SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended March 31, 1999
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X . NO .
As of April 30, 1999, there were outstanding 263,234,608 shares of
common stock, par value $1.00 per share, of the registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report contains certain statements relating to future results, which
are forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. Such statements may include,
without limitation, discussions concerning revenue and expense growth, cost
savings and efficiencies expected from the integration of Johnson & Higgins
and Sedgwick Group plc, Year 2000 remediation and testing of computer
systems, market and industry conditions, interest rates, foreign exchange
rates, contingencies and matters relating to the operations and income
taxes of Marsh & McLennan Companies, Inc. and subsidiaries ("MMC"). Such
forward- looking statements are based on available current market and
industry materials, experts' reports and opinions, as well as management's
expectations concerning future events impacting MMC. Forward-looking
statements by their very nature involve risks and uncertainties. Factors
that may cause actual results to differ materially from those contemplated
by any forward-looking statements contained herein include, in the case of
MMC's risk and insurance services and consulting businesses, the failure to
successfully integrate the businesses of Johnson & Higgins and Sedgwick
Group plc (including the achievement of synergies and cost reductions) or
other adverse consequences from those transactions; in the case of MMC's
risk and insurance service business, changes in competitive conditions, a
decrease in the premium rate levels in the global property and casualty
insurance markets, the impact of changes in insurance markets and natural
catastrophes; in the case of MMC's investment management business, changes
in worldwide and national equity and fixed income markets; and with respect
to all of MMC's activities, the failure of MMC and/or its significant
business partners to be Year 2000 compliant on a timely basis, changes in
general worldwide and national economic conditions, fluctuations in foreign
currencies, actions of competitors or regulators, changes in interest
rates, developments relating to claims and lawsuits, changes in the tax or
accounting treatment of MMC's operations and the impact of tax and other
legislation and regulation in the jurisdictions in which MMC operates.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Revenue $2,351 $1,776
Expense 1,832 1,372
Operating Income 519 404
Interest Income 7 5
Interest Expense (60) (28)
Income Before Income Taxes 466 381
Income Taxes 187 150
Net Income $ 279 $ 231
Basic Net Income Per Share (A) $1.08 $.90
Diluted Net Income Per Share (A) $1.03 $.87
Average Number of Shares
Outstanding - Basic (A) 258 257
Average Number of Shares
Outstanding - Diluted (A) 266 264
Dividends Declared (A) $.40 $.33
(A) Amounts in 1998 were restated to reflect the three-for-two stock split
in the form of a stock distribution issued on June 26, 1998.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 590 $ 610
Receivables-
Commissions and fees 1,706 1,584
Advanced premiums and claims 147 129
Other receivables 272 294
------ ------
2,125 2,007
Less-allowance for doubtful accounts (90) (98)
Net receivables 2,035 1,909
Prepaid dealer commissions -
current portion 314 315
Deferred tax assets 73 76
Other current assets 345 335
Total current assets 3,357 3,245
Long-term securities 693 828
Fixed assets, net
(net of accumulated depreciation and
amortization of $814 at March 31, 1999
and $820 at December 31, 1998) 1,240 1,287
Intangible assets 4,811 4,826
Prepaid dealer commissions 804 799
Other assets 964 886
------- -------
$11,869 $11,871
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
March 31, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 2,360 $2,234
Accounts payable and accrued liabilities 1,448 1,438
Accrued compensation and employee benefits 489 841
Accrued income taxes 437 385
Dividends payable 106 104
Total current liabilities 4,840 5,002
Fiduciary liabilities 3,820 3,257
Less - cash and investments held in
a fiduciary capacity (3,820) (3,257)
- -
Long-term debt 1,564 1,590
Other liabilities 1,706 1,620
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
400,000,000 shares, issued 259,536,307
shares at March 31, 1999 and 258,867,125
at December 31, 1998 260 259
Additional paid-in capital 910 889
Retained earnings 2,586 2,412
Accumulated other comprehensive income 57 206
3,813 3,766
Less - treasury shares, at cost,
743,675 shares at March 31, 1999 and
1,956,825 shares at December 31, 1998 (54) (107)
Total stockholders' equity 3,759 3,659
$11,869 $11,871
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Operating cash flows:
Net income $279 $231
Depreciation of fixed assets 55 38
Amortization of intangible assets 35 18
Provision (benefit) for
deferred income taxes 6 (5)
Other liabilities 86 41
Prepaid dealer commissions (4) (29)
Other, net 9 (7)
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (126) (108)
Other current assets (10) 39
Accounts payable and accrued liabilities 10 (6)
Accrued compensation and employee benefits (352) (211)
Accrued income taxes 75 119
Effect of exchange rate changes (15) 27
Net cash generated from operations 48 147
Financing cash flows:
Net increase in commercial paper 98 272
Other borrowings 20 9
Other repayments (35) (81)
Purchase of treasury shares (2) (2)
Issuance of common stock 51 45
Dividends paid (103) (85)
Net cash provided by
financing activities 29 158
Investing cash flows:
Additions to fixed assets (81) (60)
Acquisitions (11) (112)
Other, net (4) 13
Net cash used for investing activities (96) (159)
Effect of exchange rate changes on cash
and cash equivalents (1) (3)
(Decrease) increase in cash & cash equivalents (20) 143
Cash & cash equivalents at beginning of period 610 424
Cash & cash equivalents at end of period $590 $567
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have been
prepared by MMC pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
such rules and regulations, although MMC believes that the disclosures
are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in MMC's latest
annual report on Form 10-K.
The financial information contained herein reflects all adjustments
which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the three month periods
ended March 31, 1999 and 1998.
2. Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, MMC collects premiums
from insureds and, after deducting its commissions, remits the premiums
to the respective insurance underwriters; MMC also collects claims or
refunds from underwriters on behalf of insureds. Unremitted insurance
premiums and claims are held in a fiduciary capacity. Interest income
on these fiduciary funds, included in revenue, amounted to $43 million
and $30 million for the three months ended March 31, 1999 and 1998,
respectively.
Net uncollected premiums and claims and the related payables amounting
to $9.6 billion at March 31, 1999 and $10.0 billion at December 31,
1998, are not included in the accompanying Consolidated Balance Sheets.
3. Per Share Data
Basic net income per share is calculated by dividing net income by the
average number of shares of MMC's common stock outstanding. Diluted net
income per share is calculated by reducing net income for the potential
minority interest associated with unvested shares granted under the
Putnam Equity Partnership Plan. This result is then divided by the
average common shares outstanding which have been adjusted for the
dilutive effect of potential common shares.
The following reconciles net income to net income for diluted earnings
per share and basic weighted average common shares outstanding to
diluted weighted average common shares outstanding for the three-month
periods ended March 31, 1999 and 1998.
(In millions)
1999 1998
Net income $279 $231
Less: Potential minority
interest associated
with the Putnam Equity
Partnership Plan (4) -
Net income for diluted
earnings per share $275 $231
Basic weighted average
common shares outstanding 258 257
Dilutive effect of stock options 8 7
Diluted weighted average
common shares outstanding 266 264
4. Comprehensive Income
MMC has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" which establishes standards
for reporting and displaying comprehensive income and its components.
Net unrealized gains and losses on MMC's available for sale securities
as well as foreign exchange gains or losses, which prior to adoption
were reported separately in stockholders' equity, are now included in
other comprehensive income.
The components of comprehensive income for the three-month periods
ended March 31, 1999 and 1998 are as follows:
1999 1998
Foreign currency translation adjustments $(73) $ 10
Unrealized securities holding gains (losses),
net of income taxes (71) 99
Less: Reclassification adjustment for gains
included in net income,
net of income taxes (5) (8)
Other comprehensive income (loss) (149) 101
Net income 279 231
Comprehensive income $130 $332
5. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information concerning
acquisitions and interest and income taxes paid:
Three Months Ended
March 31,
(In millions of dollars) 1999 1998
Purchase acquisitions:
Assets acquired, excluding cash $ 11 $112
Liabilities assumed - -
Net cash outflow for acquisitions $ 11 $112
Interest paid $ 39 $ 33
Income taxes paid $ 84 $ 41
6. Income Taxes
In 1997, MMC received a Notice of Proposed Adjustment from a local
field office of the Internal Revenue Service ("IRS") challenging its
tax treatment related to 12b-1 fees paid by the Putnam Funds. The
notice reflected the preliminary thinking of the IRS field office and
did not constitute a formal assertion of liability by the IRS. The
notice in question asserts a position contrary to the position
enunciated in an IRS 1993 Technical Advice Memorandum. The IRS field
office withdrew the Notice of Proposed Adjustment and submitted the
matter to the national office of the IRS for consideration in a request
for technical advice. Consequently, the issue is under consideration by
the IRS. MMC believes its tax treatment of these fees is consistent
with current industry practice and applicable requirements of the
Internal Revenue Code and previously issued IRS technical advice.
Taxing authorities periodically challenge positions taken by MMC on its
tax returns. On the basis of present information and advice received
from counsel, it is the opinion of MMC's management that any
assessments resulting from current tax audits will not have a material
adverse effect on MMC's consolidated results of operations or its
consolidated financial position.
7. Acquisitions
In the fourth quarter of 1998, MMC consummated a business combination
with Sedgwick Group plc ("Sedgwick"), a London- based holding company
of one of the world's leading insurance and reinsurance broking and
consulting groups, for total cash consideration of approximately $2.2
billion, which has been initially funded with short-term commercial
paper borrowings (see Subsequent Event, Note 12). The business
combination is being accounted for using the purchase method of
accounting. Accordingly, goodwill of approximately $2.0 billion
resulting from the preliminary purchase price allocation is being
amortized over 40 years. Assets acquired and liabilities assumed have
been recorded at their estimated fair values and are subject to
adjustment when purchase accounting is finalized in 1999.
The following unaudited pro forma summary presents the consolidated
results of operations of MMC as if the Sedgwick business combination
had occurred on January 1, 1998. The pro forma results are shown for
illustrative purposes only and do not purport to be indicative of the
results which would have been reported if the business combination had
occurred on the date indicated or which may occur in the future.
(In millions of dollars, except per share figures)
Three Months Ended
March 31, 1998
Revenue $2,197
Net Income 256
Basic Net Income per share 0.96
Diluted Net Income per share 0.93
Dispositions: As part of the combination with Sedgwick, MMC acquired
several insurance underwriting companies that were already in run-off
as well as consulting businesses not compatible with its existing
operations. MMC intends to sell these operations in the near future and
accordingly, $92 million and $84 million of net assets of these
businesses at March 31, 1999 and December 31, 1998, respectively, are
included in other current assets in the Consolidated Balance Sheets as
assets to be sold. The net assets are stated at their estimated
realizable value.
8. Claims, Lawsuits and Other Contingencies
MMC and its subsidiaries are subject to various claims, lawsuits and
proceedings consisting principally of alleged errors and omissions in
connection with the placement of insurance or reinsurance and in
rendering investment and consulting services. Some of these matters
seek damages, including punitive damages, in amounts which could, if
assessed, be significant.
On November 24, 1997, an action captioned "Aiena et al. vs. Olsen et
al." ("Aiena") was brought in the United States District Court for the
Southern District of New York by certain former directors of Johnson &
Higgins ("J&H"), which was acquired by MMC in March 1997, against
twenty-four selling shareholders of J&H, as well as J&H itself and MMC.
The action essentially challenges the allocation of the consideration
paid in connection with MMC's combination with J&H as between the
defendants who were directors and shareholders of J&H at the time of
the transaction and the plaintiffs who were former directors and
shareholders of J&H. The complaint asserts, among others, claims for
breach of fiduciary duty, federal securities law violations, breach of
contract, and ERISA violations. Plaintiffs seek compensatory and
punitive damages. Two other former directors of J&H have commenced
similar actions (Sempier v. Olsen et al.; and Clements v. Olsen et
al.), which are also pending before the United States District Court
for the Southern District of New York and are contemplated to be heard
together with the Aiena action.
In 1993, several years prior to the acquisition of J&H, the Equal
Employment Opportunity Commission ("EEOC") commenced a lawsuit against
J&H in the United States District Court for the Southern District of
New York. The action alleges that a mandatory retirement policy for
directors then in effect at J&H violated the federal Age Discrimination
in Employment Act ("ADEA"). In 1995, the District Court ruled in the
EEOC's favor that the J&H mandatory retirement policy violated the
ADEA. The Court of Appeals for the Second Circuit affirmed that ruling
in 1996. The EEOC seeks to recover damages on behalf of certain former
directors and a trial on the matter of damages, unless the action is
resolved, may be held later in 1999. Pursuant to the Stock Purchase
Agreement between MMC and J&H and the stockholders of J&H, MMC will
bear one-half of all damages and expenses in this action.
Sedgwick Group plc, since prior to its acquisition, has been engaged in
a review of previously undertaken personal pension plan business as
required by United Kingdom regulators to determine whether redress
should be made to customers. Settlements and related costs previously
paid amount to approximately $90 million of which $30 million is due
from insurers. The contingent exposure of Sedgwick for pension redress
and related costs is estimated to be $210 million. Sedgwick had
recorded $140 million of reserves and recognized approximately $70
million of insurance recoveries related to this exposure.
Other present and former subsidiaries of MMC are engaged in a
comparable review of their personal pension plan businesses, although
the extent of their activity in this area, and consequently their
financial exposure, was proportionally much less than Sedgwick. The
contingent exposure of the present and former non-Sedgwick subsidiaries
of MMC for pension redress and related costs is estimated to be
approximately $130 million. Approximately $100 million of this amount
is expected to be recovered from insurers and accounting reserves have
been provided for the remaining balance. Settlements and related costs
previously paid total approximately $20 million.
MMC's ultimate exposure from the United Kingdom's personal pension plan
review, as presently calculated and including Sedgwick, is subject to a
number of variable factors including, among others, equity markets, the
rate of response to the pension review mailings, the interest rate
established quarterly by the U.K. Pension Investment Authority for
calculating compensation, and the precise scope, duration, and
methodology of the review as required by that Authority.
As part of the combination with Sedgwick, MMC acquired several
insurance underwriting companies that were already in run-off. MMC
intends to sell these operations in the near future. Sedgwick had given
guarantees with respect to certain liabilities relating to some of
these operations.
On the basis of present information, anticipated insurance coverage and
advice received from counsel, it is the opinion of MMC's management
that the disposition or ultimate determination of these claims,
lawsuits, proceedings or guarantees will not have a material adverse
effect on MMC's consolidated results of operations or its consolidated
financial position.
9. Common Stock
On May 20, 1998, the Board of Directors authorized a three-for-two
stock distribution of MMC's common stock, which was issued on June 26,
1998. All references to per share amounts have been restated for this
stock distribution.
10. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This standard, which establishes new accounting and
reporting requirements for derivative instruments, is effective for
fiscal years beginning after June 15, 1999. MMC does not expect the
adoption of this standard to have a material impact on its results of
operations or consolidated financial position.
11. Reclassifications
Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
12. Subsequent Event
In April 1999, MMC sold 4.1 million common shares, realizing
approximately $300 million of net proceeds. This transaction represents
that portion of the permanent financing of the Sedgwick acquisition
which is funded by common stock. The portion of the permanent financing
plan representing long-term debt is currently being finalized with its
issuance planned for the second or third quarter.
13. Segment Information
MMC adopted SFAS No. 131 "Disclosures About Segments of an Enterprise
and Related Information" effective with the 1998 year-end.
MMC, a professional services firm, is organized based on the different
services that it offers. MMC operates in three principal business
segments: risk and insurance services, investment management and
consulting. The risk and insurance services segment provides insurance
broking, reinsurance broking and insurance program management for
business, professional, institutional and public-entity clients. It
also provides services principally in connection with originating,
structuring and managing insurance and related industry investments.
The investment management segment primarily provides securities
investment advisory and management services and administrative services
for a group of publicly held investment companies. The consulting
segment provides advice and services to the managements of
organizations primarily in the areas of human resources and employee
benefit programs, general management consulting, and economic
consulting and analysis.
MMC evaluates segment performance based on operating income, which is
determined after deductions for directly related expenses but before
special charges. The accounting policies of the segments are the same
as those used for the consolidated financial statements.
Selected information about MMC's operating segments for the three-month
periods ended March 31, 1999 and 1998 follow:
(In millions of dollars)
Revenue Segment
from External Operating
Customers Income
1999-
Risk and Insurance Services $1,256 (a) $ 294
Investment Management 629 200
Consulting 466 48
$2,351 $ 542
1998-
Risk and Insurance Services $ 870 (a) $ 233
Investment Management 558 152
Consulting 348 33
$1,776 $ 418
(a) Includes interest income on fiduciary funds ($43 million in 1999
and $30 million in 1998).
A reconciliation of the total segment operating income to income before
income taxes in the consolidated financial statements is as follows:
1999 1998
Total segment operating income $542 $418
Corporate expense (23) (14)
Operating income 519 404
Interest income 7 5
Interest expense (60) (28)
Total income before income taxes $466 $381
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
First Quarter Ended March 31, 1999
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm providing risk and insurance services, investment management
and consulting. More than 50,000 employees worldwide provide analysis,
advice and transactional capabilities to clients in over 100 countries.
MMC is organized in three principal business segments based on the services
that each provides. Segment performance is evaluated based on operating
income, which is after deductions for directly related expenses but before
special charges.
This management's discussion and analysis of financial condition and
results of operations contains certain statements relating to future
results which are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. See "Information
Concerning Forward-Looking Statements" on page one of this filing. This
form 10-Q should be read in conjunction with MMC's latest annual report on
Form 10-K.
The consolidated results of operations follow:
(In millions of dollars) 1999 1998
Revenue:
Risk and Insurance Services $1,256 $ 870
Investment Management 629 558
Consulting 466 348
2,351 1,776
Expense:
Compensation and Benefits 1,169 851
Other Operating Expenses 663 521
1,832 1,372
Operating Income $ 519 $ 404
Operating Income Margin 22.1% 22.7%
Revenue, derived mainly from commissions and fees, rose 32% from the first
quarter of 1998. This increase is primarily due to the acquisition in
November 1998 of Sedgwick Group plc ("Sedgwick"), a London-based holding
company of one of the world's leading insurance and reinsurance broking and
consulting groups. Sedgwick's results were not reflected in the
consolidated results of operations for the first quarter of 1998.
Excluding the impact of acquisitions, revenue, on a consolidated basis,
grew approximately 9% over 1998 with a 13% revenue increase in the
investment management segment, a 6% increase in risk and insurance services
and 13% growth in revenue in the consulting segment. The increases in the
respective segments were driven predominantly by high levels of business
activity in those businesses.
Operating expenses rose 34% in the first quarter of 1999 primarily
reflecting the acquisition of Sedgwick. Excluding acquisitions, expenses
grew 8% in the first quarter due, in large part, to a higher level of
expense associated with the strong operating performance of each of MMC's
segments. Compensation costs rose in the consulting segment reflecting
higher staff levels while incentive compensation increased in the
investment management segment commensurate with operating results.
MMC is in the early stages of carrying out its integration plans for
Sedgwick operations which will result in special charges in 1999. The
amount of such special charges cannot, as yet, be determined with
precision. MMC expects to achieve gross consolidation savings of
approximately $200 million upon the full integration of Sedgwick, a portion
of such savings to be achieved in 1999 with the majority expected to be
realized in the year 2000.
Risk and Insurance Services
(In millions of dollars) 1999 1998
Revenue $1,256 $870
Expense 962 637
Operating Income $ 294 $233
Operating Income Margin 23.4% 26.8%
Revenue
Revenue for the risk and insurance services segment grew 44% over the first
quarter of 1998 primarily due to the Sedgwick acquisition. Excluding
acquisitions, revenue for risk and insurance services operations rose
approximately 6% primarily reflecting the effect of net new business
development. Overall, market conditions remained competitive in the first
quarter as substantial excess insurance capacity continued to exist.
However, the rate of decline in commercial insurance premium rates has
lessened as compared with prior year and the marketplace may be entering
into a process that could lead to rate stabilization.
Expense
Risk and insurance services expenses increased 51%, largely attributable to
the acquisition of Sedgwick. Excluding acquisitions, expenses increased
approximately 5% from the first quarter of 1998 reflecting costs associated
with a higher volume of business and increased technology spending offset,
in part, by the realization of net integration savings related to the
Johnson & Higgins transaction, which closed in March 1997.
Investment Management
(In millions of dollars) 1999 1998
Revenue $629 $558
Expense 429 406
Operating Income $200 $152
Operating Income Margin 31.8% 27.2%
Revenue
Putnam's revenue increased 13% compared with the first quarter of 1998
reflecting strong growth in the level of average assets under management on
which management fees are earned. Assets under management aggregated $306
billion at March 31, 1999 compared with $294 billion at December 31, 1998,
reflecting $5 billion of net new fund sales and additional institutional
investments, as well as a $7 billion growth in market value related to an
increase in equity market levels during the quarter.
Expense
Expenses grew 6% in the first quarter of 1999 over the same period of 1998
due to increased incentive compensation commensurate with operating
performance and increased amortization of deferred commissions from both
increased sales and redemptions. Expense increases were partially offset by
a decline in outside services costs.
Quarter-end and average assets under management for the first quarter are
presented below:
(In billions of dollars) 1999 1998
Mutual Funds:
Domestic Equity $160 $138
Taxable Bond 39 38
Tax-Free Income 16 16
International Equity 15 13
230 205
Institutional Accounts:
Fixed Income 24 23
Domestic Equity 35 26
International Equity 17 13
76 62
Quarter-end Assets $306 $267
Average Assets $300 $249
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international bond and stock market prices and
by the level of investments and withdrawals for current and new fund
shareholders and clients. They are also affected by investment performance,
service to clients, the development and marketing of new investment
products, the relative attractiveness of the investment style under
prevailing market conditions and changes in the investment patterns of
clients. Revenue levels are sensitive to all of the factors above, but in
particular, to significant changes in bond and stock market valuations.
Putnam provides individual and institutional investors with a broad range
of equity and fixed income investment products and services designed to
meet varying investment objectives and which affords its clients the
opportunity to allocate their investment resources among various
alternative investment products as changing worldwide economic and market
conditions warrant.
At the end of the first quarter, assets held in equity securities
represented 74% of assets under management, compared with 71% in 1998,
while investments in fixed income products represented 26%, compared with
29% last year.
Consulting
(In millions of dollars) 1999 1998
Revenue $466 $348
Expense 418 315
Operating Income $ 48 $ 33
Operating Income Margin 10.3% 9.6%
Revenue
Consulting services revenue increased 34% in 1999 compared with the first
quarter of 1998 reflecting an increase in the level of services provided as
well as the Sedgwick acquisition. Excluding acquisitions, consulting's
revenue increased approximately 13% in 1999. Retirement consulting revenue,
which represented 40% of the consulting segment, grew 11% in the first
quarter primarily due to a combination of consistent need for advice and
increased fee rates, principally in the U.S. and U.K. Revenue also rose 15%
in global compensation consulting, 14% in general management consulting and
4% in health care consulting due to a higher volume of business in these
practice lines during the first quarter of 1999. In addition, revenue grew
25% in the economic consulting practice.
Expense
Consulting services expenses increased 33% for the first quarter of 1999.
Excluding acquisitions, expenses increased approximately 11% reflecting the
effect of staff growth to support new business and higher incentive
compensation commensurate with strong operating performance.
Interest
Interest income earned on corporate funds increased to $7 million in the
first quarter of 1999 from $5 million in 1998. Interest expense increased
to $60 million in the first quarter of 1999 from $28 million in 1998
primarily due to interest expense associated with the incremental debt
incurred in November 1998 to finance the Sedgwick acquisition.
Income Taxes
MMC's consolidated tax rate was 40.0% of income before income taxes in the
first quarter of 1999 compared with 39.5% in the first quarter of 1998. The
increase in the 1999 tax rate is largely attributable to the
nondeductibility of certain goodwill associated with the Sedgwick
acquisition. The overall tax rates are higher than the U.S. federal
statutory rate primarily because of provisions for state and local income
taxes.
Liquidity and Capital Resources
MMC's cash and cash equivalents aggregated $590 million on March 31, 1999,
a decrease of $20 million from the end of 1998.
Cash flow from operations includes the net cash requirements of Putnam's
prepaid dealer commissions, which amounted to $4 million for the three
months compared with $29 million during the same period of 1998.
MMC's capital expenditures, which amounted to $81 million in the first
three months of 1999 and $60 million in the first quarter last year
primarily relate to computer equipment purchases and the refurbishing and
modernizing of office facilities.
As previously mentioned, during the fourth quarter MMC acquired Sedgwick
for total cash consideration of pounds 1.25 billion or approximately $2.2
billion. MMC initially financed the transaction with short-term commercial
paper that has been supported by a committed bank facility comprising 19
banks and led by J. P. Morgan.
In April 1999, MMC completed the sale of 4.1 million common shares
realizing approximately $300 million of net proceeds. That portion of the
permanent financing representing long-term debt is currently being
finalized with its issuance planned for the second or third quarter.
As further explained in Note 8 to the consolidated financial statements,
certain present and former English subsidiaries are under review by the
Personal Investment Authority concerning the disclosure and advice given to
clients regarding certain private pension transactions. The contingent
exposure for pension redress and related cost is estimated to be
approximately $340 million of which $170 million is expected to be
recovered from insurers. Approximately two-thirds of the contingent
exposure is associated with the recently completed Sedgwick acquisition
while the balance is associated with other current and former subsidiaries
of MMC. All amounts in excess of anticipated insurance recoveries have been
reserved for in the accompanying balance sheet. Although the timing and
amount of payments relating to the pension review process cannot be
predicted with certainty, it may be that MMC will temporarily fund such
payments by drawing upon its existing credit lines.
Other
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard, which establishes new
accounting and reporting requirements for derivative instruments, is
effective for fiscal years beginning after June 15, 1999. MMC does not
expect the adoption of this standard will have a material impact on its
results of operations or consolidated financial position.
Market Risk
Certain of MMC's recorded revenues, expenses, assets and liabilities are
exposed to the impact of interest rate changes and fluctuations in foreign
currency exchange rates. MMC manages its net exposure to interest rate
changes by utilizing a mixture of variable and fixed rate borrowings to
finance MMC's asset base. Interest rate swaps are utilized on a very
limited basis. MMC does not enter into foreign currency or interest rate
transactions for trading or other speculative purposes.
The translated values of revenue and expense from MMC's international risk
and insurance services and consulting operations are subject to
fluctuations due to changes in currency exchange rates. However, the net
impact of these fluctuations on MMC's results of operations or cash flows
has not been material.
Year 2000 Issue
MMC is in the final stages of updating its systems in preparation for the
Year 2000. For this purpose, the term "systems" includes computer equipment
and software that are commonly thought of as information technology ("IT")
systems including accounting, data processing, telephone and other
miscellaneous systems, as well as non-information technology ("non-IT")
systems, such as embedded technology in MMC's facilities and equipment.
In connection with this project, which began in 1995, MMC and each of its
operating segments have undertaken a five-step process consisting of (1)
taking an inventory of all technical areas, including hardware, software
(application and system), data, third-party services and infrastructure
that could potentially be affected by the Year 2000 issue, (2) assessing
the scope and severity of the issue, (3) performing necessary remediation,
(4) testing/implementation and (5) preparing contingency plans for possible
internal and/or external failures. Management level steering committees
have been established in each operating segment, and at the MMC level. The
Audit Committee of MMC's Board of Directors is regularly updated on the
status of MMC's Year 2000 efforts.
Each operating segment has already enhanced or replaced a number of systems
to ensure their Year 2000 readiness. At this time, all of MMC's operating
segments are predominantly in the testing/implementation phase of the
process for mission critical IT and non-IT systems.
A detailed review and evaluation of Sedgwick's Year 2000 plans has also
been conducted. In January 1999, the individual components of the Sedgwick
plans were incorporated into the Year 2000 project plans of the existing
operating segments with which they will be aligned. As a result of the
integration analysis, it is anticipated that Sedgwick's pre-existing plans
will be carried out to completion or, where appropriate, Sedgwick's
non-compliant systems will be replaced by MMC's compliant systems. The
incremental costs of the Sedgwick plans are included in the amounts shown
below.
The total cost of the Year 2000 project is estimated to be $65 million. Of
the total cost, $22 million is anticipated to be incurred in 1999, $26
million was expensed during 1998 and $17 million prior to 1998.
Approximately $5 million was expensed during the first quarter of 1999.
Such costs do not include expenses incurred in replacing systems and
applications in the ordinary course which have the effect of making such
systems and applications Year 2000 compliant, but which were not incurred
for that specific purpose. Costs of modifying computer software for Year
2000 conversion are being charged to expense as they are incurred and are
funded from operating cash flows. No significant projects have been
deferred or canceled as a result of Year 2000 efforts. In 1998, Year 2000
expenses represented approximately 5% of MMC's overall information
technology budget. Future costs associated with addressing this issue are
not expected to have a material adverse impact on MMC's financial position
or results of operations.
MMC expects that its mission critical IT and non-IT systems, including
those associated with supporting the Sedgwick operations, will be Year 2000
compliant by mid-1999, although some rollouts may go into the third
quarter. Non-mission critical IT and non-IT systems that could impact MMC's
ability to serve clients and conduct business beyond January 1, 2000 have
been assessed and are expected to be Year 2000 ready before the end of
1999. MMC recognizes that there may be some non-mission critical IT and
non- IT systems utilized for internal purposes that may not be compliant by
the end of 1999. It is expected that these systems will be replaced or
phased out of use.
In addition, MMC is continuing its inquiries as to the state of readiness
of its significant third party relationships including clients and vendors.
This process has included a review of third parties' Year 2000 readiness
and the incorporation of certain third party dependencies into MMC's test
plans. Where MMC has been unable to verify the status of a third party or
has received information such that the timing or readiness status of that
third party's Year 2000 project does not align with MMC's, if significant,
that supplier has been or will be replaced. For example, Marsh is notifying
clients when responses to its inquiries as to the status of their readiness
have not been received from insurance companies.
The individual operating segments of MMC are currently in the process of
analyzing the operational problems and costs (including loss of revenues)
that would be reasonably likely to result from MMC's failure or the failure
of certain third parties to complete efforts necessary to achieve Year 2000
readiness on a timely basis. For internal systems, although MMC's
expectation is that no significant disruption will occur, MMC's 1999 test
plans and contingency processes have been or will be designed to address
such a risk. For third party risks, every effort is being made to assess
and test those risks. For example, Putnam is involved in industry-wide Year
2000 testing. In July 1998, Putnam participated in the "Street-wide Test"
carried out under the auspices of the Securities Industry Association.
Putnam also participated in industry-wide testing in April 1999, which
included the simulation of a trading cycle from order entry to settlement
in a Year 2000 environment.
MMC is in the process of identifying the most reasonably likely worst case
scenarios presented by the Year 2000 problem and completing a contingency
plan for dealing with such scenarios. This process has been based, in part,
upon MMC's existing disaster recovery process. These analyses and
contingency plans will be completed during 1999. While MMC expects its Year
2000 efforts to reduce the scope and likelihood of potential Year 2000
failures, due to the overall uncertainty of the effect of a potential
failure in Year 2000 readiness, particularly with respect to MMC's business
partners or the communities in which MMC operates, MMC is unable
specifically to determine whether any particular failure or groups of
failures will have a material adverse impact on MMC.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
MARCH 31, 1999
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Credit Agreement dated as of August 24, 1998 among
Marsh & McLennan Companies, Inc., the lenders party
thereto and Morgan Guaranty Trust Company of New
York, as Administrative Agent (incorporated by
reference to the registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998).
10.2 First Amendment dated as of September 2, 1998 to the
Credit Agreement dated as of August 24, 1998 among
Marsh & McLennan Companies, Inc., the lenders party
thereto and Morgan Guaranty Trust Company of New
York, as Administrative Agent (incorporated by
reference to the registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998).
27. Financial Data Schedule
(b) Reports on Form 8-K.
Two amended reports on Form 8-K/A dated February 3,
1999 and March 31, 1999 were filed by the registrant
in connection with its acquisition of the entire
issued and unissued share capital of Sedgwick Group
plc and include amended pro forma financial
statements of the combined entity.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed this 14th day of May, 1999
on its behalf by the undersigned, thereunto duly authorized and in the
capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Frank J. Borelli
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the consolidated
Marsh & McLennan Companies, Inc. and subsidiaries
March 31, 1999 financial statements and is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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0
0
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