Spitzer Probe Hammers MMCs Results

Spitzer Probe Hammers MMCs Results

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

Marsh & McLennan Companies reported a fourth-quarter net loss of $676 million in the wake of the contingency fee scandal that has rocked the insurance industry and said it plans an additional 2,500 layoffs as it restructures its business.

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

MMC said its continued efforts to restructure and improve operations would result in approximately 2,500 people throughout its global operations getting the axe as its Marsh brokerage sheds unprofitable accounts. The initiative 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 last year that resulted in close to 3,000 layoffs.

As a result of a suit filed by New York Attorney General Eliot Spitzer last October alleging bid-rigging and abuse of compensation agreements with carriers, Marsh stopped accepting volume-based contingency fee payments. The decision resulted in the loss of more than $840 million in income for the company.

Mr. Spitzer sued MMC over allegations of kickbacks and other abuses related to Market Service Agreements at Marsh. To settle the suit in New York, MMC agreed to pay $850 million to clients who were affected by the MSA deals, which rewarded the broker with additional compensation for placing accounts with a particular carrier.

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

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

For the year, net income dropped $1.36 billion, from $1.54 billion ($2.89 a share) in 2003, to just $180 million (34 cents per share) 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 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, MMC President and Chief Executive Officer Michael Cherkasky outlined what MMC will be doing to restore its 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 added.

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

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

However, he indicated that the brokerage will maintain its position in middle-market business, and he was hopeful that discussions with larger, unprofitable clients could lead to a fee structure that would make such accounts worth the broker's service efforts.

Mr. Cherkasky said he believes that when finished, the business restructuring “would end such reductions” in the firm's workforce.

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

He said Marsh which accounts for 20 percent of MMC's revenues will also have an “a la carte” pricing structure for its client services. The more services the broker provides to a client, the more 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 streamlined company with more margin expansion.”

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 spur investments in the insurance industry. MMC will remain a major stockholder 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 to the U.S. Securities and 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 a guidance issued by the Institute of Chartered Accountants there.

Investors appeared to react positively to the news, sending the company's stock modestly higher despite the big fourth-quarter loss, even though the analyst community had mixed feelings, with some reacting positively and others failing to see a rosy a picture ahead (see sidebar).

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