Marsh to Pay $850 Million To Settle Bid-Rig Probe|
By Jonathan Stempel
Jan 31, 2005
NEW YORK (Reuters) - Marsh & McLennan Cos. on Monday agreed to pay $850 million to settle charges it conspired with insurers to rig bids, raising hopes the world's biggest insurance broker can start to move past the scandal. The settlement sent Marsh shares up as much as 4.5 percent. It ends a battle with New York Attorney General Eliot Spitzer, who accused Marsh in an Oct. 14 complaint of colluding with American International Group Inc. and other insurers to fix prices.
Chief Executive Michael Cherkasky has been overhauling Marsh's brokerage practices and corporate governance in a bid to retain clients. Spitzer said Marsh would apologize for its "unlawful" and "shameful" conduct. "This is a palatable settlement, and indicates that Michael Cherkasky must have taken several bitter pills to satisfy Spitzer's office," said Amy Domini, chief executive of Domini Social Investments in New York , whose $2 billion of assets include Marsh shares. "They have committed to greater transparency, and that is exactly what needs to happen."
Marsh will fully disclose all compensation to clients and charge only one fee or commission when arranging a policy. "This story culminates a dark period in the company's history," Cherkasky said on a conference call. Marsh neither admitted nor denied wrongdoing. But Cherkasky said the company was nevertheless "ashamed" about the conduct of "a few" employees. He said talks are ongoing with other state regulators and that while shareholder class-action lawsuits "are not going to go away overnight," the settlement with Spitzer might provide "a measure of closure" on litigation.
In the settlement with Spitzer's office and New York's insurance department, Marsh will put the $850 million in a fund to compensate clients who hired it to place insurance from 2001 to 2004. The clients need not show harm to recover. "The company has embraced restitution and reform as a way of making a clean break from the practices that misled and harmed its clients," Spitzer said. In an interview with Reuters, Spitzer said he arrived at $850 million as "a number that would be fair compensation, but would also ensure that the company did not suffer."
The settlement is the largest Spitzer has extracted from a single company in his probes of the insurance industry, Wall Street conflicts of interest and improper mutual fund trading. Marsh will make annual installment payments beginning June 1. It said none of the sum constitutes a fine or penalty. "Spreading the $850 million over four years is probably a bonus for the company," said Domini. Spitzer told Reuters that settlements with other companies are possible. "This is obviously not the end of our effort," he said.
Spitzer is investigating Marsh's biggest rivals, Aon Corp. and Willis Group Holdings Ltd. and insurers including AIG, Ace Ltd. Hartford Financial Services Group Inc. and St. Paul Travelers Cos. "It puts a lot of pressure on the other insurers and brokers to ante up," said Ric Marshall, chief insurance analyst for the Corporate Library, a corporate governance research group in Portland, Maine.
The settlement sum is roughly the same as the $845 million in "contingent compensation" fees that Marsh received in 2003 for steering more business to brokers. Marsh has since scrapped those fees. It has also cut 3,000 jobs and created a compliance unit, and its board now consists of 10 outside directors. Marsh will take a $618 million pre-tax charge to fourth-quarter 2004 earnings for the settlement. It previously set aside $232 million in the third quarter.
Cherkasky, Spitzer's former boss at the Manhattan district attorney's office, became Marsh's chief executive when Jeffrey Greenberg was ousted 11 days after Spitzer's complaint. Marsh also said an internal review found "widespread instances" in which Marsh brokers solicited less competitive "B" price quotes from insurance carriers in cases where existing carriers were expected to win policy renewals. Marsh employees, however, denied the B quotes were designed to thwart competition, according to the review conducted by its Kroll Inc. unit and the law firm Davis Polk & Wardwell.
(Additional reporting by Kevin Drawbaugh and Joseph A. Giannone)