Interview: Marsh & Mclennan
>> ace has joined a.i.g. and marsh & mclennan to say it’s not going to take fees from brokers in exchange for clients. last week, new york attorney general eliot spitzer sued marsh & mclennan, alleging the company profited by steering clients to insurers even when they did not offer the best price and policies. joining us from chicago to talk about the implications for the industry is senior director at fitch ratings, also joining us in the bloomberg studio is allan dodds frank. jim, thanks for being with us. we appreciate your appearance on the program. want to begin with your estimate of just how far this goes. is this a scandal that will continue widening for some time or is all the bad news out?
>> thank you, bob. and it’s nice to be here. right now, it’s pretty open-ended. where the new york attorney general is indicating this could be a pretty wide in scope investigation so we think that other insurers and brokers may be parties to similar suits down the road.
>> if this was a widespread industry practice where all the brokers were paid money by these companies and now, presumably, none of the brokers will be paid money by these companies, it seems like it might be a wash for the industry, right? why not?
>> well, i guess right now, the brokers do get considerable revenue from these contingent fee arrangements. i guess it’s a question of if they don’t have these arrangements, if they will -- the fees will be in additional commission or other fees or some other item.
>> jim, let me ask you the question the way i think the new york attorney general would ask the question, namely, how much will their profits be cut if, in fact, the insurance brokers have been rigging the rates, solicit ing false competitive bids, et cetera?
>> for the brokers, allan?
>> yes, how much will they be hurt if they lose the contingent commissions?
>> it’s really hard to say at this point. like i said, the constitution effect, but we look at just what insurers pay in terms of contingent commission versus fee-based or regular commissions and it’s about 9% of the total from last year. and the property casualty industry. so it is a pretty sizable amount.
>> what happens to the public trust in this industry? what are the customers going to say?
>> yeah, i think that is a big issue. that’s really where we see marsh hit here, especially if they’re the only broker named in any suit, a loss of franchise and public trust is a key item. and for insurers, i think it’s an issue, as well. it’s going to be hard for insurers to face customers in the last few years they’ve passed on tremendous rate increases and if customers think they weren’t getting the best deal back then, there may be resistance now to further changes.
>> jim, breaking news on the bloomberg terminal, that is that your firm, fitch, has cut its ratings on some of marsh & mclennan’s debt to various different issuances cut to different degrees. can you comment on that?
>> yes. we had a rating committee session this afternoon and we lowered marsh’s ratings. the senior debt rating two notches to a-minus from a-plus, and the commercial paper rating to f-2 from f-1. it’s based on potential damage from this probe and lawsuit.
>> excuse me to interrupt. where is that relative to credit grade, investment grade levels?
>> investment grade is triple b-minus or higher so they’re still well above investment grade at this point. we do have the ratings on negative rating watch still and i think until this matter is settleed, they’ll continue to stay there. right now it’s hard to tell what the damage to the franchise will be, what sort of settlements there will be. but from the attorney general’s suit, they’re looking for disgorgement of profit from these agreements and also potential punitive damages so it could be very high.
>> jim, when the attorney general of new york says he will not deal with the current leadership, he will not negotiate with them, is there any way that jeffrey greenberg can remain as c.e.o. of marsh & mclennan in your opinion?
>> it’s hard to say at this point. clearly, marsh’s board is in very heated discussions right now. it was announced today that marsh inc.’s leadership has changed and i think there will be more clearing of the decks there. i’m not sure if it goes up above marsh inc. to the parent. but it’s a possibility.
>> our thanks to jim auden with fitch rateings analyzing the insurance industry for us, we appreciate it. also thanks to allan dodds frank. after the break, a conversation with the co-c.e.o. of eads, europe’s biggest aerospace defense firm and parent to airbus. we’ll get more details on the airbus trade war with boeing.
