| Marsh Suspends Fees From Insurers as Shares Plunge (Update2)
Oct. 15 (Bloomberg) -- Marsh & McLennan Cos., the world's largest insurance broker, said it will no longer seek fees from insurers after a lawsuit from New York Attorney General Eliot Spitzer called them ``payoffs,'' driving the company's shares down as much as 47 percent.
Marsh Chief Executive Jeffrey Greenberg is giving up fees that would have contributed $485 million, or more than a quarter of its profit next year, estimated Fox-Pitt Kelton Inc. analyst Jon Balkind. Spitzer's suit puts pressure on Greenberg, 53, to step down and probably will trigger similar concessions at other brokers, said Nicholas Xie, an analyst at PNC Advisors.
``The consensus out there is that Marsh may need a management change,'' said Xie, who helps manage $48 billion for a unit of Pittsburgh-based PNC Financial Services Group Inc. that owned 500,000 shares of Marsh as recently as June.
Greenberg said in a statement today that the company is ``greatly disturbed by the allegations of wrongdoing'' in Spitzer's suit. ``We take them very seriously and we are conducting a thorough investigation,'' he said.
Marsh's stock dropped $6.08 to $28.77 as of 3:45 p.m. in New York Stock Exchange composite trading. The shares fell 25 percent yesterday. Today, Moody's Investors Service lowered its outlook on Marsh's A2 senior debt rating to negative from stable.
Spitzer's suit alleged Marsh took advantage of unsuspecting clients by seeking so-called contingent commissions from insurers such as American International Group Inc. in exchange for throwing business their way. American International, led by Jeffrey Greenberg's father, Maurice ``Hank'' Greenberg, today said it's likely to stop paying the fees, also referred to as placement service agreements.
Straight Commissions
``It's likely that AIG will no longer issue a PSA, but pay a straight commission and make certain that the commission is disclosed to the insured,'' Hank Greenberg, 79, said on a conference call. American International shares declined $2.26, or 3.8 percent, to $57.74 on the NYSE as of 3:47 p.m. The stock has lost about $24.7 billion in market value since in the past two days.
Marsh and competitors such as Aon Corp. and Willis Group Holdings Ltd. are typically paid from the premiums charged to their clients, the companies that use them to find insurance coverage. At issue in the Spitzer probe are the additional contingent commissions they take from insurers -- fees that are based on the volume and profitability of the business they steer to those insurers.
Bid Rigging
Spitzer's suit says Marsh was so intent on winning fees it devised a phony bidding system to make customers believe insurers were competing for business. His suit said American International, Ace Ltd., Hartford Financial Services Group Inc., and Munich Re were participants in the ``bid rigging,'' though none of those companies are named as defendants.
Ace vice president Patricia Abrams today pleaded guilty to participating in bid rigging with Marsh. Yesterday two executives at American International, the world's largest insurer, pleaded guilty to criminal charges related to bid rigging. Spitzer has promised more suits and arrests.
Michael Cherkasky, the former CEO of Kroll Inc., is leading Marsh's internal review. He joined Marsh when it bought the investigative and security firm earlier this year and is reporting to Greenberg and the 10 of 16 board members who are independent.
Paul Lapides, director of the corporate governance center at Kennesaw State University in Kennesaw, Georgia, said Marsh's investigation must have credibility as an independent review.
``Doing this may be the only hope Marsh has of saving its firm -- if the Spitzer charges are true,'' he said. ``Marsh may need to pay hundreds of millions of dollars in pay-outs to regulators to give to customers.''
Bad Barrel
Spitzer alleged the practice of kickbacks and bid rigging is pervasive. Spitzer has helped wrest $4.3 billion from mutual-fund and securities firms and executives and said his latest probe taints ``virtually every line of insurance.''
``It looks again like it isn't a question of a few bad apples, but a bad barrel,'' said John Bogle Sr., founder of mutual fund company Vanguard Group. ``We're seeing this over and over again.'' | |
