NEW YORK – Marsh & McLennan Cos. (MMC), the world's biggest insurance broker, on Monday agreed to pay $850 million to settle charges it conspired with insurers to rig bids, raising hopes the company can begin to put the scandal behind it.
The settlement, which sent Marsh shares up as much as 4.5 percent, ends a battle between the broker and New York Attorney General Eliot Spitzer (search), who accused Marsh in an Oct. 14 complaint of colluding with American International Group Inc. (AIG) 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 will 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 said it will fully disclose all forms of compensation to clients. It will also charge only one fee or commission when arranging a policy. It still, however, faces investigations from other states as well as many shareholder lawsuits.
Marsh shares were up $1.30, or 4.2 percent, at $32.39, after earlier rising to $32.50. The shares closed at $46.13 the day before Spitzer filed his complaint.
In the settlement with Spitzer's office and New York's insurance department, Marsh will contribute the $850 million to a fund to compensate U.S. investors who hired it to place insurance from 2001 to 2004. The clients need not show harm to recover.
Marsh will make the payments in annual installments beginning June 1. It said none of the sum constitutes a fine or penalty, and that it neither admitted nor denied wrongdoing.
"The company has embraced restitution and reform as a way of making a clean break from the practices that misled and harmed its clients in the past," Spitzer said.
In a statement, Cherkasky said the settlement "removes a major uncertainty" and enables Marsh to focus on clients.
Cherkasky became chief executive after Jeffrey Greenberg was ousted 11 days after Spitzer's complaint.
The settlement may also be a precursor to others in the insurance industry, analysts said.
Spitzer is investigating Marsh's biggest rivals, Aon Corp. (AOC) and Willis Group Holdings Ltd. (WSH), and insurers including AIG, Ace Ltd. (ACE) and Hartford Financial Services Group Inc. (HIG) and St. Paul Travelers Cos. (STA).
"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 $850 million sum is roughly the same as the $845 million in "contingent compensation" fees that Marsh received in 2003 as compensation for steering more business to brokers. Marsh has since scrapped these fees.
Marsh will take a $618 million pre-tax charge to fourth-quarter 2004 earnings for the settlement. It had set aside $232 million for a settlement in the third quarter.
Marsh also announced results of an internal review conducted by its Kroll Inc. unit and the law firm Davis Polk & Wardwell.
The report found "widespread instances" in which Marsh brokers solicited backup price quotes from insurance carriers in cases where existing carriers were expected to be awarded policy renewals.
The other carriers were sometimes solicited to provide less competitive "B quotes" with some indication they were unlikely to win the bids, the report said. Marsh employees, however, denied the B quotes were designed to thwart competition.