Both brokers suffered a decline in revenues, exacerbated by the elimination of controversial contingency deals–which hurt Marsh more than Aon. MMC also took substantial charges for regulatory and restructuring costs, and announced plans to charge higher client commissions to partly make up for lost fee income.

MMC said its quarterly profit dropped to $134 million–down from $446 million a year ago.

Indeed, it was hard to imagine a “more adverse environment for a company and its employees than we had in the 2005 first quarter at Marsh,” said Michael Cherkasky, chief executive at the world's largest broker. “Our integrity has been questioned, employees were uncertain if they still had jobs, there was new management, and a new business model was in development. Distractions were at every water cooler.”

At MMC's risk management/insurance broking business, revenue fell to $1.172 billion, down 19 percent from $1.451 billion a year ago. Reinsurance broking and services revenue stayed essentially the same–down $1 million to $282 million.

The broker said Marsh's revenue decline was caused by lost contingency fees as well as falling prices and a decline in new business. Total revenues fell to $3.182 billion from $3.196 billion. On the positive side, MMC's consulting business saw revenue rise 4 percent to $834 million.

Marsh revenues from contingency fees fell to $32 million during 2005's first quarter, down from $179 million a year ago. MMC has abandoned its contingency fee arrangements–previously described as illegal kickbacks by regulators in certain transactions–but the broker will continue to collect those fees that were owed prior to the fees' formal elimination.

MMC's first-quarter results also included $225 million of pretax charges for restructuring, retaining employees, and regulatory and compliance issues, as well as fund reimbursements at its Putnam Investments unit. Specifically, MMC spent $96 million on severance, $43 million for regulatory and compliance expenses, and $15 million to retain employees.

“We've been affected by loss of market-service revenue, softening of insurance markets, and the loss of new and retained business because of our regulatory crisis,” Mr. Cherkasky told analysts during a conference call last week. The decline was most significant in the United States, with modest drops in the rest of the world consistent with rate softening, he said.

Mr. Cherkasky, however, remained optimistic about the firm's prospects.

The firm has slashed some 5,250 jobs since New York Attorney General Eliot Spitzer targeted MMC in a civil suit last October, but Mr. Cherkasky assured analysts there were “no real surprises” in MMC's first-quarter performance and that, more importantly, the worst is now over.

“The signs of recovery at Marsh are there. You could see at the [Risk and Insurance Management Society meeting] in Philadelphia that Marsh was coming back,” Mr. Cherkasky said. “Marsh has embraced a more disciplined profit-loss-management business orientation. Our staff reductions are essentially over.”

Perhaps most significant for Marsh customers, Mr. Cherkasky announced higher client commissions beginning in the third quarter to help offset up to 25 percent of revenues lost from eliminating contingency fees in the United States. Mr. Cherkasky said Marsh has gotten a “very good response from the marketplace” about its expected commission hike. “Even in discussions with our clients, our clients are overwhelmingly understanding about what it means for them,” he said during the conference call.

At Aon Corp., the second-largest broker behind Marsh reported an 18 percent boost in its quarterly profit, thanks to expense-cutting efforts that more than made up for a fall in revenues hurt by softening prices and the ending of contingency fees. Aon's profit for the 2005 first quarter was $200 million, up from $170 million one year ago.

“It's well understood that our industry continues to face a difficult revenue environment, but despite this, my colleagues at Aon are doing a terrific job of managing costs and those efforts led to our improved performance this quarter,” said Aon's recently appointed chief executive, Gregory Case. He told analysts during a conference call last week that reported expenses in the quarter fell $66 million from a year ago, “more than offsetting a $53 million decline in reported revenue.”

“We are absolutely committed to remaining vigilant in controlling costs while we work on enhancing profitable growth,” he said, acknowledging that growing revenue “continues to be a challenge.”

Total quarterly revenues for Aon fell 2 percent to $2.51 billion. Revenues for the Risk and Insurance Brokerage Services unit dropped 4 percent to $1.4 billion, with organic revenue declining 5 percent. The lackluster revenue growth can be mainly attributed to softening property-casualty insurance rates as well as the elimination of controversial contingency fees, Aon noted.

However, the impact of abandoning contingency fees was much smaller for Aon when compared with its bigger rival Marsh. Aon received $12 million in contingency fees for 2005's first quarter, down from $35 million a year ago, as the firm booked fees trickling in from expiring contingency agreements. Aon abandoned all such arrangements at the end of 2004.

Mr. Case noted that Aon cut its expenses by 5 percent to $2.19 billion by selling its claims-services business, changing employee incentive compensations–by aligning compensations more closely with performance–and cutting staff. “During the quarter, we continued our efforts to keep costs under control,” Mr. Case said. “The organic growth was a little disappointing, but the margins were extremely good.”

Aon's other business units also performed well. The firm's consulting revenue rose 3 percent to $309 million, while insurance underwriting revenue (both life and health, and warranty, credit and p-c) rose 1 percent to $789 million, further bolstering Aon's bottom line. Total investment income also improved, up 15 percent to $93 million.

Aon's results seemed to top many analysts' expectations. Nick Pirsos, an analyst at New York-based research firm Sandler O'Neill, said the firm's quarterly performance was good and “clearly better than expected from analysts' standards.”

“Revenues did decline in line with what we were expecting in the current environment, but the expense reductions were greater than expected and they more than offset revenue decline,” he added.

Flag: A Tale Of Two Brokers

First-Quarter Earnings At A Glance

Marsh & McLennan

Profit: $134M, Down 70% From $446M Last Year

Contingent Fees: $32M, Down From $179M

Total Revenues: $3.18B, Down From $3.20B

Aon

Profit: $200M, Up 18% From $170M Last Year

Contingent Fees: $12M, Down From $35M

Total Revenues: $2.51B, Down From $2.56B

“Our clients are overwhelmingly understanding about what it means for them,” said Marsh CEO Michael Cherkasky, after announcing increases in client commissions to offset the loss of contingency fees.