Posted on 30 Jul 2009
Shares of several major insurance brokerages jumped a day after fellow broker Arthur J. Gallagher & Co. (AJG) amended a settlement agreement with state authorities to accept so-called contingent commissions, which once earned brokers billions but were barred after a bid-rigging probe.
The news, announced in Arthur J. Gallagher's earnings release Tuesday, sent shares in Marsh & McLennan Cos. (MMC), Aon Corp. (AOC) and Willis Group Holdings Ltd. (WSH) closing higher. Marsh & McLennan rose 5.3% to $20.63, Aon climbed 4.7% to $39.89 and Willis Group added 2.7% to $26.85.
The insurance industry came under heavy scrutiny five years ago after Eliot Spitzer, New York's Attorney General at the time, accused Marsh & McLennan of rigging bids for insurance contracts, overcharging clients and steering business to insurers who paid special commissions.
Those commissions were banned the following year for many large firms. The scandal triggered widespread inquiries related to practices in the insurance-brokerage industry.
Spitzer's insurance probe, which included the indictment of eight Marsh executives in late 2005, ended up aiding small firms, some analysts said. The smaller competition was able to capitalize on the commissions freely while Marsh and others' hands were tied, they said.
"Marsh has consistently advocated for a level playing field," Marsh Chairman and Chief Executive Dan Glaser said in a statement.
Large firms repeatedly urged that the special stipulations they faced be extended to the entire industry. The last few years, speculation grew that regulators' disfavor for contingent commissions would lessen.
Arthur J. Gallagher's deal with the Illinois Attorney General and the Illinois Department of Insurance appears to confirm the speculation, opening the doors for those commissions to resume, although not every brokerage will benefit equally from their resumption.
In the earnings release, Arthur J. Gallagher said it expects commissions to boost annual revenues by $10 million by 2011. The company reported revenues of $454 million in the quarter just ended.
Aon Corp. can expect "a modest boost," said Mark Lane, an analyst at William Blair who said the commissions will never be central to Aon's earnings.
Other insurers are expected to report soon, too, with Willis reporting later Wednesday and Aon Thursday. Marsh & McLennan reports the first of August. Investors will be watching for updates on agreements regarding the commissions and these companies.