Top executives of Marsh Inc. were asked to step down, and Marsh & McLennan Companies Inc., New York, says it will lay off 3,000 employees in the wake of the insurance brokerage scandal.[@@]
M&M announced that Roger E. Egan, president of Marsh, and Christopher M. Treanor, Marsh’s chairman and chief executive officer of Global Placement, were asked to resign. In addition, William L. Rosoff, senior vice president and general counsel for M&M, has resigned.
All 3 will help their replacements in assuming their new duties, M&M says.
Egan is to be replaced by Peter F. Garvey, president of Marsh’s North American operations, and William A. Malloy, president of Marsh’s Europe and Middle East operations. Both were promoted to co-president of Marsh.
Philip V. Moyles Jr., chairman of client development-North America, was promoted to executive vice president.
This makes a total of 7 executives who have been let go since New York’s Attorney General Eliot Spitzer announced a suit against M&M over bid-rigging and manipulation of insurance contract placements in return for profitable market service agreements, a form of contingency-fee commission based on account volume.
During an investor’s conference call, Michael G. Cherkasky, president of M&M and chairman and chief executive officers of Marsh, said the removal of the 3 executives was not a reflection of guilt.
“Freedom from criminal culpability is not our standard [for management] at M&M,” he said. “The issues that surfaced over the last few weeks have occurred under the stewardship of these executives. Such leadership is not up to the M&M or Marsh standards of care, and I have therefore replaced them.”
He said M&M’s internal investigation has not unearthed any evidence of extensive acts of bid-rigging or other illegal activity and added, “I’m cautiously optimistic that it is confined to a limited area” of Marsh. He said the internal probe should be completed by the end of next week.
The company also announced it would eliminate about 3,000 positions, or about 5% of its staff, worldwide.
The move comes as the company begins restructuring its finances after announcing it would no longer accept any form of contingent commissions. Contingent commissions accounted for about $845 million in earnings last year, or 7% of the company’s income. M&M says about 75% of the cuts would come in its Marsh division.
Cherkasky said the cuts would come primarily in management and redundant support positions to create a “flatter organization.” He added that the cuts would seek to avoid affecting face-to-face encounters with clients.
“We want to keep costs consistent with revenues,” he said. “We can and will re-engineer this company to keep our best employees, our clients and provide an appropriate return to our shareholders.”
The company set aside $232 million in reserves in the quarter toward a settlement with Spitzer’s office in the suit. It also announced a $40 million settlement with the Security and Exchange Commission over an alleged mutual fund nondisclosures to clients of Putnam Investments, another M&M unit.
M&M said it expects to take a pre-tax $325 million restructuring charge over the next 6 months. It also expects that cutbacks in certain discretionary spending and the elimination of positions would result in an annual savings of $400 million.
For the third quarter of this year, M&M reported net income was off 94%, going from $357 million to $21 million. Revenues rose 5%, from around $2.8 billion to almost $3 billion.
For the 9 months, net income dropped 27%, from less than $1.2 billion to $856 million. Revenues during the period increased 8%, from less than $8.6 billion to more than $9.2 billion.
Sandra Wijnberg, M&M chief financial officer, said during the conference call that while M&M has $700 million in cash on hand, it is looking to improve its liquidity and plans to announce a new multiyear credit facility soon. She said the agreement would be completed before year’s end but would give no additional details.
The revenue increases came on an 8% increase in revenues from Marsh, from $1.64 billion to $1.77 billion in the third quarter, and 11% revenue increase at Mercer, from $690 million to $766 million. Putnam’s revenues fell 16% in the quarter, from $507 million to $429 million.
While revenues continued to see declines at Putnam, the investment firm is controlling expenses, cutting its work force by 11% to date. Wijnberg said Putnam has a new agreement with trustees over transfer agency fees. Fees will now be fixed instead of on cost reimbursement.