Marsh & McLennan (NYSE:MMC) has the highest yield this company's share price has offered since 1988. The dividend has risen every year for the past 10 years at a 12% clip. The company is sporting its lowest P/E in its lifetime. So, why not buy? Why isn't this a no-brainer as a stock recommendation for Motley Fool Inside Value?
Reason No. 1: The lawsuit
New York Attorney General Eliot Spitzer alleges the company took "lucrative payoffs" for steering unsuspecting clients to certain insurers, a practice he says has been going on since the late 1990s. Spitzer also named Hartford Financial Services Group (NYSE:HIG), American International Group (NYSE:AIG), the world's largest insurer by market value, and Bermuda-based ACE Ltd. (NYSE:ACE), among others, as participants in "steering and bid rigging."
Marsh is alleged to have reaped $1.1 billion, or a third of its income last year, from such payments.
Marsh was so intent on winning fees that it allegedly devised a phony bidding system to make customers think insurers were competing for business. Spitzer charged in the suit that "a cast of the world's largest insurance companies have participated in Marsh's steering scheme" by paying "hundreds of millions of dollars for Marsh to steer business their way."
"Where is the ethical compass of this industry?" Spitzer said at a press conference. The civil suit, filed in New York State Supreme Court in Manhattan, alleged that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions. It is also alleged that Marsh solicited fake bids, which deceived its customers into thinking that true competition had taken place. The corruption in insurance is remarkable. For fellow Fool Bill Mann's opinion on these lawsuits check out Fraud at Marsh?.
Reason No. 2: The family
Now, for the real reason not to buy Marsh in the near future. Maurice "Hank" Greenberg and his sons make up an insurance dynasty. Hank Greenberg is CEO of AIG, son Jeffrey Greenberg is CEO of Marsh, and ACE is headed by Evan Greenberg, Hank's other son. Nothing like keeping it in the family, and this family is noted in the industry for power. Hank is the 78-year-old dynamo who has groomed his two sons well.
Marsh & McLennan has promoted the CEO of recently acquired Kroll, Michael Cherkasky, to head its insurance brokerage unit. To be fair, Cherkasky has an impeccable reputation and seems ideally suited to the task, but can anyone explain why the rest of upper management remains? Oh, silly me, I forgot for a moment, money is power, and Hank is the 59th richest man in the Forbes poll and has run AIG with his iron fist. We have a board at Marsh that must be immobilized with fear.
At AIG, two executives, Karen Radke, a senior vice president of an AIG division, and co-worker Jean-Baptist Tateossian, have each pleaded guilty to one count of a scheme to defraud; sentencing is scheduled for Dec. 10. AIG got between 15 percent and 20 percent of its corporate property and casualty business from Marsh & McLennan.
Early this year, Spitzer's encounter with the mutual fund industry brought Marsh's business unit Putnam front and center with $110 million in penalties and restitution for improper trading. CEO Lawrence Lasser resigned and was replaced by Charles (Ed) Haldeman. Haldeman is clean by all accounts, but can he bring about the needed change in the corporate culture at Putnam?
The Greenbergs run three of the world's most influential global insurance firms. None of them have been implicated directly, but there is no question that the corporate culture in these companies had a lot in common with that of Enron; aggressive, very aggressive.
Spitzer cites this as a problem that goes to the heart of the industry's business model. I am of the opinion more "findings" are in the offing. Spitzer's attacks on the mutual fund and brokerage industries are now taking aim at the corrupt insurance industry that has cost consumers billions of dollars.
Perhaps Spitzer's actions will motivate other states to review regulatory and enforcement activity for transparent business practices in this industry, since insurers are regulated by individual states. Of course, many do not favor Spitzer's onslaught as it disrupts market value on named companies. Tens of billions of dollars of market value in the U.S. insurance industry stock has been wiped out since the probe was disclosed last Thursday.
Somebody has to take up the crusade to return ethics to management and boardrooms. So far, some just don't get it. Spitzer said he won't negotiate with the current management of Marsh and urged its board to "look long and hard" at the leadership of the company.
Does a global professional services firm with Marsh as the risk and insurance unit offer a buying opportunity? I have no crystal ball, but I don't think this is over. David Dreman of Scudder Dreman Financial Services Fund says they are still trying to assess how much damage there will be.
So, is it a value pick?
Inside Value
advisor Philip Durell said, "This reminds me very much of Tyco (NYSE:TYC) in the summer of 2002. In February, the shares were at $60 and way overvalued. They dropped to the $40 range, and some were thinking 'value' given Tyco's aggressive growth-by-acquisition strategy. After rumors of impropriety by CEO Dennis Kowslowski and CFO Mark Schwarz, shares went to the $20 range and at this stage were indeed undervalued (I thought so and so did Bill Miller of the Legg Mason Value Fund). However, the specter was still hanging over Tyco, and eventually the shares went down to $10. At that price they were an absolute steal given the assets in Tyco's portfolio. New management came in along with a new board, and now the stock is at $30.
"I believe that MarshMac's value without the insurance brokerage arm is somewhere around the $20 mark and we could see a price below that before this is finished," Durell said. "However, even this may not make MarshMac good value if its insurance brokerage is forced out of business under a wave of class action lawsuits -- remember Arthur Andersen!"
Marsh also learned that a class action lawsuit on behalf of shareholders has been filed against it. In my opinion, this will be just the tip of an iceberg of lawsuits against brokers on behalf of shareholders and customers. J.P. Morgan Chase & Co. analysts predict the Spitzer effort will produce a "seismic shift" in property casualty business practices. The insurance scandal has now widened to include top U.S. life insurer MetLife (NYSE:MET) and is headed to health insurance companies. Spitzer says he is greatly disappointed in corporate ethics and plans to drop the other shoe for the insurance industry.
Is Marsh a value buy at $24? Spitzer ain't finished yet and may consider criminal charges on this one. I think I'll wait to see whether more cockroaches crawl out of the woodwork.
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Rogene Calvet owns no shares in any company mentioned. She can be reached at [email protected] . The Motley Fool is investors writing for investors.
