MMC Reports A 4Q loss, 2,500 More Layoffs

By Mark E. Ruquet

NU Online News Service, March 1, 4:10 p.m. EST?Marsh & McLennan Companies, rocked by its price-fixing scandal, reported a fourth-quarter loss of $676 million and said it plans an additional 2,500 layoffs as it restructures its business.[@@]

The New York-based brokerage giant said the loss was due to a combination of restructuring, regulatory settlements over charges it rigged bids and fixed prices with insurers, and related expenses.

The company last year stopped accepting incentive payments from insurers that accounted for $840 million in yearly income, after the New York attorney general's office charged in a civil suit that such contingency fees were payoffs in a scheme involving major insurers.

MMC's Marsh unit, it was alleged, in exchange for the fees steered business to cooperating insurers who fixed prices and rigged bids.

The resulting scandal, which has led 10 insurance executives at Marsh and other companies to plead guilty to fraud and other charges, also led to the resignation of Marsh's previous CEO, Jeffrey Greenberg.

MMC said that its continued efforts to restructure and improve operations would result in approximately 2,500 layoffs throughout its global operations as it sheds unspecified "thousands" of unprofitable accounts.

However, the effort should result in annual expense savings of $375 million. This is in addition to the $400 million the company said it would save from earlier restructuring efforts that resulted in close to 3,000 layoffs.

Mr. Spitzer sued MMC over alleged abuses related to volume-based contingency fee commissions (Market Service Agreements) at Marsh. To settle the suit, MMC agreed to pay $850 million to clients who were affected by the MSA agreements.

For the fourth quarter, MMC reported net income dropped from $375 million, or 71 cents a share in 2003, to a loss of $676 million, or a loss of $1.28 a share. Revenues dropped 1 percent, or $38 million, going from more than $3 billion to $2.99 billion.

For the year, net income dropped $1.36 billion, going from $1.54 billion, or $2.89 cents a share in 2003, to $180 million, or 34 cents a share. 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 payment by 50 percent in the quarter to 17 cents a share. The payment will be made on March 30 to shareholders of record as of March 15.

In an analyst conference call today, MMC's president and CEO Michael G. Cherkasky outlined what MMC will be doing to bring itself back to profitability, which, at Marsh, will include the shedding of thousands of small accounts and some major ones that are not profitable.

"A few months ago the feeling was that MMC was in crisis and others were questioning our future viability," Mr. Cherkasky told listeners. "The overriding concern then was what was going to be our new business model. No one is questioning our viability today."

"It is time to turn the page and focus on the future," he said.

In turning that page, he said, shedding thousands of small accounts and some large ones will mean a reduction in the workforce because "Marsh is not as efficient as it needs to be."

In the past, because of the MSA agreements, the volume made up for the unprofitability, Mr. Cherkasky said. But with the loss of the MSA's, Marsh can no longer make up the difference "on the back end."

However, he indicated that the firm will remain firmly entrenched in the middle market business, and he was hopeful that discussions with the larger, unprofitable clients could lead to a fee structure that would make the account profitable.

Mr. Cherkasky said he believed that the business restructuring, when finished, will end the workforce reductions.

Marsh will also establish a new, standardized commission fee schedule for insurers, which Mr. Cherkasky said he was confident carriers would accept and which will help the company recover lost revenue.

Marsh will begin seeing the results of all its effort by 2006, and "we will be a stronger, more streamlined company with more margin expansion," Mr. Cherkasky said.

Marsh, which accounts for 20 percent of MMC's revenues, will also have an a la carte pricing structure for its services in the future?the more services the broker provides to a client, the more fees will be charged, he explained.

Mr. Cherkasky said flatly that there are no plans to sell off either Mercer, MMC's consulting subsidiary, or Putnam, its investing services arm.

However, MMC will establish a spin-off of MMC Capital to provide investing in the insurance industry. MMC will remain a major stockholder in the company but "will no longer be involved in" the decision-making, said Mr. Cherkasky. The decision, he said, was made to eliminate any appearance of conflict of interest.

The company also reported that Putnam paid $80 million to the Securities & Exchange Commission to settle regulatory issues. Marsh also took a $65 million charge in the United Kingdom for future claims handling and administrative services in connection with guidance issued by The Institute of Chartered Accountants there.

Brian Meredith, with Banc of America Securities Equity Research, in an analyst's report kept a buy on MMC. He said it appears the company will be able to recoup its lost revenue into 2006 and that it has kept the loss of business to a minimum.

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MMC Reports A 4Q loss, 2,500 More Layoffs

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