MMC Looks To Amend Fee Agreement

With earnings showing little improvement for the second quarter, and the soft market driving down broker commission income, the head of Marsh revealed today that the brokerage is looking to amend its agreement with New York that forced it to drop contingency fees.

Brian Storms, chairman and chief executive officer of Marsh, said during an analyst's conference call today that the firm is in the process of obtaining an amendment to its agreement with New York, which he said would allow the brokerage to charge insurers for specific services it provides to clients.

“I'm fairly confident we will have a very public statement on this,” said Mr. Storms, indicating that the final details of the compensation agreement were still being worked out. He declined to go into details but emphasized that the fees would not be volume-related.

While Marsh continues to reinforce its position in middle-market accounts with new hires and bringing back proven sales executives, Mr. Storms said the firm is seeing aggressive pricing from insurers, but no increase in commissions to compensate for lost commission revenue.

Under an agreement in 2005 with then New York Attorney General (now governor) Eliot Spitzer, MMC gave up taking contingency fees in the face of a suit over allegations of kickbacks and steering of insurance contracts to trigger fee deals.

Michael Cherkasky, chairman and CEO of the New York-based Marsh & McLennan–parent company of Marsh–said during the conference call that earnings took a hit from higher-than-expected costs for advertising and recruitment as MMC looks to rebuild its business following the contingency fee scandal.

He said the firm is investing and making progress, improving retentions, and bringing back employees who left the firm for other brokers.

This is the first financial report that was clean of any contingency fee revenues. The remaining fees were residual payments from commissions the broker earned prior to the agreement with the attorney general.

Earnings per share in the second quarter were flat at 31 cents as the firm reported net income increased slightly by 3 percent (up $5 million) to $177 million compared with the same period last year. Revenues grew 7 percent ($185 million) to $2.8 billion.

For the first half of the year, net income dropped 24 percent (down $143 million) to $445 million, while earnings per share were off 26 cents to 79 cents a share. Revenues saw a 6 percent gain (up $323 million) to $5.6 billion.

The results were lower than expected, according to investment analyst David Small of Bear Stearns, in a note to investors. On Wednesday, the investment firm lowered its earnings per share estimate for 2007 by 18 cents to $1.42 and 2008 estimate by 15 cents to $1.75. Mr. Small noted the broker continues to lose ground and is being outperformed compared to other publicly traded brokers.

Marsh's organic growth did end up in negative numbers. While revenues grew 2 percent ($18 million) to $1.1 billion, organic growth–defined as underlying revenue before acquisitions and dispositions–stood at minus-1 percent for the quarter. For the six months, organic growth was down 2 percent despite revenue growth of 1 percent to $2.3 billion.

Marsh's results, Mr. Chekasky said, “were not quite what we expected.”

However, he said the firm was generally pleased with the first-half results, and that it is critical for MMC's future to continue to grow revenue. He said the firm would “persevere,” and that its current plans to grow are a “winning formula.”

Reinsurance service provider Guy Carpenter grew 2 percent ($3 million) to $217 million, with organic growth of 1 percent during the period. Organic growth was the same for the first six months compared with last year, despite 3 percent growth in revenue ($14 million) to $509 million.

Growth came primarily from MMC's consulting division–Mercer and Oliver Wyman–which grew 16 percent ($170 million) to $1.2 billion. For the first half, consulting grew 15 percent (up $298 million) to $2.3 billion.

With the sale of Putnam investment services, the $2.5 billion MMC received will go to stock repurchases and paying down of debt. A total of $1.5 billion will go to stock repurchase, and another $1 billion to pay down debt.

(This story was updated Wednesday, Aug. 8, at 12:15 p.m.)