Marsh & McLennan Companies, Inc.
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Cover graphic: Illustration of globe encircled by highways and industry-specific
elements; also years 1871 and 1996.
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Annual Report 1996
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Marsh & McLennan Companies, Inc.
is a professional services firm with insurance and
reinsurance broking, investment management and
consulting businesses. More than 27,000 employees
worldwide provide analysis, advice and transactional
capabilities to clients in over 80 countries.
<PAGE>
Financial Highlights
REVENUE
($ in billions)
92 93 94 95 96
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2.9 3.2 3.4 3.8 4.1
EARNINGS PER SHARE
(in dollars)
92 93 94 95 96
------ ------ ------ ------ ------
4.21 4.52 5.19 5.53 6.34
For the Three Years Ended December 31,
(In millions, except per share figures) 1996 1995 1994
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Revenue $4,149.0 $3,770.3 $3,435.0
Operating Income $ 715.3 $ 694.9 $ 670.3
Income Before Income Taxes and
Cumulative Effect of Accounting Change $ 668.0 $ 649.8 $ 631.5
Net Income $ 459.3 $ 402.9 $ 371.5
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Stockholders' Equity $1,888.6 $1,665.5 $1,460.6
Income Per Share Before Cumulative Effect
of Accounting Change $ 6.34 $ 5.53 $ 5.19
Net Income Per Share $ 6.34 $ 5.53 $ 5.05
Dividends Paid Per Share $ 3.30 $ 2.975 $ 2.80
Return on Average Stockholders' Equity 26% 26% 26%
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Year-end Stock Price $ 104 $ 88 3/4 $ 79 1/4
<PAGE>
Dear Shareholder
This past year was a very successful one for
Marsh & McLennan Companies. I am pleased to report our strong results. Revenue
rose 10 percent to $4.1 billion from $3.8 billion in 1995. Income was $459
million, compared with $403 million in 1995. Earnings per share rose 15 percent
to $6.34, compared with $5.53 in 1995. We also raised our dividend by 12.5
percent, continuing to pass the benefits of increased earnings to our
shareholders.
During the year, we took greater advantage of the breadth of our Company's
global professional services network. Changes in societal attitudes, political
reform and economic growth throughout the world are creating an increasing need
for the advice and services we provide. The closer association among our
risk-related businesses and consulting operations positions us well to respond
to the larger, more complex risks and problems our clients encounter.
This March, we agreed to a strategic business combination with Johnson &
Higgins, a leading insurance broking firm with total revenue of $1.2 billion in
1996. This is an extraordinary opportunity for Marsh & McLennan Companies - one
that will contribute to our growth and prosperity in the future and provide
significant added value to our shareholders. This strategic business combination
responds to the requirements of an increasingly competitive marketplace by
combining two firms with compatible cultures, innovative technology, dedication
to quality, global operations, talented professionals and excellent franchises.
This merger preserves and strengthens our foundation in the risk and insurance
services business. At the same time, we maintain our ability and flexibility to
continue to grow our other businesses internally and through acquisitions.
Marsh & McLennan Companies' businesses achieved
solid results in varying operating conditions in 1996. Investment management
performed superbly in a strong market, as assets under management rose to $173
billion and revenue grew 44 percent. Increased demand for consulting services
resulted in double-digit revenue growth for that sector. Insurance services
revenue totaled $1.9 billion in an environment where plentiful capacity in most
world insurance markets has lowered the cost of risk transfer.
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Putnam's mutual fund business was robust as more individuals chose funds
as savings and investment vehicles, particularly for retirement. Strong
investment performance contributed to record gains as mutual fund assets under
management increased 43 percent to $134 billion. Skillful investment management
contributed to the growth of Putnam's institutional business, which increased 23
percent to $39 billion, attracting a record level of new defined benefit and
defined contribution plan clients.
We sold The Frizzell Group Limited, a U.K. insurance program manager, in
June 1996 and realized a gain of $33 million. Excluding Frizzell, insurance
services revenue grew modestly. Insurance broking revenue increased 5 percent as
Marsh & McLennan's initiatives achieved efficiencies that improved its worldwide
insurance placement process. Furthering its global strategy of creating an
integrated organization, Marsh & McLennan expanded its presence in Europe and
Latin America.
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Graphics: Photograph of A.J.C. Smith, Chairman. Background illustration
including globe, cityscape and Marsh & McLennan Companies documents.
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3
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Seabury & Smith produced solid results, with revenue increasing 6 percent.
Prospects for growth in 1997 are good, as demand increases for the insurance
payroll deduction programs Seabury & Smith offers to employers, and the company
expands its marketing and sales of association-sponsored insurance plans.
Guy Carpenter, our reinsurance intermediary, is experiencing difficult
market conditions resulting from insurance company consolidations, higher risk
retentions and lower property catastrophe premium rates. We continue to take
steps to increase profitability by integrating functions, streamlining
operations and reducing expenses.
Marsh & McLennan Risk Capital had a successful year as it continued to
make domestic and international private equity investments, for itself and its
clients, in the insurance industry. Principal investing differentiates our risk
and insurance services business from our competitors'. Marsh & McLennan Risk
Capital allows us to make markets for clients when the need arises. Through
these investments - which to date include start-ups, turn-arounds and
consolidations - we are also participating in the ongoing restructuring of the
property & casualty insurance industry.
Our consulting business also performed well in 1996, strengthening its
growing reputation as one of the top providers of consulting services globally.
Mercer Consulting Group's revenue grew 10 percent to reach $1.2 billion. Human
resources consulting achieved strong results across all major practices,
including retirement, health care and compensation. Management and economic
consulting revenue increased as Mercer secured large new assignments, both
domestic and international. Mercer has been successful in managing its business
globally by coordinating practices and operating entities to deliver value to
clients. Mercer also has increased its presence in Europe, Latin America and
Asia.
This January, we purchased Compagnie Europeenne
De Courtage d'Assurances et de Reassurances (CECAR), the second largest
insurance broker in France. Our present French operating company, Faugere &
Jutheau, will be combined with CECAR, a leading provider of insurance broking
services to major French industrial groups around the world. CECAR's business is
complementary with Faugere & Jutheau's, extends our strong franchise on the
European continent and should increase our earnings potential in the region.
We elected two new directors to the Board in 1996: Robert F. Erburu,
former chairman of The Times Mirror Company and Jeffrey W. Greenberg, chief
executive of Marsh & McLennan Risk Capital Corp.
We are optimistic about 1997 and committed to maintaining our long-term
objective for double-digit earnings growth. We realize that the ingenuity and
commitment of our employees drive our Company's success and ensure our
reputation as one of the world's preeminent professional services firms.
/s/ A.J.C. Smith
A.J.C. Smith, Chairman March 12, 1997
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Managing
Professional Services
[Graphic: Medal -- Marsh & McLennan Companies 1871 1996]
Organizations increasingly seek sophisticated professional services to
help them compete and prosper in the global economy.
Marsh & McLennan Companies' professional services have evolved over 125
years to encompass risk and insurance services, investment management and
consulting. Our businesses deliver substantial benefits to clients as they seek
protection from the risks associated with managing businesses worldwide. We also
manage investments for clients in global financial markets and develop human
resources and business strategies.
On the following pages, we examine the performance of our businesses and
their prospects for growth. We are confident that we can continue to deliver
double-digit earnings to shareholders by effectively managing the wide array of
services our professionals provide.
5
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Risk and Insurance Services
AREA CHART:
PROPERTY & CASUALTY INSURANCE MARKETS
INTERNATIONAL GROWTH
($ in billions)
Asia Latin
Europe Pacific America
------------------------
1975 34.9 9.6 2.1
1976 41.0 12.0 2.4
1977 48.1 14.9 2.8
1978 59.9 19.2 3.5
1979 75.6 18.6 4.2
1980 73.5 22.9 6.2
1981 70.8 23.9 5.4
1982 69.1 24.7 3.9
1983 64.7 27.1 3.8
1984 61.6 28.5 3.6
1985 82.2 36.5 4.2
1986 116.6 57.5 5.6
1987 152.2 70.5 4.3
1988 152.7 80.8 5.8
1989 163.9 79.1 4.6
1990 202.0 90.4 6.1
1991 201.4 98.8 9.9
1992 196.7 102.9 12.9
1993 224.7 133.7 14.5
1994 233.0 143.0 17.0
1995 246.0 154.0 20.0
BAR CHART:
PROPERTY & CASUALTY INSURANCE MARKETS
COMPOUND ANNUAL GROWTH
(1975-1995)
UNITED STATES 8.6%
EUROPE 10.2%
ASIA PACIFIC 12.2%
LATIN AMERICA 14.9%
PIE CHART:
GLOBAL PROPERTY & CASUALTY INSURANCE MARKETS
1995: $700 billion
CANADA
$16 billion
UNITED STATES
$259 billion
OTHER
$5 billion
EUROPE
$246 billion
ASIA PACIFIC
$154 billion
LATIN AMERICA
$20 billion
Source for charts: Marsh & McLennan Companies
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Managing Global Growth
Marsh & McLennan's risk and insurance services
revenue grew in 1996. Insurance broking increased 5 percent and program
management rose 6 percent in a highly competitive insurance marketplace where
world underwriters have continued to accept risks at lower costs.
Marsh & McLennan is successfully taking steps to increase the growth of
its risk-related businesses. It is optimistic about the prospects based on the
continued expansion of global economies, the greater size and complexity of
business risks, and societal sensitivity about risk and liability. Organizations
will increasingly turn to risk and insurance services providers that have the
resources and expertise to help them succeed in challenging business
environments.
The size of the worldwide property & casualty insurance market provides
some measure of the potential. Premiums exceeded $700 billion in 1995, with the
United States accounting for 37 percent. U.S. premiums have increased at a
compound annual rate of 9 percent for the past 20 years and growth has been
greater throughout Europe, Asia Pacific and Latin America. Asia Pacific's global
market share has doubled over this period. This growth has been driven primarily
by Japan, the world's second largest economy and the second largest insurance
market.
The exceptional economic growth rates in many countries in Asia Pacific -
including South Korea, China, Taiwan, Thailand, India, Malaysia and Indonesia -
and in Latin American countries - such as Brazil, Argentina, Colombia,
Venezuela, Chile and Peru - have spurred new investment and contributed to the
growth of world trade. These emerging economies are beginning to recognize the
value of risk management, which presents excellent prospects for insurance
services providers.
International Expansion - Marsh & McLennan is distinguished by the range
and depth of its global resources and the strength of its owned-and-operated
organization of offices worldwide. It was the first insurance broker to perceive
the ongoing trend toward multinational clients and to expand operations on a
large scale around the world. Building from a strong position in North America,
Marsh & McLennan developed an extensive base in Europe, where it now operates as
an integrated organization. It continues to grow its European presence; recently
it acquired Compagnie Europeenne De Courtage d'Assurances et de Reassurances
(CECAR), France's second largest insurance broker.
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The expansion strategy applied successfully in Europe is being extended to
Latin America. Marsh & McLennan is now the area's leading insurance broker
through its wholly owned operations in Argentina, Brazil, Chile and Mexico, and
its correspondent relationships throughout the region.
It also is strategically positioned to take advantage of fast-paced
economic growth in Asia Pacific, where government-controlled markets are opening
to international competition. Japan has been the area's dominant economy. Marsh
& McLennan's long-term strategy there has been to develop strong relationships
with Japanese multinationals operating throughout the world. These firms, faced
with increasing competition locally and globally, are consequently becoming more
aware of the economic benefits of effective risk management. With insurance
regulations revised to allow new entrants to compete for business, Marsh &
McLennan will increase its presence in the Japanese market. The emerging giant
economies of China and India also present new opportunities.
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Graphic on pages 8 and 9: Landscape illustration incorporating documents,
computer screen and city scene.
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Engines of Growth - Marsh & McLennan's insurance and reinsurance broking
businesses have been transformed to capitalize on these global opportunities and
to achieve growth.
Improvements in the global delivery of services to clients should lead to
favorable financial results. Significant investment in systems automation and
information technology is making the placement of insurance in global insurance
markets more efficient and is enabling more cost-effective delivery of services
to mid-sized companies. Integrating insurance and reinsurance operations is also
leading to improved results.
More resources are now directed to client activities. Marsh & McLennan's
own global electronic network allows clients and their service teams to exchange
messages and documents
8
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Organizations increasingly turn to risk and
insurance services providers that have
the resources and expertise to help them succeed in
challenging business environments.
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Graphic on pages 8 and 9: Landscape illustration incorporating documents,
computer screen and city scene.
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easily. The firm's Global Broking System uses technology to match clients' risk
profiles with insurance placements. The system transforms paper-based processes
into faster, more accurate electronic transactions. One of the greatest benefits
of this technology will be the capture of valuable market and transaction
information that will help Marsh & McLennan professionals provide more effective
insurance coverages for clients.
Establishing global practices in the aviation, marine, energy, and
financial and professional services industries has been an excellent way to
manage the firm's industry-specific expertise. These global practices, which
have produced strong revenue growth in recent years,
9
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concentrate professional expertise in a few key locations and deliver
specialized services globally. The concept has been extended to the utility,
information and communications, transportation, health care and construction
fields.
In the competitive global economy, corporations are concerned about
managing risk more rigorously. Marsh & McLennan is a leader in designing
innovative coverages and sophisticated risk financing. It tailors programs to
fit client requirements for managing balance sheet liabilities, protecting
against employee lawsuits and achieving lower costs and broader coverage through
comprehensive multi-year, multi-line insurance contracts. New environmental
insurance programs limit the costs of cleaning up pollution sites and provide a
single solution to insuring all the parties involved in the work.
A Spectrum of Risk-Related Businesses - Seabury & Smith is attracting
increased levels of new business in insurance program management. It is building
on its strengths in customer service and program administration by developing
proprietary systems to serve payroll
As risks multiply in size and complexity,
opportunities to provide insurance services related to
risk transfer and risk management will rise.
deduction clients and members of associations, and to manage benefits programs
for small businesses.
Marsh & McLennan Risk Capital, which originates, structures and manages
insurance industry investments, differentiates Marsh & McLennan Companies from
its competitors. Marsh & McLennan Risk Capital managed more than $500 million of
capital in 1996 and is producing excellent results. Its strategy is to continue
to harvest gains from prior successful investments and redeploy them into new
ventures.
Through its investments and global services, Marsh & McLennan Risk Capital
is participating in the significant change and restructuring taking place in the
insurance industry. As a component of Marsh & McLennan's risk and insurance
services business, this exciting principal investing company is using Marsh &
McLennan's network of brokers as a source of investment ideas and to identify
investment opportunities that would not otherwise be evident. The company has
the potential to produce increased investment gains for Marsh & McLennan.
10
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Marsh & McLennan's reinsurance intermediary business has been affected by
insurance company consolidations, higher risk retention by clients and declining
reinsurance rates. To offset this, Guy Carpenter has instituted a rigorous
expense reduction program and has fortified its business development teams,
which have been successful in attracting increased levels of new business.
Recent initiatives in specialty lines coverage, catastrophe modeling and
indexing, public sector reinsurance and the capital markets have created
opportunities and
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Graphic: Illustration of globe encircled by highways and industry-specific
elements.
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extended the range of products and services offered to clients. Guy Carpenter's
strong analytical and reinsurance resources, combined with steps it is taking to
strengthen its position, will keep it at the forefront of the industry.
Marsh & McLennan is positioned well for future growth. As business risks
worldwide multiply in size and complexity, the opportunities to provide
insurance services related to the transfer and management of risk will continue
to rise.
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Investment Management
BAR CHART:
OPERATING INCOME GROWTH
($ in millions)
91 92 93 94 95 96
----- ----- ----- ----- ----- -----
94 124 169 208 244 339
BAR CHART:
MARKET SHARE OF MUTUAL FUND SALES
(Percent of Industry Net Sales of
Equity, Bond & Income Funds)
91 92 93 94 95 96
----- ----- ----- ----- ----- -----
2.8 4.2 5.2 5.7 6.7 10.4
STACKED BAR CHART:
ASSETS UNDER MANAGEMENT
($ in billions)
ASSETS UNDER
MANAGEMENT 1991 1992 1993 1994 1995 1996
------------ ---- ---- ---- ---- ---- ----
FUNDS RETAIL 36,006 44,815 62,729 64,442 87,676 123,905
DEFINED BENEFIT 15,836 18,979 26,475 27,464 31,265 38,029
DEFINED CONTRIBUTION 350 903 1,724 3,401 6,736 11,512
------ ------ ------ ------ ------- -------
TOTAL 52,192 64,697 90,928 95,307 125,677 173,446
Source for charts: Marsh & McLennan Companies and Investment Company Institute
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A Decade of Outstanding Growth
Putnam Investments' growth surged in 1996,
supported by exceptional investment performance, strong equity markets and
record sales of mutual funds. Assets under management at year-end were over $173
billion, up 38 percent from 1995, and more than four times the assets at the end
of 1990.
Putnam performed superbly in a market whose robust levels coincided with a
growing consciousness about retirement savings needs. This contributed to the
interest in mutual funds as an investment choice. Industrywide, stock funds took
in more than $200 billion of net new money in 1996, with Putnam attracting $23
billion. Putnam's institutional assets under management grew 23 percent from
1995 levels, with record increases in its 401(k) and defined benefit plan
business.
Putnam's revenue for 1996 was ahead of the prior year's level by 44
percent, with operating income increasing 39 percent. Over the past 20 years,
its operating income has grown at a compound annual rate exceeding 20 percent;
for the last five years, growth has been nearly 30 percent.
Strategy for Success - Putnam's leading position in investment management
is based on a long-term strategy that emphasizes strong performance; disciplined
investment decision-making; rigorous research and analysis; a smooth-functioning
integrated team of investment professionals; focused marketing and sales; and
quality investor services.
While broadening and strengthening its investment performance core - the
lifeblood of its business - Putnam has developed strong marketing and sales
capabilities targeted to its distribution channels, and built an investor
services function that is a leader in the industry. Putnam has elevated
marketing and investor services to the same relative standard of excellence as
it holds investment management.
The result has been the transformation of Putnam over the past decade.
Today, it offers a wide spectrum of products across diverse asset classes for
individual and institutional investors. Investments range from small-company and
specialized aggressive growth funds to international equity, global fixed
income, U.S. government, high-yield and tax-exempt funds. In 1996, Putnam
offered more than 95 mutual funds and managed institutional portfolios for over
450 global clients.
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The cornerstone of Putnam's investment process is research. To meet the
demands of its own rapid growth and the increasing need for specialized
research, Putnam more than doubled the number of investment analysts between
1990 and 1996. In addition, it has invested continuously in improving the
caliber of its professional staff. Both efforts have led to excellent investment
performance.
Distribution through brokers, financial institutions and financial
advisers has helped target customers, leading Putnam to outperform its
competitors in attracting and retaining assets. Putnam's broad range of
products, along with multiple sales charge structures that allow investors to
select funds that specifically address their financial circumstances and
investment goals, have contributed to its strong standing. Moreover, disciplined
adherence to each fund's stated investment objective has increased confidence in
Putnam's products.
Investor services are tailored to the specific needs of each mutual fund
distribution channel as well as plan sponsors and individuals. As the first
mutual fund manager to bring account administration in-house some 30 years ago,
Putnam has pioneered the use of information technology to improve shareholder
service and reduce costs. It led the mutual fund industry in the introduction of
image processing. In 1994, Putnam opened a six-acre, state-of-the-art investor
services facility in Franklin, Massachusetts, which handles 48 million pieces of
mail each year and fields 25,000 phone calls a day. In 1996, it added a
300,000-square-foot site in Andover, north of Boston, dedicated principally to
investor services, including the growing defined contribution plan business.
Putnam handled over 65 million transactions for seven million individual
shareholders in 1996. It now employs more than 4,000 people primarily in its
Boston headquarters and three separate sites in the greater Boston area.
Future Growth - Putnam's growth prospects are strong, supported by
demographic trends throughout the world, the growing preference for mutual funds
over other investments and the market share it has gained among its top
competitors. Further, defined benefit plan sponsors show an increasing
preference for multi-asset class managers such as Putnam, which serves a growing
number of clients in a multi-product relationship.
Double-digit increases through the year 2000 in total industry assets
under management, equity mutual funds and defined contribution 401(k) plans are
predicted by certain analysts. These increases are being fueled by a rise in
disposable income as baby boomers reach
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their peak saving years. Changes in Social Security in the United States and
public retirement systems worldwide also may affect the role of professional
money managers.
Overall, the pool of assets that individuals and companies will need to
manage is expected to rise. Total discretionary financial assets in the United
States approached $15 trillion in 1996, including $2.4 trillion of mutual fund
assets, exclusive of money market funds. The
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Graphic on pages 14-15: Illustration of currency and newspaper financial page.
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15
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Graphic: Illustration incorporating telephone, Putnam documents and computer
screen.
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16
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mutual fund component could increase significantly over the next five years as
more individuals turn to mutual funds as investment and savings vehicles. Demand
for professional investment advice will also increase as mutual fund choices
multiply, investment portfolios expand and decisions about retirement savings
become more complex.
The two components of Putnam's institutional business, defined benefit and
defined contribution plans, each attracted a record level of new clients and
assets in 1996. As mutual funds have become the preferred choice for defined
contribution 401(k) plans, Putnam's participation in this growing market has
increased. Industrywide, total 401(k) plan assets reached over $700 billion in
1996, up significantly in the last five years. Putnam is among the top
competitors in the field, having set its sights on becoming the premier plan
provider emphasizing performance, quality recordkeeping, education and service.
Putnam has seen strong interest, with accompanying asset and revenue
growth, in the international equity products it offers pension clients and
mutual fund shareholders.
Putnam's growth prospects are strong,
supported by demographic trends, the growing
preference for mutual funds and the market share it
has gained among its top competitors.
It is pursuing a strategy to increase the breadth of its international
investment skills and product range, with the goal of becoming a premier global
competitor in all aspects of investment management.
Demand for international investment products is expected to increase over
the next five years. Industrywide, institutional investments in international
products could grow an average of 15 percent per year, with assets projected to
double from $300 billion to $600 billion. Similar growth is expected in
international mutual funds, with assets forecasted to double from $250 billion
to $500 billion. With demand for a broader product range likely to increase, the
ability to offer different styles and a range of products will be critical.
New international initiatives, combined with anticipated growth in the
401(k) defined contribution business, continuing expansion of distribution
channels, improvements in investor services and increased interest in investing
among individuals point to significant growth for Putnam in the years ahead.
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Consulting
BAR CHART:
REVENUE GROWTH
($ in millions)
76 81 86 91 96
------ ------ ------ ------ ------
61.8 101.3 333.0 894.0 1159.0
BAR CHART:
REVENUE BY GEOGRAPHIC AREA
($ in millions)
1996: $1.2 billion
ASIA PACIFIC/ UNITED
OTHER CANADA EUROPE STATES
------------- ------ ------ ------
85.6 101.6 264.8 707.2
PIE CHART:
REVENUE BY PRACTICE
1996: $1.2 billion
MANAGEMENT CONSULTING 19%
COMPENSATION & COMMUNICATION 11%
ECONOMIC/OTHER 10%
HEALTH CARE 17%
PENSION & RETIREMENT 43%
Source for charts: Marsh & McLennan Companies
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Opportunities for Continued Growth
Global competition, privatization, deregulation
and changing demographics are among the conditions that have fueled the growth
of Mercer Consulting Group, which reached $1.2 billion in revenue in 1996. These
conditions are expected to continue in the future. The need for corporations to
seek unbiased, specialist advice on a broad array of complex issues has never
been greater.
Mercer is a leader in the $20 billion human resources and management
consulting market, which has grown at double-digit rates over the past decade.
The prospects for this market are excellent. Mercer is optimistic that it will
increase its position based on its investments in global development,
intellectual resources, technology and systems support.
Business Transformation - Marsh & McLennan Companies recognized the
potential of consulting more than 20 years ago when it separated its successful
employee benefits operations from insurance broking to form the Mercer
consulting organization. Since then, with a separate identity and management
structure, Mercer has broadened the scope of its services to become the leading
firm specializing in consulting on retirement, health care and compensation
programs.
At the time Mercer was established, 70 percent of its revenue stemmed from
retirement consulting. The rapid drive into other consulting areas and new
geographies has changed Mercer's practice mix so that today, that figure is less
than 45 percent of revenue. Through a series of strategic acquisitions, which it
successfully integrated with its existing operations, Mercer has become the
global leader in the employee benefits field with the largest market share and
an excellent franchise in all strategically important geographic locations. It
successfully moved into general management consulting through its acquisition of
four consulting firms in the past decade, adding practices in strategy,
organization, marketing and logistics. Through its economic consulting
subsidiary, it is the leader in providing research and analysis on a wide range
of issues related to business and public policy.
Mercer has set a goal of continued double-digit growth. It is optimistic
that it can sustain these results based on its improved market positioning which
increasingly puts Mercer among the preferred providers for major corporations
seeking outside counsel. This positioning should not only lead to an increase in
business for Mercer but also have the effect of reducing the costs of new
business development - a key factor in improving profit margins.
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Mercer's optimism about its strong position reflects several industry
trends. The first is that multinational companies are looking to partner with
consultants who can provide them with resources in all their key locations.
Mercer's global expansion has positioned it uniquely to respond to this need.
Second, companies' emerging interest in aligning human resources initiatives
with overall business strategies - linking reward mechanisms, for example, to
the attainment of specific goals - is driving their reliance on consulting firms
that can seamlessly integrate a variety of services.
Mercer continues to seek better ways to utilize its enormous pool of
intellectual talent. It is striving to give clients added value by taking
advantage of synergies among its services. It is pursuing new growth options by
linking skill sets in order to forge new services. An example is
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Graphic on pages 20-21: Landscape illustration incorporating city scene.
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Mercer's launch of a separate health care provider consulting practice to
leverage its management consulting and human resources expertise to focus on
issues confronting organizations in the health services industry. Excellent
prospects for this practice exist worldwide as governments reform their national
health care systems.
The International View - Mercer has established a reputation as an
international consulting leader. Demand for its services continues to grow
worldwide as both industrialized and developing nations move toward more open
marketplaces, and as their political, social and economic systems evolve.
Government-owned entities in the telecommunications, utilities and
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transportation sectors are being privatized. And for all industries, governments
are increasingly shifting health and retirement benefits responsibilities to the
private sector. Acute problems emerging from an aging population have sparked a
crisis in social security systems in many parts of the world. This has important
implications for the financing of state pension systems and for employers that
are seeking alternative ways of dealing with the increased benefits costs.
Companies around the world are reacting to accelerated change, new ways of
doing business and the sophistication of their customers. Their need for
professional advice is increasing. Mercer's prospects for growth are strong
based on the wide range of consulting services it provides that help clients
meet these challenges in their pursuit of competitive advantage.
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Graphic on pages 20-21: Landscape illustration incorporating city scene.
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Mercer is a global consulting leader.
Demand for its services continues to grow as countries
move toward more open marketplaces and
political, social and economic systems evolve.
21
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Marsh & McLennan Companies
Worldwide
Risk and Insurance Services
MARSH & McLENNAN, INCORPORATED, the world's leader in providing risk
management and insurance broking services, advises clients on risk assessment
and develops programs utilizing risk retention, risk transfer, strategic risk
financing and consulting services. The company provides a single, integrated
service to clients throughout the world.
GUY CARPENTER & COMPANY, INC. is the leading global reinsurance
intermediary. Guy Carpenter advises insurance and reinsurance companies on the
complex issue of risk management and provides a comprehensive array of support
services. The company structures and places reinsurance coverage and other
risk-transfer financing with reinsurance firms and capital markets worldwide.
SEABURY & SMITH, INC. is the leading provider of insurance program
management and underwriting management services in North America. Seabury &
Smith designs and administers specialized, systems-driven insurance programs
primarily for members of affinity groups. The company is also the largest
insurance underwriting manager of professional indemnity and directors' and
officers' liability insurance in the United Kingdom.
MARSH & McLENNAN RISK CAPITAL CORP. originates, structures and manages
insurance industry investments and provides advisory services on a global basis.
Investment Management
PUTNAM INVESTMENTS, INC., 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 more than 95 mutual funds, has
over 450 institutional clients and 7 million individual shareholders. It had
more than $173 billion in assets under management at year-end 1996.
Consulting
MERCER CONSULTING GROUP, INC. provides advice and services to the
managements of organizations. Mercer, one of the largest consulting firms in the
world, is a market leader in human resources, employee benefits and compensation
consulting. It is also widely recognized for helping organizations create and
execute strategies for profitable growth and for its economic consulting. These
areas of expertise are offered by professionals located in major business
centers around the world.
22
<PAGE>
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 (the "Company") is a
professional services firm with insurance services, investment management and
consulting businesses. Approximately 27,000 employees provide analysis, advice
and transactional capabilities to clients worldwide.
The consolidated results of operations follow:
================================================================================
(In millions, except per share figures) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
Insurance Services $1,907.3 $1,963.9 $1,886.5
Investment Management 1,082.5 750.0 615.4
Consulting 1,159.2 1,056.4 933.1
- --------------------------------------------------------------------------------
4,149.0 3,770.3 3,435.0
- --------------------------------------------------------------------------------
Expense:
Compensation and Benefits 2,204.3 1,948.8 1,740.2
Other Operating Expenses 1,170.0 1,126.6 1,024.5
Unusual Charges, net 59.4 -- --
- --------------------------------------------------------------------------------
3,433.7 3,075.4 2,764.7
- --------------------------------------------------------------------------------
Operating Income $715.3 $694.9 $670.3
================================================================================
Income Before Cumulative
Effect of Accounting Change $459.3 $402.9 $382.0
================================================================================
Net Income $459.3 $402.9 $371.5
================================================================================
Per Share Data:
Income Before Cumulative
Effect of Accounting Change $6.34 $5.53 $5.19
================================================================================
Net Income $6.34 $5.53 $5.05
================================================================================
Average Number of Shares Outstanding 72.4 72.9 73.6
================================================================================
Revenue, derived mainly from commissions and fees, increased 10% in 1996.
Excluding The Frizzell Group Limited ("Frizzell"), a U.K.-based insurance
program management firm that was sold in June 1996, revenue grew 12% from 1995
primarily due to a 44% increase in the investment management segment, largely
attributable to higher assets under management. In addition, increased demand
for the Company's consulting services resulted in 10% revenue growth for that
segment. Insurance services revenue declined 3% due to the sale of Frizzell.
Excluding the impact of Frizzell, insurance services revenue increased 1% in
1996 reflecting growth in insurance broking and insurance program management,
offset, in large part, by a decline in reinsurance broking revenue.
In 1995, total revenue increased 10% over 1994 driven principally by 22% growth
in the investment management segment, largely attributable to growth in the
level of assets under management, and a 13% increase in the consulting segment
reflecting strong demand for the Company's consulting services. Insurance
services revenue rose 4% in 1995 reflecting a $24 million increase in interest
income on fiduciary funds and strong growth in insurance broking in Canada and
Continental Europe partially offset by a $25 million decrease in revenue
received from the activities of Marsh & McLennan Risk Capital ("MMRC").
Expenses increased 12% in 1996 compared with 1995. Included in 1996 were unusual
charges totaling $92.6 million which relate to real estate matters, integration
of the Company's worldwide insurance services operations, goodwill write-offs, a
provision related to the Lloyd's Reconstruction and Renewal Plan and certain
office closings. These charges were offset, in part, by a gain of $33.2 million
on the Company's sale of Frizzell in June 1996. Of the net $59.4 million unusual
charge, $49.4 million is applicable to insurance services, $8.5 million relates
to consulting and $1.5 million is recorded in General Corporate. Excluding the
net unusual charges and the impact of only one-half year of Frizzell, expenses
increased 12% primarily due to increased incentive compensation levels
especially within investment management. Volume-related costs, particularly
those associated with higher staff levels, grew for both investment management
and consulting as a result of the increased level of business activity.
Operating expenses increased 11% in 1995 primarily due to the impact of staff
growth and incentive compensation programs in the investment management and
consulting segments commensurate with the higher volume of business, and systems
automation initiatives in all operating segments.
Net income for 1996 includes a tax adjustment that reduced the income tax
provision by $40 million. The tax adjustment primarily relates to the permanent
deployment of funds outside the United States in a tax efficient manner and
favorable state and local tax developments in the U.S. The net impact of the tax
adjustment and the net unusual charges described above increased earnings per
share by $.04 for the year.
The translated values of revenue and expense from the Company's international
insurance services and consulting operations are subject to fluctuations due to
changes in currency exchange rates. However, the net impact of these
fluctuations on the Company's results of operations has not been material.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which was effective for fiscal
years beginning
23
<PAGE>
after December 15, 1995. In accordance with this Statement, the
Company has provided disclosure in Note 6 to the consolidated financial
statements presenting pro forma net income and earnings per share amounts as if
employee stock options had been expensed based on their fair value on the grant
date, determined using the Black-Scholes option pricing model.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." A non-cash charge reflecting the
cumulative effect of this accounting change, net of income taxes, totaled $10.5
million or $.14 per share.
Insurance Services
Revenue attributable to the insurance services segment consists primarily of
fees paid by clients; commissions and fees paid by insurance and reinsurance
companies; interest income on premiums, and in certain cases on claims,
collected and not yet remitted to insurers, reinsurers or clients, such funds
being held in a fiduciary capacity.
Revenue generated by insurance services is affected by premium rate levels in
the property and casualty insurance markets and available insurance capacity, as
compensation is frequently related to the premiums paid by insureds. Revenue is
also affected by fluctuations in the amount of risk retained by insurance and
reinsurance clients themselves, and insured values, the development of new
products, markets and services, lost business, merging of clients and the volume
of business from new and existing clients, as well as interest rates for
fiduciary funds.
The Company has been instrumental in the formation of several substantial
insurance and reinsurance entities. MMRC is also an advisor to The Trident
Partnership L.P., an independent private investment partnership formed in 1994
to invest selectively in the global insurance and reinsurance industry, and Risk
Capital Reinsurance Company, a U.S. reinsurer formed in 1995 to provide
traditional and other kinds of reinsurance, both on a stand-alone basis and as
part of integrated capital solutions for insurance companies. Through MMRC, the
Company receives compensation in various forms including fees, royalties and
dividends, as well as appreciation that has been realized on the sale of the
Company's holdings in insurance entities it assisted in organizing. These
amounts are reflected within the insurance services segment in the applicable
line of business to which they apply.
The results of operations for the Company's insurance services segment are
presented below:
================================================================================
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
Insurance Broking $1,321.3 $1,260.0 $1,209.3
Reinsurance Broking 258.5 295.1 298.5
Insurance Program Management 233.6 306.1 300.0
Interest Income on Fiduciary Funds 93.9 102.7 78.7
- --------------------------------------------------------------------------------
1,907.3 1,963.9 1,886.5
- --------------------------------------------------------------------------------
Expense:
Operating Expenses 1,544.2 1,574.7 1,480.4
Unusual Charges, net 49.4 -- --
- --------------------------------------------------------------------------------
1,593.6 1,574.7 1,480.4
- --------------------------------------------------------------------------------
Operating Income $ 313.7 $ 389.2 $ 406.1
================================================================================
Operating Income Margin 16.4% 19.8% 21.5%
================================================================================
Insurance Broking Revenue
Insurance broking services are provided to clients primarily in connection with
risk management and the insurance placement process and involve analyzing
various types of property and liability loss exposures including large and
complex risks that require access to world insurance markets. Services include
insurance broking activities and professional consulting services on risk
management issues, including risk analysis, coverage requirements, self
insurance, alternative insurance and risk financing methods, claims collection,
injury management and loss prevention.
Insurance broking revenue, which is received from a predominantly corporate
clientele, increased 5% in 1996. Client revenue rose primarily due to an
increase in new business in the United States and Europe offset by declines in
commercial property and casualty premium rates worldwide. Global specialty lines
of coverage, including financial services, marine and energy, and aviation also
experienced strong new business levels. The Company does not expect premium rate
levels to improve in the near future and we anticipate that the insurance
broking marketplace will continue to be highly competitive.
In 1995, insurance broking revenue increased 4% over 1994 levels. Revenue from
MMRC declined $15 million compared with 1994 primarily due to a lower level of
realized appreciation on capital deployed in the various insurance entities the
Company has helped organize. Client revenue increased primarily due to new
business growth in Canada, Continental Europe, Australia and Latin America,
along with an increase in certain global specialty lines. In the United States,
property premium rates, with the exception of catastrophe coverages, were
generally stable while the casualty market experienced renewal rates that were
generally down on a year-over-year basis.
24
<PAGE>
Reinsurance Broking Revenue
Reinsurance broking services involve acting as an intermediary for insurance and
reinsurance organizations on all classes of reinsurance. The intermediary
assists the insurer by providing advice, placing reinsurance coverage with
reinsurance organizations located around the world and furnishing related
services such as actuarial, financial and regulatory consulting, portfolio
analysis and catastrophe modeling. Generally, the purpose of reinsurance is to
spread the risk of primary insurance or the reinsurance thereof to lessen the
concentration of risk with any one insurance or reinsurance company.
Reinsurance broking revenue in 1996 declined 12% compared with 1995. This
decline was primarily due to reduced demand for reinsurance resulting from the
consolidation among various U.S. and U.K. insurance companies, reduced
reinsurance demand due to higher risk retentions by ceding insurance companies
and the impact of lower property catastrophe premium rates.
In 1995, reinsurance broking revenue decreased slightly from 1994. The effect of
lower premium rates for property catastrophe and liability reinsurance, along
with reduced demand in the London market and a $10 million decrease in MMRC
related revenue, was offset in large part by new business.
Insurance Program Management Revenue
The insurance program management operation of Seabury & Smith primarily designs,
places and administers life, health, accident, disability, automobile,
homeowners and professional liability insurance programs primarily on a group
marketing basis to individuals, businesses and their employees, and associations
and other affinity groups and their members in the United States and Canada. In
addition, it provides underwriting management services to insurers in the United
States, Canada and the United Kingdom, primarily for professional liability
coverages.
Insurance program management revenue decreased 24% in 1996 due to the sale of
Frizzell. Revenue for Seabury & Smith, which comprises the whole of program
management subsequent to the sale of Frizzell, increased 6%. This growth was
largely the result of increased services provided to corporations and
institutions and their employees, along with increased insurance placed on
behalf of small businesses.
In 1995, insurance program management revenue increased 2% over 1994. Within
North America, revenue rose 7% in 1995. This growth was the result of increased
services provided to corporations and institutions and their employees,
increased insurance placed on behalf of small businesses, higher revenue from
professional liability products in the United States and the acquisition of a
U.K.-based company that specializes in providing professional liability
insurance products. Revenue for Frizzell, which operated in the United Kingdom,
decreased 3% in 1995 as the market for motor and household insurance services
was extremely competitive during the year.
Interest Income on Fiduciary Funds
Interest income on fiduciary funds decreased 9% in 1996 due to generally lower
average short-term interest rates worldwide. In 1995, interest income on
fiduciary funds increased 31% due to generally higher average short-term
interest rates throughout the world.
Expense
Insurance services operating expenses decreased 2% in 1996. Excluding the impact
of Frizzell, expenses increased 2% reflecting normal salary progressions. The
Company's insurance services segment has continued a cost containment program
while maintaining the level of expenditures for systems-related improvements.
Expenses for insurance services rose 6% in 1995 primarily reflecting normal
salary progressions and spending on technology and systems automation
initiatives.
Unusual Charges, net
During 1996, the Company completed the sale of Frizzell for approximately $290
million which resulted in a $33.2 million pretax gain. In addition, pretax
charges aggregating $82.6 million were also recorded in the insurance services
segment representing a provision of approximately $31 million for U.K. real
estate; $17 million for costs related to the integration of the Company's
worldwide insurance services operations; $17 million for goodwill write-offs;
$15 million related to the Lloyd's Reconstruction and Renewal Plan; and $3
million for office closings. Excluding the impact of the Frizzell gain and the
unusual charges, the margin for insurance services was 19.0%.
The results of operations for the Company's insurance services segment by
geographic area are presented below:
================================================================================
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
United States $ 1,025.3 $ 1,006.9 $ 1,028.1
Europe 696.1 784.0 709.9
Canada 96.4 93.9 86.7
Pacific Rim and Other 89.5 79.1 61.8
- --------------------------------------------------------------------------------
$ 1,907.3 $ 1,963.9 $ 1,886.5
================================================================================
Operating Income:
United States(a) $ 155.6 $ 186.9 $ 216.0
Europe(a) 111.9 155.5 150.3
Canada 27.0 25.9 23.6
Pacific Rim and Other(a) 19.2 20.9 16.2
- --------------------------------------------------------------------------------
$ 313.7 $ 389.2 $ 406.1
================================================================================
(a) Excluding the unusual charges in 1996, operating income would have been
$179.2 million in the United States, $135.7 million in Europe, $21.2
million in the Pacific Rim and Other, and insurance services in total would
have been $363.1 million.
25
<PAGE>
The sale of Frizzell caused a decline in both revenue and operating income in
Europe in 1996. Operating income also declined in Europe as a result of the
unusual charges recorded which primarily related to the U.K. The decline in
operating income in the United States reflects reduced reinsurance broking
income due to lower revenues, as well as the impact in the U.S. of the unusual
charges.
Investment Management
The Company's investment management and related services, which are performed
principally in the United States, are provided primarily under the "Putnam"
name. The services include securities investment advisory and management
services consisting of investment research and management, 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 media for variable
insurance contracts. Investment management services are also provided to
corporate profit sharing and pension funds, state and other government and
public employee retirement funds, university endowment funds, charitable
foundations, collective investment vehicles and other domestic and foreign
institutional accounts. Putnam serves as transfer agent, dividend disbursing
agent, registrar and custodian for the Putnam Funds and provides one or more of
such services to several external clients. In addition, Putnam provides
administrative and trustee services for employee benefit plans (in particular
401(k) plans), IRA's and other clients for which it receives compensation
pursuant to service and trust or custodian contracts. 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 also directly to certain large 401(k) plans
and other institutional accounts. Essentially all of Putnam's mutual funds are
available with a contingent deferred sales charge in lieu of a front-end load.
Putnam's revenue is derived primarily from investment management fees received
from the Putnam Funds and institutional accounts. Fees paid by the Funds are
approved annually by the trustees or shareholders of the Funds and are charged
at various rates depending on the individual mutual fund or account and are
usually based upon a sliding scale in relation to the level of assets under
management and, in certain instances, are also based on investment performance.
Management of Putnam and the trustees of the 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. Putnam also receives
compensation for providing certain shareholder and custody services.
The results of operations for the Company's investment management segment are
presented below:
================================================================================
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue $ 1,082.5 $ 750.0 $ 615.4
Expense 744.7 506.5 407.2
- --------------------------------------------------------------------------------
Operating Income $ 337.8 $ 243.5 $ 208.2
================================================================================
Operating Income Margin 31.2% 32.5% 33.8%
================================================================================
Revenue
Putnam's revenue increased 44% in 1996 reflecting exceptional growth in the
level of assets under management on which management fees are earned. The higher
asset level reflected a substantial increase in the level of mutual fund sales,
higher equity market valuations and new 401(k) business.
Revenue for Putnam increased 22% in 1995 reflecting strong growth in the level
of assets under management on which management fees are earned. The higher asset
level reflected significantly higher equity market valuations, mutual fund sales
and new 401(k) business.
Expense
Putnam's expenses rose 47% in 1996 reflecting the effect of significantly higher
incentive compensation levels, staff growth to support new business, increased
costs resulting from the higher level of business activity, and expanding client
needs.
Expenses for Putnam increased 24% in 1995 reflecting the effect of staff growth
and incentive compensation levels consistent with strong operating performance,
costs to develop new systems which were considered necessary to manage the
growth of Putnam's client base, and service-related costs including those for a
new client service center that became operational in the fourth quarter of 1994.
Year-end and average assets under management are presented below:
================================================================================
(In billions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Mutual Funds:
Domestic Equity $ 80.0 $ 46.8 $ 26.2
Taxable Bond 29.9 26.0 22.8
Tax-Free Income 16.4 16.9 15.2
International Equity 7.5 3.7 3.0
- --------------------------------------------------------------------------------
133.8 93.4 67.2
- --------------------------------------------------------------------------------
Institutional Accounts:
Fixed Income 19.1 19.0 18.8
Domestic Equity 14.0 8.9 6.7
International Equity 6.5 4.4 2.6
- --------------------------------------------------------------------------------
39.6 32.3 28.1
- --------------------------------------------------------------------------------
Year-end Assets $ 173.4 $ 125.7 $ 95.3
================================================================================
Average Assets $ 148.5 $ 109.2 $ 93.5
================================================================================
26
<PAGE>
Assets under management are affected by fluctuations in domestic and
international bond and stock market prices, by the level of investments and
withdrawals for current and new fund shareholders and clients. They are also
affected by investment performance, service to clients, the development and
marketing of new investment products, the relative attractiveness of the
investment style under prevailing market conditions and changes in the
investment patterns of clients. Revenue levels are sensitive to all of the
factors above, but in particular to significant changes in bond and stock market
valuations.
Putnam provides individual and institutional investors with a broad range of
equity and fixed income investment products and services designed to meet
varying investment objectives and which affords its clients the opportunity to
allocate their investment resources among various alternative investment
products as changing worldwide economic and market conditions warrant. At the
end of 1996, assets held in equity securities represented 62% of assets under
management, compared with 51% in 1995, while investments in fixed income
products represented 38%, down from 49% last year.
Consulting
The Company provides consulting services to a predominantly corporate clientele
from locations around the world, primarily in the areas of human resources and
employee benefit programs, including retirement, health care, and compensation;
and general management consulting, which comprises strategy, operations and
marketing. The Company also provides economic consulting and analysis.
Revenue in the consulting business is affected by changes in clients' industries
including government regulation, as well as new products and services, the stage
of the economic cycle and broad trends in the management of large organizations.
The results of operations for the Company's consulting segment are presented
below:
================================================================================
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue $ 1,159.2 $ 1,056.4 $ 933.1
- --------------------------------------------------------------------------------
Expense:
Operating Expenses 1,039.8 947.7 836.7
Unusual Charges 8.5 -- --
- --------------------------------------------------------------------------------
1,048.3 947.7 836.7
- --------------------------------------------------------------------------------
Operating Income $ 110.9 $ 108.7 $ 96.4
================================================================================
Operating Income Margin 9.6% 10.3% 10.3%
================================================================================
Revenue
Consulting services revenue increased 10% in 1996. Retirement consulting
revenue, which represented 43% of the consulting segment, grew 9% in 1996
reflecting higher demand in the United States, Europe and Latin America. Revenue
rose 14% in the global compensation practice, 10% in health care consulting and
7% in general management consulting in 1996.
Revenue for consulting services increased 13% in 1995 as demand for services in
all major practices increased. After adjusting for the net impact of several
small acquisitions, revenue grew approximately 11%. Retirement consulting
revenue, which represented 44% of the consulting segment, grew 7% in 1995
reflecting higher demand in the United States, Continental Europe and Latin
America. Revenue increased 17% in the global compensation practice, 16% in
general management consulting and 10% in health care consulting in 1995.
Expense
Consulting services operating expenses increased 10% in 1996 compared with 1995
primarily reflecting staff growth to support new business, higher incentive
compensation and normal salary progressions.
Expenses for the consulting segment increased 13% in 1995. Excluding the effect
of acquisitions, 1995 expenses increased approximately 11% reflecting staff
growth consistent with increased demand in general management and United States
retirement consulting as well as higher systems-related expenses associated with
initiatives to expand and increase the efficiency of services provided in the
United States.
Unusual Charges
Pretax charges of $8.5 million were recorded in the consulting segment
reflecting a provision of approximately $6 million for office realignments and
consolidations and $2.5 million for a U.K. real estate matter. Excluding the
impact of the unusual charges, the operating income margin for consulting
services was 10.3%.
The results of operations for the Company's consulting segment by geographic
area are presented below:
================================================================================
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
United States $ 707.2 $ 645.0 $586.4
Europe 264.8 240.6 197.3
Canada 101.6 90.4 78.4
Pacific Rim and Other 85.6 80.4 71.0
- --------------------------------------------------------------------------------
$1,159.2 $1,056.4 $933.1
================================================================================
Operating Income:
United States(a) $ 69.6 $ 60.4 $ 50.2
Europe(a) 24.2 33.9 30.1
Canada 15.5 11.5 11.7
Pacific Rim and Other 1.6 2.9 4.4
- --------------------------------------------------------------------------------
$ 110.9 $ 108.7 $ 96.4
================================================================================
(a) Excluding the unusual charges in 1996, operating income would have been
$75.6 million in the United States, $26.7 million in Europe, and consulting
in total would have been $119.4 million.
27
<PAGE>
European results for the consulting segment reflect the impact of investments
made in information technology, the expansion of retirement consulting, and
pressure in an expanding but competitive market for general management
consulting. Canadian results reflect improved market conditions coupled with
continued expense controls.
Interest
Interest income earned on corporate funds declined to $14.3 million in 1996
compared with $17.7 million in 1995 primarily due to generally lower yields
worldwide. Interest expense decreased to $61.6 million in 1996 from $62.8
million in 1995. This decline was due to lower average interest rates on
commercial paper borrowings. The average level of commercial paper borrowings
was slightly higher than 1995 principally due to the funding of Putnam's prepaid
dealer commissions and the cash outflows associated with the Company's share
repurchases, which was offset in large part by the cash proceeds realized on the
sale of Frizzell.
Interest income earned on corporate funds was $17.7 million in 1995 compared
with $11.8 million in 1994 primarily due to higher yields in North America and
the United Kingdom. Interest expense increased to $62.8 million in 1995 from
$50.6 million in 1994 due to an increase in commercial paper borrowings and
higher average interest rates on those borrowings. The higher level of
commercial paper borrowings primarily reflected the Company's share repurchase
program and its $40 million investment in Risk Capital Reinsurance Company.
Income Taxes
In the fourth quarter, the Company recorded a tax adjustment that reduced the
income tax provision by $40 million. The tax adjustment primarily relates to the
permanent deployment of funds outside the United States in a tax efficient
manner and favorable state and local tax developments in the U.S. Excluding the
tax adjustment, the Company's consolidated domestic and foreign tax rate was
37.25% of income before income taxes in 1996 compared with 38.0% in 1995, and
39.5% in 1994. The reductions in the 1996 and 1995 tax rates reflect the
continued implementation of tax minimization strategies primarily relating to
the Company's non-U.S. operations. The overall tax rates are higher than the
U.S. statutory rates primarily because of the impact of state and local income
taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents aggregated $299.6 million at the end of
1996, a decrease of $28.5 million from the end of 1995.
Operating Cash Flows
The Company generated $316.5 million of cash from operations in 1996 compared
with $318.1 million in 1995. These amounts reflect the net income earned by the
Company in those years adjusted for non-cash charges and working capital
changes. Included in the cash flow from operations are the net cash requirements
of Putnam's prepaid dealer commissions, which amounted to $338.7 million in 1996
compared with $104.3 million in 1995. The current portion of these prepaid
dealer commissions, amounting to $222.8 million and $136.4 million at December
31, 1996 and 1995, respectively, is included in other current assets in the
Consolidated Balance Sheets. The long-term portion amounting to $676.6 million
and $424.3 million at December 31, 1996 and 1995, respectively, is included in
other assets in the Consolidated Balance Sheets. The tax benefit associated with
these prepaid dealer commissions is recorded in deferred taxes, the long-term
portion of which is included in other liabilities in the Consolidated Balance
Sheets.
The increase in accrued compensation and employee benefits in 1996 principally
was caused by significantly higher incentive compensation levels consistent with
strong operating performance in the investment management segment. The Company
anticipates that internally generated funds will be sufficient to meet the
Company's foreseeable recurring cash requirements, including dividends, capital
expenditures and scheduled repayments of long-term debt.
Financing Cash Flows
Financing activities for the Company reduced cash by $325.0 million in 1996 and
by $92.8 million in 1995. Dividends paid by the Company amounted to $239.2
million in 1996 ($3.30 per share) and $217.0 million in 1995 ($2.975 per share).
The Company regularly purchases shares of its common stock to meet the
requirements of the various stock compensation and benefit programs. The Company
purchased 2.5 million shares in 1996 and 1.7 million shares in 1995. The Company
used the proceeds from the sale of Frizzell to complete its share repurchases
under the three million share authorization of September 1995.
During 1996, the Company executed a new revolving credit facility with several
banks to support its commercial paper borrowings and to fund other general
corporate requirements. This facility, which expires December 2001, provides
that the Company may borrow up to $750 million at market rates of interest which
may vary depending upon the level of borrowings and the Company's credit
ratings. Outstanding borrowings under the revolving credit facility at December
31, 1996 amounted to $250 million with varying dates of maturity through
December 1997. Borrowings under the revolving credit facility have been
classified as long-term debt based on the Company's intent and ability to
maintain or refinance these obligations on a long-term basis. The Company also
maintains other credit facilities, primarily related to operations located
outside the United States, aggregating $59.5 million as of December 31, 1996.
28
<PAGE>
The Company 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 56% interest in its worldwide headquarters building. Also related to the
purchase and renovation of the building, the Company has an interest rate swap
that fixes the interest rate on $100 million of variable rate borrowings at
approximately 9.5% until February 1999.
Investing Cash Flows
Investing activities for the Company reduced cash by $13.8 million in 1996 and
by $198.1 million in 1995. As previously mentioned, the Company sold Frizzell in
June 1996. The net addition to cash resulting from the sale was $241.8 million.
The Company's capital expenditures, which amounted to $157.3 million in 1996 and
$136.9 million in 1995, have primarily related to computer equipment purchases
and the refurbishing and modernizing of office facilities.
The Company has been instrumental in developing new sources of insurance
capacity. The Company, through MMRC, maintains a minority ownership interest in
various entities it assisted in organizing. Many of these investments have been
classified as securities available for sale and, as discussed more fully in Note
10 to the consolidated financial statements, the aggregate fair value of these
holdings is included in long-term securities in the Consolidated Balance Sheets.
The Company, through Marsh & McLennan Risk Capital Holdings, expects to continue
to manage and develop further these activities.
Other
The insurance coverage for potential liability resulting from alleged errors and
omissions in the professional services provided by the Company includes elements
of both risk retention and risk transfer. The Company believes it has adequately
reserved for the self-insurance 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.
The Company's policy for funding its tax qualified U.S. defined benefit
retirement plan is to contribute amounts at least sufficient to meet the funding
requirements set forth in U.S. employee benefit and tax laws. As described more
fully in Note 5 to the consolidated financial statements, the plan is currently
well funded; consequently, the Company has not been able to make a tax
deductible contribution since 1986. Because this situation is expected to
continue, a 1997 cash contribution is currently not anticipated. The related
long-term pension liability is included in other liabilities in the Consolidated
Balance Sheets.
The Company contributes to certain health care and life insurance benefits
provided to its retired employees. As described more fully in Note 5 to the
consolidated financial statements, 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 the Company as incurred. This
postretirement liability is included in other liabilities in the Consolidated
Balance Sheets.
Cumulative translation adjustments, a component of stockholders' equity in the
Consolidated Balance Sheets, represent the cumulative effect of translating the
financial statements of the Company's international operations from functional
currencies to U.S. dollars.
Subsequent Events
On March 12, 1997, the Company announced that it had agreed to a business
combination with Johnson & Higgins, a leading insurance broking firm. Total
consideration of approximately $1.8 billion will be paid by the Company, one
third in cash and two thirds in the Company's common stock. The Company will
finance the cash portion with bank borrowings and commercial paper. The
transaction is expected to close in the second quarter, subject to satisfaction
of customary closing conditions, including certain regulatory approvals. In
January 1997, the Company purchased Compagnie Europeenne De Courtage
d'Assurances et de Reassurances ("CECAR"), an insurance broker in France, for
approximately $200 million.
29
<PAGE>
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
==================================================================================================================
For the Three Years Ended December 31, 1996
(In millions, except per share figures) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 4,149.0 $ 3,770.3 $ 3,435.0
Expense 3,433.7 3,075.4 2,764.7
- ------------------------------------------------------------------------------------------------------------------
Operating income 715.3 694.9 670.3
Interest income 14.3 17.7 11.8
Interest expense (61.6) (62.8) (50.6)
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting change 668.0 649.8 631.5
Income taxes 208.7 246.9 249.5
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 459.3 402.9 382.0
Cumulative effect of accounting change (net of income tax benefit of $7.2) -- -- (10.5)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 459.3 $ 402.9 $ 371.5
==================================================================================================================
Per share data:
Income before cumulative effect of accounting change $ 6.34 $ 5.53 $ 5.19
Cumulative effect of accounting change -- -- (.14)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 6.34 $ 5.53 $ 5.05
==================================================================================================================
Average number of shares outstanding 72.4 72.9 73.6
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
================================================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (including interest-bearing amounts
of $261.1 in 1996 and $290.4 in 1995) $ 299.6 $ 328.1
- ----------------------------------------------------------------------------------------------------------------
Receivables--
Commissions and fees 937.6 830.5
Advanced premiums and claims 88.5 78.8
Consumer finance and other 103.0 271.5
- ----------------------------------------------------------------------------------------------------------------
1,129.1 1,180.8
Less--allowance for doubtful accounts (43.3) (48.3)
- ----------------------------------------------------------------------------------------------------------------
Net receivables 1,085.8 1,132.5
- ----------------------------------------------------------------------------------------------------------------
Other current assets 363.2 218.5
- ----------------------------------------------------------------------------------------------------------------
Total current assets 1,748.6 1,679.1
Consumer finance receivables, net -- 151.3
Long-term securities 573.3 411.8
Fixed assets, net 770.1 757.5
Intangible assets 545.3 729.7
Other assets 907.9 600.1
- ----------------------------------------------------------------------------------------------------------------
$ 4,545.2 $ 4,329.5
================================================================================================================
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 392.4 $ 571.1
Accrued compensation and employee benefits 391.7 257.4
Accounts payable and accrued liabilities 447.5 485.4
Accrued income taxes 259.6 197.4
Dividends payable 65.1 58.2
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 1,556.3 1,569.5
- ----------------------------------------------------------------------------------------------------------------
Fiduciary liabilities 1,685.9 1,672.6
Less--cash and investments held in a fiduciary capacity (1,685.9) (1,672.6)
- ----------------------------------------------------------------------------------------------------------------
-- --
- ----------------------------------------------------------------------------------------------------------------
Long-term debt 458.2 410.6
- ----------------------------------------------------------------------------------------------------------------
Other liabilities 642.1 683.9
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies -- --
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value, authorized 6,000,000 shares, none issued -- --
Common stock, $1 par value, authorized 200,000,000 shares,
issued 76,794,531 shares in 1996 and 1995 76.8 76.8
Additional paid-in capital 148.1 155.5
Retained earnings 1,901.6 1,688.4
Unrealized securities holding gains, net of income taxes 221.2 149.2
Cumulative translation adjustments (75.7) (86.7)
- ----------------------------------------------------------------------------------------------------------------
2,272.0 1,983.2
Less--treasury shares, at cost, 4,475,571 shares in 1996 and 4,020,742 shares in 1995 (383.4) (317.7)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,888.6 1,665.5
- ----------------------------------------------------------------------------------------------------------------
$ 4,545.2 $ 4,329.5
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
31
<PAGE>
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
================================================================================================================
For the Three Years Ended December 31, 1996
(In millions of dollars) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating cash flows:
Net income $ 459.3 $ 402.9 $ 371.5
Gain on sale of business (33.2) -- --
Unusual charges 92.6 -- --
Depreciation and amortization 139.9 135.1 120.6
Deferred income taxes (20.8) 34.7 48.0
Other liabilities 19.0 (2.4) (31.4)
Cumulative effect of accounting change -- -- 10.5
Prepaid dealer commissions (338.7) (104.3) (111.9)
Other, net (11.9) (12.4) (14.2)
Net changes in operating working capital other than cash and cash equivalents--
Receivables (95.0) (177.0) (77.7)
Other current assets (61.3) 14.0 (39.2)
Accrued compensation and employee benefits 137.2 35.6 46.9
Accounts payable and accrued liabilities (20.6) 13.0 53.9
Accrued income taxes 28.6 (9.6) (17.5)
Effect of exchange rate changes 21.4 (11.5) 9.0
- ----------------------------------------------------------------------------------------------------------------
Net cash generated from operations 316.5 318.1 368.5
- ----------------------------------------------------------------------------------------------------------------
Financing cash flows:
Net (decrease) increase in commercial paper (164.7) 57.4 125.7
Other borrowings 254.8 125.8 6.3
Other repayments (91.4) (8.7) (11.0)
Purchase of treasury shares (230.1) (137.7) (142.8)
Issuance of common stock 143.1 82.6 68.6
Dividends paid (239.2) (217.0) (206.4)
Other, net 2.5 4.8 (30.2)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (325.0) (92.8) (189.8)
- ----------------------------------------------------------------------------------------------------------------
Investing cash flows:
Additions to fixed assets (157.3) (136.9) (149.1)
Net cash proceeds from sale of business 241.8 -- --
Acquisitions (7.1) (6.8) (18.4)
Other, net (91.2) (54.4) (55.9)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (13.8) (198.1) (223.4)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (6.2) 6.0 7.6
- ----------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (28.5) 33.2 (37.1)
Cash and cash equivalents at beginning of year 328.1 294.9 332.0
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 299.6 $ 328.1 $ 294.9
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
32
<PAGE>
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
====================================================================================================================
For the Three Years Ended December 31, 1996
(In millions of dollars, except per share figures) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning and end of year $ 76.8 $ 76.8 $ 76.8
- --------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year $ 155.5 $ 166.1 $ 173.5
Exercise of stock options and related tax benefits (10.2) (7.5) (1.9)
Issuance of shares under compensation plans and related tax benefits 8.0 3.4 .8
Issuance of shares under employee stock purchase plans and related tax benefits (5.2) (6.5) (6.3)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 148.1 $ 155.5 $ 166.1
- --------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year $ 1,688.4 $ 1,507.7 $ 1,345.7
Net income 459.3 402.9 371.5
Cash dividends declared--(per share amounts:
$3.40 in 1996, $3.05 in 1995 and $2.85 in 1994) (246.1) (222.2) (209.5)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,901.6 $ 1,688.4 $ 1,507.7
- --------------------------------------------------------------------------------------------------------------------
UNREALIZED SECURITIES HOLDING GAINS, NET OF INCOME TAXES
Balance, beginning of year $ 149.2 $ 91.6 $ 138.6
Realized gains, net of income taxes (10.9) (11.4) (27.6)
Unrealized gains (losses), net of income taxes 82.9 69.0 (19.4)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 221.2 $ 149.2 $ 91.6
- --------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year $ (86.7) $ (105.4) $ (157.5)
Translation adjustments 11.0 18.7 52.1
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (75.7) $ (86.7) $ (105.4)
- --------------------------------------------------------------------------------------------------------------------
TREASURY SHARES
Balance, beginning of year $ (317.7) $ (276.2) $ (211.8)
Purchase of treasury shares (230.1) (137.7) (142.8)
Exercise of stock options 95.2 27.4 11.6
Issuance of shares under compensation plans 9.9 14.0 15.8
Issuance of shares under employee stock purchase plans 59.3 54.8 51.0
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (383.4) $ (317.7) $ (276.2)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,888.6 $ 1,665.5 $ 1,460.6
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
33
<PAGE>
Marsh & McLennan Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Marsh & McLennan Companies, Inc. and all its
subsidiaries (the "Company"). Various subsidiaries and affiliates have
transactions with each other in the ordinary course of business. All significant
intercompany accounts and transactions have been eliminated.
Fiduciary Assets and Liabilities: In its capacity as an insurance broker or
agent, the Company collects premiums from insureds and, after deducting its
commissions, remits the premiums to the respective insurance underwriters; the
Company also collects claims or refunds from underwriters on behalf of insureds.
Unremitted insurance premiums and claims are held in a fiduciary capacity.
Interest income on these fiduciary funds, included in revenue, amounted to $93.9
million in 1996, $102.7 million in 1995 and $78.7 million in 1994.
Net uncollected premiums and claims and the related payables, amounting to $3.2
billion at December 31, 1996 and $3.1 billion at December 31, 1995, are not
included in the accompanying Consolidated Balance Sheets.
In certain instances, the Company 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: Revenue includes insurance commissions, fees for services rendered,
compensation for services provided in connection with the formation and
capitalization of various insurers and reinsurers, including gains from sales of
interests in such entities, commissions on the sale of mutual fund shares and
interest income on fiduciary funds. Insurance commissions generally are recorded
as of the effective date of the applicable policies or, in certain cases
(primarily in the Company's reinsurance and London market operations), as of the
effective date or billing date, whichever is later. Fees for services rendered
are recorded as earned. Sales of mutual fund shares are recorded on a settlement
date basis and commissions thereon are recorded on a trade date basis, in
accordance with industry practice.
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. The Company maintains a policy providing for the
diversification of cash and cash equivalents to limit the concentration of
credit risk exposure.
Fixed Assets, Depreciation and Amortization: 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 the resulting
gain or loss, if any, 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.
The components of fixed assets at December 31, 1996 and 1995 are as follows:
================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- --------------------------------------------------------------------------------
Land and buildings $ 404.9 $ 404.6
Furniture and equipment 737.4 697.6
Leasehold and building improvements 323.5 293.8
- --------------------------------------------------------------------------------
1,465.8 1,396.0
Less--accumulated depreciation and amortization (695.7) (638.5)
- --------------------------------------------------------------------------------
$ 770.1 $ 757.5
================================================================================
Intangible Assets: Acquisition costs in excess of the fair value of net assets
acquired are amortized on a straight-line basis over periods up to 40 years.
Other intangible assets are amortized on a straight-line basis over their
estimated lives. The Company periodically assesses the recoverability of
intangible assets.
Prepaid Dealer Commissions: Essentially all of the mutual funds marketed by the
Company's investment management segment are made available with a deferred sales
charge. The related commissions, initially paid by the Company to broker/dealers
for distributing the funds, are recovered through charges and fees received over
a number of years. The current portion of these prepaid dealer commissions,
amounting to $222.8 million and $136.4 million at December 31, 1996 and 1995,
respectively, is included in other current assets in the Consolidated Balance
34
<PAGE>
Sheets. The long-term portion amounting to $676.6 million and $424.3 million at
December 31, 1996 and 1995, respectively, is included in other assets in the
Consolidated Balance Sheets.
Capitalized Software Costs: The Company capitalizes certain computer software
costs, principally related to purchased software packages, which are amortized
on a straight-line basis not to exceed five years. Unamortized computer software
costs amounting to $28.8 million and $9.3 million at December 31, 1996 and 1995,
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 the Company'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, 1996 amounted to approximately $315 million. However, if these
earnings were not considered permanently reinvested, under current law, foreign
tax credits would effectively offset any incremental tax liability which
otherwise might be due upon distribution.
Risk Management Instruments: Net amounts received or paid under risk management
instruments are included in the Consolidated Statements of Income as incurred.
Per Share Data: Per share data is computed using the average number of shares of
the Company's common stock outstanding. The dilutive effect of common stock
equivalents is not material.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cumulative Effect of Accounting Change: As discussed in Note 5, effective
January 1, 1994 the Company changed its method of accounting for postemployment
benefits.
Stock-Based Compensation: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company 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." Accordingly, pro forma net income
and earnings per share information has been presented in Note 6 as required
under SFAS No. 123.
Impairment of Long-Lived Assets: In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of." The adoption of this standard did not have a material impact on
the Company's financial position or results of operations.
2 Supplemental Disclosure to the Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
The following schedule provides additional information concerning acquisitions:
================================================================================
For the Three Years Ended December 31, 1996
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Purchase acquisitions:
Assets acquired, excluding cash $ 10.4 $ 21.9 $ 26.5
Liabilities assumed (3.3) (8.6) (3.8)
Issuance of debt and other obligations -- (6.5) (4.3)
- --------------------------------------------------------------------------------
Net cash outflow for acquisitions $ 7.1 $ 6.8 $ 18.4
================================================================================
Interest paid during 1996, 1995 and 1994 was $60.2 million, $66.0 million and
$48.1 million, respectively.
Income taxes paid during 1996, 1995 and 1994 were $200.0 million, $231.0 million
and $222.5 million, respectively.
3 Acquisitions and Dispositions
- --------------------------------------------------------------------------------
Acquisitions: During 1996, the Company acquired an insurance broking business
and various other insurance and reinsurance broking assets for a total cost of
$12.7 million in transactions accounted for as purchases. The cost of these
acquisitions exceeded the fair value of net assets acquired by $8.2 million.
During 1995, the Company acquired a portion of an insurance broking business and
several consulting businesses for a total cost of $15.2 million consisting of
cash and future obligations in transactions accounted for as purchases. The cost
of these acquisitions exceeded the fair value of net assets acquired by $16.0
million.
35
<PAGE>
During 1994, the Company acquired or increased its interest in several insurance
services and consulting businesses for a total cost of $22.7 million consisting
of cash and future obligations in transactions accounted for as purchases. The
cost of these acquisitions exceeded the fair value of net assets acquired by
$21.1 million.
Dispositions: During 1996, the Company sold The Frizzell Group Limited
("Frizzell") for approximately $290 million. A pretax gain of $33.2 million was
recorded in the Consolidated Statements of Income.
Subsequent Events: On March 12, 1997, the Company announced that it had agreed
to a business combination with Johnson & Higgins, a leading insurance broking
firm. Total consideration of approximately $1.8 billion will be paid by the
Company. The transaction is expected to close in the second quarter, subject to
satisfaction of customary closing conditions, including certain regulatory
approvals. In January 1997, the Company purchased Compagnie Europeenne De
Courtage d'Assurances et de Reassurances ("CECAR"), an insurance broker in
France, for approximately $200 million.
4 Income Taxes
- --------------------------------------------------------------------------------
Income before income taxes 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 Three Years Ended December 31, 1996
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting
change:
U.S. $ 436.6 $ 381.2 $ 377.5
Other 231.4 268.6 254.0
- --------------------------------------------------------------------------------
$ 668.0 $ 649.8 $ 631.5
================================================================================
Income taxes:
Current--
U.S. Federal $ 93.8 $ 88.9 $ 99.9
Other national governments 96.4 82.0 71.8
U.S. state and local 39.3 41.3 29.8
- --------------------------------------------------------------------------------
229.5 212.2 201.5
- --------------------------------------------------------------------------------
Deferred--
U.S. Federal 48.0 24.7 15.5
Other national governments (39.4) 9.2 18.9
U.S. state and local (29.4) .8 13.6
- --------------------------------------------------------------------------------
(20.8) 34.7 48.0
- --------------------------------------------------------------------------------
Total income taxes $ 208.7 $ 246.9 $ 249.5
================================================================================
The significant components of deferred income tax assets and liabilities and
their balance sheet classifications are as follows:
================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Accrued expenses not currently deductible $ 248.1 $ 179.1
Accrued retirement benefits 72.8 78.4
Differences related to non-U.S. operations 69.1 46.7
Other 8.5 17.5
- --------------------------------------------------------------------------------
398.5 321.7
Valuation allowance (27.4) (25.2)
- --------------------------------------------------------------------------------
$ 371.1 $ 296.5
================================================================================
Deferred tax liabilities:
Depreciation and amortization $ 25.3 $ 33.9
Prepaid dealer commissions 328.8 254.4
Safe harbor leasing 17.6 22.4
Unbilled revenue 22.9 27.0
Unrealized securities holding gains 119.9 81.4
Differences related to non-U.S. operations 49.0 68.2
Other 28.2 12.1
- --------------------------------------------------------------------------------
$ 591.7 $ 499.4
================================================================================
Balance sheet classifications:
Other current assets $ 4.3 $ 5.0
Accrued income taxes 69.8 19.0
Other liabilities 155.1 188.9
================================================================================
The valuation allowance relates to certain foreign deferred income tax assets.
A reconciliation from the U.S. Federal statutory income tax rate to the
Company's effective income tax rate is as follows:
================================================================================
For the Three Years Ended
December 31, 1996 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. Federal statutory rate 35.00% 35.00% 35.00%
U.S. state and local income taxes--net
of U.S. Federal income tax benefit 3.90 4.20 4.50
Differences related to non-U.S
operations (1.25) (.90) (.30)
Tax adjustment (6.00) -- --
Other (.40) (.30) .30
- --------------------------------------------------------------------------------
Effective tax rate 31.25% 38.00% 39.50%
================================================================================
36
<PAGE>
During 1996, the Company recorded a tax adjustment that reduced the income tax
provision by $40 million. The tax adjustment primarily relates to the permanent
deployment of funds outside of the United States in a tax efficient manner and
favorable state and local tax developments in the U.S.
Taxing authorities periodically challenge positions taken by the Company on its
tax returns. On the basis of present information and advice received from
counsel, it is the opinion of the Company's management that any assessments
resulting from current tax audits will not have a material adverse effect on the
Company's consolidated results of operations or its consolidated financial
position.
5 Retirement Benefits
- --------------------------------------------------------------------------------
The Company maintains pension or profit sharing plans for substantially all
employees.
Defined Benefit Plans--U.S.: The Marsh & McLennan Companies Retirement Plan
provides benefits to eligible U.S. employees. The benefits under this plan are
based on the participants' length of service and compensation, subject to the
Employee Retirement Income Security Act of 1974 and Internal Revenue Service
(IRS) limitations. The funding policy for this plan is to contribute amounts at
least sufficient to meet the requirements set forth in U.S. employee benefit and
tax laws. The plan assets are invested primarily in listed stocks, corporate
bonds and U.S. Government Securities.
The Marsh & McLennan Companies Benefit Equalization Program provides those
retirement benefits to which U.S. employees would otherwise be entitled under
the Marsh & McLennan Companies Retirement Plan if not for IRS limitations.
The Marsh & McLennan Companies Supplemental Retirement Program provides a
minimum level of retirement benefits to employees based on the participants'
length of service and compensation. The program provides benefits to
participants to the extent that the minimum benefit exceeds the aggregate
retirement benefit provided by the Marsh & McLennan Companies Retirement Plan,
the Marsh & McLennan Companies Benefit Equalization Program and Social Security.
The Company has a plan of funding the vested benefits under the Benefit
Equalization and Supplemental Retirement Programs by purchasing annuity
contracts periodically.
The components of pension cost for the U.S. defined benefit plans are as
follows:
================================================================================
For the Three Years Ended December 31, 1996
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 27.8 $ 24.5 $ 25.7
Interest cost on projected benefit obligations 60.5 56.0 50.7
Expected return on plan assets (81.2) (73.0) (70.1)
Net amortization (3.6) (6.9) (2.0)
- --------------------------------------------------------------------------------
$ 3.5 $ .6 $ 4.3
================================================================================
The actual returns on plan assets were $138.7 million, $167.2 million and $4.3
million for 1996, 1995 and 1994, respectively. These returns reflect the general
securities market conditions experienced in the respective years.
The funded status of the U.S. defined benefit plans and the actuarial
assumptions used to measure the projected benefit obligation are as follows:
================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation:
Vested $ 686.5 $ 663.4
Nonvested 25.3 19.9
- --------------------------------------------------------------------------------
$ 711.8 $ 683.3
================================================================================
Projected benefit obligation $ 797.7 $ 783.8
Fair value of plan assets 947.1 841.1
- --------------------------------------------------------------------------------
149.4 57.3
Unrecognized net gain from past experience
different from that assumed (170.8) (91.2)
Unrecognized prior service cost 21.4 27.7
Unrecognized SFAS No. 87 transition amount (37.0) (41.5)
- --------------------------------------------------------------------------------
Accrued pension liability $ (37.0) $ (47.7)
================================================================================
Actuarial assumptions:
Discount rate 8.0% 7.5%
Weighted average rate of
compensation increase 4.75% 4.25%
Expected long-term rate of return
on plan assets 10% 10%
================================================================================
In 1996, the discount rate used to value the liabilities of the U.S. defined
benefit plans was increased to reflect current interest rates of high quality
fixed income debt securities. Assumptions, including projected compensation
increases and potential cost of living adjustments for retirees, were also
revised to reflect current expectations as to future levels of inflation.
Defined Benefit Plans--Non-U.S.: The Company maintains various plans that
provide benefits to eligible non-U.S. employees. The benefits under these plans
are based on the participants' length of service and compensation. The funding
policy for these plans is to contribute amounts at least sufficient to meet the
requirements under foreign government regulations. The plans' assets are
37
<PAGE>
primarily invested in listed stocks, bonds and time deposits. The information
presented below reflects the disposition of Frizzell in 1996.
The components of pension expense for the significant non-U.S. defined benefit
plans are as follows:
================================================================================
For the Three Years Ended December 31, 1996
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 31.5 $ 34.7 $ 32.3
Interest cost on projected benefit
obligations 51.2 57.2 45.1
Expected return on plan assets (74.5) (82.1) (68.4)
Net amortization (6.3) (6.4) (6.9)
- --------------------------------------------------------------------------------
$ 1.9 $ 3.4 $ 2.1
================================================================================
The actual returns on plan assets were $106.2 million, $139.6 million and
($31.7) million for 1996, 1995 and 1994, respectively. These returns reflect the
general securities market conditions experienced in the respective years and the
impact of currency exchange rate fluctuations.
The funded status of the significant non-U.S. defined benefit plans and the
weighted average actuarial assumptions used to measure the projected benefit
obligation are as follows:
================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation:
Vested $ 624.7 $ 614.4
Nonvested 8.3 6.4
- --------------------------------------------------------------------------------
$ 633.0 $ 620.8
================================================================================
Projected benefit obligation $ 724.2 $ 720.1
Fair value of plan assets 947.8 908.4
- --------------------------------------------------------------------------------
223.6 188.3
Unrecognized net gain from past experience
different from that assumed (89.3) (56.1)
Unrecognized prior service benefit (2.7) (4.0)
Unrecognized SFAS No. 87 transition amount (24.6) (28.7)
- --------------------------------------------------------------------------------
Prepaid pension cost $ 107.0 $ 99.5
================================================================================
Actuarial assumptions:
Discount rate 8.2% 8.4%
Weighted average rate of
compensation increase 6.0% 6.3%
Expected long-term rate of
return on plan assets 9.6% 9.8%
================================================================================
In 1996, the discount rates used to value the liabilities of the non-U.S. plans
were decreased to reflect current worldwide interest rates. Assumptions,
including projected compensation increases and potential cost of living
adjustments for retirees, were also revised to reflect current expectations as
to future levels of inflation. The increase in the accumulated benefit
obligation and the projected benefit obligation reflect, in part, the impact of
the change in these assumptions and the impact of foreign exchange rate
fluctuations.
Postretirement Benefits: The Company contributes to the cost of certain health
care and life insurance benefits provided to its retired employees. The amount
of the Company's contribution, if any, is based, in part, on the employees
length of service with the Company. The cost to the Company of these
postretirement benefits is principally associated with employees in the United
States, as retired employees outside the United States receive these benefits,
in large part, from governmental health care programs. United States employees
become eligible for these benefits if they attain retirement age while working
for the Company, subject in certain instances to minimum service requirements.
The cost of these postretirement benefits is accrued during the period up to the
date employees are eligible to retire, but is funded by the Company as incurred.
The components of the United States postretirement benefits costs are as
follows:
================================================================================
For the Three Years Ended December 31, 1996
(In millions of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $1.5 $1.4 $1.6
Interest cost on accumulated
postretirement benefits 6.5 6.6 6.2
Net amortization (.9) (.6) --
- --------------------------------------------------------------------------------
$7.1 $7.4 $7.8
================================================================================
The accumulated postretirement benefit obligation at December 31, 1996 and 1995
is as follows:
================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- --------------------------------------------------------------------------------
Retirees $ 60.2 $ 59.5
Fully eligible active plan participants 11.9 14.3
Other active plan participants 15.8 18.9
- --------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation 87.9 92.7
Unrecognized net gain from past experience
different from that assumed 14.8 5.5
- --------------------------------------------------------------------------------
Accrued postretirement liability $102.7 $ 98.2
================================================================================
The discount rates used in determining the accumulated postretirement benefit
obligations were 8% and 7-1/2% for 1996 and 1995, respectively. The assumed
health care cost trend rate was approximately 9% in 1996, gradually declining to
4% in the year 2040. A 1% increase in the assumed health care cost trend rates
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1996 by $10.1 million and the postretirement benefit expense
for the year then ended by $1.2 million.
In 1996, the discount rate used to value the accumulated postretirement benefit
obligation was increased to reflect current interest rates of high quality fixed
income debt securities. The decrease in the accumulated postretirement benefit
obligation primarily reflects the impact of the change in the discount rate.
38
<PAGE>
Defined Contribution Plans: The Company maintains certain defined contribution
plans for its employees, including the Marsh & McLennan Companies Stock
Investment Plan ("SIP") and the Putnam Investments, Inc. 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, the Company matches a portion of the employees' contributions,
while under the Putnam Plan the contributions are at the discretion of the
Company subject to IRS limitations. The cost of these defined contribution plans
was $39.5 million, $35.3 million and $32.6 million for 1996, 1995 and 1994,
respectively.
Postemployment Benefits: Effective January 1, 1994, the Company adopted SFAS No.
112, "Employers' Accounting for Postemployment Benefits." The cumulative effect
of the change in accounting recorded in 1994 amounted to $10.5 million ($.14 per
share). This noncash charge represents the accumulated postemployment benefit
obligation at January 1, 1994 ($17.7 million), partially reduced by a deferred
income tax benefit ($7.2 million).
6 Stock Benefit Plans
- --------------------------------------------------------------------------------
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As a
result, the Company 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 will provide
additional pro forma disclosures required by SFAS 123. The adoption of this
standard will not have an impact on the Company's financial position or results
of operations.
In accordance with APB 25, no compensation cost has been recognized in the
Consolidated Statements of Income for the Company's stock option and stock
purchase plans. Had compensation cost for the Company's stock-based compensation
plans been determined consistent with the fair value method contained in SFAS
123, the Company's net income and earnings per share for 1996 and 1995 would
have been reduced to the pro forma amounts indicated below:
================================================================================
(In millions of dollars, except per share figures) 1996 1995
- --------------------------------------------------------------------------------
Net Income:
As reported $ 459.3 $ 402.9
Pro forma $ 447.9 $ 400.0
Earnings Per Share:
As reported $ 6.34 $ 5.53
Pro forma $ 6.19 $ 5.49
================================================================================
The fair value of each option grant included in the pro forma net income shown
above is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in 1996
and 1995, respectively: dividend yield of 3.5%; expected volatility of 14%;
risk-free interest rate of 6.0% and 6.4%; and an expected life of 5 years. The
compensation cost as generated by the Black-Scholes model, may not be indicative
of the future benefit, if any, that may be received by the option holder.
The pro forma information reflected above may not be representative of the
amounts to be expected in future years as the fair value method of accounting
contained in SFAS 123 has not been applied to options granted prior to January
1995.
Incentive and Stock Award Plan: In 1992, the Company's stockholders approved the
Marsh & McLennan Companies, Inc. 1992 Incentive and Stock Award Plan (the "1992
Plan") under which awards may be granted to employees of the Company. The types
of awards permitted include stock options, restricted stock, restricted stock
units payable in Company common stock or cash, and other stock-based awards. The
Compensation Committee of the Board of Directors (the "Compensation Committee")
determines, in its discretion, which eligible employees will receive awards, the
types of awards to be received and the terms and conditions thereof. The plan
contains provisions which, in the event of a change in control of the Company,
may accelerate the vesting of the awards. Awards relating to not more than
8,200,000 shares of common stock, plus such number of shares remaining unused
under the 1988 Incentive and Stock Award Plan (the "1988 Plan"), which was
terminated as to future awards and superseded by the 1992 Plan, may be made over
the five-year life of the 1992 Plan. There were 2,331,444 and 3,533,216 shares
available for awards at December 31, 1996 and 1995, respectively.
Stock Options: Options granted under the 1992 Plan may be designated as
incentive stock options or as non-qualified stock options. The Compensation
Committee shall determine 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.
39
<PAGE>
Stock option transactions under the 1992 Plan and prior plans are as follows:
<TABLE>
<CAPTION>
========================================================================================================================
1996 1995 1994
-------------------------- --------------------------- -------------------------
Weighted Average Weighted Average Exercise Price
Shares Exercise Price Shares Exercise Price Shares Per Share
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period 8,720,795 $ 80.63 8,121,141 $ 79.83 7,922,248 $22.78-93.63
Granted 1,374,060 $ 95.09 1,132,790 $ 79.02 609,600 $74.94-88.00
Exercised (1,287,030) $ 70.64 (359,616) $ 55.44 (186,297) $22.78-79.31
Forfeited (252,348) $ 85.50 (173,520) $ 84.74 (224,410) $49.38-93.63
--------- --------- ---------
Balance at end of period 8,555,477 $ 84.31 8,720,795 8,121,141
========================================================================================================================
Options Exercisable at year end 5,489,665 5,662,022 5,093,481
========================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
================================================================================================================
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------------
Weighted Average Weighted Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Price at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$49.37-73.88 1,277,983 2.7 years $62.51 1,277,983 $62.51
$74.37-93.57 3,013,282 6.1 years $79.72 1,978,068 $79.67
$93.62-100.07 4,264,212 7.1 years $94.09 2,233,614 $93.63
--------- ---------
8,555,477 6.1 years $84.31 5,489,665 $81.36
================================================================================================================
</TABLE>
The weighted average exercise prices for exercisable options at December 31,
1996 and 1995 was $81.36 and $77.40, respectively. The weighted average fair
value of options granted during the years ended December 31, 1996 and 1995 was
$14.70 and $12.99 per share, respectively.
Restricted Stock: Under the 1992 Plan, restricted shares of the Company's common
stock may be awarded and shall be 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 52,800, 95,900 and 59,900 restricted shares granted in 1996, 1995 and
1994, respectively, under the 1992 Plan. The Company recorded compensation
expense of $5.7 million in 1996 and 1995 and $4.9 million in 1994, related to
these shares. Shares that have been granted become unrestricted at the earlier
of January 1 of the eleventh year following the grant or the recipient's normal
retirement date or, for shares granted after 1987, the recipient's actual
retirement date if later than the normal retirement date.
Restricted Stock Units: Restricted stock units, payable in stock or cash, may be
awarded under the 1992 Plan. The Compensation Committee shall determine the
restrictions on such units, when the restrictions shall lapse, when the shares
of stock shall vest and be paid, and upon what terms the units shall be
forfeited.
There were 39,759, 67,564 and 33,818 restricted stock units awarded during 1996,
1995 and 1994, respectively, under the 1992 Plan. The Company recorded
compensation expense of $4.7 million, $2.9 million and $2.5 million in 1996,
1995 and 1994, respectively, related to restricted stock units.
Stock Purchase Plans: In May 1994, the Company's stockholders approved an
employee stock purchase plan (the "1994 Plan") to replace the 1990 Employee
Stock Purchase Plan which terminated on September 30, 1994 following its fourth
annual offering. Under these plans, eligible employees may purchase shares of
the Company'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 1994 Plan, no more than 4,000,000 shares
of the Company's
40
<PAGE>
common stock plus the remaining unissued shares in the 1990 Plan may be sold.
Employees purchased 653,000, 682,000 and 649,000 shares in 1996, 1995 and 1994,
respectively. At December 31, 1996, 3,096,000 shares were available for issuance
under the 1994 Plan. During 1995, the Company's Board of Directors approved the
Marsh & McLennan Companies Stock Purchase Plan for International Employees (the
"International Plan") which is similar to the 1994 Plan. Under the International
Plan, no more than 500,000 shares of the Company's common stock may be sold. At
December 31, 1996, 495,000 shares were available for issuance under the
International Plan. The fair value of each employee purchase right granted under
these Stock Purchase Plans is included in the pro forma net income shown above
during 1996 and 1995 and was estimated using the Black-Scholes model with the
following assumptions: dividend yield of 3.5%; expected life of 1 year; expected
volatility of 14%; and risk-free interest rate of 5.6%. The weighted average
fair value of each purchase right granted in 1996 and 1995 was $19.14 and
$17.53, respectively.
7 Long-term Obligations
- --------------------------------------------------------------------------------
The Company 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 93% of the
Company's lease obligations are for the use of office space.
The accompanying Consolidated Statements of Income include net rental costs of
$217.3 million, $218.1 million and $206.7 million for 1996, 1995 and 1994,
respectively, after deducting rentals from subleases ($8.4 million in 1996, $9.1
million in 1995 and $8.8 million in 1994).
At December 31, 1996, the aggregate future minimum rental commitments under all
noncancelable operating lease agreements are as follows:
================================================================================
For the Years Ending Gross Rentals Net
December 31, Rental from Rental
(In millions of dollars) Commitments Subleases Commitments
- --------------------------------------------------------------------------------
1997 $168.8 $ 6.6 $162.2
1998 135.3 4.4 130.9
1999 111.1 2.9 108.2
2000 92.6 1.8 90.8
2001 73.6 1.4 72.2
Subsequent years 312.2 5.2 307.0
- --------------------------------------------------------------------------------
$893.6 $22.3 $871.3
================================================================================
During 1994, the Company entered into agreements with various service companies
to outsource certain information systems activities and responsibilities which
previously were performed by the Company. Under these agreements, the Company 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, 1996, the aggregate fixed
future minimum commitments under these agreements are as follows:
================================================================================
Future
For the Years Ending December 31, Minimum
(In millions of dollars) Commitments
- --------------------------------------------------------------------------------
1997 $ 25.9
1998 24.7
1999 13.6
2000 9.4
2001 9.0
Subsequent years 21.5
- --------------------------------------------------------------------------------
$104.1
================================================================================
41
<PAGE>
8 Short-term Debt
- --------------------------------------------------------------------------------
The Company's outstanding short-term debt is as follows:
================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- --------------------------------------------------------------------------------
Commercial paper $ 387.6 $ 352.0
Consumer finance borrowings -- 135.6
Bank loans -- 79.7
Current portion of long-term debt 4.8 3.8
- --------------------------------------------------------------------------------
$ 392.4 $ 571.1
================================================================================
The weighted average interest rates on outstanding borrowings at December 31,
1996 and 1995 are as follows:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
Commercial paper 5.9% 5.8%
Consumer finance borrowings -- 7.3%
Bank loans -- 4.3%
================================================================================
During 1996, the Company executed a new revolving credit facility with several
banks to support its commercial paper borrowings and to fund other general
corporate requirements. This facility, which expires December 2001, provides
that the Company may borrow up to $750 million at market rates of interest which
may vary depending upon the level of borrowings and the Company's credit
ratings. Commitment fees of 7 basis points are payable on any unused portion.
The facility requires the Company to maintain consolidated net worth of at least
$1 billion and contains other restrictions relating to consolidations, mergers
and the sale or pledging of assets.
The Company maintains credit facilities with various banks, primarily related to
operations located outside of the United States, aggregating $59.5 million.
9 Long-term Debt
- --------------------------------------------------------------------------------
The Company's outstanding long-term debt is as follows:
================================================================================
December 31, 1996 and 1995
(In millions of dollars) 1996 1995
- --------------------------------------------------------------------------------
Revolving credit facility $ 250.0 $ --
Commercial paper -- 200.0
Mortgage--9.8% due 2009 200.0 200.0
Mortgage--7.25% due 1999 4.2 3.9
Other 8.8 10.5
- --------------------------------------------------------------------------------
463.0 414.4
Less current portion 4.8 3.8
- --------------------------------------------------------------------------------
$ 458.2 $ 410.6
================================================================================
Outstanding borrowings under the revolving credit facility at December 31, 1996
amounted to $250 million with varying dates of maturity through December 1997.
Borrowings under the revolving credit facility have been classified as long-term
debt based on the Company's intent and ability to maintain or refinance these
obligations on a long-term basis. The weighted average interest rate associated
with these borrowings was 5.9%.
The Company has a 20-year fixed rate non-recourse mortgage note agreement
amounting to $200 million, bearing an interest rate of 9.8%, in connection with
its 56% interest in its worldwide headquarters building. In the event the
mortgage is foreclosed following a default, the Company would be entitled to
remain in the space and would be obligated to pay rent sufficient to cover
interest on the notes or, starting in 1999, at fair market value if greater.
The Company has an interest rate swap which was entered into as part of the
acquisition and renovation of the Company's worldwide headquarters which fixes
the interest rate at approximately 9.5% on $100 million of variable rate
borrowings until February 1999. The weighted average interest rate received on
this swap at December 31, 1996, 1995 and 1994 was 5.7%, 6.1% and 4.6%,
respectively. The difference between the fixed rate and the weighted average
rate is included in interest expense in the Consolidated Statements of Income.
Scheduled repayments of long-term debt, excluding the revolving credit facility
described above, in 1997 and in the two succeeding years are $4.8 million, $1.9
million, and $4.3 million, respectively. No repayments are scheduled for the
years 2000 and 2001.
42
<PAGE>
10 Financial Instruments
- --------------------------------------------------------------------------------
The estimated fair value of the Company'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 the Company would realize upon disposition nor do
they indicate the Company's intent or ability to dispose of the financial
instrument.
Cash and Cash Equivalents: The estimated fair value of the Company's cash and
cash equivalents approximates their carrying value.
Long-term Investments: The Company has certain long-term investments, for which
there are no readily available market prices, amounting to $53.9 million and
$77.5 million at December 31, 1996 and 1995, respectively, which are carried on
a cost basis. Based on present information, the Company believes that the cost
of these investments approximates their fair value.
Short-term and Long-term Debt: The fair value of the Company's short-term debt,
which consists primarily of commercial paper borrowings, approximates its
carrying value. The estimated fair value of the $200 million mortgage on the
Company's worldwide headquarters building is approximately $238 million and $250
million at December 31, 1996 and 1995, respectively, based on discounted future
cash flows using interest rates available for debt with similar terms and
remaining maturities. The estimated fair value of borrowings under the revolving
credit facility approximates the carrying value.
Off-balance Sheet Instruments: The fair value of the Company's $100 million
interest rate swap has been estimated as a liability of approximately $8 million
and $13 million at December 31, 1996 and 1995, respectively. These calculations
are based on discounted future cash flows taking into account the current
interest rate environment.
Unrealized Securities Holding Gains: The Company has classified as available for
sale primarily equity securities having an aggregate fair value of $519.4
million and $334.3 million at December 31, 1996 and 1995, respectively. Gross
unrealized gains, amounting to $341.1 million and $230.6 million at December 31,
1996 and 1995, respectively, have been excluded from earnings and reported as a
separate component of stockholders' equity, net of deferred income taxes.
Proceeds from the sale of available for sale securities for the years ended
December 31, 1996 and 1995 were $28.3 million and $53.7 million, respectively.
Gross realized gains on available for sale securities sold during 1996 and 1995
amounted to $17.5 million and $23.2 million, respectively. The cost of
securities sold is determined using the average cost method for equity
securities.
A portion of insurance fiduciary funds which the Company 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.
11 Unusual Items
- --------------------------------------------------------------------------------
During 1996, the Company completed the sale of Frizzell for approximately $290
million which resulted in a $33.2 million pretax gain. In addition, pretax
charges aggregating $92.6 million were also recorded. These charges represent a
provision of approximately $33.5 million primarily for U.K. real estate; $17
million for costs related to the integration of the Company's worldwide
insurance services operations; $17 million for goodwill write-offs; $15 million
related to the Lloyd's Reconstruction and Renewal Plan; and $10.1 million
primarily related to office closings. The net impact of the unusual items
described above and the tax adjustment discussed in Note 4 increased earnings
per share by $.04 for the year.
12 Consumer Finance Operation
- --------------------------------------------------------------------------------
As discussed in Note 3, the Company sold Frizzell during 1996. The Frizzell Bank
Limited ("FBL"), an authorized institution under the United Kingdom Banking Act
1987 and a subsidiary of Frizzell, provided affinity group members with a
variety of financial services including insurance premium financing programs,
unsecured and secured loans and credit cards. These loans were financed by the
acceptance of deposits from the affinity group members and through bank
borrowings.
Consumer finance receivables, which included both fixed and variable rate loans,
amounted to $288.9 million (net of allowance for doubtful accounts of $10.9
million) at December 31, 1995. The long-term and current portion of these
consumer finance receivables amounted to $157.6 million and $142.2 million,
respectively.
43
<PAGE>
Customer deposits with one to three year terms at fixed interest rates amounted
to $98.9 million at December 31, 1995. The long-term portion of these customer
deposits amounted to $60.9 million and was included in other liabilities in the
Consolidated Balance Sheets. The current portion of customer deposits was
included in accounts payable and accrued liabilities.
13 Shareholder Rights Plan
- --------------------------------------------------------------------------------
Under the Company's Shareholder Rights Plan each common share has one Right
attached to it. Under the plan, the Rights generally become exercisable after a
person or group (i) acquires 15% or more of the Company's outstanding common
stock or (ii) commences a tender offer that would result in such person or group
owning 30% or more of the Company's common stock. When the Rights first become
exercisable, a holder will be entitled to buy from the Company one one-hundredth
of a share of a new series of Series A Junior Participating Preferred Stock of
the Company at a purchase price of $210. Alternatively, if any person acquires
15% or more of the Company's common stock except pursuant to an offer for all
shares at a fair price or if a 15% holder acquires the Company by means of a
reverse merger in which the Company and its stock survive, each Right not owned
by a 15% or more shareholder would become exercisable for common stock of the
Company (or, in certain circumstances, other consideration) having a market
value equal to twice the exercise price of the Right. If the Company is involved
in a merger or other business combination when there is a 15% or more
stockholder of the Company, the Rights will entitle a holder to buy shares of
common stock of the acquiring company having a market value of twice the
exercise price of each Right. The Rights expire on September 28, 1997, unless
redeemed earlier.
14 Claims, Lawsuits and Other Contingencies
- --------------------------------------------------------------------------------
The Company and its subsidiaries are subject to claims and lawsuits that arise
in the ordinary course of business, consisting principally of alleged errors and
omissions in connection with the placement of insurance or reinsurance and in
rendering investment and consulting services. Some of these claims and lawsuits
seek damages, including punitive damages, in amounts which could, if assessed,
be significant.
Among these is a group of claims relating to reinsurance contracts placed by
reinsurance broking subsidiaries of the Company that were called into question.
In general, these contracts concern so-called run-off exposures under which
reinsurers assumed some or all remaining liability for claims against Lloyd's
syndicates or other London insurers on policies, typically written in the past
over a period of many years and sometimes without aggregate limits. Over several
years, disputes concerning these contracts and involving cedants, reinsurers,
members of syndicates, their underwriting and members' names agencies and, in
some instances, subsidiaries of the Company have been negotiated, litigated or
deferred. As part of the Lloyd's Reconstruction and Renewal ("R&R") Plan, most
of this group of claims have been extinguished or assigned to the reinsurance
entity created to effectuate the R&R Plan. The Company believes that its
subsidiaries performed their reinsurance broking services in conformity with
accepted and customary practices in the London market.
Subsidiaries of the Company in the course of their consulting and insurance
activities advised certain clients in connection with their purchase of
guaranteed investment contracts and annuities issued by Executive Life Insurance
Company, which is in rehabilitation under the supervision of the California
Insurance Department. Some of those clients as well as the Company's
subsidiaries have been or may be involved in claims or lawsuits relating to
losses in connection with those investments. In some instances, the subsidiaries
have entered into agreements extending the time in which possible claims may be
asserted against them, or have engaged in negotiating the deferral or resolution
of claims and litigation. The Company believes that its subsidiaries acted in a
proper and professional manner in connection with these matters.
On the basis of present information, available insurance coverage and advice
received from counsel, it is the opinion of the Company's management that the
disposition or ultimate determination of these claims and lawsuits will not have
a material adverse effect on the Company's consolidated results of operations or
its consolidated financial position.
44
<PAGE>
15 Segmentation of Activity by Type of Service and Geographic Area of Operation
- --------------------------------------------------------------------------------
The Company, a professional services firm, operates in three principal business
segments: insurance services, investment management and consulting. Operating
income for each type of service is after deductions for all directly related
expenses and allocations of common expenses. General corporate expenses
primarily are comprised of employee compensation and benefits and related
occupancy costs for administrative personnel. General corporate assets primarily
consist of cash and cash equivalents, deferred income tax assets and a portion
of the Company's headquarters building.
The following table presents information about the Company's operations by type
of service and geographic area:
<TABLE>
<CAPTION>
============================================================================================
For the Three Years Ended December 31, 1996
Depreciation &
Operating Identifiable Amortization Capital
(In millions of dollars) Revenue Income Assets of Fixed Assets Expenditures
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Type of Service:
1996--(a)
Insurance Services $ 1,907.3 $ 313.7 $ 1,926.8 $ 64.5 $ 66.7
Investment Management 1,082.5 337.8 1,457.6 27.4 52.4
Consulting 1,159.2 110.9 679.6 22.6 32.7
General Corporate -- (47.1) 481.2 4.0 5.5
- ---------------------------------------------------------------------------------------------
$ 4,149.0 $ 715.3 $ 4,545.2 $ 118.5 $ 157.3
=============================================================================================
1995--
Insurance Services $ 1,963.9 $ 389.2 $ 2,193.6 $ 65.6 $ 77.2
Investment Management 750.0 243.5 997.9 21.5 29.4
Consulting 1,056.4 108.7 638.4 20.4 25.7
General Corporate -- (46.5) 499.6 3.9 4.6
- ---------------------------------------------------------------------------------------------
$ 3,770.3 $ 694.9 $ 4,329.5 $ 111.4 $ 136.9
=============================================================================================
1994--
Insurance Services $ 1,886.5 $ 406.1 $ 2,021.9 $ 62.0 $ 70.9
Investment Management 615.4 208.2 763.5 16.0 44.3
Consulting 933.1 96.4 568.4 17.9 32.3
General Corporate -- (40.4) 476.8 3.7 1.6
- ---------------------------------------------------------------------------------------------
$ 3,435.0 $ 670.3 $ 3,830.6 $ 99.6 $ 149.1
=============================================================================================
</TABLE>
Geographic Area:
1996--(a)
United States $ 2,809.2 $ 566.3 $ 2,863.6
Europe 967.1 136.9 951.6
Canada 198.0 42.5 111.8
Pacific Rim and Other 174.7 16.7 137.0
General Corporate -- (47.1) 481.2
- --------------------------------------------------------------
$ 4,149.0 $ 715.3 $ 4,545.2
==============================================================
1995--
United States $ 2,398.4 $ 494.1 $ 2,195.9
Europe 1,028.2 189.7 1,413.6
Canada 184.3 37.4 107.1
Pacific Rim and Other 159.4 20.2 113.3
General Corporate -- (46.5) 499.6
- --------------------------------------------------------------
$ 3,770.3 $ 694.9 $ 4,329.5
==============================================================
1994--
United States $ 2,227.3 $ 478.6 $ 1,824.4
Europe 909.6 180.6 1,326.4
Canada 165.1 35.3 97.3
Pacific Rim and Other 133.0 16.2 105.7
General Corporate -- (40.4) 476.8
- --------------------------------------------------------------
$ 3,435.0 $ 670.3 $ 3,830.6
==============================================================
(a) The 1996 net unusual charges included in operating income are allocated by
type of service and geographic area as follows: $49.4 million for Insurance
Services, $8.5 million for Consulting and $1.5 million for General
Corporate; $29.6 million for U.S., $26.3 million for Europe, $2.0 million
for Pacific Rim and Other and $1.5 million for General Corporate.
45
<PAGE>
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. The Company'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.
The Company 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 the Company'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 the
Company's objectives.
The Audit Committee of the Board of Directors is composed entirely of outside
directors and is responsible for recommending to the Board the independent
auditors to be engaged to audit the Company'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 the Company'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/ Frank J. Borelli
Frank J. Borelli
Senior Vice President and
Chief Financial Officer
February 26, 1997
Report of Independent Auditors
- --------------------------------------------------------------------------------
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 5 to the consolidated financial statements, during 1994 the
Company changed its method of accounting for postemployment benefits to conform
with Statement of Financial Accounting Standards ("SFAS") No. 112.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
February 26, 1997
(March 12, 1997 as to the last paragraph of Note 3)
46
<PAGE>
Marsh & McLennan Companies, Inc. and Subsidiaries
Selected Quarterly Financial Data and
Supplemental Information (Unaudited)
<TABLE>
<CAPTION>
=============================================================================================================
Income Before
Cumulative
Effect of
Accounting
Change Net Income
--------------- ---------------
Dividends Stock
(In millions of dollars, Operating Per Per Paid Per Price Range
except per share figures) Revenue Income Amount Share Amount Share Share High-Low
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
First quarter $1,070.7 $ 242.5 $ 143.1 $ 1.96 $ 143.1 $ 1.96 $ .80 $101 5/8-84 1/4
Second quarter 1,036.8 193.3 115.2 1.58 115.2 1.58 .80 $97 5/8-89
Third quarter 989.0 174.2 102.6 1.43 102.6 1.43 .80 $99-88
Fourth quarter 1,052.5 105.3 98.4 1.37 98.4 1.37 .90 $114 7/8-95 1/2
- --------------------------------------------------------------------------------------------
$4,149.0 $ 715.3 $ 459.3 $ 6.34 $ 459.3 $ 6.34 $ 3.30 $114 7/8-84 1/4
============================================================================================
1995:
First quarter $ 955.2 $ 213.6 $ 124.8 $ 1.71 $ 124.8 $ 1.71 $ .725 $85-76 1/4
Second quarter 935.2 174.9 101.8 1.40 101.8 1.40 .725 $84-76 1/8
Third quarter 921.6 158.4 91.3 1.26 91.3 1.26 .725 $89 3/8-76 5/8
Fourth quarter 958.3 148.0 85.0 1.16 85.0 1.16 .80 $90 1/8-80 1/2
- --------------------------------------------------------------------------------------------
$3,770.3 $ 694.9 $ 402.9 $ 5.53 $ 402.9 $ 5.53 $ 2.975 $90 1/8-76 1/8
============================================================================================
1994:
First quarter $ 910.2 $ 228.4 $ 130.7 $ 1.77 $ 120.2 $ 1.63 $ .675 $86 3/4-80 1/4
Second quarter 840.5 163.8 95.7 1.30 95.7 1.30 .675 $88 3/4-81 1/4
Third quarter 826.9 148.6 83.4 1.14 83.4 1.14 .725 $88 3/8-76
Fourth quarter 857.4 129.5 72.2 .98 72.2 .98 .725 $80 3/8-71 1/4
- --------------------------------------------------------------------------------------------
$3,435.0 $ 670.3 $ 382.0 $ 5.19 $ 371.5 $ 5.05 $ 2.80 $88 3/4-71 1/4
=============================================================================================================
</TABLE>
The Company's common stock (ticker symbol: MMC) is traded on the New York,
Chicago, Pacific and London stock exchanges. As of February 28, 1997, there were
17,764 stockholders of record.
47
<PAGE>
Marsh & McLennan Companies, Inc. and Subsidiaries
Ten-Year Statistical Summary of Operations
<TABLE>
<CAPTION>
=========================================================================================================
For the Ten Years Ended December 31, 1996
(In millions of dollars,
except per share figures) 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Insurance services $1,907.3 $1,963.9 $1,886.5 $1,790.5
Investment management 1,082.5 750.0 615.4 518.1
Consulting 1,159.2 1,056.4 933.1 854.8
- ---------------------------------------------------------------------------------------------------------
Total Revenue 4,149.0 3,770.3 3,435.0 3,163.4
- ---------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 2,204.3 1,948.8 1,740.2 1,635.7
Other operating expenses 1,229.4 1,126.6 1,024.5 934.9
- ---------------------------------------------------------------------------------------------------------
Total Expenses 3,433.7 3,075.4 2,764.7 2,570.6
- ---------------------------------------------------------------------------------------------------------
Operating Income 715.3(c) 694.9 670.3 592.8
Interest Income 14.3 17.7 11.8 11.9
Interest Expense (61.6) (62.8) (50.6) (46.1)
Other Income (Expense) -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Accounting Changes 668.0 649.8 631.5 558.6
Income Taxes 208.7(d) 246.9 249.5 226.2
- ---------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect
of Accounting Changes $ 459.3 $ 402.9 $ 382.0 $ 332.4
=========================================================================================================
Net Income $ 459.3 $ 402.9 $ 371.5(b) $ 332.4
=========================================================================================================
Earnings Per Share Information:
Income Before Cumulative Effect
of Accounting Changes $6.34 $5.53 $5.19 $4.52
=========================================================================================================
Net Income Per Share $6.34 $5.53 $5.05(b) $4.52
=========================================================================================================
Average Number of Shares Outstanding 72.4 72.9 73.6 73.5
Dividends Paid Per Share $3.30 $2.97-1/2 $2.80 $2.70
Return on Average Stockholders' Equity 26% 26% 26% 27%
Year-end Financial Position:
Working capital $ 192.3 $ 109.6 $ 53.7 $ 133.7
Total assets $4,545.2 $4,329.5 $3,830.6 $3,546.6
Long-term debt $ 458.2 $ 410.6 $ 409.4 $ 409.8
Stockholders' equity $1,888.6 $1,665.5 $1,460.6 $1,365.3
Total shares outstanding
(excluding treasury shares) 72.3 72.8 73.2 73.9
Other Information:
Number of employees 27,000 27,200 26,100 25,600
Stock price ranges--
U.S. exchanges--High $114-7/8 $90-1/8 $88-3/4 $97-5/8
--Low $ 84-1/4 $76-1/8 $71-1/4 $ 77
London Stock Exchange--High (pound) 68-11/32 (pound) 58-1/2 (pound) 58-15/16 (pound) 67-7/16
--Low (pound) 54-7/8 (pound) 47-7/8 (pound) 45-5/16 (pound) 52-9/16
Price/earnings multiple 16.4 16.0 15.7 18.0
=========================================================================================================
</TABLE>
(a) Reflects the adoption, effective January 1, 1992, of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and SFAS No. 109, "Accounting for Income Taxes."
(b) Reflects the adoption, effective January 1, 1994, of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits."
(c) Includes net unusual charges of $92.6 million partially offset by a $33.2
million gain on the sale of Frizzell.
(d) Includes a tax adjustment that reduced income taxes by $40 million.
48
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================
For the Ten Years Ended December 31, 1996
(In millions of dollars,
except per share figures) 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C>
Insurance services $1,632.8 $1,571.0 $1,536.8 $1,400.3
Investment management 396.0 314.2 276.2 273.1
Consulting 908.2 894.0 910.0 754.3
- ------------------------------------------------------------------------------------------------------------
Total Revenue 2,937.0 2,779.2 2,723.0 2,427.7
- ------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 1,557.8 1,461.1 1,400.0 1,223.4
Other operating expenses 838.2 820.0 795.7 694.8
- ------------------------------------------------------------------------------------------------------------
Total Expenses 2,396.0 2,281.1 2,195.7 1,918.2
- ------------------------------------------------------------------------------------------------------------
Operating Income 541.0 498.1 527.3 509.5
Interest Income 16.6 24.8 33.5 27.7
Interest Expense (38.3) (39.1) (31.0) (18.9)
Other Income (Expense) -- 43.0 (1.0) (1.0)
- ------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Accounting Changes 519.3 526.8 528.8 517.3
Income Taxes 215.5 221.3 224.7 222.4
- ---------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect
of Accounting Changes $ 303.8 $ 305.5 $ 304.1 $ 294.9
============================================================================================================
Net Income $ 263.7(a) $ 305.5 $ 304.1 $ 294.9
============================================================================================================
Earnings Per Share Information:
Income Before Cumulative Effect
of Accounting Changes $4.21 $4.18 $4.15 $4.10
============================================================================================================
Net Income Per Share $3.65(a) $4.18 $4.15 $4.10
============================================================================================================
Average Number of Shares Outstanding 72.2 73.1 73.3 71.9
Dividends Paid Per Share $2.65 $2.60 $2.55 $2.50
Return on Average Stockholders' Equity 25% 29% 31% 36%
Year-end Financial Position:
Working capital $ 198.3 $ 336.2 $ 352.5 $ 312.7
Total assets $3,088.4 $2,382.2 $2,411.2 $2,035.2
Long-term debt $ 411.2 $ 318.0 $ 319.9 $ 319.4
Stockholders' equity $1,102.9 $1,035.0 $1,085.3 $ 873.0
Total shares outstanding
(excluding treasury shares) 73.3 71.8 73.5 72.4
Other Information:
Number of employees 25,800 23,400 24,400 23,600
Stock price ranges--
U.S. exchanges--High $94-1/2 $87-1/4 $ 81 $89-3/4
--Low $71-1/4 $69-1/8 $59-3/4 $55-1/8
London Stock Exchange--High (pound) 61-7/8 (pound) 49-5/8 (pound) 49 (pound) 55-15/16
--Low (pound) 39-5/16 (pound) 35-9/16 (pound) 31-1/2 (pound) 30-13/16
Price/earnings multiple 25.0 19.5 18.8 19.0
============================================================================================================
<CAPTION>
=====================================================================================
For the Ten Years Ended December 31, 1996 Compound
(In millions of dollars, Growth Rate
except per share figures) 1988 1987 1986-1996
- -------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C>
Insurance services $1,375.7 $1,380.2 4%
Investment management 261.0 284.9 19%
Consulting 635.7 482.0 13%
- ----------------------------------------------------------------------
Total Revenue 2,272.4 2,147.1 9%
- ----------------------------------------------------------------------
Expenses:
Compensation and benefits 1,108.9 982.6 10%
Other operating expenses 648.1 614.3 9%
- ----------------------------------------------------------------------
Total Expenses 1,757.0 1,596.9 10%
- ----------------------------------------------------------------------
Operating Income 515.4 550.2 4%
Interest Income 22.7 31.0
Interest Expense (23.1) (13.0)
Other Income (Expense) 1.4 (.9)
- ----------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Accounting Changes 516.4 567.3 3%
Income Taxes 220.1 265.2
- ----------------------------------------------------------------------
Income Before Cumulative Effect
of Accounting Changes $ 296.3 $ 302.1 7%
======================================================================
Net Income $ 296.3 $ 302.1 7%
======================================================================
Earnings Per Share Information:
Income Before Cumulative Effect
of Accounting Changes $4.09 $4.06 7%
======================================================================
Net Income Per Share $4.09 $4.06 7%
======================================================================
Average Number of Shares Outstanding 72.4 74.4
Dividends Paid Per Share $2.42-1/2 $2.15 8%
Return on Average Stockholders' Equity 38% 42%
Year-end Financial Position:
Working capital $ 195.7 $ 243.2
Total assets $1,830.0 $1,634.4
Long-term debt $ 266.2 $ 16.4
Stockholders' equity $ 755.1 $ 791.7
Total shares outstanding
(excluding treasury shares) 71.5 73.9
Other Information:
Number of employees 22,800 22,700
Stock price ranges--
U.S. exchanges--High $59-3/4 $ 72
--Low $45-1/4 $43-3/4
London Stock Exchange--High (pound) 35 (pound) 46-1/2
--Low (pound) 25 (pound) 24
Price/earnings multiple 13.8 12.2
=====================================================================================
</TABLE>
49
<PAGE>
Board of Directors and Corporate Officers
BOARD OF DIRECTORS
A.J.C. Smith
Chairman
Lewis W. Bernard
Chairman
Classroom, Inc.
Former Chief Administrative
and Financial Officer
Morgan Stanley & Co., Inc.
Richard H. Blum
Marsh & McLennan
Companies, Inc.
Frank J. Borelli
Senior Vice President and
Chief Financial Officer
Robert Clements
Chairman
Risk Capital Holdings, Inc.
Peter Coster
President
Mercer Consulting Group, Inc.
Robert F. Erburu
Former Chairman
The Times Mirror Company
Jeffrey W. Greenberg
Chairman
Marsh & McLennan Risk Capital Corp.
Ray J. Groves
Chairman
Legg Mason
Merchant Banking, Inc.
Former Chairman
Ernst & Young
Richard S. Hickok
Former Chairman
KMG Main Hurdman
David D. Holbrook
Chairman
Marsh & McLennan,
Incorporated
Lawrence J. Lasser
President
Putnam Investments, Inc.
Richard M. Morrow
Former Chairman
Amoco Corporation
George Putnam
Chairman
The Putnam Funds
Adele Smith Simmons
President
John D. and Catherine T.
MacArthur Foundation
John T. Sinnott
President and Chief
Executive Officer
Marsh & McLennan,
Incorporated
Frank J. Tasco
Former Chairman
Marsh & McLennan
Companies, Inc.
R. J. Ventres
Former Chairman
Borden, Inc.
ADVISORY DIRECTORS
Richard E. Heckert
Former Chairman
E.I. du Pont de Nemours
and Company
Dean R. McKay
Former Senior Vice President
IBM Corporation
Arthur C. Nielsen, Jr.
Former Chairman
A.C. Nielsen Company
John M. Regan, Jr.
Former Chairman
Marsh & McLennan
Companies, Inc.
COMMITTEES OF
THE BOARD
Audit
Richard S. Hickok, Chairman
Robert F. Erburu
Richard M. Morrow
Adele Smith Simmons
Frank J. Tasco
Compensation
Lewis W. Bernard, Chairman
Ray J. Groves
R. J. Ventres
Executive
A.J.C. Smith, Chairman
Richard M. Morrow
Adele Smith Simmons
Frank J. Tasco
OTHER CORPORATE OFFICERS
Francis N. Bonsignore
Senior Vice President
Human Resources and
Administration
Gregory F. Van Gundy
General Counsel and
Secretary
International Advisory Board
Abdlatif Y. Al-Hamad
(Middle East)
Chairman
Arab Fund for Economic
and Social Development
Raymond Barre
(France)
Deputy, National Assembly
Former Prime Minister
Mathis Cabiallavetta
(Switzerland)
President of the
Group Executive Board
Union Bank of Switzerland
John R. Evans
(Canada)
Chairman
Torstar Corporation
Oscar Fanjul
(Spain)
Former Chairman and
Chief Executive Officer
Repsol
Toyoo Gyohten
(Japan)
President
Institute for International Monetary Affairs
Former Chairman
The Bank of Tokyo
Lord Jenkin of Roding
(United Kingdom)
Chairman
Friends' Provident Life Office
Erno Kemenes
(Eastern Europe)
Chairman
Deloitte Touche Tohmatsu
Former Minister of Economics, Hungary
Walther Leisler Kiep
(Germany)
(IAB Chairman)
General Partner
Gradmann & Holler
Marcilio Marques Moreira
(Brazil)
Senior International Advisor
Merrill Lynch
Former Ambassador of Brazil to the United States
Paul F. Oreffice
(United States)
Former Chairman and
Chief Executive Officer
The Dow Chemical Company
Jesus Silva-Herzog
(Mexico)
Ambassador of Mexico
to the United States
Wei Ming Yi
(China)
Chairman
China International Trust and
Investment Corporation
50
<PAGE>
Shareholder Information
Annual Meeting
The 1997 annual meeting of shareholders will be held at 10 a.m., Wednesday, May
21, 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 1997 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, address corrections, changes of
registration and stock certificate holdings should contact:
Harris Trust Company of New York
c/o Harris Trust and Savings Bank
Shareholder Services Division
311 West Monroe Street
P.O. Box 755
Chicago, Illinois 60690-0755
Telephone: (800) 457-8968
(312) 461-3597
Harris Trust Company of New York
c/o The Royal Bank of Scotland
Registrar's Department
P.O. Box 82, Caxton House
Redcliffe Way, Bristol BS99 7NH
England
Telephone: 117-9306600
Copies of our annual and quarterly reports, and Forms 10-K and 10-Q,
may be obtained by contacting:
Corporate Development
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
Telephone: (212) 345-5475
Marsh & McLennan Companies' Web site: http://www.marshmac.com
Stock Listings
Marsh & McLennan Companies' common stock (ticker symbol: MMC) is listed on
the New York, Chicago, Pacific and London stock exchanges.
Designed and Produced by Taylor & Ives, NYC [Logo]Printed on recycled paper
<PAGE>
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, NY 10036
(212) 345-5000
