================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2002
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, 2002, there were outstanding 537,061,702 shares of common
stock, par value $1.00 per share, of the registrant.
================================================================================
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their
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 revenues, expenses,
earnings, 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, financial markets, 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 and long-term trends, 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 or incorporated or referred to herein
include, in the case of MMC's risk and insurance services and consulting
businesses, the amount of actual insurance recoveries and financial losses from
the September 11 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, the continuation of challenging marketplace
conditions for the transfer of commercial risk 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, actual and relative investment performance, the
level of sales and redemptions and the ability to maintain investment management
and administrative fees at appropriate levels; and with respect to all of MMC's
activities, changes in general worldwide and national economic conditions,
changes in the value of investments made in individual companies and investment
funds, fluctuations in foreign currencies, actions of competitors or regulators,
changes in interest rates or in the ability to access financial markets,
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.
Forward-looking statements speak only as of the date on which they are made, and
MMC undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to reflect the
occurrence of unanticipated events.
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. 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.
PART 1. 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,
------------------ -------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenue $2,553 $2,407 $7,800 $7,579
Expense 2,041 2,095(a) 6,036 6,096(a)
------ ------- ------- -------
Operating Income 512 312 1,764 1,483
Interest Income 5 6 14 18
Interest Expense (43) (46) (118) (154)
------ ------ ------- -------
Income Before Income Taxes
And Minority Interest 474 272 1,660 1,347
Income Taxes 168 100 589 503
Minority Interest, Net of Tax 7 4 18 14
------ ------ ------- ------
Net Income $ 299 $ 168 $1,053 $ 830
====== ====== ====== ======
Basic Net Income
Per Share $0.56 $0.31 $1.94 $1.51
===== ===== ===== =====
Diluted Net Income
Per Share $0.55 $0.29 $1.88 $1.44
===== ===== ===== =====
Average Number of Shares
Outstanding - Basic 535 549 542 551
=== === === ===
Average Number of Shares
Outstanding - Diluted 548 569 559 572
=== === === ===
Dividends Declared $0.28 $0.27 $0.83 $0.78
===== ===== ===== =====
(a) 2001 expenses include charges of $173 related to September 11, 2001, see
note 8. The accompanying notes are an integral part of these consolidated
statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 675 $ 537
------- -------
Receivables-
Commissions and fees 2,123 2,288
Advanced premiums and claims 138 188
Other receivables 340 355
------- -------
2,601 2,831
Less-allowance for doubtful accounts and cancellations (138) (139)
------- -------
Net receivables 2,463 2,692
------- -------
Prepaid dealer commissions - current portion 239 308
Other current assets 285 255
------- -------
Total current assets 3,662 3,792
Goodwill and intangible assets 5,354 5,327
Fixed assets, net 1,249 1,235
(net of accumulated depreciation and
amortization of $1,211 at September 30, 2002
and $1,022 at December 31, 2001)
Long-term investments 568 826
Prepaid dealer commissions 355 528
Other assets 1,830 1,585
------- -------
$13,018 $13,293
======= =======
The accompanying notes are an integral part of these consolidated statements
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share figures)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 490 $ 757
Accounts payable and accrued liabilities 1,360 1,347
Accrued compensation and employee benefits 836 1,088
Accrued income taxes 587 600
Dividends payable 151 146
------- -------
Total current liabilities 3,424 3,938
------- -------
Fiduciary liabilities 3,854 3,630
Less - cash and investments held in
a fiduciary capacity (3,854) (3,630)
------- -------
Long-term debt 2,888 2,334
------- -------
Other liabilities 1,700 1,848
------- -------
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 560,641,640
shares at September 30, 2002 and at
December 31, 2001 561 561
Additional paid-in capital 1,466 1,620
Retained earnings 4,329 3,723
Accumulated other comprehensive loss (263) (227)
------- -------
6,093 5,677
Less - treasury shares, at cost,
24,067,604 shares at September 30, 2002 and
11,988,096 shares at December 31, 2001 (1,087) (504)
------- -------
Total stockholders' equity 5,006 5,173
------- -------
$13,018 $13,293
======= =======
The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
-------------------
2002 2001
------ -------
Operating cash flows:
Net income $1,053 $ 830
Adjustments to reconcile net income to cash generated
from operations:
Depreciation of fixed assets and capitalized software 240 248
Amortization of intangible assets 25 147
Provision for deferred income taxes (119) (5)
Other, net 36 (25)
Changes in assets and liabilities:
Net receivables 230 82
Prepaid dealer commissions 242 204
Other current assets (9) 12
Other assets (120) (115)
Accounts payable and accrued liabilities 70 (15)
Accrued compensation and employee benefits (251) (552)
Accrued income taxes 22 189
Other liabilities (130) (128)
----- -------
Net cash generated from operations 1,289 872
----- -------
Financing cash flows:
Net (decrease) increase in commercial paper (515) 675
Other borrowings 750 24
Other repayments of debt (8) (27)
Purchase of treasury shares (1,167) (590)
Issuance of common stock 436 312
Dividends paid (442) (421)
----- -------
Net cash used for financing activities (946) (27)
----- -------
Investing cash flows:
Additions to fixed assets and capitalized software (288) (324)
Proceeds from sale of fixed assets 21 161
Acquisitions (49) (53)
Other, net 115 (278)
----- -------
Net cash used for investing activities (201) (494)
----- -------
Effect of exchange rate changes on cash
and cash equivalents (4) 9
----- ------
Increase in cash & cash equivalents 138 360
Cash & cash equivalents at beginning of period 537 240
------ ------
Cash & cash equivalents at end of period $ 675 $ 600
====== ======
The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
--------------------
MMC, a professional services firm, is organized based on the different
services that it offers. Under this organization structure, 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 businesses, public entities, insurance companies,
associations, professional services organizations 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, investment consulting, general
management consulting, organizational design and economic consulting and
expert testimony.
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 accounting principles
generally accepted in the United States of America, 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-month and nine-month periods ended
September 30, 2002 and 2001. Certain reclassifications have been made to
the prior year amounts to conform to the current year presentation.
In the normal course of business MMC makes investments through its
subsidiary Marsh & McLennan Risk Capital Holdings, Ltd. ("MMRCH"),
primarily in insurance and reinsurance entities, and periodically sells
these investments. In the second quarter of 2002, MMRCH sold an investment
that it had acquired in 1997 to Trident II, L.P. MMC Capital, Inc., a
wholly owned subsidiary of MMRCH, serves as advisor to Trident II, L.P.
Revenue of $9 million from this transaction was recorded by MMRCH.
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 $90 million and $135 million for
the nine months ended September 30, 2002 and 2001, respectively.
Net uncollected premiums and claims and the related payables amounting to
$10.7 billion at September 30, 2002 and $10.8 billion at December 31, 2001
are not included in the accompanying Consolidated Balance Sheets.
4. Per Share Data
--------------
Basic net income per share is calculated by dividing net income by the
weighted 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 Putnam Class B Common
Shares and adding back dividend equivalent expense related to common stock
equivalents. This result is then divided by the weighted 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, 2002 and 2001.
Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
----------- ------------------ ------------------
2002 2001 2002 2001
------ ---- ----- ----
Net income $299 $168 $1,053 $830
Less: Potential minority interest
associated with Putnam Class B
Common Shares net of dividend
equivalent expense related to
common stock equivalents - (2) (1) (8)
---- ---- ------ -----
Net income for diluted
earnings per share $299 $166 $1,052 $822
==== ==== ====== ====
Basic weighted average
common shares outstanding 535 549 542 551
Dilutive effect of potentially
issuable common stock 13 20 17 21
---- --- ------ ----
Diluted weighted average
common shares outstanding 548 569 559 572
==== ==== ====== ===
5. Supplemental Disclosure to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning interest
and income taxes paid for the nine-month periods ended September 30, 2002
and 2001.
(In millions of dollars) 2002 2001
------------------------ ---- ----
Interest paid $ 91 $150
Income taxes paid $612 $169
6. Comprehensive Income
The components of comprehensive income for the nine-month periods ended
September 30, 2002 and 2001 are as follows:
(In millions of dollars) 2002 2001
------------------------ ------ -----
Foreign currency translation adjustments $ 71 $(34)
Unrealized investment holding losses,
net of income taxes (79) (165)
Less: Reclassification adjustment for gains
included in net income, net of income taxes (36) (57)
Deferred gain on cash flow hedges, net of income taxes 8 -
------ ----
Other comprehensive loss (36) (256)
Net income 1,053 830
------ ----
Comprehensive income $1,017 $574
====== ====
7. Pension Remeasurement
Effective July 1, 2002, MMC amended the substantive plans as defined by
Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions," related to its U.S. defined benefit pension plans.
Discretionary cost of living increases had been included in the substantive
plans for accounting purposes due to MMC's prior history of such grants.
MMC no longer has the intention of granting such increases on a regular
basis. The changes to the substantive plans have been accounted for as plan
amendments. The assets and liabilities of the plans were remeasured at July
1, 2002 to reflect the amendments and included a reduction of the expected
rate of return on plan assets to 9.25% from 10%. The change in the
substantive plans reduced the Projected Benefit Obligation by approximately
$240 million.
8. Integration and Restructuring Costs and Charges Related to September 11
-----------------------------------------------------------------------
In 1999, as part of the 1998 combination with Sedgwick Group, plc
("Sedgwick") and 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 ("1999 Sedgwick Plan")
amounted to $285 million and was included in the cost of the acquisition.
Merger-related costs for employees and offices of MMC ("1999 MMC Plan")
amounted to $266 million and were recorded as part of a 1999 special
charge.
As a result of the events of September 11, pretax charges of $173 million
were recorded in the third quarter of 2001. The charges included 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 were recorded in the financial
statements as of September 30, 2001. Charges related to September 11
decreased diluted net income per share by $0.19 for the quarter and $0.18
for the nine months ended September 30, 2001. Additional charges of $14
million were recorded in the fourth quarter of 2001. Excluding
restructuring charges, the remaining liability for charges related to
September 11 was $5 million at September 30, 2002, primarily related to
providing continued access to MMC's health and benefit plans as well as
counseling for victims' families.
In the third quarter of 2001, as a result of weakening business conditions,
which were exacerbated by the events of September 11, MMC adopted a plan to
provide for staff reductions and office consolidations, primarily in the
consulting segment ("2001 Plan"). The restructuring charges of $61 million
related to this Plan is comprised of $44 million for severance and related
benefits affecting 750 people and $17 million for future rent under
noncancelable leases.
The utilization of these charges is summarized as follows:
- --------------------------------------------------------------------------------
Utilized Utilized
1999 Sedgewick Plan: and changes in
(In millions of dollars) Initial in estimates Nine Balance
Balance through Months Sept. 30,
2001 2002 2002
- --------------------------------------------------------------------------------
Termination payments to employees $183 $(180) $(2) $ 1
Other employee-related costs 5 (5) - -
Future rent under noncancelable leases 48 (28) (2) 18
Leasehold termination and related costs 49 (30) (1) 18
- --------------------------------------------------------------------------------
$285 $(243) $(5) $37
- --------------------------------------------------------------------------------
Number of employee terminations 2,400 (2,400) - -
Number of office consolidations 125 (125) - -
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Utilized Utilized
1999 MMC Plan: and changes in
(In millions of dollars) Initial in estimates Nine Balance
Balance through Months Sept. 30,
2001 2002 2002
- -------------------------------------------------------------------------------
Termination payments to employees $194 $(187) $(2) $ 5
Future rent under noncancelable leases 31 (19) (2) 10
Leasehold termination and related costs 16 (13) - 3
Other integration related costs 25 (25) - -
- --------------------------------------------------------------------------------
$266 $(244) $(4) $18
- --------------------------------------------------------------------------------
Number of employee terminations 2,100 (2,100) - -
Number of office consolidations 50 (50) - -
- --------------------------------------------------------------------------------
The actions contemplated by the 1999 Sedgwick Plan and the 1999 MMC Plan were
substantially complete by year-end 2000. Some accruals, primarily for future
rent under noncancelable leases and salary continuance arrangements, are
expected to be paid over several years. Accruals for lease termination costs are
primarily related to expenses payable at the expiration of the lease terms.
- --------------------------------------------------------------------------------
2001 Plan
(In millions of dollars) Utilized
in
Initial Utilized Nine Balance
Balance 2001 Months Sept. 30,
2002 2002
- --------------------------------------------------------------------------------
Termination payments to employees $ 44 $(14) $(22) $ 8
Future rent under noncancelable leases 17 - (3) 14
- --------------------------------------------------------------------------------
$ 61 $(14) $(25) $22
- --------------------------------------------------------------------------------
Number of employee terminations 750 (506) (244) -
Number of office consolidations 9 (2) (7) -
- --------------------------------------------------------------------------------
Actions under the 2001 Plan were substantially complete by September 30, 2002.
Some accruals, primarily for future rent under noncancelable leases and salary
continuance arrangements are expected to be paid over several years.
9. Goodwill and Other Intangibles
In accordance with SFAS No. 142, MMC discontinued the amortization of
goodwill effective January 1, 2002. A reconciliation of previously reported
net income and earnings per share to the amounts adjusted for the exclusion
of goodwill amortization net of the pro-forma effect of directly related
expenses and income taxes for the three and nine-month periods ended
September 30, 2002 and 2001 is as follows:
(In millions, except per share figures)
Three Months
Ended Nine Months Ended
September 30, September 30,
--------------- -----------------
2002 2001 2002 2001
---- ---- ----- ----
Reported Net Income $ 299 $168 $1,053 $830
Net amortization adjustment - 32 - 99
----- ----- ------ -----
Adjusted Net Income $ 299 $200 $1,053 $929
===== ==== ====== =====
Reported earnings per share - Basic $0.56 $0.31 $1.94 $1.51
===== ===== ===== =====
Adjusted earnings per share - Basic $0.56 $0.37 $1.94 $1.69
===== ===== ===== ======
Reported earnings per share - Diluted $0.55 $0.29 $1.88 $1.44
===== ===== ===== ======
Adjusted earnings per share - Diluted $0.55 $0.35 $1.88 $1.62
===== ===== ===== ======
Changes in the carrying amount of goodwill for the nine-month period ended
September 30, 2002, are as follows:
Balance as of January 1, 2002 $5,069
Goodwill acquired 26
Other adjustments (primarily foreign exchange) 15
------
Balance as of September 30, 2002 $5,110
======
The goodwill balance at September 30, 2002 includes approximately $121
million of equity method goodwill.
MMC has completed the transitional goodwill impairment test and determined
that there is no impairment of goodwill.
Amortized intangible assets consist of the cost of client lists and client
relationships acquired and the rights to future revenue streams from
certain existing private equity funds. MMC has no intangible assets that
are not amortized. The gross carrying amount and accumulated amortization
by major intangible asset class is as follows:
(In millions of dollars) Balance at September 30, 2002
----------------------- -------------------------------------
Gross Accumulated Net Carrying
Cost Amortization Value
------- ------------- ----------
Client lists and client
relationships acquired $140 $ 48 $ 92
Future revenue streams related
to existing private equity funds 216 64 152
---- ---- ----
Total Amortized Intangibles $356 $112 $244
==== ==== ====
Aggregate amortization expense for the nine-months ended September 30, 2002
was $25 million and the estimated aggregate amortization expense is as
follows:
Year Ending December 31, Estimated Expense
------------------------------ -----------------------
2002 $34
2003 $33
2004 $33
2005 $30
2006 $24
10. Long-term Debt
--------------
In March 2002, MMC issued $500 million of 5.375% Senior Notes due 2007 and
$250 million of 6.25% Senior Notes due 2012 (the "Notes"). Interest is
payable semi-annually on March 15 and September 15 of each year. The
proceeds of these Notes were used to repay a portion of commercial paper
borrowings.
Concurrent with the issuance of the Notes, MMC entered into interest rate
swap transactions to hedge its exposure to changes in the fair value of the
Notes. The swap transactions, effectively, converted the fixed rate
obligations into floating rate obligations. Under the terms of the swaps,
the swap counterparties pay MMC a fixed rate equal to the coupon rate on
the Notes. MMC pays the swap counterparties a floating rate of 6-month
Libor plus 9.25 bps for the five-year swap and 6-month Libor plus 25.45 bps
for the ten-year swap. In July 2002, MMC dedesignated 50% of the fair value
hedge on each of the Notes and settled 50% of each of the related swaps.
The portion of the Notes no longer hedged ceased being marked to market,
and the cumulative amount of fair value adjustments previously recognized
is being amortized over the remaining life of the related Notes. MMC
redesignated the remaining portion of the swaps as a fair value hedge of
50% of the Notes. The redesignated swaps carry the identical terms and
conditions as the original swaps and under SFAS No. 133 qualify for hedge
accounting and meet all criteria necessary to conclude the hedge will be
perfectly effective. Commercial paper borrowings of $750 million at
September 30, 2002 and $1.0 billion at December 31, 2001 have been
classified as long-term debt based on MMC's intent and ability to maintain
or refinance these obligations on a long-term basis.
11. Share Repurchases
-----------------
During the first nine months of 2002, MMC repurchased approximately 24
million shares of its common stock at a cost of approximately $1.2 billion.
MMC repurchases shares, subject to market conditions, including from time
to time pursuant to the terms of a 10b5-1 plan. A 10b5-1 plan allows a
company to purchase shares during a blackout period, provided the company
communicates its share purchase instructions to the broker prior to the
blackout period, pursuant to a written plan that may not be changed.
MMC uses written put options to supplement its share repurchase program.
The contracts are European style options, which generally expire three
months from the date of sale. Settlement terms of the contracts are
controlled by MMC and include physical, net-cash or net-share settlement.
The contracts are recorded as equity transactions in accordance with EITF
Issue No. 00-19, "Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." At September 30, 2002, MMC
had open contracts on 925,000 shares, with strike prices ranging from
$37.52 to $43.76 with a maximum potential purchase commitment of $38
million. The open contracts expire between October 24, 2002 and January 6,
2003, and have a fair value of $2 million at September 30, 2002.
Approximately 59,000 shares could be issuable if the company were to elect
a net-share settlement of the contracts based on the fair value at
September 30, 2002.
12. Common Stock
------------
On May 16, 2002, the Board of Directors authorized a two-for-one stock
distribution of MMC's common stock, which was issued as a stock dividend on
June 28, 2002.
13. 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. Insurance coverage applicable to such matters includes
elements of both risk retention and risk transfer.
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. 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.As of September 30,
2002, settlements and related costs previously paid amount to approximately
$508 million, of which approximately $184 million is due from or has been
paid by insurers. The remaining estimated payments for pension redress and
related costs accrued in the financial statements is $120 million,
essentially all of which is expected to be recovered from insurers.
MMC's ultimate exposure from the review by the Personal Investment
Authority (now part of the U.K. Financial Services Authority), 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. regulators 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, including River
Thames Insurance Company Limited. MMC has subsequently disposed of
substantially all of these insurance entities, however, guarantees issued
by Sedgwick with respect to certain liabilities of River Thames remain
open.
Although the ultimate outcome of all matters referred to above cannot be
ascertained and liabilities in indeterminate amounts may be imposed on MMC
and its subsidiaries, on the basis of present information, 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.
14. 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, 2002 and 2001 follow:
(In millions of dollars)
------------------------ Revenue Segment
from External Operating
Customers Income
------------ ----------
2002
Risk and Insurance Services $4,343 (a) $1,125
Investment Management 1,697 460
Consulting 1,760 (b) 250
------- -------
$7,800 $1,835
====== ======
2001
Risk and Insurance Services $3,824 (a) $ 874
Investment Management 2,002 613
Consulting 1,753 (b) 242
------- -------
$7,579 $1,729
====== ======
(a) Includes interest income on fiduciary funds ($90 million in 2002 and
$135 million in 2001).
(b) Revenue and expense for 2001 reflect the reclassification of
reimbursed (out-of-pocket) expenses. Effective January 1, 2002,
expense reimbursements received from clients within the Consulting
segment are recorded as revenue rather than an offset to expense, in
compliance with guidance provided by the Financial Accounting
Standards Board (EITF Issue No. 01-14).
A reconciliation of the total segment operating income to income before
income taxes and minority interest in the consolidated financial statements
is as follows:
2002 2001
---- ----
Total segment operating income $ 1,835 $ 1,729
Charges relates to September 11 -- (173)
Corporate expense (89) (87)
Reclassification of minority interest 18 14
------- -------
Operating income 1,764 1,483
Interest income 14 18
Interest expense (118) (154)
------- -------
Total income before income taxes and
minority interest $ 1,660 $ 1,347
======= =======
15. New Accounting Pronouncements
-----------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS 146
addresses the financial accounting and reporting for costs associated with
exit or disposal activities and supercedes EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity." SFAS No. 146 states that a liability for a cost
associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period when the liability is
incurred. It applies to costs associated with an exit activity that does
not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 146 will be applied for exit or
disposal activities initiated after December 31, 2002. The adoption of this
standard is not anticipated to have a material impact on MMC's consolidated
financial position, results of operations or cash flows.
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, 2002
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, a major global provider
of consulting services. Approximately 59,000 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.
For a description of critical accounting policies, including those which involve
significant management judgment, see Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 1 to the consolidated
financial statements in MMC's Annual Report on Form 10-K for the year ended
December 31, 2001.
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) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $1,431 $1,219 $4,343 $3,824
Investment Management 522 616 1,697 2,002
Consulting (a) 600 572 1,760 1,753
------ ------ ------ -------
2,553 2,407 7,800 7,579
------ ------ ------ -------
Expense:
Compensation and Benefits 1,299 1,184 3,829 3,622
Other Operating Expenses 742 738 2,207 2,301
Charges related to September 11 - 173 - 173
----- ----- ----- -----
2,041 2,095 6,036 6,096
----- ----- ----- ------
Operating Income $512 $312 $1,764 $1,483
==== ==== ====== ======
Operating Income Margin 20.1% 13.0% 22.6% 19.6%
==== ==== ====== ======
(a) Revenue and expense for 2001 reflect the reclassification of reimbursed
(out-of-pocket) expenses to conform with current year presentation.
Revenue, derived mainly from commissions and fees, rose 6% from the third
quarter of 2001 and rose 3% for the nine months. Expenses decreased 3% for the
third quarter and 1% for the nine months. Revenue increased in the risk and
insurance services segment, principally driven by a higher volume of business,
partially offset by a revenue decline in the investment management segment. The
2002 expenses reflect the change in accounting for goodwill discussed under "New
Accounting Pronouncements" in this Management's Discussion and Analysis and the
write down related to Putnam's investment in T.H. Lee Equity Fund IV, L.P.,
discussed under "Investment Management." Expenses in 2001 include charges of
$173 million related to September 11, which are discussed in detail in the
September 30, 2001 Form 10-Q and the December 31, 2001 Form 10-K.
On a consolidated basis, underlying revenue which excludes the effect of such
items as foreign exchange, acquisitions, dispositions and gains and losses on
investments increased 4% as compared with the third quarter of 2001. The risk
and insurance services segment experienced underlying revenue growth of
approximately 16% primarily due to net new business and the effect of higher
commercial insurance premium rates partially offset by lower fiduciary interest
income. Revenue decreased 17% in the investment management segment as average
assets under management declined 19% from the prior year. Consulting revenue
increased 2% for the third quarter primarily reflecting an increase in
retirement consulting and administration as well as economic consulting
practices partially offset by a decline in general management consulting. For
the nine months, consolidated underlying revenue rose approximately 3%.
Operating expenses, excluding the effect of foreign exchange, acquisitions,
dispositions, the change in accounting for goodwill and charges related to
September 11, increased approximately 7% in the third quarter of 2002 primarily
due to increased compensation and benefit costs in the risk and insurance
services segment partially offset by reduced incentive compensation and lower
volume related expenses in the investment management segment. Underlying
expenses increased 4% for the first nine months of 2002 compared with the same
period of 2001.
Risk and Insurance Services
- --------------------------------------------------------------------------------
Third Quarter Nine Months
---------------- ----------------
(In millions of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Revenue $1,431 $1,219 $4,343 $3,824
Expense 1,097 979(a) 3,218 2,950(a)
------ ------ ------ ------
Operating Income $ 334 $ 240 $1,125 $ 874
====== ====== ====== =======
Operating Income Margin 23.3% 19.7% 25.9% 22.9%
====== ====== ====== =======
- --------------------------------------------------------------------------------
(a) Excludes charges related to September 11, 2001
Revenue
Revenue for the risk and insurance services segment grew 17% over the third
quarter of 2001. On a comparable basis, underlying revenue for the risk and
insurance services segment rose approximately 16% primarily reflecting net new
business and higher premium rates. Underlying revenue for insurance broking and
risk management, which accounted for approximately 75% of the entire risk and
insurance services segment, grew approximately 17%. This increase includes the
impact of an 8% decrease in fiduciary interest income, resulting from a decline
in interest rates, partially offset by higher average funds invested. Underlying
revenue for the reinsurance broking unit grew 18%, which includes the impact of
a 33% decline in fiduciary interest income. For the first nine months of 2002,
underlying revenue grew 15% over the same period of 2001.
Over the past two years, the transfer of commercial risk has become more
difficult and costly with proportionate increases in premiums. Since the
terrorist attacks in 2001, insurance and reinsurance markets worldwide have
tightened, capacity is reduced and rates increased. The size of the increases
varies according to product line and clients' loss experience, which reflects a
dynamic and changing marketplace. These trends are continuing into the fourth
quarter of 2002.
Expense
Risk and insurance services expenses increased 12% in the third quarter and 9%
for the nine months over 2001. On a comparable basis, excluding the effect of
such items as acquisitions, foreign exchange, and the change in accounting for
goodwill, expenses increased approximately 14% from the third quarter of 2001
and 12% for the nine months primarily reflecting increased incentive
compensation commensurate with strong operating performance, higher benefit
costs and increased costs due to a higher volume of business.
Expenses in 2001 exclude 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 resulting from the September 11, 2001 attacks. These costs were
recorded as part of the charges related to September 11, 2001 and are not
included in the segment's operating expenses. These charges are discussed more
fully in MMC's September 30, 2001 Form 10-Q.
Investment Management
- --------------------------------------------------------------------------------
Third Quarter Nine Months
--------------- -------------------
(In millions of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Revenue $522 $616 $1,697 $2,002
Expense 406 427(a) 1,237 1,389(a)
---- ---- ------ -----
Operating Income $116 $189 $ 460 $ 613
==== ==== ====== =====
Operating Income Margin 22.2% 30.7% 27.1% 30.6%
===== ===== ====== =====
- --------------------------------------------------------------------------------
(a) Excludes charges related to September 11, 2001
Revenue
Putnam's revenue decreased 15% compared with the third quarter of 2001.
Underlying revenue, which excludes a contractual payment from Putnam's Italian
joint venture partner, declined 17% in the third quarter primarily reflecting a
decline in the level of average assets under management on which fees are
earned. Assets under management averaged $257 billion in the third quarter of
2002, a 19% decline from the $316 billion managed in the third quarter of 2001.
Assets under management aggregated $238 billion at September 30, 2002 compared
with $286 billion at September 30, 2001 and $315 billion at December 31, 2001.
The change from December 31, 2001 results from a $66 billion decrease due to a
decline in equity market levels and $11 billion of net fund redemptions. Assets
under management at October 31, 2002 aggregated $249 billion. Underlying revenue
for Putnam decreased 16% for the first nine months of 2002 compared with the
same period of 2001.
Expense Putnam's expenses decreased 5% in the third quarter of 2002 from the
same period of 2001 and 11% in the first nine months of 2002 compared to 2001,
primarily due to a reduction in volume related expenses, as well as lower
incentive compensation reflecting the current operating environment. These
expense reductions are partially offset by a charge related to Putnam's minority
interest investment in Thomas H. Lee Partners, L.P. ("TH Lee"), a private equity
business. TH Lee is the general partner of T. H. Lee Equity Fund IV, L.P. ("Fund
IV"). In the third quarter of 2002, Putnam determined its investments related to
Fund IV may not be fully recoverable based on expected cash flows from Fund IV.
The net impact of the write down related to Fund IV on Putnam's operating income
was $32 million.
At September 30, 2002, the remaining intangible asset related to Fund IV was $24
million which is being amortized over three years.
Expenses in 2001 exclude compensation and benefit costs of $6 million related to
recovery efforts that were recorded as part of the charges related to September
11, 2001 and are not included in the segment's operating expenses. These charges
are discussed more fully in MMC's September 30, 2001 Form 10-Q.
Quarter-end and average assets under management are presented below:
- --------------------------------------------------------------------------------
(In billions of dollars) 2002 2001
- --------------------------------------------------------------------------------
Mutual Funds:
Core Equity $43 $ 51
Value Equity 38 49
Growth Equity 29 55
Fixed Income 51 48
- --------------------------------------------------------------------------------
161 203
- --------------------------------------------------------------------------------
Institutional Accounts:
Core Equity 41 41
Value Equity 6 6
Growth Equity 12 20
Fixed Income 18 16
- --------------------------------------------------------------------------------
77 83
- --------------------------------------------------------------------------------
Quarter-end Assets $238 $286
- --------------------------------------------------------------------------------
Assets from Non-US Investors $27 $26
- --------------------------------------------------------------------------------
Average Assets $257 $316
- --------------------------------------------------------------------------------
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international stock and bond market prices, the
composition of assets under management and by the level of investments and
withdrawals for current and new fund shareholders and clients. U.S. equity
markets have recorded declines in each of the past two years and over the first
nine months of 2002 after several years of substantial growth prior to 2000.
These market declines are the primary causes of the decrease in assets under
management and, accordingly, to the decrease in revenue. Items affecting revenue
also include, but are not limited to, actual and relative 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 and the
ability to maintain investment management and administrative fees at appropriate
levels. Revenue levels are sensitive to all of the factors above, but in
particular, to changes in stock and bond market valuations.
Putnam provides individual and institutional investors with a broad range of
equity and fixed income investment products and services, invested domestically
and globally, 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
71% of assets under management, compared with 78% at September 30, 2001, while
investments in fixed income products represented 29%, compared with 22% at
September 30, 2001.
Consulting
- --------------------------------------------------------------------------------
Third Quarter Nine Months
------------- -----------
(In millions of dollars) 2002 2001(a) 2002 2001(a)
- --------------------------------------------------------------------------------
Revenue $600 $572 $1,760 $1,753
Expense 514 491(b) 1,510 1,511(b)
---- ---- ------ ------
Operating Income $ 86 $ 81 $ 250 $ 242
==== ==== ====== =====
Operating Income Margin 14.3% 14.2% 14.2% 13.8%
==== ==== ====== ======
- -------------------------------------------------------------------------------
(a) Revenue and expense for 2001 reflect the reclassification of reimbursed
(out-of-pocket) expenses to conform with current year presentation.
(b) Excludes charges related to September 11, 2001
Revenue
Consulting revenue increased 5% in the third quarter of 2002 compared with the
same period of 2001. Excluding items such as foreign exchange, acquisitions and
dispositions, underlying consulting revenue increased 2%. Retirement consulting
and administration revenue, which represented 45% of the consulting segment,
grew 7% in the third quarter and economic consulting revenue rose 12%. General
management consulting revenue declined 19% due to the continued slow down in
corporate spending. For the nine months of 2002, underlying revenue decreased 1%
compared with the same period of 2001.
Expense
Consulting expenses rose 5% in the third quarter of 2002 compared with the same
period of 2001 and were essentially unchanged for the nine months. On a
comparable basis, excluding the effect of such items as foreign exchange,
acquisitions and dispositions, and the change in accounting for goodwill,
expenses rose 2% for the third quarter and were essentially unchanged for the
nine months.
Expenses in 2001 exclude compensation and benefit costs of $3 million related to
the recovery efforts that were recorded as part of the charges related to
September 11, 2001 and are not included in the segment's operating expenses.
These charges are discussed more fully in MMC's September 30, 2001 Form 10-Q.
New Accounting Pronouncements
In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", MMC
discontinued amortization of goodwill on a prospective basis, effective January
1, 2002. Although results of prior periods are not to be restated, SFAS No. 142
requires disclosure of the effect of the accounting change on all prior periods
presented. The impact of this change on 2001 results, after the effect of taxes
and directly related expenses, is an increase in diluted earnings per share as
follows for the quarter ended: March 31 - $0.06; June 30 - $0.06; September 30 -
$0.06; and December 31 - $0.05. Approximately 70% of the impact of this change
is related to the Risk and Insurance Services segment.
Effective January 1, 2002, expense reimbursements received from clients within
the consulting segment are recorded as revenue, rather than an offset to
expense, in accordance with guidance provided in EITF Issue 01-14, "Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred." Revenue and expense for prior periods reflect the
reclassification of reimbursed expenses as follows:
Reclassification of Consulting Reimbursed Expenses
2001
-----------------------------------------------
1Q 2Q 3Q 4Q YR
-----------------------------------------------
Revenue:
As Previously Reported $ 550 $ 558 $ 536 $ 516 $2,160
Reimbursements 37 36 36 39 148
------ ------ ------ ------ ------
After Reclassification $ 587 $ 594 $ 572 $ 555 $2,308
------ ------ ------ ------ ------
Expense:
As Previously Reported $ 480 $ 467 $ 455 $ 445 $1,847
Reimbursements 37 36 36 39 148
------ ------ ------ ------ ------
After Reclassification $ 517 $ 503 $ 491 $ 484 $1,995
------ ------ ------ ------ ------
Operating Income $ 70 $ 91 $ 81 $ 71 $ 313
====== ====== ====== ====== ======
Operating Margin:
As Previously Reported 12.7% 16.3% 15.1% 13.8% 14.5%
After Reclassification 11.9% 15.3% 14.2% 12.8% 13.6%
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and supercedes EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." SFAS No.146 states
that a liability for a cost associated with an exit or disposal activity shall
be recognized and measured initially at its fair value in the period when the
liability is incurred. It applies to costs associated with an exit activity that
does not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 146 will be applied for exit or
disposal activities initiated after December 31, 2002. The adoption of this
standard is not anticipated to have a material impact on MMC's consolidated
financial position, results of operations or cash flows.
Interest
Interest income earned on corporate funds amounted to $5 million in the third
quarter of 2002, compared with $6 million in the third quarter of 2001. Interest
expense of $43 million decreased from $46 million in the third quarter of 2001.
The decrease in both interest income and interest expense is primarily due to
lower average interest rates in 2002.
Income Taxes
MMC's consolidated effective tax rate was 35.5% of income before income taxes
and minority interest in the third quarter of 2002 compared with 36.8% in the
third quarter of 2001. Excluding charges related to September 11, the effective
tax rate was 37.5% for the third quarter 2001. The reduction in the effective
tax rate results primarily from the implementation of SFAS No. 142, as a
significant portion of the goodwill amortization expense recorded in prior years
was not deductible for tax purposes.
Liquidity and Capital Resources
MMC anticipates that funds generated from operations will be sufficient to meet
its foreseeable recurring operating cash requirements as well as to fund
dividends, capital expenditures and scheduled repayments of long-term debt.
MMC's ability to generate cash flow from operations is subject to the business
risks inherent in each operating segment.
MMC generated $1.3 billion of cash from operations for the nine months ended
September 30, 2002 compared with $872 million for the same period in 2001. 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 $675 million on September 30, 2002,
an increase of $138 million from the end of 2001.
MMC determines the most advantageous use of near-term cash flow when considering
alternatives including dividends, investments, acquisitions, potential funding
alternatives for its pension programs, and share repurchases. In the third
quarter, MMC increased its quarterly dividend by 6% to $.28 per share.
Financing Activity
In March 2002, MMC issued $500 million of 5.375% Senior Notes due in 2007 and
$250 million of 6.25% Senior Notes due in 2012 (the "Notes"). The net proceeds
from the Notes were used to pay down commercial paper borrowings.
Concurrent with the issuance of the Notes, MMC entered into interest rate swap
transactions to hedge 100% of its exposure to changes in the fair value of the
Notes. The swap transactions effectively converted the fixed rate obligations
into floating rate obligations. Under the terms of the swaps, the swap
counterparties pay MMC a fixed rate equal to the coupon rate on the bonds. MMC
pays the swap counterparties a floating rate of 6-month Libor plus 9.25 bps for
the five-year swap and 6 month Libor plus 25.45 bps for the ten-year swap. In
July 2002, MMC dedesignated 50% of the fair value hedge on each of the Notes and
settled 50% of each of the related swaps. The portion of the Notes no longer
hedged ceased being marked to market, and the cumulative amount of fair value
adjustments previously recognized is being amortized over the remaining life of
the related Notes. MMC redesignated the remaining portion of the swaps as a fair
value hedge of the 50% of the Notes. The redesignated swaps carry the identical
terms and conditions as the original swaps and under SFAS No. 133 qualify for
hedge accounting and meet all criteria necessary to conclude the hedge will be
perfectly effective.
As a result of these transactions, the effective interest rate over the
remaining life of the Notes, including the amortization of the fair value
adjustments, is 4.5% for $250 million of the Notes due in 2007 and 5.5% for $125
million of the Notes Due in 2012 which are no longer being hedged. Interest on
the hedged portion of the Notes, $250 million of the Notes due in 2007 and $125
million of the Notes due in 2012 remain subject to the swap terms described
above.
During the first nine months of 2002, MMC repurchased approximately 24 million
shares of its common stock at a cost of approximately $1.2 billion. MMC
repurchases shares subject to market conditions, including from time to time
pursuant to the terms of a 10b5-1 plan. A 10b5-1 plan allows a company to
purchase shares during a blackout period, provided the company communicates its
share purchase instructions to the broker prior to the blackout period, pursuant
to a written plan that may not be changed.
MMC uses written put options to supplement its share repurchase program. The
contracts are European style options, which generally expire three months from
the date of sale. Settlement terms of the contracts are controlled by MMC and
include physical, net-cash or net-share settlement. The contracts are recorded
as equity transactions in accordance with EITF Issue No. 00-19, "Derivative
Financial Instruments Indexed to, and Potentially Settled in a Company's Own
Stock." At September 30, 2002, MMC had open contracts on 925,000 shares, with
strike prices ranging from $37.52 to $43.76. The open contracts expire between
October 24, 2002 and January 6, 2003.
Investment Activity
MMC's additions to fixed assets and capitalized software, which amounted to $288
million in the first nine months of 2002 and $324 million in the nine months
last year, primarily relate to computer equipment purchases and the refurbishing
and modernizing of office facilities and software development costs.
MMC has committed to potential future investments of approximately $500 million
in connection with various MMC Capital funds and other MMC investments.
Approximately $50 million is expected to be invested during the remainder of
2002. MMC expects to fund future commitments, in part, with sales proceeds from
existing investments.
In the normal course of business MMC makes investments through its subsidiary
Marsh & McLennan Risk Capital Holdings, Ltd., primarily in insurance and
reinsurance entities, and periodically sells these investments. In the second
quarter of 2002, MMC sold an investment that it had acquired in 1997 to Trident
II, L.P. MMC Capital, Inc. a wholly owned subsidiary of MMRCH, serves as advisor
to Trident II, L.P. Revenue of $9 million from this transaction was recorded by
MMRCH. The underlying revenue growth rate for the Risk and Insurance Services
segment excludes the revenue from investment transactions.
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 and equity markets.
Interest Rate Risk
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 to manage MMC's exposure to interest rate
movements on its cash and investments, as well as to hedge the fair value of
fixed rate debt, and are only executed with counterparties of high
creditworthiness.
Foreign Currency Risk
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.
Forward contracts and options are periodically utilized by MMC to limit foreign
currency exchange rate exposure on net income and cash flows for specific,
clearly defined transactions arising in the ordinary course of its business.
Equity Price Risk
MMC has both "available for sale" investments which are carried at market value
under SFAS No. 115 and investments which are accounted for using the equity
method under APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The investments are subject to risk of changes in
market value, which if determined to be other than temporary, could result in
impairment losses. MMC reviews the carrying value of such investments to
determine if any valuation adjustments are appropriate under the applicable
accounting pronouncements.
MMC utilizes option contracts to hedge the variability of cash flows from
forecasted sales of certain available for sale investments. The hedge is
achieved through the use of European style put and call options, which mature on
the dates of the forecasted sales. The hedges are only executed with
counterparties of high creditworthiness.
Other
As further explained in Note 13 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 Financial Services Authority. At current rates of
exchange, the estimated payments for pension redress and related costs accrued
in the financial statements is $120 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. Such
amounts in excess of anticipated insurance recoveries have been provided for in
the accompanying financial statements.
Part I - Item 4. Controls & Procedures
- ---------------------------------------
a. Evaluation of Disclosure Controls and Procedures Based on their evaluation,
as of a date within 90 days of the filing of this Form 10-Q, the Company's Chief
Executive Officer and Chief Financial Officer have concluded the Company's
disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under
the Securities Exchange Act of 1934) are effective in timely alerting them to
material information relating to the Company required to be included in our
reports filed under the Exchange Act.
b. Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II, OTHER INFORMATION
--------------------------
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
September 30, 2002
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. Bylaws (restated as last amended September 19, 2002).
12. Statement Re: Computation of Ratio of Earnings to Fixed
Charges.
(b) Reports on Form 8-K
A current report on Form 8-K dated August 7, 2002 was filed by the
registrant submitting the sworn statements of its Principal Executive
officer, Jeffrey W. Greenberg, and its Principal Financial Officer,
Sandra S. Wijnberg, pursuant to the Securities and Exchange Commission
Order No. 4-460.
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, 2002 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
CERTIFICATIONS
I, Jeffrey W. Greenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marsh & McLennan
Companies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Jeffrey W. Greenberg
------------------------
Chief Executive Officer
CERTIFICATIONS
I, Sandra S. Wijnberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marsh & McLennan
Companies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Sandra W. Wijnberg
----------------------
Senior Vice President & Chief Financial Officer