Marsh & McLennan results disappoint, shares drop

* CEO says credit mkt woes hamper divestitures

* Analysts see longer road for MMC turnaround

* Adjusted profit $O.21/shr, misses Wall Street view

* Shares fall as much as 13 percent

(Adds analyst comment)

By Lilla Zuill

NEW YORK (Reuters) - U.S. insurance broker Marsh & McLennan Cos Inc (MMC.N) posted third-quarter results that missed Wall Street expectations, as it lost money on investments and increased its liability reserves, sending its shares down as much as 13 percent.

Investors had hoped for a repeat of the better-than-expected results reported a quarter ago, a bright spot for Marsh & McLennan after several years of flagging profitability.

"There were a lot of moving parts, and it was a bit messy," said Chief Executive Brian Duperreault, installed earlier this year to improve the company's fortunes. But he pointed to the strength of the firm's underlying earnings.

"The investment swing was significant, and somewhat out of our control. Strip that out, and other one-time notables, and income was up significantly," Duperreault said in an interview.

The company reported a net loss of $8 million, or 2 cents a share, compared with a year-earlier profit of $1.9 billion, when Marsh & McLennan benefited from a one-time sales gain.

Increasing its professional-liability reserves cost about 4 cents a share, and investment losses from market declines on private equity investments another 3 cents a share.

Excluding special items, the company earned $111 million, or 21 cents per share -- a 10 percent increase from the $100 million, or 19 cents a share, in the year-ago quarter, but missing Wall Street's average expectations by 11 cents per share.

"Despite management's best efforts to put a positive spin on third-quarter earnings release, the results were quite discouraging," said Friedman, Billings, Ramsey analyst Bijan Moazami, in a note to clients.

"The market is beginning to realize that even if management effectively executes on cost initiatives, the improvement in profit margins will take time to materialize," Moazami added.

He cut his price target on the stock to $25, below its closing price on Wednesday of $26.06, down 12.26 percent.

CREDIT CRUNCH

Marsh & McLennan, which earns commissions from helping commercial customers find insurance coverage, expects insurance pricing to stabilize, or even rise, for many lines of coverage when 2009 policies are renewed.

Prices, particularly for reinsurance, are firming as higher-than-expected catastrophe and investment losses cut into capital, leading to restrained capacity and higher prices.

Reinsurers sell back-up coverage to other insurers, spreading the risk of losses.

Aon Corp AOC.N, Marsh & McLennan's largest competitor, also said that rates were stabilizing or rising when it reported better-than-expected quarterly results on Oct. 31.

"Higher pricing could be partially offset by reduced volume due to a slowing economy," said Jay Gelb, an insurance analyst with Barclays Capital, in a note to clients.

The company is also cutting costs, laying off some staff at Mercer, a consulting unit, and eliminating a further 250 positions at Marsh Inc, its main insurance brokerage, by year-end.

Duperreault had planned to sell two divisions that fall within Kroll, the corporate security business. But he said tight credit markets have put those plans on ice.

The Kroll divisions, mortgage screening and government services, will be retained for now.

"It is not a great time to sell anything -- particularly if it has the word 'mortgage' in it," Duperreault said.

The company is close to selling an international restructuring division. Terms of the sale, expected to be in a management-led buyout, were not disclosed.

Marsh & McLennan said revenue at its risk and insurance services unit was 1 percent higher at $1.3 billion, while consulting revenue rose 9 percent to $1.3 billion.

Guy Carpenter, its reinsurance brokerage, saw revenue fall 9 percent in the quarter, but Duperreault expects growth in the coming year because of higher pricing.

"I don't want to be overly optimistic under the circumstances, but I would expect all of our segments to do better in 2009 than this year," Duperreault said.

(Reporting by Lilla Zuill; Editing by Lisa Von Ahn, Gerald E. McCormick, Leslie Gevirtz)