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 March 31, 1997
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 April 30, 1997, there were outstanding 82,887,800 shares
of common stock, par value $1.00 per share, of the registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements. Such
statements may include, without limitation, discussions concerning
revenue and expense growth, market and industry conditions,
interest rates, foreign exchange rates, contingencies and matters
relating to the operations and income taxes of Marsh & McLennan
Companies, Inc. and subsidiaries (the "Company"). Such forward-
looking statements are based on available current market and
industry materials, experts' reports and opinions, as well as
management's expectations concerning future events impacting the
Company. Forward-looking statements by their very nature involve
risks and uncertainties. Factors that may cause actual results to
differ materially from those contemplated by any forward-looking
statements contained herein include the impact of changes in
insurance markets and natural catastrophes in the case of the
Company's insurance services business, changes in worldwide and
national securities and fixed income markets in the case of the
Company's investment management business and, with respect to all
of the Company's activities, changes in worldwide and national
economies, fluctuations in foreign currencies, changes in interest
rates and the impact of tax and other legislation and regulation in
the jurisdictions in which the Company operates.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Ended
March 31,
1997 1996
Revenue $1,208.7 $1,070.7
Expense 931.4 828.2
Operating Income 277.3 242.5
Interest Income 3.2 3.5
Interest Expense (17.5) (15.2)
Income Before Income Taxes 263.0 230.8
Income Taxes 98.6 87.7
Net Income $ 164.4 $ 143.1
Net Income Per Share $2.25 $1.96
Average Number of Shares Outstanding 73.0 72.9
Dividends Declared $.90 $.80
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents
(including interest-bearing amounts
of $543.5 at March 31, 1997 and
$261.1 at December 31, 1996) $ 592.4 $ 299.6
Receivables-
Commissions and fees 1,205.3 937.6
Advanced premiums and claims 89.4 88.5
Other receivables 109.1 103.0
1,403.8 1,129.1
Less-allowance for doubtful accounts (40.3) (43.3)
Net receivables 1,363.5 1,085.8
Other current assets 440.8 363.2
Total current assets 2,396.7 1,748.6
Long-term securities 571.3 573.3
Fixed assets, net 954.0 770.1
(net of accumulated depreciation and
amortization of $721.3 at March 31, 1997
and $695.7 at December 31, 1996)
Intangible assets 2,133.2 545.3
Other assets 1,202.4 907.9
$7,257.6 $4,545.2
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 618.2 $ 392.4
Accrued compensation and employee benefits 229.9 391.7
Accounts payable and accrued liabilities 933.8 447.5
Accrued income taxes 268.3 259.6
Dividends payable 72.1 65.1
Total current liabilities 2,122.3 1,556.3
Fiduciary liabilities 2,525.2 1,685.9
Less - cash and investments held in
a fiduciary capacity (2,525.2) (1,685.9)
- -
Long-term debt 1,169.7 458.2
Other liabilities 963.9 642.1
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 86,615,314
shares at March 31, 1997 and 76,794,531
at December 31, 1996 86.6 76.8
Additional paid-in capital 1,150.2 148.1
Retained earnings 1,993.9 1,901.6
Unrealized securities holding gains,
net of income taxes 217.3 221.2
Cumulative translation adjustments (120.6) (75.7)
3,327.4 2,272.0
Less - treasury shares, at cost,
3,778,885 shares at March 31, 1997 and
4,475,571 shares at December 31, 1996 (325.7) (383.4)
Total stockholders' equity 3,001.7 1,888.6
$7,257.6 $4,545.2
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Three Months Ended
March 31,
1997 1996
Operating cash flows:
Net income $164.4 $143.1
Depreciation and amortization 37.1 34.9
Deferred income taxes .8 15.7
Other liabilities (6.5) 3.2
Prepaid dealer commissions (61.3) (83.9)
Other, net 2.7 (2.8)
Net changes in working capital
other than cash and cash equivalents -
Receivables (19.8) 17.5
Other current assets (2.5) 10.2
Accrued compensation and employee benefits (173.9) (94.2)
Accounts payable and accrued liabilities 16.2 (28.1)
Accrued income taxes (13.6) 12.2
Effect of exchange rate changes (7.3) 2.9
Net cash generated from
(used for) operations (63.7) 30.7
Financing cash flows:
Net increase in commercial paper 505.6 154.8
Other borrowings 399.9 .6
Other repayments (121.1) (68.8)
Purchase of treasury shares - (14.9)
Issuance of common stock 55.5 30.6
Dividends paid (65.1) (58.1)
Other, net - .6
Net cash provided by
financing activities 774.8 44.8
Investing cash flows:
Additions to fixed assets (51.4) (31.5)
Acquisitions (374.6) (1.1)
Other, net 12.9 (30.8)
Net cash used for investing activities (413.1) (63.4)
Effect of exchange rate changes on cash
and cash equivalents (5.2) (1.5)
Increase in cash & cash equivalents 292.8 10.6
Cash & cash equivalents at beginning of period 299.6 328.1
Cash & cash equivalents at end of period $592.4 $338.7
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 month periods ended March 31, 1997 and 1996.
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 $23.1 million and $23.5 million for the three
months ended March 31, 1997 and 1996, respectively.
Net uncollected premiums and claims and the related payables
amounting to $4.9 billion at March 31, 1997 and $3.2 billion
at December 31, 1996, 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
month periods ended March 31, 1997 and 1996.
(In millions of shares)
1997 1996
Primary 1.9 1.1
Fully Diluted 1.9 1.1
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", which is effective for annual and interim periods
ending after December 15, 1997. In accordance with this
statement, the Company will include the required basic and
diluted earnings per share figures on the face of the income
statement in the 1997 Annual Report. The adoption of this
accounting standard would not have had a material impact on
the reported earnings per share figure for the first quarter.
4. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information
concerning acquisitions:
Three Months Ended
March 31,
(In millions of dollars) 1997 1996
Purchase acquisitions:
Assets acquired, excluding cash $ 2,535.7 $1.1
Liabilities assumed (1,155.7) -
Shares issued (1,005.4) -
Net cash outflow for acquisitions $ 374.6 $1.1
Interest paid during the three months ended March 31, 1997 and
1996 was $16.1 million and $17.0 million, respectively.
Income taxes paid during the three months ended March 31, 1997
and 1996 were $98.4 million and $59.2 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. Acquisitions
On March 27, 1997, the Company consummated a strategic business
combination with Johnson & Higgins ("J&H"), a privately-held
insurance broking and employee benefit consulting firm. The
Company agreed to pay total consideration of approximately $1.8
billion consisting of approximately $600 million in cash and
approximately 9.8 million shares of the Company's common stock.
Approximately $1.3 billion has been paid and approximately $500
million will be paid in equal annual installments on each of the
next three or four anniversaries of the closing date. The
business combination is being accounted for using the purchase
method of accounting. Accordingly, the goodwill of
approximately $1.4 billion which results from the preliminary
purchase price allocation will be amortized over 40 years.
Subject to certain limited exceptions, an agreed number of
shares issued in connection with this transaction may not be
sold during the first and second years following the closing. In
addition, approximately 800,000 shares of common stock were
placed in escrow for a period of up to two years in order to
secure certain indemnification obligations with respect to
certain representations and warranties.
The following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the
business combination had occurred on January 1, 1997 and 1996,
respectively.
(In millions of dollars, except per share figures)
Quarter Ended March 31,
1997 1996
Revenue $1,523.0 $1,338.2
Net Income 179.0 151.6
Earnings per share 2.16 1.83
The pro forma information is based on certain estimates and
assumptions which the Company believes are reasonable. The pro
forma results are shown for illustrative purposes only and do
not purport to be indicative of the results which would have
been reported if the business combination had occurred on the
dates indicated or which may occur in the future.
In January 1997, the Company purchased Compagnie Europeenne De
Courtage d'Assurances et de Reassurances ("CECAR"), an insurance
broker in France, for approximately $200 million. The 1996 pro
forma information presented above does not include the operating
results of CECAR since the impact is not material.
7. Claims, Lawsuits and Other Contingencies
The Company and its subsidiaries are subject to various claims
and lawsuits, consisting principally of alleged errors and
omissions in connection with the placement of insurance or
reinsurance and in rendering investment and consulting services
that arise in the ordinary course of business. 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. Over several years,
disputes concerning these contracts and involving cedants,
reinsurers, members of syndicates, their underwriting and
members' names agencies and, in some instances, subsidiaries of
the Company have been negotiated, litigated or deferred. 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.
8. Reclassification
Certain reclassifications have been made to the prior year
financial statements to conform with the current year
presentation.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
First Quarter Ended March 31, 1997
General
Marsh & McLennan Companies, Inc. and Subsidiaries (the "Company")
is a professional services firm with insurance services, investment
management and consulting businesses. More than 36,000 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:
(In millions of dollars) 1997 1996
Revenue:
Insurance Services $ 562.7 $ 555.5
Investment Management 340.6 238.3
Consulting 305.4 276.9
1,208.7 1,070.7
Expense:
Compensation and Benefits 627.3 539.3
Other Operating Expenses 304.1 288.9
931.4 828.2
Operating Income $ 277.3 $ 242.5
Operating Income Margin 22.9% 22.6%
Revenue, derived mainly from commissions and fees, rose 13% from
the first quarter of 1996 driven principally by increased revenue
in the investment management segment, which was largely
attributable to higher assets under management. Also, there was
strong demand for the Company's retirement, global compensation,
health care and economic consulting services.
Operating expenses rose 12% in the first quarter of 1997 primarily
due to costs associated with staff growth as well as higher
incentive compensation levels in the investment management segment
commensurate with strong operating performance. Service-related
costs for investment management also increased resulting from the
higher level of business activity.
The Company's strategic business combination with Johnson &
Higgins, completed on March 27th, will be reflected in its results
of operations beginning with the second quarter of 1997.
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.
Insurance Services
(In millions of dollars) 1997 1996
Revenue:
Insurance Broking $422.5 $371.1
Reinsurance Broking 75.8 87.6
Insurance Program Management 41.3 73.3
Interest Income on Fiduciary Funds 23.1 23.5
562.7 555.5
Expense 405.2 399.0
Operating Income $157.5 $156.5
Operating Income Margin 28.0% 28.2%
Insurance Broking Revenue
Insurance broking revenue, received from a predominantly corporate
clientele, increased 14% from the first quarter of 1996. Excluding
the impact of the acquisition of Compagnie Europeenne De Courtage
d'Assurances et de Reassurances ("CECAR"), an international
insurance broker headquartered in France, revenue grew 4%. Client
revenue rose primarily due to new business in the United States and
Europe, offset by declines in commercial property and casualty
premium rates. The Company does not expect market conditions to
change significantly in the near term.
Reinsurance Broking Revenue
Reinsurance broking revenue decreased 13% in the first quarter of
1997. This decline was primarily due to reduced demand for
reinsurance resulting from the consolidation among various U.S. and
U.K. insurance companies, reduced reinsurance demand due to higher
risk retentions by ceding insurance companies, the impact of lower
property catastrophe premium rates, and lower Marsh & McLennan Risk
Capital related revenue.
Insurance Program Management Revenue
Insurance program management revenue decreased 44% from the first
quarter of 1996 due to the sale of Frizzell. Revenue for Seabury
& Smith, which represents the whole of program management
subsequent to the sale of Frizzell, increased 5% from 1996. This
growth was largely the result of increased services provided to
associations and their members, along with increased insurance
placed on behalf of small businesses.
Interest Income on Fiduciary Funds
Interest income on fiduciary funds decreased 2% in the first
quarter of 1997 due to generally lower average short-term interest
rates outside the United States.
Expense
Insurance services expenses increased 2% from the first quarter of
1996. Compensation and benefit expenses increased 3% primarily
reflecting normal salary progressions while other operating
expenses grew 1%.
Investment Management
(In millions of dollars) 1997 1996
Revenue $340.6 $238.3
Expense 236.7 164.8
Operating Income $103.9 $ 73.5
Operating Income Margin 30.5% 30.8%
Revenue
Putnam's revenue increased 43% compared with the first quarter of
1996 reflecting exceptional growth in the level of assets under
management on which management fees are earned. The higher asset
level reflects a record amount of mutual fund sales over the last
twelve months and significantly higher equity market valuations
compared with the first quarter of 1996.
Expense
Putnam's expenses rose 44% in the first quarter of 1997 reflecting
the effect of staff growth to support new business and incentive
compensation levels commensurate with strong operating performance,
along with increased service-related costs, including a new service
center, resulting from the higher level of business activity.
Quarter-end and average assets under management for the first
quarter are presented below:
(In billions of dollars) 1997 1996
Mutual Funds:
Domestic Equity $ 83.9 $ 54.9
Taxable Bond 30.7 26.6
Tax-Free Income 15.9 16.2
International Equity 8.7 4.6
139.2 102.3
Institutional Accounts:
Fixed Income 18.9 18.5
Domestic Equity 14.3 10.4
International Equity 7.2 4.7
40.4 33.6
Quarter-end Assets $179.6 $135.9
Average Assets $181.9 $131.2
Assets under management are affected by fluctuations in domestic
and international bond and stock market prices and by the level of
investments and withdrawals for current and new fund shareholders
and clients. They are also affected by investment performance,
service to clients, the development and marketing of new investment
products, the relative attractiveness of the investment style under
prevailing market conditions and changes in the investment patterns
of clients. Revenue levels are sensitive to all of the factors
above, but in particular, to significant changes in bond and stock
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 and which affords
its clients the opportunity to allocate their investment resources
among various alternative investment products as changing worldwide
economic and market conditions warrant. At the end of the first
quarter, assets held in equity securities represented 64% of assets
under management, compared with 55% in 1996, while investments in
fixed income products represented 36%, compared with 45% last year.
Consulting
(In millions of dollars) 1997 1996
Revenue $305.4 $276.9
Expense 277.0 252.6
Operating Income $ 28.4 $ 24.3
Operating Income Margin 9.3% 8.8%
Revenue
Consulting services revenue increased 10% in 1997 as demand for
services increased in all major practices except general management
consulting. Retirement consulting revenue, which represented 44%
of the consulting segment, grew 9% in the first quarter reflecting
higher demand in the United States, Continental Europe and Latin
America. Revenue rose 15% in the global compensation practice, and
10% in health care consulting during the first quarter of 1997.
General management consulting experienced a decline of 2%, which
was more than offset by a 19% increase in economic consulting.
Expense
Consulting services expenses increased 10% in the first quarter of
1997. The increase primarily reflects the impact of staff growth
to support new business and normal salary progressions.
Interest
Interest income earned on corporate funds declined to $3.2 million
in the first quarter of 1997 compared with $3.5 million in 1996
primarily due to generally lower yields outside the United States.
Interest expense increased to $17.5 million in the first quarter of
1997 from $15.2 million in 1996 due to increases in commercial
paper and bank borrowings. The higher level of commercial paper
borrowings primarily reflected the funding of Putnam's prepaid
dealer commissions which have continued to increase due to the
level of funds sold with a deferred sales charge. The increased
level of bank borrowings outstanding during the quarter were used
to finance the Company's acquisition of CECAR.
Income Taxes
The Company's consolidated tax rates were 37.5% of income before
income taxes in the first quarter compared with 38.0% for the
comparable period of 1996. 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
On March 27, 1997, the Company reported that it had completed its
strategic business combination with Johnson & Higgins, a leading
insurance broker, previously announced on March 12, 1997 for total
consideration of approximately $1.8 billion. Approximately one-
third of the total consideration was payable in cash and two-thirds
in the Company's common stock. The Company also purchased CECAR
for approximately $200 million during January 1997. The cash
portion of these transactions are being financed with bank
borrowings and commercial paper. The March 31, 1997 balance sheet
reflects these combinations.
The Company's cash and cash equivalents aggregated $592.4 million
on March 31, 1997, compared with $299.6 million on December 31,
1996. This increase primarily reflects the consolidation of cash
associated with the businesses acquired.
Excluding the impact of the business combinations, the Company
experienced a net cash outflow from operations reflecting the
payments made in 1997 for the 1996 incentive compensation programs
and the continuing cash requirements of Putnam's prepaid dealer
commissions.
The Company's capital expenditures, which amounted to $51.4 million
in the first three months of 1997 and $31.5 million in the first
quarter of 1996, were primarily related to computer equipment
purchases and the refurbishing and modernizing of office
facilities.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which is effective for annual and interim periods ending
after December 15, 1997. In accordance with this statement, the
Company will include the required basic and diluted earnings per
share figures on the face of the income statement in the 1997
Annual Report.
The other liabilities in the Consolidated Balance Sheets, which
totaled $963.9 million on March 31, 1997 and $642.1 million on
December 31, 1996, 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
MARCH 31, 1997
Item 5. Other Information
On May 1, 1997, the Company, through its wholly-owned
subsidiary Seabury & Smith, Inc., acquired all of the
capital stock of Albert H. Wohlers & Co. from its
existing stockholders in exchange for an aggregate of
471,625 shares of the Company's common stock, par value
$1.00 per share. The transaction was exempt from the
registration requirements of the Securities Act of 1933,
as amended, pursuant to Section 4 (2) thereof.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K dated March 14, 1997 was
filed by the Company in connection with the
Johnson & Higgins business combination.
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 May, 1997 on its behalf by the undersigned, thereunto
duly authorized and in the capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Frank J. Borelli
Senior Vice President and
Chief Financial Officer