Marsh & McLennan Cos. Lowered
Standard & Poor's Rating Services lowered its counterparty credit rating on Marsh & McLennan Cos. (MMC) to "BBB+/A-2" from "A+/A-1." The rating remains on credit watch with negative implications, where it was placed after New York State Attorney General Elliott Spitzer filed a civil complaint against MMC and its brokerage and consulting subsidiary, Marsh Inc.
The rating action reflects the revised expectations for Marsh's earnings and cash flow given Marsh's recent announcement that market service agreements (MSAs) are suspended. MSAs are agreements under which contingent commissions are received from insurers. The reduced earnings will diminish MMC's ability to rapidly retire the short-term debt that was assumed in conjunction with the $1.9 billion acquisition of Kroll Inc. this past summer.
This rating action also reflects S&P's belief that the Marsh franchise has been damaged by the allegations of bid rigging by the State of New York.
The ratings remain on credit watch negative to reflect the ongoing uncertainties of the situation, including the potential for further negative developments with respect to the bid rigging allegations and the possible adverse effects such developments might have on Marsh's competitive position, earnings or cash flow. However, short of criminal charges being filed against the company by a legal authority, S&P believes that the diversified operational profile of MMC, with several well-positioned subsidiaries, will enable it to remain a viable and profitable entity into the future.
Willis Placed on Credit Watch Neg
S&P placed its "BBB-" counterparty credit rating on Willis Group Holdings Inc. on credit watch with negative implications following recent developments in the ongoing investigation by the New York attorney general into the payment of contingent commissions, which has led to the decision by various insurance companies and insurance brokers to suspend or end certain compensation agreements. The investigation alleges that this practice motivates an insurance broker to place its clients' business with the insurer that pays the highest contingent commissions rather than with the insurer that offers the best coverage for the price, allegedly violating the brokers' fiduciary responsibility to its clients.
The ratings were placed on credit watch negative to reflect the ongoing uncertainties represented by the continuing N.Y. investigation, for which Willis is a subpoenaed party, as well as the concerns about of private litigation.
The brokerage, a consulting subsidiary of Marsh & McLennan Cos. (MMC), announced it would immediately suspend its practice of MSAs with insurance carriers. Willis indicated it would end its practice of accepting contingency commission payments (equivalent to MSAs) from insurers. S&P estimates that although the elimination of such payments is expected to affect earnings in at least the near to intermediate term, the ratings on Willis have historically been tempered by the company's lack of earnings diversification and lack of a significant track record of consistent earnings through various underwriting cycles. As such, the potential reduction in the company's recent robust earnings is not, in S&P's opinion, in and of itself sufficient cause to warrant a downgrade at this time. However, if the N.Y. AG or other legal entity files a legal charge, there would likely be a negative rating action.
Aon Corp. Lowered
S&P lowered its counterparty credit rating on Aon Corp. to "BBB+/A-2" from "A-/A-2." S&P also lowered its preferred stock rating on Aon to "BBB-" from "BBB." In addition, S&P placed all these ratings on 'credit watch' with negative implications.
The ratings were lowered to reflect revised expectations for Aon's earnings and cash flow given the recent announcement by various industry players that they are suspending MSAs. S&P believes that the disruption to earnings resulting from the prospective suspension of MSAs materially reduces Aon's ability to improve its operating and financial profiles. This improvement had been factored into the ratings.
The ratings are on credit watch negative to reflect the ongoing uncertainties related to the continuing investigation by the N.Y. AG, for which Aon is a subpoenaed party, as well as concerns about private litigation.
Fireman's Fund Downgraded
S&P lowered its counterparty and financial strength ratings on Fireman's Fund Insurance Co. (FFIC) and some of its rated subsidiaries, as well as its financial strength ratings on other units to "A" from "A+." The rating outlook remains negative.
The ratings were lowered because of S&P's incremental concern regarding the long-term strategic importance of FFIC to parent company Allianz AG. Purchased in 1991 by Allianz AG, FFIC has experienced significant strategic and financial challenges over time. Although the insurer's current financial performance is good and continues to rebound after substantial losses in 2001 and 2002, S&P views FFIC as incrementally less strategically important to its parent group.
The ratings on FFIC are based on the continued financial flexibility afforded to it by being a member of the Allianz AG group, improving operating earnings, and a strong amount of capital. Partially offsetting these strengths is a lack of market leadership in the U.S. property and casualty marketplace, increased competitive pricing in the marketplace, and below-average quality of capital.
The continued negative outlook reflects S&P's desire to see a further improved and sustainable earnings track record under new chief executive officer Charles Kavitsky, lack of material adverse reserve development into 2005, and improvements in the quality of the capital structure before considering a stable rating outlook.
S&P expects FFIC to report improved earnings in 2004 and 2005. Net income of at least $475 million is expected in 2004 with continued income growth in 2005. FFIC is expected to generate a combined loss and expense ratio of about 96-97 percent in 2004, and again in 2005 and maintain a capital adequacy ratio of at least 135 percent.
