By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
As can be expected during an earnings conference call with the executives of Marsh & McLennan Cos., the topic of conversation today eventually turned to contingent commissions, the practice whereby insurance brokers get back-door bonuses from carriers for bringing to them revenue or volume.
"The two-tiered market that has existed for the last five years is not sound public policy in our view," said Daniel S. Glaser, CEO of Marsh Inc., the MMC insurance brokerage operation, speaking to the fact that, in the post-Eliot Spitzer era, large broker houses swore off contingent commissions while smaller agents and brokers continued the practice.
Glaser commended the attorney general of Illinois for recently allowing Arthur J. Gallagher to accept contingent commissions. What Marsh is advocating, said Glaser, is a level playing field.
"We believe our settlement agreement should be sun-setted," he said, regarding Marsh's deal in 2005 with the New York insurance regulator and attorney general after its bidding and compensation practices were called into question.
Under further questioning from analysts, Glaser added that he felt that contingent commissions were a "red herring." Instead, the real focus should be on carrier revenue streams, internal systems to protect against conflict of interests and transparency with clients.
For Marsh's part, he continued, the brokerage operation's new "enhanced commissions" are how it is attempting to enhance the carrier revenue stream based on fixed fees, not ones set to revenue or volume. Glaser said that Marsh has more than 30 enhanced commission agreements already established with carriers, with full disclosure about them to clients.
"I've been more than satisfied with our level of client acceptance," he said.
REVENUE DOWN, COSTS DOWN
Still, despite hitting up carriers for added cash, the revenue for MMC's brokerage unit dropped 7 percent to $1.1 billion, mostly because of drops in front-end insurance commissions. Commercial insurance prices have not increased (despite pleas from carriers), and risk managers are buying less.
Marsh offset the drop in revenue by cutting costs; expenses were down 7 percent to $2.65 billion. The operating margin for the MMC Risk and Insurance Services unit increased to 18.2 percent from 10.6 percent, and adjusted operating margin went to 20.2 percent from 14.6 versus a year ago.
That was "real margin improvement," said MMC President and CEO Brian Duperreault during the conference call, after being asked whether Marsh simply shifted costs to the parent company's books.
"They did it on their own," he assured.
Part of the cost-cutting came at the expense of Marsh employees. In the second quarter, Marsh initiated phase three of a two-year cutback process, releasing about 3 percent of its total brokerage workforce of 8,000 employees, as Risk & Insurance® reported on July 7.
This round of layoffs included many Marsh veterans. At the same time, a reorganization of the infrastructure in the brokerage operations is underway. National staff at those groups is being cut, along with staff in other industry practice groups.
News reports suggest up to as many as 2,000 Marsh employees could leave the Risk and Insurance Services division by year-end.
Marsh executives assured analysts that they have balanced cost-cutting with the hiring of new talent; 150 new senior hires since the second quarter 2008, 80 percent of them in client-facing roles, according to Glaser.
Parent company MMC scored a second-quarter net loss of $193 million, versus a $65 million profit in the second quarter of last year. The reasons for the loss primarily were the $315 million write-down of its Kroll security consulting business.
Without these one-time items, MMC would have turned a profit of 33 cents a share, beating analysts' expectations of 32 cents a share.
"Our balance sheet remains strong," said MMC Chief Financial Officer Vanessa A. Wittman.
Part of it is the $1.3 billion in cash MMC has lying around, which will allow the company to go from "defense to offense" said Duperreault.
August 5, 2009
Copyright 2009© LRP Publications