Marsh Continues To Face Sell-Off, Rating Action
By Steve Tuckey
NU Online News Service, Oct. 18, 4:10 p.m. EDT?Marsh & McLennan continues to bear the brunt of investor wrath on allegations of bid-rigging in the insurance brokerage sector.[@@]
Shares of the New York-based insurance broker fell 10 percent this morning to add to the 37 percent they fell Friday?the day after New York State Attorney General Eliot Spitzer announced a lawsuit seeking punitive damages against the company for fraud and price fixing in violation of state antitrust law.
Also, today a second rating firm took action on the firm.
The MMC stock traded at $26.15 per share shortly after noon today, down from a 52-week high of $49.69.
The attorney general's suit alleges that the company engaged in price-fixing and bid-rigging practices that denied large commercial clients a true competitive process for the purchase of their insurance coverage. The suit alleges that the company took payoffs disguised as fees and contingent commissions from major insurers it routed business to.
Other brokers such as Chicago-based Aon and London-based Willis also saw the shares fall but at a fraction of the extent that Marsh has seen.
Standard & Poor's put the company on CreditWatch with negative implications. S&P analyst John Iten said the company faces a potential serious loss of capital should Mr. Spitzer's prosecution succeed in forcing the company to disgorge profits it received through a flawed bidding processes.
On Friday Moody's changed the Marsh rating from stable to negative on the company's senior debt.
Adam Klauber, director of research for the Chicago-based insurance investment banking firm of Cochran, Caronia & Co., said the brokerage industry will be hard hit by Mr. Spitzer's probe.
"On average, Placement Service Agreements or contingent commissions comprise 5 percent of revenues and 15 percent of earnings for publicly traded brokers," Mr. Klauber wrote in a research report issued this morning. "Reduction or elimination of revenues related to these arrangements would have an obvious negative effect on profitability."
Mr. Klauber noted that "several insurance brokers have been named in California lawsuits that accuse brokers of breaching fiduciary duty by collecting contingent commissions. These suits at a minimum increase broker cost of doing business," Mr. Klauber wrote.
In addition to Marsh, Mr. Klauber said that Chicago-based Aon faces considerable downside risk from the scandal, since its contingent fees compromise almost 20 percent of overall earnings.
In a related matter, Banc of America Securities has reduced its price target on the stock to $34 from $41 due to the loss of revenue from both the suspension of the market service agreements and a potential loss of market share because of unfavorable publicity from the scandal.
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