NU Online News Service, May 3, 4:30 p.m. EST–Marsh & McLennan Companies’ quarterly profit tumbled 70 percent as the firm felt the impact of regulatory and restructuring expenses and the loss of its contingent-fee revenues, as well as the effect of softening prices.
MMC Chief Executive Officer Michael Cherkasky, however, remained upbeat about the firm’s prospects. He also announced during an analyst conference call today that MMC’s Marsh brokerage unit will adopt higher client commissions beginning in the 2005 third quarter to offset up to a quarter of revenues lost from eliminating contingent fees in the United States.
According to Mr. Cherkasky, Marsh has gotten a “very good response from the marketplace” about its expected commission hike. “Even in discussions with our clients, our clients are overwhelmingly understanding about what it means for them,” he said during the conference call.
Marsh revenues from contingent fees fell to $32 million during the 2005 first quarter, down from $179 million one year ago.
MMC has abandoned its contingent-fee arrangements==which were described as illegal kickbacks by regulators in certain transactions==but said it will continue to collect those fees that were owed prior to their formal elimination. “We will continue to seek to collect the Market Service Agreement revenues that were owed to us prior to September 2004, under contract,” Mr. Cherkasky said.
Commenting on MMC’s quarterly results, Mr. Cherkasky said it’s hard to imagine a “more adverse environment for a company and its employees than we had in the 2005 first quarter at Marsh.”
“Our integrity has been questioned, employees were uncertain if they still had jobs, there was new management and a new business model was in development. Distractions were at every water cooler,” Mr. Cherkasky said.
During the first quarter MMC profits tumbled to $134 million, down from $446 million one year ago. At MMC’s Marsh unit, the world’s largest insurance brokerage, revenue fell to $1.172 billion, down 19 percent from $1.451 billion one year ago.
MMC said its results were hurt by lost contingent fees and related regulatory and restructuring expenses, as well as falling client commissions because of lower premium rates in the softening marketplace and a decline in new business.
“As you can imagine, the last six months have been a very tough operating environment at Marsh==particularly Marsh in the United States,” Mr. Cherkasky said. “We’ve been affected by loss of market-service revenue, softening of insurance markets and the loss of new and retained business because of our regulatory crisis.” The decline was most significant in the United States, with modest drops in the rest of the world consistent with the softening of premium pricing, Mr. Cherkasky said.
MMC said its first-quarter results include $225 million of pretax charges for restructuring, retaining employees, and regulatory and compliance issues, as well as fund reimbursements at its Putnam Investments unit. Specifically, results show that MMC spent $96 million on severance, $43 million for regulatory and compliance expenses, and $15 million to retain employees.
Since New York Attorney General Spitzer targeted MMC in a civil suit last October, MMC has cut some 5,250 jobs, but Mr. Cherkasky assured analysts there were “no real surprises” in MMC’s first-quarter performance and that the worst is now over for his firm.
“Marsh has shown remarkable resilience. The signs of recovery at Marsh are there. You could see it at the [Risk and Insurance Management Society meeting] in Philadelphia that Marsh was coming back,” Mr. Cherkasky said. “Marsh has embraced a more disciplined profit-loss-management business orientation. Our staff reductions are essentially over.”