Analyst: Marsh Okay Without Insurer Fees

Mr. Meredith said the company will recoup a substantial amount of its lost market service agreement income from insurers through higher upfront commissions and other fees. He emphasized that according to new Banc of America Securities surveys, most risk managers and carriers with business relationships with Marsh indicated they wouldn't object to such new arrangements.

Banc of America Securities surveyed 25 of the larger insurers that had market service agreements with Marsh, to determine if they would be willing to pay higher upfront commissions. Among the 25, seven said "yes," while 10 said "maybe" or said the prospect doesn't sound unreasonable. The remaining eight did not directly answer the question.

Mr. Meredith pointed out that none in the survey outwardly rejected the idea of higher upfront commissions. The reason, Mr. Meredith proposed, may be that Marsh?still the largest and most important insurance broker in the world?continues to be an integral distribution source for major insurers.

Banc of America Securities' survey found that most risk managers are also open to the idea of Marsh getting higher upfront commissions from insurers. Among the 15 risk managers Banc of America Securities surveyed, 85 percent said they would be willing to let Marsh have the additional upfront commission?as long as it was disclosed and the cost of their insurance program did not go up.

Mr. Meredith said the softening commercial lines marketplace could actually help Marsh in accepting higher upfront fees, as the broker can pass on the additional commission without their clients paying more for their programs. By his calculations, a one-point rise in commission on Marsh's U.S. non-fee-based business is worth roughly $300 million of revenue that falls to the bottom line.

Mr. Meredith also noted his conversations with risk managers and other industry participants indicate Marsh will not lose a substantial amount of market share.

Changing brokers is not a simple task for clients, he pointed out. It is usually very time-consuming and costly to switch programs to another broker. Incumbent brokers often have familiarity with client issues, know where the organization's risks are, and possess company knowledge that has been developed over the years, Mr. Meredith said. This is part of the reason why broker retention rates are in the low-90 percent range for the industry, he added.

Even if some Marsh clients want a new broker, they don't have many alternatives, Mr. Meredith noted. He said large brokers, especially Marsh, have market access and account service capabilities that are almost impossible to find elsewhere.

Further, Marsh is still a great franchise despite its scandal, Mr. Meredith observed. He said many people seem to forget that Marsh is the leading insurance broker for a reason, namely strong execution and excellent capabilities. It is difficult to argue that these strengths have been completely eliminated, he said.

Banc of America Securities also observed that fraudulent activities and market manipulation activities at Marsh appear to be limited to the excess casualty unit and not widespread through the organization.

Mr. Meredith said the New York attorney general's conclusions will be similar and that Mr. Spitzer's office has been willing to work with the company since Jeffrey Greenberg, the former chief executive officer, stepped down. He also noted Mr. Spitzer's recent comment that he is "not trying to unsettle a sector that is largely important" and is "trying to insure some stability."

Mr. Meredith added that Marsh may see more of its producers jump ship and take their business elsewhere. But so far, there has not been "a mass exodus of key employees." He observed that most Marsh producers are staying put, though leaving their options open.