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 quarter ended September 30, 1996
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, 1996, there were outstanding 71,817,894
shares of common stock, par value $1.00 per share, of the
registrant.
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,
1996 1995 1996 1995
Revenue $989.0 $921.6 $3,096.5 $2,812.0
Expense 814.8 763.2 2,486.5 2,265.1
Operating Income 174.2 158.4 610.0 546.9
Interest Income 3.7 4.7 10.7 13.2
Interest Expense (14.5) (15.8) (45.6) (47.3)
Income Before Income Taxes 163.4 147.3 575.1 512.8
Income Taxes 60.8 56.0 214.2 194.9
Net Income $102.6 $ 91.3 $ 360.9 $ 317.9
Net Income Per Share $1.43 $1.26 $4.97 $4.37
Average Number of
Shares Outstanding 71.8 72.5 72.6 72.8
Dividends Declared $.90 $.80 $2.50 $2.25
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents
(including interest-bearing amounts
of $372.1 at September 30, 1996 and
$290.4 at December 31, 1995) $ 417.4 $ 328.1
Receivables-
Commissions and fees 893.8 830.5
Advanced premiums and claims 84.7 78.8
Consumer finance and other 83.6 271.5
1,062.1 1,180.8
Less-allowance for doubtful accounts (42.5) (48.3)
Net receivables 1,019.6 1,132.5
Other current assets 279.9 218.5
Total current assets 1,716.9 1,679.1
Consumer finance receivables, net - 151.3
Long-term securities 466.3 411.8
Fixed assets, net 731.6 757.5
(net of accumulated depreciation and
amortization of $683.7 at September 30,
1996 and $638.5 at December 31, 1995)
Intangible assets 552.4 729.7
Other assets 833.6 600.1
$4,300.8 $4,329.5
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 467.9 $ 571.1
Accrued compensation and employee benefits 310.6 257.4
Accounts payable and accrued liabilities 406.9 485.4
Accrued income taxes 213.4 197.4
Dividends payable 64.6 58.2
Total current liabilities 1,463.4 1,569.5
Fiduciary liabilities 1,744.8 1,672.6
Less - cash and investments held in
a fiduciary capacity (1,744.8) (1,672.6)
- -
Long-term debt 408.5 410.6
Other liabilities 689.4 683.9
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
200,000,000 shares, issued 76,794,531
shares at September 30, 1996 and
December 31, 1995 76.8 76.8
Additional paid-in capital 149.0 155.5
Retained earnings 1,868.3 1,688.4
Unrealized securities holding gains,
net of income taxes 176.1 149.2
Cumulative translation adjustments (96.9) (86.7)
2,173.3 1,983.2
Less - treasury shares, at cost,
5,086,121 shares at September 30, 1996 and
4,020,742 shares at December 31, 1995 (433.8) (317.7)
Total stockholders' equity 1,739.5 1,665.5
$4,300.8 $4,329.5
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
Operating cash flows:
Net income $360.9 $317.9
Gain on sale of business (33.2) -
Unusual charges 33.4 -
Depreciation and amortization 104.0 99.9
Deferred income taxes 38.7 39.8
Other liabilities 16.2 (3.5)
Prepaid dealer commissions (267.4) (64.2)
Other, net (4.7) (12.4)
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (28.8) (85.0)
Other current assets 2.2 41.0
Accrued compensation and employee benefits 56.1 (17.4)
Accounts payable and accrued liabilities (41.9) (35.4)
Accrued income taxes 22.7 0.3
Effect of exchange rate changes 4.6 (9.0)
Net cash generated from operations 262.8 272.0
Financing cash flows:
Net change in debt 24.4 140.9
Purchase of treasury shares (225.4) (90.5)
Issuance of common stock 96.3 67.8
Dividends paid (174.5) (158.6)
Other, net 2.4 2.4
Net cash used for financing activities (276.8) (38.0)
Investing cash flows:
Additions to fixed assets (93.4) (100.0)
Proceeds from sale of business,
net of cash sold 241.8 -
Acquisitions (4.7) (6.8)
Other, net (37.9) (46.1)
Net cash provided by (used for)
investing activities 105.8 (152.9)
Effect of exchange rate changes on cash
and cash equivalents (2.5) 7.2
Increase in cash & cash equivalents 89.3 88.3
Cash & cash equivalents at beginning of period 328.1 294.9
Cash & cash equivalents at end of period $417.4 $383.2
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have
been prepared by the Company 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 the Company 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 the Company'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, 1996 and
1995.
2. Fiduciary Cash and Liabilities
In its capacity as an insurance broker or agent, the Company
collects premiums from insureds and, after deducting its
commissions, remits the premiums to the respective insurance
underwriters; the Company 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 $71.0 million and $77.4 million for the nine
months ended September 30, 1996 and 1995, respectively.
Net uncollected premiums and claims and the related payables
amounting to $2.9 billion at September 30, 1996 and $3.1
billion at December 31, 1995, are not included in the
accompanying Consolidated Balance Sheets.
3. Net Income Per Share
Net income per share is computed by dividing net income by the
average number of shares of common stock outstanding. Common
stock equivalents (relating principally to stock options),
which have been excluded from the calculation because their
dilutive effect is immaterial, are shown below for the three
and nine month periods ended September 30, 1996 and 1995.
(In millions of shares)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Primary 1.2 .9 1.2 .8
Fully Diluted 1.4 1.2 1.4 1.1
4. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information
concerning acquisitions:
Nine Months Ended
September 30,
(In millions of dollars) 1996 1995
Purchase acquisitions:
Assets acquired, excluding cash $ 8.1 $21.5
Liabilities assumed (3.4) (8.2)
Issuance of debt and other
obligations - (6.5)
Net cash outflow for acquisitions $ 4.7 $ 6.8
The following schedule provides details of changes in the
Company's short-term and long-term debt. Although a portion
of the Company's commercial paper borrowings is classified as
long-term debt in the Consolidated Balance Sheets, borrowings
and repayments of commercial paper are shown below based on
original maturities.
Nine Months Ended
September 30,
(In millions of dollars) 1996 1995
Net change in debt with maturities
of three months or less $ (2.8) $(84.7)
Borrowings with maturities
over three months 391.0 528.9
Repayments of debt with maturities
over three months (363.8) (303.3)
Net increase in debt $ 24.4 $140.9
Interest paid during the nine months ended September 30, 1996
and 1995 was $45.0 million and $52.1 million, respectively.
Income taxes paid during the nine months ended September 30,
1996 and 1995 were $155.2 million and $163.5 million,
respectively.
5. Income Taxes
Taxing authorities periodically challenge positions taken by
the Company on its tax returns. On the basis of present
information and advice received from counsel, it is the
opinion of the Company's management that any assessments
resulting from current tax audits will not have a material
adverse effect on the Company's consolidated results of
operations or its consolidated financial position.
6. Claims, Lawsuits and Other Contingencies
The Company and its subsidiaries are subject to claims and
lawsuits that arise in the ordinary course of business,
consisting principally of alleged errors and omissions in
connection with the placement of insurance or reinsurance and
in rendering consulting and investment services. Some of
these claims and lawsuits seek damages, including punitive
damages, in amounts which could, if assessed, be significant.
Among these is a group of claims relating to reinsurance
contracts placed by reinsurance broking subsidiaries of the
Company that were called into question. In general, these
contracts concern so-called run-off exposures under which
reinsurers assumed some or all remaining liability for claims
against Lloyd's syndicates or other London insurers on
policies, typically written in the past over a period of many
years and sometimes without aggregate limits. The initial
disputes, primarily between reinsurers and cedants, concerned
these contracts, and have largely been resolved. More
recently, related disputes, including litigation, have arisen
or been deferred by agreement between the members of
syndicates, their underwriting and members' names agencies
and, in some cases, subsidiaries of the Company. The
syndicate members have experienced significant and continuing
losses on policies, some of which were the subject of run-off
reinsurance contracts that have been voided or compromised.
As part of the Lloyd's Reconstruction and Renewal ("R&R")
plan, most of this group of claims have been extinguished or
assigned to the reinsurance entity created to effectuate the
R&R plan. The Company believes that its subsidiaries
performed their reinsurance broking services in conformity
with accepted and customary practices in the London market.
Subsidiaries of the Company in the course of their consulting
and insurance activities advised certain clients in connection
with their purchase of guaranteed investment contracts and
annuities issued by Executive Life Insurance Company, which is
in rehabilitation under the supervision of the California
Insurance Department. Some of those clients as well as the
Company's subsidiaries have been or may be involved in claims
or lawsuits relating to losses in connection with those
investments. In some instances, the subsidiaries have entered
into agreements extending the time in which possible claims
may be asserted against them, or have engaged in negotiating
the deferral or resolution of claims and litigation. The
Company believes that its subsidiaries acted in a proper and
professional manner in connection with these matters.
On the basis of present information, available insurance
coverage and advice received from counsel, it is the opinion
of the Company's management that the disposition or ultimate
determination of these claims and lawsuits will not have a
material adverse effect on the Company's consolidated results
of operations or its consolidated financial position.
7. New Accounting Standard
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
which is effective for fiscal years beginning after December
15, 1995. In accordance with the statement, the Company will
provide new footnote disclosures in its 1996 annual report
presenting pro forma net income and earnings per share amounts
as if employee stock options had been expensed based on their
estimated fair value on the grant date, determined by using
certain option pricing models.
8. Unusual Items
In June 1996, the Company completed the sale of The Frizzell
Group Limited for approximately $290 million. Second quarter
results include a $33.2 million pretax gain on the sale which
was offset by non-recurring charges totaling $33.4 million,
representing a $15.5 million provision related to the London
market, a $10 million goodwill write-off primarily
attributable to a U.K. reinsurance operation and a $7.9
million provision for various real estate matters. These
amounts are included in Expense in the Consolidated Statements
of Income.
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, 1996
General
Marsh & McLennan Companies, Inc. and Subsidiaries (the "Company")
is a professional services firm with insurance services, consulting
and investment management businesses. More than 25,000 employees
provide analysis, advice and transactional capabilities to clients
worldwide.
This management's discussion and analysis of financial condition
and results of operations should be read in conjunction with the
Company's latest annual report on Form 10-K.
The consolidated results of operations follow:
Third Quarter Nine Months
(In millions of dollars) 1996 1995 1996 1995
Revenue:
Insurance Services $425.0 $459.1 $1,458.6 $1,488.8
Consulting 292.2 269.0 862.4 784.5
Investment Management 271.8 193.5 775.5 538.7
989.0 921.6 3,096.5 2,812.0
Expense:
Compensation and Benefits 542.1 482.5 1,630.9 1,428.2
Other Operating Expenses 272.7 280.7 855.4 836.9
Unusual Charge, net - - .2 -
814.8 763.2 2,486.5 2,265.1
Operating Income $174.2 $158.4 $ 610.0 $ 546.9
Operating Income Margin 17.6% 17.2% 19.7% 19.4%
Revenue, derived mainly from commissions and fees, rose 7% from the
third quarter of 1995 and 10% for the nine months. Excluding The
Frizzell Group Limited ("Frizzell"), which was sold in June 1996,
revenue grew 12% for both the third quarter and the nine months
driven principally by increased revenue in the investment
management segment, largely attributable to higher assets under
management. In addition, there was increased demand for the
Company's consulting services.
Operating expenses rose 7% in the third quarter of 1996 and 10% for
the nine months. Excluding the impact of Frizzell, operating
expenses grew 11% for both the third quarter and the nine months
primarily due to increased incentive compensation levels especially
within investment management. Volume-related costs, particularly
those associated with higher staff levels, grew for both investment
management and consulting as a result of the increased level of
business activity.
The translated values of revenue and expense from the Company's
international insurance services and consulting operations are
affected by fluctuations in currency exchange rates. However, the
net impact of these fluctuations on the Company's results of
operations has not been material.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which is
effective for fiscal years beginning after December 15, 1995. In
accordance with the statement, the Company will provide new
footnote disclosures in its 1996 annual report presenting pro forma
net income and earnings per share amounts as if employee stock
options had been expensed based on their estimated fair value on
the grant date, determined by using certain option pricing models.
Insurance Services
Third Quarter Nine Months
(In millions of dollars) 1996 1995 1996 1995
Revenue:
Insurance Broking $293.9 $280.6 $ 994.8 $ 951.4
Reinsurance Broking 62.2 72.4 204.1 231.2
Insurance Program
Management 43.7 79.0 188.7 228.8
Interest Income on
Fiduciary Funds 25.2 27.1 71.0 77.4
425.0 459.1 1,458.6 1,488.8
Expense 363.0 385.8 1,152.2 1,167.9
Operating Income $ 62.0 $ 73.3 $ 306.4 $ 320.9
Operating Income Margin 14.6% 16.0% 21.0% 21.6%
Insurance Broking Revenue
Insurance broking revenue, received from a predominantly corporate
clientele, increased 5% from the third quarter of 1995 and 5% for
the nine months. Third quarter results reflect a 3% increase in
direct insurance broking revenue along with higher revenue from
Marsh & McLennan Risk Capital related activities. Client revenue
rose primarily due to an increase in new business in the United
States offset by declines in commercial property and casualty
premium rates. The Company does not expect premium rate levels to
change significantly in the near term and anticipates that the
insurance broking marketplace will continue to be highly
competitive.
Reinsurance Broking Revenue
Reinsurance broking revenue decreased 14% in the third quarter of
1996. This decline was primarily due to the consolidation among
various U.S. and U.K. insurance companies and higher risk
retentions which had the effect of reducing reinsurance demands,
and the impact of lower property catastrophe premium rates. The
Company expects a similar decline in reinsurance broking revenue
during the fourth quarter. For the first nine months of 1996
reinsurance broking revenue decreased 12% compared with the same
period of 1995.
Insurance Program Management Revenue
Insurance program management revenue decreased 45% from the third
quarter of 1995 and 18% for the nine months due to the sale of
Frizzell. Revenue for Seabury & Smith, which comprises the whole
of program management subsequent to the sale of Frizzell, increased
7% from the third quarter of 1995 and 6% for the nine months. This
growth was largely the result of increased services provided to
corporations and institutions and their employees along with
increased insurance placed on behalf of small businesses.
Interest Income on Fiduciary Funds
Interest income on fiduciary funds decreased 7% in the third
quarter of 1996 and 8% for the nine months due to generally lower
average short-term interest rates particularly in North America and
Continental Europe.
Expense
Insurance services expenses decreased 6% from the third quarter of
1995 and 1% for the nine months due to the sale of Frizzell.
Excluding the impact of Frizzell, expenses increased 2% in the
third quarter compared with the prior year and 1% for the nine
months reflecting continued cost containment measures while
maintaining expenditures for systems related improvements.
Unusual Charge, net
In June 1996, the Company completed the sale of Frizzell for
approximately $290 million. Second quarter results include a $33.2
million pretax gain on the sale which was offset by non-recurring
charges totaling $33.4 million, representing a $15.5 million
provision related to the London market, a $10 million goodwill
write-off largely attributable to a U.K. reinsurance operation and
a $7.9 million provision for various real estate matters.
Consulting
Third Quarter Nine Months
(In millions of dollars) 1996 1995 1996 1995
Revenue $292.2 $269.0 $862.4 $784.5
Expense 258.5 238.0 770.1 701.3
Operating Income $ 33.7 $ 31.0 $ 92.3 $ 83.2
Operating Income Margin 11.5% 11.5% 10.7% 10.6%
Revenue
Consulting services revenue increased 9% in 1996 compared with the
third quarter of 1995 and grew 10% for the nine months. Retirement
consulting revenue, which represented 43% of the consulting
segment, grew 8% in the third quarter reflecting higher demand in
North America, Continental Europe and Latin America. Revenue rose
18% in health care consulting and 16% in the global compensation
practice while general management consulting revenue was
essentially flat during the third quarter of 1996. For the nine
months, retirement consulting revenue grew 9% while revenue rose
15% in the global compensation practice, 13% in health care
consulting and 9% in general management consulting.
Expense
Consulting services expenses increased 9% in the third quarter of
1996 and 10% for the nine months. The increase primarily reflects
the impact of staff growth to support new business, higher
incentive compensation and normal salary progressions.
Investment Management
Third Quarter Nine Months
(In millions of dollars) 1996 1995 1996 1995
Revenue $271.8 $193.5 $775.5 $538.7
Expense 181.0 127.3 531.7 362.7
Operating Income $ 90.8 $ 66.2 $243.8 $176.0
Operating Income Margin 33.4% 34.2% 31.4% 32.7%
Revenue
Putnam's revenue increased 40% compared with the third quarter of
1995 and 44% for the nine months reflecting exceptional growth in
the level of assets under management on which management fees are
earned. The higher asset level reflects a substantial increase in
the level of mutual fund sales, higher equity market valuations and
new 401(k) business.
Expense
Putnam's expenses rose 42% in the third quarter of 1996 and 47% for
the nine months reflecting the effect of significantly higher
incentive compensation levels, staff growth to support new
business, and increased costs resulting from the higher level of
business activity.
Quarter-end and average assets under management for the third
quarter are presented below:
(In billions of dollars) 1996 1995
Mutual Funds:
Domestic Equity $ 72.7 $ 40.9
Taxable Bond 28.0 25.0
Tax-Free Income 16.3 16.2
International Equity 6.4 3.3
123.4 85.4
Institutional Accounts:
Fixed Income 18.6 18.6
Domestic Equity 12.9 8.7
International Equity 5.3 3.5
36.8 30.8
Quarter-end Assets $160.2 $116.2
Average Assets $150.8 $112.5
Assets under management are affected by fluctuations in domestic
and international bond and stock market prices, by the level of
investments and withdrawals for current and new fund shareholders
and clients, by the development and marketing of new investment
products, and by investment performance and service to clients.
Revenue levels are sensitive to all of the factors above, but in
particular, to significant 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
designed to meet varying investment objectives. At the end of the
third quarter, assets held in equity securities represented 61% of
assets under management, compared with 49% in 1995, while
investments in fixed income products represented 39%, compared with
51% last year.
Interest
Interest income earned on corporate funds declined to $3.7 million
in the third quarter of 1996 compared with $4.7 million in 1995 and
decreased 19% for the nine months primarily due to generally lower
yields worldwide.
Interest expense decreased to $14.5 million in the third quarter of
1996 from $15.8 million in 1995. This decline was primarily due to
lower average interest rates on commercial paper borrowings. The
average level of commercial paper borrowings during the period was
slightly higher than the comparable period of 1995 principally due
to the funding of Putnam's prepaid dealer commissions and the cash
outflows associated with the Company's share repurchases which more
than offset the lower level of debt following the Frizzell
transaction. For the nine months, interest expense decreased to
$45.6 million from $47.3 million in 1995.
Income Taxes
The Company's consolidated tax rates were 37.25% of income before
income taxes in the third quarter and nine months of 1996 compared
with 38.0%, respectively, for the comparable periods of 1995. The
reduction in the 1996 tax rate reflects the continued
implementation of tax minimization strategies around the world.
The overall tax rates are higher than the U.S. statutory rates
primarily because of the impact of state and local income taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents aggregated $417.4 million
on September 30, 1996, compared with $328.1 million on December 31,
1995. In the nine months ended September 30, 1996, the Company
generated $262.8 million of cash from operations compared with
$272.0 million in 1995.
Cash flow from operations includes the net cash requirements of
Putnam's prepaid dealer commissions, which amounted to $267.4
million for the nine months of 1996 compared with $64.2 million
during the same period of 1995. The long-term portion of these
prepaid dealer commissions is included in other assets in the
Consolidated Balance Sheets.
The Company's capital expenditures, which amounted to $93.4 million
in the first nine months of 1996 and $100.0 million in 1995, were
primarily related to computer equipment purchases and the
refurbishing and modernizing of office facilities.
As previously mentioned, the Company sold Frizzell for
approximately $290 million in June of 1996. Subsequent to the
disposition, the Company repurchased 2.2 million of its own shares.
The other liabilities in the Consolidated Balance Sheets, which
totaled $689.4 million on September 30, 1996 and $683.9 million on
December 31, 1995, include the Company's long-term pension
liability, reserves related to the Company's professional liability
insurance program, and the postretirement liability for certain
health care and life insurance benefits.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
SEPTEMBER 30, 1996
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Company has duly caused this report to
be signed this 14th day of November, 1996 on its behalf
by the undersigned, thereunto duly authorized and in the
capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
By:/s/FRANK J. BORELLI
Senior Vice President and
Chief Financial Officer