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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 2001
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . NO ___.
As of October 31, 2001 there were outstanding 274,644,046 shares of common
stock, par value $1.00 per share, of the registrant.
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INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and its
representatives may from time to time make verbal or written statements
(including certain statements contained in this report and other MMC filings
with the Securities and Exchange Commission and in our reports to stockholders)
relating to future results which are forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Such statements
may include, without limitation, discussions concerning revenue and expenses,
cash flow, capital structure, financial losses and expected insurance recoveries
resulting from the September 11, 2001 attack on the World Trade Center in New
York City, as well as market and industry conditions, premium rates, interest
rates, foreign exchange rates, contingencies and matters relating to MMC's
operations and income taxes. Such forward-looking statements are based on
available current market and industry materials, experts'reports and opinions,
as well as management's expectations concerning future events impacting MMC.
Forward-looking statements by their very nature involve risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by any forward-looking statements contained herein include, in the
case of MMC's risk and insurance services and consulting businesses, the amount
of actual insurance recoveries and financial loss from the September 11th attack
on the World Trade Center or other adverse consequences from that incident.
Other factors that should be considered in the case of MMC's risk and insurance
services business are changes in competitive conditions, movements in premium
rate levels and other changes in the global property and casualty insurance
markets, the impact of terrorist attacks, natural catastrophes and mergers
between client organizations, including insurance and reinsurance companies.
Factors to be considered in the case of MMC's investment management business
include changes in worldwide and national equity and fixed income markets and
the level of sales and redemptions; and with respect to all of MMC's activities,
changes in general worldwide and national economic conditions, fluctuations in
foreign currencies, actions of competitors or regulators, changes in interest
rates, developments relating to claims, lawsuits and contingencies, prospective
and retrospective changes in the tax or accounting treatment of MMC's operations
and the impact of tax and other legislation and regulation in the jurisdictions
in which MMC operates.
MMC is committed to providing timely and materially accurate information to
the investing public, consistent with our legal and regulatory obligations. To
that end, MMC and its operating companies use their websites to convey
meaningful information about their businesses, including the posting of updates
of assets under management at Putnam, and from time to time, Marsh Inc.'s view
of insurance market conditions. Monthly updates of assets under management at
Putnam will be posted on the first business day following the end of each month,
except at the end of March, June, September and December, when such information
will be released with MMC's quarterly earnings announcement. Investors can link
to MMC and its operating company websites through www.mmc.com.
1
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2001 2000 2001 2000
----- ------ ------ ------
Revenue $ 2,371 $ 2,535 $ 7,470 $ 7,681
Expense 2,059(a) 2,009 5,987(a) 6,022
------- ------- ------- -------
Operating Income 312 526 1,483 1,659
Interest Income 6 7 18 18
Interest Expense (46) (63) (154) (191)
------- ------- ------- -------
Income Before Income Taxes
And Minority Interest 272 470 1,347 1,486
Income Taxes 100 182 503 576
Minority Interest 4 6 14 15
------- ------- ------- -------
Net Income $ 168 $ 282 $ 830 $ 895
======= ======= ======= =======
Basic Net Income
Per Share $ 0.62 $ 1.04 $ 3.02 $ 3.32
======= ======= ======= =======
Diluted Net Income
Per Share $ 0.58 $ .97 $ 2.87 $ 3.12
======= ======= ======= =======
Average Number of Shares
Outstanding - Basic 274 272 275 270
======= ======= ======= =======
Average Number of Shares
Outstanding - Diluted 284 286 286 283
======= ======= ======= =======
Dividends Declared $ 0.53 $ .50 $ 1.56 $ 1.45
======= ======= ======= =======
(a) 2001 expenses include charges of $173 related to September 11, see note 8.
See notes to consolidated financial statements.
2
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 600 $ 240
-------- --------
Receivables-
Commissions and fees 2,248 2,370
Advanced premiums and claims 237 270
Other receivables 379 307
-------- --------
2,864 2,947
Less-allowance for doubtful accounts and cancellations (134) (135)
-------- --------
Net receivables 2,730 2,812
-------- --------
Prepaid dealer commissions -
current portion 320 362
Other current assets 266 225
-------- --------
Total current assets 3,916 3,639
Intangible assets 5,363 5,476
Fixed assets, net 1,222 1,360
(net of accumulated depreciation and
amortization of $1,007 at September 30, 2001
and $961 at December 31, 2000)
Long-term investments 651 976
Prepaid dealer commissions 600 762
Other assets 1,691 1,556
-------- --------
$ 13,443 $ 13,769
======== ========
See notes to consolidated financial statements.
3
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,011 $ 337
Accounts payable and accrued liabilities 1,559 1,964
Accrued compensation and employee benefits 836 1,388
Accrued income taxes 500 291
Dividends payable 147 139
-------- --------
Total current liabilities 4,053 4,119
-------- --------
Fiduciary liabilities 3,520 3,627
Less - cash and investments held in
a fiduciary capacity (3,520) (3,627)
-------- --------
-- --
Long-term debt 2,346 2,347
-------- --------
Other liabilities 1,949 2,075
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued -- --
Common stock, $1 par value, authorized
800,000,000 shares, issued 280,320,820
shares at September 30, 2001 and 278,379,359
at December 31, 2000 280 278
Additional paid-in capital 1,987 1,918
Retained earnings 3,724 3,323
Accumulated other comprehensive loss (405) (149)
-------- --------
5,586 5,370
Less - treasury shares, at cost,
6,062,145 shares at September 30, 2001 and
2,352,046 shares at December 31, 2000 (491) (142)
-------- --------
Total stockholders' equity 5,095 5,228
-------- --------
$ 13,443 $ 13,769
======== ========
See notes to consolidated financial statements.
4
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
----- -----
Operating cash flows:
Net income $ 830 $ 895
Adjustments to reconcile net income to
cash used for operations:
Depreciation of fixed assets and capitalized software 248 225
Amortization of intangible assets 145 134
Provision for deferred income taxes (5) 217
Integration related payments (69) (136)
Prepaid dealer commissions 204 (89)
Net receivables 82 (508)
Other current assets 12 1
Accounts payable and accrued liabilities 55 179
Accrued compensation and employee benefits (552) (36)
Accrued income taxes 189 92
Other liabilities (128) (62)
Effect of exchange rate changes (25) (10)
Other, net (114) (92)
----- -----
Net cash generated from operations 872 810
----- -----
Financing cash flows:
Net increase (decrease) in commercial paper 675 (254)
Other borrowings 24 67
Other repayments of debt (27) (168)
Purchase of treasury shares (590) --
Issuance of common stock 312 304
Dividends paid (421) (376)
----- -----
Net cash provided by financing activities (27) (427)
----- -----
Investing cash flows:
Additions to fixed assets and capitalized software (324) (352)
Proceeds from sale of businesses -- 33
Acquisitions (53) (83)
Other, net (117) (47)
----- -----
Net cash used for investing activities (494) (449)
----- -----
Effect of exchange rate changes on cash
and cash equivalents 9 (21)
----- -----
Increase in cash & cash equivalents 360 (87)
Cash & cash equivalents at beginning of period 240 428
----- -----
Cash & cash equivalents at end of period $ 600 $ 341
===== =====
See notes to consolidated financial statements.
5
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 Nature of Operations
MMC, a global professional services firm, is organized based on the
different services that it offers. MMC operates in three principal business
segments: risk and insurance services, investment management and consulting. The
risk and insurance services segment provides insurance broking, reinsurance
broking and insurance and program management services for business, public
entity, insurance company, professional, association and private clients. It
also provides services principally in connection with originating, structuring
and managing insurance, financial services and other industry-focused
investments. The investment management segment primarily provides securities
investment advisory and management services and administrative services for a
group of publicly held investment companies and institutional accounts. The
consulting segment provides advice and services to the managements of
organizations primarily in the areas of human resources and employee benefit
programs, general management consulting, organizational change and economic
consulting and analysis.
2. Principles of Consolidation
The consolidated financial statements included herein have been prepared by
MMC pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
MMC believes that the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in
MMC's latest annual report on Form 10-K.
The financial information contained herein reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results of operations for the three and nine-month periods ended September 30,
2001 and 2000. Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
3. Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, MMC collects premiums from
insureds and, after deducting its commissions, remits the premiums to the
respective insurance underwriters; MMC also collects claims or refunds from
underwriters on behalf of insureds. Unremitted insurance premiums and claims are
held in a fiduciary capacity. Interest income on these fiduciary funds, included
in revenue, amounted to $135 million and $142 million for the nine months ended
September 30, 2001 and 2000, respectively.
Net uncollected premiums and claims and the related payables amounting to
$9.9 billion at September 30, 2001 and $10.8 billion at December 31, 2000, are
not included in the accompanying Consolidated Balance Sheets.
6
4. Per Share Data
Basic net income per share is calculated by dividing net income by the
average number of shares of MMC's common stock outstanding. Diluted net income
per share is calculated by reducing net income for the potential minority
interest associated with unvested shares granted under the Putnam Equity
Partnership Plan. This result is then divided by the average common shares
outstanding, which have been adjusted for the dilutive effect of potentially
issuable common shares.
The following reconciles net income to net income for diluted earnings per
share and basic weighted average common shares outstanding to diluted weighted
average common shares outstanding for the three and nine-month periods ended
September 30, 2001 and 2000.
(In millions of dollars)
- ----------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- -----------------
2001 2000 2001 2000
----- ----- ------ -----
Net income $ 168 $ 282 $ 830 $ 895
Less: Potential minority
interest associated
with Putnam Equity
Partnership Plan (2) (5) (8) (14)
----- ----- ----- -----
Net income for diluted
earnings per share $ 166 $ 277 $ 822 $ 881
===== ===== ===== =====
Basic weighted average
common shares outstanding 274 272 275 270
Dilutive effect of potentially
issuable common shares 10 14 11 13
----- ----- ----- -----
Diluted weighted average
common shares outstanding 284 286 286 283
===== ===== ===== =====
7
5. Comprehensive Income
The components of comprehensive income for the nine-month periods ended
September 30, 2001 and 2000 are as follows:
(In millions of dollars)
----------------------
2001 2000
---- ----
Foreign currency translation adjustments $ (34) $ (142)
Unrealized investment holding (losses) gains,
net of income taxes (165) 109
Less: Reclassification adjustment for gains
included in net income, net of income taxes (57) (54)
------ -------
Other comprehensive loss (256) (87)
Net income 830 895
----- -------
Comprehensive income $574 $ 808
==== =====
6. Supplemental Disclosure to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning
interest and income taxes paid:
Nine Months Ended
September 30,
(In millions of dollars) 2001 2000
------------------------ ---- ----
Interest paid $150 $172
Income taxes paid $169 $206
In the first quarter of 2001, MMC settled its $286 million commitment to
purchase a minority investment in Gruppo Bipop-Carire S.p.A., which had been
recorded as a liability in accounts payable and accrued liabilities, and is
reflected in "other, net" in investing cash flows.
In the second quarter of 2001, MMC sold certain of its London properties
and simultaneously entered into a leaseback arrangement for a significant
portion of the properties. Total proceeds of approximately $135 million, which
exceeded the net book value of the properties by approximately $29 million, were
received by the Company and are included in "other, net" in investing cash
flows. A substantial portion of this excess was deferred and will be amortized
over the lease period.
7 Dispositions and Integration Costs
Dispositions: As part of the 1998 combination with Sedgwick Group, plc
("Sedgwick"), MMC acquired several businesses that it intended to sell,
including insurance underwriting operations already in run-off and consulting
businesses not compatible with its existing operations. During the first quarter
of 2000, MMC sold one of these businesses for $33 million which approximated its
carrying value. In third quarter 2001, MMC disposed of one of these businesses
for $0.5 million. No gain or loss was realized on the disposal. The net
liabilities of businesses to be disposed are reflected at their estimated
realizable value of $103 million and $119 million at September 30, 2001 and
December 31, 2000, respectively, and are included in accounts payable and
accrued liabilities in the Consolidated Balance Sheet. Agreements have been
reached to dispose of the remainder of these operations pending regulatory
approval.
8
Integration Costs: In 1999, as part of the integration of Sedgwick, MMC
adopted a plan to reduce staff and consolidate duplicative offices. The
estimated cost of this plan relating to employees and offices of Sedgwick
("Sedgwick Plan") amounted to $285 million and was included in the cost of the
acquisition. Merger-related costs for employees and offices of MMC ("MMC Plan")
amounted to $266 million and were recorded as part of a 1999 special charge.
The utilization of these charges is summarized as follows:
Utilized Utilized Balance
Initial and in nine Sept. 30,
(In millions of dollars) Balance changes mos. 2001
in 2001
estimates
through
2000
1999 Sedgwick Plan:
Termination payments to employees $ 183 $(160) $ (23) $-
Other employee-related costs 5 (5) -- --
Future rent under noncancelable leases 48 (20) (7) 21
Leasehold termination and related costs 49 (22) (2) 25
- ---------------------------------------- ------ ------ ----- -------
$ 285 $(207) $ (32) $ 46
- ---------------------------------------- ----- ----- ----- -------
Number of employee terminations 2,400 (2,400) -- --
Number of office consolidations 125 (116) (2) 7
Utilized Utilized Balance
Initial and in nine Sept. 30,
(In millions of dollars) Balance changes mos. 2001
in 2001
estimates
through
2000
1999 MMC Plan:
Termination payments to employees $ 194 $ (140) $ (30) $ 24
Future rent under noncancelable leases 31 (12) (4) 15
Leasehold termination and related costs 16 (10) (3) 3
Other integration related costs 25 (25) -- --
- --------------------------------------- ------- ------- ------ -------
$ 266 $ (187) $ (37) $ 42
- --------------------------------------- ------- ------- ------ -------
Number of employee terminations 2,100 (2,100) -- --
Number of office consolidations 50 (44) (5) 1
- --------------------------------------- ------- ------- ------ -------
The actions contemplated by these plans are substantially complete. Some
accruals, primarily for future rent under noncancelable leases and salary
continuance arrangements, are expected to be paid over several years.
9
8.Charges related to September 11
MMC was directly impacted by the September 11, 2001 terrorist attacks. As a
result of the destruction of the World Trade Center ("WTC"), 295 MMC colleagues
were lost.
MMC occupied fifteen floors in the two towers of the WTC, with
approximately 1,900 employees and outside consultants of its total worldwide
workforce of 57,000 at that location. The Risk and Insurance Services segment
was the most directly impacted. Information technology and finance support for
the insurance broking unit, and the headquarters for the reinsurance broking
unit were located in the WTC. A small number of Consulting colleagues were also
at that location. A long-standing disaster recovery plan was successfully
implemented, and all critical business functions and systems were recovered and
are operational. Employees have been relocated to various sites in midtown
Manhattan and the New York metropolitan area.
Pretax charges related to September 11 of $173 million were recorded in
the third quarter of 2001. The charges include services and benefits provided to
victims' families and to employees of $55 million, asset write-offs and
impairments of $32 million, compensation costs associated with business
disruption of $25 million and restructuring charges of $61 million which are
discussed below. The charges are net of insurance recoveries of $126 million,
which have been recorded in the financial statements as of September 30, 2001.
Charges related to September 11 decreased diluted net income per share by $0.38
for the quarter and nine months ended September 30, 2001.
As a result of weakening business conditions, which accelerated after the
September 11 attacks, MMC implemented a plan to reduce staff and consolidate
office locations, primarily in its consulting business. The cost of this plan
amounted to $61 million. The utilization of these charges is summarized as
follows:
Initial Balance
(In millions of dollars) Balance Utilized Sept.30,
2001
-------- --------- --------
Termination payments to employees $44 (4) $ 40
Future rent under noncancelable leases 17 -- 17
------- --------- -------
$61 (4) $ 57
Number of employee terminations 747 (201) 546
Number of office consolidations 9 -- 9
As of September 30, 2001, the actions contemplated by this plan were in
progress, and the remaining actions are expected to be substantially completed
by December 31, 2001. Some accruals, primarily future rent under noncancelable
leases (net of anticipated sublease income), are expected to be paid over
several years.
10
9. Claims, Lawsuits and Other Contingencies
MMC and its subsidiaries are subject to various claims, lawsuits and
proceedings consisting principally of alleged errors and omissions in connection
with the placement of insurance or reinsurance and in rendering investment and
consulting services. Some of these matters seek damages, including punitive
damages, in amounts which could, if assessed, be significant.
Sedgwick Group plc, since prior to its acquisition, has been engaged in a
review of previously undertaken personal pension plan business as required by
United Kingdom regulators to determine whether redress should be made to
customers. As of September 30, 2001, settlements and related costs previously
paid amount to approximately $315 million, of which approximately $44 million is
due from or has been paid by insurers. The remaining contingent exposure of
Sedgwick for pension redress and related costs is estimated to be $130 million,
essentially all of which is expected to be recovered from insurers.
Other present and former subsidiaries of MMC are engaged in a comparable
review of their personal pension plan businesses, although the extent of their
activity in this area, and consequently their financial exposure, was
proportionally much less than Sedgwick. The contingent exposure of the present
and former non-Sedgwick subsidiaries of MMC for pension redress and related
costs is estimated to be approximately $75 million, essentially all of which is
expected to be recovered from insurers. As of September 30, 2001, net
settlements and related costs previously paid total approximately $55 million.
MMC's ultimate exposure from the United Kingdom's Personal Investment
Authority review, as presently calculated and including Sedgwick, is subject to
a number of variable factors including, among others, the interest rate
established quarterly by the U.K. Personal Investment Authority for calculating
compensation, equity markets, and the precise scope, duration, and methodology
of the review as required by that authority.
As part of the combination with Sedgwick, MMC acquired several insurance
underwriting businesses that were already in run-off. Sedgwick had issued
guarantees with respect to certain liabilities of these operations.
On the basis of present information, anticipated insurance coverage and
advice received from counsel, it is the opinion of MMC's management that the
disposition or ultimate determination of these claims, lawsuits, proceedings or
guarantees will not have a material adverse effect on MMC's consolidated results
of operations or its consolidated financial position.
11
10. Financial Instruments
Effective January 1, 2001 MMC adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The adoption of this standard did not have a
material impact on MMC's consolidated financial position, results of operations
or cash flows.
11. Segment Information
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which is
after deductions for directly related expenses and minority interest but before
special charges. The accounting policies of the segments are the same as those
used for the consolidated financial statements.
Selected information about MMC's operating segments for the nine-month
periods ended September 30, 2001 and 2000 follow:
(In millions of dollars)
Revenue Segment
from External Operating
Customers Income
------------- -----------
2001-
Risk and Insurance Services $3,824 (a) $ 874
Investment Management 2,002 613
Consulting 1,644 242
----- -------
$7,470 $1,729 (b)
====== =======
2000-
Risk and Insurance Services $3,581 (a) $ 727
Investment Management 2,502 782
Consulting 1,598 233
------- -------
$7,681 $1,742 (b)
====== ======
(a) Includes interest income on fiduciary funds ($135 million in 2001
and $142 million in 2000).
(b) A reconciliation of the total segment operating income to income
before income taxes in the consolidated financial statements is as follows:
12
(In millions of dollars)
----------------------
2001 2000
------ -------
Total segment operating income $1,729 $1,742
Charges related to September 11 (173) --
Corporate expense (87) (98)
Reclassification of minority interest 14 15
------- -------
Operating income 1,483 1,659
Interest income 18 18
Interest expense (154) (191)
-------- -------
Total income before income taxes and
minority interest $1,347 $1,486
====== ======
12. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") No. 16 "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of SFAS No. 141
are to be accounted for using one method, the purchase method. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB No. 17, "Intangible Assets." It changes the
accounting for goodwill from an amortization method to an impairment only
approach. Starting January 1, 2002, MMC will cease the amortization of goodwill
that was recorded in past business combinations as required by SFAS No. 142. The
full impact of applying this standard is yet to be determined.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting for standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No.
144 supersedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be disposed of". SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The impact of applying these
standards is yet to be determined.
13
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Third Quarter and Nine Months Ended September 30, 2001
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh, the world's leading risk and
insurance services firm; Putnam Investments, one of the largest investment
management companies in the United States; and Mercer Consulting Group, a major
global provider of consulting services. Approximately 57,000 employees worldwide
provide analysis, advice and transactional capabilities to clients in over 100
countries.
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which is
after deductions for directly related expenses and minority interest, but before
charges related to September 11.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Information Concerning Forward-Looking
Statements" on page one of this filing. This Form 10-Q should be read in
conjunction with MMC's latest Annual Report on Form 10-K.
The consolidated results of operations follow:
Third Quarter Nine Months
------------------ -----------------
(In millions of dollars) 2001 2000 2001 2000
Revenue:
Risk and Insurance Services $1,219 $1,132 $3,824 $3,581
Investment Management 616 863 2,002 2,502
Consulting 536 540 1,644 1,598
------ ------ ------ ------
2,371 2,535 7,470 7,681
------ ------ ------ ------
Expense:
Compensation and Benefits 1,184 1,267 3,622 3,782
Amortization of Intangibles 48 46 145 134
Other Operating Expenses 654 696 2,047 2,106
Charges related to September 11 173 -- 173 --
------ -- ---- ------ ------
2,059 2,009 5,987 6,022
------ ------ ------ ------
Operating Income $ 312 $ 526 $1,483 $1,659
====== ====== ====== ======
Operating Income Margin 13.2% 20.7% 19.9% 21.6%
====== ====== ====== ======
Minority interest recorded in other operating expenses in 2000 has been
reclassified to be consistent with the 2001 presentation.
14
Consolidated Results Revenue, derived mainly from commissions and fees,
declined 6% from the third quarter of 2000 and decreased 3% for the nine months.
This resulted largely from a decline in revenue in the investment management
segment due to lower assets under management on which fees are earned, offset
by a higher volume of business in the risk and insurance services segment.
On a consolidated basis, underlying revenue, which excludes the effect of
items such as foreign exchange, acquisitions and dispositions, declined
approximately 5% from the third quarter of 2000. The risk and insurance services
segment experienced underlying revenue growth of approximately 10% primarily due
to the effect of higher commercial insurance premium rates and net new business
development. Consulting revenue grew 1% for the quarter due to a higher volume
of business in the retirement practice offset by a decline in the compensation
and communications consulting and general management consulting practices.
Revenue decreased 29% in the investment management segment as average assets
under management decreased 23% from the prior year. For the nine months,
consolidated underlying revenue declined approximately 1%.
Operating expenses, excluding the effect of items such as foreign exchange,
acquisitions and dispositions, and charges related to September 11, decreased
approximately 4% in the third quarter of 2001 primarily due to significantly
lower incentive compensation in the investment management segment and a
reduction in discretionary expenses in all segments, partially offset by
expenses associated with a higher volume of business in the risk and insurance
services segment. Expenses were also reduced by the realization of incremental
net integration savings related to the Sedgwick Group plc ("Sedgwick")
transaction. Underlying expenses declined 1% for the first nine months of 2001
compared with the same period of 2000.
MMC was directly and profoundly impacted by the September 11, 2001
terrorist attacks. As a result of the destruction of the World Trade Center
("WTC"), 295 MMC colleagues were lost.
MMC occupied a combined total of fifteen floors in the two towers of the
WTC, that housed approximately 1,900 employees and outside consultants. The risk
and insurance services segment was the most directly impacted by this event. The
WTC housed the center for information technology and finance support of Marsh,
where most of the lost colleagues were employed. The WTC also served as the
headquarters for Guy Carpenter, MMC's reinsurance intermediary. Employees have
been relocated to various sites in midtown Manhattan and the New York
metropolitan area. In addition, certain support functions previously performed
in the WTC have been distributed among regional processing centers throughout
the United States. A small number of colleagues from the consulting business
were located at the WTC, all of whom have been relocated to other sites.
Boston-based Putnam Investments, MMC's investment management subsidiary,
suffered disruptions due to building evacuations and the closing of the equity
markets. MMC successfully implemented long-standing disaster recovery plans. All
critical business functions and systems have been recovered and are operational.
15
In the third quarter of 2001, MMC recorded pretax charges of $173 million,
net of insurance recoveries, related to the events of September 11 and the
subsequent impact on business conditions. The impact of these costs, net of
taxes, was a reduction in EPS of $.38 for the quarter and nine months ended
September 30, 2001. Services and benefits provided to victims' families and
employees, such as salary and benefit continuance, counseling and a commitment
to the MMC Victims Relief Fund, make up $55 million of the charges. Write-off or
impairments of intangibles and other non-cash assets were $32 million and
charges related to disruption of business operations amounted to $25 million. As
a result of weakening business conditions, which were exacerbated by the events
of September 11, a charge of $61 million was recorded to provide for planned
staff reductions and office consolidations, primarily in the consulting segment.
The charge is comprised of $44 million for severance and related benefits
affecting approximately 750 people and $17 million for future rent under
non-cancelable leases. Actions under the plan are expected to be substantially
completed by December 31, 2001. Utilization of these charges is summarized in
Note 8 to the consolidated financial statements.
Risk and Insurance Services
Third Quarter Nine Months
-------------------- ----------------------
(In millions of dollars) 2001 2000 2001 2000
Revenue $1,219 $1,132 $3,824 $3,581
Expense 979 (a) 933 2,950 (a) 2,854
-------- -------- ------- -------
Operating Income $ 240 $ 199 $ 874 $ 727
======= ======= ====== ======
Operating Income Margin 19.7% 17.6% 22.9% 20.3%
====== ====== ====== ======
(a) Excludes charges related to September 11.
Revenue for the risk and insurance services segment grew 8% over the third
quarter of 2000. On a comparable basis, underlying revenue for risk and
insurance services operations rose approximately 10% primarily reflecting the
effect of net new business and higher commercial insurance premium rates.
Insurance broking and risk management revenue, which represented approximately
71% of risk and insurance services, grew approximately 8% over the third quarter
of 2000. In addition, revenue grew 24% in the reinsurance operation and 6% in
the consumer and program practices unit. Over the last 18 months, the transfer
of commercial risk has become more difficult and more expensive for clients. The
terrorist attacks have accelerated these trends. Insurance industry losses will
be felt across multiple product lines, most acutely in commercial property.
Clients now face a more difficult marketplace as insurance and reinsurance
markets worldwide tighten, capacity is reduced and rates increase. The size of
the increases varies according to product line and clients' loss experience and
reflects a marketplace that is changing daily as the January 2002 renewals
begin. For the first nine months of 2001, underlying revenue grew 10% over the
same period of 2000.
Expenses for risk and insurance services increased 5% for the third quarter
and 3% for the first nine months of 2001 compared to the same periods of 2000.
Excluding the effect of items such as acquisitions and foreign exchange,
expenses increased approximately 8% from the third quarter of 2000 primarily
reflecting costs associated with a higher volume of business, partially offset
by the realization of net integration savings related to the Sedgwick
transaction. For the nine months, expenses for risk and insurance services,
excluding items such as acquisitions and the effect of foreign exchange and
charges related to September 11, rose approximately 7%.
16
The events of September 11 resulted in significant disruption of business in
Marsh, which was directly impacted. The effect on revenue cannot be quantified.
Significant resources were dedicated to recovery of business operations, and
providing assistance to victims' families. Compensation and benefit costs of $15
million related to employees who were unable to report to work or were involved
directly in the recovery efforts have been recorded as part of the charges
related to September 11 and are not included in the segment's operating
expenses.
Investment Management
Third Quarter Nine Months
------------------- -------------------
(In millions of dollars) 2001 2000 2001 2000
Revenue $ 616 $ 863 $2,002 $2,502
Expense 427 (a) 592 1,389 (a) 1,720
------- ------- ------- -------
Operating Income $ 189 $ 271 $ 613 $ 782
====== ====== ======= =======
Operating Income Margin 30.7% 31.4% 30.6% 31.3%
===== ===== ====== =====
(a) Excludes charges related to September 11.
Putnam's revenue decreased 29% compared with the third quarter of 2000,
reflecting a decline in the level of average assets under management on which
management fees are earned and lower equity earnings on its Thomas H. Lee
investment. Assets under management averaged $316 billion in the third quarter
of 2001, a 23% decline from the $412 billion managed in the third quarter of
2000. Assets under management were $286 billion at September 30, 2001 compared
with $406 billion at September 30, 2000 and $339 billion at June 30, 2001. The
decrease from the end of the second quarter reflects net redemptions of $3
billion plus a $50 billion decrease resulting from a decline in equity market
levels during the quarter. Revenue for Putnam decreased 20% for the first nine
months of 2001 compared with the same period of 2000, largely as a result of
lower average assets under management.
Putnam's expenses decreased 28% in the third quarter of 2001 from the same
period of 2000 and 19% in the first nine months of 2001 compared to 2000,
primarily due to lower incentive compensation reflecting the current operating
environment.
The events of September 11 resulted in disruption of business operations
throughout MMC. Significant resources were dedicated to the recovery efforts
of the risk and insurance services segment, particularly related to information
technology. Compensation and benefit costs of $6 million related to the recovery
efforts have been recorded as part of the charges related to September 11 and
are not included in the segment's operating expenses.
17
Quarter-end and average assets under management are presented below:
(In billions of dollars) 2001 2000
------ ------
Mutual Funds:
Growth Equity $ 55 $142
Core Equity 51 59
Value Equity 49 57
Fixed Income 48 45
---- ----
203 303
Institutional Accounts:
Growth Equity 20 39
Core Equity 41 42
Value Equity 6 5
Fixed Income 16 17
---- ----
83 103
---- ----
Quarter-end Assets $286 $406
---- ----
Assets from Non-US Investors $ 26 $ 30
---- ----
Average Assets $316 $412
---- ----
Putnam provides individual and institutional investors with a broad range
of equity and fixed income investment products and services designed to meet
varying investment objectives and which afford its clients the opportunity to
allocate their investment resources among various investment products as
changing worldwide economic and market conditions warrant.
At the end of the third quarter, assets held in equity securities
represented 78% of assets under management, compared with 85% at September 30,
2000, while investments in fixed income products represented 22%, compared with
15% at September 30, 2000.
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international stock and bond market prices and by
the level of investments and withdrawals for current and new fund shareholders
and clients. U.S. equity markets were volatile throughout 2000 and during the
first nine months of 2001, recording declines after several years of substantial
growth. This volatility contributed to the fluctuations in assets under
management and, accordingly, to the decline in revenue. A continued decline in
general market levels could lead to further declines in revenue. Items affecting
revenue also include, but are not limited to, investment performance, service to
clients, the development and marketing of new investment products, the relative
attractiveness of the investment style under prevailing market conditions and
changes in the investment patterns of clients. Revenue levels are sensitive to
all of the factors above, but in particular, to significant changes in stock and
bond market valuations.
18
Consulting
Third Quarter Nine Months
------------------ ------------------
(In millions of dollars) 2001 2000 2001 2000
Revenue $ 536 $ 540 $1,644 $1,598
Expense 455 (a) 456 1,402 (a) 1,365
------- ------- ------- -------
Operating Income $ 81 $ 84 $ 242 $ 233
======= ======= ====== ======
Operating Income Margin 15.1% 15.6% 14.7% 14.6%
===== ===== ====== ======
(a) Excludes charges related to September 11.
Consulting services revenue declined 1% in the third quarter of 2001
compared with the same period of 2000. On a comparable basis, underlying
consulting revenue increased 1% in the third quarter and 5% for the first nine
months of 2001. Retirement consulting revenue, which represented 43% of the
consulting segment, grew 10% in the third quarter primarily due to increased
services provided. In addition, underlying revenue rose 5% in health and group
benefits consulting, 15% in organizational change practices and 13% in economic
consulting primarily due to a higher volume of business in these practice lines
during the third quarter of 2001, offset by a 10% decline in compensation and
communications consulting. Revenue in general management consulting declined by
25% from the third quarter of 2000 due to lack of demand for these services.
Consulting services expenses were relatively unchanged in the third quarter
of 2001 compared with the third quarter of 2000. On a comparable basis,
excluding the effect of such items as foreign exchange, acquisitions and
dispositions, expenses increased approximately 4% for the third quarter and 5%
for the first nine months of 2001 reflecting the effect of staff increases in
the growing practices, principally outside the United States, offset in part, by
lower discretionary spending. As mentioned in the general section of this
Management Discussion and Analysis, Mercer has taken action to adjust its
staffing levels to the current business environment.
The events of September 11 resulted in disruption of business operations
throughout MMC. The effect on revenue for Mercer cannot be quantified. Resources
were devoted to the recovery of operations. Compensation and benefit costs of $3
million related to the recovery efforts have been recorded as part of the
charges related to September 11 and are not included in the segment's operating
expenses.
Corporate Expenses
Corporate expenses decreased to $29 million in the third quarter of 2001
from $34 million in 2000 primarily due to nonrecurring costs incurred in 2000
associated with certain corporate initiatives as well as nonrecurring consulting
fees related to the integration of Sedgwick. Compensation and benefit costs of
$1 million related to the recovery efforts have been recorded as part of the
charges related to September 11 and are not included in the corporate expenses.
Expenses for the nine months ended September 30 decreased 3% compared to the
same period in 2000.
19
Interest
Interest income earned on corporate funds amounted to $6 million in the
third quarter of 2001, as compared to $7 million in the third quarter of 2000.
Interest expense of $46 million decreased from $63 million in the third quarter
of 2000 due to a decrease in the average interest rate primarily related to
commercial paper borrowings compared with the third quarter of 2000.
Income Taxes
MMC's consolidated tax rate was 36.8% of income before income taxes and
minority interest in the third quarter and 37.4% for the nine months of 2001
compared with 38.75% in the third quarter and in the first nine months of 2000.
The consolidated tax rate was 37.5% for the quarter and nine months of 2001
excluding the impact of charges related to September 11. The reduction in the
tax rate for the nine months primarily reflects lower state and non-U.S. taxes
from implementing tax efficient structures worldwide.
Liquidity and Capital Resources
MMC anticipates that internally generated funds will be sufficient to meet
its foreseeable recurring operating cash requirements as well as dividends,
capital expenditures and scheduled repayments of long-term debt.
MMC generated $872 million of cash from operations for the nine months
ended September 30, 2001 compared with $810 million for the same period in 2000.
These amounts reflect the net income earned by MMC during those periods adjusted
for non-cash charges and working capital changes.
MMC's cash and cash equivalents aggregated $600 million on September 30,
2001, an increase of $360 million from the end of 2000.
As a result of the events of September 11 and the subsequent business
environment, MMC recorded a pretax charge of $173 million. The net charges
include non-cash asset impairments of approximately $32 million and
restructuring costs of $61 million. The impact of the events of September 11 on
MMC's cash flow after the effect of insurance recoveries and taxes has not been
significant. MMC will continue to incur expenses related to recovery from the
disaster, but does not expect any material uninsured cash outflow related to
this event in excess of the charges recognized in the financial statements at
September 30, 2001. Recoveries under certain provisions of MMC's insurance
policies are contingent upon the occurrence of future events. Such provisions
include replacement value coverage of fixed assets and leasehold improvements,
which is contingent on actual replacement of the lost assets and reimbursement
of incremental rent cost for replacement office facilities, which is contingent
upon acquiring the new leasehold interest. Such recoveries will not be recorded
in the financial statements until all contingencies have been satisfied and the
amount can be reasonably estimated. Insurance recoveries of $126 million have
been recorded in the financial statements to date. Additional recoveries under
these policy provisions are expected to be significant.
20
During the first nine months of 2001, commercial paper borrowings increased
by $675 million to fund certain investments and MMC's share repurchase program.
In January 2001, $286 million was used to purchase a minority investment in
Gruppo Bipop-Carire S.p.A. During the first nine months of 2001, MMC repurchased
approximately 6.2 million shares of its common stock with a cash outlay of
approximately $590 million.
MMC's additions to fixed assets and capitalized software, which amounted to
$324 million in the first nine months of 2001 and $352 million during the same
period last year, primarily relate to computer equipment purchases and the
refurbishing and modernizing of office facilities and software development
costs. MMC wrote off fixed assets and leasehold improvements with a net book
value of $83 million as a result of the terrorist attacks, all of which is
covered by insurance.
In the second quarter of 2001, MMC sold certain of its London properties
and simultaneously entered into a leaseback arrangement for a significant
portion of the properties. Total proceeds of approximately $135 million were
received.
MMC has committed to potential future investments of approximately $725
million in connection with various MMC Capital funds and other MMC investments.
Approximately $250 million is expected to be invested during the remainder of
2001. MMC expects to fund future commitments, in part, with sales proceeds from
existing investments.
As further explained in Note 9 to the consolidated financial statements,
the disclosure and advice given to clients regarding certain personal pension
transactions by certain present and former subsidiaries in the United Kingdom
are under review by the Personal Investment Authority. At current rates of
exchange, the contingent exposure for pension redress and related cost is
presently estimated to be approximately $205 million, essentially all of which
is expected to be recovered from insurers. Approximately two-thirds of the
contingent exposure is associated with the Sedgwick acquisition while the
balance is associated with other current and former subsidiaries of MMC. The
timing of payments and insurance recoveries relating to the pension review
process cannot be predicted with certainty; however, payments net of anticipated
insurance recoveries were approximately $90 million in 2000, and $100 million
during the first nine months of 2001. These payments are reflected in other
liabilities in the Consolidated Statements of Cash Flows.
Market Risk
Certain of MMC's revenues, expenses, assets and liabilities are exposed to
the impact of interest rate changes and fluctuations in foreign currency
exchange rates. MMC manages its net exposure to interest rate changes by
utilizing a mixture of variable and fixed rate borrowings to finance MMC's asset
base. Interest rate swaps are used on a limited basis and are with
counterparties of high creditworthiness. MMC does not enter into foreign
currency or interest rate transactions for trading or other speculative
purposes.
The translated values of revenue and expense from MMC's international risk and
insurance services and consulting operations are subject to fluctuations due to
changes in currency exchange rates. However, the net impact of these
fluctuations on MMC's results of operations or cash flows has not been material.
21
Other
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") No. 16 "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of SFAS No. 141
are to be accounted for using one method, the purchase method. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB No. 17, "Intangible Assets". It changes the
accounting for goodwill from an amortization method to an impairment only
approach. Starting January 1, 2002, MMC will cease the amortization of goodwill
that was recorded in past business combinations as required by SFAS No. 142. The
full impact of applying this standard is yet to be determined, however, the
elimination of amortization expense on goodwill is expected to increase reported
annual earnings for MMC by at least $0.40 per share beginning in 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No.
144 supersedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be disposed of". SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The full impact of applying
these standards is yet to be determined.
22
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
SEPTEMBER 30, 2001
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Employment Letter between R. J. Groves and MMC dated August 1, 2001.
12. Statement Re: Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K
None.
23
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, MMC
has duly caused this report to be signed this 14th day of November, 2001 on its
behalf by the undersigned, thereunto duly authorized and in the capacity
indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Sandra S. Wijnberg
----------------------------------------------------
Senior Vice President and
Chief Financial Officer
24