By JACK ROBERTS, editor in
chief of Risk & Insurance®
It's been a rough few years for Marsh Inc., the global insurance brokerage operation of parent Marsh & McLennan Cos. But the turnaround looks to be under way, and not a moment too soon.
The downhill slide began five years ago, with then New York State Attorney General Eliot Spitzer's near-indictment of MMC and the actual indictment of some of the firm's global placement executives on bid-rigging charges.
Then-CEO of MMC subsidiary Kroll Inc., lawyer Michael Cherkasky, was named the new CEO. Given the responsibility for steering the company from the shoals of criminal indictment, Cherkasky was in the end successful.
But the price was steep. As the stock price plunged, MMC had to pay $850 million into a settlement fund to refund contingency fees to clients. The episode resulted in a decline in revenue and profits, a change in business strategies, the layoff of hundreds of employees and a sudden firmwide cutback in expenses.
Back then, the biggest challenge was an effort to change the corporate culture at Marsh, one that Cherkasky characterized as "hubris" when he took over in December 2004. It was an embarrassing episode for one of the nation's most respected financial services companies.
But even so, Cherkasky was unable to right the listing ship in the wake of the Spitzer debacle. Margins remained slim, along with profits. The company posted little growth. Certainly, it didn't help that the market was softening, buffeting the brokerage firm with lower commission revenue, made worse by the lack of the former back-end or contingency fees forbidden by the Spitzer agreement.
There was hope that former Marsh CEO Brian Storms, who two years ago led a big effort to penetrate the middle market, could change the organization and culture of the brokerage operations.
Given the commodification of the insurance-buying process among the Fortune 500, Storms, hired in September 2005, believed the time had come for Marsh to barrel full steam ahead into the middle market with unique new products drawn from Marsh's expertise with big clients. In November 2006, he hired Mark Feuer to lead Marsh's small business and middle market units. Feuer, who'd built a reputation as a growth-oriented executive at Merrill Lynch, was quoted as saying in interviews back then that he loved "fractured markets."
But any promise of a Storms-led turnaround evaporated suddenly last year, when Storms was shown the door by Cherkasky in the wake of poor earnings reports. Later Feurer also left, along with a number of other top Marsh executives.
Now, with the executive-level intrigue finally over, Marsh looks to be on the upswing, though it has yet to report a dramatic improvement in profit numbers.
Could this finally be the year for Marsh? Or will the latest initiatives stall once more, this time hobbled by what may turn out to be the deepest recession since the Great Depression?
Under any circumstances, 2009 will be critical because the patience of the market, if nothing happens, may be wearing thin. Stock analysts complain that they have been waiting now for years for evidence of the turnaround at MMC in the post-Spitzer era, although they're optimistic that the new management will be successful.
The stock price declines have had repercussions beyond stockholders. Many of Marsh's highest-grossing brokers, who had been at Marsh for decades and were heavily invested in Marsh stock through various compensation incentive plans, saw their equity sink with the tanking stock price. They were vulnerable to attractive offers from competitors. The competition for talented brokers during the past few years has been fierce.
THE DUPERREAULT ERA BEGINS
But on Jan. 30, 2008, MMC named Brian Duperreault its president and CEO. Duperreault, the former chairman and CEO of ACE, helped build the large, then Bermuda-based property/casualty insurance company.
Many industry observers and analysts welcomed the hiring of Duperreault, an industry veteran with carrier experience, having spent 20 years at AIG before joining ACE. It was almost as if there was a collective sigh among the employees when the Duperreault announcement was made public.
He knows insurance and he knows brokerage, so the reaction went, and his presence at Marsh, despite the challenges, seems to be a steadying influence in the markets, among shareholders, employees and customers.
That doesn't mean he hasn't taken action, sometimes swiftly. Within weeks of his appointment, he changed the leadership at Guy Carpenter, the reinsurance brokerage operations of Marsh and MMC, sending a strong message throughout the organization.
But the key change at Marsh was made by Cherkasky just before he stepped down. He brought on Daniel S. Glaser in early December 2007 as the chairman and CEO of the brokerage subsidiary, replacing Storms.
Duperreault quickly made Glaser a key member of his new management team. Glaser came to Marsh from AIG but began his career at Marsh as a broker. Glaser's challenge was to calm the turmoil in the Marsh executive suite, grow revenue in a soft market without contingent commissions, improve margins and keep costs under control, and stem the flow of brokers and customers to the competitors.
Within his first month, he reconfigured the top management of brokerage operations, promoting Joseph McSweeny from Willis to head the U.S./Canada operations, and bringing to the New York headquarters from London Alexander Moczarski, former head of European, Middle East and Africa operations, to be president of all international operations except Canada.
Three other leaders rounded out the new brokerage executive team: Alexander (Sandy) Vieter as president of Marsh Global Specialties; long-time Marsh executive Timothy J. Mahoney as president of Global Risk Management, the home of the industry practice groups; and Henry S. Allen to head up the Global Consumer Division.
So far Glaser's reorganization efforts have been focused on "simplification," as he says. He wants to give managers more "autonomy."
"I want to make the lines clearer," he says. "I'm a big believer that the P&L ought to be going right to the level where the managers have the authority to meet their responsibilities and take the accountability for their performance."
All that executive turmoil was a year ago. Since then, the brokerage's financial performance has improved, especially foreign operations, which had been on an upswing when Moczarski was in London but continue in that direction.
But overall, revenue growth in the last year has not been dramatically impressive. Fourth-quarter and year-end results, which were expected to improve, had not yet been released at the writing of this article.
Marsh has been and is still considered the leader among the very largest clients, and Glaser says the brokerage will continue to segment the markets by both size and industry. "We want the right products and services in place at the right price," he says.
The firm's historic emphasis on industry practice groups and specialties shows that Marsh's strength is its ability to "bring the needed expertise to the client." Glaser adds that the firm's judged on "how well we delivered what we have promised to the client."
The challenge, Glaser explains, is how to price their services. "We must align our time and expertise with price." And, he added, there has been progress. "Our margin has expanded significantly this past year."
He has big plans for a push into the middle market, both through organic growth and by acquisition. "We're a major player in both the middle and small markets," Glaser says.
First Glaser and McSweeny created the "Marsh & McLennan Agency" to target small and emerging growth companies, headed up by Jack Butcher.Then they brought in David L. Eslick, former chairman and CEO of USI Holdings, as chairman of the new agency charged with the task of identifying middle-market brokerage acquisition opportunities.
Glaser has high expectations for growth in both revenue and profits from the company's consumer operations. "We're a big player in that market. Last year we sent out 50 million pieces of mail in our affinity business to that market. We handled more than 3 million phone calls throughout call centers," he says.
But it's at the upper end of the global Fortune 500 market, the market for the very largest and most complex risks, where Marsh is most well known, probably has the most resources, and brings to bear its tremendous expertise and historic commitment most effectively.
Its industry practice groups continue to flourish with the help of experienced brokers, making the firm dominant in key markets, although there have been some notable departures during the past four years.
And competition today for the very largest clients is ferocious. Both Aon and Willis HRH operate on higher margins than Marsh, so it's not clear sailing for Marsh yet, even with Duperreault and Glaser at the helm.
Glaser's been on the job for a bit more than a year now. He's had time to put his stamp on the organization. But the revenue challenges are daunting. Risk managers report that changes are expected to be implemented shortly that chip away at the contingent commission policies, which would boost margins and the bottom line, although Marsh has been steadfast in its commitment to transparency.
"Marsh is roaring back," Glaser says in an interview. "I knew Marsh well when I came here, and I know there is tremendous inherent value in this organization."
To stop the bleeding of expenses, Glaser cancelled an expensive advertising campaign, fired all the consultants and brought together what he believes to be the "right management team" to align the businesses. Because of current market conditions, he knew "revenue was going to be constrained."
Glaser says he wants to take advantage of the expertise, the depth and clout that Marsh holds in the markets. He's reorganized the placement process, taking it out of the hands of local offices, creating 14 placement hubs. Each line of insurance will be placed through a particular hub.
For example, all 14 hubs will be placing property coverage. But more specialized lines may only be placed through three or four strategically located offices. "We want to make sure that the best people are placing insurance for our clients," he says.
In addition, the hubs are not profit-and-loss centers. Little incentive exists for breakdown as it did when Marsh operated a worldwide placement system resulting in the bid-rigging indictments.
This brings us back to the culture question. After nearly five years, the "hubris" factor is clearly diminished. "The Marsh folks don't swagger the way they used to," says one risk manager for a major manufacturer.
Nor do scores of Marsh executives appear for an annual presentation and then vanish, never again seen until next year. "Marsh is still Marsh, and they have some of the very best people and the best resources, but the competition is often just as strong," says the risk manager.
February 20, 2009
Copyright 2009© LRP Publications