, health care, construction, transportation) and/or risk specialty areas (e.g., property, casualty, workers compensation, environmental, aviation, marine & energy, political risk, financial and professional liability).

Risk Analysis. Marsh’s risk and insurance professionals identify, analyze and estimate risks that arise from client operations and assets. These client risks relate to physical damage to property, various liability exposures, and other factors that could result in financial loss, as well as large and complex risks that require access to world insurance and financial markets. Marsh professionals address traditional property and liability risks and a widening range of financial, strategic and operating exposures, including those relating to employment practices, the development and operation of technology resources, intellectual property, the remediation of environmental pollution, mergers and acquisitions, the interruption of revenue streams derived from leasing and credit operations and political risks.

Risk Advice. Marsh advises clients in structuring programs for retaining, mitigating, financing, and transferring risk in combinations that vary according to the client’s particular needs and circumstances. In addition to insurance, Marsh might help a client develop risk management strategies that include loss-control services (such as business continuity planning, ergonomic and workplace safety programs and loss information management), or alternative risk financing (such as the securitization of risk, the placement of risk with the capital markets and self-insured programs). Marsh’s professionals help clients implement their risk management and mitigation strategies by negotiating and executing transactions with the worldwide insurance and capital markets, establishing and managing specialized insurance companies owned by clients (sometimes known as “captive insurance companies”) and implementing various loss-control programs.

Global Consumer Practice and Other Activities. In addition to its main risk management and broking practice described above, Marsh operates a global consumer practice that provides advice, broking and program management services to corporate and association clients globally and to individual and small business clients primarily in the United States. Marsh professionals in this practice design, market and administer a variety of insurance and insurance-related products and services, such as consumer property and casualty programs and life insurance, purchased by an association’s or professional group’s members or provided to employees of corporate clients as part of a voluntary payroll deduction program. Other areas of the consumer practice include: private client services, which provides specialized risk and insurance programs to high-net-worth individuals and family offices; Marsh financial services, which offers key-person and executive benefit programs, as well as planning and wealth preservation solutions to affluent individuals; and a small commercial practice, which offers standardized insurance programs to small businesses and franchise operations. Marsh subsidiaries also provide insurance support services such as claims collection, claims advocacy, injury management, claims administration, and other insurance- and risk- related services.

Subsidiaries in the Risk and Insurance Services segment, under various names apart from Marsh, also provide underwriting management services to insurers in the United States and Canada, primarily for professional liability coverages.

Guy Carpenter

Guy Carpenter’s approximately 2,600 professionals around the world provide their clients with reinsurance solutions that include:

risk management modeling and advice;
the placement of reinsurance coverage with reinsurance markets worldwide;
risk-transfer financing in the capital markets;
contract and claims management; and
run-off services administration.

Reinsurance is a form of risk transfer that an insurance company or other risk assumption entity (such as a captive insurer or a governmental entity) purchases in order to reduce its exposure to liability on the insurance policies it has written. The purchaser of reinsurance spreads its risk by transferring (or “ceding”) a portion of its underwriting liability to another insurance provider, which is known as the “reinsurer.” Reinsurance enables the ceding entity, among other things, to expand its underwriting capacity, stabilize its underwriting results, secure protection against large or unexpected losses, or withdraw from (“run-off”) a class or line of business in an orderly fashion.

Acting as a broker or intermediary on all classes of reinsurance, Guy Carpenter places two main types of property and casualty reinsurance. Treaty reinsurance involves the transfer of a portfolio of risks. Facultative reinsurance entails the transfer of part or all of the coverage provided by a single insurance policy.

Guy Carpenter also provides reinsurance services in a broad range of specialty practice areas, including accident and health, agriculture, alternative risk transfer, environmental, general casualty, investment banking, life and annuity, marine and energy, professional liability, program manager solutions, property, retrocessional reinsurance (reinsurance between reinsurers), structured risk, surety, terror risk, and workers compensation. In addition, Guy Carpenter provides its clients with numerous reinsurance-related services, such as actuarial, enterprise risk management, financial and regulatory consulting and portfolio analysis. Guy Carpenter’s Instrat^® unit delivers advanced risk assessment analytics, catastrophe modeling and exposure management tools to assist clients in the reinsurance decision-making process.

Guy Carpenter offers run-off services for inactive clients in North America and elsewhere through Reinsurance Solutions International, LLC and ReSolutions International Limited, respectively. These subsidiaries also offer reinsurance and insurance administration solutions on a fee basis.

Marsh & McLennan Risk Capital Holdings

MMC owns investments in private equity funds and insurance and financial services firms through its subsidiary Marsh & McLennan Risk Capital Holdings (“Risk Capital Holdings”).

Compensation for Services

Marsh and Guy Carpenter are compensated for brokerage and consulting services primarily through fees paid by clients and commissions paid out of premiums charged by insurance and reinsurance companies. Commission rates vary in amount depending upon the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer, the capacity in which the broker acts

and negotiations with clients. For billing and other administrative services, Marsh and Guy Carpenter receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others.

We also receive certain investment-related revenues from Risk Capital Holdings. For a more detailed discussion of revenue sources and factors affecting revenue in our Risk and Insurance Services segment, see Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this report.

Risk Consulting & Technology

MMC’s Risk Consulting and Technology segment generated 8% of total operating segments revenue in 2006. This segment consists of Kroll, Inc. and its subsidiaries.

Kroll has approximately 3,900 colleagues in 27 countries, and also uses a worldwide network of consultants with specialized expertise. Kroll provides a broad range of investigative, intelligence, financial, security and technology services to corporate, government, institutional and individual clients. Kroll develops, markets and delivers consulting-based services and technology-enabled solutions through four business groups:

Consulting Services;
Corporate Advisory & Restructuring;
Security; and
Technology Services.

Three of Kroll’s four business groups, Consulting Services, Corporate Advisory & Restructuring and Security, provide consulting and related services. Kroll’s Consulting Services Group provides a wide range of services to help clients mitigate business, financial and physical risks and achieve their legal, operational and financial objectives. This group consists of two primary businesses which operate globally. Business Intelligence & Investigations provides the following services: information gathering and analysis to help clients identify business risks and make informed decisions; conducting investigations to help clients to uncover wrongdoing; litigation support; locating misappropriated assets; and managing programs to protect intellectual property, prevent money laundering and ensure the integrity of vendors. Financial Advisory Services provides a full range of forensic accounting, litigation consulting, and valuation services to help clients uncover fraud, comply with securities and corporate governance regulations, value businesses and assess financial damages for insurance claims and litigation.

The Corporate Advisory & Restructuring Group provides domestic and cross-border professional services with the objective of maximizing the value of financially-troubled companies for the benefit of their stakeholders. Working on behalf of companies or creditors in North America and Europe, this group provides interim and crisis management, operational turnaround, strategic advisory, corporate finance, recovery and restructuring, and liquidation services.

The Security Group serves clients operating in U.S. and non-U.S. locations, including high risk areas of the world, such as multinational corporations, government agencies, high-net-worth individuals, architectural firms, and private and public sector organizations. Services provided by this group include: security consulting; architectural security engineering; outsourced security operations and management; executive protection; high risk environment intelligence and protective services; crisis and kidnap response; travel safety training programs; and training programs for executives, security professionals and military personnel. The Security Group also includes Kroll’s U.S. government services business, which conducts security clearance investigations of government personnel and monitors law enforcement agencies and other public and private entities’ compliance with federal consent decrees and other government mandates.

Kroll’s fourth business group, Technology Services, provides technology-enabled solutions through Kroll Ontrack and Kroll Factual Data, as well as Kroll’s Background Screening and Substance Abuse Testing businesses. Kroll Ontrack provides large-scale electronic and paper-based discovery, computer forensics, and data recovery solutions to help companies, law firms, and government agencies quickly and cost-effectively review, manage and produce relevant evidence. Its data recovery solutions are offered in North America, Europe and Asia-Pacific, and its legal technologies solutions are offered in the United States and Canada. Kroll Factual Data offers information services to mortgage and consumer lending businesses, landlords, employers and other business customers in the United States. Kroll’s Background Screening business provides employee and vendor background investigations and identity theft services to a wide range of business and non-profit clients worldwide. The Substance Abuse Testing business provides substance abuse testing to corporate, institutional and government clients in the United States, Canada and Europe.

Compensation for Services

Kroll receives compensation in the form of fees paid by clients. These fees are typically earned on an hourly, project, fixed fee or per unit basis. For a more detailed discussion of revenue sources and factors affecting revenue in our Risk Consulting and Technology segment, see Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this report.

Consulting

MMC conducts business in its Consulting segment through Mercer Inc. and its subsidiaries and affiliates. Consulting is MMC’s second-largest business segment, generating 35% of total operating segments revenue in 2006 and employing approximately 19,800 colleagues worldwide. Mercer operates through two main business groups, each divided into lines of business, as follows:

l *Mercer Human Resource Consulting*, consisting of the following lines of business:

	–	Retirement & Investments

	–	Health & Benefits

	–	Talent

	–	Outsourcing

l *Mercer Specialty Consulting*, consisting of the following lines of business:

	–	Management Consulting

	–	Organizational Design and Change Management

	–	Economic Consulting

Mercer Human Resource Consulting

With approximately 16,700 colleagues in 41 countries, Mercer Human Resource Consulting, or Mercer HR, is a leading global provider of a broad range of human resource (HR) advice and solutions. Mercer HR also provides related financial advice, products and services in the retirement and health and benefits areas. Mercer HR’s clients include a majority of the companies in the Fortune 1000 and FTSE 100. Mercer HR also serves medium and small market organizations.

Mercer Human Resource Consulting operates in the following four lines of business:

Retirement & Investments

Working together, the groups within Retirement and Investments offer clients a full suite of retirement advice and solutions.

Mercer Retirement professionals provide consulting advice to corporate, governmental and institutional clients on the design, financial management, administration and communication of a broad range of retirement plans. Mercer consultants offer consulting services in many retirement-related areas, such as defined benefit and defined contribution plans, executive retirement plans, retiree medical benefits and the retiree benefits aspects of mergers and acquisitions.

Through Mercer Investment Consulting, we provide advice to medium and long term investors (either directly or through third parties) on investment strategy and choice of investment managers. Mercer Investment Consulting offers customized guidance at each stage of the investment decision, risk management and investment monitoring process. Mercer consultants in this line of business work with institutional pension fund investors, non-pension investors, third party providers (including funds of managers) and retail intermediaries in more than 35 countries.

Through Mercer Global Investments, we provide global, multi-manager investment solutions to institutional investors (primarily retirement plan sponsors and trustees) and individual investors (in Australia and prospectively in other countries), primarily for investment of their retirement plan assets. Mercer Global Investments offers a diverse range of investment options to meet a full spectrum of risk/ return preferences. We manage 69 investment vehicles across a range of investment strategies in four geographic regions (US, Canada, Europe and Australia/New Zealand). Within this context, we help our clients with: strategy (defining objectives, asset liability analysis, strategic asset allocation); portfolio structuring (implementation, manager selection, draft investment guidelines, trust and custody); and evaluation (performance reporting, cash flow management, manager compliance). As of December 31, 2006, Mercer Global Investments had assets under management of approximately $13.6 billion worldwide.

Health & Benefits

Mercer’s Health & Benefits professionals work with small, medium and large organizations in the public and private sectors to design, implement, and administer a broad range of employee and retiree health and welfare programs. Mercer Health & Benefits provides clients advice and solutions related to a broad spectrum of health and welfare related issues including health care strategy, health care funding, pharmacy, and disease and absentee management. This support of our clients is provided through traditional consulting as well as commission-based brokerage services in connection with the selection of insurance companies and healthcare providers.

Talent

Mercer’s Human Capital professionals provide consulting services and related content products to help clients optimize workforce performance. Mercer works with clients to design, analyze and align their compensation and performance management systems, including both executive compensation and broad-based employee compensation programs. Mercer’s Human Capital business also provides data, software and compensation administration services to help companies manage and operate their compensation and total rewards programs. In addition, Mercer Human Capital advises HR executives on how to improve the efficiency and effectiveness of their companies’ HR functions. Executing broad human capital and benefits strategies requires a robust communications capability. Within the Human Capital line of business Mercer’s employee communications business provides this capability to its clients.

Outsourcing

Through Mercer HR Services, Mercer provides outsourced HR administration, technology and business process solutions globally, primarily to Fortune 1000 organizations. Mercer HR Services helps employers reduce costs, streamline operations and improve productivity of HR staff and employees. Our technology, administration and outsourcing services include health and group benefits administration, defined benefit and defined contribution administration and total benefits outsourcing.

Mercer Specialty Consulting

The Mercer Specialty Consulting companies have more than 3,100 colleagues serving clients in over 50 countries. The businesses operate as a portfolio of focused management and economic consulting practices that assist corporate enterprises in the areas of strategy development, operational improvement, risk management, organizational and leadership development, regulatory economics and litigation support.

Mercer Management Consulting, employing approximately 1,100 colleagues, advises on issues of business strategy and operational excellence, primarily serving large corporations in North America, Europe and the Asia Pacific region. Mercer Management consultants help clients anticipate and realize future sources of value growth based on insights into rapidly changing customer priorities, economics and markets.

Mercer Oliver Wyman consultants provide strategy and risk management consulting, primarily to clients in the financial services sector. Mercer Oliver Wyman also provides actuarial consulting services to insurance companies, government entities and other organizations. Mercer Oliver Wyman has approximately 1000 colleagues throughout North America, Europe and the Asia Pacific region.

Lippincott Mercer, with more than 100 colleagues, advises leading corporations around the world on corporate branding, identity and image, and has helped create some of the world’s most recognized brands.

Mercer Delta Organizational Consulting helps CEOs, senior executives, and boards of directors of major global corporations, government agencies, and private institutions transform their business through a unique combination of consulting services and leadership programs. From its offices in North America and Western Europe, Mercer Delta’s more than 250 colleagues provide advisory services related to driving growth (both organic and through mergers and acquisitions), accelerating execution of strategy, and building talent. Specific issues on which Mercer Delta has consulted include board and senior leadership effectiveness, executive development, coaching, management of the talent pipeline, organizational design and culture, and transformation management.

National Economic Research Associates, or NERA, is a team of more than 600 colleagues operating worldwide. NERA consultants provide independent research and analysis to achieve practical solutions to highly complex business and legal issues relating to competition, regulation, public policy, strategy, finance and litigation. NERA’s clients include corporations, governments, law firms, regulatory agencies, trade associations, and international agencies. Practice areas include the communications industry, where NERA has been involved in nearly every spectrum auction on behalf of the sponsor or a bidder, and transfer pricing, in which NERA professionals advise multinational corporations on the pricing of goods, services and intangible properties that move across different operating units or geographical boundaries.

Compensation for Services

Mercer Human Resource Consulting and the Mercer Specialty Consulting Businesses are compensated for advice and services primarily through fees paid by clients. Mercer Human Resource Consulting Health & Benefits business is compensated through commissions from insurance companies for the placement of insurance contracts (comprising more than half of the revenue) and consulting fees. Mercer Global Investment’s discretionary investment management business and certain of Mercer HR Services’ defined contribution administration services are compensated through

fees based on assets under management. For a more detailed discussion of revenue sources and factors affecting revenue in the Consulting segment, see Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this report.

Investment Management

MMC conducts business in its Investment Management segment through Putnam Investments Trust and its subsidiaries. Investment Management generated 12% of total operating segments revenue in 2006 and employs approximately 2,600 colleagues as of January 1, 2007. Primarily through its office in Boston, Massachusetts, Putnam provides investment management and related services through a broad range of investment products, including its own family of mutual funds, which are offered to individual and institutional investors. Putnam has been engaged in the investment management business since 1937 and is one of the largest mutual fund managers in the United States. In addition to its Boston headquarters, Putnam has offices in London and Tokyo.

On January 31, 2007, MMC entered into an agreement with Great-West Lifeco Inc. (“GWL”), a majority-owned subsidiary of Power Financial Corporation, pursuant to which GWL agreed to purchase Putnam for $3.9 billion in cash. The parties expect the transaction to close in mid-2007, subject to regulatory consents and other contractually-provided closing conditions. For more detailed information regarding the sale of Putnam, see Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this report.

Investment Management Services

Putnam provides investment management and related services through a broad range of investment products that are offered directly or through intermediaries to both individual and institutional investors. Products that Putnam sponsors for individual retail investors include a family of open-end and closed-end mutual funds (the “Putnam Funds”), college savings plans, annuity products and offshore products. Putnam also provides investment management services on a separately managed or commingled basis to individuals, corporate profit-sharing and pension funds, state and other governmental and public employee retirement funds, university endowment funds, charitable foundations, collective investment vehicles (both U.S. and non-U.S.) and other domestic and foreign institutional accounts. Putnam also provides investment management services in the capacity of sub-advisor for investment products sponsored or co-sponsored by other institutions.

Putnam manages its mutual funds, institutional client accounts and other portfolios in order to meet varying investment objectives, and to afford investors in the Putnam Funds and other clients the opportunity to allocate their investments among various investment products as their changing needs and worldwide economic and market conditions warrant. The investment process used by Putnam in managing its assets is based upon both fundamental and quantitative research. Fundamental research includes valuation analysis, economic, political, industry and company research, company visits, and the utilization of such sources as company public records and activities, management interviews, company-prepared information, and other publicly available information, as well as analyses of suppliers, customers and competitors. Quantitative analysis includes the analysis of past trends and the use of sophisticated financial modeling to gauge how particular securities may perform. Putnam also incorporates a risk-management capability that analyzes securities across all the Putnam Funds and other portfolios to identify areas of over-concentration and potential risks.

Putnam’s assets under management consisted of the following levels and composition at December 31, 2006 and 2005 (in $ billions):

	December 31,			December 31,
	2006			2005
Mutual Funds:
Growth Equity	$	26		$	31
Value Equity		37			37
Blend Equity		28			26
Fixed Income		33			32
Total Mutual Fund Assets		124			126

Institutional:
Equity		36			34
Fixed Income		32			29
Total Institutional Assets		68			63
Total Ending Assets	$	192		$	189

The asset information above includes the following:

Assets from Non-US Investors	$	36		$	32

Assets in Prime Money Market Funds	$	4.3		$	.5
Average Assets Under Management:
Quarter	$	189		$	188
Year-to-Date	$	186		$	196

Net Flows including Dividends
Reinvested:
Quarter	$	(0.1	)	$	(6.4	)
Year-to-Date	$	(15.8	)	$	(31.7	)

Impact of Market/Performance on Ending
Assets Under Management	$	18.9		$	7.2

Markets for Putnam’s Services and Products

Retail. Putnam generally markets its investment products for individual investors to intermediaries such as broker-dealers, financial planners, and registered investment advisers, who use them to meet the investment needs and objectives of their clients’ overall investment programs. These products consist of:

the Putnam Funds;
insurance products, such as variable annuities and variable life insurance policies, that use mutual funds as the underlying funding vehicles; and
separately managed accounts and other platforms sponsored by broker-dealers, financial planners and registered investment advisers.

The Putnam Funds are publicly-held investment companies registered under the Investment Company Act of 1940. These retail mutual funds cover a broad range of domestic and international equity, fixed-income, blended and money market investment portfolios. As of December 31, 2006, the Putnam Funds included 96 open-end investment companies (mutual funds), which are available for

investments and withdrawals on most business days; and 11 closed-end funds, which are not available for investments or withdrawals but the shares of which are traded on various major domestic stock exchanges.

Institutional. Putnam provides investment management services and products to defined benefit and defined contribution retirement plans sponsored by corporations, state, municipal and other governmental authorities, retirement plans sponsored by unions under the Taft-Hartley Act, endowments, foundations and other institutional customers. Putnam provides its products and services to defined contribution plans in various ways, including through financial intermediaries, on a bundled basis in conjunction with its affiliate Mercer Human Resources Services, or on an “investment only” basis typically for larger plans. In the employee benefit plan market, investment options are usually selected by the plan sponsors and may include Putnam mutual funds and other Putnam-managed products, as well as employer stock and other investments that are not managed by Putnam. In addition, Putnam offers its investment services directly to employee benefit plans, endowments, foundations and other institutional investors, either as separate accounts or in the form of collective trusts and other pooled vehicles that are made available solely to institutional investors.

International. Putnam provides investment management products and services in a number of international markets, including Europe, Japan, Australia, Canada and several other countries. Putnam markets its products and services to both retail and institutional clients in most of these countries, through direct sales and marketing activities, joint ventures and independent distributors.

Private Equity. Putnam offers private equity and alternative investment funds to institutional and high-net-worth individual investors in conjunction with Thomas H. Lee Partners, L.P., or THL, a private equity firm. Putnam has a joint venture arrangement with THL and THL’s partners in connection with which it owns a minority interest in THL for purposes of participating in THL’s traditional business of managing private equity and leveraged buyout funds. Putnam and certain of its employees also are investors in certain of these private equity and other funds.

Related Financial and Administrative Services

In support of Putnam’s primary investment management business, Putnam subsidiaries provide other related services, including transfer agency, underwriting, distribution, shareholder services, custodial, trustee and other fiduciary services. PFTC, a Massachusetts trust company, serves as transfer agent, dividend disbursing agent, registrar and, until recently, custodian for the Putnam Funds and provides custody services to certain commingled and other accounts. As of December 31, 2006, custody and fund accounting services for the Putnam Funds were transferred to State Street Bank and Trust Company. In the future, Putnam may also transfer custody and fund accounting services for certain commingled and other accounts to an outside service provider.

Putnam Retail Management Limited Partnership, or PRM, a Putnam subsidiary and a registered broker-dealer and member of the National Association of Securities Dealers, or NASD, acts as principal underwriter of the shares of the open-end Putnam Funds, selling primarily through independent broker-dealers, financial planners and financial institutions, including banks, and directly to certain large 401(k) plans and other institutional accounts.

Compensation for Services

Putnam’s revenue is derived primarily from investment management and 12b-1 fees received from the Putnam Funds and investment management fees for institutional accounts. Putnam also receives fees from the Putnam Funds for administrative services performed by PFTC. For a more detailed discussion of revenue sources and factors affecting revenue in our Investment Management segment, see Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this report.

Regulation

MMC’s activities are subject to licensing requirements and extensive regulation under United States federal and state laws, as well as laws of other countries in which MMC’s subsidiaries operate. See Item 1A (“Risk Factors”) below for a discussion of how actions by regulatory authorities or changes in legislation and regulation in the jurisdictions in which we operate may have an adverse effect on our businesses.

Risk and Insurance Services. While laws and regulations vary from location to location, every state of the United States and most foreign jurisdictions require insurance market intermediaries and related service providers (such as insurance brokers, agents and consultants, reinsurance brokers, managing general agents and third party administrators) to hold an individual and/or company license from a governmental agency or self-regulatory organization. Some jurisdictions issue licenses only to individual residents or locally-owned business entities; in this case, if MMC has no licensed subsidiary, we may maintain arrangements with residents or business entities licensed to act in such jurisdiction.

Beginning in January 2005, all European Union member states were required to implement the Insurance Mediation Directive. This Directive aims to apply consistent minimum professional standards to insurance intermediaries, including a licensing system based on an assessment of factors such as professional competence, financial capacity and professional indemnity insurance. As member states of the European Union adopt regulations to comply with the Directive, our insurance intermediary operations in the European Union have become or will become subject to enhanced regulatory requirements. In January 2005, as part of the implementation of the Directive in the United Kingdom, the power and responsibilities of the Financial Services Authority, or FSA, were expanded to include regulation of insurance and reinsurance intermediaries in the United Kingdom.

Insurance authorities in the United States and certain other jurisdictions in which MMC’s subsidiaries do business, including the FSA in the United Kingdom, also have enacted laws and regulations governing the investment of funds, such as premiums and claims proceeds, held in a fiduciary capacity for others. These laws and regulations typically provide for segregation of these fiduciary funds and limit the types of investments that may be made with them.

Certain of MMC’s risk and insurance services activities are governed by other regulatory bodies, such as investment, securities and futures licensing authorities. In the United States, Marsh and Guy Carpenter use the services of MMC Securities Corp., an NASD-registered broker dealer and an indirect, wholly-owned subsidiary of MMC, primarily in connection with investment banking-related services and advising on alternative risk financing transactions. In the European Union, these businesses receive securities transfer services from another MMC subsidiary, MMC Securities Ltd., which is regulated by the FSA for the conduct of investment business in the United Kingdom.

In some jurisdictions, insurance-related taxes may be due either directly from clients or from the insurance broker. In the latter case, the broker customarily looks to the client for payment.

Risk Consulting and Technology. Certain of Kroll’s risk consulting and investigative activities are licensed and regulated at the federal, state and local level in the United States and abroad. Many of these activities also involve the use of data from outside sources, including third party vendors and governmental records. As a result, changes in existing, or the implementation of new, laws and regulations, particularly relating to privacy, could interfere with Kroll’s historical access to and use of such data. Substance abuse testing laboratories operated by a Kroll subsidiary are certified on the federal level and licensed in a number of states.

Consulting. Certain of Mercer HR’s retirement-related consulting services are subject to pension law and financial regulation in many countries, including by the Securities and Exchange Commission, or SEC, in the United States and the FSA in the United Kingdom. In addition, the trustee services, investment services (including advice to individuals on the investment of personal pension assets and assumption of discretionary investment management responsibilities) and retirement and employee benefit program administrative services provided by Mercer Human Resource Consulting and its

subsidiaries and affiliates are subject to investment and securities regulations in various jurisdictions. The benefits insurance consulting and brokerage services provided by Mercer Human Resource Consulting and its subsidiaries and affiliates are subject to the same licensing requirements and regulatory oversight as the insurance market intermediaries described above regarding our Risk and Insurance Services businesses. In the United States, Mercer Human Resource Consulting and Mercer Management Consulting use the services of MMC Securities Corp. primarily in connection with the sale of retirement and employee benefit plans, and investment banking services, respectively.

Investment Management. Virtually all aspects of Putnam’s investment management business are subject to extensive regulation and supervision by various federal, state, and foreign regulatory authorities. Putnam’s activities are subject to regulation by the SEC and other federal, state and self-regulatory authorities in the United States, by the FSA in the United Kingdom, by the Financial Services Agency in Japan, and by the national securities regulatory authorities in certain other countries in which it does business. The Investment Advisers Act of 1940 (the “Advisers Act”) imposes numerous obligations on certain of Putnam’s subsidiaries which are registered in the United States as investment advisers, including record-keeping, operating and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act of 1940 (the “1940 Act”) imposes similar obligations on the investment companies that are advised by Putnam. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and the 1940 Act, ranging from fines and censure to termination of an investment adviser’s registration.

Competitive Conditions

MMC faces strong competition in all of its business segments from providers of similar products and services. MMC also encounters strong competition throughout its businesses from both public corporations and private firms in attracting and retaining qualified employees.

Risk and Insurance Services. MMC’s combined insurance and reinsurance broking services business is the world’s largest of its kind. The principal bases upon which our insurance and reinsurance businesses compete include the range, quality and cost of the services and products provided to clients. MMC encounters strong competition in the risk and insurance services business from other insurance and reinsurance brokerage firms that operate on a nationwide or worldwide basis, from a large number of regional and local firms in the United States, the European Union and elsewhere, from insurance and reinsurance companies that market and service their insurance products without the assistance of brokers or agents and from other businesses, including commercial and investment banks, accounting firms and consultants, that provide risk-related services and products.

Certain insureds and groups of insureds have established programs of self insurance (including captive insurance companies) as a supplement or alternative to third-party insurance, thereby reducing in some cases their need for insurance placements. There are also many other providers of affinity group and private client services, including specialized firms, insurance companies and other institutions.

The continuing impact of legal and regulatory proceedings concerning our insurance brokerage operations also could affect Marsh’s competitive position. These proceedings are discussed in more detail in note 16 to the consolidated financial statements included under Item 8 of this report. Please also read our discussion of the risks associated with these proceedings and their impact under Item 1A (“Risk Factors”) below.

Risk Consulting and Technology. In risk consulting and technology, we face competition from local, regional, national and international firms that provide similar services in the fields of accounting, corporate advisory and restructuring services, investigative and security services, consulting and technology services. Kroll’s Consulting Services Group faces competition from local, regional, national

and international accounting firms and forensic accounting, litigation support, investigative and other specialist and consulting firms. Kroll’s Corporate Advisory & Restructuring Group faces competition from national and international accounting firms and specialist recovery firms. Kroll’s Security Group faces competition from international and local security firms, government security contractors, and architectural engineering firms. Kroll’s Technology Services Group faces competition from small, independent service providers and technology companies.

Consulting. MMC’s consulting and HR outsourcing businesses face strong competition from other privately and publicly held worldwide and national companies, as well as regional and local firms. These businesses compete generally on the basis of the range, quality and cost of the services and products provided to clients. Competitors include independent consulting and outsourcing firms, as well as consulting and outsourcing operations affiliated with accounting, information systems, technology and financial services firms.

Mercer Investment Consulting faces competition from many sources, including multi-manager services offered by other investment consulting firms and financial institutions. Mercer Global Investments, Mercer HR’s recently established multi-manager business, in particular faces significant competition from better-established rivals with greater experience in that market.

In many cases, clients have the option of handling the services provided by Mercer internally, without assistance from outside advisors.

Investment Management. Putnam’s investment management business is highly competitive. Putnam competes with other providers of investment products and services primarily on the basis of the range of investment products offered, investment performance, distribution, scope and quality of shareholder and other services, and general reputation in the marketplace. Sales of Putnam Fund shares are also influenced by general securities market conditions, government regulations, global economic conditions and advertising and sales promotional efforts. Putnam competes with other mutual fund firms and institutional asset managers that offer investment products similar to Putnam’s as well as products which Putnam does not offer, including passively managed funds such as index funds. Putnam also experiences competition from a number of mutual fund sponsors that offer their funds to the general public without sales charges, which Putnam does not do.

Many securities dealers, whose large retail distribution systems play an important role in the sale of shares in the Putnam Funds, also sponsor competing proprietary mutual funds. To the extent that such securities dealers value the ability to offer customers a broad selection of investment alternatives, they will continue to sell independent funds, such as Putnam’s, notwithstanding the availability of proprietary products. However, to the extent that these firms limit or restrict the sale of Putnam Fund shares through their brokerage systems in favor of their proprietary mutual funds, Putnam’s assets under management, and thus Putnam’s revenues, might decline.

In addition to the preceding discussion, see “Risk Factors –Competitive Risks,” in Part 1A of this report.

Segmentation of Activity by Type of Service and Geographic Area of Operation.

Financial information relating to the types of services provided by MMC and the geographic areas of its operations is incorporated herein by reference to note 17 to the consolidated financial statements included under Item 8 of this report.

Employees

As of January 1, 2007, MMC and its consolidated subsidiaries employed about 55,200 people worldwide, including approximately 28,300 in risk and insurance services, approximately 3,900 in risk consulting and technology, approximately 19,800 in consulting and approximately 2,600 in investment management. Approximately 600 individuals are employed by MMC at the parent-company level.

EXECUTIVE OFFICERS OF MMC

The executive officers of MMC are elected annually by MMC’s board of directors. As of March 1, 2007, the following individuals were executive officers of MMC:

Matthew B. Bartley, age 50, is chief financial officer of MMC. Prior to assuming his current position in September 2006, Mr. Bartley was treasurer of MMC, a position he held since joining MMC in April 2001. Previously, Mr. Bartley was vice president of taxes at Engelhard Corporation, a multinational specialty chemicals and precious metals company, with responsibility for tax and transaction planning, execution and reporting. Prior to that role, he served for close to ten years in senior international treasury and tax positions at PepsiCo, Inc., where he was responsible for global strategic transaction planning and execution across international operating businesses.

Michael A. Beber, age 47, is senior vice president and chief strategic development officer of MMC, a position he has held since January 2005. From February 1999 through January 2005, Mr. Beber was executive vice president for strategic development of Kroll Inc. From July 2004 through January 2005 he was also president of Kroll’s Background Screening Group. From August 1991 to January 1999, Mr. Beber was a principal with Kroll Lindquist Avey, which Kroll acquired in June 1998. Prior to joining Lindquist Avey, Mr. Beber was a partner with BDO LLP, a senior manager with KPMG Peat Marwick, and a senior accountant with PriceWaterhouse.

Peter J. Beshar, age 45, is executive vice president and general counsel of MMC. Before joining MMC in November 2004, Mr. Beshar was a litigation partner in the law firm of Gibson, Dunn & Crutcher LLP. Mr. Beshar joined Gibson, Dunn & Crutcher in 1995 after serving as an Assistant Attorney General in the New York Attorney General’s office.

M. Michele Burns, age 49, is chairwoman and chief executive officer of Mercer Human Resource Consulting. Ms. Burns joined MMC as executive vice president on March 1, 2006, assumed the position of chief financial officer of MMC on March 31, 2006 and moved to her current position with Mercer on September 25, 2006. Prior to joining MMC, Ms. Burns was executive vice president and chief financial officer since May 2004, and chief restructuring officer since August 2004, of Mirant Corporation, an energy company. Prior to joining Mirant, she was executive vice president and chief financial officer of Delta Air Lines, Inc. from August 2000 to April 2004. She held various other positions in the finance and tax departments of Delta beginning in January 1999. Delta filed for protection under Chapter 11 of the United States Bankruptcy Code in September 2005.

Mathis Cabiallavetta, age 62, is vice chairman, office of the CEO of MMC, chairman of MMC International and a member of MMC’s International Advisory Board. He is chairman of Marsh AG, Switzerland and a member of the board of directors of Kessler & Co, Switzerland. He is also a member of the board of directors of Altria Group, Inc., vice president of the Swiss American Chamber of Commerce, and a member of the Advisory Board of General Atlantic Partners in New York. Prior to joining MMC in 1999, Mr. Cabiallavetta was chairman of the board of UBS AG, a company he joined in 1971.

Michael G. Cherkasky, age 56, is president and chief executive officer of MMC, a position he has held since October 2004. He also served as chairman and chief executive officer of Marsh Inc. from October 2004 until September 2005. Before its business combination with MMC in July 2004, Mr. Cherkasky was president and chief executive officer of Kroll Inc. Mr. Cherkasky joined Kroll in 1994, becoming president and chief executive officer in 2001. Prior to joining Kroll, Mr. Cherkasky spent 16 years in the criminal justice system, including serving as chief of the Investigations Division for the New York County District Attorney’s Office.

John Drzik, 44, is president and chief executive officer of Mercer Specialty Consulting, a position he assumed in June 2006. Mr. Drzik is also president of Mercer Oliver Wyman, which was formed following MMC’s acquisition of Oliver, Wyman & Company in 2003. Mr. Drzik joined Oliver, Wyman & Company in 1984, became president in 1995, and was appointed chairman in 2000, a position he held until MMC’s acquisition of the firm, when he became president of the new organization.

Simon Freakley, age 45, is president and chief executive officer of Kroll Inc., a position he has held since October 2004. Mr. Freakley was previously a director of Kroll Inc. since June 2003 and head of Kroll’s Consulting Group since April 2004. He was president of Kroll’s Corporate Advisory & Restructuring Group from September 2002 until its consolidation with Kroll’s Consulting Services Group in April 2004. From 1996 until his appointment as Kroll’s CEO, Mr. Freakley was also managing partner of Kroll Ltd. (previously Kroll Buchler Phillips and Buchler Phillips), Kroll’s U.K.-based corporate advisory and restructuring subsidiary. Mr. Freakley joined Buchler Phillips in 1992, and in 1999, the firm was acquired by Kroll.

E. Scott Gilbert, age 51, is senior vice president and chief compliance officer of MMC. Prior to joining MMC in January 2005, he had been the chief compliance counsel of the General Electric Company since September 2004. Prior thereto, he was counsel, litigation and legal policy at GE. Between 1986 and 1992, when he joined GE, he served as an Assistant United States Attorney for the Southern District of New York.

Charles E. Haldeman Jr., age 58, is president and chief executive officer of Putnam Investments. Mr. Haldeman joined Putnam in October 2002 as senior managing director and co-head of Investments. He was named president and chief executive officer in November 2003. Before joining Putnam, Mr. Haldeman was president and chief executive officer of Delaware Investments from 2000 to 2002, president and chief operating officer of United Asset Management Corporation from 1998 to 2000, and a partner and director of Cooke & Bieler, Inc. from 1974 to 1998.

David Nadler, age 58, is vice chairman, office of the CEO of MMC and a member of MMC’s International Advisory Board. Dr. Nadler founded the Delta Consulting Group, Inc., a consulting firm specializing in executive leadership and organizational change, in 1980. He served as chairman and chief executive officer of that firm until its acquisition by MMC’s subsidiary Mercer Inc. in 2000, when it became Mercer Delta Consulting, LLC. Dr. Nadler served as chairman and CEO of Mercer Delta through December 2005 and remains chairman and senior partner of that firm.

Michael A. Petrullo, age 38, is senior vice president and chief administrative officer of MMC. After MMC’s acquisition of Kroll in July 2004, Mr. Petrullo became chief financial officer for the risk consulting businesses of Marsh and Kroll until assuming his current position with MMC in January 2005. Mr. Petrullo was chief operating officer and executive vice president of Kroll Inc. from December 2002 to July 2004. Prior thereto, he was deputy chief operating officer of Kroll from June through December of 2002, the acting chief financial officer of Kroll from November 2001 to June 2002, and vice president and controller of Kroll from August 2001 to November 2001. He was vice president-finance of Kroll’s Investigations and Intelligence Group from February 1999 until August 2001. He joined Kroll Associates in 1995, serving as assistant controller through February 1998.

David Spiller, 50, is president and chief executive officer of Guy Carpenter & Company, LLC. Prior to assuming his current position on July 1, 2006, he served as president of Guy Carpenter since joining the firm in January 2006. Before joining Guy Carpenter, Mr. Spiller was chief executive officer of Benfield Ltd., the U.K. subsidiary of Benfield Group Limited, a reinsurance and risk intermediary, where he was responsible for all business and offices outside of the United States. In addition to his leadership position with Benfield Ltd., Mr. Spiller was a managing director and held various other management positions with the Benfield Group. He had transitioned to Benfield through its merger with Greig Fester Group in 1997, where he had held the position of chief executive officer since 1995. Mr. Spiller had joined Greig Fester in 1979.

Brian M. Storms, age 52, is chairman and chief executive officer of Marsh Inc. Prior to assuming his current position in September 2005, Mr. Storms was president and chief executive officer of Mercer Human Resource Consulting, which he joined in August of 2004 as vice chairman. Prior to joining Mercer, he served as president since 2001 and then as chief executive officer since July 2002 of UBS Global Asset Management, Americas. Prior thereto, he was president of Mitchell Hutchins, the asset

management subsidiary of Paine Webber, from 1999 until UBS AG’s acquisition of Paine Webber Group Inc. in November 2000. From 1996 through 1999 Mr. Storms was president of Prudential Investments.

AVAILABLE INFORMATION

MMC is subject to the informational reporting requirements of the Securities Exchange Act of 1934. In accordance with the Exchange Act, MMC files with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. MMC makes these reports available free of charge through its website, www.mmc.com, as soon as reasonably practicable after they are filed with the SEC. The public may read and copy such materials at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC, 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, such as MMC; the address of that site is http://www.sec. gov.

MMC also posts on its website the following documents with respect to corporate governance:

Guidelines for Corporate Governance;
Code of Business Conduct and Ethics;
procedures for addressing complaints and concerns of employees and others; and
the charters of the Audit Committee, Compensation Committee, Compliance Committee and Directors and Governance Committee of MMC’s Board of Directors.

All of the above documents are available in printed form to any MMC stockholder upon request.

Item 1A. Risk Factors

In addition to the other information in this report and our other filings with the SEC, you should carefully consider the following risk factors in evaluating MMC and its businesses. The risks described below have the potential to materially adversely affect our business, financial condition or results of operations.

Litigation-Related Risks

Continuing legal and regulatory proceedings concerning MMC may have a material adverse effect on our business, financial condition or results of operations.

In January 2005, MMC and its subsidiary Marsh entered into an agreement (the “Settlement Agreement”) with the New York State Attorney General (“NYAG”) and the New York State Insurance Department (“NYSID”) to settle a civil complaint filed in New York State court by NYAG in October 2004 (the “NYAG Lawsuit”) and a related citation (the “Citation”) issued by NYSID at approximately the same time. Among other things, the NYAG Lawsuit and the Citation had alleged that Marsh’s use of market service agreements with various insurance companies entailed fraudulent business practices, bid-rigging, illegal restraint of trade and other violations of the New York business and insurance statutes, and was not adequately disclosed to Marsh’s clients or MMC’s investors. Following the announcement of the NYAG Lawsuit and related actions taken by MMC, MMC’s stock price dropped from approximately $45 per share to a low of approximately $22.75 per share.

Pursuant to the Settlement Agreement, MMC established a fund of $850 million, payable over four years, for policyholder clients in the U.S who placed insurance through Marsh between 2001 and 2004. Approximately 70,000 eligible policyholders have elected to receive an aggregate distribution of approximately $750 million under this fund.

Notwithstanding the Settlement Agreement, numerous other lawsuits have been commenced against us, one or more of our subsidiaries, and our current and former directors and officers, relating to matters alleged in the NYAG Lawsuit. Numerous putative class action suits purportedly brought on behalf of policyholders and our shareholders against us, certain of our subsidiaries and certain of our current and former officers and directors are pending in various federal and state courts and in Canada. Shareholder derivative suits have been filed in various jurisdictions. There are also several actions brought by individual policyholders and additional suits may be filed by other policyholders. The myriad claims asserted in these suits include alleged violations of federal securities and antitrust laws, ERISA, RICO, and other statutory and common law claims, and seek significant damages. In addition, the States of Connecticut and Florida have brought lawsuits against MMC and Marsh.

Further, following the filing of the NYAG Lawsuit, MMC and certain of its subsidiaries received notices of investigations and inquiries, together with requests for documents and information, from attorneys general, departments of insurance and other governmental entities in a significant number of jurisdictions (other than New York) that relate to the allegations in the NYAG Lawsuit. MMC also has been contacted by certain state attorneys general and commissioners of insurance indicating that they may seek additional monetary or other remedies from MMC.

An adverse outcome under any of the lawsuits and regulatory actions involving MMC and its subsidiaries could have a material adverse effect on our business, financial condition or results of operations. The lawsuits and regulatory actions also could result in negative publicity, reputational damage and harm to our client and employee relationships. Any of these developments could negatively affect our business, financial condition or results of operations.

For further information about the above and other legal and regulatory matters involving MMC and its subsidiaries, see note 16 to our consolidated financial statements included under Item 8 of this report.

MMC has agreed to retain specified liabilities of Putnam, the outcome of which may have a material adverse effect on our financial condition or results of operations.

On February 1, 2007, we announced our agreement to sell Putnam to Great-West Lifeco., Inc., which we expect to close in mid-2007. Under the stock purchase agreement relating to the sale, MMC has agreed to indemnify Great-West Lifeco., Inc. for liabilities that may arise in connection with specified regulatory and litigation matters involving Putnam, including certain claims, litigation or investigations relating to “excessive fees” or “market-timing.” The matters for which MMC has retained indemnification obligations are more fully described in note 16 to our consolidated financial statements included under Item 8 of this report. Adverse outcomes in the matters for which MMC has retained indemnification obligations could have a material adverse effect on our financial condition or results of operations.

Risks Relating to Our Business Model and Operations

We may not be as successful as we hope in implementing Marsh’s evolving business model.

Since 2004, Marsh has made significant changes to its business model, including the elimination of market service agreements with insurers. The elimination of market service revenue has negatively affected our financial results. In 2004, we recognized market service revenue of $516 million, relating to insurance placements made before October 1, 2004. In 2005 and 2006, respectively, we recognized $114 million and $43 million of market service revenue relating to placements made before October 1, 2004.

Under MMC’s current business model, Marsh seeks to increase revenue through higher commissions and fees that are disclosed to its clients, and to generate profitable revenue growth by focusing on the provision of value-added risk advisory services beyond traditional brokerage activities. Marsh’s current business and compensation model continues to evolve and in some respects remains untested. We cannot be certain that it will generate the profitable revenue growth we are targeting. The inability to derive adequate revenues from Marsh’s current business and compensation model may significantly impede improvement in our operating results and profitability.

We may not achieve all the cost savings and operational improvements we expect from our September 2006 restructuring initiative and other changes to our MMC-wide operating model.

In September 2006, we announced a series of restructuring and other initiatives designed to enhance MMC’s operational efficiency and improve our profitability. These initiatives, which involve information technology, real estate, corporate functions, and operating company business processes, are expected to yield annualized savings of approximately $350 million by the end of 2008, with associated charges of approximately $225 million. We cannot be certain that we will achieve our targeted cost savings and operational improvements on the announced timetable, or at all. If we do not, the impact of the 2006 restructuring initiatives on our operating margin will not be as significant as we currently expect.

In addition, MMC believes that future revenue growth will partly depend on increased collaboration among MMC’s operating companies in accessing their respective client bases. Similarly, MMC believes that improvements to its future operating efficiency will depend on its ability to rationalize and consolidate business processes and infrastructure across the entire company. Our attempt to achieve these goals entails risks because MMC, due in part to its history of growth through acquisitions, has not traditionally operated in the integrated fashion that management currently envisions. For example, to achieve the above goals we must improve and rationalize our technology infrastructure; standardize a variety of business operational functions; develop increasingly scalable services; improve our ability to market services across our operating companies; create compensation systems that track

and reward cross-business collaboration; and market MMC’s brands in a more unified manner. Any inability to execute these changes may significantly impede improvement in our operating results and profitability.

We are subject to significant uninsured exposures arising from “errors and omissions” claims.

MMC’s operating companies provide numerous services for clients around the world. For example, Marsh advises on and places insurance coverage, and sometimes provides related services such as risk management advice and claims management and collections. Guy Carpenter performs similar services in its role as a reinsurance broker. Mercer renders a variety of consulting and investment management services. As a result of these and other activities, MMC operating companies are potentially subject to errors and omissions, or E&O, claims by clients and third parties who may allege that they were damaged as a result of MMC’s failure to perform its duties as expected. MMC works hard to minimize its potential E&O exposures by, among other things, prevention and remediation efforts and employee education/training, but it is not possible to prevent E&O exposures completely. When E&O claims do arise, claimants often seek monetary damages. In the case of Marsh and Guy Carpenter, claimants may allege losses representing the value of insurance or reinsurance coverage lost due to broker negligence. In the case of Mercer, claimants may allege losses due to negligent investment or consulting advice.

E&O claims in any given case can be significant and may subject MMC, in addition to potential liability for monetary damages, to reputational harm and diversion of personnel and management resources. Since 2001, the worldwide market for professional liability insurance for E&O claims in the financial services industry has contracted significantly, which has caused MMC to assume increasing levels of self-insurance for its potential E&O exposures. MMC uses internal actuarial and other estimates, and case-level reviews by inside and outside counsel, to establish loss reserves which it believes are adequate to provide for this self-insured retention. These reserves are reviewed quarterly and adjusted as developments warrant. Nevertheless, given the unpredictability of E&O claims and of litigation which could flow from them, it is possible that an adverse outcome in a particular matter could have a material adverse effect on MMC’s financial condition or results of operations in a given quarterly or annual period. For further information about our E&O exposure and related insurance coverage, including self-insurance, see note 16 to our consolidated financial statements appearing under Item 8 of this report.

Credit rating downgrades could negatively affect our financing costs if we need to raise additional capital.

MMC’s credit rating was lowered following the filing of the NYAG Lawsuit in October 2004, and both Moody’s and Standard & Poor’s currently have MMC on a negative credit outlook. If we need to raise capital in the future (for example, in order to fund maturing debt obligations or finance acquisitions or other initiatives), any further credit rating downgrade could negatively affect our financing costs or access to financing sources.

We may not be able to successfully integrate the businesses we acquire.

We have a history of numerous acquisitions, including our $1.9 billion acquisition of Kroll in July 2004; nine acquisitions in 2005 for total consideration of $68 million; and 16 acquisitions in 2006 for total consideration of $200 million. We expect that acquisitions will continue to be a part of our growth strategy.

Acquired businesses may not achieve the levels of revenue, profit or productivity we anticipate or otherwise perform as we expect. In addition, acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies and difficulties in integrating acquired

businesses. While we intend that our acquisitions will improve our competitiveness and profitability, we cannot be certain that our past or future acquisitions will be accretive to earnings or otherwise meet our operational or strategic expectations.

We are exposed to multiple risks associated with the global nature of our operations.

We do business worldwide, and we plan to expand our operations further into Asia and other foreign markets. This subjects us to significant legal, economic, operational and market risks. These risks include, among others:

the economic and political conditions in foreign countries;
the imposition of local investment or other restrictions by foreign governments;
potential costs and difficulties in complying, or monitoring compliance, with rules relating to trade sanctions administered by the U.S. Office of Foreign Assets Control, the requirements of the U.S. Foreign Corrupt Practices Act and the rules thereunder, or other U.S. laws and regulations applicable to business operations abroad;
the imposition of controls or limitations on the conversion of foreign currencies or remittance of dividends and other payments from foreign subsidiaries;
the imposition of withholding and other taxes on remittances and other payments from subsidiaries;
difficulties in monitoring employees in geographically dispersed locations; and
potential costs and difficulties in complying with a wide variety of foreign laws and regulations administered by foreign government agencies.

Some of our subsidiaries in foreign countries receive revenue that differs from their functional currencies. Also, we generally must translate the financial results of our foreign subsidiaries into U.S. dollars. Although we may use derivative financial instruments to help protect against adverse effects due to exchange rate fluctuations, we cannot eliminate these risks, and significant changes in exchange rates may have an adverse effect on our financial results.

Competitive Risks

Each of our businesses operates in a highly competitive environment.

We encounter strong competition for talent in our risk and insurance services business. This competition comes from other insurance brokerage firms which also operate on a nationwide or worldwide basis, from a large number of regional and local firms throughout the world, from insurance and reinsurance companies that market and service their insurance products without the assistance of brokers or agents and from other businesses that provide risk-related services. Our consulting and risk consulting and technology businesses compete with independent consulting firms and organizations affiliated with accounting, information systems, technology and financial services firms around the world, and experience significant competition for talent. Any inability to respond successfully to this competition could have a material negative impact on our business or results of operations.

In addition, growing competition due to new legislative or industry developments could adversely affect us. These developments include:

the selling of insurance by insurance companies directly to insureds without the involvement of a broker or other market intermediary;
changes in our business compensation model as a result of regulatory investigations;

an increase in competition from existing or recently-formed insurance brokers who have not agreed to limit their use of market service arrangements, thereby giving them a competitive advantage over those brokers, such as Marsh, which have agreed to limit the use of such arrangements;
the establishment of programs in which state-sponsored entities provide property insurance or reinsurance or other alternative types of coverage in catastrophe-prone areas; and
the creation of in-house servicing capabilities by insurance companies or by certain insurance consumers which compete with the third party administration and other administration, servicing and risk management products offered by our consulting and risk consulting and technology segments.

Increased competition as a result of these developments could cause the supply of, and demand for, our products and services to change, which could adversely affect our results of operations and financial condition.

We may experience loss of key personnel and clients.

Across all of our businesses, we must preserve our capabilities to serve clients and the capacity to support staff development. Retention of our employees therefore is critical to us, and the loss of key managerial personnel or significant revenue producers could have a material adverse effect on our business and results of operations. Since late 2004 we have developed compensation programs to retain, motivate, and reward certain key employees, but we cannot be certain of our ability to retain our key employees or attract similar new employees in the future. In addition, as a result of the recent legal and regulatory matters referred to above under “Litigation-Related Risks,” as well as Marsh’s newly competitive business environment, we may lose important clients or experience difficulty in generating new business. In that event, our business or results of operations could be materially adversely affected.

Regulatory Risks

Actions by regulatory authorities or changes in legislation and regulation in the jurisdictions in which we operate may have an adverse effect on our business.

Our activities are subject to licensing requirements and extensive regulation under the laws of the United States and its various states, the European Union and the European and other countries in which our subsidiaries operate. Some of this regulation has only recently been instituted; for example, in January 2005, as part of the United Kingdom’s implementation of the EU Insurance Mediation Directive, our insurance and reinsurance services activities in the United Kingdom came under the jurisdiction of the Financial Services Authority. Many of our businesses depend on the validity of, and continued good standing under, the licenses and approvals pursuant to which they operate, as well as compliance with applicable regulations.

In all jurisdictions, applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals, and to implement regulations. Licenses may be denied or revoked for various reasons, including the violation of such regulations, conviction of crimes and similar matters. Possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in a particular business for specified periods of time, revocation of licenses, censures, redress to clients and fines. In some instances, we follow practices based on our interpretations, or those generally followed by the industry, of laws or regulations, which may prove to be different from those of regulatory authorities. Accordingly, the possibility exists that we may be precluded or temporarily suspended from carrying on some or all of our activities or otherwise fined or penalized in a given jurisdiction.

We cannot be certain that our risk and insurance services, consulting and risk consulting and technology activities will continue to be conducted in any given jurisdiction as they have been in the past. Any significant impairment of our ability to conduct our business as we historically have done could have a material adverse effect on our business, financial condition or results of operations. For further information about regulatory conditions affecting our business segments, see Item 1 (“Business”) of this report.

Risks Related to The Risk and Insurance Services Business

Volatility or declines in premiums and other trends in the insurance and reinsurance markets may significantly impede our ability to generate improved revenue growth and profitability.

MMC’s risk and insurance services segment represented 45% of our total operating segment revenue in 2006. We derive much our revenue in that segment from fees paid by clients and commissions paid out of premiums charged by insurance and reinsurance providers. We do not determine the insurance premiums on which much of our revenues are based, and these premiums may vary widely over market cycles or across coverage types or geographic locations conditions. For example, for several years through late 2000, heavy competition for market share among insurance carriers, increased underwriting capacity and improved economies of scale following consolidations resulted in flat or reduced premium rates (a “soft” market), which in turn put downward pressure on Marsh’s and Guy Carpenter’s commission revenue in many lines and in many geographic areas. The insurance industry then transitioned to a “hard” market, in which premium rates were stable or increasing, particularly following the events of September 11^th. Since 2004, the market has again softened in many lines and in geographic areas, although, within that general pattern, an unusually high incidence of hurricanes and other natural disasters periods has hardened the market in certain geographic areas and business lines. Because of these market fluctuations, which MMC cannot predict or control, revenues and profitability in our risk and insurance services segment may be volatile or subject to downward pressure.

In addition, we may continue to witness trends toward the development of alternative insurance markets, which deprive brokers of the opportunity to generate premium-based revenue. These trends include greater levels of self-insurance by corporations and other entities, the use of “captive” insurers and the advent of capital markets-based solutions to traditional insurance needs. While Marsh and Guy Carpenter historically have been able to participate in some of these activities on behalf of their customers, and have obtained fee revenue for such services, the continuation of trends like the foregoing may impede our ability to improve revenues and profitability in our risk and insurance services segment.

Risks Related to the Consulting and Risk Consulting and Technology Businesses

In addition to engaging in the risk and insurance services industry through Marsh and Guy Carpenter, MMC participates significantly in the consulting industry and related activities. Our consulting segment, consisting of Mercer HR and Mercer Specialty, represented 35% of our total operating segment revenue in 2006 and our risk consulting and technology segment, consisting of Kroll, contributed 8%. These businesses entail their own risks.

Demand for Mercer’s and Kroll’s services may decrease for various reasons, including a general economic downturn or a decline in a client’s or an industry’s financial condition.

We cannot be certain that demand for our consulting and risk consulting and technology services will continue to grow, or that we will compete successfully with existing or new competitors. Demand for our services also may change based on the evolving needs or financial circumstances of our clients. Economic downturns affecting particular clients or industry groups could reduce demand for our services and increase price competition.

In addition, the demand for many of Mercer HR’s benefits services is affected by government regulation and taxation of employee benefits plans. This regulation and taxation drive our clients’ needs for compliance-related services. Significant changes in tax or social welfare policy or regulations could lead some employers to discontinue their employee benefit plans, including defined benefit pension plans, thereby reducing the demand for our services. A simplification of regulations or tax policy also could reduce the need for our services.

Our results may suffer if we are unable to achieve or maintain adequate utilization and suitable billing rates for our consultants.

In many cases, Mercer’s and Kroll’s clients are free to terminate our engagements at any time. If clients reduce the scope of, or terminate the use of our services with little or no notice, our consultant utilization rate might decline. In that case, we must rapidly re-deploy our consultants to other engagements in order to minimize the potential negative impact on our financial performance. Moreover, because a significant portion of our work is project-based rather than recurring in nature, our consultants’ utilization depends on our ability to continually secure additional engagements.

In addition, our profitability at Mercer and Kroll is largely a function of the rates we are able to charge for our services and the staffing costs for our personnel. Accordingly, if we are not able to maintain the rates we charge for our services or appropriate staffing costs of our personnel, we will not be able to sustain our profit margin and our profitability will suffer. The prices we are able to charge for our services are affected by a number of factors, including:

clients’ perception of our ability to add value through our services;
market demand for the services we provide;
our ability to develop new services and the introduction of new services by competitors;
the pricing policies of our competitors; and
general economic conditions.

If we are unable to achieve and maintain adequate overall utilization as well as maintain or increase the billing rates for our consultants, our financial results could materially suffer.

Quarterly revenues and profitability may fluctuate significantly in our consulting and risk consulting and technology segments.

Quarterly variations in Mercer’s and Kroll’s revenues and operating results may occur due to several factors. These include:

the significance of client engagements commenced and completed during a quarter;
the unpredictability of the timing and amount of success fees, particularly at Kroll;
the possibility that clients may decide to delay or terminate a current or anticipated project as a result of factors unrelated to our work product or progress;
fluctuations in consultant hiring and utilization rates and clients’ ability to terminate engagements without penalty;
the success of strategic acquisitions, alliances or investments; and
general economic conditions, since results of operations in our consulting businesses are directly affected by the level of business activity of our clients, which in turn are affected by the level of economic activity in the industries and markets that they serve.

In addition, a significant portion of total operating expenses at Mercer and Kroll is relatively fixed. Therefore, a variation in the number of client assignments or in the timing of the initiation or the completion of client assignments can cause significant variations in quarterly operating results for these businesses.

Acceleration of the shift by employers from defined benefit plans to defined contribution plans could adversely affect Mercer HR’s operating results.

Mercer HR currently provides clients with actuarial and consulting services relating to both defined benefit and defined contribution plans. Defined benefit pension plans generally require more services than defined contribution plans because defined benefit plans typically involve large asset pools, complex calculations to determine employer costs, funding requirements and sophisticated analysis to match liabilities and assets over long periods of time. If organizations shift to defined contribution plans more rapidly than we anticipate and we do not adjust our service offerings to take account of that change, Mercer HR’s operating results could be adversely affected.

Item 1B. Unresolved Staff Comments.

There are no unresolved comments to be reported pursuant to Item 1B.

Item 2. Properties.

MMC and its subsidiaries have major office locations in and around New York, London and Boston. We also maintain other offices around the world.

MMC and certain of its subsidiaries, including Marsh USA Inc., Mercer Human Resource Consulting, Inc. and Mercer Management Consulting, Inc., own, directly and indirectly through special-purpose subsidiaries, a 55% condominium interest covering approximately 894,000 square feet in a 44-story building in midtown Manhattan in New York City, which serves as MMC’s worldwide headquarters. MMC’s owned interest is financed by a loan that is non-recourse to MMC (except in the event of certain prohibited actions) and secured by a first mortgage lien on the condominium interests and a first priority assignment of leases and rents. In the event of a default in the payment of the loan and certain credit rating downgrade events, MMC would be obligated to pay rent for the entire occupancy of the mortgaged property. MMC leases an additional 556,000 square feet of space in its headquarters building of which 322,000 square feet has been subleased to third parties. MMC and its subsidiaries lease an additional 673,000 square feet in various locations around New York City in support of its operations, including a lease covering approximately 420,000 rentable square feet in a building in Hoboken, New Jersey.

The principal offices of the Marsh and Mercer subsidiaries in the United Kingdom currently are located in the City of London, comprising 354,000 square feet under a long term lease. Marsh and Mercer subsidiaries lease an additional 362,000 square feet of office space in and around London in support of their operations, of which approximately 209,000 square feet are subleased to third parties.

The principal executive offices of the Putnam subsidiaries comprise approximately 300,000 square feet of leased space located in the financial district of Boston, Massachusetts. Putnam also leases approximately 656,000 square feet in various locations in the Boston area for investor services and other activities in support of its operations.

Item 3. Legal Proceedings.

Information regarding legal proceedings is set forth in note 16 to the consolidated financial statements appearing under Item 8 (“Financial Statements and Other Supplementary Data”) of this report.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for MMC’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

For information regarding dividends paid and the number of holders of MMC’s common stock, see the table entitled “Selected Quarterly Financial Data and Supplemental Information (Unaudited)” on the last page of Item 8 (“Financial Statements and Other Supplementary Data”) of this report.

MMC’s common stock is listed on the New York, Chicago and London stock exchanges. The high and low stock prices (NYSE composite quotations) for our common stock for each quarterly period and year in 2006 and 2005 are as follows:

	2006		2005
	Stock Price Range		Stock Price Range
	High	Low	High	Low
First Quarter	$32.73	$28.94	$34.25	$27.00
Second Quarter	$31.29	$25.90	$30.90	$26.87
Third Quarter	$29.49	$24.00	$30.50	$26.67
Fourth Quarter	$32.47	$27.27	$33.42	$26.79
Full Year	$32.73	$24.00	$34.25	$26.67

On February 27, 2007, the closing price of MMC’s common stock on the NYSE was $29.28.

The following table sets forth information regarding MMC’s purchases of its common stock on a monthly basis during the fourth quarter of 2006. Share repurchases are recorded on a trade date basis.

Issuer Repurchases of Equity Securities
			(c)	(d)
			Total Number of	Maximum Number
	(a)		Shares Purchased	of Shares that May
	Total Number	(b)	as Part of Publicly	Yet Be Purchased
	of Shares	Average Price	Announced Plans	Under the Plans or
Period	Purchased	Paid per Share	or Programs (1)	Programs
October 1, 2006 –
October 31, 2006	0	—	0	49,904,636
November 1, 2006 –
November 30, 2006	0	—	0	49,904,636
December 1, 2006 –
December 31, 2006	0	—	0	49,904,636
Total	0	—	0	49,904,636

(1)

On March 18, 1999, MMC’s board of directors authorized the repurchase of up to 40 million shares of MMC’s common stock, and on May 18, 2000 the board further authorized the repurchase of up to an additional 88 million shares. There is no expiration date specified under either of these authorizations. While MMC made no share repurchases in 2005 or in 2006, in previous years MMC has repurchased, and in the future may repurchase, shares of its common stock, on the open market or otherwise, for treasury and to meet requirements for the issuance of shares relating to MMC’s various stock compensation and benefit programs. The timing and level of MMC’s share repurchase activity may be affected by MMC’s priorities relating to the use of its cash flows for a variety of purposes. These purposes may include, in addition to share repurchases, the funding of dividends, acquisitions, investments, pension contributions and debt reduction.

Item 6. Selected Financial Data.

Marsh & McLennan Companies, Inc. and Subsidiaries
FIVE-YEAR STATISTICAL SUMMARY OF OPERATIONS

																	Compound
For the Years Ended December 31,																	Growth Rate
(In millions except per share figures)		2006			2005		^(b)	2004		^(b)	2003			2002			2001-2006
Revenue:
Service Revenue		$	11,699		$	11,395		$	11,527		$	11,100		$	10,039		4	%
Investment Income (Loss)			222			183			200			100			67
Total Revenue			11,921			11,578			11,727			11,200			10,106		4	%
Expenses:
Compensation and Benefits			7,113			6,897			6,685			5,710			5,025		9	%
Other Operating Expenses			3,350			3,788			3,476			3,032			2,845		1	%
Regulatory and Other Settlements			—			40			969			10			—
Total Expenses			10,463			10,725			11,130			8,752			7,870		6	%
Operating Income			1,458	^(a)		853	^(a)		597	^(a)		2,448			2,236		(3	)%
Interest Income			64			47			21			24			19
Interest Expense			(303	)		(332	)		(219	)		(185	)		(160	)
Income Before Income Taxes and Minority
Interest			1,219			568			399			2,287			2,095		(5	)%
Income Taxes			388			191			239			751			731
Minority Interest, Net of Tax			13			10			8			20			18
Income From Continuing Operations			818			367			152			1,516			1,346		(3	)%
Discontinued Operations, Net of Tax			172			37			24			24			19		70	%
Net Income		$	990		$	404		$	176		$	1,540		$	1,365		—
Basic Income Per Share Information:
Income From Continuing Operations		$	1.49		$	0.68		$	0.29		$	2.85		$	2.49		(3	)%
Income From Discontinued Operations		$	0.31		$	0.07		$	0.04		$	0.04		$	0.03		73	%
Net Income		$	1.80		$	0.75		$	0.33		$	2.89		$	2.52		—
Average Number of Shares Outstanding			549			538			526			533			541
Diluted Income Per Share Information:
Income From Continuing Operations		$	1.45		$	0.67		$	0.29		$	2.77		$	2.42		(3	)%
Income From Discontinued Operations		$	0.31		$	0.07		$	0.04		$	0.04		$	0.03		60	%
Net Income		$	1.76		$	0.74		$	0.33		$	2.81		$	2.45		1	%
Average Number of Shares Outstanding			557			543			535			548			557
Dividends Paid Per Share		$	0.68		$	0.68		$	1.30		$	1.18		$	1.09		(8	)%
Return on Average Stockholders’ Equity			18	%		8	%		3	%		29	%		27	%
Year-end Financial Position:
Working capital		$	285		$	911		$	256		$	189		$	(199	)
Total assets		$	18,137		$	17,892		$	18,498		$	15,053		$	13,855
Long-term debt		$	3,860		$	5,044		$	4,691		$	2,910		$	2,891
Stockholders’ equity		$	5,819		$	5,360		$	5,056		$	5,451		$	5,018
Total shares outstanding (net of treasury
shares)			552			546			527			527			538
Other Information:
Number of employees			55,500			54,900			63,900			60,400			59,400
Stock price ranges	—
U.S. exchanges	— High	$	32.73		$	34.25		$	49.69		$	54.97		$	57.30
	— Low	$	24.00		$	26.67		$	22.75		$	38.27		$	34.61

	(a)	Includes net restructuring costs of $87 million, $317 million and $337 million in 2006, 2005 and 2004, respectively.
	(b)	Certain balances have been reclassified to conform with current presentation. See Note 1 to the Consolidated Financial Statements.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations, appearing under Item 7 of this report, for discussion of significant items affecting our results of operations in 2006 and 2005.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

Marsh & McLennan Companies, Inc. and Subsidiaries (“MMC”) is a global professional services firm. MMC’s subsidiaries include Marsh Inc. (“Marsh”), which provides risk and insurance services; Guy Carpenter & Company, LLC (“Guy Carpenter”), which provides reinsurance services; Kroll Inc. (“Kroll”), which provides risk consulting and technology services; Mercer Inc. (“Mercer”), which provides human resource and specialty consulting services; and Putnam Investments (“Putnam”), which provides investment management services. MMC’s approximately 55,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries.

MMC operates in four principal business segments based on the services provided. Risk and Insurance Services includes risk management and insurance and reinsurance broking and services, provided primarily by Marsh and Guy Carpenter. Risk Consulting & Technology, conducted through Kroll, includes risk consulting and related investigative, intelligence, financial, security and technology services. Consulting, which comprises the activities of Mercer Human Resource Consulting and Mercer’s Specialty Consulting Businesses, includes human resource consulting and related services, and specialized management and economic consulting services. We conduct Investment Management through Putnam. Please see Note 18 to the consolidated financial statements, which discusses MMC’s agreement to sell Putnam to Great-West Lifeco Inc. A fuller description of our segments’ business activities is included in Part I, Item 1 of this report.

We describe the primary sources of revenue and categories of expense for each segment below, in our discussion of segment financial results. Management evaluates performance based on segment operating income, which reflects expenses directly related to segment operations, but not MMC corporate-level expenses. A reconciliation of segment operating income to total operating income is included in Note 17 to the consolidated financial statements included elsewhere in this report. The accounting policies used for each segment are the same as those used for the consolidated financial statements.

This MD&A contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” at the outset of this report.

Significant Developments in 2006

MMC’s historical financial information should be viewed in light of the significant developments discussed below.

As described more fully below, results of operations in 2006 reflect, among other items:

stock option expense under SFAS 123(R) (“Share-Based Payment”), which MMC adopted effective July 1, 2005. MMC’s 2006 results include stock option expense in each segment for the full year. The 2005 results reflect a charge for six months (from the date of adoption on July 1, 2005) recorded in corporate expenses;
restructuring savings and charges under MMC’s 2005 and 2006 restructuring plans;
the sale of Sedgwick Claims Management Services in the first quarter of 2006, the gain from which appears in discontinued operations;
the sale of Price Forbes, MMC’s U.K.-based wholesale brokerage business in the third quarter of 2006, the loss from which, net of current year earnings, is included in discontinued operations;

the sale of Kroll Security International (“KSI”), Kroll’s international high-risk asset and personal protection division in the fourth quarter of 2006, the gain from which, net of current year operating loss, is included in discontinued operations; and
the continuing decline in market service revenues in the risk and insurance services segment.

Consolidated Results of Operations

For the Years Ended December 31,
(In millions, except per share figures)	2006		2005		2004
Revenue:
Service revenue	$	11,699	$	11,395	$	11,527
Investment income (loss)		222		183		200
Operating revenue		11,921		11,578		11,727
Expense:
Compensation and benefits		7,113		6,897		6,685
Other operating expenses		3,350		3,788		3,476
Settlement and other costs		—		40		969
Operating expenses		10,463		10,725		11,130
Operating income	$	1,458	$	853	$	597
Income from Continuing Operations	$	818	$	367	$	152
Discontinued Operations, net of tax		172		37		24
Net income	$	990	$	404	$	176
Income from Continuing Operations Per Share:
Basic	$	1.49	$	0.68	$	0.29
Diluted	$	1.45	$	0.67	$	0.29
Net Income Per Share:
Basic	$	1.80	$	0.75	$	0.33
Diluted	$	1.76	$	0.74	$	0.33
Average number of shares outstanding:
Basic		549		538		526
Diluted		557		543		535

Consolidated operating income in 2006 increased 71% to $1.5 billion, resulting from a 3% increase in operating revenue and a 2% decrease in operating expenses. Revenue increases in consulting and risk consulting & technology were partly offset by decreases in risk and insurance services and investment management. The decrease in operating expenses reflects cost savings from restructuring activities, reduced net restructuring and related charges as well as lower costs related to several significant expense items, discussed in more detail below under “Consolidated Revenue and Expense”. These expense savings were partly offset by incremental costs, primarily related to stock options under SFAS 123(R).

Results from discontinued operations in 2006 were $172 million net of tax, primarily resulting from the gain on the sale of Sedgwick Claims Management Services in January 2006. In the third quarter of 2006, MMC completed the sale of Price Forbes, its U.K.-based wholesale insurance broker. The loss on the disposal of Price Forbes and net income associated with its 2006 results are included in discontinued operations. The results of Price Forbes were insignificant to MMC’s 2005 results and, therefore, prior year amounts have not been restated. In the fourth quarter of 2006, Kroll completed the sale of Kroll Security International (“KSI”), its international high-risk asset and personal protection division. The gain on the disposal of KSI, and the financial results associated with 2006 and prior periods, are included in discontinued operations.

Consolidated Revenues and Expenses

Consolidated revenue for the year ended December 31, 2006 was $11.9 billion, a 3% increase over the prior year. Higher revenue in the consulting and risk consulting & technology segments was partly offset by lower revenue in the risk and insurance services and investment management segments. Consolidated revenue increased 3% on an underlying basis, which includes the impact of a $71 million reduction in market services revenue.

MMC does business in over 100 countries, as a result of which the impact of foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, the revenue impact of acquisitions and dispositions may affect period-over-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by identifying these impacts. The impact of foreign currency translations, acquisitions and dispositions on MMC’s operating revenues by segment is as follows:

	Twelve Months Ended								Components of Revenue Change
	December 31,						% Change				Acquisitions/
							GAAP		Currency		Dispositions		Underlying
(In millions, except percentage figures)	2006			2005			Revenue		Impact		Impact		Revenue
Risk and Insurance Services
Insurance Services	$	4,390		$	4,567		(4	)%	—		(2	)%	(2	)%
Reinsurance Services		880			836		5	%	—		—		5	%
Risk Capital Holdings (a)		193			189		2	%	—		(5	)%	7	%
Total Risk and Insurance Services		5,463			5,592		(2	)%	—		(2	)%	—
Risk Consulting & Technology (b)		979			872		12	%	—		3	%	9	%
Consulting
Human Resource Consulting		3,021			2,794		8	%	1	%	—		7	%
Specialty Consulting		1,204			1,008		19	%	1	%	2	%	16	%
Total Consulting		4,225			3,802		11	%	1	%	1	%	9	%
Investment Management		1,385			1,506		(8	)%	—		—		(8	)%
Total Operating Segments	$	12,052		$	11,772		2	%	—		—		2	%
Corporate/Eliminations		(131	)		(194	)
Total Revenue	$	11,921		$	11,578		3	%	—		—		3	%

	Twelve Months Ended								Components of Revenue Change
	December 31,						%Change				Acquisitions/
							GAAP		Currency		Dispositions		Underlying
(In millions, except percentage figures)	2005			2004			Revenue		Impact		Impact		Revenue
Risk and Insurance Services
Insurance Services	$	4,567		$	5,166		(12	)%	1	%	—		(13	)%
Reinsurance Services		836			859		(3	)%	1	%	—		(4	)%
Risk Capital Holdings (a)		189			180		5	%	—		(8	)%	13	%
Total Risk and Insurance Services		5,592			6,205		(10	)%	1	%	—		(11	)%
Risk Consulting & Technology (b)		872			371		135	%	(1	)%	114	%	22	%
Consulting
Human Resource Consulting		2,794			2,786		—		1	%	—		(1	)%
Specialty Consulting		1,008			851		19	%	—		1	%	18	%
Total Consulting		3,802			3,637		4	%	1	%	—		3	%
Investment Management		1,506			1,710		(12	)%	—		—		(12	)%
Total Operating Segments	$	11,772		$	11,923		(1	)%	1	%	4	%	(6	)%
Corporate/Eliminations		(194	)		(196	)
Total Revenue	$	11,578		$	11,727		(1	)%	1	%	4	%	(6	)%

(a)		Risk Capital Holdings owns MMC’s investments in private equity funds, insurance and financial services firms.
(b)		Certain reclassifications have been made to prior year amounts to conform with current presentation. The data presented excludes the KSI division, which is included in discontinued operations.

Revenue

In 2006, risk and insurance services revenue decreased 2% compared with 2005 and was flat on an underlying basis. A 5% increase in underlying revenue in reinsurance services was offset by a 2% decrease in insurance services, partly resulting from a $71 million decline in market service revenue. Risk consulting & technology revenue increased 12% due to growth in Kroll’s corporate advisory and restructuring, technology services and security businesses. Consulting revenue increased 11%, resulting from a 19% increase in Mercer’s specialty consulting businesses and an 8% increase in Mercer HR consulting. Investment management revenue declined 8%, primarily due to a decrease in assets under management, partly offset by higher investment gains.

During 2005, revenue in the risk and insurance services segment decreased 10% from 2004. Underlying revenue declined 11%, resulting from a $407 million decline in market services revenue, lower levels of new business and renewals and the impact of lower insurance premium rates. These declines were partly offset by the impact of foreign currency exchange rates. Risk consulting & technology revenue increased $501 million. Due to the acquisition of Kroll in July 2004, results in 2005 include a full year of revenue for Kroll, compared with six months of revenue in 2004. Underlying growth in risk consulting & technology was 22%, due to growth in technology services, corporate advisory and restructuring, and background screening. Consulting revenue increased 4%, resulting from a 19% increase in Mercer’s specialty consulting businesses. Investment management revenue declined 12% as a result of the decrease in assets under management and lower investment income.

Operating Expenses

Consolidated operating expenses in 2006 decreased 2% from 2005. The decrease in operating expenses reflects cost savings from restructuring activities; a decrease in net restructuring and related charges; lower settlement, legal and regulatory costs related to proceedings involving MMC and certain of its subsidiaries; and lower costs related to employee retention awards, partly offset by higher compensation costs, primarily in the consulting segment due to increased headcount and higher incentive compensation. Expenses in 2006 also reflect lower amortization of prepaid dealer commissions and lower costs related to professional liability claims. Expenses in 2005 include a charge of $37 million for Putnam’s estimate of costs to address issues relating to the calculation of certain amounts previously paid to Putnam by the Putnam mutual funds in the form of cost reimbursements to Putnam for transfer agency services relating to defined contribution operations. These decreases in 2006 were partly offset by higher expenses related to stock options. Due to the adoption of SFAS 123(R) on July 1, 2005, the prior year includes expenses related to stock options for only six months while 2006 includes stock option expense for the full year. In 2006, the costs related to stock options are included in segment results. In 2005, the costs related to stock options are included in Corporate.

Consolidated operating expenses in 2005 decreased 4% from 2004. This was primarily due to savings from restructuring initiatives and lower regulatory and other settlement expenses, partly offset by employee retention costs, the impact of acquisitions, higher benefits costs, and incremental costs, primarily related to stock options, resulting from the implementation of SFAS 123 (R). In addition, Putnam’s expenses in 2005 include a charge of $37 million for the estimated cost necessary to address issues relating to the calculation of certain amounts previously paid to Putnam by the Putnam mutual funds in the form of cost reimbursements to Putnam for transfer agency services relating to defined contribution operations. Expenses in 2004 include an $850 million charge related to the NYAG/NYSID settlement, costs of $224 million related to Putnam’s settlement and agreements with the SEC and Office of the Secretary of the Commonwealth of Massachusetts and restructuring costs of $337 million, partly offset by a $105 million credit from the final insurance settlement related to World Trade Center losses.

Restructuring and Related Activities

MMC initiated restructuring activities in the first quarter of 2005 (the “2005 Plan”) and the third quarter of 2006 (the “2006 Plan”). In 2006 we incurred net restructuring costs of $87 million and related charges of $38 million from actions taken under these restructuring plans. The costs and annualized savings relating to the plans are discussed below.

2005 Plan

MMC’s actions under the 2005 Plan are complete. MMC is currently realizing annualized savings of approximately $400 million attributable to the 2005 Plan relating primarily to the risk and insurance services segment. In early 2006, MMC began implementing its plan to eliminate excess space in its corporate headquarters building in mid-town New York (“headquarters building”). Costs related to its headquarters building incurred through June 30, 2006 (approximately $40 million) and savings generated from those actions (approximately $10 million) were recognized as part of the 2005 Plan.

2006 Plan

In September 2006, MMC announced cost savings initiatives related to firm-wide infrastructure, organization structure and operating company business processes which are expected to result in annualized savings of approximately $350 million when fully implemented by the end of 2008, and result in restructuring charges and related costs of approximately $225 million. The cost savings

initiatives are expected to be implemented in several phases – Phase 1 began in September 2006, with several additional phases to follow. The discussion below identifies the areas impacted and savings expected from various phases of the 2006 Plan.

Phase 1 of the 2006 Plan is expected to result in cost savings of $160 million. The expected savings from this phase comprise $70 million from operating company process improvements and $90 million from corporate infrastructure and process improvements in IT, real estate and corporate functions. Staff reductions of more than 750 are expected. During 2006, MMC recorded a net charge of $10 million in connection with actions taken under Phase 1 that includes a $74 million gain on the sale of five floors in MMC’s headquarters building, more than offset by costs primarily related to severance and exit costs for facilities. Through December 2006, the actions under Phase 1 are expected to result in annualized savings of approximately $110 million beginning in the first quarter of 2007. These actions under Phase 1 are expected to be completed by the second quarter of 2007, except for certain actions related to MMC’s headquarters building, discussed below.

As part of its ongoing review of operations, Marsh has identified additional actions that are expected to result in the reduction of 170 positions (“Phase 2”). These actions are expected to increase the expected annualized savings from the 2006 Plan by approximately $40 million and result in additional charges of approximately $40 million related to severance and exit costs for facilities. In the fourth quarter of 2006, MMC incurred costs of $14 million related to this second phase of the 2006 Plan.

MMC currently expects additional annualized savings of $190 million under one or more future phases of the 2006 Plan, resulting from infrastructure improvements in information technology, procurement, human resources, finance and real estate, as well as organizational structure and business process improvements. Detailed plans relating to these future phases are not yet complete, and may impact the amount of expected savings, expected costs or both that will result from these planned actions. Savings from these additional phases are expected to be realized as the actions are implemented through the end of 2008.

As noted above, MMC has been reducing its occupancy at its headquarters building in New York. Phase 1 of the 2006 Plan includes net costs of $8 million and expected annualized savings of approximately $25 million related to these actions. The expected net costs of $8 million comprise both gains on the sale of owned floors and losses on sub-leases of leased floors, which will be recognized at the earlier of when the floors are vacated or when sub-lease agreements are executed. During the fourth quarter of 2006, MMC sold its condominium interest in five floors of its headquarters building, realizing a gain of $74 million. The disposal of these floors is an integral part of MMC’s overall restructuring plan and the gain from this disposal has been included as a reduction of other operating expenses, consistent with the classification of other costs for actions taken related to this and other facilities MMC has vacated. The sale of the five floors will reduce MMC’s annual facilities costs by approximately $5 million, which is included in the $110 million of savings from Phase 1 of the 2006 Plan, as discussed above.

MMC expects to vacate an additional seven floors, five of which it leases and expects to sub-lease and two of which it owns and expects to lease to a third party. Additional costs of $60 million are expected from these remaining actions, which are expected to generate annualized savings of $20 million when completed over the next 12-18 months.

Businesses Exited in 2006 and 2005

In December 2006, Kroll completed the sale of KSI, its international security operation that provided high-risk asset and personal protection services. The financial results of KSI are included in discontinued operations.

sell, are included in discontinued operations in the consolidated statement of income. The prior year’s amounts have not been restated because the results of Price Forbes were insignificant to MMC’s 2005 results. MMC completed the sale of Price Forbes in September 2006.

In October 2005, Marsh completed the sale of Crump Group, Inc., its U.S.-based wholesale insurance broker. The gain on the sale was recognized in the fourth quarter of 2005. In December 2005 MMC agreed to sell its majority interest in Sedgwick CMS Holdings (“SCMS”). The sale of SCMS was completed on January 31, 2006, and the associated gain on the sale was recognized in the first quarter of 2006. Crump and SCMS are classified as discontinued operations in the accompanying financial statements.

In May 2005, MMC sold the assets of MMC Capital, which had been MMC’s private equity management subsidiary, to Stone Point Capital LLC (“Stone Point”), an entity controlled by the former managers of MMC Capital for approximately $3 million. At the time of the asset sale, Stone Point assumed responsibility for management of the Trident Funds and other private equity funds previously managed by MMC Capital. MMC does not participate in the investment decisions or management of Stone Point or the private equity funds managed by Stone Point. MMC, through its subsidiary Risk Capital Holdings, continues to own investments in firms such as Ace Ltd., XL Capital Ltd. and Axis Capital Holdings, Ltd., as well as its investments in the Trident II and other funds managed by Stone Point.

Subsequent Event

On January 31, 2007, MMC entered into a stock purchase agreement with Great-West Lifeco Inc. (“GWL”), a majority-owned subsidiary of Power Financial Corporation, pursuant to which GWL will purchase Putnam Investments Trust. The sale includes Putnam’s interest in the T.H. Lee private equity business. The after-tax cash proceeds to MMC are expected to be approximately $2.5 billion, subject to possible adjustment based on (i) changes in Putnam’s adjusted stockholders’ equity between September 30, 2006 and closing and (ii) any decline below an agreed threshold in Putnam’s adjusted asset management revenue between December 31, 2006 and closing. For further information and a copy of the stock purchase agreement, please see our Form 8-K filed on February 1, 2007. MMC expects the sale of Putnam to close in mid-2007. Putnam is classified as part of continuing operations in this annual report because the decision to sell Putnam was not made until after December 31, 2006 and Putnam did not meet the criteria to be classified as a discontinued operation in 2006. We expect to classify Putnam as a discontinued operation in the first quarter of 2007.

Risk and Insurance Services

In the Risk and Insurance Services segment, MMC’s subsidiaries and other affiliated entities act as brokers, agents or consultants for insureds, insurance underwriters and other brokers in the areas of risk management, insurance broking and insurance program management services, primarily under the name of Marsh; and engage in reinsurance broking, catastrophe and financial modeling services and related advisory functions, primarily under the name of Guy Carpenter.

Marsh and Guy Carpenter are compensated for brokerage and consulting services primarily through fees paid by clients and/or commissions paid out of premiums charged by insurance and reinsurance companies. Commission rates vary in amount depending upon the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer, the capacity in which the broker acts and negotiations with clients. Revenues are affected by premium rate levels in the insurance/reinsurance markets, since compensation is frequently related to the premiums paid by insureds/reinsureds. In many cases, compensation may be negotiated in advance on the basis of the estimated value of the services to be performed. Revenue is also affected by fluctuations in the amount of risk retained by insurance and reinsurance clients themselves and by increases or decreases in the value of the risks that have been insured, new and lost business, and the volume of business from new and existing clients.

Effective October 1, 2004, Marsh eliminated contingent compensation, or market services agreements with insurers, under which it had received revenues based upon such factors as the overall volume, growth and, in some cases, profitability, of the total business placed by Marsh with a given insurer.

For billing and other administrative services, Marsh and Guy Carpenter receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others. The investment of fiduciary funds is regulated by state and other insurance authorities. These regulations typically provide for segregation of fiduciary funds and limit the types of investments that may be made with them. Interest income from these investments varies depending on the amount of funds invested and applicable interest rates, both of which vary from time to time.

Following the sale of MMC Capital’s business in May 2005, we no longer receive fees in connection with the private equity investments previously managed by MMC Capital, nor do we receive management fees or origination fees related to this business, except that MMC retained the right to receive certain performance fees relating to the Trident II private equity partnership. We continue to receive dividends and to recognize capital appreciation or depreciation on the investments held by Risk Capital Holdings, as well as revenue on Risk Capital Holdings’ sales of investments from time to time.

The results of operations for the risk and insurance services segment are presented below:

(In millions of dollars)	2006			2005			2004
Revenue:
Service Revenue	$	5,267		$	5,412		$	6,056
Investment Income		196			180			149
Operating Revenue		5,463			5,592			6,205
Expense		4,786			5,287			6,121
Operating Income	$	677		$	305		$	84
Operating Margin		12.4	%		5.5	%		1.4	%

Revenue

Revenue in risk and insurance services decreased 2% in 2006 compared with 2005 and was flat on an underlying basis. Higher revenue in reinsurance services and Risk Capital Holdings was offset by a decrease in insurance services.

Underlying revenue at Marsh in 2006 was down 2% as compared to 2005. In 2006, Marsh’s new business grew 10 percent globally with solid growth in all major geographies. However, new business growth was more than offset by decreased market service revenues, which declined to $43 million in 2006 from $114 million in the prior year, and the impact of a softer pricing environment in the property and casualty insurance markets.

Effective January 1, 2007, Marsh will manage certain businesses (formerly part of Risk Consulting & Technology) which had revenue of approximately $25 million in 2006.

Reinsurance services revenue increased 5%, primarily due to new business growth. Although U.S. property catastrophe reinsurance premium rates were higher, reinsurance premium rates for most other lines were stable to down and the market environment for property catastrophe reinsurance continued to be impacted by limited reinsurer capacity and higher risk retention by clients.

Risk Capital Holdings revenue in 2006 was 2% higher compared with 2005. Higher mark-to-market gains, primarily from MMC’s investments in the Trident private equity funds were partly offset by lower realized gains from sales of directly held investments and the the elimination of investment management fees following the sale of MMC Capital’s business in May 2005. Revenue in 2006 increased 7% on an underlying basis due to higher investment gains. We expect revenues related to Risk Capital Holdings to decline in 2007.

In December 2006, MMC, through its subsidiary Risk Capital Holdings, contributed its limited partnership interest in Trident III, valued at $182 million, to the U.K. Pension Fund. The transaction was recorded at the estimated fair value of MMC’s investment on the date of the contribution. Risk Capital Holdings’ revenue in 2006 included $38 million of mark-to-market gains for Trident III recognized through the date of the contribution.

At December 31, 2006, the balance of accounts receivable related to accrued market services revenue earned prior to October 1, 2004 was approximately $43 million, compared with $132 million at December 31, 2005. MMC intends to collect the remaining MSA revenue earned prior to October 1, 2004, and is seeking to enforce its rights under the contracts to collect amounts due. However, there is no assurance that MMC will be successful in collecting all amounts due. To the extent such accrued amounts are not collected, a charge to earnings would result. In 2007, MMC collected an additional $23 million of accrued market service revenue.

Revenue in the risk and insurance services segment decreased 10% in 2005 compared with 2004, reflecting decreases in both insurance services and reinsurance services revenue. In insurance services, underlying revenue decreased 13%. Excluding the impact of decreased market services revenue, underlying revenue decreased 6%, reflecting lower new business volume and lower commercial premium rates. The decrease in underlying revenue was most significant in the United States; however, the percentage decline improved in the fourth quarter compared with earlier quarters in 2005 despite continued premium rate declines in the commercial insurance marketplace. Market services revenue declined from $521 million in 2004 to $114 million in 2005.

Expense

In 2006, expenses in the risk and insurance services segment decreased 9% compared to the prior year. The decrease reflects cost savings from restructuring; a decrease in restructuring charges from $257 million in 2005 to $100 million in 2006; a decrease of $45 million in settlement, legal and regulatory costs related to market services agreements and associated shareholder and policyholder litigation; and a decrease of $78 million related to employee retention awards. In addition, 2006 expenses reflect lower incentive compensation costs and lower costs related to professional liability claims. Partly offsetting these decreases were costs of $47 million in 2006 related to employee stock options. The operating margin for 2006 improved to 12.4% from 5.5% in 2005.

Expenses in the risk and insurance services segment decreased 14% in 2005, compared with the prior year. Expenses in 2004 included a $850 million charge related to the settlement with the NYAG and NYSID.

Risk Consulting & Technology

MMC’s Risk Consulting & Technology segment primarily consists of Kroll and its subsidiaries, acquired by MMC in July 2004. Kroll services fall into two major product lines: consulting services which includes risk consulting, corporate advisory & restructuring and security; and technology enabled solutions.

Kroll receives compensation primarily in the form of fees paid by clients. These fees are typically earned on an hourly, project, fixed fee or per-unit basis. Kroll’s revenue is subject to changes in international economic and regulatory conditions. Some of Kroll’s revenue sources are counter-cyclical to the performance of the economy in general. These sources may include, for example, fees from restructuring, turnaround and forensic engagements relating to commercial bankruptcies and bond defaults. Kroll is also subject to normal competitive forces such as pricing pressures, demand for professional staff and new product development on the part of competitors, particularly in technology services.

The results of operations for the risk consulting & technology segment are presented below:

(In millions of dollars)	2006			2005			2004
Revenue	$	979		$	872		$	371
Expense		830			751			326
Operating Income	$	149		$	121		$	45
Operating Margin		15.2	%		13.9	%		12.1	%

Revenue

Risk consulting & technology revenues increased 12% in 2006 compared with 2005, 9% on an underlying basis. The technology services group, Kroll’s largest business unit, increased revenues by 12%. This unit’s Kroll OnTrack electronic discovery business responded successfully to market conditions and continued its improvement from the first quarter of 2006. The consulting services group reported double-digit growth, primarily due to strong operations performance by corporate advisory and restructuring partially due to success fees on several large engagements. Background screening was driven by strong growth in the identity theft business.

In the fourth quarter of 2006, Kroll completed the sale of KSI, its international security operation that provides high-risk asset and personal protection services. The financial results of KSI are included in discontinued operations. Effective January 1, 2007, Kroll will transfer to Marsh certain businesses which had revenue of $25 million in 2006.

The year-to-year comparisons of the segment’s revenue between 2005 and 2004 are significantly impacted by the fact that we acquired Kroll in July 2004. As a result, 2004 results include only six months of Kroll’s operations. Underlying revenue growth in 2005 was 22% due to growth in the technology services, corporate advisory and restructuring and background screening practices.

Expense

Risk consulting & technology expenses increased 11% in 2006 compared with 2005. Approximately half of the increase results from acquisitions and the impact of foreign currency fluctuation. The remaining increase reflects higher compensation in the corporate advisory and restructuring and the background screening businesses, as well as increased costs for outside services in the background screening business due to a higher volume of business. Expenses in 2006 include amortization of identified intangibles of $57 million. In addition, expenses in 2006 include a credit related to the early termination of a licensing agreement.

The year-to-year comparisons of the segment’s expenses between 2005 and 2004 are significantly impacted by the fact that we acquired Kroll in July 2004. As a result, 2004 results include only six months of Kroll’s operations. Expenses include amortization of identified intangible assets of $58 million and $24 million in 2005 and 2004, respectively.

Consulting

MMC conducts business in its Consulting segment through Mercer Inc. and its subsidiaries and affiliates. Mercer operates through two main business groups. Mercer Human Resource Consulting (“Mercer HR”) includes practice groups specializing in retirement and investments, outsourcing, health and benefits and talent. The Mercer Specialty Consulting Businesses focus on management consulting, organizational design and change management, and economic consulting.

The major component of Mercer’s revenue, in both Mercer HR and the Mercer Specialty Consulting Companies, is fees paid by clients for advice and services. Mercer HR, principally through its health & benefits line of business, also earns significant revenue in the form of commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts,

primarily life, health and accident coverages. Revenue for Mercer global investment’s discretionary investment management business and certain of Mercer HR’s outsourcing business defined contribution administration services consists principally of fees based on assets under administration.

Revenue in the consulting business is affected by, among other things, global economic conditions, including changes in clients’ particular industries and markets. Revenue is also subject to competition due to the introduction of new products and services, broad trends in employee demographics, the effect of government policies and regulations, and fluctuations in interest and foreign exchange rates. Revenues from the provision of discretionary investment management services and retirement trust and administrative services are significantly affected by securities market performance.

The results of operations for the consulting segment are presented below:

(In millions of dollars)	2006			2005			2004
Revenue:
Service Revenue	$	4,224		$	3,802		$	3,637
Investment Income		1			—			—
Operating Revenue		4,225			3,802			3,637
Expense		3,759			3,351			3,228
Operating Income	$	466		$	451		$	409
Operating Margin		11.0	%		11.9	%		11.2	%

Revenue

Consulting revenue in 2006 increased 11% compared with 2005. Revenue in Mercer HR increased 8%, or 7% on an underlying basis driven by strong growth in retirement and investments, and talent. Mercer Specialty Consulting revenues grew 19%, 16% on an underlying basis. Each of the Mercer Specialty companies contributed to this performance, led by Mercer Oliver Wyman which increased underlying revenues 22%.

Consulting revenue in 2005 increased 4% compared with 2004. On an underlying basis, revenue increased 3%, due to a 18% increase in Mercer Specialty Consulting, while Mercer HR decreased 1% versus prior year. The increase in underlying revenue in Mercer Specialty reflected increases of 24% in management consulting, reflecting a 25% increase in Mercer Oliver Wyman, and 6% in economic consulting. Within Mercer HR, underlying revenue decreased 1%, reflecting a decline in the revenue associated with defined contribution plan assets previously administered by Putnam and transferred to Mercer effective January 1, 2005, increased pricing competition on traditional actuarial valuation services, and a decline in the employee benefits business transferred from Marsh to Mercer. These declines were partly offset by strong growth in talent.

Expense

Consulting expenses increased 12% in 2006 compared with 2005. The expense increase reflects restructuring charges of $27 million, the impact of acquisitions and higher compensation costs due in part to increased staff levels. In addition, expenses in 2006 include costs of $41 million related to employee stock options.

Consulting expenses increased 4% in 2005 compared with 2004. On an underlying basis, expenses increased 3%, as savings from restructuring activity and lower costs for restructuring were offset by employee retention costs, increased benefits costs and higher expenses in Specialty Consulting due to a higher volume of business.

Investment Management

MMC conducts business in its Investment Management segment through Putnam. Putnam provides investment management and related services through a broad range of investment products, including the Putnam Funds, its own family of mutual funds which are offered to individual and institutional investors. In support of the primary investment management business, Putnam subsidiaries provide other related services including transfer agency, underwriting, distribution, shareholder services, custodial, trustee and other fiduciary services. Putnam Fiduciary Trust Company (“PFTC”) serves as transfer agent, dividend disbursing agent, registrar and custodian for the Putnam Funds and provides custody services to several external clients.

On January 31, 2007, MMC entered into a stock purchase agreement with Great-West Lifeco Inc. (“GWL”), a majority-owned subsidiary of Power Financial Corporation, pursuant to which GWL will purchase Putnam Investments Trust. MMC expects the sale of Putnam to close in mid-2007. Putnam is classified as part of continuing operations in this annual report because the decision to sell Putnam was not made until after December 31, 2006 and Putnam did not meet the criteria to be classified as a discontinued operation in 2006. We expect to classify Putnam as a discontinued operation in the first quarter of 2007.

Putnam’s revenue is derived primarily from investment management and 12b-1 fees (described more fully below) received from the Putnam Funds and investment management fees for institutional accounts. Putnam also receives fees from the Putnam Funds for administrative services performed by PFTC.

Putnam companies receive fees for the investment management services provided to the Putnam Funds and institutional accounts pursuant to investment advisory contracts under which the mutual fund or institutional investor pays fees to the Putnam company that manages the fund or account. The amount of the fees varies depending on the individual mutual fund or institutional account. Fees are usually based on a sliding scale in relation to assets under management, and, in some cases are also based on investment performance. These advisory contracts generally may be terminated by either party without penalty, and contracts with the Putnam Funds must be approved annually by the fund’s shareholders or trustees, including a majority who are not affiliated with Putnam. Putnam management and the fund trustees regularly review the Putnam Fund contract fee structures in light of fund performance, the level and range of services provided, and current industry conditions.

Investment management revenues depend largely on the total value and composition of Putnam’s assets under management. Assets under management are particularly affected by fluctuations in domestic and international stock and bond market prices, and the net level of investments and withdrawals by current and new mutual fund shareholders and institutional clients. Items affecting revenue also include, but are not limited to, actual and relative investment performance, service to clients, the development and marketing of new investment products, the relative attractiveness of Putnam’s investment styles under prevailing market conditions, changes in the investment patterns of fund shareholders and institutional clients and Putnam’s ability to maintain investment management and administrative fees at current levels.

All open-end Putnam funds other than money market funds have adopted distribution plans pursuant to Rule 12b-1 under the Investment Company Act of 1940, commonly referred to as 12b-1 plans. Pursuant to these 12b-1 plans, the Putnam Funds make payments to Putnam Retail Management (“PRM”) to cover costs relating to distribution of the Putnam Funds and services provided to shareholders, at rates that differ by class of fund shares. These payments, known as Rule 12b-1 fees, enable PRM to pay service fees and other continuing compensation to firms that distribute shares of the Putnam Funds and provide services to fund shareholders. PRM retains some Rule 12b-1 fees as compensation for the costs of distribution and other services provided by Putnam and its affiliates to shareholders and for commissions advanced by Putnam at the point of sale (and recovered through fees received over time)

to firms that distribute shares of the Putnam Funds. These 12b-1 plans, and Rule 12b-1 fees paid by the Putnam Funds thereunder, are subject to annual renewal by the fund trustees and to termination by vote of the fund shareholders or by vote of a majority of the trustees who are not affiliated with Putnam.

PFTC receives compensation from the Putnam Funds for its administrative (transfer agency and shareholder services) and custodial services pursuant to, respectively, investor servicing agreements which may be terminated by either party on 90 days’ notice, and pursuant to written custody agreements which may be terminated by either party on 30 days’ notice. These contracts generally provide for compensation on the basis of several factors which vary with the type of service being provided. The transfer agent servicing fee received by PFTC is a fixed rate per account for retail shareholders and a fixed rate service fee based on assets under management for mutual fund defined contribution shareholders.

The results of operations for the investment management segment are presented below:

(In millions of dollars)	2006			2005			2004
Revenue:
Service Revenue	$	1,360		$	1,503		$	1,659
Investment Income		25			3			51
Operating Revenue		1,385			1,506			1,710
Expense		1,082			1,243			1,612
Operating Income	$	303		$	263		$	98
Operating Margin		21.9	%		17.5	%		5.7	%

Revenue

Putnam’s revenue declined 8% in 2006 compared to 2005 due to a decrease in management fees resulting from a decline in average assets under management, lower 12b-1 fee revenue and lower transfer agency fees, partly offset by higher investment income. Assets under management averaged $186 billion in 2006, a 5% decline from the $196 billion managed in the same period of 2005. Assets under management aggregated $192 billion at December 31, 2006. The increase in assets under management since December 31, 2005 results from a $19 billion positive impact of market and investment performance partly offset by net outflows of $16 billion. Net flows for the fourth quarter of 2006 were neutral. As of February 23, 2007, year-to-date net outflows were approximately $5 billion.

At December 31, 2006, assets held in equity securities represented 66% of assets under management compared with 68% in 2005 and 69% in 2004, while investments in fixed income products represented 34% compared with 32% in 2005 and 31% in 2004.

Putnam’s revenue decreased 12% in 2005, reflecting a decrease in fees due to a decline in assets under management, lower 12b-1 fee revenue, and decreased investment gains. Assets under management averaged $196 billion in 2005, a 10% decline from the $217 billion managed in 2004. Assets under management aggregated $189 billion at December 31, 2005, compared with $213 billion at December 31, 2004. The change in assets under management from December 31, 2004 results primarily from net redemptions of $31 billion, partly offset by the positive impact of market performance.

Putnam receives service fees from the Putnam mutual funds for transfer agent, custody, and other administrative services, as contracted by the Trustees of the Putnam mutual funds. Effective January 2005, the transfer agent service fee agreement was converted to a fixed rate per retail shareholder account and a fixed rate service fee based on average assets under management for mutual fund assets in defined contribution plans. For the first six months of 2004, the transfer agent service fee agreement was based on the reimbursement of the cost of service. For the third and fourth quarters

of 2004, transfer agent service fees were based on a fixed fee and recorded as revenue. The change in the service fee agreement resulted in an increase in both service fee revenue and expense of approximately $32 million in 2005 compared with 2004.

Year-end and average assets under management are presented below:

(In billions of dollars)	2006			2005			2004
Mutual Funds
Growth Equity	$	26		$	31		$	38
Value Equity		37			37			41
Blend Equity		28			26			28
Fixed Income		33			32			36
		124			126			143
Institutional:
Equity		36			34			40
Fixed Income		32			29			30
		68			63			70
Year-end Assets	$	192		$	189		$	213
Assets from Non-US Investors	$	36		$	32		$	38
Assets in Prime Money Market Funds	$	4		$	1		$	—
Average Assets	$	186		$	196		$	217

Components of year-to-date change in ending assets under management:
Net Redemptions including Dividends Reinvested	$	(16	)	$	(31	)	$	(51	)
Impact of PanAgora acquisition	$	—		$	—		$	8
Impact of Market/Performance	$	19		$	7		$	16

The categories of mutual fund assets reflect style designations aligned with each fund’s prospectus.

Expense

Expenses in 2006 decreased $161 million from 2005, due to a decrease in amortization expense for prepaid dealer commissions and the year-over-year effect of a $37 million charge in 2005 relating to costs to address issues associated with the calculation of certain amounts previously paid to Putnam by Putnam mutual funds in the form of cost reimbursements to Putnam for transfer agency services relating to defined contribution operations. Partly offsetting these decreases were costs of $14 million related to employee stock options.

Expenses for 2005 decreased 23% from 2004. Expenses in 2005 include a $37 million charge, described above. Expenses in 2004 include a charge of $224 million related to Putnam’s regulatory settlements with the SEC and the Secretary of the Commonwealth of Massachusetts on market-timing issues. Other expense reductions in 2005 include lower compensation and severance costs, reduced costs related to regulatory issues, a decrease in amortization expense for prepaid dealer commissions and a decrease in restructuring charges. These reductions were partially offset by an increase in expenses previously borne by the funds under the prior transfer agent service agreement. Putnam’s expenses in 2004 include a $25 million credit to compensation expense associated with the settlement with Putnam’s former chief executive officer.

Corporate Items

Corporate Expenses

Corporate expenses of $137 million in 2006 were $150 million lower than in 2005. The decrease is primarily due to the impact of stock option expense, which was recorded as a corporate charge in 2005 and was charged to the business segments in 2006, and lower net restructuring charges, largely resulting from a gain on the disposal of five floors in MMC’s headquarters building, partly offset by higher professional services fees.

In 2006, MMC corporate recorded a net credit of $31 million for restructuring and related charges. A $74 million gain on the sale of five floors in MMC’s headquarters building was partly offset by future rent on non-cancelable leases for floors vacated by MMC as well as accelerated amortization/depreciation related to floors that have been or will be vacated as part of the restructuring. The sale of these floors is an integral part of MMC’s overall restructuring plan and the gain from this disposal has been included as a reduction of other operating expense, consistent with the classification of other actions taken related to facilities MMC has vacated. In 2005, MMC corporate recorded $72 million of restructuring and related charges, primarily related to the consolidation of office space in London.

Corporate expenses were $287 million in 2005 compared to $39 million in 2004. Expenses in 2005 included $64 million of incremental expenses, primarily related to stock options, resulting from the adoption of SFAS 123 (R) effective July 1, 2005. The incremental cost related to the implementation of SFAS 123 (R) was charged to corporate and not to the operating segments in 2005. In addition, $6 million was recorded for severance and other termination benefits related to the 2005 Plan, and a charge of $49 million was recorded related to the consolidation of office space in London. Because the office consolidation was initiated by MMC to benefit its London operations as a whole, the related charge was recorded in corporate. Corporate expenses also reflected $30 million of charges in connection with the resolution of certain litigation and related matters.

Corporate expenses in 2004 included $18 million of restructuring costs, including severance and other termination benefits, future rent under non-cancelable leases and lease termination costs. The impact of the final settlement for insured losses related to the WTC reduced Corporate expenses in 2004. The replacement value of the assets exceeded their book value by $105 million which was recorded as a reduction of other operating expenses.

Interest

Interest income earned on corporate funds amounted to $64 million in 2006, an increase of $17 million from 2005. The increase in interest income reflected the combination of higher average corporate cash balances and generally higher average interest rates in 2006 compared with the prior year. Interest expense of $303 million in 2006 decreased from $332 million in 2005. The decrease in interest expense is primarily due to $34 million recorded in the third quarter of 2005 for the prepayment charge incurred in connection with the refinancing of the mortgage on MMC’s headquarters building in New York.

Interest income was $47 million for 2005, an increase of $26 million from 2004. The increase in interest income reflected the combination of higher average corporate cash balances and generally higher average interest rates in 2005 compared with 2004. Interest expense was $332 million in 2005 compared to $219 million in 2004. The increase in interest expense is due to an increase in the amount of average outstanding debt resulting from the acquisition of Kroll and a $34 million charge in 2005 for the prepayment of the $200 million mortgage on MMC’s corporate headquarters in New York. In addition, interest expense in 2005 includes a write-off of $7 million of unamortized deferred financing costs related to MMC’s prior revolving credit agreements which were refinanced in December 2005.

Income Taxes

MMC’s consolidated effective tax rate was 31.8% in 2006 compared to 33.7% in 2005. The change primarily reflects the release of valuation allowances on certain deferred tax assets and the resolution of tax audit issues, partly offset by an adjustment of the 2005 tax provision estimates to the tax return amount.

MMC’s consolidated effective tax rate was 33.7% in 2005, a decrease from 59.4% in 2004. The decrease in the rate was primarily due to the impact in 2004 of the non-deductibility of Putnam’s $224 million in regulatory settlements and of a lower benefit related to Marsh’s $850 million settlement of the NYAG lawsuit; partially offset in 2005 by an increase in valuation allowances provided on net operating losses in certain state and foreign jurisdictions.

The effective tax rate is sensitive to the geographic mix of MMC’s earnings, which may have a favorable or unfavorable impact on the rate. Furthermore, losses in certain jurisdictions cannot be offset by earnings from other operations, and may require valuation allowances affecting the rate, depending on estimates of their realizability.

MMC establishes allowances for potential liabilities that may arise out of tax audits and litigation to the extent that such liabilities are probable and can be estimated in accordance with SFAS No. 5. Once established, allowances are evaluated based on the facts and circumstances that exist at each reporting period. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue for which an allowance had previously been recorded. Such adjustments could have a material impact on MMC’s effective tax rate, net income, and cash flows in a particular future period.

2005 Stock Option Exchanges

At the May 2005 Annual Meeting, MMC’s shareholders approved a stock option exchange offer for MMC options. Under the exchange offer, eligible employees could exchange certain deeply underwater options for new options with an estimated fair value equal to 90% of the value of options surrendered in exchange, calculated using the Black-Scholes pricing model. Effective July 1, 2005, employees elected to exchange 42 million options for 16 million new options. The exchange resulted in the retirement of 26 million options and no incremental compensation expense was incurred in connection with the new option grants. The exercise price of the new options of $27.86 is equal to the market price of MMC’s common stock as of the new grant date. The new options were unvested when granted and will vest on the later of the second anniversary of the new option grant or the vesting date of the tendered option. The other terms and conditions of the new options are substantially similar to those of the tendered options they replaced.

On September 29, 2005, certain eligible participants in the Putnam Investments Trust Equity Partnership Plan participated in a voluntary option exchange pursuant to the terms of the Offer to Exchange Certain Outstanding Options (the “Offer to Exchange”), dated August 30, 2005. Under the Offer to Exchange, holders of options on Class B shares meeting certain eligibility requirements could elect to exchange those options for restricted shares with the equivalent value of the exchanged options, as determined using the Black-Scholes valuation model. As a result of the Offer to Exchange, a total of 2,201,850 options were retired and 139,388 restricted shares were issued at a grant price of $28.26 per share.

Liquidity and Capital Resources

MMC’s routine liquidity needs are primarily for servicing debt and paying dividends on outstanding stock. Our primary source for meeting these requirements is cash flows from our operations.

Cash on our consolidated balance sheets includes funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown separately in the consolidated balance sheet as an offset to fiduciary liabilities.

Operating Cash Flows

MMC generated $878 million of cash from operations in 2006 compared with $399 million in 2005. These amounts reflect the net income earned by MMC during those periods, excluding gains or losses from the disposition of businesses, the gain on the sale of five floors from the MMC headquarters building and adjusted for non-cash charges and changes in working capital which relate, primarily, to the timing of payments for accrued liabilities or receipts of assets. These include payments in 2006 of approximately $270 million for regulatory settlements and tax payments of $136 million related to the disposition of businesses. Cash generated from the disposition of businesses is included in investing cash flows.

In January 2005 MMC reached a settlement with the NYAG and NYSID that resolved the actions commenced by them against MMC and Marsh. As a result of this agreement, MMC recorded a charge in 2004 for an $850 million policyholder fund. MMC paid the first $255 million to the fund on June 1, 2005. An additional $255 million was paid on June 1, 2006, and $170 million will be paid to the fund on or before each of June 1, 2007 and 2008, respectively. These amounts are included in Regulatory settlements in the consolidated balance sheets.

MMC has funding requirements for the U.S. non-qualified and non-U.S. pension plans in 2007 of approximately $19 million and $176 million, respectively. MMC’s policy for funding its tax qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth in U.S. and applicable foreign law. There currently is no ERISA funding requirement for the U.S. qualified plan in 2006 or in 2007. Funding requirements for non-U.S. plans vary country by country. Contribution rates are determined by the local actuaries based on local funding practices and requirements. Funding amounts may be influenced by future asset performance, discount rates and other variables impacting the assets and/or liabilities of the plan. In addition, amounts funded in the future, to the extent not due under regulatory requirements, may be affected by alternative uses of MMC’s cash flows, including dividends, investments, and share repurchases.

During 2006, MMC contributed approximately $20 million to the U.S. pension plans and $319 million to the significant non-U.S. pension plans, compared with $229 million for U.S. plans and $498 million for significant non-U.S. plans in 2005. The contribution to the non-U.S. plans in 2006 includes a non-cash contribution of MMC’s investment in Trident III, a private equity limited partnership. The contribution was recorded based on the estimated fair value on the date of the contribution of $182 million.

Financing Cash Flows

Net cash used for financing activities was $759 million in 2006 compared with $128 million of net cash provided by financing activities in 2005. During 2006, MMC reduced outstanding debt by approximately $570 million.

In December 2005, MMC and certain of its foreign subsidiaries entered into a new $1.2 billion multi-currency revolving credit facility. Subsidiary borrowings under the facility are unconditionally guaranteed by MMC. The facility, which will expire in December 2010, replaced MMC’s $1.0 billion and $700 million revolving credit facilities which were scheduled to expire in 2007 and 2009, respectively. In December 2005, certain of MMC’s foreign subsidiaries borrowed approximately $510 million under the new facility, primarily to fund the repatriation of accumulated earnings pursuant to the American Jobs Creation Act of 2004. There was $94 million outstanding under this facility at December 31, 2006.

In September 2005, MMC issued $550 million of 5.15% senior notes due 2010 and $750 million of 5.75% senior notes due 2015 (the “2005 Notes”). The net proceeds from the 2005 Notes were used to pay down the $1.3 billion term loan facility established in late 2004.

Also in September 2005, MMC refinanced its headquarters building in New York City by entering into a 30-year, $475 million mortgage loan agreement at a fixed annual rate of 5.7%. This replaced the existing $200 million, 9.8% mortgage due in 2009. The incremental proceeds, net of a $34 million prepayment charge, were used to pay down outstanding short-term debt.

MMC’s senior debt is currently rated Baa2 by Moody’s and BBB by Standard & Poor’s. MMC’s short-term debt is currently rated P-2 by Moody’s and A-2 by Standard & Poor’s. MMC carries a negative outlook from both Moody’s and Standard & Poor’s.

MMC paid total dividends of $374 million in 2006 ($0.68 per share) and $363 million ($0.68 per share) in 2005. MMC made no share repurchases in 2006.

In January 2007, MMC announced that its board of directors had approved an increase to MMC’s quarterly cash dividend to 19 cents per share from 17 cents previously.

MMC also maintains other credit facilities, guarantees and letters of credit with various banks, primarily related to operations located outside the United States, aggregating $270 million at December 31, 2006 and $354 million at December 31, 2005. There was $8 million outstanding under these facilities at December 31, 2006.

Investing Cash Flows

Net cash used for investing activities amounted to $136 million in 2006 compared with $153 million of net cash provided by investing activities in 2005. Cash generated by the sale of SCMS totaled $326 million in 2006, which was partly offset by net purchases of long term investments. Cash used for acquisitions totaled $221 million in 2006 versus $74 million in 2005. Remaining deferred cash payments of approximately $75 million related to acquisitions completed in 2006 and prior years are recorded in Accounts payable and accrued liabilities or in Other liabilities in the consolidated balance sheets at December 31, 2006. Proceeds from sales related to fixed assets and capitalized software includes $125 million of proceeds related to the sale of the floors from the MMC headquarters building. In addition, cash used to purchase investments of $193 million was partly offset by the sale of securities of $118 million in 2006. In 2005, cash generated by the sale of securities totaled $333 million.

MMC expects the after tax proceeds from the anticipated sale of Putnam in mid-2007 to approach $2.5 billion, subject to certain adjustments in the sale agreement. MMC will analyze various alternatives for use of the expected proceeds including acquisitions, adjustments to our capital structure, such as debt repayment and/or share repurchases, and investments in our existing businesses.

MMC’s additions to fixed assets and capitalized software, which amounted to $307 million in 2006 and $345 million in 2005, primarily relate to computer equipment purchases, the refurbishing and modernizing of office facilities and software development costs.

MMC has committed to potential future investments of approximately $222 million in connection with various private equity funds and other MMC investments. The commitment comprises $82 million related to Trident II and other funds managed by Stone Point and $140 million related to possible investments by Putnam. At December 31, 2006, MMC has no future commitments related to Trident III, as those commitments were assumed by MMC’s U.K. pension plan when the investment in Trident III was contributed to the plan in December 2006. The majority of MMC’s other investment commitments for funds managed by Stone Point are related to Trident II, the investment period for which is now closed for new investments. Any remaining capital calls for Trident II would relate to follow-on investments in existing portfolio companies or for management fees or other partnership expenses. Significant future capital calls related to Trident II are not expected. Although it is anticipated that Trident II will be harvesting its remaining portfolio in 2007 and thereafter, the timing of any portfolio company sales and capital distributions is unknown and not controlled by MMC.

Putnam has investment commitments of $140 million for three active Thomas H. Lee (“THL”) funds, of which Putnam believes approximately $42 million will not be called. Putnam is authorized to commit to invest up to $187 million in future THL investment funds, but is not required to do so. At December 31, 2006 none of that additional $187 million is committed. These commitments will remain with Putnam when the anticipated sale of Putnam closes.

Approximately $37 million was invested in 2006 related to all of the commitments discussed above (including investments in Trident III prior to its contribution to MMC’s U.K. pension plan).

Commitments and Obligations

MMC’s contractual obligations were comprised of the following as of December 31, 2006 (dollars in millions):

	Payment due by Period
			Within		1-3		4-5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Bank Borrowings-International	$	8	$	8	$	—	$	—	$	—
Current portion of long-term debt		1,103		1,103		—		—		—
Long-term debt		3,865		—		669		566		2,630
NYAG/NYSID settlement		340		170		170		—		—
Net operating leases		3,472		462		762		566		1,682
Service agreements		451		129		182		99		41
Other long-term obligations		86		73		10		2		1
Total	$	9,325	$	1,945	$	1,793	$	1,233	$	4,354

Market Risk

Certain of MMC’s revenues, expenses, assets and liabilities are exposed to the impact of interest rate changes and fluctuations in foreign currency exchange rates and equity markets.

Interest Rate Risk
MMC manages its net exposure to interest rate changes by utilizing a mixture of variable and fixed rate borrowings to finance MMC’s asset base. MMC uses interest rate swaps on a limited basis to manage exposure to interest rate movements on its cash and investments as well as interest expense on borrowings. Rate swaps are only executed with highly creditworthy counterparties.

MMC had the following investments and debt instruments subject to variable interest rates:

	December 31,
(In millions of dollars)	2006
Cash and cash equivalents invested
in certificates of deposit and time deposits (Note 1)	$	2,089
Fiduciary cash and investments (Note 1)	$	3,704
Variable rate debt outstanding (Note 11)	$	601

These investments and debt instruments are discussed more fully in the above-indicated notes to the consolidated financial statements.

Based on the above balances, if short-term interest rates increase by 10% or 48 basis points over the course of the year, annual interest income, including interest earned on fiduciary funds, would increase by approximately $15 million. However, this would be partially offset by a $2 million increase in interest expense resulting in a net increase to income before income taxes and minority interest of $13 million.

Foreign Currency Risk
The translated values of revenue and expense from MMC’s international risk and insurance services and consulting operations are subject to fluctuations due to changes in currency exchange rates. We periodically use forward contracts and options to limit foreign currency exchange rate exposure on net income and cash flows for specific, clearly defined transactions arising in the ordinary course of business.

Equity Price Risk
MMC holds investments in public and private companies, as well as in certain private equity funds managed by Stone Point. Publicly traded investments of $124 million are classified as available for sale under SFAS No. 115. Non-publicly traded investments of $75 million are accounted for using the cost method and $366 million are accounted for using the equity method under APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. Changes in value of trading securities are recognized in income when they occur. The investments that are classified as available for sale or that are not publicly traded are subject to risk of changes in market value, which if determined to be other than temporary, could result in realized impairment losses. MMC periodically reviews the carrying value of such investments to determine if any valuation adjustments are appropriate under the applicable accounting pronouncements.

Other
A significant number of lawsuits and regulatory proceedings are pending. See Note 16 to the consolidated financial statements.

Management’s Discussion of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and judgments that affect reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Management considers the policies discussed below to be critical to understanding MMC’s financial statements because their application places the most significant demands on management’s judgment, and requires management to make estimates about the effect of matters that are inherently uncertain. Actual results may differ from those estimates.

Legal and Other Loss Contingencies
MMC and its subsidiaries are subject to numerous claims, lawsuits and proceedings. GAAP requires that liabilities for contingencies be recorded when it is probable that a liability has been incurred before the balance sheet date and the amount can be reasonably estimated. Significant management judgment is required to comply with this guidance. MMC analyzes its litigation exposure based on available information, including consultation with outside counsel handling the defense of these matters, to assess its potential liability.

In addition, to the extent that insurance coverage is available, significant management judgment is required to determine the amount of recoveries that are expected under MMC’s various insurance programs.

Retirement Benefits
MMC maintains qualified and non-qualified defined benefit pension plans for its U.S. and a variety of defined benefit and defined contribution plans for eligible non-U.S. employees. MMC’s policy for funding its tax qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth in U.S. and applicable foreign laws.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). SFAS 158 requires that MMC

recognize the funded status of its overfunded defined benefit pension and retiree medical plans (the “Plans”) as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The gains or losses and prior service costs or credits that have not been recognized as components of net periodic costs are recorded as a component of Accumulated Other Comprehensive Income (“AOCI”), net of tax, in MMC’s balance sheet. MMC adopted the provisions of SFAS 158, prospectively, on December 31, 2006.

The determination of net periodic pension cost is based on a number of actuarial assumptions, including an expected long-term rate of return on plan assets, the discount rate and assumed rate of salary increase. Significant assumptions used in the calculation of net periodic pension costs and pension liabilities are disclosed in Note 8 to the consolidated financial statements. MMC believes the assumptions for each plan are reasonable and appropriate and will continue to evaluate actuarial assumptions at least annually and adjust them as appropriate. Based on its current assumptions, MMC expects pension expense to decrease by approximately $53 million in 2007 and currently expects to contribute approximately $195 million to the plans during 2007.

During 2005 MMC made changes to the U.S. pension plan that were designed to reduce MMC’s benefits costs going forward. The changes, which were effective January 1, 2006, include changing the benefit formula from a final average salary to a career average salary as well as a change in the calculation for early retirement benefits. During 2006, MMC made similar changes to its U.K. pension plans.

Future pension expense or credits will depend on plan provisions, future investment performance, future assumptions, and various other factors related to the populations participating in the pension plans. Holding all other assumptions constant, a half-percentage point change in the rate of return and discount rate assumptions would affect net periodic pension cost for the U.S. and U.K. plans, which comprise approximately 84% of total pension plan liabilities, as follows:

	0.5 Percentage						0.5 Percentage
	Point Increase						Point Decrease
(In millions of dollars)	U.S.			U.K.			U.S.		U.K.
Assumed Rate of Return	$	(14.4	)	$	(23.4	)	$	14.4	$	23.4
Discount Rate	$	(28.4	)	$	(51.5	)	$	30.4	$	54.6

Changing the discount rate and leaving the other assumptions constant may not be representative of the impact on expense, because the long-term rates of inflation and salary increases are correlated with the discount rate.

MMC contributes to certain health care and life insurance benefits provided to its retired employees. The cost of these postretirement benefits for employees in the United States is accrued during the period up to the date employees are eligible to retire, but is funded by MMC as incurred. This postretirement liability is included in Other liabilities in the consolidated balance sheets. The key assumptions and sensitivity to changes in the assumed health care cost trend rate are discussed in Note 8 to the consolidated financial statements.

Income Taxes
MMC’s tax rate reflects its income, statutory tax rates and tax planning in the various jurisdictions in which it operates. Significant judgment is required in determining the annual tax rate and in evaluating tax positions. Tax allowances are established when, despite the belief that the tax return positions are fully supportable, there is the potential that they may be successfully challenged. These allowances, as well as the related interest, are adjusted to reflect changing facts and circumstances.

Tax law requires items be included in MMC’s tax returns at different times than the items are reflected in the financial statements. As a result, the annual tax expense reflected in the consolidated statements of income is different than that reported in the tax returns. Some of these differences are permanent, such as expenses that are not deductible in the returns, and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which benefit has already been recorded in the financial statements. Valuation allowances are established for deferred tax assets when it is estimated that future taxable income will be insufficient to use a deduction or credit in that jurisdiction. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements.

As discussed below, under New Accounting Pronouncements, MMC’s accounting for income taxes will be impacted by the adoption of FASB Interpretation No. 48.

Share-based Payment
Effective July 1, 2005, MMC adopted SFAS 123(R) “Share-based Payment”, which requires, among other things, that the estimated fair value of stock options be charged to earnings. Significant management judgment is required to determine the appropriate assumptions for inputs such as volatility and expected term necessary to estimate option values. In addition, management judgment is required to analyze the terms of the plans and awards granted thereunder to determine if awards will be treated as equity awards or liability awards, as defined by SFAS 123(R).

As of December 31, 2006, there was $84 million of unrecognized compensation cost related to MMC’s option awards and $15 million of unrecognized compensation cost related to Putnam’s option awards. The weighted-average periods over which the costs are expected to be recognized are 1.4 years for MMC and 1.7 years for Putnam. Also as of December 31, 2006, there was $203 million of unrecognized compensation cost related to MMC’s restricted stock, restricted stock unit and deferred stock unit awards and $94 million of unrecognized compensation cost related to Putnam’s restricted stock awards.

See Note 9 to the consolidated financial statements for additional information regarding the adoption of SFAS 123(R).

Investment Valuation
MMC holds investments in both public and private companies, as well as certain private equity funds managed by Stone Point and T.H. Lee. The majority of the public investments are accounted for as available for sale securities under SFAS No. 115. Where applicable, certain investments are accounted for under APB Opinion No. 18. MMC periodically reviews the carrying value of its investments to determine if any valuation adjustments are appropriate under the applicable accounting pronouncements. MMC bases its review on the facts and circumstances as they relate to each investment. Fair value of private equity investments is determined by the Funds’ investment managers. Factors considered in determining the fair value of private equity investments include: implied valuation of recently completed financing rounds that included sophisticated outside investors; performance multiples of comparable public companies; restrictions on the sale or disposal of the investments; trading characteristics of the securities; and the relative size of the holdings in comparison to other private investors and the public market float. In those instances where quoted market prices are not available, particularly for equity holdings in private companies, or formal restrictions limit the sale of securities, significant management judgment is required to determine the appropriate value of MMC’s investments. MMC reviews the appropriateness of valuation results for significant private equity investments with the fund manager.

New Accounting Pronouncements

New accounting pronouncements are discussed in Note 1 to MMC’s consolidated financial statements.

In September 2006, the FASB issued SFAS 158 which requires that MMC recognize the funded status of its overfunded defined benefit pension and retiree medical plans (the “Plans”) as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The gains or losses and prior service costs or credits that have not been recognized as components of net periodic costs are recorded as a component of AOCI, net of tax, in MMC’s balance sheet. MMC adopted the provisions of SFAS 158, prospectively, on December 31, 2006. The impact of adopting SFAS 158 caused a reduction in assets of $660 million and an increase in liabilities of $245 million, including a related adjustment to tax benefits of $423 million. The net impact of adopting SFAS 158 was a reduction of MMC’s stockholders’ equity of $905 million, $804 million including an adjustment for the impact of recording a minimum pension credit prior to the adoption of SFAS 158. This adoption has no impact on MMC’s consolidated statements of income or cash flows. The adoption of SFAS 158 does not impact any financial covenants in MMC’s bank agreements, nor does MMC expect adoption to adversely impact its credit ratings. SFAS 158 also requires companies to measure the funded status of their plans as of their year-end balance sheet date no later than 2008. MMC’s existing policy is to measure the funded status of its Plans as of its year-end balance sheet date and therefore is not impacted by this requirement.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands required disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of MMC’s 2008 fiscal year. MMC is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires that MMC recognize in its consolidated financial statements the impact of a tax position when it is more likely than not that the tax position would be sustained upon examination by the tax authorities based on the technical merits of the position. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 will be effective for MMC beginning in the first quarter of 2007, with the cumulative effect of any change in accounting principle recorded as an adjustment to opening retained earnings. On February 27, 2007 the FASB issued draft implementation guidance in the form of a proposed FASB Staff Position subject to a thirty day comment period. Pending finalization of this guidance, MMC is evaluating the impact of adopting FIN 48 on its consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See the information set forth under the heading “Market Risk” above under Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

Item 8. Financial Statements and Supplementary Data.

Financial Highlights

For the Years Ended December 31,
(In millions, except per share figures)	2006		2005		2004
Revenue	$	11,921	$	11,578	$	11,727
Income Before Income Taxes and Minority Interest	$	1,219	$	568	$	399
Income From Continuing Operations	$	818	$	367	$	152
Net Income	$	990	$	404	$	176
Stockholders’ Equity	$	5,819	$	5,360	$	5,056
Diluted Income Per Share:
Income From Continuing Operations	$	1.45	$	0.67	$	0.29
Net Income	$	1.76	$	0.74	$	0.33
Dividends Paid Per Share	$	0.68	$	0.68	$	1.30
Year-end Stock Price	$	30.66	$	31.76	$	32.90

Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Income

For the Years Ended December 31,
(In millions, except per share figures)			2006			2005			2004
Revenue:
Service revenue			$	11,699		$	11,395		$	11,527
Investment income (loss)				222			183			200
Operating revenue				11,921			11,578			11,727
Expense:
Compensation and benefits				7,113			6,897			6,685
Other operating expenses				3,350			3,788			3,476
Settlement and other costs				—			40			969
Operating expenses				10,463			10,725			11,130
Operating income				1,458			853			597
Interest income				64			47			21
Interest expense				(303	)		(332	)		(219	)
Income before income taxes and minority interest				1,219			568			399
Income taxes				388			191			239
Minority interest, net of tax				13			10			8
Income from continuing operations				818			367			152
Discontinued operations, net of tax				172			37			24
Net income			$	990		$	404		$	176
Basic net income per share	— Continuing operations		$	1.49		$	0.68		$	0.29
	— Net income		$	1.80		$	0.75		$	0.33
Diluted net income per share	— Continuing operations		$	1.45		$	0.67		$	0.29
	— Net income		$	1.76		$	0.74		$	0.33
Average number of shares outstanding		— Basic		549			538			526
		— Diluted		557			543			535

The accompanying notes are an integral part of these consolidated statements.

Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Balance Sheets

December 31,
(In millions of dollars)	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	2,089		$	2,020
Receivables
Commissions and fees		2,615			2,407
Advanced premiums and claims		82			117
Other		467			363
		3,164			2,887
Less — allowance for doubtful accounts and cancellations		(156	)		(157	)
Net receivables		3,008			2,730
Assets of discontinued operations		—			153
Other current assets		737			359
Total current assets		5,834			5,262
Goodwill and intangible assets		7,775			7,773
Fixed assets, net		1,043			1,178
Long-term investments		597			277
Pension related assets		613			1,596
Other assets		2,275			1,806
	$	18,137		$	17,892
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	1,111		$	498
Accounts payable and accrued liabilities		2,477			1,733
Regulatory settlements — current portion		238			333
Accrued compensation and employee benefits		1,507			1,413
Accrued income taxes		216			192
Dividends payable		—			93
Liabilities of discontinued operations		—			89
Total current liabilities		5,549			4,351
Fiduciary liabilities		3,704			3,795
Less — cash and investments held in a fiduciary capacity		(3,704	)		(3,795	)
		—			—
Long-term debt		3,860			5,044
Regulatory settlements		173			348
Pension, postretirement and postemployment benefits		1,089			1,180
Liability for errors and omissions		629			630
Other liabilities		1,018			979
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1 par value, authorized 6,000,000 shares, none issued		—			—
Common stock, $1 par value, authorized 1,600,000,000 shares,
issued 560,641,640 shares in 2006 and 2005		561			561
Additional paid-in capital		1,138			1,143
Retained earnings		5,691			4,989
Accumulated other comprehensive loss		(1,272	)		(756	)
		6,118			5,937
Less — treasury shares at cost, 8,727,764 in 2006 and
15,057,704 in 2005		(299	)		(577	)
Total stockholders’ equity		5,819			5,360
	$	18,137		$	17,892

The accompanying notes are an integral part of these consolidated statements.

Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

For the Years Ended December 31,
(In millions of dollars)	2006			2005			2004
Operating cash flows:
Net income	$	990		$ 404			$ 176
Adjustments to reconcile net income to cash generated from operations:
Depreciation of fixed assets and capitalized software		391			391			392
Amortization of intangible assets		97			99			64
Provision (benefit) for deferred income taxes		60			36			(71	)
Net (gains) losses on investments		(222	)		(183	)		(200	)
Disposition of assets		(218	)		(19	)		—
Accrual of stock-based compensation, resulting from
adoption of SFAS 123(R)		116			64			—
Changes in assets and liabilities:
Net receivables		(157	)		57			(107	)
Other current assets		(651	)		122			60
Other assets		19			(229	)		93
Accounts payable and accrued liabilities		682			(35	)		858
Accrued compensation and employee benefits		94			(167	)		328
Accrued income taxes		(242	)		4			(39	)
Other liabilities		(184	)		(72	)		446
Effect of exchange rate changes		103			(73	)		69
Net cash provided by operations		878			399			2,069
Financing cash flows:
Net decrease in commercial paper		—			(129	)		(311	)
Proceeds from issuance of debt		322			2,341			4,265
Other repayments of debt		(888	)		(1,990	)		(2,003	)
Purchase of treasury shares		—			—			(536	)
Issuance of common stock		181			269			456
Dividends paid		(374	)		(363	)		(681	)
Net cash (used for) provided by financing activities		(759	)		128			1,190
Investing cash flows:
Capital expenditures		(307	)		(345	)		(376	)
Net sales (purchases) of long-term investments		(107	)		318			120
Proceeds from sales related to fixed assets		136			46			23
Dispositions		375			156			—
Acquisitions		(221	)		(74	)		(2,364	)
Other, net		(12	)		52			41
Net cash (used for) provided by investing activities		(136	)		153			(2,556	)
Effect of exchange rate changes on cash and cash equivalents		73			(43	)		28
Increase in cash and cash equivalents		56			637			731
Cash and cash equivalents at beginning of period		2,033			1,396			665
Cash and cash equivalents at end of period		2,089			2,033			1,396
Cash and cash equivalents — reported as discontinued operations		—			(13	)		(26	)
Cash and cash equivalents — continuing operations	$	2,089		$2,020			$1,370

The accompanying notes are an integral part of these consolidated statements.

Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income

For the Years Ended December 31,
(In millions, except per share figures)	2006			2005			2004
COMMON STOCK
Balance, beginning of year	$	561		$	561		$	561
Issuance of shares under stock compensation plan and
employee stock purchase plans		—			—			—
Balance, end of year	$	561		$	561		$	561
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year	$	1,143		$	1,316		$	1,301
Acquisitions		—			(15	)		1
SFAS 123(R) periodic compensation costs and implementation adjustment		90			202			—
Issuance of shares to MMC retirement plan		—			(160	)		—
Issuance of shares under stock compensation plans and
employee stock purchase plans and related tax benefits		(95	)		(200	)		14
Balance, end of year	$	1,138		$	1,143		$	1,316
RETAINED EARNINGS
Balance, beginning of year	$	4,989		$	5,044		$	5,386
Net income (a)		990			404			176
Dividend equivalents paid		(8	)		(2	)		—
Dividends declared — (per share amounts: $.51 in 2006, $.85 in
2005, $.99 in 2004)		(280	)		(457	)		(518	)
Balance, end of year	$	5,691		$	4,989		$	5,044
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year	$	(756	)	$	(370	)	$	(279	)
Foreign currency translation adjustments (b)		305			(271	)		234
Unrealized investment holding losses, net of
reclassification adjustments (c)		(17	)		(85	)		(58	)
Initial adoption of SFAS 158, net of tax		(905	)		—			—
Minimum pension liability adjustment (d)		101			(30	)		(266	)
Net deferred loss on cash flow hedges (e)		—			—			(1	)
Balance, end of year	$	(1,272	)	$	(756	)	$	(370	)
TREASURY SHARES
Balance, beginning of year	$	(577	)	$	(1,495	)	$	(1,518	)
Purchase of treasury shares		—			—			(524	)
Acquisitions		2			82			7
Issuance of shares to MMC retirement plan		—			365			—
Issuance of shares under stock compensation plans and
employee stock purchase plans		276			471			540
Balance, end of year	$	(299	)	$	(577	)	$	(1,495	)
TOTAL STOCKHOLDERS’ EQUITY	$	5,819		$	5,360		$	5,056
TOTAL COMPREHENSIVE INCOME (a+b+c+d+e)	$	1,379		$	18		$	85

The accompanying notes are an integral part of these consolidated statements.

Marsh & McLennan Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Nature of Operations: Marsh & McLennan Companies, Inc. (“MMC”), a global professional services firm, is organized based on the different services that it offers. Under this organizational structure, MMC operates in four principal business segments: risk and insurance services, risk consulting & technology, consulting and investment management.

As discussed in Note 5, MMC disposed of several businesses in 2006 and 2005, which are classified as discontinued operations in these financial statements.

The risk and insurance services segment provides risk management and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations, and private clients. Prior to the sale of MMC Capital’s business to Stone Point Capital, LLC (“Stone Point”) on May 31, 2005, the risk and insurance services segment also provided services principally in connection with originating, structuring and managing investments, primarily in the insurance and financial services industries. MMC no longer participates in the investment decisions or management of Stone Point or the Trident funds. However, MMC continues to own investments in the funds managed by Stone Point and directly owns investments in certain insurance and financial services entities through its subsidiary Marsh and McLennan Risk Capital Holdings (“Risk Capital Holdings”).

The risk consulting & technology segment provides various risk consulting and related risk mitigation services to corporate, government, institutional and individual clients. These services fall into two main business groups: consulting, which includes corporate advisory & restructuring services, consulting services and security services; and technology-enabled solutions.

The consulting segment provides advice and services to the managements of organizations in the areas of Human Resource Consulting, comprising retirement and investments, health & benefits, outsourcing and talent; and Specialty Consulting, comprising management consulting, organization design and change management, and economic consulting.

The investment management segment primarily provides securities investment advisory distribution and administrative services for institutional accounts and a group of publicly held investment companies.

As discussed in Note 18, on February 1, 2007 MMC announced an agreement to sell Putnam, which comprises its entire investment management segment.

Principles of Consolidation: The accompanying consolidated financial statements include all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Fiduciary Assets and Liabilities: In its capacity as an insurance broker or agent, MMC collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. MMC also collects claims or refunds from underwriters on behalf of insureds.

Unremitted insurance premiums and claims are held in a fiduciary capacity. Interest income on these fiduciary funds, included in service revenue, amounted to $180 million in 2006, $151 million in 2005, and $130 million in 2004. Since fiduciary assets are not available for corporate use, they are shown in the balance sheet as an offset to fiduciary liabilities. At December 31, 2006, Putnam managed the investment of approximately $1.4 billion of the fiduciary assets.

Net uncollected premiums and claims and the related payables were $8.7 billion and $10.4 billion at December 31, 2006 and 2005, respectively. MMC is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Net uncollected premiums and claims and the related payables are, therefore, not assets and liabilities of MMC and are not included in the accompanying consolidated balance sheets.

In certain instances, MMC advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. These advances are made from corporate funds and are reflected in the accompanying consolidated balance sheets as receivables.

Revenue: Risk and Insurance Services revenue includes insurance commissions, fees for services rendered, interest income on certain fiduciary funds and market service fees from insurers earned on placements made prior to October 2004. Effective October 1, 2004 Marsh agreed to eliminate contingent compensation agreements with insurers. Insurance commissions and fees for risk transfer services generally are recorded as of the effective date of the applicable policies or, in certain cases (primarily in MMC’s reinsurance operations), as of the effective date or billing date, whichever is later. Commissions are net of policy cancellation reserves, which are estimated based on historic and current data on cancellations. Fees for non-risk transfer services provided to clients are recognized over the period in which the services are provided, using a proportional performance model. Fees resulting from achievement of certain performance thresholds are recorded when such levels are attained and such fees are not subject to forfeiture. Prior to 2006, revenue also includes compensation for services provided in connection with the organization, structuring and management of insurance, financial and other industry-focused investments, as well as appreciation or depreciation that has been recognized on holdings in such investments. MMC no longer receives management fees or origination fees related to Stone Point’s business, except that MMC retained the right to receive certain performance fees related to the Trident II private equity partnership. MMC will continue to receive dividends and to recognize capital appreciation or depreciation on its investment holdings. In addition, Crump Group, Inc. and Sedgwick CMS Holdings and Price Forbes, which were previously part of this segment, are classified as discontinued operations.

Risk Consulting & Technology compensation consists of fees paid by clients. Such fees are typically charged on an hourly, project, or fixed fee basis, and sometimes on a per service or per unit basis. Revenue is recognized as the services are performed pursuant to the applicable contractual arrangements. Revenue related to time and materials arrangements is recognized in the period in which the services are performed. Revenue from hourly or daily rate engagements is recognized as hours are expended at the agreed-upon billing amounts. Revenue related to fixed price arrangements is recognized based upon a proportional performance model. Revenue provided from credit services is recognized when the information is delivered to the customer, either electronically or by other means. The impact of any revisions in estimated total revenue and direct contract costs is recognized in the period in which they become known. Expenses incurred by professional staff in the generation of revenue are billed to the client and included in revenue. Kroll records either billed or unbilled accounts receivable based on case-by-case invoicing determinations. Software revenue is recognized when the product is shipped, with the exception of royalty-based products, for which revenue is recognized as applicable royalty reports are received. Software revenue is recorded net of estimated customer returns and allowances. Contingent fees are recognized as earned and upon satisfaction of all conditions to their payment. Kroll Security International, which was previously part of this segment, is classified as a discontinued operation.

Consulting revenue includes fees paid by clients for advice and services and commissions from insurance companies for the placement of individual and group contracts. Fee revenue for engagements where Mercer is remunerated based on time plus out-of-pocket expenses is recognized based on the amount of time consulting professionals expend on the engagement. For fixed fee engagements, revenue is recognized using a proportional performance model. Revenue from insurance commissions not subject to a fee arrangement is recorded over the effective period of the applicable policies. Revenues for asset based fees are recognized on an accrual basis by applying the daily/monthly rate as contractually agreed with the client to the net asset value.

Investment Management revenue is derived primarily from investment management fees and 12b-1 fees. Investment management fees are recognized as services are provided. Such fees are based on the net assets of the funds and are collected directly from the applicable funds. Mutual fund distribution fees are recognized over the period in which the fees can be charged to the related funds, or when a contingent deferred sales charge is triggered by a redemption. Sales of mutual fund shares are recorded on a settlement date basis and commissions thereon are recorded on a trade date basis. Fees resulting from achievement of specified performance thresholds are recorded when such levels are attained and such fees are not subject to forfeiture.

MMC has deferred the recognition of performance fee revenue in connection with the management of certain private equity funds of $172 million at December 31, 2006. This revenue is based on the investment performance over the life of each private equity fund, and future underperformance may result in the forfeiture of such revenue. As noted above, MMC only recognizes performance fee revenue when such fees are no longer subject to forfeiture, which for the $172 million noted above, may take a number of years to resolve.

Cash and Cash Equivalents: Cash and cash equivalents primarily consist of certificates of deposit and time deposits, generally with original maturities of three months or less.

Fixed Assets: Fixed assets are stated at cost less accumulated depreciation and amortization. Expenditures for improvements are capitalized. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and any gain or loss is reflected in income. Expenditures for maintenance and repairs are charged to operations as incurred.

Depreciation of buildings, building improvements, furniture, and equipment is provided on a straight-line basis over the estimated useful lives of these assets. Leasehold improvements are amortized on a straight-line basis over the periods covered by the applicable leases or the estimated useful life of the improvement, whichever is less. MMC periodically reviews long-lived assets for impairment whenever events or changes indicate that the carrying value of assets may not be recoverable.

The components of fixed assets are as follows:

December 31,
(In millions of dollars)	2006			2005
Furniture and equipment	$	1,365		$	1,557
Land and buildings		397			457
Leasehold and building improvements		844			888
		2,606			2,902
Less — accumulated depreciation and amortization		(1,563	)		(1,724	)
	$	1,043		$	1,178

Investment Securities: MMC holds investments in both public and private companies, as well as certain private equity funds (managed by Stone Point and T.H. Lee) and seed shares for mutual funds. Publicly traded investments are classified as available for sale or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), and carried at market value. Non-publicly traded investments are carried at cost in accordance with APB Opinion No. 18 (“APB 18”). Changes in the fair value of trading securities are recorded in earnings when they occur. Changes in the fair value of available for sale securities are recorded in stockholders’ equity, net of applicable taxes, until realized. Securities classified as trading or available for sale under SFAS 115, or carried at cost under APB 18, are included in Long-term investments in the consolidated balance sheets.

Certain investments, primarily investments in private equity funds, are accounted for using the equity method under APB 18. The underlying private equity funds follow investment company accounting, where securities within the fund are carried at fair value. MMC records its proportionate share of the change in fair value of the funds in earnings. Securities recorded using the equity method are included in Other assets in the consolidated balance sheets.

Gains or losses recognized in earnings from the investment securities described above are included in Investment income (loss) in the consolidated statements of income. Costs related to management of MMC’s investments, including incentive compensation partially derived from investment income and loss, are recorded in operating expenses.

Goodwill and Other Intangible Assets: Goodwill represents acquisition costs in excess of the fair value of net assets acquired. Goodwill is reviewed at least annually for impairment. MMC performs an annual impairment test for each of its reporting units during the third quarter of each year. Fair values of the reporting units are estimated using a market approach or a discounted cash flow model. Carrying values for the reporting units are based on balances at the prior quarter end and include directly identified assets and liabilities as well as an allocation of those assets and liabilities not recorded at the reporting unit level. Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated lives and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature.

Capitalized Software Costs: MMC capitalizes certain costs to develop, purchase, or modify software for the internal use of MMC. These costs are amortized on a straight-line basis over periods ranging from three to ten years. Costs incurred during the preliminary project stage and post implementation stage are expensed as incurred. Costs incurred during the application development stage are capitalized. Costs related to updates and enhancements are only capitalized if they will result in additional functionality. Computer software costs of $270 million and $284 million, net of accumulated amortization of $663 million and $524 million at December 31, 2006 and 2005, respectively, are included in Other assets in the consolidated balance sheets.

Legal and Other Loss Contingencies: MMC and its subsidiaries are subject to a significant number of claims, lawsuits and proceedings. MMC records liabilities for contingencies including legal costs when it is probable that a liability has been incurred before the balance sheet date and the amount can be reasonably estimated. To the extent such losses can be recovered under MMC’s insurance programs, estimated recoveries are recorded when losses for insured events are recognized. Significant management judgment is required to estimate the amounts of such contingent liabilities and the related insurance recoveries. MMC analyzes its litigation exposure based on available information, including consultation with outside counsel handling the defense of these matters, to assess its potential liability. Contingent liabilities are not discounted.

Income Taxes: MMC’s tax rate reflects its income, statutory tax rates and tax planning in the various jurisdictions in which it operates. Significant judgment is required in determining the annual tax rate and in evaluating tax positions. Tax allowances are established for uncertain tax positions when, despite the belief that the tax return positions are consistent with applicable law, there is the potential that they may be successfully challenged. The allowances, are established for all identified liabilities and related interest, that are probable and can be estimated in accordance with SFAS No. 5. The possibility that a taxing authority may not assert an issue is not taken into account. It is assumed that the taxing authority will become fully aware of all facts relating to an issue and propose adjustments as appropriate. Allowances are evaluated based upon the facts and circumstances that exist at each reporting period. Allowances for issues that have been asserted by tax authorities and resolved by agreement are adjusted in the quarter when agreement is reached. If the statute of limitations operates to bar assessment of an issue that has not been asserted by a taxing authority, the related allowance is reversed at that time.

Tax law requires items to be included in MMC’s tax returns at different times than the items are reflected in the consolidated statements of income. As a result, the annual tax expense reflected in the consolidated statements of income is different than that reported in the tax returns. Some of these differences are permanent, such as expenses that are not deductible in the returns, and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which benefit has already been recorded in the financial statements. Valuation allowances are established for deferred tax assets when it is estimated that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements.

U.S. Federal income taxes are provided on unremitted foreign earnings except those that are considered permanently reinvested, which at December 31, 2006 amounted to approximately $1.6 billion. However, if these earnings were not considered permanently reinvested, the incremental tax liability which otherwise might be due upon distribution, net of foreign tax credits, would be approximately $70 million.

Derivative Instruments: All derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

Variable Interest Entities: Through Putnam, MMC manages $4.8 billion in the form of Collateralized Debt Obligations (“CDOs”), Collateralized Bond Obligations (“CBOs”) and Collateralized Loan Obligations (“CLOs”). Separate limited liability companies were established to issue the notes evidencing these obligations and to hold the underlying collateral, which consists of high-yield bonds and other securities. Putnam serves as the collateral manager for the CDOs, CBOs and CLOs. The maximum loss exposure related to the CDOs, CBOs and CLOs is limited to Putnam’s investment totaling $4.6 million in certain of these CDOs and CLOs reflected in Long-term investments in the consolidated balance sheets at December 31, 2006. MMC has concluded it is not the primary beneficiary of these entities under FIN 46(R) “Consolidation of Variable Interest Entities.”

Concentrations of Credit Risk: Financial instruments which potentially subject MMC to concentrations of credit risk consist primarily of cash and cash equivalents, commissions and fees receivable and insurance recoverables. MMC maintains a policy providing for the diversification of cash and cash equivalent investments and places its investments in an extensive number of high quality financial institutions to limit the amount of credit risk exposure. Concentrations of credit risk with respect to receivables are generally limited due to the large number of clients and markets in which MMC does business, as well as the dispersion across many geographic areas.

Per Share Data: Basic net income per share is calculated by dividing net income by the weighted average number of shares of MMC’s common stock outstanding, excluding unvested restricted stock. Diluted net income per share is calculated by reducing net income for the potential minority interest expense associated with unvested shares under the Putnam Equity Partnership Plan, discussed further in Note 9, and adding back dividend equivalent expense related to common stock equivalents, to the extent recognized in earnings. This result is then divided by the weighted average common shares outstanding, which have been adjusted for the dilutive effect of potentially issuable common shares. The following reconciles income from continuing operations to income from continuing operations for diluted earnings per share and basic weighted average common shares outstanding to diluted weighted average common shares outstanding:

For the Years Ended December 31,
(In millions)		2006			2005			2004
Income from continuing operations		$	818		$	367		$	152
Less:	Potential minority interest expense
	associated with Putnam Class B
	Common Shares		(13	)		(5	)		—
Add:	Dividend equivalent expense related to common stock equivalents		—			1			2
Income from continuing operations for diluted earnings per share		$	805		$	363		$	154
Basic weighted average common shares outstanding			549			538			526
Dilutive effect of potentially issuable common shares			8			5			9
Diluted weighted average common shares outstanding			557			543			535
Average stock price used to calculate
common stock equivalents		$	29.06		$	29.65		$	42.12

Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may vary from those estimates.

New Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132 (R)” (“SFAS 158”). SFAS 158 requires that MMC recognize the funded status of its overfunded defined benefit pension and retiree medical plans (the “Plans”) as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The gains or losses and prior service costs or credits that have not been recognized as components of net periodic costs are recorded as a component of Accumulated Other Comprehensive Income (“AOCI”), net of tax, in MMC’s balance sheet. MMC adopted the provisions of SFAS 158, prospectively, on December 31, 2006. The impact of adopting SFAS 158 caused a reduction in assets of $660 million and an increase in liabilities of $245 million, including a related adjustment to tax benefits of $423 million. The net impact of adopting SFAS 158 was a reduction to MMC’s stockholders’ equity of $905 million, $804 million including the impact of recording a minimum pension credit prior to the adoption of SFAS 158. SFAS 158 also requires companies to measure the funded status of their plans as of their year-end balance sheet date no later than 2008. MMC’s existing policy is to measure the funded status of its Plans as of its year-end balance sheet date and therefore, MMC is not impacted by this requirement.

accounting principle recorded as an adjustment to opening retained earnings. On February 27, 2007 the FASB issued draft implementation guidance in the form of a proposed FASB Staff Position subject to a thirty day comment period. Pending finalization of this guidance, MMC is evaluating the impact of adopting FIN 48 on its consolidated financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 159 on its consolidated financial position and results of operations.

Reclassifications: Certain reclassifications have been made to the prior year amounts to conform with current year presentation, in particular with regard to discontinued operations classification for Kroll Security International and certain balance sheet line items.

2. Supplemental Disclosures

The following schedule provides additional information concerning acquisitions, interest and income taxes paid:

For the Years Ended December 31,
(In millions of dollars)	2006			2005			2004
Purchase acquisitions:
Assets acquired, excluding cash	$	200		$	68		$	2,353
Liabilities assumed		—			—			(17	)
Issuance of debt and other obligations		(32	)		(8	)		(33	)
Deferred purchase consideration		53			80			61
Shares issuable		—			(66	)		—
Net cash outflow for acquisitions	$	221		$	74		$	2,364
Interest paid	$	300		$	307		$	198
Income taxes paid	$	597		$	156		$	383

An analysis of the allowance for doubtful accounts for the three years ended December 31 follows:

(In millions of dollars)	2006			2005			2004
Balance at beginning of year	$	157		$	142		$	115
Provision charged to operations		11			49			30
Accounts written-off, net of recoveries		(23	)		(25	)		(10	)
Effect of exchange rate changes		11			(9	)		7
Balance at end of year	$	156		$	157		$	142

In December 2006, MMC contributed its limited partnership interest in Trident III, valued at $182 million, to its pension plan in the United Kingdom.

In September 2005, the Company contributed 8 million shares of MMC common stock, valued at $205 million, to the U.S. qualified retirement plan.

3. Other Comprehensive Income (Loss)

The components of other comprehensive income (loss) are as follows:

For the Years Ended December 31,
(In millions of dollars)		2006			2005			2004
Foreign currency translation adjustments		$	305			$(271	)	$	234
Unrealized investment holding gains, net of income tax liability of
$2, $10 and $3 in 2006, 2005 and 2004, respectively			7			18			8
Less:	Reclassification adjustment for realized gains included in
	net income, net of income tax liability of $14, $55 and $36
	in 2006, 2005 and 2004, respectively		(24	)		(103	)		(66	)
Minimum pension liability adjustment, net of income tax liability
(benefit) of $51 in 2006, ($3) in 2005 and ($123) in 2004			101			(30	)		(266	)
Deferred loss on cash flow hedges, net of income tax benefit of $0,
$0 and $(1) in 2006, 2005 and 2004, respectively			—			—			(1	)
		$	389			$(386	)	$	(91	)

The components of accumulated other comprehensive income (loss), net of taxes, are as follows:

December 31,
(In millions of dollars)					2006			2005
Foreign currency translation adjustments					$	278		$	(27	)
Net unrealized investment gains						36			53
Minimum pension liability adjustment						—			(782	)
Net changes under SFAS 158						(1,586	)		—
					$	(1,272	)	$	(756	)

4. Acquisitions and Dispositions

During 2006, MMC made 16 acquisitions, for total purchase consideration of $200 million. The allocation of purchase consideration resulted in acquired goodwill of $132 million as of December 31, 2006. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized.

In December 2006, MMC sold its interest in Kroll Security International, which provided high risk asset and personal protection services. The gain on sale is included in discontinued operations.

In September 2006, MMC sold the assets of Price Forbes, its U.K.-based insurance wholesale operation. The loss on the sale, which included a charge in the first quarter of 2006 to reduce the carrying amount of its assets to fair value, is included in discontinued operations.

In January 2006, MMC sold its majority interest in Sedgwick CMS Holdings (“SCMS”), a provider of claims management and associated productivity services. The gain on sale, including the gain on MMC’s indirect investment in SCMS through the Trident II private equity fund, is included in discontinued operations.

During 2005, MMC made nine acquisitions, for total purchase consideration of $68 million. The allocation of purchase consideration resulted in acquired goodwill of $45 million during 2005.

In May 2005, MMC sold the assets of MMC Capital, its private equity manager, to Stone Point Capital LLC, a company controlled by the former managers of MMC Capital, for approximately $3 million. Stone Point has assumed responsibility for management of the Trident Funds and other private equity funds previously managed by MMC Capital. MMC does not participate in the investment decisions or management of Stone Point or the private equity funds managed by Stone Point. MMC continues to

own direct investments in insurance and financial services companies, including Ace Ltd., XL Capital Ltd. and Axis Capital Holdings Ltd., as well as its investments in Trident II and other funds managed by Stone Point.

5. Discontinued Operations

In the fourth quarter of 2006, Kroll completed the sale of Kroll Security International (“KSI”), its international high-risk asset and personal protection division. The gain on the disposal of KSI and the financial results associated with 2006 and prior periods are included in discontinued operations.

In the first quarter of 2006, MMC determined that Price Forbes, its U.K.-based insurance wholesale operation, met the criteria for classification as a discontinued operation. The 2006 results of Price Forbes, which include a charge to reduce the carrying amount of its assets to fair value less cost to sell, are included in discontinued operations in the consolidated statement of income. The results of Price Forbes were insignificant to MMC’s 2005 results and therefore, prior year amounts have not been restated. MMC completed the sale of Price Forbes in September 2006.

MMC sold Crump Group, Inc., its U.S.-based wholesale insurance broker, during the fourth quarter of 2005, and its majority interest in SCMS, a provider of claims management and associated productivity services, on January 31, 2006. The account balances and activities of these entities are presented as discontinued operations in the accompanying consolidated financial statements.

All of the entities classified as discontinued operations were part of MMC’s risk and insurance services segment, except KSI, which was part of MMC’s risk consulting & technology segment.

Summarized Statements of Income data for discontinued operations is as follows:

For the Years Ended December 31,
(In millions of dollars)	2006		2005		2004
Revenue	$	148	$	531	$	433
Income before provision for income tax	$	2	$	44	$	44
Provision for income tax		2		21		20
Income from discontinued operations, net of tax		—		23		24

Gain on disposal of discontinued operations		298		55		—
Provision for income tax		126		41		—
Gain on disposal of discontinued operations, net of tax		172		14		—
Discontinued operations, net of tax	$	172	$	37	$	24

Summarized Balance Sheet data for discontinued operations is as follows:

December 31,
(In millions of dollars)			2006		2005
Assets of discontinued operations:
Current assets				$—	$	40
Fixed assets, net				—		31
Goodwill and intangible assets				—		78
Other assets				—		4
Total assets of discontinued operations				$—	$	153
Liabilities of discontinued operations				$—	$	89

6. Goodwill and Other Intangibles

MMC is required to assess goodwill and any indefinite-lived intangible assets for impairment annually or more frequently if circumstances indicate impairment may have occurred. MMC performs the annual impairment test for each of its reporting units during the third quarter of each year. MMC completed its annual impairment tests in the third quarter of 2006 and determined that such assets were not impaired.

Changes in the carrying amount of goodwill are as follows:

(In millions of dollars)	2006			2005
Balance as of January 1, 2006	$	7,246		$	7,459
Goodwill acquired		132			45
Disposals		(29	)		(95	)
Purchase accounting adjustments in accordance with SFAS No. 141		(111	)		(38	)
Other adjustments ^(a)		90			(125	)
Balance as of December 31, 2006	$	7,328		$	7,246

(a)	Primarily includes foreign exchange

Goodwill allocable to each of MMC’s reportable segments is as follows: Risk and Insurance Services $3.7 billion; Risk Consulting & Technology $1.6 billion; Consulting $1.9 billion; and Investment Management $0.1 billion.

The goodwill balance at December 31, 2006 and 2005 includes approximately $115 million and $121 million, respectively, of equity method goodwill.

Amortized intangible assets consist of the cost of client lists, client relationships and trade names acquired, and the rights to future revenue streams from certain existing private equity funds. The gross cost and accumulated amortization by major intangible asset class is as follows:

2006

2005

Net

Net

December 31,

Gross

Accumulated

Carrying

Gross

Accumulated

Carrying

(In millions of dollars)

Cost

Amortization

Amount

Cost

Amortization

Amount

Customer and marketing related

$655

$266

$389

$638

$191

$447

Future revenue streams related to

existing private equity funds

200

142

200

125

Total amortized intangibles

$855

$408

$447

$838

$316

$522

Aggregate amortization expense for the years ended December 31, 2006 and 2005, was $97 million and $99 million, respectively, and the estimated future aggregate amortization expense is as follows:

For the Years Ending December 31,
(In millions of dollars)	Estimated Expense
2007	$	76
2008		70
2009		61
2010		45
2011		34
Subsequent years	161
	$	447

7. Income Taxes

Income before income taxes and minority interest shown below is based on the geographic location to which such income is attributable. Although income taxes related to such income may be assessed in more than one jurisdiction, the income tax provision corresponds to the geographic location of the income.

For the Years Ended December 31,
(In millions of dollars)	2006			2005			2004
Income before income taxes and minority interest:
U.S.	$	536			$142			$(111	)
Other		683			426			510
	$	1,219			$568			$ 399
Income taxes:
Current—
U.S. Federal	$	32			$ (22	)		$ 187
Other national governments		226			124			79
U.S. state and local		70			53			44
		328			155			310
Deferred—
U.S. Federal		146			49			(118	)
Other national governments		(51	)		(5	)		67
U.S. state and local		(35	)		(8	)		(20	)
		60			36			(71	)
Total income taxes	$	388			$191			$ 239

The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:

December 31,
(In millions of dollars)				2006			2005
Deferred tax assets:
Accrued expenses not currently deductible ^(a)				$	649		$	742
Differences related to non-U.S. operations					303			164
Accrued retirement & postretirement benefits — non-U.S. operations					239			51
Net operating losses ^(b)					96			31
Income currently recognized for tax					57			51
Other					57			62
				$	1,401		$	1,101
Deferred tax liabilities:
Unrealized investment holding gains				$	17		$	29
Differences related to non-U.S. operations					143			91
Depreciation and amortization					162			282
Accrued retirement benefits					11			107
Other					100			24
				$	433		$	533

(a)	Net of valuation allowance of $2 million and $9 million, respectively.
(b)	Net of valuation allowance of $14 million and $68 million, respectively.

December 31,
(In millions of dollars)		2006		2005
Balance sheet classifications:
Current assets	$	180	$	153
Other assets	$	799	$	415
Other liabilities	$	11	$	—

A reconciliation from the U.S. Federal statutory income tax rate to MMC’s effective income tax rate is shown below.

For the Years Ended December 31,	2006		2005		2004
	%		%		%
U.S. Federal statutory rate	35.0		35.0		35.0
U.S. state and local income taxes–net of
U.S. Federal income tax benefit	1.9		5.1		1.6
Differences related to non-U.S. operations	(5.3	)	(5.1	)	(8.2	)
NYAG lawsuit, including state taxes	—		—		12.9
Putnam regulatory settlements	—		—		19.4
Meals and entertainment	.9		1.5		2.9
Dividends paid to employees	(.6	)	(1.4	)	(3.3	)
Other	(.1	)	(1.4	)	(.9	)
Effective tax rate	31.8		33.7		59.4

Reversals of valuation allowances recorded in prior years reduced the tax provision by $29 million in 2006. The valuation allowances had a net decrease of $61 million in 2006 compared with a net increase of $26 million in 2005. Approximately $1 million of the cumulative valuation allowances relates to amounts which if realized would reduce goodwill or increase contributed capital in the future. Approximately 50% of the Company’s net operating loss carryforwards expire over various periods from 2007 through 2025, and others are unlimited. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjusts the valuation allowance accordingly. MMC evaluates all significant available positive and negative evidence, including the existence of losses in recent years and its forecast of future taxable income, in assessing the need for a valuation allowance. The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into account the Company’s recent performance. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences are deductible. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, MMC believes it is more likely than not that it will realize the benefits of the deferred tax assets, net of existing valuation allowances at December 31, 2006. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

The American Jobs Creation Act (the “Act”), adopted on October 22, 2004, provided for a special one-time tax deduction, or dividend received deduction, of 85% of qualifying foreign earnings that are repatriated in either a company’s last tax year that began before the enactment date or the first tax year that begins during the one-year period beginning on the enactment date. In the fourth quarter of 2005, MMC recorded an income tax benefit of $8 million, attributable to the repatriation of approximately $585 million of qualifying earnings under the provisions of the Act. The $8 million tax benefit resulted from the reversal of deferred tax liabilities previously provided under SFAS No. 109, which were in excess of the tax liabilities from repatriation of these qualifying earnings.

MMC is routinely examined by the Internal Revenue Service and tax authorities in the United Kingdom, as well as states in which it has significant business operations, such as California, Massachusetts and New York. The tax years under examination vary by jurisdiction. MMC regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. MMC has established tax allowances which it believes are adequate in relation to the potential assessments. MMC believes the resolution of tax matters will not have a material effect on the consolidated financial condition of MMC, although a resolution could have a material impact on MMC’s net income or cash flows and on its effective tax rate in a particular future period.

8. Retirement Benefits

MMC maintains qualified and non-qualified defined benefit pension plans for its eligible U.S. employees and a variety of defined benefit and defined contribution plans for eligible non-U.S. employees. MMC’s policy for funding its tax qualified defined benefit pension plans is to contribute amounts at least sufficient to meet the funding requirements set forth in U.S. and applicable foreign law.

Implementation of SFAS 158
In September 2006, the FASB issued SFAS 158 which requires that MMC recognize on a prospective basis the funded status of its overfunded defined benefit pension and retiree medical plans (the “Plans”) as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The offsetting adjustment to the amount of assets and liabilities required to be recognized is recorded in AOCI, net of tax, in MMC’s 2006 year-end balance sheet. Subsequent changes in the funded status will be recognized through the income statement and other comprehensive income in the year in which they occur as appropriate. The incremental effect of applying SFAS 158 on individual line items in MMC’s consolidated balance sheet as of December 31, 2006 including tax effects is as follows:

	Before
	Application of						After Application
(In millions of dollars)	Statement 158			Adjustments			of Statement 158
Goodwill and intangible assets	$	7,777		$	(2	)	$	7,775
Pension related assets		1,694			(1,081	)		613
Other assets		1,852			423			2,275
Total assets		18,797			(660	)		18,137

Accounts payable and accrued liabilities		2,439			38			2,477
Pension, postretirement and postemployment benefits		882			207			1,089
Accumulated other comprehensive loss^(a)		(367	)		(905	)		(1,272	)
Total stockholders’ equity	$	6,724		$	(905	)	$	5,819

(a)

The SFAS 158 implementation adjustment excludes a $101 million credit to the minimum pension liability.

Combined U.S. and non-U.S. Plans
The weighted average actuarial assumptions utilized for the U.S. and significant non-U.S. defined benefit plans as of the end of the year are as follows:

	Pension				Postretirement
	Benefits				Benefits
	2006		2005		2006		2005
Weighted average assumptions:
Discount rate (for expense)	5.1	%	5.5	%	5.6	%	5.9	%
Expected return on plan assets	8.2	%	8.4	%	—		—
Rate of compensation increase (for expense)	3.8	%	3.6	%	—		—
Discount rate (for benefit obligation)	5.4	%	5.1	%	5.8	%	5.6	%
Rate of compensation increase (for benefit obligation)	3.8	%	3.8	%	—		—

The long-term rate of return assumption is selected for each plan based on the facts and circumstances that exist as of the measurement date, and the specific portfolio mix of each plan’s assets. MMC uses Mercer actuaries to perform the valuations of its pension plans. MMC utilizes a model developed by its actuaries to assist in the setting of this assumption. The model takes into account several factors, including: actual and target portfolio allocation; investment, administrative and trading expenses incurred directly by the plan trust; historical portfolio performance; relevant forward-looking economic analysis; and expected returns, variances, and correlations for different asset classes. All returns utilized and produced by the model are geometric averages. These measures are used to determine probabilities using standard statistical techniques to calculate a range of expected returns on the portfolio. MMC generally does not adjust the rate of return assumption from year to year if, at the measurement date, it is within the best estimate range, defined as between the 25th and 75th percentile of the expected long-term annual returns in accordance with the “American Academy of Actuaries Pension Practice Council Note May 2001 Selecting and Documenting Investment Return Assumptions” and consistent with Actuarial Standards of Practice No. 27. The historical five- and ten-year average asset returns of each plan are also reviewed to ensure they are consistent and reasonable compared with the best estimate range. The expected return on plan assets is determined by applying the assumed long-term rate of return to the market-related value of plan assets as defined by SFAS No. 87. This market-related value recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market value of assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future market-related value of the assets will be impacted as previously deferred gains or losses are recorded.

The target asset allocation for the U.S. plans is 70% equities and 30% fixed income, and for the U.K. plans, which comprise approximately 84% of non-U.S. plan assets, is 58% equities and 42% fixed income. As of the measurement date, the actual allocation of assets for the U.S. plan was 74% to equities and 26% to fixed income, and for the U.K. plans was 62% to equities and 38% to fixed income. The assets of the Company’s defined benefit plans are well-diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans’ real return within acceptable risk parameters. MMC uses threshold-based portfolio rebalancing to ensure the actual portfolio remains consistent with target allocations.

The discount rate selected for each U.S. plan is based on a model bond portfolio with coupons and redemptions that closely match the expected liability cash flows from the plan. Discount rates for non-U.S. plans are based on appropriate bond indices such as the iBoxx £ Corporates 15-year index in the U.K. Projected compensation increases reflect current expectations as to future levels of inflation.

The components of the net periodic benefit cost for combined U.S. and non-U.S. defined benefit and other postretirement benefit plans are as follows:

For the Years Ended December 31,	Pension Benefits									Postretirement Benefits
(In millions of dollars)	2006			2005			2004			2006			2005			2004
Service cost	$	235		$	245		$	232		$	6		$	9		$	11
Interest cost		494			472			422			14			18			20
Expected return on plan assets		(695	)		(640	)		(618	)		—			—			—
Amortization of prior service credit		(54	)		(41	)		(38	)		(14	)		(3	)		(2	)
Amortization of transition asset		—			—			(5	)		—			—			—
Recognized actuarial loss		237			177			90			4			1			3
Net Periodic Benefit Cost	$	217		$	213		$	83		$	10		$	25		$	32

U.S. Plans
The following schedules provide information concerning MMC’s U.S. defined benefit pension plans and postretirement benefit plans:

	U.S. Pension						U.S. Postretirement
December 31,	Benefits						Benefits
(In millions of dollars)	2006			2005			2006			2005
Change in benefit obligation:
Benefit obligation at beginning of year	$	3,094		$	3,013		$	194		$	309
Service cost		83			88			4			8
Interest cost		182			176			11			15
Amendments		—			(138	)		—			(92	)
Actuarial loss		33			80			(5	)		(27	)
Benefits paid		(128	)		(125	)		(12	)		(19	)
Benefit obligation at end of year	$	3,264		$	3,094		$	192		$	194
Change in plan assets:
Fair value of plan assets at beginning of year	$	3,015		$	2,635		$	—		$	—
Actual return on plan assets		475			276			—			—
Employer contributions		20			229			12			19
Benefits paid		(128	)		(125	)		(12	)		(19	)
Fair value of plan assets at end of year	$	3,382		$	3,015		$	—		$	—
Funded status	$	118		$	(79	)	$	(192	)	$	(194	)
Unrecognized net actuarial loss		N/A			858			N/A			38
Unrecognized prior service credit		N/A			(282	)		N/A			(93	)
Net asset (liability) recognized	$	118		$	497		$	(192	)	$	(249	)

	U.S. Pension						U.S. Postretirement
December 31,	Benefits						Benefits
(In millions of dollars)	2006			2005			2006			2005
Amounts recognized in the Consolidated Balance
Sheets under SFAS 158:
Noncurrent assets	$	454			N/A		$	—			N/A
Current liabilities		(19	)		N/A			(13	)		N/A
Noncurrent liabilities		(317	)		N/A			(179	)		N/A
	$	118			N/A		$	(192	)		N/A
Amounts recognized in the Consolidated Balance
Sheets under prior accounting rules:
Prepaid benefit cost		N/A		$	746			N/A		$	—
Accrued benefit liability		N/A			(314	)		N/A			(249	)
Accumulated other comprehensive loss		N/A			65			N/A			—
Net amount recognized		N/A		$	497			N/A		$	(249	)

Amounts not yet recognized in net periodic cost and
included in accumulated other comprehensive income:
Unrecognized prior service credit	$	228			N/A		$	78			N/A
Unrecognized net actuarial loss		(572	)		N/A			(29	)		N/A
Total amounts included in AOCI	$	(344	)		N/A		$	49			N/A
Cumulative employer contributions in excess of net
periodic cost		462			N/A			(241	)		N/A
Net amount recognized in consolidated balance sheet	$	118			N/A		$	(192	)		N/A
Accumulated benefit obligation at December 31	$	3,160		$	3,021		$	—		$	—

Estimated amounts that will be amortized from accumulated other comprehensive income in the next fiscal year:

Prior service cost (credit)	$	(54	)		N/A		$	(13	)		N/A
Net loss		79			N/A			2			N/A
	$	25			N/A		$	(11	)		N/A

The weighted average actuarial assumptions utilized in determining the above amounts for the U.S. defined benefit and other U.S. postretirement plans as of the end of the year are as follows:

	U.S. Pension				U.S. Postretirement
	Benefits				Benefits
	2006		2005		2006		2005
Weighted average assumptions:
Discount rate (for expense)	5.9	%	6.0	%	5.9	%	6.0	%
Expected return on plan assets	8.75	%	8.75	%	—		—
Rate of compensation increase (for expense)	3.4	%	3.0	%	—		—
Discount rate (for benefit obligation)	6.1	%	5.9	%	6.1	%	5.9	%
Rate of compensation increase (for benefit obligation)	3.4	%	3.4	%	—		—

In September 2005, the Company contributed 8 million shares of MMC common stock, valued a