Exhibit 13
MMC [LOGO]
MARSH o PUTNAM o MERCER
MARSH & MCLENNAN COMPANIES
ANNUAL REPORT 2002
COVER GRAPHIC OMITTED: ILLUSTRATION, ARCHITECTURE
MMC IS A GLOBAL PROFESSIONAL SERVICES FIRM WITH ANNUAL REVENUES EXCEEDING $10
BILLION. IT IS THE PARENT COMPANY OF MARSH INC., THE WORLD'S LEADING RISK AND
INSURANCE SERVICES FIRM; PUTNAM INVESTMENTS, ONE OF THE LARGEST INVESTMENT
MANAGEMENT COMPANIES IN THE UNITED STATES; AND MERCER INC., A MAJOR GLOBAL
PROVIDER OF CONSULTING SERVICES. APPROXIMATELY 59,000 EMPLOYEES PROVIDE
ANALYSIS, ADVICE AND TRANSACTIONAL CAPABILITIES TO CLIENTS IN OVER 100
COUNTRIES.
FINANCIAL HIGHLIGHTS
For the Years Ended December 31, 2002 2001 2000
(IN MILLIONS, EXCEPT PER SHARE FIGURES)
- ---------------------------------------------------------------------------------------------
Revenue(a) $ 10,440 $ 9,869 $ 10,308
Income Before Income Taxes and Minority Interest $ 2,133 $ 1,590 $ 1,955
Net Income $ 1,365 $ 974 $ 1,181
Stockholders' Equity $ 5,018 $ 5,173 $ 5,228
- ---------------------------------------------------------------------------------------------
Diluted Net Income Per Share $ 2.45 $ 1.70 $ 2.05
Diluted Net Income Per Share Excluding Special Items(b) $ 2.45 $ 2.12 $ 2.05
Dividends Paid Per Share $ 1.09 $ 1.03 $ .95
Year-end Stock Price $ 46.21 $ 53.73 $ 58.50
=============================================================================================
(a) 2001 and 2000 amounts have been reclassified to conform with current year
presentation.
(b) 2001 results exclude an investment valuation charge discussed in Note 11
and charges related to September 11 and special credits discussed in Note
12.
[THE DATA PRESENTED BELOW APPEARS IN A BAR CHART IN THE PRINTED DOCUMENT]
MMC S&P
--- ---
TOTAL RETURN 1982 $100 $100
OF MMC STOCK 1983 127 122
AND S&P 500 1984 157 130
1982-2002 1985 225 171
1986 344 203
20-Year Compound 1987 291 213
Annual Growth 1988 346 248
1989 496 327
MMC 1990 514 317
17.6% 1991 554 413
1992 643 445
S&P 500 1993 589 490
12.7% 1994 595 496
1995 690 682
1996 836 839
1997 1233 1119
1998 1488 1439
1999 2494 1742
2000 3104 1583
2001 2908 1395
2002 2556 1087
DEAR SHAREHOLDER
MMC performed well in 2002. Consolidated revenues rose 6 percent to $10.4
billion. Net income grew 40 percent to $1.4 billion, and earnings per share
increased 44 percent to $2.45. Excluding special items in 2001, net income grew
12 percent, and earnings per share increased 16 percent.
MMC achieved these results in a year when a slowing global economy, protracted
declines in equity markets, and confidence-eroding corporate scandals were
features of the business environment. The aftermath of the terrorist attacks on
the World Trade Center affected business generally and MMC directly. We miss our
295 colleagues lost in the attacks and continue to assist their families.
Our performance in 2002 is attributable to a business model that provides
professional services of considerable breadth with the management of each of our
operating companies expected to concentrate on achieving success in its own
market. MMC's businesses compete in different fields and have individual
identities, but they share a commitment to client service and professional
excellence.
MMC's total return to stockholders--share appreciation plus dividends--has
outperformed the S&P 500 consistently since the company went public in 1962,
including for the last three years. MMC has increased dividends paid to
shareholders every year since 1962, a record matched by only 13 of the 2,800
companies listed on the New York Stock Exchange. In 2002 we again raised the
dividend rate and split our stock two-for-one.
In the pages that follow, the leaders of our operating companies discuss in
detail their business performance in 2002.
Marsh had excellent results. Revenues from risk and insurance services increased
15 percent to $5.9 billion. Operating income rose 31 percent to $1.5 billion.
Marsh responded to the needs of clients, who faced new risks, more complex
exposures, and an insurance market characterized by reduced underwriting
capacity, higher rates, and restricted terms and conditions. In this
environment, Marsh's specialized expertise in risk consulting and risk transfer
and its longstanding relationships with global insurance and reinsurance markets
are a great competitive advantage.
After 40 years of distinguished service, John T. Sinnott, chairman and chief
executive officer of Marsh, announced his retirement from the firm, effective
July 2003. Jack's leadership of Marsh has been exemplary, and he will continue
as a special advisor to MMC. We are fortunate to have an executive as skilled
and experienced as Ray J. Groves to succeed Jack. Ray became chief executive
officer of Marsh in January 2003 and will become chairman in July 2003.
MMC Capital, our private equity business, had a successful year investing in
insurance, reinsurance, and other financial services companies. AXIS Capital
Holdings, a company MMC Capital formed to increase underwriting capacity after
the terrorist attacks, has established itself as a global provider of insurance
and reinsurance. We anticipate that our insurance industry presence and market
knowledge will continue to provide MMC Capital with a proprietary advantage in
private equity investing.
In 2002 Putnam managed through the downturn in equity markets, which for the
first time in 60 years suffered a third straight year of declines. Putnam's
revenues declined 10 percent to $2.2 billion. Operating income was $560 million.
Average assets under management were $279 billion compared with $328 billion in
2001. Putnam's institutional business had positive asset flows for the seventh
consecutive year. And despite difficult markets, the assets Putnam managed for
international clients grew to a record $33 billion.
The bear market has undermined some investors' faith in stocks, but it has not
reduced the need to save for the future. People expect to live longer and better
in retirement. By providing a range of retail mutual funds, tax-deferred savings
plans, and retirement plans, Putnam can help meet these aspirations. The
fundamentals of Putnam's strategy--multiple distribution channels, unmatched
customer service, consistent investment results over time, and style discipline
across a broad array of funds--are sound and should continue to provide the
basis for its long-term business success.
Mercer's revenues rose 2 percent in 2002 to $2.4 billion. Operating income
increased 4 percent to $326 million. Retirement services, which represent 50
percent of Mercer's business, showed consistent growth throughout the year, as
did health care and economic consulting. This was partly
2
offset by lower revenues from other practices, principally business strategy,
which declined 19 percent compared with 2001.
Mercer is the global leader in retirement and human resource consulting. In
industrialized economies, aging populations pose challenges for government
pension plans, which should increase the emphasis on private retirement
provisions and the need for retirement consulting.
With 59,000 employees operating in 100 countries, MMC is well positioned to
deliver professional services wherever clients need them. The growth of open,
deregulated markets is creating new demand in continental Europe, Latin America,
and Asia for the advice and services provided by MMC.
Collaboration is an essential element in the delivery of professional services.
By drawing on the range of MMC's capabilities, professionals in our operating
companies can provide the variety of advice and services that many clients
require. Collaboration enhances the quality of service to clients, increases
efficiency, and makes the firm a more interesting and attractive place for
talented people to work--all adding to shareholder value. MMC country managers
have a particular role in encouraging collaborative business development around
the world.
In a year when corporate scandals and allegations of accounting and financial
abuses made headlines, I am grateful for the strength of MMC's ethics, culture,
and commitment to client service and professional standards. These qualities
serve our shareholders well.
MMC has always aspired to a system of corporate governance that is appropriate
to the company and serves the long-term interests of its shareholders. Effective
oversight of the company requires independent directors who are dedicated,
skilled, and experienced. For MMC, we believe that a board combining a majority
of such directors with a number of well-qualified executive directors is the
best approach to corporate governance.
In 2002 Morton O. Schapiro was elected to the Board of Directors. The president
of Williams College, Mort is a distinguished economics professor and academic
administrator who will contribute significantly to the deliberations of the
Board.
Rob White-Cooper retired from MMC at the end of 2002. His contributions to the
successful integration of Sedgwick and to collaborative efforts across MMC's
operating companies have been substantial. Saxon Riley, a former MMC director
and retired chairman of Lloyd's of London, retired from MMC's International
Advisory Board in 2002.
When the year 2002 began, barely three months had passed since the terrorist
attacks at the World Trade Center claimed the lives of 295 members of our
corporate family. We have continued our efforts to ease the suffering of
families of lost colleagues. MMC's Family Relationship Program has helped people
get answers to questions and access resources. Psychological and emotional
counseling has been available through MMC's employee assistance program. And
independent financial advisors have provided counseling about investment, tax,
and related issues. In early 2002 The MMC Victims Relief Fund paid out virtually
all of its $22 million in contributions. MMC hosted a commemoration for families
in September. A permanent memorial honoring our lost colleagues will be
completed in the summer of 2003 and located in the plaza adjacent to our
corporate headquarters.
PHOTOGRAPH OF JEFFREY W. GREENBERG,
CHAIRMAN, MMC.
The uncertainty in the business landscape in early 2003 is troubling, but it
does not alter our confidence in the future of MMC. Clients need specialized
advice and services, and all of our businesses have excellent global growth
prospects. We have a profitable company with strong cash flow, good earnings
growth, and a healthy balance sheet.
It is my privilege to work with a talented, experienced, and diverse group of
colleagues well able to achieve MMC's goals. We remain grateful for your
confidence and trust.
/s/ Jeffrey W. Greenberg
Jeffrey W. Greenberg March 3, 2003
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RISK AND INSURANCE SERVICES
A conversation with John T. Sinnott, chairman, and
Ray J. Groves, president and chief executive officer, of Marsh Inc.
JOHN T. SINNOTT IS RETIRING IN 2003 AFTER MORE THAN 40 YEARS WITH MARSH.
RAY J. GROVES SUCCEEDED HIM AS CEO IN JANUARY AND WILL BECOME CHAIRMAN IN JULY.
MR. GROVES WAS NAMED PRESIDENT AND CHIEF OPERATING OFFICER OF MARSH IN
OCTOBER 2001, SHORTLY AFTER BECOMING A SENIOR ADVISOR TO MMC.
HE HAS BEEN A MEMBER OF MMC'S BOARD OF DIRECTORS SINCE 1994 AND IS THE FORMER
CHAIRMAN AND CHIEF EXECUTIVE OF ERNST & YOUNG.
MR. GROVES, BEFORE WE DISCUSS MARSH WITH YOU AND MR.
SINNOTT, TELL US BRIEFLY ABOUT THE EXPERIENCE YOU
BRING TO THIS LARGE, COMPLEX ORGANIZATION.
- --------------------------------------------------------------------------------
Most of my career has been with professional services firms, dealing closely
with clients and leading professionals. This has meant devoting a great deal of
time to identifying the best ways to organize, motivate, and mobilize people
with high intellectual capacity and excellent technical skills. These
characteristics describe Marsh's professionals very well. I have worked on how
to communicate these capabilities to clients, build resources internally, and
encourage professionals to collaborate--all to bring the highest quality
services and advice to the client.
WHAT DISTINGUISHES MARSH'S APPROACH
TO SERVING CLIENTS?
- --------------------------------------------------------------------------------
Two key characteristics are Marsh's ability to deliver excellent service to
clients around the world and the breadth and scope of our knowledge and
specialization. Marsh is a large global institution of 38,000 people serving
clients in more than 100 countries. Our clients can access more than 400 offices
worldwide, which are staffed by professionals who speak the native language,
understand local and regional risk issues, and are experts in creating programs
tailored to clients' needs. These offices serve as the link to the knowledge and
expertise of Marsh's risk, insurance, and reinsurance specialists--no matter
where these experts may be located. An equally important characteristic that
flows from our global client service and specialized strengths is our commitment
to teamwork.
5
[THE DATA PRESENTED BELOW APPEARS IN A PIE CHART IN THE PRINTED DOCUMENT]
2002 REVENUE
$5.9 BILLION
------------
RISK MANAGEMENT & INSURANCE BROKING 75%
UNITED STATES 41%
EUROPE 23%
ASIA PACIFIC 5%
LATIN AMERICA 3%
CANADA 3%
REINSURANCE BROKING & SERVICES 11%
RELATED INSURANCE SERVICES 14%
PLEASE ELABORATE ON MARSH'S APPROACH
TO SPECIALIZATION.
- --------------------------------------------------------------------------------
Specialization is one of the main strategic components of our services for
clients. Segmenting our business according to client size is an initial level of
specialization. The approach is based largely on the way our clients have told
us how they want to receive our services. Our specialists in global risk
practices develop solutions in all the major categories of risk, such as
property, casualty, and directors and officers liability. Marsh's more than 20
industry practices provide yet another level of expertise in specific fields.
The specialists in our risk consulting practice collaborate with clients to
identify, quantify, and reduce the potential effect of risks they face in
today's changing, more complex business environment.
Marsh's reinsurance operation, Guy Carpenter, uses its expertise in a dozen
specialty practices to deliver solutions in areas such as property, workers
compensation, professional liability, environmental liability, and life,
accident and health. Carpenter's specialists draw on the most advanced
quantitative modeling tools in the industry, local knowledge, and extensive
market relationships to develop effective reinsurance approaches such as
catastrophe bonds and government pools.
The specialists in our Global Broking practice concentrate on insurance
placements by industry, line of insurance coverage, and specific insurance
companies. These brokers know the global insurance markets well and have
relationships with the senior decision makers in insurance companies around the
world. This approach makes risk transfer more efficient and less costly for all
the participants in the process. It gives our clients unique access to the
insurance markets and underwriters the opportunity to work with brokers who
understand their individual requirements and risk tolerance.
WHAT ARE THE GROWTH OPPORTUNITIES
FOR MARSH?
- --------------------------------------------------------------------------------
Marsh's results in 2002 were outstanding. Revenues rose 15 percent to $5.9
billion, and operating income increased 31 percent to $1.5 billion, including
the change in accounting for goodwill. This performance reflects the strong
contribution of our business units in all the geographies where Marsh operates.
We see opportunities for continued
6
GRAPHIC OMITTED: ILLUSTRATION, ARCHITECTURE
growth in today's world where risk is a greater concern. For example, as a
result of the terrorist attacks and recent corporate governance crises in the
United States, risk is now on the agenda of nearly all boards of
directors--something that was not true just a few years ago. Given Marsh's
"360-degree" view and understanding of risk--that is, our ability to analyze
risk from multiple perspectives--our advice on a wider range of issues will be
needed.
Our services are in demand as countries around the world privatize industries,
liberalize trade policies, ease barriers to international investment, and
deregulate insurance markets. As our clients access new markets globally and
begin new commercial relationships, they appreciate Marsh's ability to provide
advice on analyzing, reducing, and transferring risk. Marsh is continuing to
expand into markets with high, long-term potential such as China and India, and
to make acquisitions when they fit a geographic or product niche.
Marsh has excellent prospects to build its business with new and existing
clients in midsize businesses and small enterprises, where no company has
commanding market share. Marsh currently serves less than 10 percent of the
midsize client market in the United States, leaving plenty of room to grow.
[THE DATA PRESENTED BELOW APPEARS IN A BAR CHART IN THE PRINTED DOCUMENT]
REVENUE
(BILLIONS)
-------------
FIVE-YEAR COMPOUND ANNUAL GROWTH 16%
1998 = $3.351
1999 = 4.523
2000 = 4.780
2001 = 5.152
2002 = 5.910
In our continuous effort to raise the bar in service for clients, we see
opportunities to make incremental improvements in the processes we use to
transfer risk, serve clients, and make our operations more efficient. These
changes should lead to continued earnings growth and margin improvement without
major reengineering of our business models.
Finally, current insurance market conditions are such that businesses of all
sizes are seeking answers to a difficult set of issues concerning the
availability and cost of insurance. This increases the demand for Marsh's global
risk consulting and risk transfer capabilities. Evidence of these expanding
client requirements is seen in the strong growth of our risk consulting practice
in 2002.
GIVE US AN UPDATE ON INSURANCE
MARKET CONDITIONS.
- --------------------------------------------------------------------------------
An unusual confluence of events has created very difficult insurance marketplace
conditions for our clients. The 13-year-long "soft" insurance market, which was
marked by year-after-year declines in commercial insurance prices in the United
States, began to reverse in early 2000. Prices rose gradually until September
11, 2001, after which increases accelerated sharply. Corporate governance issues
followed, causing insurance prices to increase even more. Low interest rates, a
depressed stock market, and claims for mass tort liabilities such as asbestos
are also contributing to marketplace conditions. As a result, for the first time
since the mid-1980s, clients have been dealing with reduced capacity for risks,
restrictive terms and conditions, coverage exclusions, and sharply higher prices
in almost every line of commercial insurance.
These conditions have continued through the first part of 2003, although there
are wide variations by line of coverage, the client's exposures and prior loss
experience.
HOW IS MARSH HELPING CLIENTS IN
THIS ENVIRONMENT?
- --------------------------------------------------------------------------------
Challenges in the current market have made a high level of response from our
professionals even more critical. This has included finding capacity for
difficult risks, helping clients provide the more detailed information now
required by underwriters, conducting more extensive
8
negotiations with the markets, and keeping our clients abreast of developments.
Since September 11, 2001, underwriters' exclusion of terrorism coverage from
policies has been a particularly severe problem for clients. Marsh has been
continuously at the forefront of developing a solution to this issue. The
Terrorism Risk Insurance Act of 2002, which was signed into law in the United
States last November, requires insurers to offer terrorism coverage to all
businesses, with the federal government acting as a reinsurer for terrorism
risks. Since passage of the legislation, skilled collaboration among our
clients, our professionals, and the insurance markets has been necessary to
weave through the complexities of the new risks and exposures and the
requirements of the new law.
Clients value what we bring to the table as risk advisors, but they also expect
us to make a difference in the marketplace. We look constantly for ways to
ensure that our clients--businesses and other institutions--have a reasonable
opportunity to transfer risks they are not retaining themselves. We have helped
clients develop alternative risk transfer solutions such as captives and
policy-holder-owned insurance companies.
Serving our clients can also mean working with existing insurance markets to
consider new areas of risk underwriting where we see opportunity for both our
clients and the underwriters. Assessing each market's current and future
capacity to assume risks is essential in advising our insurance and reinsurance
clients. We devote a great amount of time and effort to this function.
PLEASE UPDATE US ON THE ACTIVITIES OF
MMC CAPITAL.
- --------------------------------------------------------------------------------
Marsh has always taken a leading and innovative role in insurance market-making
in order to create additional capacity for our clients. In fact, since the
1980s, we have helped form 13 insurance and reinsurance companies for this
purpose, including ACE, XL, Centre Re, Mid Ocean, and AXIS. In 1992 MMC
formalized this market-making role by establishing MMC Capital. MMC's
sponsorship of the first Trident investment fund in 1994 and the $1.4 billion
Trident II fund in 1999 has enabled MMC Capital to react quickly to market
dislocations and other investment opportunities.
MMC Capital led the formation of AXIS in November 2001 in response to the
significant supply and demand imbalances in the worldwide insurance marketplace
following the World Trade Center attacks. MMC Capital used the enormous
advantage in market knowledge it derives from its access to the entire Marsh
network to create AXIS quickly and efficiently. AXIS has established itself as a
global provider of specialty insurance and treaty reinsurance. In its first full
year of operations, it reported gross written premiums in excess of $1 billion
and strong profitability. The first Trident fund has performed well for its
investors, and the second fund, Trident II, of which AXIS is a portfolio
company, is making strong progress.
WHAT IS THE OUTLOOK FOR MARSH?
- --------------------------------------------------------------------------------
We are approaching the years ahead from a position of strength. We have strong
revenues, good operating margins, a global presence, an excellent management
team, and world-class professional talent--all of which will serve us well
through changing insurance marketplace conditions. We are "bullish" on future
growth for Marsh within the world of risk and insurance services. []
[THE DATA PRESENTED BELOW APPEARS IN A BAR CHART IN THE PRINTED DOCUMENT]
OPERATING
INCOME
(BILLIONS)
----------
FIVE-YEAR COMPOUND ANNUAL GROWTH 25%
1988 = $0.613
1999 = 0.806
2000 = 0.944
2001 = 1.139
2002 = 1.490
9
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INVESTMENT MANAGEMENT
A conversation with Lawrence J. Lasser,
president and chief executive officer of Putnam Investments
PLEASE GIVE US YOUR ASSESSMENT OF THE
EQUITY MARKET ENVIRONMENT.
- --------------------------------------------------------------------------------
Last year was a difficult year for the economy, markets, investors, and most
investment management companies. The United States experienced a continuation of
the most severe bear market since 1932, with the S&P 500 and Nasdaq down 23
percent and 32 percent, respectively. U.S. stock mutual funds had $27 billion in
net redemptions, the first time since 1988 that stock funds had net redemptions.
There have been 11 bear markets since the 1930s. Bear markets are painful, but
most people believe that current conditions show that investment and economic
history is being repeated, not rewritten. Three consecutive years of down
markets are unusual. We hope stock market declines are behind us, and there are
factors that support a better outlook in 2003. Still, it's important to remember
that although equity markets rise and fall, long-term growth has been strong,
with a 10 percent total return on a compound basis for U.S. equities over the
last 40 years. This is why stocks remain a necessary part of diversified
investment portfolios.
WHAT WAS THE EFFECT ON
PUTNAM'S PERFORMANCE?
- --------------------------------------------------------------------------------
We entered 2002 with $315 billion in assets under management, approximately 80
percent in equities, and ended the year with $251 billion. Putnam's revenues
declined 10 percent to $2.2 billion, and operating income declined to $560
million.
Putnam's results for 2002 were clearly affected by the weakness in the equity
markets. Yet, again, one needs to step back and look at performance over a
longer period of time. Putnam's average assets over the last 10 years grew at a
compound annual rate of 17 percent, revenues
11
grew at a rate of 18 percent, and operating income at 16 percent. Putnam entered
the 1990s as the tenth largest mutual fund company in the United States and is
today the fifth largest.
HAVE RECENT CONDITIONS LED PUTNAM TO
CHANGE ITS STRATEGY?
- --------------------------------------------------------------------------------
Putnam has a history of continuously reengineering to improve performance. As
difficult as it has been to endure the downturn in equities, we continue to
believe in our business model, which rests on long-term, consistent investment
performance, breadth and depth of investment product, first-class investor
service, and strong distribution. This model has taken us years to build, and we
feel it positions us well for the future.
Twenty years ago, Putnam was a traditional institutional investment management
company with a growth equity focus, few fixed-income products, and a small
number of mutual funds. We believed Putnam had to be larger to capture economies
of scale and to attract and retain
[THE DATA PRESENTED BELOW APPEARS IN A BAR CHART IN THE PRINTED DOCUMENT]
AVERAGE
ASSETS UNDER
MANAGEMENT
(BILLIONS)
------------
FIVE-YEAR COMPOUND ANNUAL GROWTH 6%
1998 = $264
1999 = 322
2000 = 397
2001 = 328
2002 = 279
investment talent. We rebuilt investor services. We changed our sales
organization into a first-rate force and developed new channels of distribution.
We expanded our investment product line to be comprehensive across asset
classes. We developed a defined benefit institutional business and became a
major competitor in the defined contribution market. We added an international
business that is growing and profitable.
COULD YOU ELABORATE ON PUTNAM'S
INVESTMENT PROCESS.
- --------------------------------------------------------------------------------
The overarching priority of Putnam investment management is to achieve yearly
performance that is consistently above median in every product category, against
benchmarks and peers, building to a superior long-term record. We recognize that
to achieve this result each product must have a strategy designed for the long
term and be managed by experienced investment professionals who make solid,
informed decisions in a disciplined, repeatable manner, according to Putnam's
style-consistent, truth-in-labeling approach.
Team management is a hallmark of Putnam's investment process. The recent
appointment of co-heads of investment exemplifies that strategy. The experience
and judgment of our portfolio teams is critical. We want to continue to develop,
train, and hire those who will distinguish Putnam in its ability to make
informed judgments on a stock-by-stock basis. The goal is to combine all our
skills in a culture of shared vision, teamwork, and high achievement.
In the last year, we have implemented many changes in our investment
decision-making process, including the approaches we take and the application of
risk management and portfolio construction tools. As always, we manage our funds
relative to explicit benchmarks. At the same time, Putnam's investment
professionals leverage all of the resources available to them: risk management
and portfolio construction tools, integrated research, trading, performance
attribution, and first-rate technology.
12
WHAT WERE THE BUSINESS
SUCCESSES IN 2002?
- --------------------------------------------------------------------------------
We had success in our institutional business, which now represents about one
third of Putnam. Institutional accounts had positive asset flows in 2002, as
they have for the last seven years. We were pleased to have won a $2 billion
defined contribution plan account, our largest ever, and the second $1
billion-plus success last year.
Growth from international sources, including mutual fund and institutional
assets, was excellent. The assets Putnam manages for international clients
reached a record $33 billion in 2002, making Putnam one of the largest foreign
competitors in non-U.S. markets. Our international team landed the biggest piece
of new business ever for Putnam--the assignment to manage $2.5 billion in
international assets in pension funds for one of Australia's largest banks. In
Europe, we continue to focus on existing partnerships while expanding into new
relationships, including an alliance with the fund management company of the
Talanx/HDI Group, Germany's third largest insurer.
We are a leader in investor services, having continuously enhanced the quality
of service we provide to mutual fund shareholders. In 2002 Putnam was once again
awarded the DALBAR "Triple Crown" for service excellence to mutual fund
investors, financial advisors, and annuity holders. It received the highest
award in all three categories, continuing the recognition of outstanding service
Putnam has provided over the past decade.
HOW DID YOU CHANGE YOUR PRODUCT LINE?
- --------------------------------------------------------------------------------
As markets have changed in the last few years, investors have sought less
volatile products and a simplified, easier-to-understand product line. As
investors' preferences have moved from equity to fixed income, Putnam's
fixed-income assets have grown from $60 billion at the end of 2001 to $67
billion in 2002. Fixed income now represents 27 percent of our assets under
management.
Last year, we edited our mutual fund family product line by combining 10 smaller
funds and eliminating one. Through this consolidation in our fund lineup, we
will be able to concentrate our investment resources and talent better and
deliver stronger performance.
In an ongoing effort to develop new products that meet the needs of investors,
we made product enhancements to the Putnam CollegeAdvantage plan, which has a
nearly 10 percent share of the 529 college savings plan market and excellent
growth prospects. We also added a stable value fund option to CollegeAdvantage
as an alternative for investors who want stability in their principal
investment, combined with potentially higher returns than the average money
market fund.
WHAT ARE THE OPPORTUNITIES FOR PUTNAM?
- --------------------------------------------------------------------------------
Internationally, we see attractive opportunities as governments implement
retirement reforms and move to private solutions for retirement planning. Putnam
offers retirement savings for individuals, tax-deferred savings
[THE DATA PRESENTED BELOW APPEARS IN A CHART IN THE PRINTED DOCUMENT]
DALBAR
INVESTOR SERVICE AWARDS
-----------------------
For the fifth time in six years, Putnam won the DALBAR "Triple Crown" for
service excellence in three categories--the highest achievement of any
investment management company.
Mutual Fund Financial Annuity
Shareholders Intermediaries Contract Holders
------------ -------------- ----------------
2002 Highest Award Highest Award Highest Award
2001 Highest Award Highest Award Highest Award
2000 Highest Award Highest Award Highest Award
1999 Highest Award Highest Award Honorable Mention
1998 Highest Award Highest Award Highest Award
1997 Highest Award Highest Award Highest Award
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[THE DATA PRESENTED BELOW APPEARS IN A PIE CHART IN THE PRINTED DOCUMENT]
YEAR-END 2002
ASSETS UNDER MANAGEMENT
$251 BILLION
MUTUAL FUND BLEND EQUITY 13%
MUTUAL FUND FIXED INCOME 18%
MUTUAL FUND VALUE EQUITY 16%
MUTUAL FUND GROWTH EQUITY 18%
INSTITUTIONAL FIXED INCOME 9%
INSTITUTIONAL EQUITY 26%
plans for individuals through their employment, and pension management. Having
done this historically in the United States, we now provide new retirement
products for investors throughout the world.
It is also important to remember that while returns have declined, people still
save for the same things. People are living longer and expecting to live better
in retirement. Between their personal savings, pensions, and other retirement
accounts, they are primarily responsible for their own needs and want to pass on
assets to the next generation. And again, this is true not only in America; it
is true across the developed world. People can invest individually, or, as tens
of millions have, they can invest through mutual fund accounts and benefit from
full-time professional management and diversification.
WHAT IS THE OUTLOOK FOR 2003?
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Markets are difficult to predict. They are dependent not only on the health of
the economy and corporate profits but also on worldwide political events. This
is why we believe most long-term investors should invest in a diversified
portfolio rather than try to time the markets. Our equity strategists anticipate
moderate returns from the major indexes over the next three to five years. It is
also clear that the ingredients of a modest rebound are now in place: low
interest rates, low inflation, a growing economy, and sharply lower stock
prices.
WHAT ARE YOUR ASPIRATIONS
FOR PUTNAM?
- --------------------------------------------------------------------------------
My aspirations for Putnam have never changed. I want Putnam to continue to be a
great company defined by great people doing great work for customers, a company
respected by its competitors, its people admired in the community, MMC's
shareholders rewarded by Putnam's success. Putnam is a strong company in an
industry with excellent long-term growth prospects. We will succeed by resisting
the temptation to focus on the short term and by focusing instead in a
disciplined manner on our longer-term objectives. []
15
GRAPHIC OMITTED: ILLUSTRATION, ARCHITECTURE
CONSULTING
A conversation with Peter Coster,
president and chief executive officer of Mercer Inc.
HOW DO YOU VIEW MERCER'S
PERFORMANCE IN 2002?
- --------------------------------------------------------------------------------
Mercer continued to grow in a difficult environment for the consulting industry.
We finished the year with a 2 percent increase in revenues and a 4 percent
increase in operating income, including the change in accounting for goodwill.
Retirement services, health care and group benefits, and economic consulting
performed well. Management and organizational change consulting revenues
declined. Viewed from a geographic perspective, revenue growth tended to be
stronger outside North America.
We completed several acquisitions to support international growth and fill gaps
in service offerings, continued to invest in our intellectual capital and
people, and rolled out a new identity program that communicates Mercer's ability
to provide expert advice across a range of key management issues. Most
importantly, we continued to deliver top-flight service to our clients.
TELL US MORE ABOUT HOW MERCER
MANAGED IN THIS ENVIRONMENT.
- --------------------------------------------------------------------------------
The market downturn we are now experiencing began in the middle of 2000,
primarily as a result of slowing economies in which corporations deferred
spending for certain types of consulting. Mercer's ability to maintain its
profitability through this period reflects our view that downturns are both
inevitable and unpredictable as to timing and depth, and we should therefore
manage our business in good times to ensure we are not overextended
17
[THE DATA PRESENTED BELOW APPEARS IN A PIE CHART IN THE PRINTED DOCUMENT]
2002 REVENUE
BY CONSULTING PRACTICE
$2.4 BILLION
ECONOMIC 6%
HUMAN CAPITAL 15%
MANAGEMENT & ORGANIZATIONAL CHANGE 13%
HEALTH CARE & GROUP BENEFITS 16%
RETIREMENT SERVICES 50%
when markets inevitably weaken. In the current downturn, we cut expenses early
in affected practices and have managed costs tightly. At the same time, we have
continued to invest in intellectual capital, geographic expansion, and new
capabilities to strengthen our franchise and position ourselves for growth.
WHAT TYPES OF CONSULTING SERVICES ARE IN
GREATEST DEMAND?
- --------------------------------------------------------------------------------
Demand for retirement consulting was strong in 2002, as it has been for the last
several years. Mercer is the global market leader in this area. With strong
operations in all major markets, we are well positioned to serve our many
clients and particularly to advise multinationals who increasingly want to
address human resource and benefit issues throughout their organizations in a
coordinated way. The combination of the slide in stock markets and low interest
rates has placed many retirement plans in underfunded positions. Clients find
themselves making difficult decisions about plan funding and investments at a
time when their businesses are reporting lower earnings and cash flow. Mercer's
retirement and investment consulting practices are helping them model risks and
select the right investment strategy, funding policy, and plan design to manage
these risks and align their benefit programs with the needs of their businesses.
Health care consulting is much in demand as clients are faced with managing more
complex programs and increasing costs. U.S. employers' average health care costs
increased nearly 15 percent in 2002 and have risen more than 50 percent over the
past five years. We are supporting clients in a variety of ways, including
helping them form medical and pharmaceutical purchasing coalitions and working
on their behalf to encourage health care organizations to adopt more rigorous
medical quality standards.
18
GRAPHIC OMITTED: ILLUSTRATION, ARCHITECTURE
The increasing need of corporations and government entities for economic
consulting advice on complex issues in litigation, regulation, and privatization
is generating growth for NERA. Its global scale is a source of competitive
advantage in assignments such as multinational mergers or antitrust litigation.
NERA economists are advising on fundamental management issues worldwide,
including new ways to value directors and officers exposures, employee stock
options, and exotic financial instruments.
With demands on corporate leaders greater than ever, senior executives of large
organizations continue to seek advice from Mercer Delta Organizational
Consulting on issues of leadership and organization. For example, corporate
governance is currently high profile for clients, driven by intense investor and
regulatory attention. Mercer Delta helps its clients move beyond merely
satisfying the new governance rules to actually improving how boards of
directors and CEOs work together.
[THE DATA PRESENTED BELOW APPEARS IN A BAR CHART IN THE PRINTED DOCUMENT]
REVENUE
(BILLIONS)
----------
FIVE-YEAR COMPOUND ANNUAL GROWTH 11%
1998 = $1.658
1999 = 2.086
2000 = 2.286
2001 = 2.308
2002 = 2.364
WHAT IS MERCER DOING TO STRENGTHEN ITS
BUSINESS FOR THE FUTURE?
- --------------------------------------------------------------------------------
I'll touch on a few highlights.
We continue to invest in new capabilities and intellectual capital. NERA added a
transfer pricing practice, which performed strongly in its first year. Mercer
Delta acquired the intellectual capital of Sorcher Associates, a leader in
executive assessment. Mercer Human Resource Consulting continued to develop its
market-leading thinking on productivity and human resource metrics. Many
companies are coming to realize that their employees are their most important
asset--and the one they know the least about. Mercer Human Resource Consulting
has unmatched capabilities to measure the bottom-line outcomes of human resource
strategies and practices, and this helps our clients understand and benefit from
their investment in people.
Our financial strength as part of MMC has enabled us to acquire some very
attractive businesses at a time when competitors may lack the resources to do
so. During 2002 we acquired organizational change consulting firms in Canada and
France to support our strategy of building Mercer Delta Organizational
Consulting from its U.S. roots into the leading global firm advising on
leadership, organization, and change. We also acquired a London- and New
York-based media consulting operation to add media industry expertise to Mercer
Management Consulting and a London-based competition policy firm to strengthen
NERA's capabilities in the fast-growing area of antitrust/competition policy.
Several acquisitions for Mercer Human Resource Consulting in Europe added scale
and capabilities to our operations.
In early 2003 we reached agreement for two further acquisitions, subject to
regulatory review and customary contract terms. One of these is KPMG's actuarial
services business in Germany, which we see as a key market. With more and more
clients asking us to advise them on pension benefit strategy throughout the
world, this acquisition strengthens significantly our pension consulting
resources
20
in a country where many multinationals are headquartered and most large ones
have operations. The second and larger acquisition is Oliver, Wyman & Company,
the leading firm specializing in strategy consulting to the financial services
industry. This New York-headquartered firm also has strong operations across
western Europe as well as in Canada and Singapore. The integration of Oliver,
Wyman with our existing financial services consulting groups will create a
global financial services strategy practice second to none in quality and in its
capability to address risk-adjusted capital issues. This acquisition will
position Mercer as the major force in financial services consulting, add a risk
analysis dimension to our other industry-focused business strategy consulting,
and enhance MMC's position in the field of enterprise risk.
As I've said before, Mercer's acquisition strategy is to gain market position,
not market share. Expense savings may be involved in some acquisitions, but that
doesn't drive our strategy. Our aim is to acquire outstanding businesses with
outstanding people who share our vision and values, with the goal of driving our
organic growth.
YOU MENTIONED THAT MERCER INTRODUCED A
NEW IDENTITY PROGRAM DURING 2002.
WHAT PROMPTED THIS?
- --------------------------------------------------------------------------------
For some time, Mercer's strategy has been to develop a family of global
consulting operations offering best-in-class specialist advice addressing the
most important issues faced by clients. This structure allows Mercer to provide
consulting solutions that are both broad and deep, based on industry-leading
intellectual capital and world-class talent in each specialist area. We deliver
our services and advice in the way that best fits each client's specific need,
whether that need is limited to a single specialist area or calls for an
integrated approach across several disciplines. Our new identity program clearly
signals the capabilities represented by our individual operating companies and,
at the same time, identifies the connections and linkages among them. In this
way, it supports our strategy, communicates the special advantages of our
organization, and helps each of Mercer's business units build on the reputations
and goodwill of the others.
WHAT IS THE OUTLOOK FOR 2003
AND BEYOND?
- --------------------------------------------------------------------------------
In a tough economy, Mercer has continued to grow, invest, and generate profits.
We are in an excellent position to take advantage of opportunities as they
arise.
Consulting has been a successful and rewarding business for MMC for many years,
and I'm confident that organizations will continue to demand specialist advice
attuned to their particular needs. The focus of consulting advice may shift over
time, but the major themes tend to remain constant: What is the best business
design for a company? How should the company be organized and led? How can it
best attract, retain, and motivate employees to achieve its strategy? Mercer is
well qualified to help clients answer these questions and many more. We have an
excellent platform for future growth. [ ]
[THE DATA PRESENTED BELOW APPEARS IN A BAR CHART IN THE PRINTED DOCUMENT]
OPERATING INCOME
(MILLIONS)
----------------
FIVE-YEAR COMPOUND ANNUAL GROWTH 17%
1998 = $202
1999 = 260
2000 = 312
2001 = 313
2002 = 326
21
MMC WORLDWIDE
RISK AND INSURANCE SERVICES
MARSH INC. is the world leader in delivering risk and insurance services and
solutions to clients. Global risk management consulting, insurance broking,
financial solutions, and insurance program management services are provided for
businesses, public entities, associations, professional services organizations,
and private clients under the MARSH name. Reinsurance broking, financial
modeling services, and related advisory functions are conducted worldwide for
insurance and reinsurance companies, principally under the GUY CARPENTER name.
Underwriting management services are performed for a wide range of clients.
MMC CAPITAL is a global private equity firm with over $2 billion of committed
capital under management. MMC Capital invests in industries where MMC possesses
specialized knowledge and proprietary deal flow.
INVESTMENT MANAGEMENT
PUTNAM INVESTMENTS, one of the oldest and largest money management organizations
in the United States, offers a full range of both equity and fixed-income
products, invested domestically and globally, for individual and institutional
investors. Putnam, which manages over 100 mutual funds, has over 700
institutional clients and more than 13 million individual shareholder accounts.
It had $251 billion in assets under management at year-end 2002.
CONSULTING
MERCER INC., one of the world's largest consulting firms, operates as a family
of specialist firms, each a leader in its field. MERCER HUMAN RESOURCE
CONSULTING helps employers understand, develop, implement, and measure the
effectiveness of their retirement, benefit, rewards, and other human resource
programs with the goal of creating measurable business results through their
people. MERCER INVESTMENT CONSULTING provides advice and solutions to
institutional investors. MERCER MANAGEMENT CONSULTING helps leading enterprises
develop, build, and operate strong businesses that deliver sustained shareholder
value growth. MERCER DELTA ORGANIZATIONAL CONSULTING works with CEOs and
executive teams of major companies on the design and leadership of large-scale
transformation. NATIONAL ECONOMIC RESEARCH ASSOCIATES (NERA), a firm of
consulting economists, applies economics to complex business and legal issues
arising from competition, regulation, public policy, strategy, finance, and
litigation. LIPPINCOTT MERCER, which consults on brand strategy and identity,
helps clients create, develop, and manage their brands. MERCER RISK, FINANCE &
INSURANCE CONSULTING, a firm of consulting actuaries, advises insurance
companies, government entities, and other organizations on all aspects of
property-casualty, life, and health care risks.
22
Marsh & McLennan Companies, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 but before
charges related to September 11 and special credits. The accounting policies of
the segments are identical to those used for the consolidated financial
statements.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") 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" in MMC's 2002 Annual Report on Form 10-K.
The consolidated results of operations follow:
================================================================================
(IN MILLIONS, EXCEPT PER SHARE FIGURES) 2002 2001 2000
- --------------------------------------------------------------------------------
REVENUE:
Service Revenue $10,373 $10,011 $10,232
Investment Income (Loss) 67 (142) 76
- --------------------------------------------------------------------------------
Operating Revenue 10,440 9,869 10,308
- --------------------------------------------------------------------------------
EXPENSE:
Compensation and Benefits 5,199 4,877 4,941
Other Operating Expenses 2,967 3,055 3,190
Charges Related to September 11
and Special (Credits) -- 174 (2)
- --------------------------------------------------------------------------------
Operating Expenses 8,166 8,106 8,129
- --------------------------------------------------------------------------------
OPERATING INCOME $ 2,274 $ 1,763 $ 2,179
================================================================================
NET INCOME $ 1,365 $ 974 $ 1,181
================================================================================
NET INCOME PER SHARE:
BASIC $ 2.52 $ 1.77 $ 2.18
================================================================================
DILUTED $ 2.45 $ 1.70 $ 2.05
================================================================================
AVERAGE NUMBER OF SHARES OUTSTANDING:
BASIC 541 550 543
DILUTED 557 572 569
================================================================================
In 2002, operating revenue, derived primarily from commissions and fees, rose
6%. The increase resulted from a higher volume of business in the risk and
insurance services segment, partially offset by a decline in revenue in the
investment management segment due to lower assets under management on which fees
are earned. In addition, an investment valuation charge recorded in 2001 related
to Gruppo Bipop-Carire S.p.A. ("Bipop") resulted in a favorable variance for
investment income in the current year compared to 2001. Excluding the effect of
such items as foreign exchange, acquisitions and dispositions, underlying
service revenue increased 3%. The risk and insurance services segment
experienced underlying revenue growth of 15% primarily due to net new business
and the effect of higher commercial insurance premium rates, partially offset by
lower fiduciary interest income. Underlying consulting revenue increased 1%
reflecting a higher volume of business in retirement services partially offset
by a decline in management consulting. Underlying revenue declined 18% in the
investment management segment primarily due to a reduction in average assets
under management which declined 15% from 2001.
Operating expenses increased 1% in 2002 compared to 2001, which included charges
related to September 11 and amortization of goodwill. Excluding these items, as
well as the effect of foreign exchange, acquisitions and dispositions,
underlying expenses increased 4% from the prior year. The increase is primarily
due to increased compensation and benefits costs in the risk and insurance
services segment commensurate with operating performance partially offset by
reduced incentive compensation and lower volume related expenses in the
investment management segment.
In 2001, operating revenue declined 4%. The decrease resulted from a decline in
revenue in the investment management segment due largely to lower assets under
management on which fees are earned and an investment valuation charge related
to an other than temporary decline in Putnam's investment in Bipop, partially
offset by a higher volume of business in the risk and insurance services
segment. Excluding the effect of such items as foreign exchange, acquisitions
and dispositions, underlying service revenue declined approximately 1% compared
with 2000. Underlying revenue decreased 19% in the investment management segment
as the level of average assets under management declined in 2001, primarily as a
result of a reduction in the equity market levels. The risk and insurance
services segment experienced underlying revenue growth of approximately 10%
primarily due to the impact of higher commercial insurance premium rates and net
new business development, partially offset by lower fiduciary interest income.
Underlying consulting revenue grew 3% for the year reflecting a higher volume of
business in retirement services, health care and group benefits and economic
consulting offset by a decline in management consulting.
Operating expenses were essentially unchanged in 2001 compared to 2000.
Underlying expenses, excluding the effect of foreign exchange, acquisitions and
dispositions, and the impact of charges related to September 11, decreased 2%
from the prior year. The decrease relates primarily to lower incentive
compensation in the investment management segment and a reduction in
discretionary expenses in all segments partially offset by expenses associated
with a higher volume of business in the risk and insurance services segment.
Expenses were also reduced by approximately $40 million of incremental net
consolidation savings associated with the Sedgwick Group plc ("Sedgwick")
integration, primarily in risk and insurance services.
In 2001, MMC recorded pretax charges of $187 million, net of insurance
recoveries, related to the events of September 11 and the subsequent impact on
business conditions. The components of this charge are discussed further in the
section of this MD&A entitled Charges Related to September 11 and Special
Credits.
23
RISK AND INSURANCE SERVICES
The operations within this segment consist of risk and insurance services as
broker, agent or consultant for insureds, insurance underwriters and other
brokers on a worldwide basis. These services are provided by Marsh Inc.
("Marsh"), which delivers risk and insurance services and solutions to clients
through its various subsidiaries and affiliates. Risk management, insurance
broking, financial solutions and insurance program management services are
provided for businesses, public entities, associations, professional services
organizations and private clients under the Marsh name. Reinsurance broking,
catastrophe and financial modeling services and related advisory functions are
conducted for insurance and reinsurance companies, principally under the Guy
Carpenter name. Underwriting management services are performed for a wide range
of clients under various names. In addition, MMC Capital provides services
principally in connection with originating, structuring and managing insurance,
financial services and other industry-focused investments.
The services provided within this segment include the identification, analysis,
estimation, mitigation, financing and transfer of risks that arise from client
operations. These risks relate to damage to property, various liability
exposures, and other factors that could result in financial loss, including
large and complex risks that require access to world insurance and financial
markets. The risks addressed by Marsh's operating units go beyond traditional
property-liability areas to include a widening range of exposures. Major
examples of these risks include employment practices liability, the launch and
operation of rockets and spacecraft, the development and operation of technology
resources (such as computers, communications networks and websites), the theft
or loss of intellectual property, copyright infringement, the remediation of
environmental pollution, merger and acquisition issues, the interruption of
revenue streams derived from leasing and credit operations, political risks and
various other financial, strategic and operating exposures.
Marsh's subsidiaries provide a broad spectrum of services requiring expertise in
multiple disciplines: risk identification, estimation and mitigation; conducting
negotiations and placement transactions with the worldwide insurance and capital
markets; gaining knowledge of specific insurance product lines and technical
aspects of client operations, industries and fields of business; actuarial
analysis; and understanding the regulatory and legal environments of various
countries. Marsh provides advice on addressing client exposures, which includes
structuring programs for retaining, mitigating, financing, and transferring the
risks in combinations that vary according to the risk profiles, requirements and
preferences of clients. Specific professional functions provided in this process
include loss-control services, the placement of client risks with the worldwide
insurance and capital markets (risk transfer), the development of alternative
risk financing methods, establishment and management of specialized insurance
companies owned by clients ("captive insurance companies"), claims collection,
injury management and other insurance and risk related services.
Reinsurance services are provided to insurance and reinsurance companies and
other risk assumption entities by Guy Carpenter and primarily involve acting as
a broker or intermediary on all classes of reinsurance. The predominant lines
addressed are property and casualty. In addition, reinsurance activities include
specialty lines such as professional liability, medical malpractice, accident,
life and health. Services include providing advice, placing coverages with
reinsurance markets, arranging risk-transfer financing with capital markets, and
furnishing related services such as actuarial, financial and regulatory
consulting, portfolio analysis, catastrophe modeling and claims services. An
insurance or reinsurance company may seek reinsurance or other risk-transfer
financing on all or a portion of the risks it insures.
Marsh provides underwriting management services to insurers in the United
States, Canada and the United Kingdom, primarily for professional liability
coverages. These services are provided under various names apart from Marsh.
Marsh's Affinity and Private Client Practices unit provides advice and program
services to corporate, association and individual clients in North America and
Europe. Marsh Affinity provides associations with the design, marketing and
administration of a variety of insurance-related products purchased by the
association members. Marsh Affinity offers services and administration to
corporations for employee voluntary payroll deduction programs and insurance-
and benefit-related programs. Marsh's Private Client Services practice markets
specialized risk and insurance programs to high net worth individuals.
MMC Capital, Inc. is a private equity investment firm that manages fund families
focused on distinct industry sectors. It is an advisor to The Trident
Partnership L.P., a private investment partnership formed in 1994 with capital
commitments of $660 million, and Trident II, L.P. formed in 1999 with $1.4
billion in capital commitments for investments in insurance, financial services
and related industries. MMC Capital also is the advisor to funds which invest in
technology, communications and information companies primarily that support the
financial services sector. Investors in these funds include MMC Capital's
corporate parent and other investors. In response to Marsh's client needs, MMC
Capital helped develop an additional source of insurance and reinsurance
capacity after September 11 through the formation of AXIS Capital Holdings
("AXIS"). AXIS had an initial capitalization of $1.6 billion, which included a
$250 million investment by Trident II and a $100 million direct investment by
MMC, and began underwriting in Bermuda during the fourth quarter of 2001.
Revenue attributable to the risk and insurance services segment consists
primarily of fees paid by clients; commissions and fees paid by insurance and
reinsurance companies; compensation for billing and related services, in the
form of interest income on funds held in a fiduciary capacity for others, such
as premiums and claims proceeds; placement service revenue from insurers; and
compensation for services provided in connection with the organization,
structuring and management of insurance, financial services and other
industry-focused investments, including fees and dividends, as well as
appreciation or depreciation that has been realized on sales of holdings in such
entities.
Revenue generated by the risk and insurance services segment is fundamentally
derived from the value of the services provided to clients and insurance
markets. These revenues are affected by premium rate levels in the property and
casualty and employee benefits insurance markets and available insurance
capacity, since compensation is frequently related to the premiums paid by
insureds. In many cases, compensation may be negotiated in advance based upon
the estimated value of the services to be performed. Revenue is also affected by
fluctuations in the amount of risk retained by insurance and reinsurance clients
themselves and by insured values, the development of new products, markets and
services, new and lost business, merging of clients and the volume of business
from new and existing clients, as well as by the level of interest realized on
the investment of fiduciary funds. Revenue and fees also may be received from
originating, structuring and managing insurance, financial services and other
industry-focused investments, as well as income derived from investments made by
MMC. Placement service revenue includes payments or allowances by insurance
companies based upon such factors as the overall volume of business placed by
the broker with that insurer, the aggregate commissions paid by the insurer for
that business during specific periods, or the profitability or loss to the
insurer of the risks placed. This revenue reflects compensation for services
provided by brokers to the insurance market. These services include new product
development, the development and provision of technology, administration, and
the delivery of information on developments among broad client segments and the
insurance markets.
Revenues vary from quarter to quarter as a result of the timing of policy
renewals, the net effect of new and lost business, achievement of contingent
compensation thresholds, interest and foreign exchange rate fluctuations and the
realization of revenue from investments, whereas expenses tend to be more
uniform throughout the year.
24
The results of operations for the risk and insurance services segment are
presented below:
================================================================================
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
REVENUE $5,910 $5,152 $4,780
EXPENSE(a) 4,420 4,013 3,836
- --------------------------------------------------------------------------------
OPERATING INCOME $1,490 $1,139 $ 944
================================================================================
OPERATING INCOME MARGIN 25.2% 22.1% 19.7%
================================================================================
(a) 2001 expense excludes charges related to September 11 and special credits
which are detailed below.
REVENUE
Revenue for the risk and insurance services segment grew 15% over 2001. In 2002,
revenue includes $18 million resulting from an increase in the valuation of an
investment in AXIS Capital Holdings held by Trident II, a private equity fund.
Excluding the effect of such items as foreign exchange, acquisitions and
dispositions and investment gains and losses, underlying revenue grew 15%
primarily reflecting net new business and higher premium rates, offset by lower
fiduciary interest income. In 2002, underlying revenue grew 16% in risk
management and insurance broking, which represents approximately three quarters
of risk and insurance services segment revenue, 21% in reinsurance broking and
services, and 6% in related insurance services.
Within risk management and insurance broking underlying revenue increased 17% in
the United States, 15% in Europe and 19% in other geographies resulting from net
new business and the effect of higher premium rates partially offset by lower
fiduciary interest income. Over the past several 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 has been reduced and
rates have increased. The size of the increases varies according to product line
and clients' loss experience, which reflects a dynamic and changing marketplace.
While some moderation in insurance rate increases is occurring in property
lines, the difficult market is expected to continue in 2003, particularly for
many liability coverages.
Revenue for the risk and insurance services segment increased 8% in 2001 over
2000. Excluding the effects of such items as foreign exchange, acquisitions and
dispositions and investment gains and losses, underlying revenue rose 10%
reflecting net new business and the effect of higher premium rates offset by
lower fiduciary interest income. Underlying revenue for risk management and
insurance broking services, which represented about three quarters of risk and
insurance services, grew approximately 9% over 2000 and increased 13% in the
reinsurance broking and services business, and 12% in related insurance
services.
EXPENSE
In 2002, risk and insurance services expenses increased 10% over prior year.
Excluding the effect of such items as foreign exchange, acquisitions and
dispositions and the change in accounting for goodwill, underlying expenses
increased 12% from 2001 primarily reflecting increased incentive compensation,
higher benefit costs and increased costs due to a higher volume of business.
Risk and insurance services expenses increased 5% in 2001. Underlying expenses
increased approximately 7% from 2000 primarily reflecting staff growth and other
costs associated with a higher volume of business, partially offset by the
realization of $40 million of incremental net integration savings related to the
Sedgwick transaction.
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 and are not included in
the segment's operating expenses.
INVESTMENT MANAGEMENT
The operations within the investment management segment consist of services
primarily under the Putnam name. The services, which are performed principally
in the United States, include securities investment advisory and management
services consisting of investment research and management, and accounting and
related services for a group of publicly held investment companies (the "Putnam
Funds"). A number of the open-end funds serve as funding vehicles for variable
insurance contracts. Investment management services are also provided on a
separately managed or commingled basis to individuals, corporate profit-sharing
and pension funds, state and other governmental and public employee retirement
funds, university endowment funds, charitable foundations, collective investment
vehicles (both U.S. and non-U.S.) and other domestic and foreign institutional
accounts. Putnam serves as transfer agent, dividend disbursing agent, registrar
and custodian for the Putnam Funds and provides custody services to several
external clients. In addition, Putnam provides administrative and trustee (or
custodial) services including participant accounting, plan administration and
transfer agent services for employee benefit plans (in particular defined
contribution 401(k) plans), IRAs and other clients for which it receives
compensation pursuant to service and trust or custodian contracts with plan
sponsors and the Putnam Funds. Putnam also acts as principal underwriter of the
shares of the open-end Putnam Funds, selling primarily through independent
broker/dealers, financial planners and financial institutions, including banks,
and directly to certain large 401(k) plans and other institutional accounts.
Shares of open-end funds are generally sold at their respective net asset value
per share plus a sales charge, which varies depending on the individual fund and
the amount and class of shares purchased. Essentially all Putnam Funds are
available with a contingent deferred sales charge in lieu of a front-end load.
The related prepaid dealer commissions initially paid by Putnam to
broker/dealers for distributing such funds can be recovered through charges and
fees received over a number of years.
Putnam's revenue is derived primarily from investment management and 12b-1 fees
received from the Putnam Funds and investment management fees for institutional
accounts. The investment management services provided by Putnam are performed
pursuant to advisory contracts. The amount of the fees varies depending on the
individual mutual fund or account and is usually based upon a sliding scale in
relation to the level of assets under management and, in certain instances, is
also based on investment performance. The management of Putnam and the trustees
of the Putnam Funds regularly review the fund fee structure in light of fund
performance, the level and range of services provided, industry conditions and
other relevant factors. Contracts with the Putnam Funds continue in effect only
so long as approved, at least annually, by their shareholders or by the Putnam
Funds' trustees. The termination of one or more of these contracts, or other
advisory contracts, could have a material adverse effect on Putnam's results of
operations. Putnam also receives compensation for providing certain shareholder
and custody services.
Putnam has a minority interest in Thomas H. Lee Partners ("THL"), a private
equity investment firm. In addition, Putnam and THL formed a joint venture
entity, TH Lee, Putnam Capital ("THLPC") of which Putnam owns 25%. THL and THLPC
offer private equity and alternative investment funds for institutional and high
net worth investors.
25
The results of operations for the investment management segment are presented
below:
================================================================================
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
REVENUE(a) $2,166 $2,409 $3,242
EXPENSE(b) 1,606 1,825 2,215
- --------------------------------------------------------------------------------
OPERATING INCOME $ 560 $ 584 $1,027
================================================================================
OPERATING INCOME MARGIN 25.9% 24.2% 31.7%
================================================================================
(a) Includes investment valuation charge of $222 million in 2001, recorded as a
reduction of revenue. Excluding this charge, operating income margin was
30.5%.
(b) 2001 expense excludes charges related to September 11, which are detailed
below.
REVENUE
In 2002, Putnam's revenue decreased 10% compared with prior year. Underlying
revenue, which excludes a contractual payment from Putnam's Italian joint
venture partner and investment gains and losses, declined 18% reflecting a
decline in the level of average assets under management on which management fees
are earned. Assets under management averaged $279 billion in 2002, a 15%
decrease compared with $328 billion managed in 2001. Assets under management
aggregated $251 billion at December 31, 2002 compared with $315 billion at
December 31, 2001. The decline in assets under management during 2002 resulted
from market declines as well as net redemptions of $10.3 billion, which includes
reinvested dividends.
Putnam's revenue decreased 26% in 2001 reflecting an investment valuation charge
and a decline in the level of average assets under management on which
management fees are earned. Underlying revenue declined 19%. Assets under
management averaged $328 billion in 2001, a 17% decrease compared with the $397
billion managed in 2000. Assets under management aggregated $315 billion at
December 31, 2001 compared with $370 billion at December 31, 2000, as a $66.5
billion decrease resulting from a reduction in equity market levels was
partially offset by $11.5 billion of net new sales, including reinvested
dividends.
In 2000, MMC entered into an agreement to purchase a minority investment in the
publicly traded common stock of Bipop as part of a new agreement that expanded
the companies' existing joint venture in Italy, and Putnam became the exclusive
investment management partner for Bipop's planned expansion into other parts of
Western Europe. The Bipop common shares subsequently declined in value. MMC
determined this decline was other than temporary, and in the fourth quarter of
2001, recorded a pretax charge of $222 million to write down the cost basis of
the investment to its fair value. In 2002, Bipop was merged with Banca di Roma,
the combined businesses were reorganized and the names of the successor
companies were changed. As a result of these actions Putnam's initial holding in
Bipop is now comprised of common shares in Fineco S.p.A. ("Fineco") and
Capitalia S.p.A. In the fourth quarter of 2002, MMC recorded a pretax investment
valuation charge of $20 million for an other than temporary decline in the value
of Fineco.
EXPENSE
Putnam's expenses declined 12% in 2002 and 17% in 2001 primarily due to lower
incentive compensation reflecting the current operating environment. In 2002,
the expense reductions were partially offset by the write-down of certain assets
from Putnam's acquisition of a minority interest in Thomas H. Lee Partners, L.P.
("TH Lee"), a private equity business. TH Lee is the general partner of Thomas
H. Lee Private Equity Fund IV, L.P. ("Fund IV"). In the third quarter of 2002,
Putnam determined that the acquired performance fee assets related to Fund IV
may not be fully recoverable based on expected cash flows from Fund IV. The net
impact of the write-down on Putnam's expenses was $32 million.
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 and are not included in the segment's operating expenses.
Year-end and average assets under management are presented below:
================================================================================
(IN BILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
MUTUAL FUNDS:
Growth Equity $ 45 $ 77 $115
Blend Equity 33 45 57
Value Equity 40 54 57
Fixed Income 46 43 40
- --------------------------------------------------------------------------------
164 219 269
- --------------------------------------------------------------------------------
INSTITUTIONAL:
Equity 66 79 86
Fixed Income 21 17 15
- --------------------------------------------------------------------------------
87 96 101
- --------------------------------------------------------------------------------
YEAR-END ASSETS $251 $315 $370
================================================================================
YEAR-END ASSETS FROM
NON-U.S. INVESTORS $ 33 $ 30 $ 31
================================================================================
AVERAGE ASSETS $279 $328 $397
================================================================================
The categories of mutual fund assets reflect style designations aligned with
each fund's prospectus. All prior year amounts have been reclassified to conform
with the current investment mandate for each product.
The 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 declined in 2002 for the third consecutive year after several years of
substantial growth prior to 2000. Furthermore, in 2002, the mutual fund industry
had net redemptions in equity funds for the first time in 14 years. The
volatility in the equity markets contributed to the decline in assets under
management and, accordingly, to the reduction of revenue recognized by Putnam. A
continued decline in general market levels will reduce future 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, 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 significant changes in bond and stock market valuations.
Putnam provides individual and institutional investors with a broad range of
both 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 2002, assets held in equity securities represented 73% of assets
under management, compared with 81% in 2001 and 85% in 2000, while investments
in fixed income products represented 27%, compared with 19% in 2001 and 15% in
2000.
26
CONSULTING
Through Mercer Inc. ("Mercer") the operations within this segment provide
consulting and related services from locations around the world, primarily to
business organizations, in the areas of:
Retirement Services including retirement consulting, administration and
investment consulting;
Health Care & Group Benefits consulting;
Human Capital consulting including performance, measurement and rewards,
communication and human resource operations;
Management and Organizational Change consulting comprising strategy,
operations, organizational change, leadership and organizational design;
and
Economic consulting.
Mercer Human Resource Consulting provides professional advice and services to
corporate, government and institutional clients in more than 40 countries and
territories in North and South America, Europe, Asia, Australia and New Zealand.
Consultants help organizations understand, develop, execute and measure
retirement, health care and group benefits and human capital programs, policies
and strategies.
Mercer Management Consulting provides advice and assistance on issues of
business strategy and operational execution, primarily to large corporations in
North America, Europe and Asia. Consultants help clients anticipate and realize
future sources of value growth based on insights into rapidly changing customer
priorities, economics and markets. Mercer Management Consulting also assists its
clients in the implementation of their strategies. Under the Lippincott Mercer
name, Mercer Management Consulting advises leading corporations on issues
relating to brand, corporate identity and image.
Mercer Delta Consulting works with senior executives and CEOs of major
corporations and other institutions on organizational design and the leadership
of organizational change.
National Economic Research Associates ("NERA") serves law firms, corporations,
trade associations and governmental agencies. NERA provides research and
analysis of economic and financial issues arising in competition, regulation,
finance, public policy, litigation and management. NERA's auction practice
advises clients on the structuring and operation of large scale auctions, such
as telecommunications spectrum auctions. NERA also advises on transfer pricing.
The major component of Mercer revenue is fees paid by clients for advice and
services. In addition, commission revenue is received from insurance companies
for the placement of individual and group insurance contracts, primarily life,
health and accident coverages. The Australian retirement trust business charges
asset-based fees on invested assets. A relatively small amount of revenue is
derived from brokerage commissions in connection with a registered securities
broker dealer.
Revenue in the consulting business is affected by, among other things, economic
conditions around the world, including changes in clients' industries and
markets. Furthermore, revenue is subject to the introduction of new products and
services, broad trends in employee demographics, the effect of government
policies and regulations, market valuations and interest and foreign exchange
rate fluctuations.
The results of operations for the consulting segment are presented below:
================================================================================
(IN MILLIONS OF DOLLARS) 2002 2001(b) 2000(b)
- --------------------------------------------------------------------------------
REVENUE $2,364 $2,308 $2,286
EXPENSE(a) 2,038 1,995 1,974
- --------------------------------------------------------------------------------
OPERATING INCOME $ 326 $ 313 $ 312
================================================================================
OPERATING INCOME MARGIN 13.8% 13.6% 13.6%
================================================================================
(a) 2001 expense excludes charges related to September 11 and special credits,
which are detailed below.
(b) Revenue and expense for 2001 and 2000 reflect the reclassification of
reimbursed (out-of-pocket) expenses to conform with current year
presentation.
REVENUE
Consulting services revenue increased 2% in 2002, reflecting consistent growth
from retirement services along with improving trends from other practices.
Excluding the effect of such items as foreign exchange, acquisitions and
dispositions, underlying consulting revenue increased 1% in 2002. Underlying
revenue from retirement services, Mercer's largest practice, grew by 7% over
2001 primarily due to an increased provision of advice on retirement issues and
greater interest by clients in managing retirement programs on a global basis.
Underlying revenue also grew 15% in economic consulting and 4% in health care
and group benefits consulting. These increases were partially offset by
decreases of 19% in management consulting and 9% in human capital consulting.
Consulting services revenue increased 1% in 2001 reflecting mixed results in the
group's practices amid difficult market conditions. Excluding the effect of
foreign exchange, acquisitions and dispositions, consulting revenue increased
approximately 3% in 2001. Retirement services revenue grew by 10% over 2000
primarily due to a higher volume of business in this practice line in 2001.
Underlying revenue also grew 11% in economic consulting and 7% in health care
and group benefits consulting. These increases were offset by a 21% decline in
management consulting.
EXPENSE
Consulting services expenses increased 2% in 2002. Excluding the effect of such
items as foreign exchange, acquisitions and dispositions and the change in
accounting for goodwill, expenses increased 2% due primarily to increased
compensation costs.
Consulting services expenses increased 1% in 2001. Excluding the effect of
foreign exchange, acquisitions and dispositions, expenses increased 3% in 2001
reflecting the effect of staff increases in the growing practices principally
outside the United States, offset in part by lower discretionary spending.
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 and are not included in the segment's operating 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 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:
================================================================================
(IN MILLIONS OF DOLLARS) 2001 2000
- --------------------------------------------------------------------------------
REVENUE:
As Previously Reported $2,160 $2,135
Reimbursements 148 151
- --------------------------------------------------------------------------------
After Reclassification $2,308 $2,286
- --------------------------------------------------------------------------------
EXPENSE:
As Previously Reported $1,847 $1,823
Reimbursements 148 151
- --------------------------------------------------------------------------------
After Reclassification $1,995 $1,974
- --------------------------------------------------------------------------------
OPERATING INCOME $ 313 $ 312
================================================================================
OPERATING INCOME MARGIN:
As Previously Reported 14.5% 14.6%
After Reclassification 13.6% 13.6%
================================================================================
27
CORPORATE EXPENSES
Corporate expenses increased to $123 million in 2002 from $116 million in 2001
due to increased compensation costs and an increase in headcount.
Corporate expenses decreased to $116 million in 2001 from $127 million in 2000
due to nonrecurring costs incurred in 2000 associated with certain corporate
initiatives as well as nonrecurring fees related to the integration of Sedgwick.
Compensation and benefits of $1 million related to the recovery efforts that
were recorded as part of the charges related to September 11 and are not
included in corporate expenses.
CHARGES RELATED TO SEPTEMBER 11 AND SPECIAL CREDITS
MMC was directly and profoundly impacted by the September 11, 2001 terrorist
attacks. As a result of the destruction of the World Trade Center ("WTC"), 295
MMC colleagues were lost. MMC occupied a combined total of fifteen floors in the
two towers of the WTC, that housed approximately 1,900 employees and outside
consultants. The risk and insurance services segment was the most directly
impacted by this event. The WTC housed the center for information technology and
finance support of Marsh, where most of the lost colleagues were employed. The
WTC also served as the headquarters for Guy Carpenter, Marsh's reinsurance
intermediary. Employees were relocated to various sites in midtown Manhattan and
the New York metropolitan area. In addition, certain support functions
previously performed in the WTC were distributed among regional processing
centers throughout the United States. A small number of colleagues from the
consulting business were located at the WTC, all of whom were relocated to other
sites. Boston-based Putnam Investments, MMC's investment management subsidiary,
suffered disruptions due to building evacuations and the closing of the equity
markets. MMC successfully implemented long-standing disaster recovery plans. All
critical business functions and systems were recovered.
As a result of the events of September 11 and the subsequent business
environment, MMC recorded pretax charges totaling $187 million in 2001. Services
and benefits provided to victims' families and employees, such as compensation
and benefit continuance, counseling and a commitment to the MMC Victims Relief
Fund, amounted to $69 million of the charges. Write-offs or impairments of
intangibles and other assets were $32 million and charges related to disruption
of business operations amounted to $25 million. The remaining liability related
to these charges was $3 million at December 31, 2002, primarily related to
providing continued access to MMC's health and benefit plans for victims'
families. The above charges are net of insurance recoveries of $126 million,
which were collected prior to December 31, 2002.
As a result of weakening business conditions, which were exacerbated by the
events of September 11, a charge of $61 million was recorded to provide for
staff reductions and office consolidations, primarily in the consulting segment.
The charge is comprised of $44 million for severance and related benefits
affecting approximately 750 people and $17 million for future rent under
noncancelable leases. Actions under the plan were completed by September 30,
2002. Utilization of these charges is summarized in Note 12 to the consolidated
financial statements.
In the fourth quarter of 2001, MMC recorded a special credit of $13 million
attributable to changes in estimates in connection with integration and
restructuring plans provided for in prior years. Changes in estimated costs
resulted in a reversal of reserves of $5 million for employee termination costs
and $2 million related to office consolidations associated with the Sedgwick
transaction and a $6 million reversal of reserves related to office
consolidation costs associated with the Johnson & Higgins ("J&H") combination.
The combined impact of the charges related to September 11 and the special
credit was a $.19 reduction in diluted net income per share for the year.
In the fourth quarter of 2000, MMC recorded a net special credit of $2 million
attributable to changes in estimates in connection with integration and
restructuring plans from prior years. Changes in estimated costs resulted in a
special charge of $7 million for employee termination costs associated with the
Sedgwick transaction and a reversal of reserves of $9 million related to office
consolidation costs, of which $7 million represented lease abandonment costs in
London and $2 million represented office consolidation costs associated with the
J&H combination. The resulting net special credit had no effect on diluted net
income per share.
INTEREST
Interest income earned on corporate funds was $19 million in 2002 compared with
$23 million in 2001. Interest expense decreased to $160 million in 2002 from
$196 million in 2001. The decrease in interest income was primarily due to lower
average interest rates in 2002 compared with 2001. The decrease in interest
expense was primarily due to lower average interest rates, partially offset by
an increase in the average debt outstanding. MMC's March 2002 issuance of
long-term debt is discussed in detail under the Financing Cash Flows of the
Liquidity and Capital Resources section of this MD&A.
Interest income earned on corporate funds was $23 million in 2001, unchanged
from 2000. Interest expense decreased to $196 million in 2001 from $247 million
in 2000. The decrease in interest expense was primarily due to lower average
interest rates in 2001 and a reduced level of outstanding debt compared with
2000.
INCOME TAXES
MMC's consolidated effective tax rate was 35.0% in 2002 compared with 37.7% in
2001. In 2001, the underlying tax rate, excluding the effect of the special
credit, charges related to September 11 and the investment valuation charge, was
37.5%. The decrease in the effective rate in 2002 compared to 2001 results from
a combination of the change in accounting for goodwill and the geographic mix of
MMC's businesses. The reduction in the underlying 2001 tax rate compared with
the 2000 rate of 38.5% primarily reflects lower state and non-U.S. taxes from
implementing tax efficient structures worldwide. The overall tax rates in 2001
and 2000 are higher than the U.S. Federal statutory rate primarily because of
the non-deductibility of goodwill and provisions for state and local income
taxes. Due to the events of September 11 and the government's subsequent
directives, MMC's estimated tax payments related to the third quarter of 2001
were paid in the first quarter of 2002, resulting in a larger balance of Accrued
income taxes at December 31, 2001 compared to the current year.
28
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOWS
MMC anticipates that funds generated from operations will be sufficient to meet
its foreseeable recurring working capital 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. These risks are discussed in the
operating segment sections of this MD&A and the Business section of Part I of
Form 10-K.
MMC's cash and cash equivalents aggregated $546 million at the end of 2002, an
increase of $9 million from the end of 2001.
MMC generated $1.3 billion of cash from operations in 2002. Cash flow from
operations includes the impact of contributions to retirement plans of $460
million as well as rental payments of $406 million under operating leases. MMC's
commitment for future payments under operating leases is disclosed in Note 9 to
the consolidated financial statements. MMC generated $1.5 billion of cash from
operations in 2001. Cash flow from operations includes $367 million of net
rental payments under operating leases during 2001.
Included in the cash flows from operations are the net cash payments related to
the 1999 and 1997 merger-related charges. These charges were related to business
combinations with Sedgwick and J&H. Related cash outlays of $34 million, $82
million and $179 million were made in 2002, 2001 and 2000, respectively.
As a result of the events of September 11, 2001 and the subsequent business
environment, MMC recorded pretax charges in 2001 totaling $187 million. The net
charges included asset impairments of approximately $32 million and
restructuring costs of $61 million. The impact of the events of September 11 on
MMC's cash flow after the effect of insurance recoveries and tax benefits has
not been significant. MMC does not expect any material uninsured cash outflow
related to this event in excess of the charges recognized in the consolidated
financial statements at December 31, 2001. Recoveries under certain provisions
of MMC's insurance policies are contingent upon the occurrence of future events.
Such provisions include replacement value coverage of fixed assets and leasehold
improvements, which is contingent on actual replacement of the lost assets and
reimbursement of incremental rent cost for replacement office facilities. Such
recoveries are not recorded in the financial statements until all contingencies
have been satisfied and the amount can be reasonably estimated.
RETIREMENT PLAN FUNDING
Information about MMC's pension obligations, plan assets and net periodic
pension costs are discussed in Note 7 to the consolidated financial statements.
The amounts included in this disclosure are dependent upon the use of estimates
as discussed under Management's Discussion of Critical Accounting Policies of
this MD&A. During 2002, due primarily to negative returns on plan assets and
lower discount rates, the net funded status of the U.S. and significant non-U.S.
pension plans declined by $273 million and $475 million, respectively. Benefit
obligations of the U.S. and significant non-U.S. pension plans exceeded the fair
value of plan assets by $264 million and $742 million, respectively, at December
31, 2002. The funded status at December 31, 2002 includes the effects of
contributions made during the year and the plan amendments discussed below.
During 2002, MMC contributed approximately $144 million to the U.S. plans and
$316 million to the significant non-U.S. plans, compared with $26 million for
U.S. plans and $52 million for significant non-U.S. plans in 2001. These
contributions resulted in an increase in prepaid pension expense for certain
plans, which is included in Other assets in the Consolidated Balance Sheets. The
minimum pension liability related to any plan is recorded in Other liabilities
in the Consolidated Balance Sheets. There currently is no ERISA funding
requirement for the U.S. plan in 2002 or in 2003. Funding requirements for
non-U.S. plans vary country by country. Contribution rates are determined by the
local foreign actuaries based on local funding practices and requirements.
Funding amounts may be influenced by future asset performance, discount rates
and other variables impacting the assets and/or liabilities of the plan. In
addition, amounts funded in the future, to the extent not required under
regulatory requirements, may be affected by alternative uses of MMC's cash
flows, including dividends, investments and share repurchases.
The assets and liabilities of the U.S. defined pension plans were re-measured at
July 1, 2002 to reflect a change in substantive plans as defined by SFAS No. 87,
"Employers' Accounting for Pensions" and a reduction of the expected rate of
return on plan assets to 9.25% from 10%. Discretionary cost of living increases
have been excluded from the substantive plans for accounting purposes because
MMC no longer has the intention of granting such increases. The change in the
substantive plans reduced the projected benefit obligation by approximately $273
million. Effective January 1, 2003, MMC has further reduced the expected rate of
return for its U.S. pension plans from 9.25% to 8.75% and the weighted average
rate of return for the significant non-U.S. plans declined from 8.9% to
approximately 8.3%.
The unrecognized actuarial losses for U.S. plans were $784 million and $175
million as of December 31, 2002 and 2001, respectively. The unrecognized
actuarial losses for the non-U.S. plans were $1,241 million and $423 million as
of December 31, 2002 and 2001, respectively. These unrecognized net actuarial
losses may result in increases in the future net periodic pension costs,
depending on several factors, including whether such losses at each measurement
date exceed the corridor in accordance with SFAS No. 87. MMC does not expect the
change in net periodic pension cost to have a material effect on the overall
results of operations in 2003.
The target asset allocation for the U.S. plans is 65% equities, 30% bonds and 5%
real estate and for the U.K. plans is 60% equities and 40% bonds which
approximates the actual portfolio allocation in 2002 and 2001. MMC uses
threshold based portfolio rebalancing to ensure the actual portfolio remains
consistent with target allocations.
FINANCING CASH FLOWS
Net cash used for financing activities amounted to $1.0 billion in 2002,
compared with $536 million in 2001, resulting primarily from share repurchases
and the payment of dividends to shareholders.
MMC uses commercial paper borrowing to manage its short-term liquidity. MMC
currently maintains and expects to continue to maintain revolving credit
facilities in excess of 100% of expected commercial paper borrowing levels to
ensure liquidity is maintained in the event of market disruptions. Commercial
paper borrowings of $750 million at December 31, 2002 and $1.0 billion at
December 31, 2001 have been classified as Long-term debt in the Consolidated
Balance Sheets based on MMC's intent and ability to refinance these obligations
on a long-term basis. The revolving credit facilities are discussed below.
During 2002, MMC improved liquidity and extended the average maturity of
outstanding debt through the issuance of $750 million of long-term senior notes
which were used to pay down commercial paper borrowings. At December 31, 2002,
commercial paper balances decreased $484 million compared to the prior year,
resulting from the issuance of the senior notes, partially offset by
approximately $266 million of additional borrowing.
29
During 2001, commercial paper borrowing increased by $410 million to fund
investments and share repurchases. Debt repayments amounted to $26 million in
2001. Other borrowings amounted to $23 million in 2001, for a net increase in
debt of approximately $407 million during the year.
In June 2002, MMC arranged a $1.4 billion revolving credit facility. The new
credit facility replaced a similar facility that expired during 2002. Borrowing
under the new facility, which expires in June 2003, is at market rates of
interest. The facility supports MMC's commercial paper borrowing. No amounts
were outstanding under this facility at December 31, 2002.
During 2002, MMC executed a revolving credit facility with several banks to
support its commercial paper borrowing. This noncancelable facility, which
expires in June 2007, provides that MMC may borrow up to $1.0 billion at market
rates of interest, which vary depending upon the level of usage of the facility
and MMC's credit ratings. No amounts were outstanding under this facility at
December 31, 2002.
MMC also maintains other credit facilities with various banks, primarily related
to operations located outside the United States, aggregating $274 million at
December 31, 2002 and $214 million at December 31, 2001. Approximately $35
million was outstanding under these facilities at December 31, 2002.
MMC's revolving credit and other debt agreements contain covenants which
include, in some cases, restrictions on consolidations or mergers, the sale or
pledging of assets and minimum net worth requirements. MMC must maintain a
consolidated net worth of at least $3.5 billion under the most restrictive of
its net worth covenants.
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 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. In January 2003, MMC dedesignated the remaining fair value
hedge on each of the Notes and settled the remaining swaps. The cumulative
amount of fair value adjustments previously recognized is being amortized over
the remaining life of the related Notes. 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 4.0% for the Notes due in 2007
and 5.1% for the Notes due in 2012.
In February 2003, MMC issued $250 million of 3.625% Senior Notes due 2008 and
$250 million of 4.85% Senior Notes due 2013. The net proceeds from these notes
was used to pay down commercial paper.
In 2002, MMC continued to repurchase shares of its common stock for treasury as
well as to meet requirements for issuance of shares for its various stock
compensation and benefit programs. During 2002, MMC repurchased 24.2 million
shares for total consideration of $1.2 billion, compared with 15.6 million
shares for total consideration of $763 million in 2001.
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 currently plans to continue to
repurchase shares in 2003, subject to market conditions.
Dividends paid by MMC amounted to $593 million in 2002 ($1.09 per share) and
$567 million in 2001 ($1.03 per share).
INVESTING CASH FLOWS
Cash used for investing activities amounted to $273 million in 2002 and $655
million in 2001. Cash used for acquisitions amounted to $92 million in 2002,
primarily related to several consulting businesses and $53 million in 2001,
primarily related to insurance brokerage businesses and the THL transaction.
MMC's additions to fixed assets and capitalized software, which amounted to $423
million in 2002 and $433 million in 2001, primarily related to computer
equipment purchases, the refurbishing and modernizing of office facilities and
software development costs.
In the second quarter of 2001, MMC sold certain of its London properties and
simultaneously entered into a two and one-half year leaseback arrangement for a
significant portion of the properties. Total proceeds of approximately $135
million were received.
MMC has committed to potential future investments of approximately $490 million
in connection with various MMC Capital funds and other MMC investments.
Approximately $40 million was invested in 2002 and approximately $475 million
was invested in 2001. Of the amount in 2001, $286 million was paid to purchase a
minority investment in Bipop and $100 million was used to acquire a minority
interest in AXIS. MMC expects to fund its future investment commitments, in
part, with sales proceeds from existing investments.
COMMITMENTS AND OBLIGATIONS
MMC's commitments and obligations consist of future rent payments under
operating leases (discussed in Note 9) and repayments of long-term debt
(discussed in Note 10) as well as the commitments discussed above.
30
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 to manage MMC's exposure to interest rate movements on its cash
and investments as well as interest expense on borrowings and are only executed
with counterparties of high creditworthiness.
MMC had the following investments and debt instruments subject to variable
interest rates:
================================================================================
Year Ended December 31,
(IN MILLIONS OF DOLLARS) 2002
- --------------------------------------------------------------------------------
Cash and cash equivalents invested in certificates of
deposit and time deposits (Note 1) $ 458
Fiduciary cash and investments (Note 1) $4,010
Variable rate debt outstanding (Note 10) $1,256
Notional amount of interest rate swaps (Note 10) $ 375
================================================================================
These investments and debt instruments are discussed more fully in the
above-indicated notes to the consolidated financial statements.
Based on the above balances, if short-term interest rates increase by 10% or 16
basis points, annual interest income would increase by approximately $7 million;
however, this would be partially offset by a $3 million increase in interest
expense resulting in a net increase to income before income taxes and minority
interest of $4 million.
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
At December 31, 2002, MMC had investments of approximately $410 million which
are carried at market value under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The investments are subject to risk
of changes in market value, which if determined to be other than temporary,
could result in realized impairment losses. The gross unrealized gains and
losses on the available for sale investments are discussed in Note 11. In
addition, approximately $284 million of investments primarily comprise MMC's
investments in TH Lee and certain funds managed by MMC Capital which are
accounted for using the equity method under APB Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock." MMC periodically reviews
the carrying value of such investments to determine if any valuation adjustments
are appropriate under the applicable accounting pronouncements.
In 2001, MMC entered into a series of option contracts to hedge the variability
of cash flows from forecasted sales of certain available for sale investments.
The sales are forecasted to occur over the next eight quarters. The hedge is
achieved through the use of European style put and call options, which mature on
the dates of the forecasted sales. Gains or losses on the option contracts are
deferred in other comprehensive loss until the related forecasted sales occur.
At December 31, 2002, the net increase in fair value of the option contracts of
$7 million was recorded as an asset and a reduction of Accumulated other
comprehensive loss in the Consolidated Balance Sheets.
OTHER
The insurance coverage for potential liability resulting from alleged errors and
omissions in the professional services provided by MMC includes elements of both
risk retention and risk transfer. MMC believes it has adequately reserved for
the self-insurance portion of the contingencies. Payments related to the
respective self-insured layers are made as legal fees are incurred and claims
are resolved and generally extend over a considerable number of years. The
amounts paid in that regard vary in relation to the severity of the claims and
the number of claims active in any particular year. The long-term portion of
this liability is included in Other liabilities in the Consolidated Balance
Sheets.
MANAGEMENT'S DISCUSSION OF CRITICAL
ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and judgments that affect reported amounts of assets, liabilities,
revenue and expenses and disclosure of contingent assets and liabilities.
Management considers the policies discussed below to be critical to
understanding MMC's financial statements because their application places the
most significant demands on management's judgment, and estimation about the
effect of matters that are inherently uncertain. Actual results may differ from
those estimates.
LEGAL AND OTHER LOSS 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. GAAP requires that liabilities for contingencies be recorded when it
is probable that a liability has been incurred before the balance sheet date and
the amount can be reasonably estimated. Significant management judgment is
required to comply with this guidance. MMC analyzes its litigation exposure
based on available information, including consultation with outside counsel
handling the defense of these matters, to assess its potential liability.
RETIREMENT BENEFITS
MMC maintains qualified and non-qualified defined benefit pension plans for its
U.S. and non-U.S. eligible employees. MMC's policy for funding its tax qualified
defined benefit retirement plans is to contribute amounts at least sufficient to
meet the funding requirements set forth in U.S. and international laws.
31
The determination of net periodic pension cost is based on a number of actuarial
assumptions, including an expected long-term rate of return on plan assets, the
discount rate and assumed rate of salary increase. The long-term rate of return
assumption is selected for each plan based on the facts and circumstances that
exist as of the measurement date, and the specific portfolio mix of each plan's
assets. MMC utilizes a model developed by its actuaries to assist in the setting
of this assumption. The model takes into account several factors including:
actual and target portfolio allocation; investment, administrative and trading
expenses incurred directly by the plan trust; historical portfolio performance;
relevant forward-looking economic analysis; and expected returns, variances, and
correlations for different asset classes. All returns utilized and produced by
the model are geometric averages. These measures are used to determine
probabilities using standard statistical techniques to calculate a range of
expected returns on the portfolio. MMC generally does not adjust the rate of
return assumption from year to year if, at the measurement date, it is within
the best estimate range, defined as between the 25th and 75th percentile of the
expected long-term annual returns in accordance with the "American Academy of
Actuaries Pension Practice Council Note May 2001 Selecting and Documenting
Investment Return Assumptions" and consistent with Actuarial Standards of
Practice No. 27. The historical five- and ten-year average asset returns of each
plan are also reviewed to ensure they are consistent and reasonable compared
with the best estimate range. The expected return on plan assets is determined
by applying the assumed long-term rate of return to the market-related value of
plan assets as defined by SFAS No. 87. This market-related value recognizes
investment gains or losses over a five-year period from the year in which they
occur. Investment gains or losses for this purpose are the difference between
the expected return calculated using the market-related value of assets and the
actual return based on the market value of assets. Since the market-related
value of assets recognizes gains or losses over a five-year period, the future
market-related value of the assets will be impacted as previously deferred gains
or losses are recorded.
The discount rate selected for each U.S. plan is based on Moody's Aa Long-Term
Bond yield index. This index is tested to ensure it is correlated to the plan
liabilities using a bond model with durations that match the expected payment
patterns of the plan. Discount rates for non-U.S. plans are also based on
appropriate bond indices such as the IBoxx (pound) Corporates 15-year index in
the U.K. Significant assumptions used in the calculation of net periodic pension
costs and pension liabilities are disclosed in Note 7 to the consolidated
financial statements. MMC believes the assumptions for each plan are reasonable
and appropriate and will continue to evaluate actuarial assumptions at least
annually and adjust as appropriate.
Future pension expense or credits will depend on plan provisions, future
investment performance, future assumptions and various other factors related to
the populations participating in the pension plans. Holding all other
assumptions constant, a half-percentage point change in the rate of return and
discount rate assumptions would affect net periodic pension cost for the U.S.
and U.K. plans, which comprise approximately 90% of total pension plan
liabilities, as follows:
================================================================================
0.5 Percentage 0.5 Percentage
Point Increase Point Decrease
------------------------------------------
(IN MILLIONS OF DOLLARS) U.S. U.K. U.S. U.K.
- --------------------------------------------------------------------------------
Assumed Rate of Return $(14) $(13) $14 $13
Discount Rate $(25) $(11) $16 $13
================================================================================
Changing the discount rate and leaving the other assumptions constant, may not
be representative of the impact on expense because the long-term rates of
inflation and salary increases are correlated with the discount rate.
MMC contributes to certain health care and life insurance benefits provided to
its retired employees. The cost of these postretirement benefits for employees
in the United States is accrued during the period up to the date employees are
eligible to retire, but is funded by MMC as incurred. This postretirement
liability is included in Other liabilities in the Consolidated Balance Sheets.
The key assumptions and sensitivity to changes in the assumed health care cost
trend rate are discussed in Note 7 to the consolidated financial statements.
INCOME TAXES
MMC records the estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts recorded in the Consolidated
Balance Sheets as well as operating losses and tax credit carryforwards. MMC
bases its estimate of deferred tax assets and liabilities on current laws and
rates and in certain cases, business plans and other expectations about future
outcomes. Changes in existing tax laws and rates and future business results may
affect the amount of deferred tax liabilities or the valuation of deferred tax
assets over time.
INVESTMENT VALUATION
MMC holds investments in both public and private companies, as well as certain
private equity funds managed by MMC Capital. The majority of these investments
are accounted for as available for sale securities under SFAS No. 115. Where
applicable, certain investments are accounted for under APB Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock." MMC periodically
reviews the carrying value of its investments to determine if any valuation
adjustments are appropriate under the applicable accounting pronouncements. MMC
bases its review on the facts and circumstances as they relate to each
investment. In those instances where quoted market prices are not available,
particularly for equity holdings in private companies, significant management
judgment is required to determine the appropriate value of MMC's investments.
PREPAID DEALER COMMISSIONS
Sales commissions paid by MMC to selling brokers at the time of sale of back-end
load mutual funds (Class B shares) are capitalized and amortized over the period
that the shareholder is subject to contingent deferred sales charge (typically
over six years). Distribution fees (12b-1) and contingent deferred sales charges
are recorded as revenue as earned. Should MMC lose its ability to recover
prepaid dealer commissions through distribution fees and contingent deferred
sales charges, the value of the prepaid dealer commission asset would
immediately decline. MMC periodically reviews the expected undiscounted cash
flows against the carrying value of the prepaid dealer commission balance. If
the cash flows are not sufficient to recover the carrying value of the asset,
the asset is adjusted to fair value. No such impairments were recorded in the
periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed in Note 1 to the consolidated
financial statements.
32
Marsh & McLennan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
=======================================================================================================
For the Years Ended December 31,
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE FIGURES) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Revenue:
Service revenue $ 10,373 $ 10,011 $ 10,232
Investment income (loss) 67 (142) 76
- -------------------------------------------------------------------------------------------------------
Operating revenue 10,440 9,869 10,308
- -------------------------------------------------------------------------------------------------------
Expense:
Compensation and benefits 5,199 4,877 4,941
Other operating expenses 2,967 3,055 3,190
Charges related to September 11 and special (credits) -- 174 (2)
- -------------------------------------------------------------------------------------------------------
Operating expenses 8,166 8,106 8,129
- -------------------------------------------------------------------------------------------------------
Operating income 2,274 1,763 2,179
Interest income 19 23 23
Interest expense (160) (196) (247)
- -------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 2,133 1,590 1,955
Income taxes 747 599 753
Minority interest, net of tax 21 17 21
- -------------------------------------------------------------------------------------------------------
Net income $ 1,365 $ 974 $ 1,181
=======================================================================================================
Basic net income per share $ 2.52 $ 1.77 $ 2.18
=======================================================================================================
Diluted net income per share $ 2.45 $ 1.70 $ 2.05
=======================================================================================================
Average number of shares outstanding--Basic 541 550 543
=======================================================================================================
Average number of shares outstanding--Diluted 557 572 569
=======================================================================================================
The accompanying notes are an integral part of these consolidated statements.
33
Marsh & McLennan Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
=======================================================================================================================
December 31,
(IN MILLIONS OF DOLLARS) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 546 $ 537
- -----------------------------------------------------------------------------------------------------------------------
Receivables
Commissions and fees 2,178 2,288
Advanced premiums and claims 119 188
Other 305 355
- -----------------------------------------------------------------------------------------------------------------------
2,602 2,831
Less--allowance for doubtful accounts and cancellations (124) (139)
- -----------------------------------------------------------------------------------------------------------------------
Net receivables 2,478 2,692
Prepaid dealer commissions--current portion 226 308
Other current assets 414 255
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 3,664 3,792
Goodwill and intangible assets 5,404 5,327
Fixed assets, net 1,308 1,235
Long-term investments 578 826
Prepaid dealer commissions 292 528
Other assets 2,609 2,061
- -----------------------------------------------------------------------------------------------------------------------
$13,855 $13,769
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 543 $ 757
Accounts payable and accrued liabilities 1,406 1,347
Accrued compensation and employee benefits 1,568 1,564
Accrued income taxes 194 600
Dividends payable 152 146
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,863 4,414
- -----------------------------------------------------------------------------------------------------------------------
Fiduciary liabilities 4,010 3,630
Less--cash and investments held in a fiduciary capacity (4,010) (3,630)
- -----------------------------------------------------------------------------------------------------------------------
-- --
Long-term debt 2,891 2,334
- -----------------------------------------------------------------------------------------------------------------------
Other liabilities 2,083 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 in 2002 and 2001 561 561
Additional paid-in capital 1,426 1,620
Retained earnings 4,490 3,723
Accumulated other comprehensive loss (452) (227)
- -----------------------------------------------------------------------------------------------------------------------
6,025 5,677
Less--treasury shares, at cost 22,441,817 shares in 2002 and 11,988,096 shares in 2001 (1,007) (504)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,018 5,173
- -----------------------------------------------------------------------------------------------------------------------
$13,855 $13,769
=======================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
34
Marsh & McLennan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================================================================================================
For the Years Ended December 31,
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Operating cash flows:
Net income $ 1,365 $ 974 $ 1,181
Adjustments to reconcile net income to cash generated from operations:
Depreciation of fixed assets and capitalized software 324 325 305
Amortization of goodwill and other intangible assets 35 195 183
Provision for deferred income taxes 176 (67) 175
(Gains) losses on investments (67) 142 (76)
Changes in assets and liabilities:
Net receivables 215 122 (484)
Prepaid dealer commissions 317 289 (38)
Other current assets (96) 9 10
Other assets (611) (244) (174)
Accounts payable and accrued liabilities 135 (190) (97)
Accrued compensation and employee benefits 4 (199) 276
Accrued income taxes (445) 394 226
Other liabilities (123) (248) (163)
Effect of exchange rate changes 51 (3) (26)
- ---------------------------------------------------------------------------------------------------------------------
Net cash generated from operations 1,280 1,499 1,298
- ---------------------------------------------------------------------------------------------------------------------
Financing cash flows:
Net (decrease) increase in commercial paper (484) 410 (696)
Proceeds from issuance of debt 791 23 197
Other repayments of debt (25) (26) (303)
Purchase of treasury shares (1,184) (763) (49)
Issuance of common stock 490 387 364
Dividends paid (593) (567) (514)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (1,005) (536) (1,001)
- ---------------------------------------------------------------------------------------------------------------------
Investing cash flows:
Additions to fixed assets and capitalized software (423) (433) (512)
Proceeds from sales and insurance recoveries related to fixed assets 18 182 81
Acquisitions (92) (53) (99)
Other, net 224 (351) 66
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (273) (655) (464)
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 7 (11) (21)
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 9 297 (188)
Cash and cash equivalents at beginning of year 537 240 428
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 546 $ 537 $ 240
=====================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
35
Marsh & McLennan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
=============================================================================================================================
For the Years Ended December 31,
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE FIGURES) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of year $ 561 $ 559 $ 551
Issuance of shares under stock compensation plans and
employee stock purchase plans -- 2 8
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 561 $ 561 $ 559
- -----------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year $ 1,620 $ 1,637 $ 1,214
Acquisitions -- 5 17
Issuance of shares under stock compensation plans and
employee stock purchase plans and related tax benefits (194) (22) 406
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,426 $ 1,620 $ 1,637
- -----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year $ 3,723 $ 3,323 $ 2,674
Net income(a) 1,365 974 1,181
Dividends declared--(per share amounts:
$1.11 in 2002, $1.05 in 2001 and $0.98 in 2000) (598) (574) (532)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 4,490 $ 3,723 $ 3,323
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year $ (227) $ (149) $ (75)
Foreign currency translation adjustments(b) 131 (34) (127)
Unrealized investment holding (losses) gains, net of reclassification adjustments(c) (106) (44) 56
Minimum pension liability adjustment(d) (257) 2 (3)
Net deferred gain (loss) on cash flow hedges(e) 7 (2) --
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (452) $ (227) $ (149)
- -----------------------------------------------------------------------------------------------------------------------------
TREASURY SHARES
Balance, beginning of year $ (504) $ (142) $ (194)
Purchase of treasury shares (1,184) (763) (49)
Acquisitions 10 10 --
Issuance of shares under stock compensation plans and
employee stock purchase plans 671 391 101
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $(1,007) $ (504) $ (142)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 5,018 $ 5,173 $ 5,228
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (a+b+c+d+e) $ 1,140 $ 896 $ 1,107
=============================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
36
Marsh & McLennan Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
NATURE OF OPERATIONS: Marsh & McLennan Companies, Inc. ("MMC"), a professional
services firm, is organized based on the different services that it offers.
Under this organizational structure, MMC operates in three principal business
segments: risk and insurance services, investment management and consulting. The
risk and insurance services segment provides risk management and insurance
broking, reinsurance broking and insurance 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 retirement services, human capital, health care and group benefit programs,
management consulting, organizational change and organizational design, economic
consulting and corporate identity.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include all wholly-owned and majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
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 $118 million in 2002, $165
million in 2001, and $195 million in 2000. Since fiduciary assets are not
available for corporate use, they are shown in the balance sheet as an offset to
fiduciary liabilities.
Net uncollected premiums and claims and the related payables were $11.7 billion
and $10.8 billion at December 31, 2002 and 2001, respectively. MMC is not a
principal to the contracts under which the right to receive premiums or the
right to receive reimbursement of insured losses arises. Net uncollected
premiums and claims and the related payables are, therefore, not assets and
liabilities of MMC and are not included in the accompanying Consolidated Balance
Sheets.
In certain instances, MMC advances premiums, refunds or claims to insurance
underwriters or insureds prior to collection. These advances are made from
corporate funds and are reflected in the accompanying Consolidated Balance
Sheets as receivables.
REVENUE: Risk and Insurance Services revenue includes insurance commissions,
fees for services rendered, placement service revenue from insurance carriers,
and interest income on fiduciary funds. Revenue also includes compensation for
services provided in connection with the organization, structuring and
management of insurance, financial and other industry-focused investments.
Insurance commissions and fees for risk transfer services generally are recorded
as of the effective date of the applicable policies or, in certain cases
(primarily in MMC's reinsurance and London market operations), as of the
effective date or billing date, whichever is later. Commissions are net of
policy cancellation reserves, which are estimated based on historic and current
data on cancellations.
Fees for non-risk transfer services provided to clients are recognized over the
period in which the services are provided or on a percentage of completion
basis. Fees resulting from achievement of certain performance thresholds are
recorded when such levels are attained and such fees are not subject to
forfeiture.
Investment Management revenue is derived primarily from investment management
fees and 12b-1 fees. Investment management fees are recognized as services are
provided. Mutual fund distribution fees are recognized over the period in which
the fees can be collected from the related funds, or when a contingent deferred
sales charge is triggered by a redemption. Sales of mutual fund shares are
recorded on a settlement date basis and commissions thereon are recorded on a
trade date basis. Fees resulting from achievement of specified performance
thresholds are recorded when such levels are attained and such fees are not
subject to forfeiture.
Consulting revenue includes fees paid by clients for advice and services and
commissions from insurance companies for the placement of individual and group
contracts. Fee revenue is recognized as services are provided based on the
amount of time consulting professionals expend on the engagement plus
out-of-pocket expenses, or on a percentage of completion basis for engagements
with contractual fixed fees. Insurance commissions are recorded as of the
effective date of the applicable policies.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents primarily consist of
certificates of deposit and time deposits, generally with original maturities of
three months or less.
FIXED ASSETS: Fixed assets are stated at cost less accumulated depreciation and
amortization. Expenditures for improvements are capitalized. Upon sale or
retirement, the cost and related accumulated depreciation and amortization are
removed from the accounts and any gain or loss is reflected in income.
Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation of buildings, building improvements, furniture and equipment is
provided on a straight-line basis over the estimated useful lives of these
assets. Leasehold improvements are amortized on a straight-line basis over the
periods covered by the applicable leases or the estimated useful life of the
improvement, whichever is less. MMC periodically reviews long-lived assets for
impairment whenever events or changes indicate that the carrying value of assets
may not be recoverable.
The components of fixed assets are as follows:
================================================================================
December 31,
(IN MILLIONS OF DOLLARS) 2002 2001
- --------------------------------------------------------------------------------
Furniture and equipment $ 1,323 $ 1,142
Land and buildings 466 447
Leasehold and building improvements 794 668
- --------------------------------------------------------------------------------
2,583 2,257
Less--accumulated depreciation
and amortization (1,275) (1,022)
- --------------------------------------------------------------------------------
$ 1,308 $ 1,235
================================================================================
37
GOODWILL AND OTHER INTANGIBLE ASSETS: MMC adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangibles" ("SFAS No. 142")
effective January 1, 2002. Goodwill represents acquisition costs in excess of
the fair value of net assets acquired. SFAS No. 142 changed the accounting for
goodwill from an amortization method to an impairment only approach. Goodwill is
reviewed at least annually for impairment. Other intangible assets that are not
deemed to have an indefinite life are amortized on a straight-line basis over
their estimated lives and reviewed for impairment upon the occurrence of certain
triggering events in accordance with SFAS No. 142.
PREPAID DEALER COMMISSIONS: Essentially all of the mutual funds marketed by
MMC's investment management segment are made available with a contingent
deferred sales charge in lieu of a front-end load. The related prepaid dealer
commissions, initially paid by MMC to broker/dealers for distributing such
funds, can be recovered through charges and fees received over a number of
years. The prepaid dealer commissions are generally amortized over a six-year
period adjusted for early termination in the form of contingent deferred sales
charges. MMC assesses the recoverability of prepaid dealer commissions by
comparing the expected future cash flows with recorded balances.
CAPITALIZED SOFTWARE COSTS: MMC capitalizes certain costs to develop, purchase
or modify software for the internal use of MMC. These costs are amortized on a
straight-line basis over periods ranging from three to ten years. Computer
software costs of $251 million and $227 million, net of accumulated amortization
of $319 million and $226 million at December 31, 2002 and 2001, respectively,
are included in Other assets in the Consolidated Balance Sheets.
INCOME TAXES: Income taxes provided reflect the current and deferred tax
consequences of events that have been recognized in MMC's financial statements
or tax returns. U.S. Federal income taxes are provided on unremitted foreign
earnings except those that are considered permanently reinvested, which at
December 31, 2002 amounted to approximately $1.2 billion. However, if these
earnings were not considered permanently reinvested, the incremental tax
liability which otherwise might be due upon distribution, net of foreign tax
credits, would be approximately $100 million.
DERIVATIVE INSTRUMENTS: All derivatives, whether designated in hedging
relationships or not, are recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject
MMC to concentrations of credit risk consist primarily of cash and cash
equivalents and commissions and fees receivable. MMC maintains a policy
providing for the diversification of cash and cash equivalent investments and
places its investments in an extensive number of high quality financial
institutions to limit the amount of credit risk exposure. Concentrations of
credit risk with respect to receivables are generally limited due to the large
number of clients and markets in which MMC does business, as well as the
dispersion across many geographic areas.
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 expense associated with unvested shares under the
Putnam Equity Partnership Plan, as discussed further in Note 8, 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 Years Ended December 31,
(IN MILLIONS) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,365 $ 974 $ 1,181
Less: Potential minority interest expense associated with Putnam Class B Common Shares (2) (6) (17)
Add: Dividend equivalent expense related to common stock equivalents 2 2 2
- -----------------------------------------------------------------------------------------------------------------------------
Net income for diluted earnings per share $ 1,365 $ 970 $ 1,166
=============================================================================================================================
Basic weighted average common shares outstanding 541 550 543
Dilutive effect of potentially issuable common shares 16 22 26
- -----------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 557 572 569
=============================================================================================================================
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may vary from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS: In November 2002, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 interprets SFAS No. 5, "Accounting
for Contingencies," SFAS No. 57, "Related Party Disclosures," SFAS No. 107,
"Disclosure about Fair Value of Instruments" and nullifies FIN 34, "Disclosure
of Indirect Guarantees of Indebtedness of Others." This interpretation expands
the disclosure requirements for certain guarantors of debt. It also clarifies
that certain guarantors are required to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions are
applied on a prospective basis to guarantees issued or modified after December
31, 2002 and the disclosure requirements are currently effective. 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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 interprets Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" and addresses consolidation
by business enterprises qualifying as variable interest entities ("VIE"). FIN 46
defines a VIE as a corporation, partnership, trust or other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 applies immediately
to VIEs created after January 31, 2003 in which the company obtains an interest
after that date. FIN 46 applies to the first fiscal year or interim period
beginning after June 15, 2003 for VIEs in which MMC holds a variable interest
that it acquired before February 1, 2003.
MMC through Putnam, manages $2.3 billion in the form of Collateralized Debt
Obligations ("CDO") and Collateralized Bond Obligations ("CBO"). The CDOs and
CBOs were created prior to February 1, 2003. Separate limited liability
companies were established to issue the notes and to hold the
38
underlying collateral, which consists of high-yield bonds and other securities.
Putnam serves as the collateral manager for the CDOs and CBOs. The maximum loss
exposure related to the CDOs and CBOs is limited to Putnam's investment totaling
$3.5 million, reflected in Long-term investments in the Consolidated Balance
Sheets at December 31, 2002. MMC is assessing the overall impact of this
pronouncement and does not expect the implementation of FIN 46 to have a
significant impact on its consolidated results of operations.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior year
amounts to conform with current year presentation.
2 Supplemental Disclosure to the Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
The following schedule provides additional information concerning acquisitions,
interest and income taxes paid:
================================================================================
For the Years Ended December 31,
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
Purchase acquisitions:
Assets acquired, excluding cash $ 99 $ 79 $201
Liabilities assumed (2) -- (8)
Issuance of debt and other obligations (5) (26) (77)
Shares issued -- -- (17)
- --------------------------------------------------------------------------------
Net cash outflow for acquisitions $ 92 $ 53 $ 99
- --------------------------------------------------------------------------------
Interest paid $154 $192 $244
Income taxes paid $931 $175 $305
================================================================================
3 Other Comprehensive Loss
- --------------------------------------------------------------------------------
The components of other comprehensive loss are as follows:
====================================================================================================================================
For the Years Ended December 31,
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $ 131 $ (34) $(127)
Unrealized investment holding (losses) gains, net of income tax (benefit) liability of $(35), $(60) and
$63 in 2002, 2001 and 2000, respectively (70) (116) 125
Less: Reclassification adjustment for realized (gains) losses included in net income, net of
income tax (liability) benefit of $(21), $39 and $(38) in 2002, 2001 and 2000, respectively (36) 72 (69)
Minimum pension liability adjustment, net of income tax (benefit) liability of $(110) in 2002,
$3 in 2001 and $(2) in 2000 (257) 2 (3)
Deferred gain (loss) on cash flow hedges, net of income tax liability (benefit) of $3 and
$(1) in 2002 and 2001, respectively 7 (2) --
- ------------------------------------------------------------------------------------------------------------------------------------
$(225) $ (78) $ (74)
====================================================================================================================================
The components of accumulated other comprehensive loss, net of taxes, are as
follows:
====================================================================================================================================
December 31,
(IN MILLIONS OF DOLLARS) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $(292) $(423)
Net unrealized investment gains 120 226
Minimum pension liability adjustment (285) (28)
Net deferred gain (loss) on cash flow hedges 5 (2)
- ------------------------------------------------------------------------------------------------------------------------------------
$(452) $(227)
====================================================================================================================================
4 Acquisitions
- --------------------------------------------------------------------------------
During 2002, MMC acquired several insurance and reinsurance broking, consulting
and investment management businesses in transactions accounted for as purchases
for a total cost of $99 million. The cost of the transactions exceeded the fair
value of assets acquired, which included $18 million of identified intangible
assets, by $42 million. During 2001, MMC increased its investment in an
investment management business and acquired other insurance broking and
consulting businesses. The transactions were accounted for as purchases for a
total cost of $79 million. The cost of these investments exceeded the fair value
of assets acquired, which included $48 million of identified intangible assets,
by $29 million.
39
5 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 net income 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 is as follows:
================================================================================
For the Years Ended December 31,
(IN MILLIONS,
EXCEPT PER SHARE FIGURES) 2002 2001 2000
- --------------------------------------------------------------------------------
Reported net income $1,365 $ 974 $1,181
Net amortization adjustment -- 131 136
- --------------------------------------------------------------------------------
Adjusted net income $1,365 $1,105 $1,317
Reported net income
per share--Basic $ 2.52 $ 1.77 $ 2.18
Adjusted net income
per share--Basic $ 2.52 $ 2.00 $ 2.42
Reported net income
per share--Diluted $ 2.45 $ 1.70 $ 2.05
Adjusted net income
per share--Diluted $ 2.45 $ 1.93 $ 2.29
================================================================================
Changes in the carrying amount of goodwill are as follows:
================================================================================
(IN MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
Balance as of January 1, 2002 $5,069
Goodwill acquired 42
Other adjustments (primarily foreign exchange) 40
- --------------------------------------------------------------------------------
Balance as of December 31, 2002 $5,151
================================================================================
The goodwill balance at December 31, 2002 includes approximately $121 million of
equity method goodwill.
MMC 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 with indefinite
lives. The gross cost and accumulated amortization by major intangible asset
class at December 31, 2002 are as follows:
================================================================================
Gross Accumulated Net Carrying
(IN MILLIONS OF DOLLARS) Cost Amortization Amount
- --------------------------------------------------------------------------------
Client lists and client
relationships acquired $148 $ 50 $ 98
Future revenue streams
related to existing private
equity funds 216 70 146
- --------------------------------------------------------------------------------
Total amortized intangibles $364 $120 $244
================================================================================
Aggregate amortization expense for the year ended December 31, 2002 was $35
million and the estimated future aggregate amortization expense is as follows:
================================================================================
For the Years Ended December 31, Estimated
(IN MILLIONS OF DOLLARS) Expense
- --------------------------------------------------------------------------------
2003 $35
2004 $35
2005 $31
2006 $25
2007 $23
================================================================================
6 Income Taxes
- --------------------------------------------------------------------------------
Income before income taxes and minority interest shown below is based on the
geographic location to which such income is attributable. Although income taxes
related to such income may be assessed in more than one jurisdiction, the income
tax provision corresponds to the geographic location of the income.
================================================================================
For the Years Ended December 31,
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
Income before income taxes and minority interest:
U.S $1,346 $1,070 $1,415
Other 787 520 540
- --------------------------------------------------------------------------------
$2,133 $1,590 $1,955
================================================================================
Income taxes:
Current--
U.S. Federal $ 424 $ 490 $ 436
Other national governments 111 131 82
U.S. state and local 36 45 60
- --------------------------------------------------------------------------------
571 666 578
- --------------------------------------------------------------------------------
Deferred--
U.S. Federal 17 (128) 79
Other national governments 130 52 87
U.S. state and local 29 9 9
- --------------------------------------------------------------------------------
176 (67) 175
- --------------------------------------------------------------------------------
Total income taxes $ 747 $ 599 $ 753
================================================================================
The significant components of deferred income tax assets and liabilities and
their balance sheet classifications are as follows:
================================================================================
December 31,
(IN MILLIONS OF DOLLARS) 2002 2001
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accrued expenses not currently deductible $595 $703
Differences related to non-U.S. operations 206 188
Accrued retirement benefits -- 57
Other 27 22
- --------------------------------------------------------------------------------
$828 $970
================================================================================
DEFERRED TAX LIABILITIES:
Prepaid dealer commissions $ 96 $233
Unrealized securities holding gains 67 121
Differences related to non-U.S. operations 87 59
Depreciation and amortization 99 74
Accrued retirement benefits 26 --
Other 5 19
- --------------------------------------------------------------------------------
$380 $506
================================================================================
BALANCE SHEET CLASSIFICATIONS:
Current assets $105 $ 41
Other assets $343 $423
================================================================================
40
A reconciliation from the U.S. Federal statutory income tax rate to MMC's
effective income tax rate is as follows:
================================================================================
For the Years Ended
December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
U.S. state and local income
taxes--net of U.S. Federal
income tax benefit 2.0 2.2 2.3
Differences related to
non-U.S. operations (1.6) (1.1) (1.0)
Other (.4) 1.6 2.2
- --------------------------------------------------------------------------------
Effective tax rate 35.0% 37.7% 38.5%
================================================================================
Taxing authorities periodically challenge positions taken by MMC on its tax
returns. On the basis of present information, it is the opinion of MMC's
management that any assessments resulting from current tax audits will not have
a material adverse effect on MMC's consolidated results of operations or its
consolidated financial position.
7 Retirement Benefits
- --------------------------------------------------------------------------------
MMC maintains qualified and non-qualified defined benefit pension plans for its
U.S. and non-U.S. eligible employees. MMC's policy for funding its tax qualified
defined benefit retirement plans is to contribute amounts at least sufficient to
meet the funding requirements set forth in the U.S. and international laws.
The weighted average actuarial assumptions utilized for the U.S. and significant
non-U.S. defined benefit plans as of the end of the year were as follows:
================================================================================
Pension Postretirement
Benefits Benefits
- --------------------------------------------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Weighted average assumptions:
Discount rate 6.1% 6.5% 6.6% 7.0%
Expected return on plan assets 8.5% 9.4% -- --
Rate of compensation increase 3.8% 4.1% -- --
================================================================================
The components of the net periodic (income) benefit cost for combined U.S. and
significant non-U.S. defined benefit and other postretirement plans are as
follows:
================================================================================================================
For the Years Ended December 31, Pension Benefits Postretirement Benefits
---------------------------------------------------------------
(IN MILLIONS OF DOLLARS) 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Service cost $ 171 $ 156 $ 154 $ 7 $ 6 $ 4
Interest cost 337 310 295 19 17 15
Expected return on plan assets (519) (492) (460) -- -- --
Amortization of prior service (credit) cost (17) 1 4 (2) (1) (1)
Amortization of transition asset (5) (4) (11) -- -- --
Recognized actuarial loss (gain) 11 (20) (19) 3 -- (1)
- ----------------------------------------------------------------------------------------------------------------
$ (22) $ (49) $ (37) $ 27 $ 22 $ 17
================================================================================================================
41
The following schedules provide information concerning MMC's U.S. defined
benefit pension plans and postretirement benefit plans:
======================================================================================================================
U.S. Pension U.S. Postretirement
December 31, Benefits Benefits
-----------------------------------------------
(IN MILLIONS OF DOLLARS) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $2,307 $2,115 $ 209 $ 170
Service cost 67 63 6 5
Interest cost 160 154 16 15
Actuarial loss 167 105 24 37
Benefits paid (119) (125) (5) (8)
Plan amendments (273) (5) -- (10)
- ----------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 2,309 2,307 250 209
- ----------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,316 2,584 -- --
Actual return on plan assets (216) (169) -- --
Non-qualified plan assets held in segregated trusts (80) -- -- --
Employer contributions 144 26 5 8
Benefits paid (119) (125) (5) (8)
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,045 2,316 -- --
- ----------------------------------------------------------------------------------------------------------------------
Funded status (264) 9 (250) (209)
Unrecognized net actuarial loss 784 175 47 18
Unrecognized prior service credit (259) (4) (9) (11)
Unrecognized transition asset (10) (14) -- --
- ----------------------------------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 251 $ 166 $ (212) $ (202)
- ----------------------------------------------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost $ 475 $ 324 $ -- $ --
Accrued benefit liability (235) (203) (212) (202)
Accumulated other comprehensive loss 11 45 -- --
- ----------------------------------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 251 $ 166 $ (212) $ (202)
======================================================================================================================
The weighted average actuarial assumptions utilized in determining the above
amounts for the U.S. defined benefit and other postretirement plans as of the
end of the year were as follows:
======================================================================================================================
U.S. Pension U.S. Postretirement
Benefits Benefits
-----------------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Weighted average assumptions:
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 8.75% 9.63% -- --
Rate of compensation increase 3.5% 4.0% -- --
======================================================================================================================
The U.S. defined benefit pension plans do not have any direct or indirect
ownership of MMC stock. Plan assets of approximately $1.5 billion and $1.6
billion at December 31, 2002 and 2001, respectively, were managed by Putnam,
which includes both separately managed and publicly available investment funds.
The discount rate used to value the liabilities of the U.S. defined benefit
pension plans and postretirement benefit plans reflects current interest rates
of high quality fixed income debt securities. Projected compensation increases
reflect current expectations as to future levels of inflation.
The assets and liabilities of the U.S. defined benefit pension plans were
re-measured at July 1, 2002 to reflect a change in substantive plans as defined
by SFAS No. 87, "Employers' Accounting for Pensions" and a reduction of the
expected rate of return on plan assets to 9.25% from 10%. Discretionary cost of
living increases have been excluded from the substantive plans for accounting
purposes because MMC no longer has the intention of granting such increases. The
change in the substantive plans reduced the projected benefit obligation by
approximately $273 million.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the U.S. pension plans with accumulated benefit obligations
in excess of plan assets were $261 million, $231 million and $0, respectively,
as of December 31, 2002 and $294 million, $248 million and $80 million,
respectively, as of December 31, 2001.
42
The components of the net periodic (income) benefit cost for the U.S. defined
benefit and other postretirement benefit plans are as follows:
===================================================================================================================================
For the Years Ended December 31, U.S. Pension Benefits U.S. Postretirement Benefits
--------------------------------------------------------------------
(IN MILLIONS OF DOLLARS) 2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost $ 67 $ 63 $ 59 $ 6 $ 5 $ 3
Interest cost 160 154 143 16 15 12
Expected return on plan assets (241) (238) (217) -- -- --
Amortization of prior service (credit) cost (17) 1 3 (2) (1) (1)
Amortization of transition asset (5) (4) (5) -- -- --
Recognized actuarial loss (gain) 9 (18) (19) 3 -- (1)
- -----------------------------------------------------------------------------------------------------------------------------------
$ (27) $ (42) $ (36) $ 23 $ 19 $ 13
===================================================================================================================================
The assumed health care cost trend rate was approximately 12.5% in 2002
gradually declining to 5% in the year 2018. Assumed health care cost trend rates
have a significant effect on the amounts reported for the U.S. health care
plans. A one percentage point change in assumed health care cost trend rates
would have the following effects:
===================================================================================================================================
1 Percentage 1 Percentage
(IN MILLIONS OF DOLLARS) Point Increase Point Decrease
- -----------------------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 3 $ (3)
Effect on postretirement benefit obligation $36 $(30)
===================================================================================================================================
The following schedules provide information concerning MMC's significant
non-U.S. defined benefit pension plans and postretirement benefit plans:
====================================================================================================================================
Non-U.S. Pension Non-U.S. Postretirement
December 31, Benefits Benefits
----------------------------------------------
(IN MILLIONS OF DOLLARS) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $2,997 $2,692 $ 41 $ 38
Service cost 104 93 1 1
Interest cost 177 156 3 2
Employee contributions 19 17 -- --
Actuarial loss 173 181 6 3
Benefits paid (123) (109) (2) (2)
Foreign currency changes 313 (36) 3 (1)
Plan amendments -- 3 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 3,660 2,997 52 41
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,730 3,024 -- --
Actual return on plan assets (271) (206) -- --
Effect of settlement (8) -- -- --
Company contributions 316 52 2 2
Employee contributions 19 17 -- --
Benefits paid (123) (109) (2) (2)
Foreign currency changes 255 (48) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,918 2,730 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status (742) (267) (52) (41)
Unrecognized net actuarial loss 1,241 423 9 2
Unrecognized prior service cost 10 9 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 509 $ 165 $(43) $(39)
====================================================================================================================================
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost $ 526 $ 195 $ -- $ --
Accrued benefit liability (420) (30) (43) (39)
Intangible asset 9 -- -- --
Accumulated other comprehensive loss 394 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 509 $ 165 $(43) $(39)
====================================================================================================================================
Weighted average assumptions:
Discount rate 5.7% 5.8% 5.9% 6.2%
Expected return on plan assets 8.3% 8.9% -- --
Rate of compensation increase 4.0% 4.2% -- --
====================================================================================================================================
43
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the non-U.S. pension plans with accumulated benefit
obligations in excess of plan assets were $2,074 million, $1,850 million and
$1,489 million, respectively, as of December 31, 2002 and $42 million, $34
million and $22 million, respectively, as of December 31, 2001.
The components of the net periodic benefit cost (income) for the significant
non-U.S. defined benefit and other postretirement benefit plans are as follows:
==========================================================================================================
For the Years Ended December 31, Non-U.S. Pension Benefits Non-U.S. Postretirement Benefits
------------------------------------------------------------------
(IN MILLIONS OF DOLLARS) 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Service cost $ 104 $ 93 $ 95 $ 1 $ 1 $ 1
Interest cost 177 156 152 3 2 3
Expected return on plan assets (278) (254) (243) -- -- --
Amortization of prior service cost -- -- 1 -- -- --
Amortization of transition asset -- -- (6) -- -- --
Recognized actuarial loss (gain) 2 (2) -- -- -- --
- ----------------------------------------------------------------------------------------------------------
$ 5 $ (7) $ (1) $ 4 $ 3 $ 4
==========================================================================================================
The assumed health care cost trend rate was approximately 7.3% in 2002,
gradually declining to 4.5% in the year 2010. Assumed health care cost trend
rates have a significant effect on the amounts reported for the non-U.S. health
care plans. A one percentage point change in assumed health care cost trend
rates would have the following effects:
================================================================================
1 Percentage 1 Percentage
(IN MILLIONS OF DOLLARS) Point Increase Point Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost components $1 $ --
Effect on postretirement benefit obligation $7 $ (6)
================================================================================
CONTRIBUTION PLANS: MMC maintains certain defined contribution plans for its
employees, including the Marsh & McLennan Companies Stock Investment Plan
("SIP") and the Putnam Investments, LLC Profit Sharing Retirement Plan (the
"Putnam Plan"). Under these plans, eligible employees may contribute a
percentage of their base salary, subject to certain limitations. For the SIP,
MMC matches a portion of the employees' contributions, while under the Putnam
Plan the contributions are at the discretion of MMC subject to IRS limitations.
The SIP is an Employee Stock Ownership Plan under U.S. tax law and plan assets
of approximately $1.3 billion and $1.5 billion at December 31, 2002 and 2001,
respectively, were invested in MMC stock. In addition, SIP plan assets of
approximately $418 million and $455 million at December 31, 2002 and 2001,
respectively, were managed by Putnam. The cost of these defined contribution
plans was $92 million, $83 million and $79 million for 2002, 2001 and 2000,
respectively.
8 Stock Benefit Plans
- --------------------------------------------------------------------------------
MMC has stock-based benefit plans under which employees are awarded grants of
restricted stock, stock options or other forms of awards. As provided under SFAS
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") MMC has elected
to continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has provided the required additional pro forma
disclosures.
MMC INCENTIVE AND STOCK AWARD PLANS: In 2000, the Marsh & McLennan Companies,
Inc. 2000 Employee Incentive and Stock Award Plan (the "2000 Employee Plan") and
the Marsh & McLennan Companies, Inc. 2000 Senior Executive Incentive and Stock
Award Plan (the "2000 Executive Plan") were adopted. The 2000 Employee and
Executive plans (the "2000 Plans") replaced the 1997 Employee Incentive and
Stock Award Plan and the 1997 Senior Executive Incentive and Stock Award Plans
(the "1997 Plans"). The types of awards permitted under these plans include
stock options, restricted stock, stock bonus units, restricted and deferred
stock units payable in MMC common stock or cash, and other stock-based and
performance-based awards. The Compensation Committee of the Board of Directors
(the "Compensation Committee") determines, at its discretion, which affiliates
may participate in the plans, which eligible employees will receive awards, the
types of awards to be received and the terms and conditions thereof. The right
of an employee to receive an award may be subject to performance conditions as
specified by the Compensation Committee. The 2000 Plans contain provisions
which, in the event of a change in control of MMC, may accelerate the vesting of
the awards. Awards relating to not more than 80,000,000 shares of common stock
may be made over the life of the 2000 Employee Plan plus shares remaining unused
under preexisting stock plans. Awards relating to not more than 8,000,000 shares
of common stock may be made over the life of the 2000 Executive Plan plus shares
remaining unused under preexisting stock plans. There were 65,049,280,
87,067,422 and 104,301,742 shares available for awards under the 2000 Plans and
prior plans at December 31, 2002, 2001 and 2000, respectively.
STOCK OPTIONS: Options granted under the 2000 Plans may be designated as
incentive stock options or as non-qualified stock options. The Compensation
Committee determines the terms and conditions of the option, including the time
or times at which an option may be exercised, the methods by which such exercise
price may be paid and the form of such payment. Except under certain limited
circumstances, no stock option may be granted with an exercise price of less
than the fair market value of the stock at the time the stock option is granted.
44
Stock option transactions under the 2000 Plans and prior plans are as follows:
====================================================================================================================================
2002 2001 2000
-----------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period 70,067,916 $34.58 62,270,030 $30.21 60,036,872 $24.45
Granted 21,006,580 $55.78 15,734,408 $46.42 14,368,260 $45.67
Exercised (7,216,142) $23.16 (6,521,510) $19.95 (10,798,938) $17.84
Forfeited (1,727,500) $47.51 (1,415,012) $41.25 (1,336,164) $35.40
---------- ---------- ---------- ------
Balance at end of period 82,130,854 $40.74 70,067,916 $34.58 62,270,030 $30.21
====================================================================================================================================
Options exercisable at year-end 42,009,798 $31.49 36,649,040 $26.48 31,221,060 $21.44
====================================================================================================================================
The following table summarizes information about stock options at December 31,
2002:
====================================================================================================================================
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted Average Weighted Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/02 Contractual Life Exercise Price at 12/31/02 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
$13.08-$25.36 13,898,726 2.7 years $17.09 13,898,726 $17.09
$25.37-$37.30 8,790,010 5.0 years $30.14 8,695,260 $30.12
$37.31-$50.94 35,933,038 7.1 years $42.84 17,565,514 $41.36
$50.95-$62.33 23,509,080 8.9 years $55.47 1,850,298 $52.36
---------- ----------
$13.08-$62.33 82,130,854 6.6 years $40.74 42,009,798 $31.49
====================================================================================================================================
RESTRICTED STOCK: Restricted shares of MMC's common stock may be awarded and are
subject to such restrictions on transferability and other restrictions, if any,
as the Compensation Committee may impose. The Compensation Committee may also
determine when and under what circumstances the restrictions may lapse and
whether the participant shall have the rights of a stockholder, including,
without limitation, the right to vote and receive dividends. Unless the
Compensation Committee determines otherwise, restricted stock that is still
subject to restrictions shall be forfeited upon termination of employment.
There were 249,421, 245,800 and 255,600 restricted shares granted in 2002, 2001
and 2000, respectively. MMC recorded compensation expense of $13 million in
2002, $11 million in 2001 and $13 million in 2000, related to these shares.
Shares that have been granted generally become unrestricted at the earlier of:
(1) January 1 of the eleventh year following the grant or (2) the later of the
recipient's normal or actual retirement date.
RESTRICTED STOCK UNITS: Restricted stock units, may be awarded under the plans.
The Compensation Committee shall determine the restrictions on such units, when
the restrictions shall lapse, when the units shall vest and be paid, and upon
what terms the units shall be forfeited.
There were 760,749, 393,382 and 274,782 restricted stock units awarded during
2002, 2001 and 2000, respectively. The total value of the restricted stock units
at the time of the award was $40 million, $19 million and $14 million in 2002,
2001 and 2000, respectively. The cost of the awards is amortized over the
vesting period, which is generally three years.
DEFERRED STOCK UNITS: Deferred stock units may be awarded under the plans. The
Compensation Committee shall determine the restrictions on such units, when the
restrictions shall lapse, when the units shall vest and be paid, and upon what
terms the units shall be forfeited.
There were 1,669,680, 1,447,230 and 1,297,452 deferred stock units awarded
during 2002, 2001 and 2000, respectively. The total value of the deferred stock
unit awards was $85 million, $76 million and $60 million in 2002, 2001 and 2000,
respectively. The cost of the awards is amortized over the vesting period, which
is generally three years.
PUTNAM INVESTMENTS EQUITY PARTNERSHIP PLAN: In 1997, Putnam adopted the Putnam
Investments Equity Partnership Plan (the "Equity Plan") pursuant to which Putnam
is authorized to grant or sell to certain employees of Putnam or its
subsidiaries restricted shares of a new class of common shares of Putnam
Investments Trust, the parent of Putnam Investments, LLC ("Class B Common
Shares") and options to acquire the Class B Common Shares. Such awards or
options generally vest over a four-year period. Holders of Putnam Class B Common
Shares are not entitled to vote and have no rights to convert their shares into
any other securities of Putnam. In certain circumstances, Class B Common Shares
will be converted into Class A Common Shares. Awards of restricted stock and/or
options may be made under the Equity Plan with respect to a maximum of
12,000,000 shares of Class B Common Shares, which would represent approximately
12% of the outstanding shares on a fully diluted basis, as increased for certain
issuances of Putnam Class A Common Stock to MMC. Through December 31, 2002,
Putnam made awards pursuant to the Equity Plan of 1,051,400, 1,712,000 and
2,041,000 Class B Common Shares and shares subject to options in 2002, 2001 and
2000, respectively. These awards included 525,700, 856,000 and 1,020,500
restricted shares with a value of $39 million, $91 million and $90 million in
45
2002, 2001 and 2000, respectively. These awards also included 525,700, 856,000
and 1,020,500 shares subject to options in 2002, 2001 and 2000, respectively.
There were 3,419,893 shares available for grant related to the Equity Plan at
December 31, 2002. In addition, the MMC Board of Directors has authorized an
increase in the number of shares that can be made available to Putnam employees
by 4,000,000 shares.
Pursuant to an executive compensation agreement, Putnam awarded 100,000
restricted stock units in 2001 with a value of $11 million and 50,000 options in
2002 and 2001, related to Class B Common Shares to an executive of Putnam.
MMC STOCK PURCHASE PLANS: In May 1999, MMC's stockholders approved an employee
stock purchase plan (the "1999 Plan") to replace the 1994 Employee Stock
Purchase Plan (the "1994 Plan") which terminated on September 30, 1999 following
its fifth annual offering. Under these plans, eligible employees may purchase
shares of MMC's common stock, subject to certain limitations, at prices not less
than 85% of the lesser of the fair market value of the stock at the beginning or
end of any offering period. Under the 1999 Plan, no more than 40,000,000 shares
of MMC's common stock plus the remaining unissued shares in the 1994 Plan may be
sold. Employees purchased 3,744,190, 2,855,072 and 4,199,980 shares in 2002,
2001 and 2000, respectively. At December 31, 2002, 35,465,556 shares were
available for issuance under the 1999 Plan. In July 2002, MMC Board of Directors
approved an additional 5,000,000 shares of common stock for issuance under the
1995 MMC Stock Purchase Plan for International Employees (the "International
Plan"). With the additional shares under the International Plan, no more than
8,000,000 shares of MMC's common stock may be sold. Employees purchased 717,696,
556,326 and 769,014 shares in 2002, 2001 and 2000, respectively. At December 31,
2002, 4,347,068 shares were available for issuance under the International Plan.
PRO FORMA INFORMATION: In accordance with the intrinsic value method allowed by
APB 25, no compensation cost has been recognized in the Consolidated Statements
of Income for MMC's stock option and stock purchase plans and the stock options
awarded under the Putnam Investments Equity Partnership Plan. Had compensation
cost for MMC's stock-based compensation plans been determined consistent with
the fair value method prescribed by SFAS No. 123, MMC's net income and net
income per share for 2002, 2001 and 2000 would have been reduced to the pro
forma amounts indicated in the table below.
================================================================================
(IN MILLIONS OF DOLLARS,
EXCEPT PER SHARE FIGURES) 2002 2001 2000
- --------------------------------------------------------------------------------
NET INCOME:
As reported $1,365 $ 974 $1,181
Adjustment for fair value
method, net of tax (152) (114) (81)
- --------------------------------------------------------------------------------
Pro forma $1,213 $ 860 $1,100
- --------------------------------------------------------------------------------
NET INCOME PER SHARE:
BASIC:
As reported $ 2.52 $ 1.77 $ 2.18
Pro forma $ 2.24 $ 1.57 $ 2.03
DILUTED:
As reported $ 2.45 $ 1.70 $ 2.05
Pro forma $ 2.18 $ 1.50 $ 1.91
================================================================================
The pro forma information reflected above includes stock options issued under
MMC incentive and stock award plans and the Putnam Investments Equity
Partnership Plan and stock issued under MMC stock purchase plans.
The estimated fair value of options granted was calculated using the
Black-Scholes option pricing valuation model. The weighted average assumptions
used in the valuation models is as follows:
=======================================================================================================================
Stock Options Stock Purchase Plans
-----------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
MMC INCENTIVE AND STOCK AWARD PLANS
Dividend yield 2.3% 2.0% 2.0% 2.3% 2.0% 2.0%
Expected volatility 33.2% 32.7% 26.3% 31.4% 37.3% 26.3%
Risk-free interest rate 4.9% 4.6% 6.5% 1.2% 2.4% 6.1%
Weighted-average fair value $16.82 $13.99 $13.35 $11.18 $14.09 $17.20
Expected life 5 YEARS 5 years 5 years 1 YEAR 1 year 1 year
PUTNAM INVESTMENTS EQUITY PARTNERSHIP PLAN
Dividend yield 5.0% 5.0% 5.0%
Expected volatility 44.4% 42.4% 38.3%
Risk-free interest rate 4.9% 4.6% 6.5%
Weighted-average fair value $21.63 $29.66 $24.43
Expected life 5 YEARS 5 years 5 years
=======================================================================================================================
46
9 Long-term Commitments
- --------------------------------------------------------------------------------
MMC leases office facilities, equipment and automobiles under noncancelable
operating leases. These leases expire on varying dates; in some instances
contain renewal and expansion options; do not restrict the payment of dividends
or the incurrence of debt or additional lease obligations; and contain no
significant purchase options. In addition to the base rental costs, occupancy
lease agreements generally provide for rent escalations resulting from increased
assessments for real estate taxes and other charges. Approximately 96% of MMC's
lease obligations are for the use of office space.
The Consolidated Statements of Income include net rental costs of $406 million,
$367 million and $359 million for 2002, 2001 and 2000, respectively, after
deducting rentals from subleases ($20 million in 2002, $8 million in 2001 and
2000).
At December 31, 2002, the aggregate future minimum rental commitments under all
noncancelable operating lease agreements are as follows:
================================================================================
For the Years Ended Gross Rentals Net
December 31, Rental from Rental
(IN MILLIONS OF DOLLARS) Commitments Subleases Commitments
- --------------------------------------------------------------------------------
2003 $ 416 $ 26 $ 390
2004 382 23 359
2005 350 22 328
2006 312 21 291
2007 275 19 256
Subsequent years 2,134 212 1,922
- --------------------------------------------------------------------------------
$3,869 $ 323 $3,546
================================================================================
MMC has entered into agreements with various service companies to outsource
certain information systems activities and responsibilities. Under these
agreements, MMC is required to pay minimum annual service charges. Additional
fees may be payable depending upon the volume of transactions processed with all
future payments subject to increases for inflation. At December 31, 2002, the
aggregate fixed future minimum commitments under these agreements are as
follows:
================================================================================
Future
For the Years Ended December 31, Minimum
(IN MILLIONS OF DOLLARS) Commitments
- --------------------------------------------------------------------------------
2003 $35
2004 19
2005 7
Subsequent years 14
- --------------------------------------------------------------------------------
$75
================================================================================
10 Debt
- --------------------------------------------------------------------------------
MMC's outstanding debt is as follows:
================================================================================
December 31,
(IN MILLIONS OF DOLLARS) 2002 2001
- --------------------------------------------------------------------------------
SHORT-TERM:
Commercial paper $ 506 $ 741
Bank loans 35 --
Current portion of long-term debt 2 16
- --------------------------------------------------------------------------------
$ 543 $ 757
================================================================================
LONG-TERM:
Commercial paper $ 750 $1,000
Senior notes--6.625% due 2004 598 597
Senior notes--7.125% due 2009 398 398
Senior notes--5.375% due 2007(a) 530 --
Senior notes--6.25% due 2012(a) 275 --
Mortgage--9.8% due 2009 200 200
Notes payable--8.62% due 2005 73 76
Notes payable--7.68% due 2006 62 62
Other 7 17
- --------------------------------------------------------------------------------
2,893 2,350
Less current portion 2 16
- --------------------------------------------------------------------------------
$2,891 $2,334
================================================================================
(a) See discussion of these notes.
The weighted average interest rates on MMC's outstanding short-term debt at
December 31, 2002 and 2001 are 1.6% and 2.1%, respectively.
In June 2002, MMC arranged two revolving credit facilities to support its
commercial paper borrowings. These credit facilities replaced similar facilities
that expired during 2002. MMC may borrow up to $1.4 billion under the 364-day
facility that expires in June 2003 with commitment fees of 5 basis points
payable on any unused portion. Repayment of any outstanding borrowing under this
facility can be extended up to one year from the expiration date. MMC may borrow
up to $1.0 billion under the noncancelable 5-year facility that expires in June
2007 with commitment fees of 8 basis points payable on any unused portion. The
interest rates on these facilities vary based upon the level of usage of the
facility and MMC's credit ratings. Each of the facilities requires MMC to
maintain consolidated net worth of at least $3.5 billion and contains certain
other restrictions relating to consolidations, mergers and the sale or pledging
of assets. No amounts were outstanding under these facilities at December 31,
2002.
Commercial paper borrowings of $750 million and $1.0 billion at December 31,
2002 and 2001, respectively, have been classified as long-term debt based on
MMC's intent and ability to maintain and refinance the obligations on a
long-term basis.
47
Additional credit facilities are maintained with various banks, primarily
related to operations located outside the United States, aggregating $274
million at December 31, 2002 and $214 million at December 31, 2001. Amounts
outstanding under these facilities at December 31, 2002 were $35 million and no
amounts were outstanding at December 31, 2001.
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 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 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. In January 2003, MMC dedesignated the remaining fair value
hedge on each of the Notes and settled the remaining swaps. The cumulative
amount of fair value adjustments previously recognized is being amortized over
the remaining life of the related Notes. 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 4.0% for the Notes due in 2007
and 5.1% for the Notes due in 2012.
In February 2003, MMC issued $250 million of 3.625% Senior Notes due 2008 and
$250 million of 4.85% Senior Notes due 2013. The net proceeds from the notes
were used to pay down commercial paper borrowings.
MMC has a fixed rate non-recourse mortgage note agreement due in 2009 amounting
to $200 million, bearing an interest rate of 9.8%, in connection with its
interest in its worldwide headquarters building in New York City. In the event
the mortgage is foreclosed following a default, MMC would be entitled to remain
in the space and would be obligated to pay rent sufficient to cover interest on
the notes or at fair market value if greater.
Scheduled repayments of long-term debt in 2003 and in the four succeeding years
are $2 million, $1.4 billion, $65 million, $60 million and $500 million,
respectively.
11 Financial Instruments
- --------------------------------------------------------------------------------
The estimated fair value of MMC's significant financial instruments is provided
below. Certain estimates and judgments were required to develop the fair value
amounts. The fair value amounts shown below are not necessarily indicative of
the amounts that MMC would realize upon disposition nor do they indicate MMC's
intent or ability to dispose of the financial instrument.
================================================================================
2002 2001
--------------------------------------------
December 31, CARRYING FAIR Carrying Fair
(IN MILLIONS OF DOLLARS) AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 546 $ 546 $ 537 $ 537
Long-term investments 578 578 826 826
Short-term debt 543 543 757 758
Long-term debt 2,891 3,116 2,334 2,455
================================================================================
CASH AND CASH EQUIVALENTS: The estimated fair value of MMC's cash and cash
equivalents approximates their carrying value.
LONG-TERM INVESTMENTS: Long-term investments primarily consist of available for
sale securities recorded at quoted market prices. MMC also has certain
additional long-term investments, for which there are no readily available
market prices, amounting to $168 million and $179 million at December 31, 2002
and 2001, respectively, which are carried on a cost basis. MMC monitors these
investments for impairment and makes appropriate reductions in carrying values
when necessary.
MMC had investments with an aggregate fair value of $410 million and $647
million at December 31, 2002 and 2001, respectively, which are carried at market
value under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Gross unrealized gains amounting to $209 million and $360 million
and gross unrealized losses of $23 million and $16 million at December 31, 2002
and 2001, respectively, have been excluded from earnings and reported, net of
deferred income taxes, as accumulated other comprehensive loss which is a
component of stockholders' equity.
MMC recorded net gains (losses) associated with its long-term investments of $57
million, $(111) million and $107 million, in 2002, 2001 and 2000, respectively.
Proceeds from the sale of available for sale securities for the years ended
December 31, 2002, 2001 and 2000 were $161 million, $155 million and $237
million, respectively. Gross realized gains on available for sale securities
sold during 2002, 2001 and 2000 amounted to $100 million, $112 million and $108
million, respectively. In 2002, 2001 and 2000, MMC recorded losses of $43
million, $223 million and $1 million respectively, related to the decline in
value of certain long-term investments that were other than temporary. The cost
of securities sold is determined using the average cost method for equity
securities.
In 2000, MMC entered into an agreement to purchase a minority investment in the
publicly traded common stock of Gruppo Bipop-Carire S.p.A. ("Bipop") as part of
a new agreement that expanded the companies' existing joint venture in Italy,
and Putnam became the exclusive investment management partner for Bipop's
planned expansion into other parts of Western Europe. The Bipop common shares
subsequently declined in value. MMC determined this decline was other than
temporary, and in the fourth quarter of 2001, recorded a pretax $222 million
charge to write down the cost basis of the investment to its fair value. This
amount was reclassified as a charge against revenue to conform with current year
presentation. In 2002, Bipop was merged with Banca di Roma, the combined
businesses were reorganized and the names of the successor companies were
changed. As a result of these actions, Putnam's initial holding in Bipop is now
comprised of common shares in Fineco S.p.A. ("Fineco") and Capitalia S.p.A. In
the fourth quarter of 2002, MMC recorded a pretax investment valuation charge of
$20 million for an other than temporary decline in the value of Fineco.
48
MMC also holds investments in certain private equity fund partnerships which are
accounted for using the equity method. MMC's share of gains (losses) from such
investments of $10 million, $(31) million and $(31) million in 2002, 2001 and
2000, respectively, are included in Investment income (loss) in the Consolidated
Statements of Income.
A portion of insurance fiduciary funds which MMC holds to satisfy fiduciary
obligations are invested in high quality debt securities which are generally
held to maturity. The difference between cost and fair value of these
investments is not material.
SHORT-TERM AND LONG-TERM DEBT: The fair value of MMC's short-term debt, which
consists primarily of commercial paper borrowings, approximates its carrying
value. The estimated fair value of MMC's long-term debt is based on discounted
future cash flows using current interest rates available for debt with similar
terms and remaining maturities.
OPTION CONTRACTS: In 2001, MMC entered into a series of option contracts to
hedge the variability of cash flows from forecasted sales of certain available
for sale equity investments. The sales are forecasted to occur over the next
eight quarters. The hedge is achieved through the use of European style put and
call options, which mature on the dates of the forecasted sales. Gains or losses
on the option contracts are deferred in Other Comprehensive Loss until the
related forecasted sales occur. The hedging relationship is considered perfectly
effective because all critical terms of the hedge and the forecasted sales
match. As a result no hedge ineffectiveness will be recognized in earnings. At
December 31, 2002, the net increase in fair value of the option contracts of $7
million was recorded as an asset and a reduction of Accumulated Other
Comprehensive Loss on the balance sheet. MMC expects approximately $3 million to
be reclassified into earnings over the next year as the related forecasted sales
occur.
12 Integration and Restructuring Costs,
Charges Related to September 11 and Special Credits
- --------------------------------------------------------------------------------
INTEGRATION COSTS: In 1999, as part of the integration of Sedgwick Group plc
("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 the 1999
special charge.
The utilization of the 1999 charges is summarized as follows:
===============================================================================================================
Utilization and
Changes in BALANCE
Initial Estimates 2002 DECEMBER 31,
(IN MILLIONS OF DOLLARS) Balance through 2001 Utilization 2002
- ---------------------------------------------------------------------------------------------------------------
1999 SEDGWICK PLAN:
Termination payments to employees $ 183 $ (180) $ (1) $ 2
Other employee-related costs 5 (5) -- --
Future rent under noncancelable leases 48 (28) (5) 15
Leasehold termination and related costs 49 (30) (2) 17
- ---------------------------------------------------------------------------------------------------------------
$ 285 $ (243) $ (8) $34
- ---------------------------------------------------------------------------------------------------------------
Number of employee terminations 2,400 (2,400) -- --
Number of office consolidations 125 (125) -- --
===============================================================================================================
1999 MMC PLAN:
Termination payments to employees $ 194 $ (187) $ (3) $ 4
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) $ (5) $17
- ---------------------------------------------------------------------------------------------------------------
Number of employee terminations 2,100 (2,100) -- --
Number of office consolidations 50 (50) -- --
===============================================================================================================
Changes in estimates are attributable to differences in actual cost from initial
estimates in implementing the original plan of integration. As a result of
changes in estimates during the fourth quarter of 2001, reserves related to the
1999 Sedgwick Plan of $3 million were reversed and recorded as a reduction of
goodwill. MMC also recorded a special credit of $7 million related to the 1999
MMC Plan, representing reductions of estimated costs of $5 million for employee
termination costs and $2 million related to office
49
consolidations. This $7 million was included in the net special credit of $13
million in 2001, discussed below.
During the fourth quarter of 2000, reserves related to the 1999 Sedgwick Plan of
$10 million were reversed and recorded as a reduction of goodwill. MMC also
recorded a special charge of $7 million representing changes in estimated
employee termination costs related to the 1999 MMC Plan. This $7 million special
charge was included in the net special credit of $2 million in 2000, as
discussed below.
The other integration costs primarily consist of consulting fees and system
conversion costs incurred in 1999 as a result of the restructuring and merging
of MMC and Sedgwick operations.
The actions contemplated by these plans were completed by year-end 2000. Some
accruals, primarily for future rent under noncancelable leases, costs to restore
leased properties to contractually agreed upon condition and salary continuance
arrangements, are expected to be paid over several years.
CHARGES RELATED TO SEPTEMBER 11: As a result of the events of September 11 and
the subsequent business environment, MMC recorded a pretax charge of $187
million in 2001. Services and benefits provided to victims' families and
employees, such as salary and benefit continuance, counseling and a commitment
to the MMC Victims Relief Fund, represent $69 million of the charges. Write-offs
or impairments of intangibles and other non-cash assets were $32 million and
charges related to disruption of business operations amounted to $25 million.
The above charges are net of insurance recoveries of $126 million, which were
collected prior to December 31, 2002.
RESTRUCTURING COSTS: 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.
The 2001 charge of $61 million is comprised of $44 million for severance and
related benefits affecting 750 people and $17 million for future rent under
noncancelable leases. Actions under the plan were completed 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.
Utilization of the charges is summarized as follows:
================================================================================
BALANCE
Utilization DECEMBER 31,
Initial ---------------
(IN MILLIONS OF DOLLARS) Balance 2001 2002 2002
- --------------------------------------------------------------------------------
Termination payments to employees $ 44 $ (14) $ (25) $ 5
Future rent under noncancelable leases 17 -- (4) 13
- --------------------------------------------------------------------------------
$ 61 $ (14) $ (29) $18
- --------------------------------------------------------------------------------
Number of employee terminations 750 (506) (244) --
Number of office consolidations 9 (2) (7) --
================================================================================
SPECIAL CREDITS: In the fourth quarter of 2001, MMC recorded a special credit of
$13 million attributable to changes in estimates in connection with integration
and restructuring plans provided for in prior years. Changes in estimated costs
resulted in a reversal of reserves of $5 million for employee termination costs
and $2 million related to office consolidations associated with the Sedgwick
transaction and a $6 million reversal of reserves related to office
consolidation costs associated with MMC's 1997 combination with Johnson &
Higgins ("J&H"). The combined impact of the charges related to September 11 and
the special credit was a $.19 reduction in diluted net income per share in 2001.
During 2000, MMC recorded a net special credit of $2 million. This included a
special charge of $7 million representing a change in the estimates related to
the 1999 reserve for employee termination costs associated with the Sedgwick
transaction and reserves of $9 million for office consolidation costs which were
reversed in 2000. Of the $9 million, $7 million represented lease abandonment
costs in London and $2 million represented office consolidation costs associated
with the combination with J&H. The resulting net special credit had no effect on
diluted net income per share.
13 Common Stock
- --------------------------------------------------------------------------------
On May 16, 2002, the Board of Directors authorized a two-for-one stock
distribution of MMC common stock, which was issued as a stock dividend on June
28, 2002. All capital accounts and references to per share amounts have been
restated for this stock distribution.
In 2002, MMC repurchased shares of its common stock for treasury as well as to
meet requirements for issuance of shares for its various stock compensation and
benefit programs. During 2002, MMC repurchased 24.2 million shares for total
consideration of $1.2 billion, compared with 15.6 million shares for total
consideration of $763 million in 2001.
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 currently plans to continue to
repurchase shares in 2003, subject to market conditions.
14 Stockholder Rights Plan
- --------------------------------------------------------------------------------
On September 18, 1997, MMC's Board of Directors approved the extension of the
benefits afforded by MMC's previously existing rights plan by adopting a new
stockholder rights plan, which was amended and restated as of January 20, 2000
and further amended on June 7, 2002. Under the current plan, Rights to purchase
stock, at a rate of one Right for each common share held, were distributed to
shareholders of record on September 29, 1997 and automatically attach to shares
issued thereafter. Under the plan, the Rights generally become exercisable after
a person or group (i) acquires 15% or more of MMC's outstanding common stock or
(ii) commences a tender offer that would result in such a person or group owning
15% or more of MMC's common stock. When the Rights first become exercisable, a
holder will be entitled to buy from MMC a unit consisting of one six-hundredth
of a share of Series A Junior Participating Preferred Stock of MMC at a purchase
price of $200. If any person acquires 15% or more of MMC's common stock or if a
15% holder acquires MMC by means of a reverse merger in which MMC and its stock
survive, each Right not owned by a 15% or more shareholder would become
exercisable for common stock of MMC (or in certain circumstances, other
consideration) having a market value equal to twice the exercise price of the
Right. The Rights expire on September 29, 2007, except as otherwise provided in
the plan.
50
15 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 December 31, 2002, settlements and related costs
previously paid amount to approximately $525 million, of which approximately
$200 million is due from or has been paid by insurers. A small percentage of
cases remain to be settled at December 31, 2002, and the remaining payments are
not expected to be material.
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 ("River Thames"), which was sold in 2001. Sedgwick
guaranteed payment of claims on certain policies underwritten through the
Institute of London Underwriters by River Thames ("ILU Guarantee"). The policies
covered by the ILU Guarantee are reinsured up to (pound)40 million by a related
party of River Thames. Payment of claims under the reinsurance agreement is
collateralized by segregated assets held in a trust. As of December 31, 2002,
the reinsurance coverage exceeded the best estimate of the projected liability
of the policies covered by the ILU Guarantee. To the extent River Thames or the
reinsurer are unable to meet their obligations under those policies, a claimant
may seek to recover from MMC under the guarantee. MMC does not expect any
material net impact on its consolidated financial position or results of
operations related to this guarantee.
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.
16 Segment Information
- --------------------------------------------------------------------------------
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which
includes investment income and losses attributable to each segment, directly
related expenses and minority interest, but excludes special credits and charges
related to September 11. The accounting policies of the segments are the same as
those used for the consolidated financial statements described in Note 1.
Revenues are attributed to geographic areas on the basis of where the services
are performed.
Selected information about MMC's operating segments and geographic areas of
operation follow:
==================================================================================================================================
For the Years Ended Segment Depreciation
December 31, Operating Total and Capital
(IN MILLIONS OF DOLLARS) Revenue Income Assets Amortization Expenditures
- ----------------------------------------------------------------------------------------------------------------------------------
2002--
Risk and Insurance Services $ 5,910(a) $1,490 $ 8,571 $183 $257
Investment Management 2,166 560 2,144 108 82
Consulting 2,364 326 2,080 58 53
- ----------------------------------------------------------------------------------------------------------------------------------
$10,440 $2,376 $12,795 $349 $392
==================================================================================================================================
2001--
Risk and Insurance Services $ 5,152(a) $1,139 $ 7,859 $307 $202
Investment Management 2,409(b) 584(b) 3,001 124 102
Consulting 2,308 313 1,904 72 86
- ----------------------------------------------------------------------------------------------------------------------------------
$ 9,869 $2,036 $12,764 $503 $390
==================================================================================================================================
2000--
Risk and Insurance Services $ 4,780(a) $ 944 $ 8,745 $304 $244
Investment Management 3,242 1,027 2,651 100 139
Consulting 2,286 312 1,717 65 89
- ----------------------------------------------------------------------------------------------------------------------------------
$10,308 $2,283 $13,113 $469 $472
==================================================================================================================================
51
A reconciliation of the totals for the operating segments to the applicable line
items in the consolidated financial statements is as follows:
================================================================================
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST:
Total segment operating income $ 2,376 $ 2,036 $ 2,283
Charges related to
September 11 and special
credits (see Note 12) -- (174) 2
Corporate expense (123) (116) (127)
Reclassification of minority
interest 21 17 21
- --------------------------------------------------------------------------------
Operating income 2,274 1,763 2,179
Interest income 19 23 23
Interest expense (160) (196) (247)
- --------------------------------------------------------------------------------
Total income before income
taxes and minority interest $ 2,133 $ 1,590 $ 1,955
================================================================================
================================================================================
Total
Operating Corporate/ Total
(IN MILLIONS OF DOLLARS) Segments Eliminations Consolidated
- --------------------------------------------------------------------------------
OTHER SIGNIFICANT ITEMS:
2002--
Total assets $12,795 $1,060(c) $13,855
Depreciation and amortization 349 10 359
Capital expenditures 392 31 423
2001--
Total assets $12,764 $1,005(c) $13,769
Depreciation and amortization 503 17 520
Capital expenditures 390 43 433
2000--
Total assets $13,113 $1,031(c) $14,144
Depreciation and amortization 469 19 488
Capital expenditures 472 40 512
================================================================================
Operating Segment Revenue by Product is as follows:
================================================================================
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
RISK & INSURANCE SERVICES
Risk Management and Insurance Broking $ 4,411 $3,829 $ 3,595
Reinsurance Broking and Services 632 523 470
Related Insurance Services 867 800 715
- --------------------------------------------------------------------------------
Total Risk & Insurance Services 5,910 5,152 4,780
- --------------------------------------------------------------------------------
INVESTMENT MANAGEMENT 2,166 2,409 3,242
- --------------------------------------------------------------------------------
CONSULTING
Retirement Services 1,115 1,022 951
Health Care & Group Benefits 358 343 324
Human Capital 340 361 378
Management and Organizational Change 280 322 380
Economic 130 112 102
- --------------------------------------------------------------------------------
2,223 2,160 2,135
Reimbursed Expenses 141 148 151
- --------------------------------------------------------------------------------
Total Consulting 2,364 2,308 2,286
- --------------------------------------------------------------------------------
Total $10,440 $9,869 $10,308
================================================================================
Information by geographic area is as follows:
================================================================================
(IN MILLIONS OF DOLLARS) 2002 2001 2000
- --------------------------------------------------------------------------------
GEOGRAPHIC AREA:
EXTERNAL REVENUE--
United States $ 7,005 $ 6,811 $ 7,324
United Kingdom 1,499 1,325 1,314
Continental Europe 950 843 787
Other 986 890 883
- --------------------------------------------------------------------------------
$10,440 $ 9,869 $10,308
================================================================================
FIXED ASSETS--
United States $ 914 $ 912 $ 916
United Kingdom 261 192 310
Continental Europe 64 55 52
Other 69 76 82
- --------------------------------------------------------------------------------
$ 1,308 $ 1,235 $ 1,360
================================================================================
(a) Includes interest income on fiduciary funds ($118 million in 2002, $165
million in 2001 and $195 million in 2000).
(b) Includes charge of $222 million related to an other than temporary decline
in value of the common stock of Gruppo Bipop-Carire S.p.A.
(c) Corporate assets primarily include unallocated goodwill, insurance
recoverables, prepaid pension and a portion of MMC's headquarters building.
52
Report of Management
- --------------------------------------------------------------------------------
The management of Marsh & McLennan Companies, Inc. has prepared and is
responsible for the accompanying financial statements and other related
financial information contained in this annual report. MMC's financial
statements were prepared in accordance with generally accepted accounting
principles, applying certain estimates and informed judgments as required.
Deloitte & Touche LLP, independent auditors, have audited the financial
statements and have issued their report thereon.
MMC maintains a system of internal accounting controls designed to provide
reasonable assurance that transactions are executed in accordance with
management's authorization, that assets are safeguarded and that proper
financial records are maintained. Key elements of MMC's internal controls
include securing the services of qualified personnel and proper segregation of
duties. Internal auditors monitor the control system by examining financial
reports, by testing the accuracy of transactions and by otherwise obtaining
assurance that the system is operating in accordance with MMC's objectives.
The Audit Committee of the Board of Directors is composed entirely of
independent outside directors and is responsible for recommending to the Board
the independent auditors to be engaged to audit MMC's financial statements,
subject to stockholder ratification. In addition, the Audit Committee meets
periodically with internal auditors and the independent auditors, both with and
without management, to discuss MMC's internal accounting controls, financial
reporting and other related matters. The internal auditors and independent
auditors have full and unrestricted access to the Audit Committee.
/s/ Sandra S. Wijnberg
Sandra S. Wijnberg
Senior Vice President and
Chief Financial Officer
February 28, 2003
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders of
Marsh & McLennan Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Marsh & McLennan
Companies, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Marsh & McLennan Companies, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As described in Notes 1 and 5 to the consolidated financial statements, the
Company changed its method of accounting for goodwill amortization to conform to
Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2003
53
Marsh & McLennan Companies, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA AND
SUPPLEMENTAL INFORMATION (UNAUDITED)
=====================================================================================================================
Net Income (Loss)
Per Share(a) Dividends
(IN MILLIONS OF DOLLARS, Operating Net ------------------- Paid Per
EXCEPT PER SHARE FIGURES) Revenue Income Income Basic Diluted Share
- ---------------------------------------------------------------------------------------------------------------------
2002:
First quarter $ 2,635 $ 687 $ 418 $ .76 $ .73 $.265
Second quarter 2,612 565 336 .62 .60 .265
Third quarter 2,553 512 299 .56 .55 .28
Fourth quarter 2,640 510 312 .58 .57 .28
- ---------------------------------------------------------------------------------------------------------------------
$10,440 $2,274 $1,365 $2.52 $2.45 $1.09
=====================================================================================================================
2001:
First quarter $ 2,631(e) $ 645 $ 369 $ .67 $ .63 $.25
Second quarter 2,541(e) 526 293 .53 .51 .25
Third quarter 2,407(e) 312(b) 168(b) .31 .29(b) .265
Fourth quarter 2,290(e)(f) 280(c) 144(c) .26 .26(c) .265
- ---------------------------------------------------------------------------------------------------------------------
$ 9,869(e)(f) $1,763(d) $ 974(d) $1.77 $1.70(d) $1.03
=====================================================================================================================
2000:
First quarter $ 2,701(e) $ 619 $ 337 $ .63 $ .59 $.225
Second quarter 2,515(e) 514 276 .51 .48 .225
Third quarter 2,575(e) 526 282 .52 .48 .25
Fourth quarter 2,517(e) 520 286 .52 .49 .25
- ---------------------------------------------------------------------------------------------------------------------
$10,308(e) $2,179 $1,181 $2.18 $2.05 $.95
=====================================================================================================================
(a) Net income per share is computed independently for each of the periods
presented. Accordingly, the sum of the quarterly net income per share
amounts does not equal the total for the year in 2001 and 2000.
(b) Excluding one-time items of $173 for the third quarter of 2001, operating
income, net income and diluted net income per share are $485, $274 and
$.48, respectively.
(c) Excluding one-time items of $223 for the fourth quarter of 2001, operating
income, net income and diluted net income per share are $503, $286 and
$.50, respectively.
(d) Excluding one-time items of $396 for the full year 2001, operating income,
net income and diluted net income per share are $2,159, $1,222 and $2.12,
respectively.
(e) In accordance with EITF Issue 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," revenue
includes reclassification of expense reimbursements received from clients.
(f) Reflects reclassification of a pretax $222 million investment write-down
related to an other than temporary decline in value of the common stock of
Gruppo Bipop-Carire S.p.A. as a charge against revenue to conform with
current year presentation.
All per share amounts have been restated for a two-for-one stock distribution of
MMC common stock, which was issued as a stock dividend on June 28, 2002.
As of February 28, 2003, there were 10,666 stockholders of record.
54
Marsh & McLennan Companies, Inc. and Subsidiaries
FIVE-YEAR STATISTICAL SUMMARY OF OPERATIONS
====================================================================================================================================
Compound
For the Years Ended December 31, Growth Rate
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE FIGURES) 2002 2001 2000 1999(b) 1998 1997-2002
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $ 5,910 $ 5,152 $ 4,780 $ 4,523 $ 3,351 16%
Investment Management 2,166 2,409 3,242 2,684 2,296 3%
Consulting 2,364 2,308 2,286 2,086 1,658 11%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenue 10,440 9,869 10,308 9,293 7,305 11%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and Benefits 5,199 4,877 4,941 4,574 3,561 11%
Other Operating Expenses 2,967 3,229 3,188 3,252 2,324 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses 8,166 8,106 8,129 7,826 5,885 9%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 2,274 1,763(a) 2,179 1,467(c) 1,420 23%
Interest Income 19 23 23 21 25
Interest Expense (160) (196) (247) (233) (140)
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Minority Interest 2,133 1,590 1,955 1,255 1,305 24%
Income Taxes 747 599 753 524 509
Minority Interest, Net of Tax 21 17 21 5 --
====================================================================================================================================
Net Income $ 1,365 $ 974 $ 1,181 $ 726 $ 796 26%
====================================================================================================================================
Basic Net Income Per Share Information:
Net Income Per Share $ 2.52 $ 1.77 $ 2.18 $ 1.38 $ 1.56 23%
Average Number of Shares Outstanding 541 550 543 526 512
====================================================================================================================================
Diluted Net Income Per Share Information:
Net Income Per Share $ 2.45 $ 1.70 $ 2.05 $ 1.31 $ 1.49 23%
Average Number of Shares Outstanding 557 572 569 543 527
====================================================================================================================================
Dividends Paid Per Share $ 1.09 $ 1.03 $ .95 $ .85 $ .73 12%
Return on Average Stockholders' Equity 27% 19% 25% 19% 23%
Year-end Financial Position:
Working capital $ (199) $ (622) $ (855) $(1,405) $(1,903)(d)
Total assets $13,855 $13,769 $14,144 $13,503 $12,117
Long-term debt $ 2,891 $ 2,334 $ 2,347 $ 2,357 $ 1,590
Stockholders' equity $ 5,018 $ 5,173 $ 5,228 $ 4,170 $ 3,659
Total shares outstanding (excluding treasury shares) 538 548 552 534 514
Other Information:
Number of employees 59,400 57,800 57,000 52,900 54,300
Stock price ranges--
U.S. exchanges--High $ 57.30 $ 59.03 $ 67.85 $ 48.38 $32.16
--Low $ 34.61 $ 39.70 $ 35.25 $ 28.57 $21.69
====================================================================================================================================
(a) Includes one-time items of $396 million.
(b) Includes full year results for Sedgwick, which was acquired in November
1998.
(c) Includes a special charge of $337 million.
(d) Includes $2.2 billion of commercial paper borrowings made to initially
finance the acquisition of Sedgwick.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for discussion of significant items affecting the results of
operations in 2002 and 2001.
55
BOARD OF DIRECTORS AND CORPORATE OFFICERS
BOARD OF DIRECTORS
JEFFREY W. GREENBERG
Chairman
MATHIS CABIALLAVETTA
Vice Chairman, MMC
Chairman, MMC Global Development
CHARLES A. DAVIS
Vice Chairman, MMC
Chairman and Chief Executive Officer,
MMC Capital, Inc.
LEWIS W. BERNARD
Chairman, Classroom, Inc.
Former Chief Administrative
and Financial Officer,
Morgan Stanley & Co., Inc.
PETER COSTER
President and Chief Executive Officer,
Mercer Inc.
ROBERT F. ERBURU
Former Chairman,
The Times Mirror Company
OSCAR FANJUL
Vice Chairman and Chief Executive
Officer, Omega Capital
Honorary Chairman, Repsol, S.A.
RAY J. GROVES
President and Chief Executive Officer,
Marsh Inc.
STEPHEN R. HARDIS
Chairman, Axcelis Technologies, Inc.
Former Chairman, Eaton Corporation
GWENDOLYN S. KING
President, Podium Prose
Former Commissioner,
Social Security Administration
THE RT. HON. LORD LANG OF MONKTON, DL
Former British Secretary of
State for Trade & Industry
LAWRENCE J. LASSER
President and Chief Executive Officer,
Putnam Investments, LLC
DAVID A. OLSEN
Former Chairman, Johnson & Higgins
MORTON O. SCHAPIRO
President, Williams College
ADELE SIMMONS
Vice Chair, Chicago Metropolis 2020
Former President,
John D. and Catherine T. MacArthur
Foundation
JOHN T. SINNOTT
Chairman, Marsh Inc.
A.J.C. SMITH
Former Chairman, MMC
ADVISORY DIRECTORS
RICHARD E. HECKERT
Former Chairman,
E.I. du Pont de Nemours and Company
RICHARD M. MORROW
Former Chairman, Amoco Corporation
GEORGE PUTNAM
Chairman Emeritus, The Putnam Funds
FRANK J. TASCO
Former Chairman, MMC
COMMITTEES OF THE BOARD
AUDIT
Stephen R. Hardis, CHAIRMAN
Oscar Fanjul
Gwendolyn S. King
David A. Olsen
Morton O. Schapiro
Adele Simmons
COMPENSATION
Lewis W. Bernard, CHAIRMAN
Robert F. Erburu
The Rt. Hon. Lord Lang of Monkton, DL
DIRECTORS AND GOVERNANCE
Robert F. Erburu, CHAIRMAN
Gwendolyn S. King
The Rt. Hon. Lord Lang of Monkton, DL
EXECUTIVE
Jeffrey W. Greenberg, CHAIRMAN
Lewis W. Bernard
Stephen R. Hardis
The Rt. Hon. Lord Lang of Monkton, DL
Adele Simmons
A.J.C. Smith
OTHER CORPORATE OFFICERS
SANDRA S. WIJNBERG
Senior Vice President and
Chief Financial Officer
WILLIAM L. ROSOFF
Senior Vice President and
General Counsel
FRANCIS N. BONSIGNORE
Senior Vice President,
Executive Resources and Development
BARBARA S. PERLMUTTER
Senior Vice President, Public Affairs
INTERNATIONAL ADVISORY BOARD
A.J.C. SMITH
INTERNATIONAL ADVISORY BOARD CHAIRMAN
Former Chairman, MMC
ABDLATIF Y. AL-HAMAD (Middle East)
Chairman, Arab Fund for Economic
and Social Development
RAYMOND BARRE (France)
Former Prime Minister
ROLF E. BREUER (Germany)
Chairman, Deutsche Bank AG
MATHIS CABIALLAVETTA (Switzerland)
Vice Chairman, MMC
Chairman, MMC Global Development
JOHN R. EVANS (Canada)
Chairman, Torstar Corporation
OSCAR FANJUL (Spain)
Vice Chairman and Chief Executive
Officer, Omega Capital
Honorary Chairman, Repsol, S.A.
TOYOO GYOHTEN (Japan)
President, Institute for
International Monetary Affairs
Former Chairman, The Bank of Tokyo
MARCILIO MARQUES MOREIRA (Brazil)
Senior International Advisor,
Merrill Lynch
Former Finance Minister and
Former Ambassador to the United States
PAUL F. OREFFICE (United States)
Former Chairman and
Chief Executive Officer,
The Dow Chemical Company
JESUS SILVA-HERZOG (Mexico)
Institute for Monetary Affairs
Former Finance Minister and
Former Ambassador to the United States
WEI MING YI (China)
Chairman, International Advisory Council,
China International Trust and
Investment Corporation
56
SHAREHOLDER INFORMATION
ANNUAL MEETING
The 2003 annual meeting of shareholders will be held at 10 a.m., Thursday, May
15, in the 2nd floor auditorium of the McGraw-Hill Building, 1221 Avenue of the
Americas, New York City. At the time of the mailing of this annual report, the
notice of the annual meeting and proxy statement, together with a proxy card, is
scheduled to be sent to each shareholder.
ANTICIPATED 2003 DIVIDEND PAYMENT DATES
February 14 (paid), May 15, August 15, November 14
FINANCIAL AND INVESTOR INFORMATION
Shareholders and prospective investors inquiring about reinvestment and payment
of dividends, consolidation of accounts, changes of registration and stock
certificate holdings should contact:
The Bank of New York
Shareholder Relations Department
P.O. Box 11258
Church Street Station
New York, NY 10286
Telephone: (800) 457-8968
(610) 312-5238
Certificates for transfer and address changes should be sent to:
The Bank of New York
Receive and Deliver Department
P.O. Box 11002
Church Street Station
New York, NY 10286
The Bank of New York
c/o Computershare Services
Registrar's Department
P.O. Box 82, The Pavilions
Bridgewater Road, Bristol BS99 7NH
England
Telephone: 0870-7020000
The Bank of New York's website: www.stockbny.com
E-mail inquiries: shareowner-svcs@bankofny.com
Copies of our annual reports and Forms 10-K and 10-Q are available on MMC's
website and also may be requested by contacting:
Corporate Development
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, NY 10036
Telephone: (212) 345-5475
MMC's website: www.mmc.com
STOCK LISTINGS
MMC's common stock (ticker symbol: MMC) is listed on the New York, Chicago,
Pacific, and London stock exchanges.
- --------------------------------------------------------------------------------
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT TO SHAREHOLDERS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH BY
THEIR NATURE INVOLVE RISKS AND UNCERTAINTIES. PLEASE REFER TO MARSH & MCLENNAN
COMPANIES' 2002 ANNUAL REPORT ON FORM 10-K FOR "INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS" AND A DESCRIPTION OF CERTAIN FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER FROM GOALS REFERRED TO HEREIN OR CONTEMPLATED BY SUCH
STATEMENTS.
- --------------------------------------------------------------------------------
SELECTED IMAGERY: COVER: NEW EXCHANGE IN THE STRAND, LONDON, INIGO JONES.
PAGE 4: TOP, TEATRO OLIMPICO, VICENZA, ANDREA PALLADIO;
CENTER, COURT OPERA, VIENNA, E. VAN DER NULL AND A. SICARD
VON SICARDSBURG.
PAGE 7: TOP, GATEWAY FOR HATTON HOUSE, LONDON, INIGO JONES;
BOTTOM, THE TEMPIETTO, ROME, DONATO BRAMANTE.
PAGE 10: CENTER, DETAIL OF CORINTHIAN COLUMN; BOTTOM,
ACADEMY OF SCIENCE, ATHENS.
PAGE 14: TOP, MERCHANT'S HOUSE, CANTON; CENTER, ADAPTATION
OF INDIAN ARCHITECTURE; BOTTOM, PHOENIX HALL, KYOTO.
PAGE 16: TOP LEFT, VILLA ROTONDA, VICENZA, ANDREA PALLADIO;
TOP RIGHT, PLAN AND ELEVATION OF VILLA TRISSINO, MELEDO,
ANDREA PALLADIO; BOTTOM, SECTION OF THE PANTHEON, ROME.
PAGE 19: TOP, DRAWING OF A PALACE, ITALY, ROBERT ADAM;
BOTTOM, MONTICELLO, VIRGINIA, THOMAS JEFFERSON.
Designed and Produced by Taylor & Ives, Inc., NYC
GRAPHIC OMITTED: ILLUSTRATION, ARCHITECTURE
MMC [LOGO]
MARSH o PUTNAM o MERCER
MARSH & MCLENNAN COMPANIES
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, NY 10036
www.mmc.com