By Alistair Barr
After nine bearish years, FBR Capital Markets insurance analyst Bijan Moazami finally turned bullish on insurance broker Marsh & McLennan Cos. (MMC), according to a note to investors Monday.
Chief Executive Brian Duppereault, who took over in January 2008, has turned the company around, and that should show up in operating results this year, the analyst said.
Revenue in Marsh & McLennan's main insurance brokerage business should grow in the mid-single digits, helped by exposure to emerging markets. Meanwhile, the company has more room to expand profit margins than rival Aon Corp. (AON), Moazami said.
"Mr. Brian Duppereault has done an excellent job in turning around the company," the analyst wrote. "Given the tremendous progress the company has made and potential improvement in the global economy in 2010, we are positive on Marsh & McLennan's outlook for the first time in the nine years that we have been covering Marsh & McLennan at FBR."
At the start of this century, Marsh & McLennan was the undisputed leader in the business of helping big, global corporations purchase insurance. However, the company was sued by New York Attorney General Eliot Spitzer in 2004 for allegedly rigging insurance bids. Marsh settled the suit and agreed to give up controversial payments known as contingent commissions. This meant the company missed out on a large chunk of highly lucrative revenue, throwing its business model into disarray. Meanwhile, some employees and clients left, benefiting rivals like Aon and Willis Group Holdings PLC (WSH).
Since Duppereault returned, Marsh has stopped the rot, with fewer client defections and higher employee morale.
"Marsh & McLennan is back on the offensive, after years of fighting simply for survival," Moazami wrote Monday. "It is conceivable that the company can now grow again at the expense of Aon."
For the first quarter of 2010, Marsh & McLennan reported flat organic revenue at its main insurance brokerage business, while Aon posted a 3% decline, the analyst noted. (Organic revenue measures sales excluding the impact of recent acquisitions, divestitures and currency fluctuations.)
"While one quarter is certainly not enough to make a trend, we believe that this represents a step in the right direction and could signal a return to Marsh's former glory," Moazami said.
Expense Accounts In Danger
Marsh & McLennan also may be able to generate higher profit margins than Aon, the analyst argued. Marsh's margins lagged Aon's in recent years as the loss of contingent commissions, a "disregard for expenses" and "incompetence" by the management team that previously ran the company hurt Marsh, Moazami said.
When Marsh employees were leaving to join rivals, previous executives tried to increase compensation to retain talent. That knocked profit margins, he said.
"With new management in place, however, employee morale has improved, costs have been reduced, and margins have expanded," Moazami wrote.
Even though Marsh has already cut costs, there's room for more, the analyst added. For years, insurance brokers were paid based on production, with little regard for expenses and final profits, he said.
Brokers in the insurance industry are always on the road, so travel and entertainment budgets can be large. This gives Marsh an opportunity for cost cuts.
"Cost consciousness among employees and a greater focus on the bottom line could go a long way to keep expenses under control," Moazami wrote.
Marsh & McLennan shares slipped 7 cents to $21.65 in afternoon trading Monday, while Aon declined 1% to $39.26.
-By Alistair Barr; 415-439-6400; AskNewswires@dowjones.com