Spitzer Probe Hammers MMCs Results

Broker loses $676 million in fourth quarter; plans tolay off another 2,500

Marsh & McLennan Companies reported a fourth-quarter netloss of $676 million in the wake of the contingency fee scandalthat has rocked the insurance industry and said it plans anadditional 2,500 layoffs as it restructures itsbusiness.

New York-based MMC said the loss was due to a combination ofrestructuring, regulatory settlements and related expenses.

MMC said its continued efforts to restructure and improveoperations would result in approximately 2,500 people throughoutits global operations getting the axe as its Marsh brokerage shedsunprofitable accounts. The initiative should result in annualexpense savings of $375 million. This is in addition to the $400million the company said it would save from earlier restructuringefforts last year that resulted in close to 3,000 layoffs.

As a result of a suit filed by New York Attorney General EliotSpitzer last October alleging bid-rigging and abuse of compensationagreements with carriers, Marsh stopped accepting volume-basedcontingency fee payments. The decision resulted in the loss of morethan $840 million in income for the company.

Mr. Spitzer sued MMC over allegations of kickbacks and otherabuses related to Market Service Agreements at Marsh. To settle thesuit in New York, MMC agreed to pay $850 million to clients whowere affected by the MSA deals, which rewarded the broker withadditional compensation for placing accounts with a particularcarrier.

Mr. Spitzer charged that Marsh helped orchestrate bid-rigging inreturn for such additional fees. (Marsh did not admit to anywrongdoing in its settlement with Mr. Spitzer.)

For the fourth quarter, MMC reported a stark turnaround from netincome of $375 million (71 cents a share) in 2003 to a loss of $676million ($1.28 per share) last year. Despite the loss ofcontingency fee income late in the year, revenues dropped just 1percentsome $38 milliongoing from more than $3 billion to $2.99billion.

For the year, net income dropped $1.36 billion, from $1.54billion ($2.89 a share) in 2003, to just $180 million (34 cents pershare) last year. Revenues inched up 5 percent, or $615 million,from $11.5 billion to less than $12.2 billion.

The company also announced it would reduce its dividend paymentby 50 percent in the quarter to 17 cents a share. The payment willbe made on March 30 to shareholders of record as of March 15.

In an analyst conference call, MMC President and Chief ExecutiveOfficer Michael Cherkasky outlined what MMC will be doing torestore its profitability, which at Marsh will include the sheddingof thousands of small accounts and some major ones that are notprofitable.

“A few months ago, the feeling was that MMC was in crisis andothers were questioning our future viability,” Mr. Cherkasky toldlisteners. “The overriding concern then was what was going to beour new business model. No one is questioning our viabilitytoday.”

“It is time to turn the page and focus on the future,” headded.

In turning that page, he said, the shedding of thousands ofsmall accounts, along with some large ones, will mean a reductionin the workforce. “Marsh is not as efficient as it needs to be,” heremarked.

In the past, because of the MSA agreements, the brokerage'sadditional volume-based fees made up for the unprofitability ofindividual accounts, Mr. Cherkasky explained. But with the loss ofthe MSAs, Marsh can no longer make up the difference “on the backend,” he added.

However, he indicated that the brokerage will maintain itsposition in middle-market business, and he was hopeful thatdiscussions with larger, unprofitable clients could lead to a feestructure that would make such accounts worth the broker's serviceefforts.

Mr. Cherkasky said he believes that when finished, the businessrestructuring “would end such reductions” in the firm'sworkforce.

Marsh will also establish a new, standardized commission feeschedule for insurers, which Mr. Cherkasky said he was confidentcarriers would accept and would help recover revenue lost when thebroker ended MSA deals.

He said Marsh which accounts for 20 percent of MMC's revenueswill also have an “a la carte” pricing structure for its clientservices. The more services the broker provides to a client, themore fees will be charged, he noted.

Marsh will begin seeing the results of all its efforts by 2006,he said, declaring that “we will be a stronger, more streamlinedcompany with more margin expansion.”

Mr. Cherkasky said flatly that there are no plans to sell offeither Mercer (MMC's consulting subsidiary) or Putnam (itsinvesting services arm).

However, MMC will establish a spin-off of MMC Capital to spurinvestments in the insurance industry. MMC will remain a majorstockholder in the company but “will no longer be involved in”decision-making, according to Mr. Cherkasky. The decision, he said,was made to eliminate any appearance of a conflict of interest.

There were other charges reported. Putnam paid $80 million tothe U.S. Securities and Exchange Commission to settle regulatoryissues. Marsh also took a $65 million charge in the United Kingdomfor future claims-handling and administrative services inconnection with a guidance issued by the Institute of CharteredAccountants there.

Investors appeared to react positively to the news, sending thecompany's stock modestly higher despite the big fourth-quarterloss, even though the analyst community had mixed feelings, withsome reacting positively and others failing to see a rosy a pictureahead (see sidebar).

Reproduced from National Underwriter Edition, March 4, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.