Fitch Ratings has affirmed its ratings on the players in the Putnam Investments deal.

Fitch Ratings affirmed Great-West Lifeco’s ratings following the announcement that Great-West has reached a definitive agreement to acquire for cash the stock of Putnam Investments and its subsidiaries.

Putnam will be operated as a separate business unit of Great-West and managed by Putnam’s existing management team. Putnam will be a subsidiary of Great-West’s U.S. holding company, Great-West Life & Annuity Financial Inc. and a sister to Great-West’s U.S. life insurance operating company, Great-West Life & Annuity Insurance Co.

Fitch says that the affirmation of the ratings reflects that at less than 10% of Great-West’s pro forma earnings and shareholders’ equity, Putnam does not materially alter Great-West’s profile. Fitch is also comfortable with the range of alternatives available to Great-West in funding the US$3.9 billion purchase price.

Fitch also affirmed its rating of the seller in the deal, Marsh & McLennan Companies Inc. (MMC), although the rating outlook for the firm remains negative.

It notes that the transaction is expected to close during the middle of 2007 and the after tax proceeds of the sale could total approximately US$2.5 billion. MMC expects to use part of the proceeds to pay down debt and for share repurchases, and Fitch expects that the company could use a portion of the remaining proceeds to fund future acquisitions.

“Fitch’s decision to affirm MMC’s rating’s at this time reflects Fitch’s expectation that MMC’s credit fundamentals will not deteriorate from current levels following the completion of MMC’s balance sheet restructuring,” it says.

Fitch adds that it believes that the sale of Putnam will free MMC’s management from the distraction of running an underperforming, ancillary business that shares little synergy with remaining businesses. As a result, MMC can focus more on improving its core insurance brokerage business.

“Partially offsetting these positives are the fact that Putnam has historically provided MMC with a diversified earnings stream,” it says. However, Fitch notes that Putnam’s contributions have significantly diminished since market timing allegations surfaced in late 2003. Putnam contributed more than one-third of MMC’s pretax earnings in 2001, but currently accounts for only about 20% of MMC’s profits.

“Although Fitch views MMC’s decision to sell Putnam favorably, Fitch feels that a Negative Outlook is still warranted,” it says. “Fitch continues to believe that Marsh, which will now comprise a larger percentage of MMC’s ongoing business, has experienced a material decline in franchise value following the New York Attorney General’s civil suit and allegations of bid rigging. Although Fitch recognizes that Marsh has maintained a leading global market share, and that Marsh’s recent operating performance, although improving, continues to lag its closest competitors.”

“During the first nine months of 2006, Marsh’s reported revenues declined by 4% (23% on an organic basis). Pretax margins in the Risk and Insurance Services segment improved to 13.5% from 5.7% in the year-ago period, but remain below historical levels between 24%-28%,” it said. “While Marsh’s margins should improve to the mid-to-high teens in the near term, they are unlikely to return to prior peak levels, as Marsh encounters a more challenging operating environment due to the softening of commercial insurance pricing. Moreover, MMC remains at a relative disadvantage versus many smaller competitors that still accept contingent commissions.”

Items that Fitch is monitoring that may promote a return to a stable rating outlook include:
improvement in MMC’s insurance brokerage margins to levels in the high-teens on a stable or increasing revenue base; settlements of outstanding litigation at modest costs, and no additional litigation filings; and, debt-to-capital ratios migrating closer to historical levels near 40% from current levels around 45%.