Marsh Pegs Contingency Payments at Center of Probe at $1.2 Billion in Past 18 Months

October 21, 2004

The company at the center of a probe into insurance brokerage fees says it took in more than $1.2 billion in incentive payments over the past 18 months and that its decision to stop using such fees will reduce operating income.

Marsh & McLennan Companies Inc. disclosed late Monday that its Marsh Inc. insurance unit collected $845 million of such fees in 2003, and another $420 million through June 30 this year.

The fees, which are over and above ordinary commissions, have been paid by insurance companies to brokers, mainly for steering profitable clients the insurer’s way. New York Attorney General Eliot Spitzer sued Marsh & McLennan last week over the fees as well as for bid rigging, and said the investigation extends to several large insurers.

Spitzer’s civil suit says the “placement service agreements,” also known as contingent commissions or market service agreements, had led to corporate customers not getting the best prices on property and casualty policies.

New York-based Marsh & McLennan has since ended the practice, and this week two major insurance companies named in Spitzer’s probe — New York-based American International Group Inc. and Bermuda-based ACE Ltd. — said they also have stopped using such incentives.

On Tuesday MetLife Inc., which is based in New York, said it was not surprised it received subpoenas from Spitzer in the case because of its size. MetLife wrote some $9 billion in premiums in 2003.

It said that MetLife “pays both base commissions and other contingent payments” and valued the incentive fees at about $25 million in 2003. MetLife said it was conducting an internal review and that it “was not aware of any instance in which MetLife or any other company had provided a ‘fictitious’ quote.”

Spitzer has alleged that March & McLennan, as part of bid-rigging efforts, sought phony quotes from some insurance companies to try to give commercial customers the illusion of a competitive bidding process.

In a statement Monday, Marsh & McLennan said the $845 million in fees represented 12 percent of its risk and insurance services revenue of $6.9 billion and 7 percent of its $11.6 billion in overall revenue. The fees also represented more than 50 percent of the company’s earnings over the same period.

Soon after Marsh & McLennan’s announcement, Moody’s Investors Service cut its ratings on Marsh & McLennan’s senior debt and commercial paper. The debt remains on watch for possible further downgrades.

“If there are additional complaints against other insurance brokers, the impact on Marsh may be less severe. On the other hand, if Marsh is the only company against which a civil complaint is filed, there is the potential for significant adverse financial and business implications for Marsh,” Moody’s said in a statement.

Investors, who pushed Marsh & McLennan shares down nearly 45 percent over three trading days, on Tuesday eased up a bit on the company. Marsh & McLennan shares were up $1.56 at $24.01 in early Tuesday trading on the New York Stock Exchange.

MetLife shares were up 50 cents at $35. AIG shares were down 13 cents at $59.55, while ACE shares were down $1.53 at $33.85.

Besides ACE and AIG, Spitzer’s probe also mentioned Hartford Financial Services Group Inc. and Munich-American Risk Partners, a division of the German-headquartered Munich Re Group. None of the insurers has been charged.

Copyright 2004 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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