Yesterday MMC announced results for 2005, a year that CEO Cherkasky described as "challenging." MMC has been under pressure since October 2004 when Attorney General Spitzer attacked a practice innocently termed "market services revenues," but more blatantly called "double-dipping" in Texas. The issue of representation is similar to the one I raised in yesterday's blog. Since MMC was receiving payments both from purchasers and sellers of insurance, it was unclear who MMC really represented.
The earnings conference call was unsurprising in its expressed "optimism" and its self-congratulatory tone. Also unsurprising, analysts spent their questions on updating their spreadsheets, not on understanding MMC's business model. Despite everyone's best efforts, some useful information came out anyway.
At the end of the presentation, the CEO commented that while the MSRs had always been around, they had actually been very small until recent years. Despite an acclaimed "new Marsh" (the "old" one being unaffordable), recent changes really imply a return to the more distant past.
I studied the issue and he's right. In reviewing the last twenty years, Marsh's operating margins were fairly stable at 20%, until about 1998. Suddenly, they started to push up to the mid-twenties. Based on Cherkasky's comments, the growth in MSRs caused the increase. So what's so bad about returning to "the good old days"?
Alot, if you bought the stock from 1998 to 2004. The seeming small increase in margins from 20% to 25% relates to an increase of about $500 million on $10 billion in revenue. But, in Wall Street's alchemy, the value of the company moved from roughly two times revenue ($20 billion) to three times revenue ($30 billion). That extra one-third value based on recurring MSRs is simply no longer there and represents a permanent loss for the 1998 to 2004 buyers.
The good news is that MMC is now moving to past margins. Large companies have had and will probably always need assistance in addressing their risk management needs. At those levels, MMC should be worth roughly two times revenues - a nice jump from today's one and a half times revenue valuation.
"Market Services Agreements" were in place to gain compensation from insurance companies while such clear conflicts of interest were not disclosed to the corporate purchasers of insurance. Jeffrey Greenberg was considered to be the architect of this aggressive plan and this episode ended his career of leadership of a publicly traded company.
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