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Stock Analyst Update

Price-Fixing Allegations Made Against Insurers

Marsh & McLennan, American International Group, ACE, and Hartford Named in Suit.

Below is a recent Stock Analyst Note update. Click here to see a list of all Notes available to Premium Membership subscribers.

Insurers  American International Group AIG,  Ace Limited ACE, and  Hartford HIG were named in a lawsuit making ugly allegations against dominant insurance broker  Marsh & McLennan MMC. Based on our initial review of the New York attorney general's complaint, we're sticking with our fair value estimates for AIG and Hartford, and placing ACE under review. Our preliminary expectation is that we will reduce our fair value estimate for ACE, and we will update our analysis once we have reviewed our assumptions.

Marsh is a powerful supplier to these insurers, as it directs a significant portion of commercial insurance business--especially to large insurers like AIG, ACE, and Hartford. The lawsuit alleges that Marsh co-opted executives from these insurers to participate in a form of illegal price-fixing, where the insurers would structure certain price quotes to ensure that they would or wouldn't win sales in accordance with Marsh's wishes. We expect that Marsh's alleged role at the center of the process--determining which insurers would keep which business at what prices and organizing noncompetitive quotes in return for contingent commission payments--would see that firm bear the bulk of any punishment deemed appropriate.

In our opinion, if the litigation is successful, the three insurance companies would all incur substantial fines and certain executives may be jailed. However, the impact on the businesses would likely be less dramatic. All three would face greater competition for new business, which would decrease their growth rates and profitability, although not substantially. AIG, ACE, and Hartford are all large enough that they would continue to attract business even if Marsh is shut down--which is unlikely--and certainly each of these three has sufficient high-quality products to be able to compete on merit.

Both AIG and Hartford are diversified businesses, so our reduced growth and profitability forecasts have only a small impact on our fair values, mostly offset by profits accumulated since our last updates. We expect to reduce our fair value estimate for ACE, mostly because of a recently announced $500 million hurricane loss, but also because we think ACE is slightly more exposed to a loss of business from Marsh and more likely to suffer reduced premium growth.
Dreyfus Neenan

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