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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File No. 1-5998
Marsh & McLennan Companies, Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware 36-2668272
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1166 Avenue of the Americas
New York, New York 10036-2774
(Address of Principal Executive Offices; Zip Code)
Registrant's telephone number, including area code: (212) 345-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock New York Stock Exchange
(par value $1.00 per share) Chicago Stock Exchange
Preferred Stock Purchase Rights Pacific Exchange
London Stock Exchange
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___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X . No___.
As of June 30, 2004, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $23,503,586,889.
As of February 18, 2004, there were outstanding 528,922,434 shares of
common stock, par value $1.00 per share, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
(only to the extent set forth in the part indicated)
Notice and Proxy Statement for the 2005 Annual Meeting of Stockholders to
be filed within 120 days after December 31, 2004...... Part III
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MARSH & McLENNAN COMPANIES, INC.
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ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
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PART I
Item 1. Business.
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Marsh & McLennan Companies, Inc. ("MMC"), is a global professional
services firm with origins dating from 1871 in the United States. MMC is the
parent company of various subsidiaries and affiliates that provide clients with
analysis, advice and transactional capabilities in the fields of risk and
insurance services, investment management and consulting and human resource
services.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under Item 7 on pages 27 through 50 of this report
for a discussion of MMC's revenues and operating income by industry segment for
each of the last three fiscal years.
Risk and Insurance Services
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MMC's risk and insurance services are provided by its subsidiaries and their
affiliates as broker, agent or consultant for insureds, insurance underwriters
and other brokers on a worldwide basis in the areas of:
o risk management and insurance broking,
o reinsurance broking and services,
o risk consulting and technology services, and
o related insurance services.
Risk management and consulting, insurance broking and insurance program
management services are provided for businesses, public entities, associations,
professional services organizations and private clients under the Marsh name.
Reinsurance broking, catastrophe and financial modeling services and related
advisory functions are conducted for insurance and reinsurance companies
principally under the Guy Carpenter name. Various risk consulting and technology
services are provided to businesses, governments and individuals throughout the
world primarily under the Kroll name. Underwriting management and wholesale
broking services are performed for a wide range of clients under various names,
the largest of which is Crump. Claims and associated productivity services are
provided by Sedgwick Claims Management Services. In addition, MMC Capital
provides services principally in connection with originating, structuring and
managing insurance, financial services and other industry-focused investments.
On February 28, 2005, MMC signed a letter of intent providing for the transfer
of MMC Capital's business, including the management of the Trident Funds, to a
company to be formed by MMC Capital's senior management, including its chairman
and chief executive officer. The transfer is expected to close by the end of the
second quarter 2005.
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Marsh. Marsh serves clients with risk and insurance services in more than
100 countries in all principal regions of the world where insurance business is
conducted. These clients are engaged in essentially all of the major areas of
manufacturing and services found in the world economy. Business clients range
from prominent worldwide corporations to mid-size and small businesses and
professional service organizations. Marsh's clientele also includes government
agencies, high-net-worth individuals, and individuals served through affinity
groups and employer-based programs.
The services provided by Marsh's operating units include the
identification, analysis, estimation, mitigation, financing and transfer of
risks that arise from client operations and assets. These client risks relate to
damage to property, various liability exposures, and other factors that could
result in financial loss, including large and complex risks that require access
to world insurance and financial markets. Risks addressed go beyond traditional
property-liability areas to include a widening range of exposures. Examples of
these risks include employment practices liability, the launch and operation of
rockets and spacecraft, the development and operation of technology resources
(such as computers, communications networks and websites), the theft or loss of
intellectual property, copyright infringement, the remediation of environmental
pollution, exposures related to mergers and acquisitions, the interruption of
revenue streams derived from leasing and credit operations, political risks and
various other financial, strategic and operating exposures.
Marsh's subsidiaries provide a broad spectrum of services requiring
expertise in multiple disciplines: identifying, estimating and mitigating risk;
conducting negotiations and placement transactions with the worldwide insurance
and capital markets; gaining knowledge of specific insurance product lines and
technical aspects of client operations, industries and fields of business;
performing actuarial analyses; and understanding the regulatory and legal
environments of various countries. Once client risks are identified, Marsh
provides advice on addressing those exposures, including structuring programs
for retaining, mitigating, financing, and transferring the risks in combinations
that vary according to the risk profiles, requirements and preferences of
clients.
Specific professional functions provided by Marsh in the risk
management and mitigation process include loss-control services, placement of
client risks with the worldwide insurance and capital markets (risk transfer),
development of alternative risk financing methods and establishment and
management of specialized insurance companies owned by clients ("captive
insurance companies"). Marsh and its subsidiaries also provide insurance support
services such as claims collection, claims advocacy, injury management, claims
administration, and other insurance and risk related services.
Marsh operates principally through the offices of its subsidiaries and
affiliates in various countries around the world. In certain countries,
correspondent relationships are maintained with unaffiliated firms.
Marsh's Affinity and Private Client Practices business unit provides
advice and program services to corporate and association clients globally and to
individual clients in the United States. Marsh's Affinity practice provides
associations with the design, marketing, and administration of a variety of
insurance-related products purchased by the association members. The Affinity
practice also offers services and administration to corporations for employee
voluntary payroll deduction programs and insurance- and benefit-related
programs. Marsh's Private Client Services practice markets specialized risk and
insurance programs to
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high net worth individuals and family offices. Marsh's Financial Services
practice offers key-person and executive benefit programs, as well as planning
and wealth preservation solutions for affluent individuals.
Marsh provides underwriting management services to insurers in the
United States, Canada and the United Kingdom, primarily for professional
liability coverages. Marsh also provides wholesale broking services, consisting
of specialized placement services for affiliated and unaffiliated brokers, in
the United States and United Kingdom. These underwriting management and
wholesale broking services are provided under various names apart from Marsh.
Sedgwick Claims Management Services, a majority-owned subsidiary of
Marsh, is a leading provider of various claims and productivity management
solutions to North American clients. It provides claims administration and
related services principally for workers' compensation, employers' liability,
general liability, automobile liability, and short and long term disability
claims.
Guy Carpenter. Guy Carpenter, its subsidiaries and affiliates provide
reinsurance services to insurance and reinsurance companies and other risk
assumption entities. An insurance or reinsurance company client may seek
reinsurance or other risk-transfer financing on all or a portion of the risks it
insures. Acting as a broker or intermediary on all classes of reinsurance, Guy
Carpenter principally addresses treaty reinsurance, which concerns an entire
class of business, and facultative reinsurance, which focuses selectively on
individual risks, for property and casualty lines. Guy Carpenter also provides
reinsurance solutions in various specialty practice areas such as professional
liability, medical malpractice, agriculture, marine, accident & health, life &
annuity, and alternative risk transfer. These reinsurance services include
providing advice, placing coverages with reinsurance markets, arranging
risk-transfer financing with capital markets, claims and run-off services. Guy
Carpenter also provides its clients with numerous related services such as
actuarial, financial and regulatory consulting, portfolio analysis, advanced
catastrophe modeling through its Instrat(R) unit. Guy Carpenter's offices are
located principally in North and South America, Europe and Asia Pacific.
Kroll. MMC acquired Kroll Inc. in July 2004. Kroll provides various risk
consulting and related risk mitigation services to corporate, government,
institutional and individual clients. These risk consulting services fall into
three main business groups: (1) corporate advisory and restructuring services,
(2) consulting services and (3) technology services. Kroll provides corporate
advisory and restructuring services to financially troubled companies throughout
North America and Europe. These services are provided in the areas of corporate
restructuring and operational turnaround, strategic advice, financial crisis
management and corporate finance. Kroll provides independent consulting services
that are free from the audit conflicts incurred by major accounting firms. These
services include business and financial investigations, forensic accounting,
business valuation, litigation consulting, due diligence, litigation
intelligence, asset tracing and analysis, market intelligence, intellectual
property and infringement investigations, corporate security consulting and
emergency management. In its technology services business area, Kroll provides
electronic discovery, data recovery and computer forensics services, risk
technologies, along with related software solutions. Finally, Kroll works
closely with Marsh's Risk Consulting practice in providing Marsh clients with a
broad range of consulting and technology services.
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MMC Capital. MMC Capital is a private equity firm that manages investments
and committed capital of more than $2 billion. During the past ten years,
MMC Capital has targeted investments in the insurance and financial services
industries as the investment manager of the Trident Funds, which consist of The
Trident Partnership formed in 1994, Trident II formed in 1999 and Trident III
formed in 2003. Investors in these funds include MMC Capital's corporate parent
and other investors.
MMC Capital's investment activities date back to the mid-1980s when MMC
was instrumental in sponsoring several Bermuda-based insurance and reinsurance
companies, including ACE Limited, XL Capital Ltd., Centre Reinsurance Holdings
Limited and Mid Ocean Limited. More recently, MMC Capital helped to develop an
additional source of insurance and reinsurance capacity after the September 11,
2001 terrorist attacks through the formation of AXIS Capital Holdings Limited.
As a result of the foregoing activities, subsidiaries and affiliates of
MMC may have direct or indirect investments in insurance and reinsurance
companies, including entities at Lloyd's, which are considered for client
placements by MMC's insurance and reinsurance brokerage businesses.
On February 28, 2005, MMC signed a letter of intent providing for the
transfer of MMC Capital's business, including the management of the Trident
Funds, to a company to be formed by MMC Capital's senior management, including
its chairman and chief executive officer. MMC will maintain a strategic alliance
with the acquisition company and continue certain of its investments in the
Trident funds. In addition, MMC may maintain its investments in certain
insurance and reinsurance companies.
Compensation for Services.
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The revenue attributable to MMC's risk and insurance services consisted
primarily of fees paid by clients, commissions and fees paid by insurance and
reinsurance companies, and compensation for billing and related services in the
form of interest income on funds held in a fiduciary capacity for others, such
as premiums and claims proceeds. Revenue in 2004 also included market service
fees from insurers earned prior to October 1, 2004.
Revenue generated by risk and insurance services depends on the value to
clients of the services provided. These revenues are affected by premium rate
levels in the property and casualty and employee benefits insurance markets,
since compensation is frequently related to the premiums paid by insureds. In
many cases, compensation may be negotiated in advance on the basis of the
estimated value of the services to be performed. Revenue is also affected by
fluctuations in the amount of risk retained by insurance and reinsurance clients
themselves and by insured values, the development of new products, markets and
services, new and lost business, merging of clients (including insurance
companies that are clients in the reinsurance intermediary business) and the
volume of business from new and existing clients, as well as by the level of
interest realized on the investment of fiduciary funds, and foreign exchange
rate fluctuations.
Market services revenue had been part of the overall compensation for
Marsh's services in 2004. Effective October 1, 2004, Marsh agreed to eliminate
contingent compensation
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agreements with insurers. No such compensation will be earned for placements
made after October 1, 2004.
Commission rates vary in amount depending upon the type of insurance or
reinsurance coverage provided, the particular insurer or reinsurer, the capacity
in which the broker acts and negotiations with clients. In some cases, clients
pay Marsh fees for brokerage or advisory services. Occasionally, commissions are
shared with other brokers that have participated in placing insurance or
servicing insureds.
The investment of fiduciary funds is governed by the applicable laws or
regulations of insurance authorities of the states in the United States and in
other jurisdictions in which MMC's subsidiaries do business. These laws and
regulations typically govern the manner in which such funds must be segregated
and limit the type of investments that may be made with such funds. The amount
of funds invested and interest rates vary from time to time.
Compensation for the various risk consulting and related risk
mitigation services provided by Kroll subsidiaries consists of fees paid by
clients. Kroll charges such fees typically on an hourly, project, or fixed fee
basis, and sometimes on a per service or per unit basis. Compensation for risk
and insurance services also was received by MMC Capital in connection with the
organization, structuring and management of insurance, financial services and
other industry-focused investments, including fees and dividends, as well as
appreciation or depreciation that has been recognized on holdings in such
entities.
Investment Management
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Investment management and related services are provided by Putnam
Investments Trust and its subsidiaries. Putnam has been engaged in the
investment management business since 1937, with its principal offices in Boston,
Massachusetts. Putnam also has offices in London and Tokyo. Putnam provides
individual and institutional investors with a broad range of both equity and
fixed income investment products and services, invested domestically and
globally. These products and services, designed to meet varying investment
objectives, afford Putnam's clients the opportunity to allocate their investment
resources among various investment products as changing worldwide economic and
market conditions warrant.
Investment Management Services. Putnam's investment management services,
which are performed principally in the United States, include securities
investment advisory and management services consisting of investment research
and management, and accounting and related services for a group of publicly-held
investment companies. As of December 31, 2004, there were 110 such funds (the
"Putnam Funds") registered under the Investment Company Act of 1940, including
14 closed-end investment companies whose shares are traded on various major
domestic stock exchanges. A number of the open-end funds serve as funding
vehicles for variable insurance contracts. Investment management services are
also provided on a separately managed or commingled basis to individuals,
corporate profit-sharing and pension funds, state and other governmental and
public employee retirement funds, university endowment funds, charitable
foundations, collective investment vehicles (both U.S. and non-U.S.) and other
domestic and foreign institutional accounts.
The majority of Putnam's assets under management are derived from U.S.
individuals and institutions. In recent years Putnam has been expanding its
international client base on a selective basis through joint ventures and the
development of products such as offshore funds.
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Many international markets are well developed and have established investment
management firms. It may be difficult for Putnam to establish businesses abroad
whose profitability equals that of its business in the U.S.
Putnam has a minority interest in Thomas H. Lee Partners ("THL"), a
private equity investment firm, from which Putnam receives transactions fees. In
addition, Putnam and THL formed a joint venture entity, TH Lee, Putnam Capital
in which Putnam owns a 25% interest. THL and TH Lee, Putnam Capital offer
private equity and alternative investment funds for institutional and
high-net-worth investors. Putnam is also an investor in certain of those funds.
During 2004, Putnam acquired an additional 30% of the voting stock of
PanAgora Asset Management, Inc. ("PanAgora"), increasing its voting ownership to
80%. PanAgora, which was established in 1989, manages quantitative and
fixed-income investments for institutional clients. As a direct result of this
transaction, Putnam's reported assets under management increased by
approximately $8 billion.
Assets managed by Putnam, on which management fees are earned,
aggregated approximately $213 billion and $240 billion as of December 31, 2004
and 2003, respectively, invested both domestically and globally. Average assets
under management were approximately $217 billion and $258 billion for 2004 and
2003, respectively. Mutual fund assets aggregated $143 billion at December 31,
2004 and $163 billion at December 31, 2003. Institutional account assets
aggregated $70 billion at December 31, 2004 and $77 billion at December 31,
2003. Assets held in equity securities at December 31, 2004 represented 69% of
assets under management, compared with 72% in 2003 and 73% in 2002, while
investments in fixed income products represented 31%, compared with 28% in 2003
and 27% in 2002. Assets from non-U.S. investors aggregated approximately $38
billion and $39 billion at December 31, 2004 and 2003, respectively.
The investment management services provided to the Putnam Funds and
institutional accounts are performed pursuant to advisory contracts, which
provide for fees payable to the Putnam company that manages the account. The
amount of the fees varies depending on the individual mutual fund or account and
is usually based upon a sliding scale in relation to the level of assets under
management and, in certain instances, is also based on investment performance.
Such contracts automatically terminate in the event of their assignment,
generally may be terminated by either party without penalty and, as to contracts
with the Putnam Funds, continue in effect only so long as approved, at least
annually, by their shareholders or by the Putnam Mutual Funds' Trustees
("Trustees"), including a majority who are not affiliated with Putnam.
Amendments to fund advisory contracts must be approved by fund shareholders.
"Assignment" includes any direct or indirect transfer of a controlling block of
voting stock in Putnam or MMC. The management of Putnam and the Trustees
regularly review the fund fee structure in light of fund performance, the level
and range of services provided, industry conditions and other relevant factors.
A reduction in management fees payable under these contracts and/or the
termination of one or more of these contracts could have a material adverse
effect on Putnam's results of operations.
Putnam Fiduciary Trust Company. A Putnam subsidiary, Putnam Fiduciary Trust
Company ("PFTC"), a Massachusetts trust company, serves as transfer agent,
dividend disbursing agent, registrar and custodian for the Putnam Funds and
provides custody services to several external clients. PFTC receives
compensation from the Putnam Funds for such services pursuant to written
investor servicing agreements which may be terminated by either party on 90
days'
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notice, and pursuant to written custody agreements which may be terminated by
either party on 30 days' notice. These contracts generally provide for
compensation on the basis of several factors which vary with the type of service
being provided. Effective July 1, 2004, the compensation paid under the
contracts for transfer agent services was amended from a cost of service
structure to a fixed fee structure for the remainder of 2004. An additional
amendment, effective January 1, 2005, changes the transfer agent servicing fee
to a fixed rate per retail shareholder account and a fixed rate service fee
based on assets under management for mutual fund defined contribution
shareholders. Included in the amendments, PFTC will incur certain expenses,
including sub-transfer agent fees and communications costs, previously borne
directly by the Putnam Funds. PFTC assumes the financial responsibility and
risks associated with changes in these expenses. In addition, PFTC provides
administrative and trustee (or custodial) services, including transfer agent
services for individual retirement accounts and other clients, for which it
receives compensation pursuant to service and trust or custodian contracts with
plan participants and the Putnam Funds.
Through December 31, 2004, PFTC also provided administrative and
trustee (or custodial) services consisting of participant accounting and plan
administration services for certain qualified contribution employee benefit
plans (in particular 401(k) plans, certain defined benefit plans (cash-balance
plans), employee stock purchase plans and certain non-qualified compensation
plans), for which it received compensation pursuant to service and trust or
custodian contracts with plan sponsors. In the case of employee benefit plans,
investment options are usually selected by the plan sponsors and may include
Putnam mutual funds and other Putnam managed products, as well as employer stock
and other non-Putnam investments. Effective January 1, 2005, this defined
contribution plan servicing business was transferred to newly-formed
subsidiaries of Mercer, Inc., where it will operate under the names Mercer HR
Services and Mercer Trust Company. Plan sponsors may continue to include Putnam
mutual funds and other Putnam managed products as investment options for the
employee benefit plans serviced by Mercer HR Services.
Putnam Retail Management Limited Partnership. Putnam Retail Management
Limited Partnership ("PRM"), a Putnam subsidiary and a registered broker dealer
and member of the National Association of Securities Dealers ("NASD"), acts as
principal underwriter of the shares of the open-end Putnam Funds, selling
primarily through independent broker/dealers, financial planners and financial
institutions, including banks, and directly to certain large 401(k) plans and
other institutional accounts. Shares of open-end funds are generally sold to
investors at their respective net asset value per share plus a sales charge,
which varies depending on the individual fund and the amount and class of shares
purchased. In some cases the sales charge is assessed only if the shares are
redeemed within a stated time period. In accordance with certain terms and
conditions described in the prospectuses for these funds, certain investors are
eligible to purchase shares at net asset value or at reduced sales charges, and
investors may generally exchange their shares of a fund at net asset value for
shares of another Putnam Fund without paying additional sales charges.
All open-end Putnam Funds other than a money market fund have adopted
and put in place distribution plans pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Pursuant to these distribution plans, the Putnam Funds make
payments to PRM to cover costs relating to distribution of the Putnam Funds and
services provided to shareholders at rates that differ by class of shares. These
payments enable PRM to pay service fees and other continuing compensation to
firms that provide services to Putnam Fund shareholders and distribute shares of
the Putnam Funds. Some Rule 12b-1 fees are retained by PRM as
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compensation for the costs of distribution and other services provided by Putnam
and its affiliates to shareholders and for commissions advanced by Putnam at the
point of sale (and recovered through fees received over time) to firms that
distribute shares of the Putnam Funds. These 12b-1 distribution plans, and
payments made by the Putnam Funds thereunder, are subject to annual renewal by
the Trustees and to termination by vote of the shareholders of the Putnam Funds
or by vote of a majority of the Trustees who are not affiliated with Putnam.
Failure of the Trustees to approve continuation of the Rule 12b-1 plans for
Class B (deferred sales charge) shares would have a material adverse effect on
Putnam's business and results of operations. The Trustees also have the ability
to reduce the level of 12b-1 fees paid by a fund or to make other changes that
would reduce the amount of 12b-1 fees received by Putnam. Such changes could
have a material adverse effect on Putnam's business and results of operations.
Compensation for Services. Putnam's revenue is derived primarily from
investment management and 12b-1 fees received from the Putnam Funds and
investment management fees for institutional accounts. Investment management
revenues depend largely on the total value and composition of assets under
management. Assets under management and revenue levels are particularly affected
by fluctuations in domestic and international stock and bond market prices, the
composition of assets under management and by the level of investments and
withdrawals for current and new fund shareholders and clients. U.S. equity
markets showed modest appreciation in 2004, following substantial growth in the
second half of 2003. Prior to the second half of 2003, US equity markets
declined steadily for over three years. In 2004, assets under management
continued to be adversely affected by, and may continue to be adversely affected
in the future by, increased redemptions in response to the underperformance of
certain Putnam funds relative to competing products in the mutual fund
marketplace and the market timing related issues and other events that gave rise
to the administrative proceedings brought by the Securities and Exchange
Commission ("SEC") and the Massachusetts Secretary of the Commonwealth in the
fourth quarter of 2003. These proceedings and the settlement thereof are
discussed in more detail in Note 15 to the Consolidated Financial Statements
included under Item 8 of this report. Items affecting revenue also include, but
are not limited to, actual and relative investment performance, service to
clients, the development and marketing of new investment products, the relative
attractiveness of the investment style under prevailing market conditions,
changes in the investment patterns of clients and the ability to maintain
investment management and administrative fees at current levels.
Revenue levels are sensitive to all of the factors above, but in
particular to significant changes in bond and stock market valuations and net
flows into and out of Putnam's funds. Fluctuations in the prices of stocks will
have an effect on equity assets under management and may influence the flow of
monies to and from equity funds and accounts. Fluctuations in interest rates and
in the yield curve have a similar effect on fixed income assets under management
and may influence the flow of monies to and from fixed-income funds and
accounts.
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Consulting and HR Services
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Under the Mercer name, subsidiaries and affiliates of MMC, separately
and in collaboration, provide consulting and human resource ("HR") outsourcing
services from locations around the world, primarily to business organizations,
in the areas of:
o Retirement Services including retirement consulting, administration
and investment consulting and discretionary investment management;
o Health Care & Group Benefits consulting and administration;
o Human Capital consulting and administration including performance,
measurement and rewards, communication and HR technology & operations
consulting;
o Management and Organizational Change consulting comprising risk and
strategy, operations, organizational change, leadership,
organizational design and corporate branding; and
o Economic consulting.
Mercer Human Resource Consulting professionals provide consulting
advice and services to corporate, government and institutional clients in more
than 40 countries throughout the world. These consultants help their client
organizations to develop, execute and measure their retirement and health care
and group benefits programs, policies and strategies. Consultants similarly help
clients understand their human capital, or workforce, practices in a systemic
way and develop strategies and programs to utilize their human capital to their
competitive advantage. During 2004 it was announced that the health care and
group benefit activities of Marsh and Mercer will be combined under varying
organizational structures and time tables globally. We currently anticipate that
the combination will be substantially completed during 2005, but that timing is
dependent on local legal requirements, including insurance licensing. When
complete, Mercer's Health and Benefits business is expected to operate in
approximately 60 countries.
In certain locations outside of the United States, Mercer Human
Resource Consulting advises individuals in the investment and disposition of
lump sum retirement benefits and other retirement savings and offers a
retirement trust service which incorporates plan administration, trustee
services and investment manager selection. As of December 31, 2004, retirement
plan assets invested through the firm's Australian retirement trust totaled
US$6.4 billion, representing the interests of about 146,000 participants.
Under the Mercer Investment Consulting name, the firm assists trustees
of pension funds and other institutional investors in the selection of
investment managers and investment strategies. In the U.S., Mercer Investment
Consulting, through an NASD registered broker dealer affiliate and in connection
with its investment consulting business, assists investment consulting clients
in asset transitions when a new investment manager is selected. Mercer has
announced to clients that it will close this broker-dealer business in the first
half of 2005.
During 2004 Mercer in the U.S. established a "funds-of-managers"
business marketed initially as Mercer Directed Investment Services and now
known as Mercer Global Investments. A funds-of-managers business entails
utilizing multiple third party investment managers selected by Mercer to invest
client assets. Commencing in 2005, most client assets are expected to be
invested in either investment companies subadvised by multiple investment
managers or in a group trust maintained by Mercer Trust Company, described
below. During
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2005, Mercer plans to extend its funds-of-managers business to countries other
than the U.S. In Australia, Mercer already operates funds-of-managers as part of
its Mercer retirement trust offering. Total assets under management as of
December 31, 2004 in the funds-of-managers structure were approximately $309
million in the U.S. and US$6.4 billion in Australia.
Mercer Human Resource Consulting also has an HR outsourcing business
that helps clients administer their retirement, group benefits and other human
resource programs. Effective December 31, 2004, Mercer's U.S. defined benefit
plan and human resource administration business was combined with the
administrative and trustee (or custodial) services previously conducted by
Putnam Fiduciary Trust Company, a sister company, consisting of participant
accounting and plan administration services for certain qualified contribution
employee benefit plans (in particular 401(k) plans, certain defined benefit
plans (cash-balance plans), employee stock purchase plans and certain
non-qualified compensation plans). These businesses will be operated by
newly-formed subsidiaries of Mercer, Inc. and will operate under the names
Mercer HR Services and Mercer Trust Company. Compensation for these HR
outsourcing services is received pursuant to service and trust or custodian
contracts with plan sponsors. In the case of employee benefit plans, investment
options are usually selected by the plan sponsors and may include Putnam mutual
funds and other Putnam managed products, as well as employer stock and other
non-Putnam investments.
Mercer Management Consulting provides advice and assistance on issues
of business strategy and operational execution, primarily to large corporations
in North America, Europe and Asia. Consultants help clients anticipate and
realize future sources of value growth based on insights into rapidly changing
customer priorities, economics and markets. Mercer Management Consulting also
assists its clients in the implementation of their strategies. Under the Mercer
Oliver Wyman name, Mercer Management Consulting provides risk and strategy
consulting, primarily to clients in the financial services sector, as well as
actuarial consulting services to insurance companies, government entities and
other organizations. Under the Lippincott Mercer name, Mercer Management
Consulting advises leading corporations on issues relating to brand, corporate
identity and image.
Mercer Delta Organizational Consulting, with offices in North America
and Europe, works with senior executives and chief executive officers of major
corporations and other institutions on organizational design and leadership of
organizational change.
National Economic Research Associates ("NERA") serves law firms,
corporations, trade associations and governmental agencies, from offices in the
United States, Europe, Asia and Australia. NERA provides research and analysis
of economic and financial issues arising in competition, regulation, finance,
public policy, litigation and management. NERA's auction practice advises
clients on the structuring and operation of large scale auctions, such as
telecommunications spectrum auctions. NERA also advises on transfer pricing.
Compensation for Services. The major component of Mercer's revenue is fees
paid by clients for advice and services. A smaller percentage of revenue is in
the form of commissions received from insurance companies for the placement of
individual and group insurance contracts, primarily life, health and accident
coverages. The investment consulting practice receives compensation based on
fees for service and sometimes is compensated based on assets under management.
Revenue for the discretionary investment management business (Mercer Global
Investments and the Australian trust business) is based principally on fees
calculated as a percentage of assets under management. A relatively small amount
of revenue
-10-
was derived in 2004 from brokerage commissions in connection with a registered
securities broker-dealer.
Revenue in the consulting business is affected by, among other things,
economic conditions around the world, including changes in clients' industries
and markets. Furthermore, revenue is subject to the introduction of new products
and services, broad trends in employee demographics, the effect of government
policies and regulations, market valuations, and interest and foreign exchange
rate fluctuations. Revenues from the provision of discretionary investment
management services and retirement trust and administrative services are
significantly affected by changes in bond and stock market valuations.
Regulation
- ----------
The activities of MMC are subject to licensing requirements and
extensive regulation under the laws of the United States and its various states,
territories and possessions, as well as laws of other countries in which MMC's
subsidiaries operate. These laws and regulations are primarily intended to
benefit clients and mutual fund investors.
MMC's three business segments depend on the validity of, and continued
good standing under, the licenses and approvals pursuant to which they operate,
as well as compliance with pertinent regulations.
In all jurisdictions the applicable laws and regulations are subject to
amendment or interpretation by regulatory authorities. Generally, such
authorities are vested with relatively broad discretion to grant, renew and
revoke licenses and approvals, and to implement regulations. Licenses may be
denied or revoked for various reasons, including the violation of such
regulations, conviction of crimes and similar matters. Possible sanctions that
may be imposed include the suspension of individual employees, limitations on
engaging in a particular business for specified periods of time, revocation of
licenses, censures, redress to clients and fines. In some instances, MMC follows
practices based on its interpretations, or those generally followed by the
industry, of laws or regulations, which may prove to be different from those of
regulatory authorities. Accordingly, the possibility exists that MMC may be
precluded or temporarily suspended from carrying on some or all of its
activities or otherwise fined or penalized in a given jurisdiction.
No assurances can be given that MMC's risk and insurance services,
investment management or consulting activities can continue to be conducted in
any given jurisdiction as they have been in the past.
Risk and Insurance Services. While laws and regulations vary from location
to location, every state of the United States and most foreign jurisdictions
require an insurance broker or agent (and in some cases a reinsurance broker or
intermediary) or insurance consultant, managing general agent or third party
administrator, to have an individual and/or company license from a governmental
agency or self-regulatory organization. In addition, certain of MMC's risk and
insurance activities are also governed by investment, securities and futures
licensing and other regulatory authorities. A few jurisdictions issue licenses
only to individual residents or locally-owned business entities. In some of
these jurisdictions, if MMC has no licensed subsidiary, MMC may maintain
arrangements with residents or business entities licensed to act in such
jurisdiction. Also, in some jurisdictions, various insurance related taxes
-11-
may also be due either by clients directly or from the broker. In the latter
case, the broker customarily looks to the client for payment.
Certain risk consulting and investigative activities engaged in by
Kroll are licensed and regulated at the federal, state and local level in the
U.S. and abroad. Many of these activities also involve the use of data from
outside sources including third party vendors and governmental records. Changes
in, or the implementation of new, laws and regulations, particularly relating to
privacy, could interfere with access to and use of such data. A substance abuse
testing laboratory owned by a Kroll subsidiary is certified on the federal level
and licensed in a number of states.
Investment Management. Putnam's securities investment management activities
are subject to regulation in the United States by the SEC and other federal,
state and self regulatory authorities, in the United Kingdom and Japan by their
respective national securities regulatory authorities, and in certain other
countries in which it does business. Investment advisers with mutual fund and
institutional clients are subject to extensive new SEC regulations, and may
become subject to additional SEC regulations in the future, which might entail
substantial new administrative obligations and associated costs and compliance
risks for Putnam.
Putnam's officers, directors and employees may from time to time own
securities, which are also held by the Putnam Funds or institutional accounts.
Putnam's internal policies with respect to individual investments require prior
clearance and reporting of transactions and restrict certain transactions so as
to reduce the possibility of conflicts of interest.
To the extent that existing or future regulations or regulatory actions
affecting the sale of Putnam fund shares or other investment products or their
investment strategies, cause or contribute to reduced sales of Putnam fund
shares or investment products or impair the investment performance of the Putnam
Funds or such other investment products, Putnam's aggregate assets under
management and its revenues might be adversely affected. Changes in regulations
affecting the free movement of international currencies might also adversely
affect Putnam.
Consulting and HR Services. Mercer's largest service area,
retirement-related consulting, is subject to pension law and financial
regulation in many countries, including regulation by the Financial Services
Authority in the UK. In addition, the provision of services related to brokerage
activities, merger and acquisition assistance, trustee services, investment
matters (including advice to individuals on the investment of personal pension
assets and assumption of discretionary investment management responsibilities)
and the placing of individual and group insurance contracts subjects Mercer
Human Resource Consulting subsidiaries to insurance, investment or securities
regulations and licensing in various jurisdictions.
Competitive Conditions
- ----------------------
Principal methods of competition in risk and insurance services and
consulting include the quality and types of services and products that a broker
or consultant provides its clients and their cost. Putnam competes with other
providers of investment products and services primarily on the basis of the
range of investment products offered, the investment performance of such
products, the manner in which such products are distributed, the scope and
quality of the shareholder and other services provided, and its general
reputation in the marketplace.
-12-
Sales of Putnam fund shares are also influenced by general securities market
conditions, government regulations, global economic conditions and advertising
and sales promotional efforts. All of these businesses also encounter strong
competition from both public corporations and private firms in attracting and
retaining qualified employees.
Risk and Insurance Services. The combined insurance and reinsurance broking
services business of MMC is the largest of its type in the world.
MMC encounters strong competition in the risk and insurance services
business from other insurance brokerage firms which also operate on a nationwide
or worldwide basis, from a large number of regional and local firms in the
United States, the European Union and in other countries and regions, from
insurance and reinsurance companies that market and service their insurance
products without the assistance of brokers or agents and from other businesses,
including commercial and investment banks, accounting firms and consultants that
provide risk-related services and products.
Certain insureds and groups of insureds have established programs of
self insurance (including captive insurance companies), as a supplement or
alternative to third-party insurance, thereby reducing in some cases the need
for insurance placements. There are also many other providers of affinity group
and private client services, including specialized firms as well as insurance
companies and other institutions.
Kroll competes with other national and international firms that provide
similar services in the fields of accounting, corporate advisory and
restructuring services, investigative and security services, consulting and
technology services.
MMC Capital competes with other organizations that set up private
equity funds to structure and manage investments in the insurance industry.
These organizations include insurance companies, brokers and other market
participants. As disclosed above, on February 28, 2005, MMC signed a letter of
intent providing for the transfer of MMC Capital's business, including the
management of the Trident Funds, to a company to be formed by MMC Capital's
senior management. The transfer is expected to close by the end of the second
quarter 2005.
Investment Management. Putnam Investments is one of the largest investment
management firms in the United States. The investment management business is
highly competitive. In addition to competition from firms already in the
investment management business, including public and private firms, commercial
banks, stock brokerage and investment banking firms, and insurance companies,
there is competition from other firms offering financial services and other
investment alternatives. Although Putnam Investments has expanded its marketing
and distribution outside the U.S., it competes in non-U.S. markets with local
and global firms, many of whom have much larger investment management businesses
in their respective non-U.S. markets. Putnam's competitive position continued to
be adversely affected in 2004, and may continue to be adversely affected in the
future, by the underperformance of certain Putnam funds relative to competing
products in the mutual fund marketplace.
Many securities dealers, whose large retail distribution systems play
an important role in the sale of shares in the Putnam Funds, also sponsor
competing proprietary mutual funds. To the extent that such securities dealers
value the ability to offer customers a broad selection of
-13-
investment alternatives, they will continue to sell independent funds,
notwithstanding the availability of proprietary products. However, to the extent
that these firms limit or restrict the sale of Putnam fund shares through their
brokerage systems in favor of their proprietary mutual funds, assets under
management might decline and Putnam's revenues might be adversely affected. In
addition, a number of mutual fund sponsors presently market their funds to the
general public without sales charges. Certain firms also offer passively managed
funds such as index funds to the general public.
In 2004, Putnam's competitive position was adversely affected, and may
continue to be adversely affected in the future, by the market timing related
issues and other events that gave rise to the administrative proceedings brought
by the SEC and the Massachusetts Secretary of the Commonwealth in the fourth
quarter of 2003. These proceedings and the settlement thereof are discussed in
more detail in Note 15 to the Consolidated Financial Statements included under
Item 8 of this report. The management team at Putnam is committed to restoring
Putnam's reputation for reliability and integrity. Any further damage to
Putnam's reputation could have a material adverse effect on Putnam.
Consulting and HR Services. Mercer, one of the largest global consulting
firms, is a leader in many of its businesses. Mercer Human Resource Consulting
is the world's largest human resources consulting organization.
MMC's consulting and HR outsourcing businesses face strong competition
from other privately and publicly held worldwide and national companies, as well
as regional and local firms. Competitors include independent consulting and
outsourcing firms as well as consulting and outsourcing operations affiliated
with accounting, information systems, technology and financial services firms.
The employee benefit plan administrative and trustee business of Putnam
Fiduciary Trust Company that was recently combined with Mercer's HR outsourcing
business was adversely affected in 2004 by the market timing related issues and
other events that gave rise to the administrative proceedings brought by the SEC
and the Massachusetts Secretary of the Commonwealth in the fourth quarter of
2003. These events, as well as continued underperformance of certain Putnam
funds relative to competing products in the mutual fund marketplace, may
continue to adversely affect the combined HR outsourcing businesses in the
future. Mercer's investment services face competition from many sources,
including funds-of-managers operated by other investment consulting firms and
financial institutions. Mercer's recently established funds-of-managers
business, in particular, faces significant competition from entrenched rivals
with greater experience in that market. For most of the services provided by
Mercer, clients also have the option of handling these issues internally without
assistance from outside advisors.
Segmentation of Activity by Type of Service and Geographic Area of Operation.
- ----------------------------------------------------------------------------
Financial information relating to the types of services provided by MMC
and the geographic areas of its operations is incorporated herein by reference
to Note 16 of the Notes to Consolidated Financial Statements below under Item
8 on pages 95 to 97 of this report. MMC's non-U.S. operations are subject
to the customary risks involved in doing business in other countries, including
currency fluctuations and exchange controls.
-14-
Employees
- ---------
As of January 31, 2005, MMC and its consolidated subsidiaries employed
about 61,800 people worldwide, of whom approximately 39,750 were employed by
subsidiaries providing risk and insurance services, approximately 3,450 were
employed by subsidiaries providing investment management services, approximately
18,000 (including approximately 1,300 employees transferred to Mercer HR
Services and Mercer Trust Company on January 1, 2005) were employed by
subsidiaries providing consulting services, and approximately 600 were employed
by MMC.
Executive Officers of MMC
- -------------------------
The executive officers of MMC are elected annually. As of February 28,
2005, the following individuals were executive officers of MMC:
Michael A. Beber, age [45], is senior vice president and chief
strategic development officer of MMC, a position he has held since
early January 2005. From February 1999 through December 2004, Mr. Beber
was executive vice president for strategic development and president of
the Background Screening Group of Kroll Inc., which MMC acquired in
July 2004. From August 1991 to January 1999, Mr. Beber was a principal
with Kroll Lindquist Avey, which Kroll acquired in June 1998. Prior to
joining Lindquist Avey, Mr. Beber was a partner with BDO LLP, a senior
manager with KPMG Peat Marwick, and a senior accountant with
PriceWaterhouse (now PriceWaterhouseCoopers).
Peter J. Beshar, age 43, is senior vice president, general
counsel and corporate secretary of MMC. Before joining MMC in November
of 2004, Mr. Beshar was a litigation partner in the law firm of Gibson,
Dunn & Crutcher LLP. Mr. Beshar joined Gibson, Dunn & Crutcher in 1995
after serving as an Assistant Attorney General in the New York Attorney
General's office.
Francis N. Bonsignore, age 58, is senior vice president,
executive resources & development of MMC. He previously served as
senior vice president, human resources & administration from 1990
through June 2001. Immediately prior thereto he was partner and
national director, human resources for Price Waterhouse.
Mathis Cabiallavetta, age 60, is chairman of MMC International
and a member of MMC's International Advisory Board. Prior to joining
MMC in 1999, Mr. Cabiallavetta was chairman of the board of UBS A.G., a
company he joined in 1971. Mr. Cabiallavetta is a director of Altria
Group, Inc., HBM BioVentures AG and the Swiss American Chamber of
Commerce.
Michael G. Cherkasky, age 54, is president and chief executive
officer of MMC. He is also chairman and chief executive officer of
Marsh Inc., MMC's risk and insurance services subsidiary. Prior to
being named to his current positions in October 2004, Mr. Cherkasky was
president and chief executive officer of Kroll Inc., the global risk
consulting company acquired by MMC in July 2004. Since then, he had
also been responsible for Marsh's Risk Consulting Practice. Mr.
Cherkasky joined Kroll in 1994, rising to the position of president and
chief executive officer in 2001. Prior to joining Kroll, Mr. Cherkasky
spent 16 years in the criminal justice system, including serving as
chief of the Investigations Division for the New York County District
Attorney's Office.
-15-
Charles A. Davis, age 56, is chairman and chief executive
officer of MMC Capital. He joined MMC Capital as president in 1998, was
named chief executive officer in 1999 and chairman in 2002. He was vice
chairman of MMC from 1999 to 2004. Prior to joining MMC, Mr. Davis was
a partner of Goldman Sachs Group L.P., a firm he joined in 1975. Mr.
Davis is a director of Axis Capital Holdings Limited, Media General,
Inc., Progressive Corporation and Merchants Bancshares, Inc.
Simon Freakley, age 43, is president and chief executive
officer of Kroll Inc., a position he has held since October 2004. Mr.
Freakley was previously a director of Kroll Inc. since June 2003 and
head of Kroll's Consulting Group since April 2004. He was president of
Kroll's Corporate Advisory & Restructuring Group from September 2002
until its consolidation with Kroll's Consulting Services Group in April
2004. From 1996 until his appointment as Kroll's CEO, Mr. Freakley was
also managing partner of Kroll Ltd. (previously Kroll Buchler Phillips
and Buchler Phillips), Kroll's U.K.-based corporate advisory and
restructuring subsidiary. Mr. Freakley joined Buchler Phillips in 1992,
and in 1999, the firm was acquired by Kroll.
E. Scott Gilbert, age 49, is senior vice president and chief
compliance officer of MMC. Prior to joining MMC in January 2005, he was
the chief compliance counsel of the General Electric Company since
September 2004. Prior thereto, he was counsel, litigation and legal
policy at GE. Between 1986 and 1992, when he joined GE, he served as an
Assistant United States Attorney for the Southern District of New York.
Charles E. Haldeman, age 56, is president and chief executive
officer of Putnam Investments. Mr. Haldeman joined Putnam in October
2002 as senior managing director and co-head of Investments. He was
named president and chief executive officer in November 2003. Before
joining Putnam, Mr. Haldeman was president and chief executive officer
of Delaware Investments from 2000 to 2002, president and chief
operating officer of United Asset Management Corporation from 1998 to
2000, and a partner and director of Cooke & Bieler, Inc. from 1974 to
1998.
David J. Morrison, age 57, is president and chief executive
officer of Mercer Management Consulting ("Mercer MC"). Prior to
assuming his current position in November 2002, he was vice chairman of
Mercer MC since January 2000. From July 1998 to December 1999 he served
as head of Mercer MC's Strategic Capabilities Group. Mr. Morrison
joined Mercer MC as vice president in December 1997 when Mercer
acquired Corporate Decisions, Inc., of which he was the president and
a significant shareholder. Mr. Morrison has been a member of the
Mercer, Inc. board of directors since January 2000.
Michael A. Petrullo, age 36, is senior vice president and
chief administrative officer of MMC. After MMC's acquisition of Kroll
in July 2004, Mr. Petrullo became chief financial officer for the risk
consulting businesses of Marsh and Kroll until assuming his current
position with MMC in January 2005. Mr. Petrullo was chief operating
officer and executive vice president of Kroll Inc. from December 2002
to July 2004. Prior thereto, he was deputy chief operating officer of
Kroll from June through December of 2002, the acting chief financial
officer of Kroll from November 2001 to June 2002, and vice president
and controller of Kroll from August 2001 to November 2001. He was vice
president-finance of Kroll's Investigations and Intelligence Group from
February 1999
-16-
until August 2001. He joined Kroll Associates in 1995, serving as
assistant controller through February 1998.
Brian M. Storms, age 50, is president and chief executive
officer of Mercer Human Resource Consulting, which he joined in August
of 2004 as vice chairman. Prior to joining Mercer, he served as
president since 2001 and then as chief executive officer since July
2002 of UBS Global Asset Management, Americas. Prior thereto, he was
president of Mitchell Hutchins, the asset management subsidiary of
Painewebber, from 1999 until UBS AG's acquisition of Paine Webber Group
Inc. in November 2000. From 1996 through 1999 Mr. Storms was president
of Prudential Investments.
Sandra S. Wijnberg, age 48, is senior vice president and chief
financial officer of MMC, a position she has held since joining the
Company in January 2000. From 1997 through 1999, Ms. Wijnberg was
senior vice president and treasurer of Yum! Brands, Inc. (formerly
Tricon Global Restaurants, Inc.). Prior thereto, Ms. Wijnberg spent
three years with PepsiCo, Inc., last serving as senior vice president
and chief financial officer of its KFC Corporation division.
Salvatore D. Zaffino, age 60, is chairman and chief executive
officer of Guy Carpenter & Company, Inc. Prior to becoming chairman in
1999, Mr. Zaffino served as chairman and chief executive officer of
Sedgwick Re North America from 1993 to 1998, when Sedgwick Group plc,
its parent company, was acquired by MMC. From 1985 to 1993, he was
chairman of Crump Re, an organization he founded and continued to
manage until its merger with Sedgwick Re.
Available Information.
- ----------------------
MMC is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended. In accordance with the Exchange
Act, MMC files its annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, and any amendments to such reports, with the
SEC. MMC makes these reports available free of charge through its website,
www.mmc.com, as soon as reasonably practicable after they are filed with the
SEC. The public may read and copy such materials at the SEC's Public Reference
Room at 450 Fifth Street, NW, Washington, DC, 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the SEC, such as MMC; the address of that site is
http://www.sec.gov.
MMC also posts on its website the following documents with respect to
corporate governance:
o Guidelines for Corporate Governance;
o Code of Business Conduct and Ethics;
o Procedures for addressing complaints and concerns of employees and
others; and
o the charters of the Audit Committee, Compensation Committee and
Directors & Governance Committee of the Board of Directors.
All of the above documents are available in printed form to any MMC stockholder
upon request.
-17-
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their
representatives may from time to time make oral or written statements (including
certain statements contained in this report and other MMC filings with the
Securities and Exchange Commission and in our reports to stockholders) 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 the matters raised in the
complaint filed by the New York Attorney General's Office stating a claim for,
among other things, fraud and violations of New York State antitrust and
securities laws, the complaint filed by the Connecticut Attorney General and
numerous other investigations being conducted by other state attorneys general
and state superintendents or commissioners of insurance, elimination of market
services agreements ("MSA"), the new business model of MMC or Marsh Inc.,
expected synergies from business combinations, cost savings from reductions in
staff levels, the adverse consequences arising from market-timing issues at
Putnam, including fines and restitution, revenues, expenses, earnings and cash
flow, capital structure, existing credit facilities, and access to public
capital markets including commercial paper markets, pension funding, market and
industry conditions, premium rates, financial markets, interest rates, foreign
exchange rates, claims, lawsuits and other contingencies, and matters relating
to MMC's operations and income taxes.
Such forward-looking statements are based on available current market and
industry materials, experts' reports and opinions, and long-term trends, as well
as management's expectations concerning current and 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 forward-looking statements that we make include:
o the impact of litigation and regulatory proceedings brought by the New
York Attorney General's Office, other state attorneys general and
state insurance regulators,
o the impact of class actions, derivative actions and individual suits
brought by policyholders and shareholders (including MMC employees)
asserting various claims, including claims under U.S. securities laws,
ERISA, unfair business practices and other common law or statutory
claims,
o loss of clients,
o loss of producers or key managers,
o inability to negotiate satisfactory new arrangements for Marsh's
compensation with insurance carriers or clients,
o inability to reduce expenses to the extent necessary to achieve
desired levels of profitability,
o inability to collect previously accrued MSA revenue,
o changes in competitive conditions,
o movements in premium rate levels,
-18-
o changes in the availability of, and the market conditions and the
premiums insurance carriers charge for, insurance products,
o mergers between client organizations,
o insurance or reinsurance company insolvencies,
o the impact of litigation and other matters stemming from market-timing
issues at Putnam,
o changes in worldwide and national equity and fixed income markets,
o actual and relative investment performance of the Putnam mutual funds,
o the level of sales and redemptions of Putnam mutual fund shares,
o the ability to maintain investment management and administrative fees
at current levels at Putnam,
o the ability of MMC to successfully access the public capital markets
to meet long term financing needs,
o the continued strength of MMC's relationships with its employees and
clients,
o the ability to successfully integrate acquired businesses and realize
expected synergies,
o changes in general worldwide and national economic conditions,
o the impact of terrorist attacks,
o natural catastrophes,
o changes in the value of investments made in individual companies and
investment funds,
o fluctuations in foreign currencies,
o actions of regulators,
o changes in interest rates,
o developments relating to claims, lawsuits and contingencies,
o prospective and retrospective changes in the tax or accounting
treatment of MMC's operations, and
o the impact of tax and other legislation and regulation in the
jurisdictions in which MMC operates.
Forward-looking statements speak only as of the date on which they are made, and
MMC undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to reflect the
occurrence of unanticipated events.
-19-
MMC is committed to providing timely and materially accurate information to the
investing public, consistent with our legal and regulatory obligations. To that
end, MMC and its operating companies use their websites to convey meaningful
information about their businesses, including the anticipated release of
quarterly financial results and the posting of updates of assets under
management at Putnam. Monthly updates of total assets under management at Putnam
will be posted to the MMC website the first business day following the end of
each month. Putnam posts mutual fund and performance data to its website
regularly. Assets for most Putnam retail mutual funds are posted approximately
two weeks after each month-end. Mutual fund net asset value (NAV) is posted
daily. Historical performance and Lipper rankings are also provided. Investors
can link to MMC and its operating company websites through www.mmc.com.
Item 2. Properties.
- ------ ----------
MMC and its subsidiaries have major office locations in New York,
London and Boston, as well as other offices around the world.
MMC and certain of its subsidiaries, including Marsh USA Inc. and
Mercer Human Resource Consulting, Inc., as tenants in common, own a 69%
condominium interest covering approximately 1,120,000 square feet in a 44-story
building in midtown Manhattan in New York City, which serves as their worldwide
headquarters. MMC has a fixed rate nonrecourse mortgage note agreement due in
2009 amounting to $200 million, bearing an interest rate of 9.8%, with the notes
secured by MMC's interest in its worldwide headquarters. In the event the
mortgage is foreclosed following a default, MMC would be entitled to remain in
the space and would be obligated to pay rent sufficient to cover interest on the
notes or at fair market value if greater. MMC leases an additional 315,000
square feet of space in its headquarters building. MMC and its subsidiaries
lease an additional 735,000 square feet in various locations around New York
City in support of its operations, including a lease covering approximately
420,000 rentable square feet in a building in Hoboken, New Jersey.
The principal offices of the Marsh subsidiaries in the UK currently are
located in the City of London in Tower Place, comprising 354,000 square feet
under a long term lease. Marsh subsidiaries lease an additional 214,000 square
feet of office space in and around London in support of their operations. The
principal offices of the Mercer subsidiaries in the UK comprise approximately
200,000 square feet of leased space in and around London. Mercer also has
entered into a lease covering approximately 150,000 rentable square feet in a
new building close to Tower Place.
The principal executive offices of the Putnam subsidiaries comprise
approximately 332,000 square feet of leased space located at One Post Office
Square, Boston, Massachusetts in Boston's financial district. Putnam leases an
additional approximately 917,000 square feet (including approximately 261,000
square feet transferred to Mercer HR Services on January 1, 2005) in various
locations around the Boston area for investor services and other activities in
support of its operations.
The remaining business activities of MMC and its subsidiaries are
conducted principally in leased office space in cities throughout the world. In
general, no difficulty is anticipated in negotiating renewals as leases expire
or in finding other satisfactory space if the premises become unavailable. From
time to time, MMC and its subsidiaries may have unused space and
-20-
may seek to sublet such space to third parties, depending upon the demands for
office space in the locations involved.
Item 3. Legal Proceedings.
- ------ -----------------
Information regarding legal proceedings is set forth in Note 15 to the
financial statements on pages 82 to 94 of this report.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
None.
PART II
Item 5. Market for MMC's Common Equity, Related Stockholder Matters and
- ------ ---------------------------------------------------------------
Issuer Purchases of Equity Securities.
- -------------------------------------
For information regarding dividends paid and the number of holders of
MMC's common stock, see the table entitled "Selected Quarterly Financial Data
and Supplemental Information (Unaudited)" below under Item 8 on page 99 of
this report.
MMC's common stock is listed on the New York, Chicago, Pacific and
London stock exchanges. The high and low stock prices (NYSE composite
quotations) for our common stock for each quarterly period in 2004 and 2003 are
as follows:
----------------------------------------------------------------
2004 2003
----------------------------------------------------------------
Stock Price Range Stock Price Range
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter $ 49.69 45.67 $ 49.50 38.27
Second Quarter $ 47.51 42.05 $ 54.97 42.27
Third Quarter $ 46.66 42.10 $ 53.98 47.50
Fourth Quarter $ 47.35 22.75 $ 49.48 41.75
----------------------------------------------------------------
$ 49.69 22.75 $ 54.97 38.27
On February 25, 2004 the closing price of MMC's common stock was $31.63.
-21-
The following table sets forth information regarding MMC's purchases of
its common stock on a monthly basis during the fourth quarter of 2004. Share
repurchases are recorded on a trade date basis.
Issuer Repurchases of Equity Securities
(a) (b) (c) (d)
Total Number of Maximum
Total Number Average Price Shares Number of
of Shares Paid per Share Purchased as Shares that May
Purchased Part of Publicly Yet Be
Announced Plans Purchased Under
or Programs (1) the Plans or
Period Programs
October 1, 2004 - 405,000 $34.44 405,000 49,904,636
October 31, 2004
November 1, 2004 - 0 -- 0 49,904,636
November 30, 2004
December 1, 2004 - 0 -- 0 49,904,636
December 31, 2004
- -----------------------------------------------------------------------------------------
Total 405,000 $34.44 405,000 49,904,636
(1) As set forth in its public filings from time to time, MMC engages in a
share repurchase program. On March 18, 1999, MMC's board of directors
authorized the repurchase of up to 40 million shares of MMC's common stock
and on May 18, 2000 the board further authorized the repurchase of up to an
additional 88 million shares. There is no expiration date specified under
either of these authorizations and MMC may repurchase its shares under each
of these authorizations in the future. MMC periodically purchases shares of
its common stock, in the open market or otherwise, subject to market
conditions, for treasury as well as to meet requirements for issuance of
shares for its various stock compensation and benefit programs.
Sales of Unregistered Securities
On March 31, 2004, Mercer Delta Consulting, LLC, an indirect, wholly-owned
subsidiary of MMC, acquired substantially all of the assets of CDR
International, LLC ("CDR") for $7,041,500 in cash to be paid over 4 years, and
the issuance of 158,409 shares of MMC common stock in three equal installments
beginning on the second anniversary of the acquisition closing date. The stock
consideration was deemed issued on March 31, 2004 to CDR and its members in
reliance upon the private placement exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
On April 7, 2003, Mercer Management Consulting, Inc., an indirect, wholly-owned
subsidiary of MMC, acquired substantially all of the assets of Oliver, Wyman &
Company LLC ("OWC") for $159,000,000 in cash to be paid over 4 years, and the
issuance of 2,540,809 shares of MMC common stock in three equal installments
beginning on the second anniversary of the acquisition closing date. The stock
consideration was deemed issued on April 7, 2003 to OWC and its members in
reliance upon the private placement exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
-22-
Equity Compensation Plan Information Table
The following table sets forth information as of December 31, 2004,
with respect to compensation plans under which equity securities of MMC are
authorized for issuance:
---------------------------------------------------------------------------------------
(a) Number of (b) Weighted- average (c) Number of securities
securities to be exercise price of remaining available for
issued upon outstanding options, future issuance under
exercise of warrants and rights (2) equity compensation
outstanding plans (excluding
options, warrants securities reflected in
and rights (1)(2) column (a)) (2)
Plan category
---------------------------------------------------------------------------------------
Equity compensation 20,984,390 $37.2723 45,347,560 (3)
plans approved by
stockholders
---------------------------------------------------------------------------------------
Equity compensation 65,226,297 $45.1287 56,281,539 (4)
plans not approved by
stockholders
---------------------------------------------------------------------------------------
Total 86,210,687 (5) $43.2164 101,629,099 (5)
---------------------------------------------------------------------------------------
- ----------------------------
(1) This column reflects shares subject to unexercised options granted over the
last ten years under MMC's 2000 Senior Executive Incentive and Stock Award
Plan, 1997 Senior Executive Incentive and Stock Award Plan, 1992 Incentive
and Stock Award Plan, 2000 Employee Incentive and Stock Award Plan and 1997
Employee Incentive and Stock Award Plan. This column contains information
regarding stock options only; there are no warrants or stock appreciation
rights outstanding.
(2) The number of shares that may be issued at the close of current offering
periods under stock purchase plans, and the weighted-average exercise price
of such shares, is uncertain and is consequently not reflected in columns
(a) and (b). The number of shares to be purchased will depend on the amount
of contributions with interest accumulated under these plans as of the
close of the offering periods. The shares remaining available for future
issuance in column (c) includes any shares that may be acquired under all
current offering periods for these plans. See notes (3) and (4) below.
(3) Includes the following:
o 28,186,972 shares available for future awards under the 1999 Employee
Stock Purchase Plan, a stock purchase plan qualified under Section 423
of the Internal Revenue Code. Employees may acquire shares at a
discounted purchase price on four quarterly purchase dates within the
one-year offering period with the proceeds of their contributions plus
interest accumulated during the respective quarter. The purchase price
may be no less than 85% of the market price of the stock on the
purchase date.
o 3,774,881 shares that may be issued to settle outstanding restricted
stock unit, deferred stock unit and deferred bonus unit awards and
other deferred compensation obligations.
o 9,198,404 shares available for future awards under the 2000 Senior
Executive Incentive and Stock Award Plan. Awards may consist of stock
options, stock appreciation rights, restricted stock, restricted stock
units, deferred stock units, deferred bonus units, dividend
equivalents, stock bonus, performance awards and other unit-based or
stock-based awards.
o 3,183,741 shares available for future deferrals directed into share
units under the Stock Investment Supplemental Plan, a nonqualified
deferred compensation plan providing benefits to
-23-
employees whose benefits are limited under the tax-qualified Stock
Investment Plan, an employee stock ownership plan with a 401(k)
feature.
o 1,003,562 shares available for future awards under the Directors Stock
Compensation Plan. Awards may consist of shares, deferred stock units
and dividend equivalents.
(4) Includes the following:
o 11,311,995 shares available for future awards under the Stock Purchase
Plan for International Employees, Stock Purchase Plan for French
Employees, Save as You Earn Plan (U.K.), and Irish Savings Related
Share Option Scheme 2001.
o 10,398,783 shares that may be issued to settle outstanding restricted
stock unit, deferred stock unit and deferred bonus unit awards under
the 2000 Employee Incentive and Stock Award Plan and predecessor plans
and programs.
o 32,270,144 shares available for future awards under the 2000 Employee
Incentive and Stock Award Plan. Awards may consist of stock options,
stock appreciation rights, restricted stock, restricted stock units,
deferred stock units, deferred bonus units, dividend equivalents,
stock bonus, performance awards and other unit-based or stock-based
awards.
o 148,810 shares available for future awards under the Approved Share
Participation Schemes for employees in Ireland. Awards are made in
shares of stock.
o 1,835,327 shares available for future awards, and 316,480 shares that
may be issued to settle outstanding awards, under the Special
Severance Pay Plan. Awards consist of stock units and dividend
equivalents.
(5) MMC's Board of Directors has authorized the repurchase of common stock,
including an ongoing authorization to repurchase shares in connection with
awards granted under equity-based compensation plans, subject to market
conditions and other factors. Pursuant to that authorization, MMC
repurchased 11.4 million shares in 2004. See the "Liquidity and Capital
Resources" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below under Item 7 on pages 43 to
47 of this report.
The material features of MMC's compensation plans that have not been
approved by stockholders and under which MMC shares are authorized for issuance
are described below. Any such material plans under which awards in MMC shares
may currently be granted are included as exhibits to this report.
o Stock Purchase Plan for International Employees, Stock Purchase Plan
for French Employees, Save As You Earn Plan (U.K.) and Irish Savings
Related Share Option Scheme. Eligible employees may elect to
contribute to these plans through regular payroll deductions over an
offering period which varies by plan from 1 to 5 years. On each
purchase date, generally the end of the offering period, participants
may receive their contributions plus interest in cash or use that
amount to acquire shares of stock at a discounted purchase price.
Under the International Plan, the purchase price may be no less than
85% of the market price of the stock on each of four quarterly
purchase dates within the one-year offering period. Under the French
Plan, the purchase price may be no less than 85% of the market price
of the stock at the end of the offering period. Under the U.K. and
Irish Plans, the purchase price may be no less than 80% of the market
price of the stock at the beginning of the offering period.
o 2000 Employee Incentive and Stock Award Plan and predecessor plans and
programs. The terms of this plan and the 1997 Employee Incentive and
Stock Award Plan are described in Note 8 to the Consolidated Financial
Statements
-24-
included below under Item 8 of this report. In addition, the Stock
Bonus Award Program provided for the payment of up to 50% of annual
bonuses otherwise payable in cash, in the form of deferred stock units
or deferred bonus units which are settled in shares. No future awards
may be granted under any predecessor plan or program.
o Approved Share Participation Schemes for Employees in Ireland.
Eligible participants may elect to acquire shares of stock at market
price by allocating their bonus and up to an equivalent amount of
their basic salary. The acquired shares are held in trust and
generally may not be transferred for two years following their
acquisition. The initial value of any shares held in trust for more
than three years is not subject to income tax.
o Special Severance Pay Plan. Under this plan, certain holders of
restricted stock or awards in lieu of restricted stock with at least
10 years of service will receive payment in shares upon forfeiture of
their award if their employment with MMC or one of its subsidiaries
terminates. The amount of such payment is based on years of service,
with the individual receiving up to a maximum of 90% of the value of
the restricted shares after 25 years of service and is subject to
execution of a non-solicitation agreement.
-25-
Item 6. Selected Financial Data.
- ------ -----------------------
MARSH & MCLENNAN COMPANIES, INC. AND SUBSIDIARIES
FIVE-YEAR STATISTICAL SUMMARY OF OPERATIONS
Compound
Growth
For the Years Ended December 31, Rate
(In millions except per share figures) 2004 2003 2002 2001 2000 1999-2004
- -------------------------------------------------- ------- ------- ------- ------- ------- ---------
Revenue:
Risk and Insurance Services $ 7,391 $ 6,868 $ 5,910 $ 5,152 $ 4,780 10%
Investment Management 1,757 2,001 2,166 2,409 3,242 (8)%
Consulting 3,070 2,719 2,364 2,308 2,286 8%
Corporate/ Eliminations (c) (59) (44) (52) (43) (45)
------- ------- ------- ------- ------- ---
Total Revenue 12,159 11,544 10,388 9,826 10,263 6%
------- ------- ------- ------- ------- ---
Expenses:
Compensation and Benefits 6,714 5,926 5,199 4,877 4,941 8%
Other Operating Expenses 3,887 3,156 2,967 3,229 3,188 4%
Regulatory and Other Settlements 969 10 -- -- --
Corporate/ Eliminations (c) (59) (44) (52) (43) (45)
------- ------- ------- ------- ------- ---
Total Expenses 11,511 9,048 8,114 8,063 8,084 8%
------- ------- ------- ------- ------- ----
Operating Income 648(b) 2,496 2,274 1,763(a) 2,179 (15)%
Interest Income 21 24 19 23 23
Interest Expense (219) (185) (160) (196) (247)
------- ------- ------- ------- ------- ---
Income Before Income Taxes and Minority Interest 450 2,335 2,133 1,590 1,955 (19)%
Income Taxes 259 770 747 599 753
Minority Interest, Net of Tax 15 25 21 17 21
------- ------- ------- ------- ------- ---
Net Income $ 176 $ 1,540 $ 1,365 $ 974 $ 1,181 (25)%
------- ------- ------- ------- ------- ---
Basic Net Income Per Share Information:
Net Income Per Share $ .33 $ 2.89 $ 2.52 $ 1.77 $ 2.18 (25)%
Average Number of Shares Outstanding 526 533 541 550 543
------- ------- ------- ------- ------- ---
Diluted Net Income Per Share Information:
Net Income Per Share $ .33 $ 2.81 $ 2.45 $ 1.70 $ 2.05 (24)%
Average Number of Shares Outstanding 535 548 557 572 569
------- ------- ------- ------- ------- ---
Dividends Paid Per Share $ 1.30 $ 1.18 $ 1.09 $ 1.03 $ .95 9%
Return on Average Stockholders' Equity 3% 29% 27% 19% 25%
Year-end Financial Position:
Working capital $ 152 $ 189 $ (199) $ (622) $ (855)
Total assets $18,337 $15,053 $13,855 $13,769 $14,144
Long-term debt $ 4,691 $ 2,910 $ 2,891 $ 2,334 $ 2,347
Stockholders' equity $ 5,056 $ 5,451 $ 5,018 $ 5,173 $ 5,228
Total shares outstanding (excluding
treasury shares) 527 527 538 548 552
Other Information:
Number of employees 63,900 60,400 59,400 57,800 57,000
Stock price ranges-
U.S. exchanges - High $ 49.69 $ 54.97 $ 57.30 $ 59.03 $ 67.85
- Low $ 22.75 $ 38.27 $ 34.61 $ 39.70 $ 35.25
(a) Includes charges related to September 11 and restructuring costs of $396
million.
(b) Includes restructuring costs of $337 million.
(c) Certain balances have been reclassified to conform with current
presentation.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for discussion of significant items affecting the results of
operations in 2004 and 2003.
-26-
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations.
- ---------------------
MARSH & MCLENNAN COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh Inc. ("Marsh"), the world's
leading risk and insurance services firm; Putnam Investments ("Putnam"), one of
the largest investment management companies in the United States; and Mercer
Inc. ("Mercer"), a major global provider of consulting services. Over 60,000
employees worldwide provide analysis, advice and transactional capabilities to
clients in over 100 countries.
In 2004, MMC operated in three principal business segments based on the services
provided. Segment performance is evaluated on the basis of segment operating
income, which is after deductions for directly related expenses and minority
interest, but before corporate expenses. A reconciliation of segment operating
income to total operating income is included in Note 16 to the Consolidated
Financial Statements. The accounting policies of the segments are identical to
those used for the Consolidated Financial Statements. A complete description of
each of MMC's business segments is included in Part 1, Item 1 of this report.
The financial results presented and this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") are based on MMC's
business segments as they existed in 2004. MMC has announced several
organizational changes that will change its reportable business segments
effective January 1, 2005.
This MD&A contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Information Concerning Forward-looking
Statements" in Part 1, Item 1 of this report on pages 18 to 20.
RECENT DEVELOPMENTS
The historical financial results presented below should be viewed in light of
recent developments, which have significantly impacted MMC's results of
operations, liquidity and financial condition.
Marsh Developments
On October 14, 2004, the New York State Attorney General's Office ("NYAG")
filed a Civil Complaint (the "NYAG Lawsuit") in state court against MMC
and Marsh (collectively "Marsh") asserting claims under New York law for
fraudulent business practices, antitrust violations, securities fraud, unjust
enrichment and common law fraud. On October 21, 2004, the New York State
Insurance Department ("NYSID") issued a citation, amended on October 24, 2004,
(the "Amended Citation") that ordered MMC and a number of its subsidiaries and
affiliates that hold New York insurance licenses to appear at a hearing and show
cause why regulatory action should not be taken against them. These issues are
discussed more fully in Note 15 to the Consolidated Financial Statements.
-27-
On January 30, 2005, MMC entered into an agreement (the "Settlement Agreement")
with the NYAG and the NYSID to settle the NYAG Lawsuit and the Amended Citation.
Pursuant to the Settlement Agreement, Marsh will establish a fund of $850
million (the "Fund"), payable over four years, for Marsh policyholder clients.
MMC recorded a $232 million charge in the third quarter of 2004 and an
additional $618 million charge in the fourth quarter of 2004 for the amount to
be paid into the Fund in accordance with the Settlement Agreement. In addition,
MMC recorded a charge of $16 million for estimated costs to calculate and
administer payments out of the Fund. The total amount of the settlement will be
paid into the Fund as follows: on or before each of June 1, 2005 and 2006, $255
million, and on or before each of June 1, 2007 and 2008, $170 million.
Marsh has changed its business model to require complete transparency to clients
of all fees and remuneration to be received by Marsh for performing its
services. Effective October 1, 2004, Marsh agreed to eliminate contingent
compensation agreements with insurers. As a result, market services revenue
("MSAs") declined to $541 million in 2004 from $845 million in the prior year.
Due to the filing of the Attorney General's civil complaint, Marsh was unable
to complete the normal process to verify amounts earned or determine that
collection of these amounts is reasonably assured for certain contracts. As a
result, Marsh did not accrue a significant portion of market services revenue
related to placement activity in the third quarter. Although some insurance
companies have indicated they may delay payments until the issues concerning
market services agreements are clarified, Marsh intends to collect market
services revenue earned prior to October 1, 2004. Any such revenue earned but
not accrued at September 30, 2004 will be recognized when collected or when
confirmation of the amount of payment is received from the carriers. Market
services revenue of $73 million was recorded in the fourth quarter of 2004. No
market services revenue will be earned for placements made after October 1,
2004. Marsh is refining the details of its new business model and does not
anticipate realizing the benefits from its implementation until later in 2005.
Although MMC expects to be fairly and fully compensated for the services
it provides, there is no assurance that revenues under the new model will be
sufficient to achieve operating margins and cash flows that are comparable to
historical levels. In addition, client revenue may also be reduced due to
negative reaction to the issues raised in the complaint.
MMC Developments
On October 25, 2004, Michael Cherkasky was named President and Chief Executive
Officer of MMC and was elected to MMC's Board of Directors. Robert Erburu was
named lead director of the MMC Board of Directors.
On November 18, 2004, MMC announced that five members of its Board of Directors,
who were also executives of the company, stepped down from their positions on
the Board. After this action, MMC's Board consists of Michael Cherkasky, the
company's president and chief executive officer, and ten outside members.
In addition to these changes, MMC has taken a number of steps to enhance the
control and compliance environment.
Across all of its businesses, MMC must preserve its capabilities to serve
clients and the capacity to support staff development. Retention of employees is
critical to the organization. As a result, MMC has developed compensation
programs to retain, motivate, and reward certain key employees. These programs
resulted in $12 million of additional compensation
-28-
expense in the fourth quarter of 2004 and will potentially increase compensation
costs in 2005 by approximately $110 million.
MMC is conducting an ongoing examination of all parts of its cost structure to
identify areas where expenses can be reduced appropriately. On a global basis,
MMC has reducedheadcount by 2,750 in the fourth quarter, 2004 through staff
reductions and attrition. These actions are expected to result in annual savings
of approximately $400 million when fully implemented in mid-2005. As a result of
these actions, pre-tax costs of $337 million were incurred in the fourth quarter
of 2004, primarily related to severance and other termination benefits and
future rent under non-cancelable leases and lease termination costs, as well as
$14 million for costs related to accelerated amortization or abandonment of
leasehold improvements and other assets. Additional costs of $14 million are
expected to be incurred in the first half of 2005 related to the 2004
restructuring activity. Marsh Inc. continues to restructure its operations,
improve efficiencies, and eliminate unprofitable accounts. This could affect
approximately 2,500 people throughout its global operations and, when fully
implemented, should lead to annual expense savings exceeding $375 million.
This will result in additional restructuring charges.
Following the filing of the NYAG Lawsuit, uncertainty regarding changes in
Marsh's business model, the impact of eliminating contingent compensation
agreements and potential fines and/or penalties resulted in credit rating
downgrades and the inability to access commercial paper markets. The matters
raised in the NYAG Lawsuit may have prohibited MMC from borrowing under its
revolving facilities. The required lenders under each of the facilities
agreed to waive the effect of such matters until December 30, 2004.
During the period from October 14 to December 15, 2004, the revolving credit
facilities were drawn upon to refinance approximately $1.7 billion of maturing
commercial paper. On December 15, 2004, MMC completed financing with respect
to a $1.3 billion, two-year term loan facility and the amendment of its
existing $1 billion revolving credit facility which expires in June 2007,
and $700 million revolving credit facility which expires in June 2009.
The term loan was used to pay down balances on the revolving credit facilities.
MMC's debt and credit facilities are discussed in more detail in the Liquidity
and Capital Resources section of this MD&A.
Putnam Developments
On November 13, 2003, pursuant to an agreement with Putnam, the Securities and
Exchange Commission ("SEC") entered findings of fact which Putnam neither
admitted nor denied, that Putnam had violated the Investment Advisors Act of
1940 and the Investment Company Act of 1940.
On April 8, 2004, Putnam entered into a settlement of those charges under which
Putnam was required to pay $5 million in restitution plus a civil monetary
penalty of $50 million. The settlement provided that if the restitution
calculated by the independent assessment consultant under the SEC order exceeded
$10 million, Putnam would be responsible for paying the excess.
On April 8, 2004, simultaneously and in conjunction with the settlement of the
above-referenced SEC proceeding, the Massachusetts Secretary of the Commonwealth
("Massachusetts Security Division") entered a Consent Order in final settlement
of charges filed against Putnam and two of its employees on October 28, 2003 by
the Massachusetts Security Division alleging violations of the state's
securities law anti-fraud provision. That Consent Order provided that if the
-29-
restitution calculated by the independent assessment consultant under the
Massachusetts order exceeded $15 million, Putnam would be responsible for paying
the excess. The restitution called for by the Consent Order will be distributed
by the same independent assessment consultant appointed pursuant to the November
13, 2003 and April 8, 2004 SEC orders, acting in his capacity as the independent
distribution consultant under the Orders.
On March 3, 2005, the independent assessment consultant issued his assessment
reports (dated March 2, 2005) under the SEC orders and the Massachusetts
Consent Order. In the reports, the independent assessment consultant concluded
that $108.5 million is the total amount of restitution payable by Putnam to fund
shareholders. Putnam will pay $25 million of this amount from the amounts
previously made available for restitution under the SEC and Massachusetts
orders, and has recorded a charge for the additional $83.5 million in the fourth
quarter of 2004. In addition to the $108.5 million in restitution, Putnam fund
shareholders will also receive a distribution of $45 million, which will be
taken from the civil penalty Putnam previously paid to the SEC and does not
reflect an additional payment. The independent assessment consultant, in his
capacity as the independent distribution consultant under April 8, 2004 SEC
order and the Massachusetts Consent Order, is continuing his work on a
distribution plan that will provide for the distribution of the restitution
amounts described above to Putnam fund shareholders. Putnam will incur
additional costs in connection with the implementation of the distribution plan.
-30-
CONSOLIDATED RESULTS OF OPERATIONS
MMC's results of operations in 2004 have been impacted significantly by the
developments discussed above, as well as the changing business environment in
which MMC operates. Consolidated results of operations are as follows:
(In millions, except per share figures) 2004 2003 2002
- --------------------------------------- ------- ------- -------
REVENUE:
Service Revenue $11,959 $11,444 $10,321
Investment Income (Loss) 200 100 67
------- ------- -------
Operating Revenue 12,159 11,544 10,388
------- ------- -------
EXPENSE:
Compensation and Benefits 6,714 5,926 5,199
Other Operating Expenses 3,828 3,112 2,915
Regulatory and Other Settlements 969 10 --
------- ------- -------
Operating Expenses 11,511 9,048 8,114
------- ------- -------
OPERATING INCOME $ 648 $ 2,496 $ 2,274
------- ------- -------
NET INCOME $ 176 $ 1,540 $ 1,365
------- ------- -------
NET INCOME PER SHARE:
BASIC $ 0.33 $ 2.89 $ 2.52
------- ------- -------
DILUTED $ 0.33 $ 2.81 $ 2.45
------- ------- -------
AVERAGE NUMBER OF SHARES OUTSTANDING:
BASIC 526 533 541
------- ------- -------
DILUTED 535 548 557
------- ------- -------
Operating income in 2004 declined 74% to $648 million, reflecting costs of
regulatory settlements at Marsh and Putnam and costs related to restructuring
MMC's businesses. Results in risk and insurance services include an $850 million
charge related to the settlement agreement reached with the NYAG and NYSID, the
impact of a $304 million decrease in MSA revenue, and $231 million of
restructuring charges. Investment Management results reflect a decline in
revenue resulting from lower assets under management, charges of $224 million
for regulatory settlements with the SEC and Commonwealth of Massachusetts,
related legal costs and costs related to restructuring and repositioning
Putnam's business that were incurred throughout 2004 and fourth quarter
restructuring charges of $26 million. Results for Consulting include $62 million
of restructuring charges. Corporate results include an expense credit of $105
million from final settlements with insurers for claims related to the September
11, 2001 attack on the World Trade Center ("WTC") partially offset by $18
million of restructuring charges.
-31-
An analysis of MMC's operating revenue by segment and the impact of foreign
currency translation, acquisitions and dispositions is as follows:
COMPONENTS OF REVENUE CHANGE
TWELVE MONTHS ENDED --------------------------------------
DECEMBER 31, % CHANGE ACQUISITIONS/
------------------- GAAP UNDERLYING DISPOSITIONS CURRENCY
(IN MILLIONS, EXCEPT PERCENTAGE FIGURES) 2004 2003 REVENUE REVENUE (A) IMPACT IMPACT
- ---------------------------------------- ------- ------- -------- ----------- ------------- --------
RISK AND INSURANCE SERVICES
Risk Management and Insurance Broking $ 4,805 $ 4,881 (2)% (6)% 1% 3%
Reinsurance Broking and Services 842 797 6% 3% -- 3%
Risk Consulting and Technology (b) 716 300 139% 9% 130% --
Related Insurance Services (c) 1,028 890 16% 12% 3% 1%
------- ------- --- --- --- ---
Total Risk and Insurance Services (d) 7,391 6,868 8% (2)% 7% 3%
------- ------- --- --- --- ---
INVESTMENT MANAGEMENT 1,757 2,001 (12)% (12)% -- --
------- ------- --- --- --- ---
CONSULTING
Retirement Services (d) 1,356 1,203 13% -- 5% 8%
Management and Organizational Change 585 449 30% 13% 12% 5%
Health Care and Group Benefits 397 388 2% 1% -- 1%
Human Capital (d) 407 384 6% 1% -- 5%
Economic 166 150 11% 9% -- 2%
------- ------- --- --- --- ---
2,911 2,574 13% 3% 4% 6%
Reimbursed Expenses 159 145
------- ------- --- --- --- ---
Total Consulting 3,070 2,719 13% 3% 4% 6%
------- ------- --- --- --- ---
Total Operating Segments $12,218 $11,588 5% (3)% 5% 3%
Corporate/Eliminations (59) (44)
------- ------- --- --- --- ---
Total $12,159 $11,544 5% (3)% 5% 3%
======= ======= === === === ===
COMPONENTS OF REVENUE CHANGE
TWELVE MONTHS ENDED ----------------------------
DECEMBER 31, % CHANGE CURRENCY/
------------------- GAAP UNDERLYING ACQUISITIONS
(IN MILLIONS, EXCEPT PERCENTAGE FIGURES) 2003 2002 REVENUE REVENUE (A) IMPACT
- ---------------------------------------- ------- ------- -------- ----------- ------------
Risk and Insurance Services $ 6,868 $ 5,910 16% 13% 3%
Investment Management 2,001 2,166 (8)% (8)% --
Consulting 2,719 2,364 15% 3% 12%
------- ------- --- --- ---
Total Operating Segments $11,588 $10,440 11% 6% 5%
Corporate/Eliminations (44) (52)
------- ------- --- --- ---
Total Revenue $11,544 $10,388 11% 6% 5%
======= ======= === === ===
(a) Underlying revenue measures the change in revenue before the impact of
acquisitions and dispositions using constant currency exchange rates.
(b) Includes the operations of Kroll, acquired in 2004 and Marsh risk
consulting, previously reported in Risk and Insurance broking.
(c) Includes U.S. affinity, wholesale broking, underwriting management, claims
management and MMC Capital businesses.
(d) Certain reclassifications have been made to prior year amounts to conform
with current presentation.
-32-
Revenue, derived mainly from commissions and fees, increased 5% from 2003. The
increase in revenue was primarily due to the impact of acquisitions and foreign
exchange. Consolidated revenue decreased 3% on an underlying basis, which
measures the change in revenue before the impact of acquisitions and
dispositions and using constant currency exchange rates. Underlying revenue
growth in consulting was more than offset by a decrease in investment management
revenue due to a decline in average assets under management and a decrease in
risk and insurance services revenue resulting from the elimination of MSAs.
Revenue increased 8% in risk and insurance services. Acquisitions, including the
acquisition of Kroll, contributed 7% to the segment's revenue growth. Revenue in
this segment declined 2% on an underlying basis in 2004 resulting primarily from
the $304 million decline in MSA revenues which more than offset a 3% increase in
client revenue and fiduciary income. Related insurance services reflects growth
in claims management and higher investment income at MMC Capital. Consulting
revenue grew 3% on an underlying basis. Higher demand for strategic advice
generated an increase in management and organizational change consulting.
Acquisitions contributed 4% to the revenue growth of consulting largely
reflecting the acquisition of Synhrgy HR Technologies (completed in January,
2004) and Oliver Wyman (completed in April, 2003). Revenue decreased 12% in the
investment management segment due to a decline in the amount of average assets
under management on which fees are earned and lower 12b-1 fees, partially offset
by higher investment income related to the sale of Putnam's interest in its
Italian joint venture and related securities and by transaction fees related to
private equity funds. Average assets under management declined 16% in 2004
compared with 2003.
Operating expenses increased 27% in 2004 over 2003, of which 10% was due to the
effects of acquisitions and foreign exchange. Expenses in 2004 also include an
$850 million charge related to the settlement agreement with the NYAG and the
NYSID, charges of $224 million related to Putnam's settlement agreements with
the SEC and the Massachusetts Security Division, costs of $337 million related
to restructuring MMC's businesses partly offset by a credit of $105 million from
the final settlement with insurers for claims related to the September 11, 2001
attack on the WTC. Combined, these items increased expenses by 14%. Underlying
expenses excluding these items increased 3% due to higher compensation and
benefits costs which includes severance of $108 million incurred prior to
implementation of the restructuring plan in the fourth quarter and increased
pension costs of $93 million, as well as other costs related to regulatory
issues. These increases were partially offset by a decrease in amortization
expense for prepaid dealer commissions and a credit to compensation expense
related to the settlement with Putnam's former chief executive officer.
The 6% growth in underlying revenue in 2003 was primarily driven by higher
renewal revenue and market services revenue and the impact of higher premiums in
the risk and insurance services segment combined with growth in each of the
practices of the consulting segment. Offsetting this growth was an 8% decrease
in the investment management segment due to a decline in the amount of assets
under management on which fees are earned and a decline in underwriting and
distribution fees.
Operating expenses increased 11% in 2003, 5% on an underlying basis. The
increase in underlying expenses was driven by higher compensation and benefit
costs in risk and insurance services as well as higher facility and insurance
costs, partially offset by a decrease in amortization expense for prepaid dealer
commissions.
-33-
RISK AND INSURANCE SERVICES
MMC's risk and insurance services are provided by its subsidiaries and their
affiliates as broker, agent or consultant for insureds, insurance underwriters
and other brokers on a worldwide basis in the areas of risk management and
insurance broking, reinsurance broking and services, risk consulting and
technology services, and related insurance services. Risk management and
consulting, insurance broking and insurance program management services are
provided for businesses, public entities, associations, professional services
organizations and private clients under the Marsh name. Reinsurance broking,
catastrophe and financial modeling services, and related advisory functions are
conducted for insurance and reinsurance companies, principally under the Guy
Carpenter name. Risk consulting and technology services are provided to
businesses, governments and individuals throughout the world, primarily under
the Kroll name. Underwriting management and wholesale broking services are
performed for a wide range of clients under various names, the largest of which
is Crump. Claims and associated productivity services are provided by Sedgwick
Claims Management Services. In addition, MMC Capital provides services
principally in connection with originating, structuring and managing insurance,
financial services, and other industry-focused investments.
Revenue attributable to the risk and insurance services segment consists
primarily of fees paid by clients, commissions and fees paid by insurance and
reinsurance companies and compensation for billing and related services in the
form of interest income on funds held in a fiduciary capacity for others, such
as premiums and claims proceeds. Results in 2004 also include MSA revenue
earned prior to October 1, 2004. MMC eliminated MSAs effective October 1, 2004.
Compensation for the various risk consulting and related risk mitigation
services provided by Kroll subsidiaries consists of fees paid by clients,
typically charged on an hourly, project, or fixed fee basis, and sometimes on a
per service or per unit basis. Revenue also includes compensation for services
provided by MMC Capital in connection with the organization, structuring and
management of insurance, financial services, and other industry-focused
investments, including fees and dividends, as well as appreciation or
depreciation that has been recognized on holdings in such entities.
Revenue generated by the risk and insurance services segment depends on the
value to clients of the services provided. These revenues are affected by
premium rate levels in the property and casualty and employee benefits insurance
markets, since compensation is frequently related to the premiums paid by
insureds. In many cases, compensation may be negotiated in advance on the basis
of the estimated value of the services to be performed. Revenue is also affected
by fluctuations in the amount of risk retained by insurance and reinsurance
clients themselves and by insured values, the development of new products,
markets and services, new and lost business, merging of clients and the volume
of business from new and existing clients, as well as by the level of interest
realized on the investment of fiduciary funds and foreign exchange rate
fluctuations.
As previously discussed, MMC is making several changes to its risk and insurance
business model. These changes include complete transparency to clients of all
fees and remuneration to be received by Marsh and effective October 1, agreed to
eliminate contingent compensation agreements with insurers. Although MMC expects
to be fairly and fully compensated for the services it provides, there is no
assurance that revenues under the new model will be sufficient to achieve
operating margins and cash flows that are comparable to historical levels. In
addition, client revenue may also be reduced due to negative reaction to the
issues raised in the complaint.
-34-
The results of operations for the risk and insurance services segment are
presented below:
(In millions of dollars) 2004 2003 2002
- ------------------------ ------ ------ ------
REVENUE $7,391 $6,868 $5,910
EXPENSE 7,139 5,117 4,420
------ ------ ------
OPERATING INCOME $ 252 $1,751 $1,490
------ ------ ------
OPERATING INCOME MARGIN 3.4% 25.5% 25.2%
------ ------ ------
REVENUE
Revenue for the risk and insurance services segment grew 8% in 2004 over 2003.
Acquisitions, principally Kroll, along with other smaller acquisitions,
contributed 7% to revenue growth. Underlying revenue declined 2%. In risk
management and insurance broking, underlying revenue decreased 6% primarily due
to a reduction in MSAs, discussed in more detail below. Client revenue increased
1%, reflecting a 3% growth in Europe and 4% growth in other international
markets, partially offset by a 2% decline in North America. Underlying revenue
in reinsurance broking increased 3%. Related insurance services revenue
increased 12%, on an underlying basis, resulting from an increase in claims
management and higher investment income at MMC Capital.
Effective October 1, 2004, Marsh agreed to eliminate contingent compensation
agreements with insurers. As a result, market services revenue declined to $541
million in 2004 from $845 million in the prior year. Due to the filing of the
NYAG Lawsuit, MMC was unable to complete the normal process to verify amounts
earned or determine that collection of these amounts is reasonably assured for
certain contracts. As a result, MMC did not accrue a significant portion of
market services revenue related to placement activity in the third quarter.
Although some insurance companies have indicated they may delay payments until
the issues concerning market services agreements are clarified, MMC intends to
collect market services revenue earned prior to October 1, 2004. Any such
revenue earned but not accrued at September 30, 2004 will be recognized when
collected or when confirmation of the amount of payment is received from the
carriers. No market services revenue will be earned for placements made after
October 1, 2004. The following table provides quarterly MSA revenue for 2003 and
2004:
Quarter Ended 2004 2003
- ------------- ---- ----
March 31 $211 $173
June 30 211 202
September 30 46 177
December 31 73 293
---- ----
Total $541 $845
==== ====
Revenue for the risk and insurance services segment grew 16% in 2003 over 2002,
13% on an underlying basis, reflecting an increase in renewal business, higher
market services revenues, and the effect of higher premiums. Fiduciary interest
income in 2003 declined 3% compared to 2002. Demand for Marsh's services was
strong as the risks faced by clients grew in number, complexity and severity.
Although premium rates increased during 2003 in most casualty lines, the rate of
premium increases moderated during the year and some property coverage rates
declined. In 2003, the underlying revenue in risk management and insurance
broking, which is approximately 75% of this segment's revenues, grew 13%. Within
risk management and insurance broking, underlying revenue grew 15% in the United
States, 10% in Europe, and 15% in other geographies. Reinsurance broking and
services grew 21% on an underlying basis due
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to increased new business and renewals. Related insurance services grew 5% as
increases in the underwriting management and claims management businesses were
partially offset by a decrease in affinity business and lower investment income
at MMC Capital.
EXPENSE
In 2004, risk and insurance services expenses increased 40% over 2003.
Approximately 16% of the increase is due to an $850 million charge for the
settlement agreement with the NYAG and the NYSID and legal and other costs of
$31 million related to this matter. Expenses in 2004 include restructuring
charges of $231 million, including severance and other termination benefits,
future rent under non-cancellable leases and lease termination costs and
incremental amortization of $7 million related to accelerated amortization or
abandonment of leasehold improvements. Annual cost savings of $271 million are
expected when the restructuring is fully implemented. Expenses in 2004 also
include $8 million for employee retention programs, which will increase 2005
compensation expenses by $75 million. In connection with accounting guidance
issued by the Institute of Chartered Accountants in the U.K., MMC reassessed its
obligation to provide future claims handling and certain administrative services
for brokerage clients in the European marketplace. MMC has determined that under
certain circumstances it is obligated to provide such services based on its
current business practices. In the fourth quarter, MMC recorded a pre-tax charge
of approximately $65 million to reflect the change in estimated cost to provide
these services. This charge does not result in any incremental cash outflow for
the Company. The effects of acquisitions and foreign exchange increased expenses
by 14%. On an underlying basis, excluding the items previously discussed,
expenses increased 4%. Compensation and benefits increased by 5%, primarily due
to increased pension and benefits costs, and other operating expenses increased
1%.
Marsh Inc. continues to restructure its operations, improve efficiencies, and
eliminate unprofitable accounts. This could affect approximately 2,500 people
throughout its global operations and, when fully implemented, should lead to
annual expense savings exceeding $375 million. This will result in additional
restructuring charges.
In 2003, risk and insurance services expenses increased 16% over 2002, 11% on an
underlying basis. Expense growth results primarily from higher compensation and
benefit costs reflecting increased headcount and higher incentive compensation
expenses, along with an increase in costs for facilities and insurance.
ACQUISITION
In July 2004, MMC acquired Kroll, Inc., the world's leading provider of risk
mitigation services. The combination of Marsh and Kroll expands MMC's
capabilities to assist clients in managing the total cost of risk. The total
cost of the acquisition was $1.9 billion. In addition, during the year MMC made
several smaller acquisitions in the risk and insurance services segment, at an
aggregate cost of $250 million.
INVESTMENT MANAGEMENT
The operations within the investment management segment consist of services
primarily under the Putnam name. The services, which are performed principally
in the United States, include securities investment advisory and management
services consisting of investment research and management, and accounting and
related services for a group of publicly held investment companies (the "Putnam
Funds"). A number of the open-end funds serve as funding vehicles for variable
insurance contracts. Investment management services are also provided on a
separately managed or commingled basis to individuals, corporate profit-sharing
and pension
-36-
funds, state and other governmental and public employee retirement funds,
university endowment funds, charitable foundations, collective investment
vehicles (both U.S. and non-U.S.), and other domestic and foreign institutional
accounts. Putnam serves as transfer agent, dividend disbursing agent, registrar
and custodian for the Putnam Funds and provides custody services to several
external clients. In addition, Putnam provided administrative and trustee (or
custodial) services consisting of participant accounting and plan administration
services for certain qualified contribution employee benefit plans (in
particular 401(k) plans, certain defined benefit plans (cash-balance plans),
employee stock purchase plans and certain non-qualified compensation plans), for
which it receives compensation pursuant to service and trust or custodian
contracts with plan sponsors. Putnam also acts as principal underwriter of the
shares of the open-end Putnam Funds, selling primarily through independent
broker/dealers, financial planners and financial institutions, including banks,
and directly to certain large 401(k) plans and other institutional accounts.
Shares of open-end funds are generally sold at their respective net asset value
per share plus a sales charge, which varies depending on the individual fund and
the amount and class of shares purchased. Essentially all Putnam Funds are
available with a contingent deferred sales charge in lieu of a front-end load.
The related prepaid dealer commissions initially paid by Putnam to
broker/dealers for distributing such funds can be recovered through charges and
fees received over a number of years.
Putnam's revenue is derived primarily from investment management and 12b-1 fees
received from the Putnam Funds and investment management fees for institutional
accounts. The investment management services provided by Putnam are performed
pursuant to advisory contracts. The amount of the fees varies depending on the
individual mutual fund or account and is usually based upon a sliding scale in
relation to the level of assets under management and, in certain instances, is
also based on investment performance. The management of Putnam and the trustees
of the Putnam Funds regularly review the fund fee structure in light of fund
performance, the level and range of services provided, industry conditions, and
other relevant factors. Contracts with the Putnam Funds continue in effect only
so long as approved, at least annually, by their shareholders or by the Putnam
Funds' Trustees, including a majority who are not affiliated with Putnam. A
reduction in management fees payable under these contracts and/or the
termination of one or more of these contracts, or other advisory contracts,
could have a material adverse effect on Putnam's results of operations. Putnam
also receives compensation for providing certain shareholder and custody
services.
Putnam has a minority interest in Thomas H. Lee Partners ("THL"), a private
equity investment firm, from which Putnam receives transactions fees. In
addition, Putnam and THL formed a joint venture entity, TH Lee, Putnam Capital
("THLPC") in which Putnam owns a 25% interest. THL and THLPC offer private
equity and alternative investment funds for institutional and high net worth
investors. Putnam is also an investor in certain of those funds.
The results of operations for the investment management segment are presented
below:
(In millions of dollars) 2004 2003 2002
- ------------------------ ------ ------ ------
REVENUE $1,757 $2,001 $2,166
EXPENSE 1,667 1,504 1,606
------ ------ ------
OPERATING INCOME $ 90 $ 497 $ 560
------ ------ ------
OPERATING INCOME MARGIN 5.1% 24.8% 25.9%
------ ------ ------
-37-
REVENUE
Putnam's revenue decreased 12% in 2004 reflecting a decrease in fees due to a
decline in average assets under management partially offset by higher investment
gains, higher equity income resulting from THL transaction fees related to
private equity investments and increased transfer agent fees. Assets under
management averaged $217 billion for the year ended December 31, 2004, a 16%
decline from the $258 billion managed in 2003. Assets under management
aggregated $213 billion at December 31, 2004 compared with $240 billion at
December 31, 2003. The change from December 31, 2003 primarily results from net
redemptions of $51 billion, partly offset by increases due to market
appreciation of $16 billion and the consolidation of PanAgora ($8 billion).
Putnam receives service fees from the Putnam Funds for transfer agency, custody
and other administrative services, as contracted by the Trustees of the Putnam
Funds. In the third quarter of 2004, the contract for transfer agency services
was converted from an expense reimbursement basis to a fixed fee for the
remainder of 2004. The change in the service fee calculation resulted in an
increase in both service fee revenue and expenses of approximately $41 million
during the second half of 2004. The change in the service fee contract is
expected to have an immaterial impact on operating income in future quarters,
but will reduce operating margins by approximately 100 basis points from
previous levels.
At the end of 2004, assets held in equity securities represented 69% of assets
under management, compared with 72% in 2003 and 73% in 2002, while investments
in fixed income products represented 31%, compared with 28% in 2003 and 27% in
2002.
Putnam's revenue decreased 8% in 2003, which is due to the effect of decreased
assets under management and a decline in underwriting and distribution fees
partially offset by higher investment income driven by investment gains from
trading securities in 2003 and a favorable comparison to 2002, which included a
charge for the decline in value of an available for sale security. Assets under
management averaged $258 billion in the year ended December 31, 2003, an 8%
decrease from the $279 billion managed during the year ended December 31, 2002.
Assets under management aggregated $240 billion at December 31, 2003 compared
with $251 billion at December 31, 2002. The change from December 31, 2002 was
primarily due to net redemptions of $61 billion partially offset by an increase
in equity market levels.
Year-end and average assets under management are presented below:
(In billions of dollars) 2004 2003 2002
- ------------------------ ---- ---- ----
MUTUAL FUNDS:
Growth Equity $ 38 $ 46 $ 45
Value Equity 41 43 40
Blend Equity 28 32 33
Fixed Income 36 42 46
---- ---- ----
143 163 164
---- ---- ----
INSTITUTIONAL:
Equity 40 51 66
Fixed Income 30 26 21
---- ---- ----
70 77 87
---- ---- ----
Year-end Assets $213 $240 $251
---- ---- ----
ASSETS FROM NON-US INVESTORS $ 38 $ 39 $ 33
---- ---- ----
AVERAGE ASSETS $217 $258 $279
---- ---- ----
-38-
Components of year-to-date change in ending assets under management:
NEW SALES/(REDEMPTIONS) INCLUDING DIVIDENDS REINVESTED $(51) $(61) $(10)
IMPACT OF PANAGORA ACQUISITION $ 8 $ -- $ --
IMPACT OF MARKET/PERFORMANCE $ 16 $ 50 $(53)
The categories of mutual fund assets reflect style designations aligned with
each fund's prospectus.
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international stock and bond market prices, the
composition of assets under management and by the level of investments and
withdrawals for current and new fund shareholders and clients. Items affecting
revenue also include, but are not limited to, actual and relative investment
performance, service to clients, the development and marketing of new investment
products, the relative attractiveness of the investment style under prevailing
market conditions, changes in the investment patterns of clients and the ability
to maintain investment management and administrative fees at historic levels.
Future revenue may be adversely affected by continued net redemptions, shifts in
asset style and share mix, and by limits on fund expense ratios and front end
sales charges. Revenue levels are sensitive to all of the factors above, but in
particular, to significant changes in stock and bond market valuations and net
flows into or out of Putnam's funds.
EXPENSE
Expenses in 2004 increased 11% from 2003. Expenses in 2004 include $224 million
for Putnam's regulatory settlements with the SEC and the Commonwealth of
Massachusetts. Restructuring costs incurred by Putnam in the fourth quarter
totaled $15 million. Other significant items recorded in 2004 were severance of
$57 million incurred prior to the fourth quarter restructuring, as well as
incremental costs related to regulatory issues and repositioning Putnam,
including legal and audit costs of $45 million and communications costs of $16
million. In 2004, Putnam discontinued the practice of directing brokerage
commissions and virtually eliminated the use of soft dollars, causing expenses
to increase by approximately $40 million. These increases were partially offset
by a decrease in amortization expense for prepaid dealer commissions and a $25
million credit to compensation expense associated with the settlement with
Putnam's former chief executive officer. Investment management expenses in 2004
also reflect costs of $16 million, including $10 million of restructuring costs,
related to a start-up hedge fund management business at MMC that was
subsequently discontinued.
In 2003, Putnam's expenses declined 6% compared to 2002 primarily due to lower
amortization expense for prepaid dealer commissions and lower impairment charges
related to intangible assets. These reductions were partially offset by net
costs of approximately $24 million related to the investigation of market timing
in certain Putnam funds, including compliance, legal, and communication expenses
as well as estimated potential restitution to the Putnam funds.
ACQUISITION
In July 2004, Putnam acquired an additional 30% of the voting stock of PanAgora
Asset Management, Inc., bringing its total interest to an 80% voting majority.
PanAgora primarily offers index, enhanced index and structured products, which
typically have a lower level of management fees than Putnam's core products.
This transaction increased Putnam's reported assets under management by
approximately $8 billion.
-39-
CONSULTING
Through Mercer, the operations within this segment provide consulting and human
resource ("HR") outsourcing services from locations around the world, primarily
to business organizations, in the areas of:
o Retirement Services including retirement consulting, administration, and
investment consulting and discretionary investment management;
o Health Care & Group Benefits consulting and administration;
o Human Capital consulting including performance, measurement and rewards,
communication and HR technology & operations consulting;
o Management and Organizational Change consulting comprising strategy,
operations, organizational change, leadership and organizational design;
and
o Economic consulting.
The major component of Mercer revenue is fees paid by clients for advice and
services. In addition, commission revenue is received from insurance companies
for the placement of individual and group insurance contracts, primarily life,
health and accident coverages. The investment consulting practice receives
compensation based on fees for service and sometimes is compensated based on
assets under management. Revenue for the discretionary investment management
business is based principally on fees calculated as a percentage of assets under
management. A relatively small amount of revenue is derived from brokerage
commissions in connection with a registered securities broker/dealer.
Revenue in the consulting business is affected by, among other things, economic
conditions around the world, including changes in clients' industries and
markets. Furthermore, revenue is subject to the introduction of new products and
services, broad trends in employee demographics, the effect of government
policies and regulations, market valuations, and interest and foreign exchange
rate fluctuations. Revenues from the provision of discretionary investment
management services and retirement trust and administrative services are
significantly affected by changes in bond and stock market valuations.
The results of operations for the consulting segment are presented below:
(In millions of dollars) 2004 2003 2002
- ------------------------ ------ ------ ------
REVENUE $3,070 $2,719 $2,364
EXPENSE 2,740 2,356 2,038
------ ------ ------
OPERATING INCOME $ 330 $ 363 $ 326
------ ------ ------
OPERATING INCOME MARGIN 10.7% 13.4% 13.8%
------ ------ ------
REVENUE
Consulting revenue in 2004 increased 13% over 2003. Acquisitions, which
accounted for 4% of the revenue growth in 2004, include Synhrgy HR Technologies
which closed in January, 2004, and Oliver, Wyman & Company ("OWC") which closed
on April 1, 2003. On an underlying basis, revenue increased 3% due to the higher
demand for consulting services resulting from improving economic conditions.
Underlying revenue grew 9% in economic consulting, 13% in management and
organizational change, 1% in health care & group benefits and 1% in the human
capital practices. Underlying revenue growth in retirement services was flat.
Consulting revenue in 2003 increased 15% over 2002 primarily due to the impact
of foreign
-40-
exchange and acquisitions. Acquisitions included OWC as well as several smaller
acquisitions in Mercer's retirement and benefits consulting businesses. On an
underlying basis, Mercer's revenue increased 3%, with all practices reporting
underlying revenue growth. Economic Consulting underlying revenue increased by
12%. In Mercer's largest practice, Retirement Services, underlying revenue
increased modestly, while other practices had growth between 2% and 4% in a
difficult operating environment.
EXPENSE
Consulting expenses increased 16% in 2004 compared to 2003. Expenses in 2004
include restructuring charges of $62 million, including severance and other
termination benefits and future rent under non-cancellable leases and lease
termination costs as well as incremental expense of $7 million related to
accelerated amortization or abandonment of leasehold improvements and other
assets. The restructuring activities are expected to result in annual cost
savings of $57 million when fully implemented. Expenses in 2004 also include $4
million for employee retention programs, which will increase 2005 compensation
expense by $36 million. In addition, the impact of acquisitions and foreign
exchange increased expense by 11%. On an underlying basis, excluding the items
discussed above, expenses increased 2%, primarily due to higher employee
compensation and benefit costs.
Consulting services expenses increased 16% in 2003 compared to 2002 primarily
due to the impact of foreign exchange, costs related to increased headcount
resulting from acquisitions, and increased amortization expense for acquired
intangible assets. As described in Note 4 to the Consolidated Financial
Statements, a portion of the OWC purchase consideration is contingent upon
future employment. This amount has been accounted for as prepaid compensation
and is being recognized as compensation expense over four years. Consulting
services expenses increased 3% on an underlying basis, due to higher facilities
and insurance costs.
ACQUISITIONS
In January 2004, MMC acquired Synhrgy HR Technologies, a leading provider of
human resource technology and outsourcing services for a total cost of $115
million.
CORPORATE ITEMS
CORPORATE EXPENSES
Corporate expenses in 2004 include costs of $18 million related to restructuring
MMC's businesses, including severance and other termination benefits, future
rent under non-cancellable leases and lease termination costs. The impact of the
final settlement for insured losses related to the WTC reduced Corporate
expenses in 2004. The replacement value of the assets exceeded their book value
by $105 million which was recorded as a reduction of other operating expenses.
Corporate expenses increased to $140 million in 2003 from $123 million in 2002
due to increased compensation costs, an increase in headcount, and increased
costs for facilities and insurance.
-41-
INTEGRATION AND RESTRUCTURING CHARGES
Note 12 to the Consolidated Financial Statements discusses integration and
restructuring costs. In November 2004, MMC announced that it would undertake
restructuring initiatives involving staff reductions and consolidations of
facilities in response to MMC's current situation and the realities of the
marketplace. On a global basis, MMC has reduced staff by approximately 2,750.
These actions are expected to result in savings of approximately $400 million
when fully implemented in mid-2005. As a result of these actions, MMC incurred
pre-tax costs of $337 million, primarily related to severance and other
termination benefits, future rent under non-cancellable leases and lease
termination costs, and also incurred costs of $14 million related to accelerated
amortization or abandonment of leasehold improvements and other assets.
Additional costs of $14 million are expected to be incurred in the first half of
2005 related to the 2004 restructuring activity. Employee retention programs
will increase compensation costs in 2005 by approximately $110 million.
Marsh Inc. continues to restructure its operations, improve efficiencies, and
eliminate unprofitable accounts. This could affect approximately 2,500 people
throughout its global operations and, when fully implemented, should lead to
annual expense savings exceeding $375 million. This will result in additional
restructuring charges.
MMC previously incurred integration and restructuring costs related to the
acquisition of Johnson & Higgins ("J&H") in 1997, Sedgwick in 1998 and a
restructuring plan in 2001. During 2004, MMC recorded the following payments, as
well as adjustments related to changes in the estimated costs of integration and
restructuring plans. A payment of $3 million for costs related to the Sedgwick
Plan and $4 million of the reserves were reversed by MMC and recorded as a
reduction of goodwill; a payment of $2 million and a credit of $1 million for a
reduction in the estimated cost of the 1999 MMC plan related to the Sedgwick
acquisition; a payment of $3 million and a charge of $1 million for increased
costs related to the 2001 restructuring plan; and $1 million of the reserves
were reversed by MMC and recorded as a reduction of goodwill and a charge of $4
million to reflect the current estimate for required lease payments related to
the J&H acquisition. The net impact of the charges and credits to integration
and restructuring reserves decreased diluted net income per share by
approximately one-half of one cent for the year ended December 31, 2004.
INTEREST
Interest income earned on corporate funds was $21 million in 2004 compared with
$24 million in 2003. Interest expense increased from $185 million in 2003 to
$219 million in 2004. The increase in interest expense is due primarily to an
increase in the amount of average outstanding debt.
Interest income earned on corporate funds was $24 million in 2003 compared with
$19 million in 2002. Interest expense increased to $185 million in 2003 from
$160 million in 2002. The increase in interest income was primarily due to a
higher level of invested balances during 2003, partially offset by a decline in
the average interest rate earned. The increase in interest expense is primarily
due to an increase in the average interest rates on outstanding debt. The
increase in the average interest rate resulted from the conversion of a
significant portion of the company's debt from floating to fixed rates.
INCOME TAXES
MMC's consolidated effective tax rate was 57.6% in 2004, an increase from 33%
in 2003. The
-42-
increase in the rate was primarily due to the non-deductibility of Putnam's $224
million in regulatory settlements; a lower tax benefit related to Marsh's $850
million settlement of the NYAG Lawsuit due to partial attribution to foreign
operations; and a partially offsetting benefit for foreign earnings taxed at
lower rates. In 2002 the effective tax rate was 35%. The decrease in the
effective rate in 2003 compared with 2002 results from the change in the
geographic mix of MMC's businesses and tax planning with respect to
international operations.
In December 2004, the FASB issued Staff Position ("FSP") No. 109-2, "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004". The American Jobs Creation Act of 2004
(the "Act"), signed into law on October 22, 2004, provides for a special
one-time tax deduction, or dividend received deduction ("DRD"), of 85% of
qualifying foreign earnings that are repatriated in either a company's last tax
year that began before the enactment date or the first tax year that begins
during the one-year period beginning on the enactment date. FSP 109-2 provides
entities additional time to assess the effect of repatriating foreign earnings
under the Act for purposes of applying SFAS No. 109, "Accounting for Income
Taxes", which typically requires the effect of a new tax law to be recorded in
the period of enactment. MMC will elect, if applicable, to apply the DRD to
qualifying dividends of foreign earnings repatriated in its calendar year 2005.
MMC is awaiting further clarifying guidance from the U.S. Treasury Department on
certain provisions of the Act. Once this guidance is received, MMC expects to
complete its evaluation of the effects of the Act during 2005. Under the
limitations on the amount of dividends qualifying for the DRD of the Act, the
maximum repatriation of MMC's foreign earnings that may qualify for the special
one-time DRD is approximately $1.2 billion. Therefore, the range of possible
amounts of qualifying dividends of foreign earnings is between zero and
approximately $1.2 billion. Although the evaluation is ongoing, MMC estimates
the range of income tax effects of potential repatriations to be zero to $63
million.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOWS
MMC generated $2.1 billion of cash from operations in 2004 compared with $1.9
billion in 2003. These amounts reflect the net income earned by MMC during those
periods adjusted for non-cash charges and changes in working capital which
relate primarily to the timing of payments for accrued liabilities or receipts
of assets. Although net income declined significantly from the prior year, a
number of charges recorded in 2004 have not yet been paid by MMC which
substantially offset the cash flow impact of the decline in operating income.
These include $989 million of settlement costs in Marsh and Putnam, and $278
million of restructuring costs which are recorded in the Consolidated Balance
Sheet as Accrued liabilities, Accounts payable, Other liabilities, or Accrued
salaries, depending on the nature of the item. Cash flows from operations were
reduced by a higher amount of investment gains, which are included in investing
cash flows. An increase in 2004 of cash outflows related to payment of deferred
compensation plans was largely offset by cash generated from the liquidation of
assets related to these plans included in the change in other assets in the
Consolidated Statements of Cash Flows.
Effective October 1, 2004, Marsh agreed to eliminate contingent compensation
agreements with insurers. At December 31, 2004 accounts receivable related to
accrued market services revenue was $282 million. Subsequent to the filing of
the NYAG Lawsuit, some insurance companies indicated they may delay payments
until the issues concerning market services
-43-
agreements are clarified. Collection of previously accrued MSA revenue may occur
more slowly than expected. Following the announcement of the settlement with the
NYAG and the NYSID, MMC reaffirmed its intention to collect outstanding MSA
revenue earned prior to October, 2004 and will seek to enforce its rights under
the contracts to collect amounts due.
For the years ended December 31, 2004 and 2003, MSA revenue was $541 million and
$845 million, respectively. As discussed earlier, Marsh is revising its business
model so that revenue for all services provided is disclosed to clients.
The elimination of MSA revenue will negatively impact near-term revenue and
operating income. Marsh is refining the details of its new business model and
does not anticipate realizing the benefits from its implementation until later
in 2005. Although MMC expects to be fairly and fully compensated for the
services it provides, there is no assurance that revenues under the new model
will be sufficient to achieve operating margins and cash flows that are
comparable to historical levels. In addition, client revenue may also be
reduced due to negative reaction to the issues raised in the complaint.
As previously discussed, MMC reached a settlement with the NYAG and NYSID that
resolved the actions by them that were commenced against MMC and Marsh. As a
result of this agreement, MMC will establish an $850 million fund to compensate
clients, of which $255 million will be paid to the fund on or before each of
June 1, 2005 and 2006, respectively, and $170 million will be paid to the fund
on or before each of June 1, 2007 and 2008, respectively. These amounts are
included in Regulatory Settlements on the Consolidated Balance Sheets.
MMC has funding requirements for the U.S. non-qualified and U.K. plans in 2005
of approximately $18 million and $184 million, respectively. MMC's policy for
funding its tax qualified defined benefit retirement plans is to contribute
amounts at least sufficient to meet the funding requirements set forth in U.S.
and international law. There currently is no ERISA funding requirement for the
U.S. qualified plan in 2004 or in 2005. Funding requirements for non-U.S. plans
vary country by country.
During 2004, MMC contributed approximately $47 million to the U.S. pension plans
and $239 million to the significant non-U.S. pension plans, compared with $21
million for U.S. plans and $366 million for significant non-U.S. plans in 2003.
These contributions resulted in an increase in prepaid pension expense for
certain plans. The minimum pension liability related to any plan is recorded in
Other liabilities in the Consolidated Balance Sheets.
During 2004, the net funded status of the U.S. and significant non-U.S. pension
plans decreased by $253 million and $389 million, respectively, due primarily to
higher actuarial losses. Benefit obligations of the U.S. and significant
non-U.S. pension plans exceeded the fair value of plan assets by $397 million
and $1.1 billion, respectively, at December 31, 2004. The funded status at
December 31, 2004 includes the effects of contributions made during the year.
Contribution rates are determined by the local foreign actuaries based on local
funding practices and requirements. Funding amounts may be influenced by future
asset performance, discount rates and other variables impacting the assets
and/or liabilities of the plan. In addition, amounts funded in the future, to
the extent not required under regulatory requirements, may be affected by
alternative uses of MMC's cash flows, including dividends, investments, and
share repurchases.
Under generally accepted accounting principles, if the Accumulated Benefit
Obligation of a plan exceeds the fair value of that plan's assets (an "ABO
deficit"), an additional minimum liability is recorded. The additional minimum
liability is equal to the ABO deficit plus the amount of
-44-
prepaid pension cost recognized for that plan. The additional minimum liability
is established through a charge to other comprehensive income (equity), net of
applicable taxes. At December 31, 2004, MMC has prepaid pension costs of
approximately $1.4 billion which relate primarily to the U.S. qualified plan and
two U.K. plans, as well as some smaller plans in various countries.
FINANCING CASH FLOWS
Net cash provided by financing activities was $1.2 billion in 2004 compared
with a $1.3 billion use of cash in 2003. The cash generated in 2004 relates
primarily to the issuance of long term debt to fund the acquisition of Kroll,
Inc. in July 2004 and the $1.3 billion term loan discussed below. Approximately
$1.2 billion of net debt was added in 2004, compared with a slight reduction in
net debt in 2003.
The matters raised in the NYAG Lawsuit on October 14, 2004 (described in Note 15
of the Consolidated Financial Statements) may have prohibited MMC from borrowing
under its revolving facilities. The required lenders under each of the
facilities agreed to waive the effect of such matters until December 30, 2004.
During the period from October 14 to December 15, 2004, the revolving credit
facilities were drawn upon to refinance approximately $1.7 billion of maturing
commercial paper. On December 15, 2004, MMC completed financing with respect to
a $1.3 billion, two-year term loan facility and the amendment of its existing $1
billion revolving credit facility which expires in June 2007 and $700 million
revolving credit facility which expires in June 2009. The term loan facility
replaced MMC's existing one-year facilities and the proceeds from this loan were
used to pay down the outstanding balances on revolving credit facilities. At
December 31, 2004, $373 million was outstanding on the revolving credit
facilities.
Subsequent to the filing of the NYAG Lawsuit on October 14, 2004, both Moody's
and Standard & Poor's have lowered their credit ratings on MMC. MMC's senior
debt is currently rated Baa2 by Moody's and BBB by Standard & Poor's. These
ratings remain on review for possible further downgrade. MMC's short-term
ratings are currently P-2 by Moody's and A-2 by Standard & Poor's. These ratings
also remain on review for possible further downgrade. These rating actions will
result in increased borrowing costs for MMC.
In 2004, MMC repurchased 11.4 million shares for $524 million, substantially all
of which was purchased in the first and second quarter.
Dividends paid by MMC amounted to $681 million in 2004 ($1.30 per share) and
$631 million ($1.18 per share) in 2003. At its November 18 meeting, MMC's Board
deferred its decision with respect to the company's dividend for the first
quarter of 2005, pending completion of its review of Marsh's business model and
ongoing regulatory matters. On February 26, 2005 MMC declared a dividend of
$0.17 per share.
In June 2004, MMC refinanced $600 million of maturing long term debt by issuing
commercial paper.
In July 2004, MMC purchased Kroll, Inc. in an all-cash transaction totaling
approximately $1.9 billion. The purchase was initially funded with commercial
paper borrowings. Following the acquisition, MMC issued $650 million of 5.375%
Senior Notes due 2014 and $500 million of Floating Rate Notes due 2007. The
proceeds from these notes were used to repay the commercial paper borrowings.
-45-
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033. In
February 2003, MMC issued $250 million of 3.625% Senior Notes due in 2008 and
$250 million of 4.85% Senior Notes due in 2013 (the "2003 Notes"). The net
proceeds from the 2003 Notes were used to pay down commercial paper borrowings.
MMC also maintains other credit facilities, guarantees and letters of credit
with various banks, primarily related to operations located outside the United
States, aggregating $331 million at December 31, 2004 and $209 million at
December 31, 2003. There was $61 million outstanding under these facilities at
December 31, 2004.
MMC's credit agreements contain covenants which include, in some cases,
restrictions on consolidations or mergers, the sale or pledging of assets, and
leverage and coverage ratio requirements. Details on the specific leverage and
coverage ratio requirements can be found in the Credit Agreement and Amendment
documents filed on Form 8-K with the SEC on December 15, 2004. Two outstanding
loans amounting to $125 million include covenants stating minimum net worth
requirements, the most restrictive of which requires at least $3.5 billion of
net worth.
In January 2003, MMC terminated and settled interest rate swaps that had hedged
the fair value of Senior Notes issued in 2002. The cumulative amount of
previously recognized adjustments of the fair value of the hedged notes is being
amortized over the remaining life of those notes. As a result, the effective
interest rate over the remaining life of the notes, including the amortization
of the fair value adjustments, is 4.0% for the $500 million Senior Notes due in
2007 (5.375% coupon rate) and 5.1% for the $250 million Senior Notes due in 2012
(6.25% coupon rate).
INVESTING CASH FLOWS
Cash used for investing activities amounted to $2.6 billion in 2004 and $470
million in 2003. The primary use of cash in 2004 was for the acquisition of
Kroll, Inc., Synhrgy HR Technologies and the Australia and New Zealand
operations of Heath Lambert, and payments of approximately $61 million for
acquisitions completed in prior years. Remaining cash payments of approximately
$65 million related to acquisitions completed in 2004 and prior years are
recorded in Accounts payable and accrued liabilities or in Other liabilities in
the Consolidated Balance Sheets at December 31, 2004. Cash used for acquisitions
in 2003 amounted to $178 million, primarily related to the acquisition of OWC
and several smaller consulting businesses.
MMC's additions to fixed assets and capitalized software, which amounted to $376
million in 2004 and $436 million in 2003, primarily relate to computer equipment
purchases, the refurbishing and modernizing of office facilities and software
development costs.
The sale of Putnam's interest in its Italian joint venture and related
securities along with sales of securities by MMC Capital, generated $199 million
of cash in 2004. Securities sales during 2003 generated $106 million. These
sales are included in Other, net in the Consolidated Statements of Cash Flows.
MMC has committed to potential future investments of approximately $471 million
in connection with various MMC Capital private equity funds and other MMC
investments. Commitments of $276 million relate to Trident III, a private equity
fund managed by MMC Capital, which was formed in 2003. The funding commitment
to Trident III will decrease by $100 million when the spinoff of MMC Capital's
business occurs. The remaining commitments relate to other funds
-46-
managed by MMC Capital (approximately $90 million) and by Putnam through THL and
THLPC (approximately $105 million). Trident III closed in December 2003, and has
an investment period of six years. While it is unknown when the actual capital
calls will occur, typically, the investment period for funds of this type has
been closer to four years, which would indicate an expected capital call of
approximately $50-$75 million per year but actual capital calls may occur more
quickly. The timing of capital calls is not controlled by MMC. The majority of
the other investment commitments for funds managed by MMC Capital related to
Trident II. The investment period for Trident II is closed for new investments.
Any remaining capital calls would relate to follow on investments in existing
portfolio companies or for management fees or other partnership expenses.
Significant capital calls related to Trident II are not expected at this time.
Although it is anticipated that Trident II will be harvesting its portfolio in
2005 and thereafter, the timing of any portfolio company sales and capital
distributions is unknown and not controlled by MMC.
Putnam has investment commitments of $105 million for three active THL funds, of
which approximately $50 million is not expected to be called and funded. Putnam
is authorized to commit to invest up to $187 million in future THL investment
funds, but is not required to do so. At December 31, 2004 none of the $187
million is committed.
Approximately $49 million was invested in 2004 related to all of the commitments
discussed above.
COMMITMENTS AND OBLIGATIONS
MMC's contractual obligations were comprised of the following as of December 31,
2004 (dollars in millions):
Payment due by Period
---------------------------------------------------------------
Contractual Obligations Total Within 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------- ------- ------------- --------- --------- -------------
Revolving Lines of Credit $ 434 $ 434 $ -- $ -- $ --
Current portion of long-term debt 70 70 -- -- --
Commercial Paper 129 129 -- -- --
Long Term Debt 4,673 -- 2,366 854 1,453
NYAG/NYSID Settlement 850 255 425 170 --
Net Operating leases 4,077 505 859 652 2,061
Service Agreements 217 76 79 29 33
Other long-term obligations 68 24 44 -- --
------- ------ ------ ------ ------
Total $10,518 $1,493 $3,773 $1,705 $3,547
======= ====== ====== ====== ======
MARKET RISK
Certain of MMC's revenues, expenses, assets and liabilities are exposed to the
impact of interest rate changes and fluctuations in foreign currency exchange
rates and equity markets.
INTEREST RATE RISK
MMC manages its net exposure to interest rate changes by utilizing a mixture of
variable and fixed rate borrowings to finance MMC's asset base. Interest rate
swaps are used on a limited basis to manage MMC's exposure to interest rate
movements on its cash and investments as well as interest expense on borrowings
and are only executed with counterparties of high creditworthiness.
-47-
MMC had the following investments and debt instruments subject to variable
interest rates:
Year Ended December 31,
(In millions of dollars) 2004
- ------------------------ ------
Cash and cash equivalents invested
in certificates of deposit and time deposits (Note 1) $1,396
Fiduciary cash and investments (Note 1) $4,136
Variable rate debt outstanding (Note 10) $2,363
These investments and debt instruments are discussed more fully in the
above-indicated notes to the Consolidated Financial Statements.
Based on the above balances, if short-term interest rates increase by 10%, or 26
basis points, annual interest income would increase by approximately $14
million; however, this would be partially offset by a $6 million increase in
interest expense resulting in a net increase to income before income taxes and
minority interest of $8 million.
FOREIGN CURRENCY RISK
The translated values of revenue and expense from MMC's international risk and
insurance services and consulting operations are subject to fluctuations due to
changes in currency exchange rates.
Forward contracts and options are periodically utilized by MMC to limit foreign
currency exchange rate exposure on net income and cash flows for specific,
clearly defined transactions arising in the ordinary course of its business.
EQUITY PRICE RISK
MMC holds investments in both public and private companies as well as certain
private equity funds managed by MMC Capital, including Trident II and Trident
III. Publicly traded investments of $410 million are classified as available for
sale under SFAS No. 115. Non-publicly traded investments of $75 million and $327
million are accounted for under APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock", using the cost method and the
equity method, respectively. Changes in value of trading securities are
recognized in income when they occur. The investments that are classified as
available for sale or that are not publicly traded are subject to risk of
changes in market value, which if determined to be other than temporary, could
result in realized impairment losses. MMC periodically reviews the carrying
value of such investments to determine if any valuation adjustments are
appropriate under the applicable accounting pronouncements.
OTHER
A significant number of lawsuits and regulatory proceedings are pending, see
Note 15 to the Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and judgments that affect reported amounts of assets, liabilities,
revenue and expenses, and disclosure of contingent assets and liabilities.
Management considers the policies discussed below to be critical to
understanding MMC's financial statements because their application places the
most significant demands on management's judgment, and estimation about the
-48-
effect of matters that are inherently uncertain. Actual results may differ from
those estimates.
Legal and Other Loss Contingencies
MMC and its subsidiaries are subject to numerous claims, lawsuits and
proceedings. GAAP requires that liabilities for contingencies be recorded when
it is probable that a liability has been incurred before the balance sheet date
and the amount can be reasonably estimated. Significant management judgment is
required to comply with this guidance. MMC analyzes its litigation exposure
based on available information, including consultation with outside counsel
handling the defense of these matters, to assess its potential liability.
Retirement Benefits
MMC maintains qualified and non-qualified defined benefit pension plans for its
U.S. and non-U.S. eligible employees. MMC's policy for funding its tax qualified
defined benefit retirement plans is to contribute amounts at least sufficient to
meet the funding requirements set forth in U.S. and international laws.
The determination of net periodic pension cost is based on a number of actuarial
assumptions, including an expected long-term rate of return on plan assets, the
discount rate and assumed rate of salary increase. Significant assumptions used
in the calculation of net periodic pension costs and pension liabilities are
disclosed in Note 7 to the Consolidated Financial Statements. MMC believes the
assumptions for each plan are reasonable and appropriate and will continue to
evaluate actuarial assumptions at least annually and adjust as appropriate.
Pension expense in 2004 increased by $93 million compared with 2003. Based on
its current assumptions, MMC expects pension expense to increase by
approximately $140 million in 2005 and currently expects to contribute
approximately $256 million to the plans during the year. MMC has reviewed ways
to reduce benefits costs going forward and expects to take actions during 2005
to mitigate these increases by the beginning of 2006.
Future pension expense or credits will depend on plan provisions, future
investment performance, future assumptions, and various other factors related to
the populations participating in the pension plans. Holding all other
assumptions constant, a half-percentage point change in the rate of return and
discount rate assumptions would affect net periodic pension cost for the U.S.
and U.K. plans, which comprise approximately 90% of total pension plan
liabilities, as follows:
0.5 Percentage 0.5 Percentage
Point Increase Point Decrease
-------------- --------------
(In millions of dollars) U.S. U.K. U.S. U.K.
---- ------- ---- -----
Assumed Rate of Return $(13.0) $(20.1) $13.0 $20.1
Discount Rate $(29.0) $(47.2) $32.0 $50.6
Changing the discount rate and leaving the other assumptions constant, may not
be representative of the impact on expense because the long-term rates of
inflation and salary increases are correlated with the discount rate.
MMC contributes to certain health care and life insurance benefits provided to
its retired employees. The cost of these postretirement benefits for employees
in the United States is accrued during the period up to the date employees are
eligible to retire, but is funded by MMC as incurred. This postretirement
liability is included in Other liabilities in the Consolidated Balance Sheets.
The key assumptions and sensitivity to changes in the assumed health care
-49-
cost trend rate are discussed in Note 7 to the Consolidated Financial
Statements.
Income Taxes
MMC's tax rate reflects its income, statutory tax rates and tax planning in the
various jurisdictions in which it operates. Significant judgment is required in
determining the annual tax rate and in evaluating tax positions. Tax allowances
are established when, despite the belief that the tax return positions are fully
supportable, there is potential that they may be successfully challenged. These
allowances, as well as the related interest, are adjusted to reflect changing
facts and circumstances.
Tax law requires items be included in MMC's tax returns at different times than
the items are reflected in the financial statements. As a result, the annual tax
expense reflected in the Consolidated Statements of Income is different than
that reported in the tax returns. Some of these differences are permanent, such
as expenses that are not deductible in the returns, and some differences are
temporary and reverse over time, such as depreciation expense. Temporary
differences create deferred tax assets and liabilities. Deferred tax assets
generally represent items that can be used as a tax deduction or credit in tax
returns in future years for which benefit has already been recorded in the
financial statements. Valuation allowances are established for deferred tax
assets when it is estimated that future taxable income will be insufficient to
use a deduction or credit in that jurisdiction. Deferred tax liabilities
generally represent tax expense recognized in the financial statements for which
payment has been deferred, or expense for which a deduction has been taken
already in the tax return but the expense has not yet been recognized in the
financial statements.
Investment Valuation
MMC holds investments in both public and private companies, as well as certain
private equity funds managed by MMC Capital. The majority of these investments
are accounted for as available for sale securities under SFAS No. 115. Where
applicable, certain investments are accounted for under APB Opinion No. 18. MMC
periodically reviews the carrying value of its investments to determine if any
valuation adjustments are appropriate under the applicable accounting
pronouncements. MMC bases its review on the facts and circumstances as they
relate to each investment. Factors considered in determining the fair value of
private equity investments include: implied valuation of recently completed
financing rounds that included sophisticated outside investors; performance
multiples of comparable public companies; restrictions on the sale or disposal
of the investments; trading characteristics of the securities; and the relative
size of MMC's holdings in comparison to other private investors and the public
market float. In those instances where quoted market prices are not available,
particularly for equity holdings in private companies, or formal restrictions
limit the sale of securities, significant management judgment is required to
determine the appropriate value of MMC's investments.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed in Note 1 to the Consolidated
Financial Statements.
-50-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ------- ----------------------------------------------------------
See the information set forth under the heading "Market Risk" above under
Item 7., Management's Discussion and Analysis of Financial Condition and Results
of Operations, on pages 47 to 48 of this report.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
FINANCIAL HIGHLIGHTS
For the Years Ended December 31,
(In millions except per share figures) 2004 2003 2002
- --------------------------------------- ------- ------- -------
Revenue $12,159 $11,544 $10,388
Income Before Income Taxes and Minority Interest $ 450 $ 2,335 $ 2,133
Net Income $ 176 $ 1,540 $ 1,365
Stockholders' Equity $ 5,056 $ 5,451 $ 5,018
------- ------- -------
Diluted Net Income Per Share $ .33 $ 2.81 $ 2.45
Dividends Paid Per Share $ 1.30 $ 1.18 $ 1.09
Year-end Stock Price $ 32.90 $ 47.89 $ 46.21
-51-
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31,
(In millions except per share figures) 2004 2003 2002
- -------------------------------------------------- ------- ------- -------
Revenue:
Service revenue $11,959 $11,444 $10,321
Investment income (loss) 200 100 67
------- ------- -------
Operating revenue 12,159 11,544 10,388
------- ------- -------
Expense:
Compensation and benefits 6,714 5,926 5,199
Other operating expenses 3,828 3,112 2,915
Regulatory and other settlements 969 10 --
------- ------- -------
Operating expenses 11,511 9,048 8,114
------- ------- -------
Operating income 648 2,496 2,274
Interest income 21 24 19
Interest expense (219) (185) (160)
------- ------- -------
Income before income taxes and minority interest 450 2,335 2,133
Income taxes 259 770 747
Minority interest, net of tax 15 25 21
------- ------- -------
Net income $ 176 $ 1,540 $ 1,365
------- ------- -------
Basic net income per share $ .33 $ 2.89 $ 2.52
------- ------- -------
Diluted net income per share $ .33 $ 2.81 $ 2.45
------- ------- -------
Average number of shares outstanding-Basic 526 533 541
------- ------- -------
Average number of shares outstanding-Diluted 535 548 557
------- ------- -------
The accompanying notes are an integral part of these consolidated statements.
-52-
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
(In millions of dollars) 2004 2003
- ------------------------ ------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 1,396 $ 665
------- -------
Receivables
Commissions and fees 2,507 2,388
Advanced premiums and claims 102 89
Other 424 342
------- -------
3,033 2,819
Less - allowance for doubtful accounts and cancellations (143) (116)
------- -------
Net receivables 2,890 2,703
Other current assets 601 480
------- -------
Total current assets 4,887 3,848
Goodwill and intangible assets 8,139 5,797
Fixed assets, net 1,387 1,389
Long-term investments 558 648
Prepaid pension 1,394 1,199
Other assets 1,972 2,172
------- -------
$18,337 $15,053
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 636 $ 447
Accounts payable and accrued liabilities 1,834 1,501
Regulatory settlements - current portion 394 10
Accrued compensation and employee benefits 1,591 1,263
Accrued income taxes 280 272
Dividends payable -- 166
------- -------
Total current liabilities 4,735 3,659
------- -------
Fiduciary liabilities 4,136 4,228
Less - cash and investments held in a fiduciary capacity (4,136) (4,228)
------- -------
-- --
Long-term debt 4,691 2,910
Regulatory settlements 595 --
Pension, postretirement and postemployment benefits 1,333 997
Other liabilities 1,927 2,036
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value, authorized 6,000,000 shares,
none issued -- --
Common stock, $1 par value, authorized 1,600,000,000 shares,
issued 560,641,640 shares in 2004 and 2003 561 561
Additional paid-in capital 1,316 1,301
Retained earnings 5,044 5,386
Accumulated other comprehensive loss (370) (279)
------- -------
6,551 6,969
Less - treasury shares at cost, 33,831,782 shares in 2004
and 33,905,497 shares in 2003 (1,495) (1,518)
------- -------
Total stockholders' equity 5,056 5,451
------- -------
$18,337 $15,053
======= =======
The accompanying notes are an integral part of these consolidated statements.
-53-
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31,
(In millions of dollars) 2004 2003 2002
- -------------------------------- ------- ------- -------
Operating cash flows:
Net income $ 176 $ 1,540 $ 1,365
Adjustments to reconcile net income to cash generated
from operations:
Depreciation of fixed assets and capitalized software 392 349 324
Amortization of intangible assets 64 42 35
Provision (benefit) for deferred income taxes (71) 90 176
(Gains) losses on investments (200) (100) (67)
Changes in assets and liabilities:
Net receivables (107) (199) 215
Other current assets 60 (34) (15)
Other assets 93 (289) (318)
Accounts payable and accrued liabilities 858 23 135
Accrued compensation and employee benefits 328 125 4
Accrued income taxes (39) 85 (445)
Other liabilities 446 135 (123)
Effect of exchange rate changes 69 100 51
------- ------- -------
Net cash generated from operations 2,069 1,867 1,337
------- ------- -------
Financing cash flows:
Net decrease in commercial paper (311) (817) (484)
Proceeds from issuance of debt 4,265 800 791
Other repayments of debt (2,003) (55) (25)
Purchase of treasury shares (536) (1,195) (1,184)
Issuance of common stock 456 573 490
Dividends paid (681) (631) (593)
------- ------- -------
Net cash provided by (used for) financing activities 1,190 (1,325) (1,005)
------- ------- -------
Investing cash flows:
Additions to fixed assets and capitalized software (376) (436) (423)
Proceeds from sales related to fixed assets 23 8 18
Acquisitions (2,364) (178) (92)
Other, net 161 136 167
------- ------- -------
Net cash used for investing activities (2,556) (470) (330)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents 28 47 7
------- ------- -------
Increase in cash and cash equivalents 731 119 9
Cash and cash equivalents at beginning of year 665 546 537
------- ------- -------
Cash and cash equivalents at end of year $ 1,396 $ 665 $ 546
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
-54-
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the Years Ended December 31,
(In millions of dollars, except per share figures) 2004 2003 2002
- -------------------------------------------------- ------- ------- -------
COMMON STOCK
Balance, beginning of year $ 561 $ 561 $ 561
Issuance of shares under stock compensation plans and
employee stock purchase plans -- -- --
------- ------- -------
Balance, end of year $ 561 $ 561 $ 561
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year $ 1,301 $ 1,426 $ 1,620
Acquisitions 1 2 --
Issuance of shares under stock compensation plans and
employee stock purchase plans and related tax benefits 14 (127) (194)
------- ------- -------
Balance, end of year $ 1,316 $ 1,301 $ 1,426
------- ------- -------
RETAINED EARNINGS
Balance, beginning of year $ 5,386 $ 4,490 $ 3,723
Net income (a) 176 1,540 1,365
Dividends declared-(per share amounts:
$.99 in 2004, $1.21 in 2003 and $1.11 in 2002) (518) (644) (598)
------- ------- -------
Balance, end of year $ 5,044 $ 5,386 $ 4,490
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year $ (279) $ (452) $ (227)
Foreign currency translation adjustments (b) 234 302 131
Unrealized investment holding (losses) gains,
net of reclassification adjustments (c) (58) 76 (106)
Minimum pension liability adjustment (d) (266) (201) (257)
Net deferred (loss) gain on cash flow hedges (e) (1) (4) 7
------- ------- -------
Balance, end of year $ (370) $ (279) $ (452)
------- ------- -------
TREASURY SHARES
Balance, beginning of year $(1,518) $(1,007) $ (504)
Purchase of treasury shares (524) (1,209) (1,184)
Acquisitions 7 16 10
Issuance of shares under stock compensation plans and
employee stock purchase plans 540 682 671
------- ------- -------
Balance, end of year $(1,495) $(1,518) $(1,007)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY $ 5,056 $ 5,451 $ 5,018
------- ------- -------
TOTAL COMPREHENSIVE INCOME (a+b+c+d+e) $ 85 $ 1,713 $ 1,140
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
-55-
Marsh & McLennan Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Marsh & McLennan Companies, Inc. ("MMC"), a professional
services firm, is organized based on the different services that it offers.
Under this organizational structure, MMC operated in 2004 in three principal
business segments: risk and insurance services, investment management and
consulting. The risk and insurance services segment provides risk management and
insurance broking, reinsurance broking and insurance program management services
for businesses, public entities, insurance companies, associations, professional
services organizations, and private clients. It also provides risk consulting
and technology services to businesses, governments and individuals, and provides
services principally in connection with originating, structuring and managing
investments, primarily in the insurance and financial services industries. The
investment management segment primarily provides securities investment advisory
and management services and administrative services for a group of publicly held
investment companies and institutional accounts. The consulting segment provides
advice and services to the managements of organizations primarily in the areas
of retirement services, human capital, health care and group benefit programs,
management consulting, organizational change and organizational design, economic
consulting, and corporate identity.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include all wholly-owned and majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
FIDUCIARY ASSETS AND LIABILITIES: In its capacity as an insurance broker or
agent, MMC collects premiums from insureds and, after deducting its commissions,
remits the premiums to the respective insurance underwriters. MMC also collects
claims or refunds from underwriters on behalf of insureds. Unremitted insurance
premiums and claims are held in a fiduciary capacity. Interest income on these
fiduciary funds, included in service revenue, amounted to $130 million in 2004,
$114 million in 2003, and $118 million in 2002. Since fiduciary assets are not
available for corporate use, they are shown in the balance sheet as an offset to
fiduciary liabilities.
Net uncollected premiums and claims and the related payables were $11.2 billion
and $11.5 billion at December 31, 2004 and 2003, respectively. MMC is not a
principal to the contracts under which the right to receive premiums or the
right to receive reimbursement of insured losses arises. Net uncollected
premiums and claims and the related payables are, therefore, not assets and
liabilities of MMC and are not included in the accompanying Consolidated Balance
Sheets.
In certain instances, MMC advances premiums, refunds or claims to insurance
underwriters or insureds prior to collection. These advances are made from
corporate funds and are reflected in the accompanying Consolidated Balance
Sheets as receivables.
REVENUE: Risk and Insurance Services revenue includes insurance commissions,
fees for services rendered, interest income on fiduciary funds and through
the first three quarters of 2004, market service fees from insurers. Effective
October 1, 2004 Marsh agreed to eliminate contingent compensation agreements
with insurers. Revenue also includes compensation for services provided in
connection with the organization, structuring and management of insurance,
financial and other industry-focused investments, as well as appreciation or
depreciation that has
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been recognized on holdings in such investments. Insurance commissions and fees
for risk transfer services generally are recorded as of the effective date of
the applicable policies or, in certain cases (primarily in MMC's reinsurance and
London market operations), as of the effective date or billing date, whichever
is later. Commissions are net of policy cancellation reserves, which are
estimated based on historic and current data on cancellations. Fees for non-risk
transfer services provided to clients are recognized over the period in which
the services are provided, using a proportional performance model. Fees
resulting from achievement of certain performance thresholds are recorded when
such levels are attained and such fees are not subject to forfeiture.
Investment Management revenue is derived primarily from investment management
fees and 12b-1 fees. Investment management fees are recognized as services are
provided. Mutual fund distribution fees are recognized over the period in which
the fees can be charged to the related funds, or when a contingent deferred
sales charge is triggered by a redemption. Such fees are based on the net assets
of the funds and are collected directly from the applicable funds. Sales of
mutual fund shares are recorded on a settlement date basis and commissions
thereon are recorded on a trade date basis. Fees resulting from achievement of
specified performance thresholds are recorded when such levels are attained and
such fees are not subject to forfeiture.
Consulting revenue includes fees paid by clients for advice and services and
commissions from insurance companies for the placement of individual and group
contracts. Fee revenue for engagements where Mercer is remunerated based on time
plus out-of-pocket expenses is recognized based on the amount of time consulting
professionals expend on the engagement. For fixed fee engagements, revenue is
recognized using a proportional performance model. Insurance commissions are
recorded as of the effective date of the applicable policies.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents primarily consist of
certificates of deposit and time deposits, generally with original maturities of
three months or less.
FIXED ASSETS: Fixed assets are stated at cost less accumulated depreciation and
amortization. Expenditures for improvements are capitalized. Upon sale or
retirement, the cost and related accumulated depreciation and amortization are
removed from the accounts and any gain or loss is reflected in income.
Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation of buildings, building improvements, furniture, and equipment is
provided on a straight-line basis over the estimated useful lives of these
assets. Leasehold improvements are amortized on a straight-line basis over the
periods covered by the applicable leases or the estimated useful life of the
improvement, whichever is less. MMC periodically reviews long-lived assets for
impairment whenever events or changes indicate that the carrying value of assets
may not be recoverable.
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The components of fixed assets are as follows:
December 31,
(In millions of dollars) 2004 2003
- ------------------------ ------- -------
Furniture and equipment $ 1,676 $ 1,510
Land and buildings 458 445
Leasehold and building improvements 914 882
------- -------
3,048 2,837
Less-accumulated depreciation and amortization (1,661) (1,448)
------- -------
$ 1,387 $ 1,389
======= =======
INVESTMENT SECURITIES: MMC holds investments in both public and private
companies, as well as certain private equity funds (managed by MMC Capital and
T.H. Lee) and seed shares for mutual funds. Publicly traded investments are
classified as available for sale or trading securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), and carried at market value. Non-publicly traded investments are
carried at cost in accordance with APB Opinion No. 18 ("APB 18"). Changes in the
fair value of trading securities are recorded in earnings when they occur.
Changes in the fair value of available for sale securities are recorded in
stockholders' equity, net of applicable taxes, until realized. Securities
classified as trading or available for sale under SFAS 115, or carried at cost
under APB 18, are included in Long-term investments in the Consolidated Balance
Sheets.
Certain investments, primarily investments in private equity funds, are
accounted for using the equity method under APB 18. The underlying private
equity funds follow investment company accounting, where securities within the
fund are carried at fair value. MMC records its proportionate share of the
change in fair value of the funds in earnings when they occur. Securities
recorded using the equity method are included in Other assets in the
Consolidated Balance Sheets.
Gains or losses recognized in earnings from the investment securities described
above are included in Investment income (loss) in the Consolidated Statements of
Income. Costs related to management of MMC's investments, including incentive
compensation partially derived from investment income and loss, are recorded in
operating expenses.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents acquisition costs in
excess of the fair value of net assets acquired. Goodwill is reviewed at least
annually for impairment. Other intangible assets that are not deemed to have an
indefinite life are amortized over their estimated lives and reviewed for
impairment upon the occurrence of certain triggering events in accordance with
applicable accounting literature.
CAPITALIZED SOFTWARE COSTS: MMC capitalizes certain costs to develop, purchase,
or modify software for the internal use of MMC. These costs are amortized on a
straight-line basis over periods ranging from three to ten years. Costs incurred
during the preliminary project stage and post implementation stage are expensed
as incurred. Costs incurred during the application development stage are
capitalized. Costs related to updates and enhancements are only capitalized if
they will result in additional functionality. Computer software costs of $281
million and $255 million, net of accumulated amortization of $418 million and
$372 million at December
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31, 2004 and 2003, respectively, are included in Other assets in the
Consolidated Balance Sheets.
LEGAL AND OTHER LOSS CONTINGENCIES: MMC and its subsidiaries are subject to
various claims, lawsuits and proceedings. MMC records liabilities for
contingencies including legal costs when it is probable that a liability has
been incurred before the balance sheet date and the amount can be reasonably
estimated. Significant management judgment is required to comply with this
guidance. MMC analyzes its litigation exposure based on available information,
including consultation with outside counsel handling the defense of these
matters, to assess its potential liability. Contingent liabilities are not
discounted.
INCOME TAXES: MMC's tax rate reflects its income, statutory tax rates and tax
planning in the various jurisdictions in which it operates. Significant
judgement is required in determining the annual tax rate and in evaluating tax
positions. Tax allowances are established when, despite the belief that the tax
return positions are fully supportable, there is the potential that they may be
successfully challenged. These allowances, as well as the related interest, are
adjusted to reflect changing facts and circumstances.
Tax law requires items be included in MMC's tax returns at different times than
the items are reflected in the Consolidated Statements of Income. As a result,
the annual tax expense reflected in the Consolidated Statements of Income is
different than that reported in the tax returns. Some of these differences are
permanent, such as expenses that are not deductible in the returns, and some
differences are temporary and reverse over time, such as depreciation expense.
Temporary differences create deferred tax assets and liabilities. Deferred tax
assets generally represent items that can be used as a tax deduction or credit
in tax returns in future years for which benefit has already been recorded in
the financial statements. Valuation allowances are established for deferred tax
assets when it is estimated that future taxable income will be insufficient to
use a deduction or credit in that jurisdiction. Deferred tax liabilities
generally represent tax expense recognized in the financial statements for which
payment has been deferred, or expense for which a deduction has been taken
already in the tax return but the expense has not yet been recognized in the
financial statements.
U.S. Federal income taxes are provided on unremitted foreign earnings except
those that are considered permanently reinvested, which at December 31, 2004
amounted to approximately $1.7 billion. However, if these earnings were not
considered permanently reinvested, the incremental tax liability which otherwise
might be due upon distribution, net of foreign tax credits, would be
approximately $190 million.
In December 2004, the FASB issued Staff Position ("FSP") No. 109-2, "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004." The American Jobs Creation Act of 2004
(the "Act"), signed into law on October 22, 2004, provides for a special
one-time tax deduction, or dividend received deduction ("DRD"), of 85% of
qualifying foreign earnings that are repatriated in either a company's last tax
year that began before the enactment date or the first tax year that begins
during the one-year period beginning on the enactment date. FSP 109-2 provides
entities additional time to assess the effect of repatriating foreign earnings
under the Act for purposes of applying SFAS No. 109, "Accounting for Income
Taxes," which typically requires the effect of a new tax law to be recorded in
the period of enactment. MMC will elect, if applicable, to apply the DRD to
qualifying dividends of foreign earnings repatriated in its calendar year 2005.
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MMC is awaiting further clarifying guidance from the U.S. Treasury Department on
certain provisions of the Act. Once this guidance is received, MMC expects to
complete its evaluation of the effects of the Act during 2005. Under the
limitations on the amount of dividends qualifying for the DRD of the Act, the
maximum repatriation of MMC's foreign earnings that may qualify for the special
one-time DRD is approximately $1.2 billion. Therefore, the range of possible
amounts of qualifying dividends of foreign earnings is between zero and
approximately $1.2 billion. Although the evaluation is ongoing, MMC estimates
the range of income tax effects of potential repatriations to be zero to $63
million.
PREPAID DEALER COMMISSIONS: Essentially all of the mutual funds marketed by
MMC's investment management segment are made available with a contingent
deferred sales charge in lieu of a front-end load. The related prepaid dealer
commissions, initially paid by MMC to broker/dealers for distributing such
funds, can be recovered through charges and fees received over a number of
years. The prepaid dealer commissions are amortized on a straight-line basis
over a period not to exceed six years. If early terminations result in the
recognition of contingent deferred sales charges, the amortization of prepaid
dealer commissions is accelerated accordingly. MMC assesses the recoverability
of prepaid dealer commissions by comparing the expected future cash flows with
recorded balances.
DERIVATIVE INSTRUMENTS: All derivatives, whether designated in hedging
relationships or not, are recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
VARIABLE INTEREST ENTITIES: MMC through Putnam, manages $3.6 billion in the form
of Collateralized Debt Obligations ("CDO") and Collateralized Bond Obligations
("CBO"). Separate limited liability companies were established to issue the
notes and to hold the underlying collateral, which consists of high-yield bonds
and other securities. Putnam serves as the collateral manager for the CDOs and
CBOs. The maximum loss exposure related to the CDOs and CBOs is limited to
Putnam's investment totaling $7.5 million, reflected in Long-term investments in
the Consolidated Balance Sheets at December 31, 2004. MMC has concluded it is
not the primary beneficiary of these structures under FIN 46 "Consolidation of
Variable Interest Entities."
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject
MMC to concentrations of credit risk consist primarily of cash and cash
equivalents, commissions and fees receivable and insurance recoverables. MMC
maintains a policy providing for the diversification of cash and cash equivalent
investments and places its investments in an extensive number of high quality
financial institutions to limit the amount of credit risk exposure.
Concentrations of credit risk with respect to receivables are generally limited
due to the large number of clients and markets in which MMC does business, as
well as the dispersion across many geographic areas.
PER SHARE DATA: Basic net income per share is calculated by dividing net income
by the weighted average number of shares of MMC's common stock outstanding.
Diluted net income per share is calculated by reducing net income for the
potential minority interest expense associated with unvested shares under the
Putnam Equity Partnership Plan, discussed further in Note 8, and adding back
dividend equivalent expense related to common stock equivalents. This result is
then
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divided by the weighted average common shares outstanding, which have been
adjusted for the dilutive effect of potentially issuable common shares. The
following reconciles net income to net income for diluted earnings per share and
basic weighted average common shares outstanding to diluted weighted average
common shares outstanding:
For the Years Ended December 31,
(In millions) 2004 2003 2002
- -------------------------------- ------ ------ ------
Net income $ 176 $1,540 $1,365
Less: Potential minority interest expense associated
with Putnam Class B Common Shares -- (1) (2)
Add: Dividend equivalent expense related to
common stock equivalents 2 2 2
------ ------ ------
Net income for diluted earnings per share $ 178 $1,541 $1,365
====== ====== ======
Basic weighted average common shares outstanding 526 533 541
Dilutive effect of potentially issuable common shares 9 15 16
------ ------ ------
Diluted weighted average common shares outstanding 535 548 557
====== ====== ======
Average stock price used to calculate common stock equivalents $42.12 $46.99 $48.95
====== ====== ======
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may vary from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS: In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Act") introduced a prescription drug
benefit under Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans. In January 2004, the Financial Accounting Standards
Board ("FASB") issued FASB Staff Position ("FSP") No. 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003". As allowed by this FSP, the Company elected to
defer accounting for the effects of the Act. In May 2004, the FASB issued FSP
No. 106-2 to address the accounting and disclosure requirements related to the
Act. The FSP was effective for the Company beginning with its third quarter
ended September 30, 2004. The effect of the Act on the Company's financial
statements was not significant.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an Amendment of
FASB Statements Nos. 87, 88, and 106". Additional disclosure requirements were
added to include information describing the types of plan assets, investment
strategy, measurement dates, plan obligations and cash flows. See Note 7 to the
Consolidated Financial Statements and the Retirement Benefits section of
Management's Discussion and Analysis for the related pension and postretirement
benefit disclosures.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-based
Payments" ("SFAS No. 123R"). SFAS No. 123R requires companies to measure and
recognize compensation for share-based payments at fair value. The effects of
adoption of SFAS No. 123R are disclosed in the proforma information in Note 8
to the Consolidated Financial Statements.
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RECLASSIFICATIONS: Certain reclassifications have been made to the prior year
amounts to conform with current year presentation.
2. SUPPLEMENTAL DISCLOSURES
The following schedule provides additional information concerning acquisitions,
interest and income taxes paid:
For the Years Ended December 31,
(In millions of dollars) 2004 2003 2002
- -------------------------------- ------ ----- ----
Purchase acquisitions:
Assets acquired, excluding cash $2,353 $ 408 $ 99
Liabilities assumed (17) (9) (2)
Issuance of debt and other obligations (33) (115) (5)
Deferred purchase consideration 61 -- --
Shares issuable -- (106) --
------ ----- ----
Net cash outflow for acquisitions $2,364 $ 178 $ 92
====== ===== ====
Interest paid $ 198 $ 172 $154
Income taxes paid $ 383 $ 542 $931
An analysis of the allowance for doubtful accounts for the three years ended
December 31, follows:
(In millions of dollars) 2004 2003 2002
- -------------------------------- ------ ----- ----
Balance at beginning of year $116 $124 $139
Provision charged to operations 30 18 21
Accounts written-off, net of recoveries (10) (36) (44)
Effect of exchange rate changes 7 10 8
------ ----- ----
Balance at end of year $143 $116 $124
====== ===== ====
3. OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows:
For the Years Ended December 31,
(In millions of dollars) 2004 2003 2002
- -------------------------------- ----- ----- -----
Foreign currency translation adjustments $ 234 $ 302 $ 131
Unrealized investment holding gains (losses), net of income tax liability
(benefit) of $3, $54 and $(35) in 2004, 2003 and 2002, respectively 8 98 (70)
Less: Reclassification adjustment for realized gains included in net
income, net of income tax liability of $36, $12 and $21
in 2004, 2003 and 2002, respectively (66) (22) (36)
Minimum pension liability adjustment, net of income tax benefit
of $123 in 2004, $77 in 2003 and $110 in 2002 (266) (201) (257)
Deferred (loss) gain on cash flow hedges, net of income tax (benefit)
liability of $(1), $(2) and $3 in 2004, 2003 and 2002, respectively (1) (4) 7
----- ----- -----
$ (91) $ 173 $(225)
===== ===== =====
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The components of accumulated other comprehensive loss, net of taxes, are as
follows:
December 31,
(In millions of dollars) 2004 2003
- ------------------------ ----- -----
Foreign currency translation adjustments $ 244 $ 10
Net unrealized investment gains 138 196
Minimum pension liability adjustment (752) (486)
Net deferred gain on cash flow hedges -- 1
----- -----
$(370) $(279)
===== =====
4. ACQUISITIONS
In July 2004, MMC acquired Kroll Inc. ("Kroll"), the world's leading risk
mitigation services firm in an all-cash $1.9 billion transaction in which Kroll
shareholders received $37 for each outstanding share of Kroll common stock
owned. The acquisition of Kroll broadens and deepens the capabilities of MMC's
risk consulting and advisory businesses by adding services which clients need to
reduce the impact of an adverse event. It expands MMC's capacity in several
important sectors that complement existing businesses, such as corporate
restructuring, business intelligence and investigations, security services,
employee screening, and electronic evidence and litigation support. The
estimated fair values of assets and liabilities are recorded in the financial
statements as follows: net tangible assets of $45 million, identified intangible
assets of $311 million; and goodwill of $1.6 billion.
In addition, MMC acquired Synhrgy HR Technologies, a leading provider of human
resource technology and outsourcing services, for a total cost of $115 million
in 2004. Substantially all employees of Synhrgy became employees of MMC.
Approximately $7 million of the purchase consideration is subject to continued
employment of the selling shareholders and is being recorded as compensation
expense over three years. MMC also acquired the Australia and New Zealand
operations of Heath Lambert for $53 million in March of 2004, Prentis Donegan
for $63 million in cash in July of 2004, an additional 30% of the voting stock
of PanAgora Asset Management, Inc. (bringing its total to an 80% voting
majority) for $3 million in cash in July of 2004, Centerlink for $36 million in
September 2004 and Corporate Systems for $72 million in cash in October 2004.
The allocation of purchase consideration resulted in acquired goodwill of $1.9
billion in 2004. Estimated fair values of assets acquired and liabilities
assumed are subject to adjustment when the purchase accounting is finalized.
In April 2003, MMC acquired Oliver, Wyman & Company ("OWC") for $265 million
comprising $159 million in cash, to be paid over 4 years, and $106 million in
MMC stock. Substantially, all former employees of OWC became employees of MMC.
Approximately $35 million of the purchase consideration is subject to continued
employment of the selling shareholders and is recorded as prepaid compensation.
This asset is being amortized as compensation expense over four years.
During 2003, MMC also acquired several insurance and consulting businesses in
transactions accounted for as purchases for a total cost of $135 million. The
cost of 2003 acquisitions exceeded the fair value of assets acquired by $307
million.
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5. GOODWILL AND OTHER INTANGIBLES
MMC is required to assess goodwill and any indefinite-lived intangible assets
for impairment annually or more frequently if circumstances indicate impairment
may have occurred. In connection with MMC's annual impairment tests in the third
quarter of 2004, it was determined that such assets were not impaired. Due to
the decline in MMC's share price following the filing of the Civil Complaint by
the Attorney General of the State of New York on October 14, 2004, MMC conducted
goodwill impairment tests as of December 31, 2004 and determined that such
assets were not impaired.
Changes in the carrying amount of goodwill are as follows:
(In millions of dollars)
Balance as of January 1, 2004 $5,533
Goodwill acquired 1,881
Other adjustments (primarily foreign exchange) 118
------
Balance as of December 31, 2004 $7,532
======
Goodwill allocable to each of MMC's reporting segments is as follows: Risk and
Insurance Services $6.3 billion; Investment Management $122 million; and
Consulting $1.1 billion.
The goodwill balance at December 31, 2004 and 2003 includes approximately $119
million and $121 million, respectively, of equity method goodwill.
Amortized intangible assets consist of the cost of client lists, client
relationships and tradenames acquired, and the rights to future revenue streams
from certain existing private equity funds. MMC has no intangible assets with
indefinite lives. The gross cost and accumulated amortization by major
intangible asset class is as follows:
2004 2003
------------------------------- -------------------------------
Net Net
December 31, Gross Accumulated Carrying Gross Accumulated Carrying
(In millions of dollars) Cost Amortization Amount Cost Amortization Amount
- ------------------------ ----- ------------ -------- ----- ------------ --------
Customer and marketing related $630 $122 $508 $222 $ 74 $148
Future revenue streams related to
existing private equity funds 198 108 90 199 92 107
---- ---- ---- ---- ---- ----
Total amortized intangibles $828 $230 $598 $421 $166 $255
==== ==== ==== ==== ==== ====
Aggregate amortization expense for the years ended December 31, 2004 and 2003,
was $64 million and $42 million, respectively, and the estimated future
aggregate amortization expense is as follows:
For the Years Ending December 31,
(In millions of dollars) Estimated Expense
- --------------------------------- -----------------
2005 $109
2006 $ 88
2007 $ 82
2008 $ 78
2009 $ 67
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6. INCOME TAXES
Income before income taxes and minority interest shown below is based on the
geographic location to which such income is attributable. Although income taxes
related to such income may be assessed in more than one jurisdiction, the income
tax provision corresponds to the geographic location of the income.
For the Years Ended December 31,
(In millions of dollars) 2004 2003 2002
- -------------------------------- ---- ------ ------
Income before income taxes and minority interest:
U.S. $(63) $1,434 $1,346
Other 513 901 787
---- ------ ------
$450 $2,335 $2,133
==== ====== ======
Income taxes:
Current-
U.S. Federal $204 $ 433 $ 424
Other national governments 80 159 111
U.S. state and local 46 88 36
---- ------ ------
330 680 571
---- ------ ------
Deferred-
U.S. Federal (118) 45 17
Other national governments 67 60 130
U.S. state and local (20) (15) 29
---- ------ ------
(71) 90 176
---- ------ ------
Total income taxes $259 $ 770 $ 747
==== ====== ======
The significant components of deferred income tax assets and liabilities and
their balance sheet classifications are as follows:
December 31,
(In millions of dollars) 2004 2003
- ------------------------ ------ -----
DEFERRED TAX ASSETS:
Accrued expenses not currently deductible $ 809 $502
Differences related to non-U.S. operations 251 254
Other 54 29
------ ----
$1,114 $785
====== ====
DEFERRED TAX LIABILITIES:
Prepaid dealer commissions $ 12 $ 22
Unrealized investment holding gains 74 107
Differences related to non-U.S. operations 123 121
Depreciation and amortization 276 83
Accrued retirement benefits 34 48
Other 21 15
------ ----
$ 540 $396
====== ====
BALANCE SHEET CLASSIFICATIONS:
Current assets $ 282 $ 35
Other assets $ 292 $354
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A reconciliation from the U.S. Federal statutory income tax rate to MMC's
effective income tax rate is shown below. The increase in percentages in 2004 is
largely due to the decline in pre-tax operating income. The increase in the
effective tax rate was primarily due to the non-deductibility of Putnam's $224
million in regulatory settlements; a lower tax benefit related to Marsh's $850
million settlement of the NYAG Lawsuit due to partial attribution to foreign
operations; and a partially offsetting benefit for foreign earnings taxed at
lower rates.
2004 2003 2002
For the Years Ended December 31, % % %
- -------------------------------- ---- ---- ----
U.S. Federal statutory rate 35.0 35.0 35.0
U.S. state and local income taxes-
net of U.S. Federal income tax benefit 1.7 2.0 2.0
Differences related to non-U.S. operations (7.3) (4.1) (1.6)
NYAG lawsuit, including state taxes 11.5 -- --
Putnam regulatory settlements 17.4 -- --
Meals and entertainment 3.0 .5 .6
Dividends paid to employees (3.0) (.5) (.6)
Other (.7) .1 (.4)
---- ---- ----
Effective tax rate 57.6 33.0 35.0
==== ==== ====
MMC is routinely examined by the Internal Revenue Service (the "IRS") and tax
authorities in the United Kingdom, as well as states in which it has significant
business operations, such as California, Massachusetts and New York. The tax
years under examination vary by jurisdiction. The current IRS examination covers
2000-2002. MMC regularly considers the likelihood of assessments in each of the
taxing jurisdictions resulting from examinations. MMC has established tax
allowances which it believes are adequate in relation to the potential
assessments. The resolution of tax matters should not have a material effect on
the consolidated financial condition of MMC, although a resolution could have a
material impact on MMC's net income or cash flows for a particular future period
and on its effective tax rate.
7. RETIREMENT BENEFITS
MMC maintains qualified and non-qualified defined benefit pension plans for its
U.S. and non-U.S. eligible employees. MMC's policy for funding its tax qualified
defined benefit retirement plans is to contribute amounts at least sufficient to
meet the funding requirements set forth in the U.S. and international law.
The weighted average actuarial assumptions utilized for the U.S. and significant
non-U.S. defined benefit plans as of the end of the year are as follows:
Pension Postretirement
Benefits Benefits
----------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average assumptions:
Discount rate (for expense) 5.8% 6.1% 6.3% 6.6%
Expected return on plan assets 8.4% 8.5% -- --
Rate of compensation increase (for expense) 3.7% 3.8% -- --
Discount rate (for benefit obligation) 5.5% 5.8% 5.9% 6.3%
Rate of compensation increase (for benefit obligation) 3.6% 3.7% -- --
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The long-term rate of return assumption is selected for each plan based on the
facts and circumstances that exist as of the measurement date, and the specific
portfolio mix of each plan's assets. MMC utilizes a model developed by its
actuaries to assist in the setting of this assumption. The model takes into
account several factors including: actual and target portfolio allocation;
investment, administrative and trading expenses incurred directly by the plan
trust; historical portfolio performance; relevant forward-looking economic
analysis; and expected returns, variances, and correlations for different asset
classes. All returns utilized and produced by the model are geometric averages.
These measures are used to determine probabilities using standard statistical
techniques to calculate a range of expected returns on the portfolio. MMC
generally does not adjust the rate of return assumption from year to year if, at
the measurement date, it is within the best estimate range, defined as between
the 25th and 75th percentile of the expected long-term annual returns in
accordance with the "American Academy of Actuaries Pension Practice Council Note
May 2001 Selecting and Documenting Investment Return Assumptions" and consistent
with Actuarial Standards of Practice No. 27. The historical five and ten-year
average asset returns of each plan are also reviewed to ensure they are
consistent and reasonable compared with the best estimate range. The expected
return on plan assets is determined by applying the assumed long-term rate of
return to the market-related value of plan assets as defined by SFAS No. 87.
This market-related value recognizes investment gains or losses over a five-year
period from the year in which they occur. Investment gains or losses for this
purpose are the difference between the expected return calculated using the
market-related value of assets and the actual return based on the market value
of assets. Since the market-related value of assets recognizes gains or losses
over a five-year period, the future market-related value of the assets will be
impacted as previously deferred gains or losses are recorded.
The target asset allocation for the U.S. plans is 70% equities and 30% bonds,
and for the U.K. plans, which comprise approximately 85% of non-U.S. plan
assets, is 58% equities and 42% fixed income. As of the measurement date, the
actual allocation of assets for the U.S. plan was 72% to equities and 28% to
fixed income, and for the U.K. plans was 58% to equities and 42% to fixed
income. Actual portfolio allocations in 2004 approximated the target
allocations. The assets of the company's defined benefit plans are
well-diversified and are managed in accordance with applicable laws and with the
goal of maximizing the plans' real return within acceptable risk parameters. MMC
uses threshold based portfolio rebalancing to ensure the actual portfolio
remains consistent with target allocations.
The discount rate selected for each U.S. plan is based on a model bond portfolio
with durations that match the expected payment patterns of the plan. Discount
rates for non-U.S. plans are based on appropriate bond indices such as the IBoxx
(pound) Corporates 15-year index in the U.K. Projected compensation increases
reflect current expectations as to future levels of inflation.
-67-
The components of the net periodic benefit cost (income) for combined U.S. and
significant non-U.S. defined benefit and other postretirement plans are as
follows:
Pension Benefits Postretirement Benefits
For the Years Ended December 31, --------------------- -----------------------
(In millions of dollars) 2004 2003 2002 2004 2003 2002
- -------------------------------- ----- ----- ----- ---- ---- ----
Service cost $ 235 $ 192 $ 171 $11 $ 9 $ 7
Interest cost 424 365 337 20 20 19
Expected return on plan assets (619) (546) (519) -- -- --
Amortization of prior service credit (38) (38) (17) (2) (2) (2)
Amortization of transition asset (4) (4) (5) -- -- --
Recognized actuarial loss 90 26 11 3 5 3
----- ----- ----- --- --- ---
Net Periodic Benefit Cost (Income) $ 88 $ (5) $ (22) $32 $32 $27
===== ===== ===== === === ===
The following schedules provide information concerning MMC's U.S. defined
benefit pension plans and postretirement benefit plans:
U.S. Pension U.S. Postretirement
Benefits Benefits
December 31, --------------- -------------------
(In millions of dollars) 2004 2003 2004 2003
- ------------------------ ------ ------ ----- -----
Change in benefit obligation:
Benefit obligation at beginning of year $2,563 $2,309 $ 290 $ 250
Service cost 82 68 10 8
Interest cost 166 155 17 17
Actuarial loss 351 139 3 23
Benefits paid (114) (108) (11) (8)
------ ------ ----- -----
Benefit obligation at end of year $3,048 $2,563 $ 309 $ 290
------ ------ ----- -----
Change in plan assets:
Fair value of plan assets at beginning of year $2,419 $2,045 $ -- $ --
Actual return on plan assets 299 461 -- --
Employer contributions 47 21 11 8
Benefits paid (114) (108) (11) (8)
------ ------ ----- -----
Fair value of plan assets at end of year $2,651 $2,419 $ -- $ --
------ ------ ----- -----
Funded status $ (397) $ (144) $(309) $(290)
Unrecognized net actuarial loss 911 674 66 65
Unrecognized prior service credit (184) (222) (5) (7)
Unrecognized transition asset -- (5) -- --
------ ------ ----- -----
Net asset (liability) recognized $ 330 $ 303 $(248) $(232)
====== ====== ===== =====
Amounts recognized in the Consolidated Balance
Sheets consist of:
Prepaid benefit cost $ 580 $ 538 $ -- $ --
Accrued benefit liability (322) (270) (248) (232)
Accumulated other comprehensive loss 72 35 -- --
------ ------ ----- -----
Net asset (liability) recognized $ 330 $ 303 $(248) $(232)
====== ====== ===== =====
Accumulated benefit obligation at December 31 $2,846 $2,399 $ -- $ --
====== ====== ===== =====
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The weighted average actuarial assumptions utilized in determining the above
amounts for the U.S. defined benefit and other U.S. postretirement plans as of
the end of the year are as follows:
U.S. Pension U.S. Postretirement
Benefits Benefits
------------ -------------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average assumptions:
Discount rate (for expense) 6.4% 6.75% 6.4% 6.75%
Expected return on plan assets 8.75% 8.75% -- --
Rate of compensation increase (for expense) 3.15% 3.5% -- --
Discount rate (for benefit obligation) 6.0% 6.4% 6.0% 6.4%
Rate of compensation increase (for benefit
obligation) 2.85% 3.15% -- --
The U.S. defined benefit pension plans do not have any direct or indirect
ownership of MMC stock. Plan assets of approximately $1.9 billion and $1.8
billion at December 31, 2004 and 2003, respectively, were managed by Putnam,
which includes both separately managed and publicly available investment funds.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the U.S. pension plans with accumulated benefit obligations
in excess of plan assets were $340 million, $315 million and $0, respectively,
as of December 31, 2004 and $290 million, $266 million and $0, respectively, as
of December 31, 2003.
The components of the net periodic benefit cost (income) for the U.S. defined
benefit and other postretirement benefit plans are as follows:
U.S. Pension U.S.Postretirement
Benefits Benefits
For the Years Ended December 31, --------------------- ------------------
(In millions of dollars) 2004 2003 2002 2004 2003 2002
- -------------------------------- ----- ----- ----- ---- ---- ----
Service cost $ 81 $ 68 $ 67 $10 $ 8 $ 6
Interest cost 166 155 160 17 17 16
Expected return on plan assets (231) (229) (241) -- -- --
Amortization of prior service credit (38) (38) (17) (2) (2) (2)
Amortization of transition asset (4) (4) (5) -- -- --
Recognized actuarial loss 46 18 9 3 5 3
----- ----- ----- --- --- ---
Net Periodic Benefit Cost (Income) $ 20 $ (30) $ (27) $28 $28 $23
===== ===== ===== === === ===
The assumed health care cost trend rate was approximately 12% in 2004 gradually
declining to 5% in the year 2019. Assumed health care cost trend rates have a
significant effect on the amounts reported for the U.S. health care plans. A one
percentage point change in assumed health care cost trend rates would have the
following effects:
1 Percentage 1 Percentage
(In millions of dollars) Point Increase Point Decrease
- ------------------------ -------------- --------------
Effect on total of service and interest cost components $ 4 $ (3)
Effect on postretirement benefit obligation $43 $(35)
-69-
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("Act") became law. The net periodic benefit cost shown above
includes the subsidy which did not have a material impact.
The following schedules provide information concerning MMC's significant
non-U.S. defined benefit pension plans and non-U.S. postretirement benefit
plans:
Non-U.S. Pension Non-U.S. Postretirement
Benefits Benefits
December 31, ---------------- -----------------------
(In millions of dollars) 2004 2003 2004 2003
- ------------------------ ------ ------ ---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $4,666 $3,660 $55 $52
Service cost 154 124 1 1
Interest cost 258 210 3 3
Employee contributions 36 27 -- --
Actuarial loss (gain) 591 325 1 (2)
Effect of settlement (11) (4) -- --
Special termination benefits 6 4 -- --
Benefits paid (162) (141) (3) (2)
Foreign currency changes 429 466 5 6
Plan amendments (31) (1) -- (3)
------ ------ --- ---
Effect of spinoff -- (4) -- --
------ ------ --- ---
Benefit obligation at end of year $5,936 $4,666 $62 $55
------ ------ --- ---
Change in plan assets:
Fair value of plan assets at beginning of year $3,934 $2,918 $-- $--
Actual return on plan assets 427 380 -- --
Effect of settlement (11) (4) -- --
Company contributions 239 366 3 2
Employee contributions 36 27 -- --
Benefits paid (162) (141) (3) (2)
Foreign currency changes 352 388 -- --
------- ------ ---- ----
Fair value of plan assets at end of year $ 4,815 $3,934 $ -- $ --
------- ------ ---- ----
Funded status $(1,121) $ (732) $(62) $(55)
Unrecognized net actuarial loss 2,322 1,655 9 8
Unrecognized prior service cost (20) 10 (3) (3)
------- ------ ---- ----
Net asset (liability) recognized $ 1,181 $ 933 $(56) $(50)
======= ====== ==== ====
Amounts recognized in the Balance Sheet consist of:
Prepaid benefit cost $ 800 $ 645 $ -- $ --
Accrued benefit liability (631) (374) (56) (50)
Intangible asset 9 8 -- --
Accumulated other comprehensive loss 1,003 654 -- --
------- ------ ---- ----
Net asset (liability) recognized $ 1,181 $ 933 $(56) $(50)
======= ====== ==== ====
Accumulated benefit obligation at December 31 $ 5,261 $4,126 $ -- $ --
======= ====== ==== ====
Weighted average assumptions:
Discount rate (for expense) 5.4% 5.7% 5.7% 5.9%
Expected return on plan assets 8.2% 8.3% -- --
Rate of compensation increase (for expense) 4.0% 4.0% -- --
Discount rate (for benefit obligation) 5.3% 5.4% 5.6% 5.7%
Rate of compensation increase (for benefit obligation) 4.0% 4.0% -- --
-70-
The benefit obligation, accumulated benefit obligation, and fair value of plan
assets for the non-U.S. pension plans with accumulated benefit obligations in
excess of plan assets were $3.4 billion, $3.1 billion and $2.5 billion,
respectively, as of December 31, 2004 and $2.6 billion, $2.4 billion and
$2 billion, respectively, as of December 31, 2003.
The non-U.S. defined benefit plans do not have any direct or indirect ownership
of MMC stock.
The components of the net periodic benefit cost for the non-U.S. defined benefit
and other postretirement benefit plans and the curtailment, settlement and
termination expenses under SFAS 88 are as follows:
Non-U.S. Pension Benefits Non-U.S. Postretirement Benefits
For the Years Ended December 31, ------------------------- -------------------------------
(In millions of dollars) 2004 2003 2002 2004 2003 2002
- -------------------------------- ----- ----- ----- ---- ---- ----
Service cost $ 154 $ 124 $ 104 $1 $1 $1
Interest cost 258 210 177 3 3 3
Expected return on plan assets (388) (317) (278) -- -- --
Recognized actuarial loss 44 8 2 -- -- --
----- ----- ----- --- --- ---
Net periodic benefit cost $ 68 $ 25 $ 5 $4 $4 $4
----- ----- ----- --- --- ---
Curtailment gain -- -- (1) -- -- --
Settlement loss 3 -- 1 -- -- --
Special termination benefits 6 4 1 -- -- --
----- ----- ----- --- --- ---
Total expense $ 77 $ 29 $ 6 $4 $4 $4
===== ===== ===== === === ===
The assumed health care cost trend rate was approximately 6.6% in 2004,
gradually declining to 4.3% in the year 2012. Assumed health care cost trend
rates have a significant effect on the amounts reported for the non-U.S. health
care plans. A one percentage point change in assumed health care cost trend
rates would have the following effects:
1 Percentage 1 Percentage
(In millions of dollars) Point Increase Point Decrease
- ------------------------ -------------- --------------
Effect on total of service and interest cost components $1 $(1)
Effect on postretirement benefit obligation $9 $(7)
MMC's estimated future benefit payments for its pension and postretirement
benefits at December 31, 2004 were as follows:
Pension Benefits Postretirement Benefits
December 31, ----------------- -----------------------
(In millions of dollars) U.S. Non-U.S. U.S. Non-U.S.
- ------------------------ ------ -------- ---- --------
2005 $ 128 $ 163 $ 14 $ 3
2006 136 174 14 3
2007 144 183 15 4
2008 154 207 16 4
2009 164 227 18 4
2010-2014 $1,005 $1,355 $105 $21
CONTRIBUTION PLANS: MMC maintains certain defined contribution plans for its
employees, including the Marsh & McLennan Companies Stock Investment Plan
("SIP") and the Putnam Investments, LLC Profit Sharing Retirement Plan (the
"Putnam Plan"). Under these plans, eligible employees may contribute a
percentage of their base salary, subject to certain limitations. For the
-71-
SIP, MMC matches a portion of the employees' contributions, while under the
Putnam Plan the contributions are at the discretion of MMC subject to IRS
limitations. The SIP is an Employee Stock Ownership Plan under U.S. tax law and
plan assets of approximately $715 million at December 31, 2004 and $1.3 billion
at December 31, 2003 were invested in MMC stock. Effective October 25, 2004, all
participants became eligible to direct their Company matching contributions and
all of their employee contribution account balances to any of the available
investment options. If a participant does not choose an investment direction for
his or her future Company matching contributions, they are automatically
invested in the Putnam Fixed Income Fund. SIP plan assets of approximately $973
million and $938 million at December 31, 2004 and 2003, respectively, were
managed by Putnam. The cost of these defined contribution plans was $97 million,
$97 million and $92 million for 2004, 2003 and 2002, respectively.
8. STOCK BENEFIT PLANS
MMC has stock-based benefit plans under which employees are awarded grants of
restricted stock, stock options or other forms of awards. As provided under SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), MMC has elected
to continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has provided the required additional pro forma
disclosures.
MMC INCENTIVE AND STOCK AWARD PLANS: In 2000, the Marsh & McLennan Companies,
Inc. 2000 Employee Incentive and Stock Award Plan (the "2000 Employee Plan") and
the Marsh & McLennan Companies, Inc. 2000 Senior Executive Incentive and Stock
Award Plan (the "2000 Executive Plan") were adopted. The types of awards
permitted under these plans include stock options, restricted stock, stock bonus
units, restricted and deferred stock units payable in MMC common stock or cash,
and other stock-based and performance-based awards. The Compensation Committee
of the Board of Directors (the "Compensation Committee") determines, at its
discretion, which affiliates may participate in the plans, which eligible
employees will receive awards, the types of awards to be received, and the terms
and conditions thereof. The right of an employee to receive an award may be
subject to performance conditions as specified by the Compensation Committee.
The 2000 Plans contain provisions which, in the event of a change in control of
MMC, may accelerate the vesting of the awards. Awards relating to not more than
80,000,000 shares of common stock may be made over the life of the 2000 Employee
Plan plus shares remaining unused under pre-existing employee stock plans.
Awards relating to not more than 8,000,000 shares of common stock may be made
over the life of the 2000 Executive Plan plus shares remaining unused under
pre-existing executive stock plans. There were 41,468,548, 46,748,574 and
65,049,280 shares available for awards under the 2000 Plans and prior plans at
December 31, 2004, 2003 and 2002, respectively.
Stock Options: Options granted under the 2000 Plans may be designated as
incentive stock options or as non-qualified stock options. The Compensation
Committee determines the terms and conditions of the option, including the time
or times at which an option may be exercised, the methods by which such exercise
price may be paid, and the form of such payment. Except under certain limited
circumstances, no stock option may be granted with an exercise price of less
than the fair market value of the stock at the time the stock option is granted.
-72-
Stock option transactions under the 2000 Plans and prior plans are as follows:
2004 2003 2002
Weighted Average Weighted Average Weighted Average
--------------------------- --------------------------- ---------------------------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
Balance at beginning of period 89,315,072 $42.30 82,130,854 $40.74 70,067,916 $34.58
Granted 9,270,590 $45.90 17,188,980 $43.11 21,006,580 $55.78
Exercised (4,532,653) $24.35 (6,947,666) $22.71 (7,216,142) $23.16
Forfeited (7,842,322) $46.81 (3,057,096) $49.50 (1,727,500) $47.51
---------- ---------- ----------
Balance at end of period 86,210,687 $43.22 89,315,072 $42.30 82,130,854 $40.74
========== ====== ========== ====== ========== ======
Options exercisable at year-end 56,187,738 $40.91 49,358,186 $37.46 42,009,798 $31.49
========== ====== ========== ====== ========== ======
The following table summarizes information about stock options at December 31,
2004:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Average
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/04 Contractual Life Exercise Price at 12/31/04 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$13.08 - $25.35 6,414,762 1.6 years $18.18 6,414,762 $18.18
$25.36 - $37.30 6,683,711 3.2 years $30.10 6,573,711 $30.14
$37.31 - $51.94 56,117,734 6.5 years $43.77 33,993,577 $43.20
$51.95 - $62.33 16,994,480 7.0 years $55.99 9,205,688 $56.00
---------- ----------
$13.08 - $62.33 86,210,687 5.9 years $43.22 56,187,738 $40.91
========== ==========
Restricted Stock: Restricted shares of MMC's common stock may be awarded and are
subject to 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 receives 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 is forfeited upon termination of employment.
There were 1,030,541, 603,200 and 249,421 restricted shares granted in 2004,
2003 and 2002, respectively. The fair value of the awards granted was $48
million in 2004, $19 million in 2003 and $13 million in 2002, related to these
shares. Shares that have been granted generally become unrestricted at the
earlier of: (1) January 1 of the eleventh year following the grant or (2) the
later of the recipient's normal or actual retirement date. Some restricted
shares granted in 2004 cliff vest in seven years.
Restricted Stock Units: Restricted stock units may be awarded under the plans.
The Compensation Committee determines the restrictions on such units, when the
restrictions lapse, when the units vest and are paid, and upon what terms the
units are forfeited.
There were 592,786, 1,039,608 and 760,749 restricted stock units awarded during
2004, 2003 and 2002, respectively. The total value of the restricted stock units
at the time of the awards was $26 million, $44 million and $40 million in 2004,
2003 and 2002, respectively. The cost of the awards is amortized over the
vesting period, which is generally three years.
Deferred Stock Units: Deferred stock units may be awarded under the plans. The
Compensation Committee determines the restrictions on such units, when the
restrictions lapse, when the units vest and are paid, and upon what terms the
units are forfeited.
-73-
There were, 3,853,020, 2,325,802 and 1,669,680 deferred stock units awarded
during 2004, 2003 and 2002, respectively. The total value of the deferred stock
unit awards was $170 million, $100 million and $85 million in 2004, 2003 and
2002, respectively. The cost of the awards is amortized over the vesting period,
which is generally three years.
PUTNAM INVESTMENTS EQUITY PARTNERSHIP PLAN: In 1997, Putnam adopted the Putnam
Investments Equity Partnership Plan (the "Equity Plan") pursuant to which Putnam
is authorized to grant or sell to certain employees of Putnam or its
subsidiaries restricted shares of a new class of common shares of Putnam
Investments Trust, the parent of Putnam Investments, LLC ("Class B Common
Shares") and options to acquire the Class B Common Shares. Such awards or
options generally vest over a four-year period. Holders of Putnam Class B Common
Shares are not entitled to vote and have no rights to convert their shares into
any other securities of Putnam. Awards of restricted stock and/or options may be
made under the Equity Plan with respect to a maximum of 12,000,000 shares of
Class B Common Shares, which would represent approximately 12% of the
outstanding shares on a fully diluted basis, as increased for certain issuances
of Putnam Class A Common Stock to MMC. Through December 31, 2004, Putnam made
awards pursuant to the Equity Plan of 2,021,879, 2,174,100 and 1,051,400 Class B
Common Shares and shares subject to options in 2004, 2003 and 2002,
respectively. These awards included 1,971,379, 21,300 and 525,700 restricted
shares with a value of $66 million, $1 million and $39 million in 2004, 2003 and
2002, respectively. These awards also included 50,500, 2,152,800 and 525,700
shares subject to options in 2004, 2003 and 2002, respectively. There were
4,048,841 shares available for grant related to the Equity Plan at December 31,
2004. Outstanding shares and common stock equivalents related to Equity Plan
grants at December 31, 2004 resulted in a minority interest in Putnam of
approximately 3.9% on a fully diluted basis.
MMC STOCK PURCHASE PLANS: In May 1999, MMC's stockholders approved an employee
stock purchase plan (the "1999 Plan") to replace the 1994 Employee Stock
Purchase Plan (the "1994 Plan") which terminated on September 30, 1999 following
its fifth annual offering. Effective October 1, 2004, certain features in these
plans were changed. Under these new features, shares are purchased four times
during the plan year (instead of one annual purchase on the last business day of
the plan year as was done previously). Also, shares of MMC common stock are
purchased at a price that is 85% of the average market price on each quarterly
purchase date. Previously, shares were purchased at a price based on 85% of the
lower of the market price at the beginning or end of the plan year. Under the
1999 Plan, no more than 40,000,000 shares of MMC's common stock plus the
remaining unissued shares in the 1994 Plan may be sold. Employees purchased
3,463,352 shares in 2004, 3,815,231 shares in 2003 and 3,744,190 shares in 2002.
At December 31, 2004, 28,186,973 shares were available for issuance under the
1999 Plan. In July 2002, the MMC Board of Directors approved an additional
5,000,000 shares of common stock for issuance under the 1995 MMC Stock Purchase
Plan for International Employees (the "International Plan"). With the additional
shares under the International Plan, no more than 8,000,000 shares of MMC's
common stock may be sold. Employees purchased 1,167,822 shares in 2004,
1,216,359 shares in 2003 and 717,696 shares in 2002. At December 31, 2004,
1,962,887 shares were available for issuance under the International Plan.
PRO FORMA INFORMATION: In accordance with the intrinsic value method allowed by
APB 25, no compensation cost has been recognized in the Consolidated Statements
of Income for MMC's stock option and stock purchase plans and the stock options
awarded under the Putnam Investments Equity Partnership Plan. Had compensation
cost for MMC's stock-based compensation plans been determined consistent with
the fair value method prescribed by SFAS
-74-
No. 123, MMC's net income and net income per share for 2004, 2003 and 2002 would
have been reduced to the pro forma amounts indicated in the table below.
(In millions of dollars, except per share figures) 2004 2003 2002
- -------------------------------------------------- ----- ------ ------
NET INCOME:
As reported $ 176 $1,540 $1,365
Adjustment for fair value method, net of tax (146) (171) (152)
----- ------ ------
Pro forma $ 30 $1,369 $1,213
----- ------ ------
NET INCOME PER SHARE:
Basic:
As reported $0.33 $ 2.89 $ 2.52
Pro forma $0.06 $ 2.57 $ 2.24
Diluted:
As reported $0.33 $ 2.81 $ 2.45
Pro forma $0.06 $ 2.50 $ 2.18
The pro forma information reflected above includes stock options issued under
MMC incentive and stock award plans and the Putnam Investments Equity
Partnership Plan and stock issued under MMC stock purchase plans.
The estimated fair value of options granted was calculated using the
Black-Scholes option pricing valuation model. The weighted average assumptions
used in the valuation models are as follows:
Stock Options Stock Purchase Plan*
--------------------------- --------------------
2004 2003 2002 2003 2002
------- ------- ------- ------ ------
MMC INCENTIVE AND STOCK AWARD
PLANS
Dividend yield 2.3% 2.3% 2.3% 2.3% 2.3%
Expected volatility 19.6% 21.0% 33.2% 29.5% 31.4%
Risk-free interest rate 2.8% 2.75% 4.9% 1.03% 1.2%
Weighted-average fair value $7.51 $7.45 $16.82 $12.47 $11.18
Expected life 5 years 5 years 5 years 1 year 1 year
PUTNAM INVESTMENTS EQUITY
PARTNERSHIP PLAN
Dividend yield 5.0% 5.0% 5.0%
Expected volatility 26.8% 29.4% 44.4%
Risk-free interest rate 3.45% 2.48% 4.9%
Weighted-average fair value $4.87 $6.55 $21.63
Expected life 5 years 5 years 5 years
* As described above, changes to the Stock Purchase Plan in 2004 eliminated
the "look back" feature, therefore a calculation of the fair value of that
feature using the Black-Scholes model calculations is no longer required.
Starting in September 2004 the costs for the Stock Purchase Plan are based
on the value of the discount.
9. LONG-TERM COMMITMENTS
MMC leases office facilities, equipment and automobiles under noncancelable
operating leases. These leases expire on varying dates; in some instances
contain renewal and expansion options; do not restrict the payment of dividends
or the incurrence of debt or additional lease obligations; and contain no
significant purchase options. In addition to the base rental costs, occupancy
lease agreements generally provide for rent escalations resulting from increased
assessments for real
-75-
estate taxes and other charges. Approximately 96% of MMC's lease obligations are
for the use of office space.
The Consolidated Statements of Income include net rental costs of $505 million,
$469 million and $397 million for 2004, 2003 and 2002, respectively, after
deducting rentals from subleases ($20 million in 2004, $21 million in 2003 and
$20 million in 2002).
At December 31, 2004, the aggregate future minimum rental commitments under all
noncancelable operating lease agreements are as follows:
For the Years Ended Gross Rentals Net
December 31, Rental from Rental
(In millions of dollars) Commitments Subleases Commitments
- ------------------------ ----------- --------- -----------
2005 $ 531 $ 26 $ 505
2006 479 24 455
2007 425 21 404
2008 376 18 358
2009 311 17 294
Subsequent years 2,234 173 2,061
------ ---- ------
$4,356 $279 $4,077
====== ==== ======
MMC has entered into agreements with various service companies to outsource
certain information systems activities and responsibilities. Under these
agreements, MMC is required to pay minimum annual service charges. Additional
fees may be payable depending upon the volume of transactions processed with all
future payments subject to increases for inflation. At December 31, 2004, 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
- --------------------------------- -----------
2005 $ 76
2006 51
2007 28
Subsequent years 62
----
$217
====
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10. DEBT
MMC's outstanding debt is as follows:
December 31,
(In millions of dollars) 2004 2003
- ------------------------ ---- ----
SHORT-TERM:
Commercial paper $ 129 $ 440
Revolving credit facility 434 --
Bank loans 3 --
Current portion of long-term debt 70 7
------ ------
$ 636 $ 447
====== ======
LONG-TERM:
Term loan - 2 year floating rate note due 2006 (3.438% at
December 31, 2004) $1,300 $ --
Senior notes - 6.625% due 2004 -- 599
Senior notes - 7.125% due 2009 399 399
Senior notes - 5.375% due 2007 (4.0% effective interest rate) (a) 514 520
Senior notes - 6.25% due 2012 (5.1% effective interest rate) (a) 266 269
Senior notes - 3.625% due 2008 249 248
Senior notes - 4.850% due 2013 249 249
Senior notes - 5.875% due 2033 295 295
Senior notes - 5.375% due 2014 646 --
Senior notes - 3 year floating rate note due 2007 (2.21% at
December 31, 2004) 499 --
Mortgage - 9.8% due 2009 200 200
Notes payable - 8.62% due 2005 65 69
Notes payable - 7.68% due 2006 61 61
Other 18 8
------ ------
4,761 2,917
Less current portion 70 7
------ ------
$4,691 $2,910
====== ======
(a) The effective interest rates result from unwinding fair value hedges, as
discussed below.
The weighted average interest rates on MMC's outstanding short-term debt at
December 31, 2004 and 2003 are 3% and 1.1%, respectively.
At December 31, 2003, based on MMC's intent and ability to refinance certain
obligations on a long-term basis, the 6.625% Senior Note due in 2004 was
classified as Long-term debt.
The matters raised in the civil NYAG Lawsuit on October 14, 2004 (described in
Note 15 to the Consolidated Financial Statements) may have prohibited MMC from
borrowing under its revolving credit facilities. The required lenders under each
of the facilities agreed to waive the effect of such matters until December 30,
2004. During the period from October 14 to December 15, 2004, the revolving
credit facilities were drawn upon to refinance approximately $1.7 billion of
maturing commercial paper. On December 15, 2004, MMC completed financing with
respect to a $1.3 billion Term Loan Facility and the amendment of its existing
$1 billion revolving credit facility which expires in June 2007 and $700 million
revolving credit facility which expires in June 2009. The Term Loan Facility
will mature on December 31, 2006 and replaces revolving credit facilities of
$700 million and $355 million, which were due to expire in 2005. The proceeds
from the Term
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Loan Facility were used to pay down the outstanding balances on revolving credit
facilities. The interest rates on these facilities vary based upon the level of
usage of the facility and MMC's credit ratings. Each of these facilities
requires MMC to maintain certain coverage and leverage ratios on the last day of
the measurement period specified in the contract and the guarantors identified
in the contract must meet certain guaranty minimum coverage percentages. The
amount outstanding under the revolving credit facilities at December 31, 2004 is
$373 million.
Additional credit facilities, guarantees and letters of credit are maintained
with various banks, primarily related to operations located outside the United
States, aggregating $331 million at December 31, 2004 and $209 million at
December 31, 2003. There was $61 million outstanding at December 31, 2004 and
there were no outstanding amounts under these facilities at December 31, 2003.
In June 2004, MMC repaid $600 million of long-term debt that matured by issuing
commercial paper. In July 2004, MMC purchased Kroll, Inc. in an all-cash
transaction totaling approximately $1.9 billion. The purchase was initially
funded with commercial paper borrowings. To support these borrowings, MMC
negotiated a new $1.5 billion, one-year revolving credit facility. Following the
acquisition, MMC issued $650 million of 5.375% Senior Notes due 2014 and $500
million of Floating Rate Notes due 2007. The proceeds from these notes were used
to repay a portion of MMC's commercial paper borrowings. Under the terms of the
agreement of the above-mentioned credit facility, the amount of the facility was
reduced by the proceeds from the issuance of the Senior Notes and Floating Rate
Notes of approximately $1.15 billion. The available revolving credit facility
totaled $355 million after the issuance of these notes and in December 2004 was
replaced by the Term Loan Facility.
In July 2003, MMC issued $300 million of 5.875% Senior Notes due 2033. In
February 2003, MMC issued $250 million of 3.625% Senior Notes due 2008 and
$250 million of 4.85% Senior Notes due 2013 (the "2003 Notes"). The net
proceeds from the 2003 Notes were used to pay down commercial paper borrowings.
In January 2003, MMC terminated and settled interest rate swaps that had hedged
the fair value of Senior Notes issued 2002. The cumulative amount of
previously recognized adjustments of the fair value of the hedged notes is being
amortized over the remaining life of those notes. As a result, the effective
interest rate over the remaining life of the notes, including the amortization
of the fair value adjustments, is 4.0% for the Notes due 2007 and 5.1% for
the Notes due 2012.
MMC has a fixed rate non-recourse mortgage note agreement due 2009 amounting
to $200 million, bearing an interest rate of 9.8%, in connection with its
interest in its worldwide headquarters building in New York City. In the event
the mortgage is foreclosed following a default, MMC would be entitled to remain
in the space and would be obligated to pay rent sufficient to cover interest on
the notes or at fair market value if greater.
Scheduled repayments of long-term debt in 2005 and in the four succeeding years
are $70 million, $1.36 billion, $1.0 billion, $251 million and $603 million,
respectively.
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11. FINANCIAL INSTRUMENTS
The estimated fair value of MMC's significant financial instruments is provided
below. Certain estimates and judgments were required to develop the fair value
amounts. The fair value amounts shown below are not necessarily indicative of
the amounts that MMC would realize upon disposition nor do they indicate MMC's
intent or ability to dispose of the financial instrument.
2004 2003
----------------- -----------------
December 31, Carrying Fair Carrying Fair
(In millions of dollars) Amount Value Amount Value
- ------------------------ -------- ------ -------- ------
Cash and cash equivalents $1,396 $1,396 $ 665 $ 665
Long-term investments $ 558 $ 558 $ 648 $ 648
Short-term debt $ 636 $ 636 $ 447 $ 447
Long-term debt $4,691 $4,705 $2,910 $3,069
CASH AND CASH EQUIVALENTS: The estimated fair value of MMC's cash and cash
equivalents approximates their carrying value.
LONG-TERM INVESTMENTS: Long-term investments primarily consist of available for
sale securities recorded at quoted market prices. MMC also has certain
additional long-term investments, for which there are no readily available
market prices, amounting to $75 million and $100 million at December 31, 2004
and 2003, respectively, which are carried on a cost basis. MMC monitors these
investments for impairment and makes appropriate reductions in carrying values
when necessary.
MMC had available for sale securities and trading investments with an aggregate
fair value of $483 million and $548 million at December 31, 2004 and 2003,
respectively, which are carried at market value under SFAS 115. Gross unrealized
gains amounting to $212 million and $304 million at December 31, 2004 and 2003,
respectively, and gross unrealized losses of $2 million at December 31, 2003
have been excluded from earnings and reported, net of deferred income taxes, in
accumulated other comprehensive loss which is a component of stockholders'
equity.
MMC recorded net gains associated with its available for sale securities of $102
million, $34 million and $57 million, in 2004, 2003 and 2002, respectively.
Proceeds from the sale of available for sale securities for the years ended
December 31, 2004, 2003 and 2002 were $170 million, $94 million and $161
million, respectively. Gross realized gains on available for sale securities
sold during 2004, 2003 and 2002 amounted to $107 million, $49 million and $100
million, respectively. In 2004, 2003 and 2002, MMC recorded losses of $5
million, $15 million and $43 million, respectively, related to the decline in
value of certain available for sale securities that were other than temporary.
The cost of securities sold is determined using the average cost method for
equity securities. The gains and losses described above are included in
Investment income (loss) in the Consolidated Statements of Income.
MMC also holds investments in certain private equity fund partnerships which are
accounted for using the equity method. MMC's share of gains from such
investments, and from trading securities and investments held at cost, of $98
million, $66 million and $10 million in 2004, 2003 and 2002, respectively, is
included in Investment income (loss) in the Consolidated Statements of Income.
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A portion of insurance fiduciary funds which MMC holds to satisfy fiduciary
obligations is invested in high quality debt securities which are generally held
to maturity. The difference between cost and fair value of these investments is
not material.
SHORT-TERM AND LONG-TERM DEBT: The fair value of MMC's short-term debt, which
consists primarily of commercial paper borrowings and bank loans, approximates
its carrying value. The estimated fair value of MMC's long-term debt is based on
discounted future cash flows using current interest rates available for debt
with similar terms and remaining maturities.
12. INTEGRATION AND RESTRUCTURING COSTS
2004 Plan
In November 2004 MMC announced that it would undertake restructuring initiatives
involving staff reductions and consolidations of facilities in response to MMC's
current situation and the realities of the marketplace (the "2004 Plan"). In
connection with this plan, MMC incurred restructuring charges of $337 million in
the year ended December 31, 2004. The breakdown by segment was $231 million, $62
million, and $26 million in risk and insurance services, consulting and
investment management, respectively. An additional $18 million of restructuring
expense was recorded in corporate. The amounts incurred and paid in 2004 and the
liability as of December 31, 2004 are as follows:
Expense Utilized Remaining
Incurred in in Liability at
(In millions of dollars) 2004 2004 12/31/04
----------- -------- ------------
Severance and benefits $273 $48 $225
Future rent on non-cancelable leases 28 1 27
Lease termination costs 18 - 18
Other exit costs 18 10 8
---- --- ----
$337 $59 $278
==== === ====
Costs of approximately $7 million related to the 2004 restructuring are expected
to be incurred in 2005. The expenses associated with these initiatives are
included in Other operating expenses in the Consolidated Statements of Income.
Liabilities associated with these initiatives are classified on the Consolidated
Balance Sheets as Accounts payable, Other liabilities, or Accrued salaries,
depending on the nature of the item.
MMC previously incurred integration and restructuring costs related to the
acquisition of Johnson & Higgins ("J&H") in 1997, Sedgwick in 1998 and a
restructuring plan in 2001. During 2004, MMC recorded the following payments, as
well as adjustments related to changes in the estimated costs of integration and
restructuring plans. A payment of $3 million for costs related to the Sedgwick
Plan and $4 million of the reserves were reversed by MMC and recorded as a
reduction of goodwill; a payment of $2 million and a credit of $1 million for a
reduction in the estimated cost of the 1999 MMC plan related to the Sedgwick
acquisition; a payment of $3 million and a charge of $1 million for increased
costs related to the 2001 restructuring plan; and $1 million of the reserves
were reversed by MMC and recorded as a reduction of goodwill and a charge of $4
million to reflect the current estimate for required lease payments related to
the J&H acquisition. The net impact of the charges and credits to integration
and restructuring reserves decreased diluted net income per share by
approximately one-half of one cent for the year ended December 31, 2004.
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At December 31, 2004, the remaining liability related to integration and
restructuring plans is as follows: 2001 Restructuring Plan $16 million; Sedgwick
acquisition - Sedgwick Plan $13 million, MMC Plan $7 million. Actions under each
of the plans are complete. The remaining accruals, primarily for future rent
under noncancelable leases, costs to restore leased properties to contractually
agreed upon conditions, and salary continuance arrangements, are expected to be
paid over several years.
13. COMMON STOCK
In 2004, MMC repurchased shares of its common stock for treasury as well as to
meet requirements for issuance of shares for its various stock compensation and
benefit programs. During 2004, MMC repurchased 11.4 million shares for total
consideration of $524 million, compared with 26.1 million shares for total
consideration of $1.2 billion in 2003.
MMC repurchases shares subject to market conditions, including from time to time
pursuant to the terms of a 10b5-1 plan. A 10b5-1 plan allows a company to
purchase shares during a blackout period, provided the company communicates its
share purchase instructions to the broker prior to the blackout period, pursuant
to a written plan that may not be changed. Approximately 1.3 million of the
shares repurchased in 2004 were made under the 10b5-1 plan.
MMC currently has no plans to repurchase its stock.
14. STOCKHOLDER RIGHTS PLAN
On September 18, 1997, MMC's Board of Directors approved the extension of the
benefits afforded by MMC's previously existing rights plan by adopting a new
stockholder rights plan, which was amended and restated as of January 20, 2000
and further amended on June 7, 2002. Under the current plan, Rights to purchase
stock, at a rate of one Right for each common share held, were distributed to
shareholders of record on September 29, 1997 and automatically attach to shares
issued thereafter. Under the plan, the Rights generally become exercisable after
a person or group (i) acquires 15% or more of MMC's outstanding common stock or
(ii) commences a tender offer that would result in such a person or group owning
15% or more of MMC's common stock. When the Rights first become exercisable, a
holder will be entitled to buy from MMC a unit consisting of one six-hundredth
of a share of Series A Junior Participating Preferred Stock of MMC at a purchase
price of $200. If any person acquires 15% or more of MMC's common stock or if a
15% holder acquires MMC by means of a reverse merger in which MMC and its stock
survive, each Right not owned by a 15% or more shareholder would become
exercisable for common stock of MMC (or in certain circumstances, other
consideration) having a market value equal to twice the exercise price of the
Right. The Rights expire on September 29, 2007, except as otherwise provided in
the plan.
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15. CLAIMS, LAWSUITS AND OTHER CONTINGENCIES
Marsh Inc. Related Matters
New York State Attorney General Investigation and Related Litigation and
Regulatory Matters
New York State Attorney General Investigation and Lawsuit
In or about April 2004, the Office of the New York State Attorney
General ("NYAG") commenced an investigation into broker compensation
arrangements generally and compensation under placement or market
service agreements specifically. NYAG issued a subpoena to MMC on
April 7, 2004 and followed with additional subpoenas in the summer and
fall of 2004.
On October 14, 2004, NYAG filed a civil complaint in New York State
court (the "NYAG Lawsuit") against MMC and Marsh Inc. (collectively
"Marsh") asserting claims under New York law for fraudulent business
practices, antitrust violations, securities fraud, unjust enrichment,
and common law fraud. The complaint alleged that market service
agreements between Marsh and various insurance companies (the
"Agreements"), created an improper incentive for Marsh to steer
business to such insurance companies and to shield them from
competition. The complaint further alleged that these Agreements were
not adequately disclosed to Marsh's clients or to Marsh's investors.
In addition, the complaint alleged that Marsh engaged in bid-rigging
and solicited fraudulent bids to create the appearance of competitive
bidding. The complaint sought relief that included an injunction
prohibiting Marsh from engaging in the alleged wrongful conduct,
disgorgement of all profits related to such conduct, restitution and
unspecified damages, attorneys fees, and punitive damages.
On October 21, 2004, the New York State Insurance Department (the
"NYSID") issued a citation, amended on October 24, 2004 (the "Amended
Citation"), that ordered MMC and a number of its subsidiaries and
affiliates that hold New York insurance licenses to appear at a
hearing and show cause why regulatory action should not be taken
against them. The amended citation charged the respondents with the
use of fraudulent, coercive and dishonest practices; violations of
Section 340 of the New York General Business Law relating to contracts
or agreements for monopoly or in restraint of trade; and violations of
the New York Insurance Law that resulted from unfair methods of
competition and unfair or deceptive acts or practices. The Amended
Citation contemplated a number of potential actions the NYSID could
take, including the revocation of licenses held by the respondents.
On October 25, 2004, NYAG announced that it would not bring criminal
charges against Marsh.
On January 30, 2005, Marsh entered into an agreement (the "Settlement
Agreement") with NYAG and the NYSID to settle the NYAG Lawsuit and the
Amended Citation.
Pursuant to the Settlement Agreement, Marsh will establish a fund of
$850 million (the "Fund"), payable over four years, for Marsh
policyholder clients. A copy of the Settlement Agreement was
previously disclosed as an exhibit to MMC's Current Report on Form 8-K
dated January 31, 2005. As a general matter, U.S. policyholder clients
who retained
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Marsh to place insurance between 2001 and 2004 that resulted in Marsh
receiving market service revenue will be eligible to receive a pro
rata distribution. No showing of fault, harm or wrongdoing is required
in order to receive a distribution. No portion of the Fund represents
a fine or penalty against Marsh and no portion of the Fund will revert
to Marsh. Clients who voluntarily elect to participate in the Fund
will tender a release relating to the matters alleged in the NYAG
Lawsuit or the Amended Citation, except for claims which are based
upon, arise out of or relate to the purchase or sale of Marsh
securities. The Settlement Agreement further provides that Marsh will
not seek or accept indemnification pursuant to any insurance policy
for amounts payable pursuant to the Settlement Agreement.
MMC has recorded a reserve of $850 million in 2004 for the amount to
be paid into the Fund in accordance with the Settlement Agreement. In
addition, MMC recorded a charge of $16 million for the expected cost
to calculate and administer payments out of the Fund.
Marsh also agreed to undertake the following business reforms within
60 days of the date of the Settlement Agreement:
a. Marsh will accept compensation for its services in placing,
renewing, consulting on or servicing any insurance policy only
by a specific fee paid by the client; or by a specific percentage
commission on premium to be paid by the insurer; or a combination
of both. The amount of such compensation must be fully disclosed
to, and consented to in writing, by the client prior to the
binding of any policy;
b. Marsh must give clients prior notification before retaining
interest earned on premiums collected on behalf of insurers;
c. In placing, renewing, consulting on or servicing any insurance
policy, Marsh will not accept from or request of any insurer any
form of contingent compensation;
d. In placing, renewing, consulting on or servicing any insurance
policy, Marsh will not knowingly use wholesalers for the
placement, renewal, consultation on or servicing of insurance
without the agreement of its client;
e. Prior to the binding of an insurance policy, Marsh will disclose
to clients all quotes and indications sought or received from
insurers, including the compensation to be received by Marsh in
connection with each quote. Marsh also will disclose to clients
at year-end Marsh's compensation in connection with the client's
policy; and
f. Marsh will implement company-wide written standards of conduct
relating to compensation and will train relevant employees in a
number of subject matters, including business ethics,
professional obligations, conflicts of interest, anti-trust and
trade practices compliance, and record keeping.
The MMC Board of Directors has established a committee of the Board to
monitor compliance with the standards of conduct regarding compensation
from insurers and will make quarterly reports to the Board of the results
of its monitoring activity for a period of five years.
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The Settlement Agreement further provides that Marsh reserves the right to
request that NYAG and the NYSID modify the Settlement Agreement if
compliance with any portion thereof proves impracticable.
Though Mercer Inc. ("Mercer") was not a defendant in the NYAG Lawsuit, U.S.
policyholder clients that retained Mercer to place, renew, consult on or
service insurance between 2001 and 2004 that related to Mercer receiving
contingent commissions or overrides are eligible to participate in the
Fund.
On January 6, 2005, NYAG filed a felony complaint against former Marsh
employee Robert Stearns as to which Mr. Stearns has entered a guilty plea.
On February 15, 2005 and February 24, 2005, former Marsh employees,
Joshua Bewlay and Kathryn Winter, respectively, pled guilty to certain
claims.
The Settlement Agreement does not resolve any investigation, proceeding or
action commenced by NYAG or NYSID against any former or current employees
of Marsh. As part of the Settlement Agreement, Marsh apologized for the
improper conduct of certain employees. Marsh also agreed to continue to
cooperate with NYAG and NYSID in connection with their ongoing
investigations of the insurance industry, and in any related proceedings or
actions. NYAG has publicly stated that additional charges and/or guilty
pleas involving Marsh personnel and others are highly likely.
Investigations by the offices of attorneys general in 18 jurisdictions,
and the departments of insurance or other state agencies in 29 other
jurisdictions remain pending.
Related Litigations
As of February 15, 2005, numerous lawsuits have been commenced against MMC,
one or more of its subsidiaries, and its current and former directors and
officers, relating to matters alleged in the NYAG Lawsuit, including the
following:
- Fifteen putative class actions have been brought purportedly on
behalf of policyholders in various federal courts, including the
Southern and Eastern Districts of New York, the District of New
Jersey, the Eastern District of Pennsylvania, the Northern
District of Illinois, the Southern District of Texas and the
Northern District of California. These actions generally include
statutory claims for violations of the Racketeering Influenced
and Corrupt Organizations Act, federal and state antitrust laws
and state unfair business practice laws, and common law claims
for, among other things, breach of contract, fraud, breach of
fiduciary duty, breach of duty of loyalty, and unjust enrichment.
The complaints seek a variety of remedies including unspecified
monetary damages, treble damages, disgorgement, restitution,
punitive damages, injunctive relief, an accounting, and
attorneys' fees and costs. The longest class period alleged in
these policyholder cases begins on January 1, 1994 and continues
to February 4, 2005. On February 17, 2005, the Judicial Panel on
Multidistrict Litigation transferred a number of these federal
cases to the District of New Jersey for coordination or
consolidated pretrial proceedings. It is anticipated that all of
the other federal cases brought by policyholders will be
transferred as well. Five similar class or representative actions
are pending in state courts -- two in California, one in New
York, one in Massachusetts and one in Texas Two putative class
actions are pending in
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Canada. There are at least two actions brought by individual
policyholders and additional suits may be filed by other
policyholders.
- On January 21, 2005, the State of Connecticut commenced a lawsuit
against Marsh challenging Marsh's conduct in connection with the
placement of a loss portfolio transfer of workers' compensation
claims for the State of Connecticut's Department of
Administrative Services. The complaint alleges that Marsh
violated Connecticut's Unfair Trade Practices Act by, among other
things, failing to disclose a $50,000 payment Marsh received from
the insurer in connection with the transfer. The complaint seeks
remedies that include an accounting, actual and punitive damages,
and the costs of investigation and conduct of the lawsuit.
- Four purported class actions on behalf of individuals and
entities who purchased or acquired MMC's publicly-traded
securities during the purported class periods are pending in the
United States District Court for the Southern District of New
York. The purported class periods extend from October 15, 1999 to
October 14, 2004. These complaints allege, among other things,
that MMC inflated its earnings during the class period by
engaging in unsustainable business practices as alleged in the
NYAG lawsuit. These complaints further allege, among other
things, that defendants deceived the investing public regarding
MMC's business, operations, management, and the intrinsic value
of MMC's stock, and caused the plaintiffs and other members of
the purported class to purchase MMC's securities at artificially
inflated prices. The complaints allege, among other things, that
MMC failed to disclose that the revenue derived from MSA
agreements with insurers was part of an unlawful scheme, which
could not be sustained and which exposed the Company to
significant regulatory sanctions, and that MMC failed to disclose
certain alleged anti-competitive and illegal practices, such as
"bid rigging" and soliciting fictitious quotes, at MMC's
subsidiaries. The complaints further allege that MMC's
revenues and earnings would have been significantly lower had
MMC's subsidiaries not engaged in these allegedly unlawful
business practices. The complaints contain factual allegations
similar to those asserted in the NYAG Lawsuit and include claims
for violations of Section 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 based on the company's
allegedly false or incomplete disclosures and seek unspecified
compensatory damages and attorneys' fees. On January 26, 2005,
the United States District Court for the Southern District of New
York issued an order consolidating these complaints into a single
proceeding and appointing co-lead plaintiffs and co-lead counsel
to represent the purported class. On February 18, 2005, the Court
entered an order requiring the co-lead plaintiffs to file a
consolidated complaint by April 19, 2005, and providing that the
Company will have until July 5, 2005 to answer or otherwise
respond to the consolidated complaint.
- Twelve shareholder derivative actions are pending against MMC's
current and former directors and officers in the Court of
Chancery of the State of Delaware, the United States District
Court for the Southern District of New York and the New York
Supreme Court for New York County. These actions allege, among
other things, that current and former directors and officers of
MMC breached their fiduciary duties with respect to the alleged
misconduct described in the NYAG Lawsuit, are liable to MMC for
damages arising from their breaches of fiduciary duty, and must
contribute to or indemnify MMC for any damages MMC has suffered.
MMC has also received six demand letters from shareholders asking
the MMC Board of Directors to take
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appropriate legal action against those directors and officers who
are alleged to have caused damages to MMC based on the facts
alleged in the NYAG Lawsuit.
- Nineteen purported class actions alleging violations of the
Employee Retirement Income Security Act ("ERISA") have been filed
in the United States District Court for the Southern District of
New York on behalf of participants in one or more MMC and Putnam
sponsored employee benefit plans (the "Plans"). The purported
class periods vary, with the longest alleged class period
extending from October 1, 1998 to February 10, 2005. These
complaints allege, among other things that, in view of the
allegedly fraudulent bids and the receipt of contingent
commissions pursuant to the Agreements, the defendants knew or
should have known that the investment of the Plans' funds in MMC
stock was imprudent. These complaints assert claims for
violations of ERISA based on, among other things, the alleged
failure to manage the Plans' assets properly, to monitor the
Plans' fiduciaries, to provide complete and accurate information
to participants and beneficiaries of the Plans, and to avoid
conflicts of interest and prohibited transactions. The complaints
seek, among other things, unspecified compensatory damages,
restitution, disgorgement, injunctive relief and attorneys' fees.
The amount of Plan assets invested in MMC stock at October 13,
2004 (immediately prior to the announcement of the NYAG Lawsuit)
was approximately $1.2 billion. The MMC stock price declined upon
the announcement of the NYAG Lawsuit from approximately $45 per
share immediately prior to such announcement to a low of $22.75
after such announcement. On February 9, 2005, the Court issued an
order consolidating these complaints into a single proceeding and
appointing co-lead plaintiffs and lead counsel to represent the
purported class. The order requires plaintiffs' counsel to confer
on the timing of a consolidated complaint and submit a proposed
scheduling order to the court.
Related Regulatory Matters
Following the filing of the NYAG Lawsuit, MMC and certain of its
subsidiaries received notices of investigations and inquiries,
together with requests for documents and information, from
attorneys general, departments of insurance and other governmental
entities in a number of jurisdictions (other than New York) that
relate to the allegations in the NYAG Lawsuit. As of February 15,
2005, offices of attorneys general in 18 jurisdictions have issued one
or more requests for information or subpoenas calling for the
production of documents or for witnesses to provide testimony.
Subpoenas, letters of inquiry and other information requests have been
received from departments of insurance or other state agencies in 29
jurisdictions. MMC and its subsidiaries are cooperating with these
requests from regulators. Also, in Australia, the Australian
Securities and Investments Commission (ASIC) has requested information
and documents from insurers and brokers, including Marsh, as part of
an examination of brokers' remuneration practices. It is possible
that MMC or its subsidiaries could face administrative proceedings or
other regulatory actions or penalties, including, without limitation,
actions to revoke or suspend their insurance licenses.
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Putnam-Related Matters
Regulatory Matters
- On October 28, 2003, the Securities and Exchange Commission ("the
SEC") commenced a civil administrative and cease and desist proceeding
against Putnam under the Investment Advisers Act of 1940 and the
Investment Company Act of 1940. On November 13, 2003, pursuant to an
agreement with Putnam, the SEC entered findings of fact, which Putnam
neither admitted nor denied, that Putnam had violated the Investment
Advisers Act of 1940 and the Investment Company Act of 1940. The order
imposed partial relief, including final censure, remedial
undertakings, and a requirement that Putnam cease and desist from
engaging in certain practices. The SEC asserted that, since 1998, at
least six of Putnam's investment management employees had engaged in
excessive short-term trading of Putnam mutual funds in their personal
accounts and that four of these employees had engaged in trading in
funds over which they had had investment decision-making
responsibilities and access to non-public information regarding their
funds' portfolios. The SEC further found that Putnam had failed to
disclose this potentially self-dealing securities trading to the
trustees or shareholders of the mutual funds it manages, had failed to
take adequate steps to detect and deter such trading activity through
internal controls and had failed in its supervision of these
investment management professionals. Under the terms of the order,
Putnam agreed to a number of remedial actions, including new employee
trading restrictions, enhanced employee trading compliance,
determination by an independent assessment consultant of the amount of
restitution that Putnam would be required to make mutual fund
investors whole for losses attributable to excessive short-term
trading by Putnam employees, the retention of an independent
compliance consultant, the undertaking of periodic compliance reviews,
and certification of compliance with the SEC. On April 8, 2004, Putnam
entered into a settlement of those charges, under which Putnam was
required to pay $5 million in restitution plus a civil monetary
penalty of $50 million. The settlement provided that if the
restitution calculated by the independent assessment consultant under
the SEC order exceeded $10 million, Putnam would be responsible for
paying the excess.
On October 28, 2003, the Secretary of the Commonwealth of
Massachusetts ("Massachusetts Securities Division") commenced a civil
administrative proceeding against Putnam and two of its employees
alleging violations of the state's securities law anti-fraud
provisions. On April 8, 2004, simultaneously and in conjunction with
the settlement of the above-referenced SEC proceeding, the
Massachusetts Securities Division entered a Consent Order in final
settlement of those charges. That Consent Order included a cease and
desist order, and required Putnam to pay $5 million in restitution and
an administrative fine of $50 million. The Consent Order provided that
if the restitution calculated by the independent assessment consultant
under the Massachusetts order exceeded $15 million, Putnam would be
responsible for paying the excess. The restitution called for by the
Consent Order will be distributed by the same independent assessment
consultant appointed pursuant to the November 13, 2003 and April 8,
2004 SEC orders, acting in his capacity as the independent
distribution consultant under the Orders.
On March 3, 2005, the independent assessment consultant issued his
assessment reports (dated March 2, 2005) under the SEC orders and the
Massachusetts Consent Order. In the reports, the independent
assessment consultant concluded that $108.5 million is the
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total amount of restitution payable by Putnam to fund shareholders.
Putnam will pay $25 million of this amount from the amounts previously
made available for restitution under the SEC and Massachusetts orders,
and has recorded a charge for the additional $83.5 million in the
fourth quarter of 2004. In addition to the $108.5 million in
restitution, Putnam fund shareholders will also receive a distribution
of $45 million under the "Fair Fund" which will be taken from the
civil penalty Putnam previously paid to the SEC and does not
reflect an additional payment. The independent assessment consultant,
in his capacity as the independent distribution consultant under the
April 8, 2004 SEC order and the Massachusetts Consent Order, is
continuing his work on a distribution plan that will provide for the
distribution of the restitution amounts described above to Putnam fund
shareholders. Putnam will incur additional costs in connection with
the implementation of the distribution plan.
In a separate action, the SEC is seeking an injunction against two of
the six investment management employees referenced above. These six
individuals are no longer employed by Putnam.
In late 2003 and early 2004, Putnam received initial document
subpoenas or requests for information from the United States Attorney
for the District of Massachusetts, the Florida Department of Financial
Services, the Office of the New York State Attorney General, Offices
of the Secretary of State and the State Auditor for the State of West
Virginia, the Vermont Securities Division, the National Association of
Securities Dealers and the U.S. Department of Labor ("Department of
Labor") inquiring into, among other things, matters that are the
subject of the SEC and Massachusetts actions described above.
- In connection with its investigation of certain brokerage matters, the
staff of the Philadelphia district office of the SEC questioned
whether, in years prior to 2004, Putnam had fully and effectively
disclosed its practices for executing securities trades through
broker-dealers that also sold Putnam mutual funds. Putnam ceased
directing brokerage to broker-dealers in connection with the sale of
fund shares as of January 1, 2004. Putnam and the Philadelphia office
negotiated an offer of settlement under which Putnam would pay a civil
penalty in the amount of $40 million and disgorgement in the amount of
$1, and the total amount would be paid to certain Putnam funds.
Discussions with the staff of the SEC with respect to this offer
are ongoing, and the offer is subject to final documentation and
acceptance by the staff and the Commissioners of the SEC. Putnam
has also received requests for information from the Department of
Labor with respect to the foregoing.
- In the Spring of 2004, Putnam received initial document requests and
subpoenas from the Massachusetts Securities Division, the Office of
the New York State Attorney General, the SEC, and the Department of
Labor relating to plan expense reimbursement agreements between Putnam
and certain multi-employer deferred compensation plans that are Putnam
clients, and also relating to Putnam's relationships with consultants
retained by multi-employer deferred compensation plans. The
Massachusetts Securities Division has taken testimony from a number of
Putnam employees relating to these matters.
- The Enforcement Staff of the SEC's Boston Office is currently
investigating certain matters that arose in the defined contribution
plan administration business formerly
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conducted by Putnam Fiduciary Trust Company ("PFTC"). Putnam also has
received requests for information about certain of these matters from
the Massachusetts Securities Division and the Department of Labor. One
of the matters relates to the manner in which certain operational
errors were corrected in connection with a January 2001 transfer and
investment of assets on behalf of a 401(k) defined contribution plan.
The manner in which these errors were corrected affected the plan and
five of the Putnam mutual funds in which certain plan assets were
invested. Putnam has made restitution to the plan and the affected
funds. Putnam also has made a number of personnel changes, including
replacing senior managers, and has implemented changes in procedures.
A second matter relates to the source and use of funds paid to a
third-party vendor by PFTC in exchange for information consulting
services. Putnam has re-processed the payment of these consulting
expenses in accordance with Putnam's corporate expense payment
procedures.
On or about September 9, 2004, the SEC issued a Formal Order directing
an investigation into the two matters described above and designating
officers to take testimony in furtherance of this investigation. In
addition, on or about September 29, 2004, the Examination Staff of the
SEC's Boston District Office communicated to Putnam and to the Board
of Trustees of the Putnam mutual funds the Examination Staff's belief
that Putnam and certain of its employees may have violated certain
provisions of federal law in connection with these two matters. The
Examination Staff has requested that Putnam provide additional
information regarding these matters and a description of the steps
Putnam has taken or intends to take with respect to these matters, and
Putnam has undertaken to do so in connection with the Enforcement
Staff's ongoing investigation. It is possible that the Enforcement
Staff may take enforcement action with respect to these matters.
- On March 2, 2004, Putnam received a request for information from the
Department of Labor relating to investments by the Putnam Profit
Sharing Retirement Plan and certain discretionary ERISA accounts in
Putnam mutual funds that pay 12b-1 fees. On October 6, 2004 the
Department of Labor indicated its preliminary belief that, in making
such investments, Putnam may have violated certain provisions of
ERISA. Putnam has made a written submission to the Department of Labor
addressing these issues. Putnam has also responded to requests for
information from the Department of Labor regarding PFTC's treatment of
gains generated by transaction processing errors made by PFTC in
connection with its administration of defined contribution plans.
Putnam has implemented new procedures for handling such gains and
intends to make restitution to certain plans pursuant to a methodology
that has been disclosed to the Department of Labor. In 2003 Putnam
provided a reserve of approximately $3 million in connection with such
restitution.
- Since December 2003, Putnam has received various requests for
information from the Department of Labor regarding the Putnam Profit
Sharing Retirement Plan, including requests for information relating
to (i) Plan governance, (ii) Plan investments, including investments
in MMC stock, (iii) the purported ERISA class actions relating to
MMC's receipt of contingent commissions and other matters, which are
discussed above, (iv) the market timing-related "ERISA Actions," which
are discussed below; and (v) the suspensions of trading in MMC stock
imposed by Putnam on its employees in October and November 2004.
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- Commencing on March 5, 2002, PFTC received a number of document
requests, subpoenas for the production of documents or testimony and
requests for interviews from the Department of Labor relating to
PFTC's role as the directed trustee of certain Global Crossing
retirement accounts.
- The Fort Worth office of the SEC has raised issues about whether the
current structure of the Putnam Research Fund's investment management
fee, which includes a performance component in addition to a base fee,
fully complies with SEC regulations concerning performance fees.
Putnam is currently engaged in discussions with the staff of the SEC
regarding possible adjustments to the fee structure. Retroactive
application of such adjustments over the period since April 1, 1997
(the period during which the performance fee has been in effect) would
result in a reduction in aggregate management fees for that period. In
the fourth quarter of 2004 Putnam provided a reserve of approximately
$2 million for this matter.
Putnam is fully cooperating with the regulatory authorities in connection with
these matters.
"Market-Timing" Related Litigation. As of February 15, 2005, MMC and Putnam
have received complaints in over 70 civil actions based on allegations of
"market-timing" and in some cases "late trading" activities. These actions were
filed in courts in New York, Massachusetts, California, Illinois, Connecticut,
Delaware, Vermont, Kansas, and North Carolina. All of the actions filed in
federal court have been transferred, along with actions against other mutual
fund complexes, to the United States District Court for the District of Maryland
for coordinated or consolidated pretrial proceedings. The lead plaintiffs in
those cases filed consolidated amended complaints on September 29, 2004. MMC and
Putnam intend to move to dismiss the non-ERISA consolidated amended complaints
on February 25, 2005 and the ERISA-related complaints on March 25, 2005.
The consolidated amended complaints currently pending in federal court in
Maryland are as follows:
- MMC and Putnam, along with certain of their former officers and
directors, have been named in a consolidated amended class action
complaint (the "MMC Class Action") purportedly brought on behalf of
all purchasers of the publicly-traded securities of MMC between
January 3, 2000 and November 3, 2003 (the "Class Period"). In general,
the MMC Class Action alleges that the defendants, including MMC,
allowed certain mutual fund investors and fund managers to engage in
market-timing in the Putnam family of funds. The complaint further
alleges that this conduct was not disclosed until late 2003, in
violation of sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder. The complaint alleges
that, as a result of defendants' purportedly misleading statements or
omissions, MMC's stock traded at inflated levels during the Class
Period. The suit seeks unspecified damages and equitable relief.
- MMC and Putnam have also been named as defendants in a consolidated
amended complaint filed on behalf of a putative class of investors in
certain Putnam funds, and in another consolidated amended complaint in
which certain fund investors purport to assert derivative claims on
behalf of all Putnam funds. These suits seek to recover unspecified
damages allegedly suffered by the funds and their shareholders as a
result of purported market-timing and late-trading activity that
allegedly occurred in certain Putnam funds. The derivative suit seeks
additional relief, including termination of the investment advisory
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contracts between Putnam Investment Management and the funds,
cancellation of the funds' 12b-1 plans and the return of all advisory
and 12b-1 fees paid by the funds over a certain period of time. In
addition to MMC and Putnam, various Putnam affiliates, certain
trustees of Putnam funds, certain present and former Putnam officers
and employees, and persons and entities that allegedly engaged in or
facilitated market-timing or late trading activities in Putnam funds
are named as defendants. The complaints allege violations of sections
11, 12(a), and 15 of the Securities Act of 1933, sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, sections 36(a) and (b), 47 and 48(a) of the
Investment Company Act of 1940, and sections 206 and 215 of the
Investment Advisors Act, as well as state law claims for breach of
fiduciary duty, breach of contract, unjust enrichment and civil
conspiracy. Putnam has also been named as a defendant in its capacity
as a sub-advisor to a non-Putnam fund in a class action suit pending
in the District of Maryland against another mutual fund complex.
- A consolidated amended complaint asserting shareholder derivative
claims has been filed, purportedly on behalf of MMC, against current
and former members of MMC's Board of Directors, two of Putnam's former
officers, and MMC as a nominal defendant (the "MMC Derivative
Action"). The MMC Derivative Action generally alleges that the members
of MMC's Board of Directors violated the fiduciary duties they owed to
MMC and its shareholders as a result of a failure of oversight of
market-timing in Putnam mutual funds. The MMC Derivative Action
alleges that, as a result of the alleged violation of defendants'
fiduciary duties, MMC suffered damages. The suit seeks unspecified
damages and equitable relief. MMC has also received two demand letters
from stockholders asking the MMC Board of Directors to take action to
remedy alleged breaches of duty by certain officers, directors,
trustees or employees of MMC or Putnam, based on market timing in the
Putnam funds. The first letter asked to have the Board of Trustees
of the Putnam Funds, as well as the MMC Board, take action to remedy
those alleged breaches of fiduciary duty. The second letter demanded
that the Company commence legal proceedings against the MMC directors,
the senior management of Putnam, the Putnam Trustees and MMC's
auditor to remedy those alleged breaches of fiduciary duty.
- MMC, Putnam, and various of their current and former officers,
directors and employees have been named as defendants in two
consolidated amended complaints that purportedly assert class action
claims under ERISA (the "ERISA Actions"). The ERISA Actions, which
have been brought by participants in MMC's Stock Investment Plan and
Putnam's Profit Sharing Retirement Plan, allege, among other things,
that, in view of the market-timing trading activity that was allegedly
allowed to occur at Putnam, the defendants knew or should have known
that the investment of the plans' funds in MMC stock and Putnam's
mutual fund shares was imprudent and that the defendants breached
their fiduciary duties to the plan participants in making these
investments. The ERISA actions seek unspecified damages, as well as
equitable relief including the restoration to the plans of all profits
the defendants allegedly made through the use of the plans' assets, an
order compelling the defendants to make good to the plans all losses
to the plans allegedly resulting from defendants' alleged breaches of
their fiduciary duties, and the imposition of a constructive trust on
any amounts by which any defendant allegedly was unjustly enriched at
the expense of the plans.
Putnam has agreed to indemnify the Putnam funds for any liabilities arising from
market-timing activities, including those that could arise in the above
securities litigations, and MMC has agreed to guarantee Putnam's obligations in
that regard.
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Other Putnam Litigation.
- MMC, Putnam Investment Management, LLC and Putnam Retail
Management Limited Partnership have been sued in the United
States District Court for the District of Massachusetts for
alleged violations of Section 36(b) of the Investment Company Act
of 1940 in connection with the receipt of purportedly excessive
advisory and distribution fees paid by the mutual funds in which
plaintiffs purportedly owned shares.
Plaintiffs seek, among other things, to recover the compensation
paid to defendants by the funds for one year prior to the filing
of the complaint, rescission of the management and distribution
agreements between defendants and the funds, and a prospective
reduction in fees. On August 13, 2004, defendants filed a motion
to dismiss the complaint for failure to state a claim for relief.
The motion has been fully briefed and argued and remains before
the court for decision.
- Putnam has also been notified by certain former institutional
clients that they are considering possible claims relating to
certain alleged disclosure failures, misrepresentations and
purported breaches of investment management agreements.
- Putnam may be subject to employment-related claims by former
employees who left Putnam in connection with various regulatory
inquiries, including claims relating to deferred compensation. A
former Putnam senior executive has notified Putnam of his
intention to initiate an arbitration proceeding against Putnam
arising from the circumstances of his separation from Putnam. To
date, no such action has been commenced.
- Commencing on July 9, 2004, PFTC, as well as Cardinal Health and
a number of other Cardinal-related fiduciaries, were named as
defendants in a litigation pending in the United States District
Court for the Southern District of Ohio relating to the allegedly
imprudent investment of retirement plan assets in Cardinal stock
in the Cardinal Health Profit Sharing, Retirement and Savings
Plan and its predecessor plans. PFTC was a directed trustee of
this plan. Plan participants have sued, alleging that plan assets
were imprudently invested in Cardinal stock when the market price
of Cardinal stock was artificially inflated and the plan
fiduciaries failed to disclose material information necessary for
participants to make informed decisions concerning investments in
such stock.
Other Governmental Inquiries
The SEC is examining the practices, compensation arrangements and disclosures of
consultants that provide services to sponsors of pension plans or other market
participants, including among other things, practices with respect to advice
regarding the selection of investment advisors to manage plan assets. Mercer
Investment Consulting, Inc. has received requests for information from the SEC
in connection with this examination and is fully cooperating.
MMC, Putnam and Mercer have been advised by the Boston Office of the SEC that it
is conducting an informal investigation of a program pursuant to which companies
within the MMC group refer business to one another and receive compensation for
such referrals. In connection with this investigation, MMC, Putnam and Mercer
have received requests for information from the SEC and are fully cooperating.
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On February 10, 2005, Mercer Investment Consulting received a letter from the
West Virginia Securities Commission seeking documents relating to services
provided by Mercer Investment Consulting and related Mercer entities to the
State of West Virginia and its Public Retirement System. Mercer is cooperating
fully with this request.
On February 8, 2005 the Department of Labor served a subpoena on MMC seeking
documents pertaining to services provided by MMC subsidiaries to employee
benefit plans, including but not
limited to documents relating to how such subsidiaries have been compensated for
such services. The request also seeks information concerning market service
agreements and the solicitation of bids from insurance companies in connection
with such services. MMC is fully cooperating with the Department of Labor.
On January 6, 2005, MMC received a request for information from the Pension
Benefit Guaranty Corporation (the "PBGC"). The PBGC requested information
regarding the funded status of the Marsh & McLennan Companies, Inc. Retirement
Plan and certain financial and business developments at MMC since the filing of
the complaint by the NYAG. MMC is fully cooperating with the PBGC's request for
information.
On or about March 25, 2004, and January 6, 2005, Mercer received requests for
documents and testimony from the U.S. Department of Justice in connection with
an industry-wide investigation of potential anti-competitive agreements or
understandings among providers of actuarial consulting services relating to
limitations of liability and other contractual terms or conditions of
engagement. Mercer is cooperating fully with this investigation.
On December 21, 2004, MMC received a request for information pursuant to a
formal investigation commenced by the SEC. The request for information seeks
documents concerning related-party transactions of MMC or MMC subsidiaries in
which transactions a director, executive officer or 5% stockholder of MMC had a
direct or indirect material interest. MMC is fully cooperating in the
investigation.
Other Matters
- MMC and its subsidiaries are subject to various other claims, lawsuits
and proceedings in the ordinary course of business. Such claims and
lawsuits consist 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 that could, if
assessed, be significant. To the extent insurance coverage is
available, the terms of any applicable coverage varies by policy year,
but the self insurance element has increased substantially over the
past several years. MMC utilizes actuarial estimates and case level
reviews to set loss reserves on the self-insured portion of its
potential exposure in these cases. To the extent that expected losses
exceed MMC's self-insured retention, an asset is recorded for the
estimated amount recoverable under its insurance programs.
- On February 7, 2005, Olwyco LLC ("Olwyco") commenced a lawsuit in the
United States District Court for the Southern District of New York,
against MMC, Mercer, and certain of MMC's former directors alleging
violations of sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder, breach of
representations and warranties, breach of contract, and unjust
enrichment. The lawsuit arises from a
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February 21, 2003 agreement in which Mercer agreed to purchase
substantially all of Olwyco's assets and, as part of the
consideration, to transfer to Olwyco-- in April of 2005, 2006 and
2007-- a fixed number of shares of MMC stock. Olwyco alleges that the
price of MMC stock at the time of the agreement was inflated
artificially as a result of a failure to disclose alleged violations
of law that later became the subject of the NYAG Lawsuit and the
Putnam "Market-Timing" litigation. Olwyco alleges that it will receive
substantially less than the agreed-upon purchase price and that it has
been damaged in an amount not less than $70 million, exclusive of
attorneys' fees and costs.
- As part of the combination with Sedgwick, MMC acquired several
insurance underwriting businesses that were already in run-off,
including River Thames Insurance Company Limited ("River Thames"),
which MMC sold in 2001. Sedgwick guaranteed payment of claims on
certain policies underwritten through the Institute of London
Underwriters (the "ILU") by River Thames (such guarantee being
hereinafter referred to as the "ILU Guarantee"). The policies covered
by the ILU Guarantee are reinsured up to L 40 million by a related
party of River Thames. Payment of claims under the reinsurance
agreement is collateralized by segregated assets held in a trust. As
of December 31, 2004, the reinsurance coverage exceeded the best
estimate of the projected liability of the policies covered by the ILU
Guarantee. To the extent River Thames or the reinsurer is unable to
meet its obligations under those policies; a claimant may seek to
recover from MMC under the guarantee.
- From 1980 to 1983, MMC owned indirectly the English & American
Insurance Company ("E&A"), which was a member of the ILU. The ILU
required MMC to guarantee a portion of E&A's obligations. After E&A
became insolvent in 1993, the ILU agreed to discharge the guaranty in
exchange for MMC's agreement to post an evergreen letter of credit
that is available to pay claims on E&A policies issued through the ILU
and incepting between July 3, 1980 and October 6, 1983. A
representative of the ILU has indicated that potentially significant
claims could be made in the coming months against the letter of
credit.
The proceedings described in this Note 15 on Claims, Lawsuits and Other
Contingencies seek significant monetary damages and other forms of relief.
Where a loss is both probable and reasonably estimable, MMC has established
reserves in accordance with SFAS No. 5, "Accounting for Contingencies".
Except as specifically set forth above, at the present time, MMC's management
is unable to provide a reasonable estimate of the range of possible loss
attributable to the foregoing proceedings or the impact they may have on MMC's
consolidated results of operations or financial position (over and above MMC's
existing loss reserves) or MMC's cash flows (to the extent not covered by
insurance). The principal reasons for this are that many of these cases are in
their early stages, the sufficiency of the complaints has not yet been tested
in most of the cases, and, in many of the cases, only limited discovery, if
any, has taken place. Without knowledge of which, if any, claims will survive,
it is not possible to reasonably estimate the possible loss or range of loss.
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16. SEGMENT INFORMATION
In 2004, MMC operated in three principal business segments based on the services
provided. Segment performance is evaluated based on segment operating income,
which includes investment income and losses attributable to each segment,
directly related expenses, minority interest, and charges or credits related to
integration and restructuring but excludes corporate expenses. The accounting
policies of the segments are the same as those used for the consolidated
financial statements described in Note 1. Revenues are attributed to geographic
areas on the basis of where the services are performed.
-95-
Selected information about MMC's operating segments and geographic areas of
operation follow:
For the Years Ended Depreciation
December 31, Operating Total and Capital
(In millions of dollars) Revenue Income Assets Amortization Expenditures
- ------------------------ ------- --------- ------- ------------ ------------
2004-
Risk and Insurance Services $ 7,391 (a) $ 252 $12,497 $264 $258
Investment Management 1,757 90 2,038 100 61
Consulting 3,070 330 3,161 78 43
------- ------ ------- ---- ----
Total Operating Segments $12,218 $ 672 $17,696 $442 $362
------- ------ ------- ---- ----
Corporate/Eliminations (59)(b) (24)(c) 641(d) 14 14
------- ------ ------- ---- ----
Total Consolidated $12,159 $ 648 $18,337 $456 $376
======= ====== ======= ==== ====
2003-
Risk and Insurance Services $ 6,868 (a) $1,751 $ 9,625 $203 $281
Investment Management 2,001 497 2,377 106 56
Consulting 2,719 363 2,786 70 59
------- ------ ------- ---- ----
Total Operating Segments $11,588 $2,611 $14,788 $379 $396
------- ------ ------- ---- ----
Corporate/Eliminations (44)(b) (115)(c) 265(d) 12 40
------- ------ ------- ---- ----
Total Consolidated $11,544 $2,496 $15,053 $391 $436
======= ====== ======= ==== ====
2002-
Risk and Insurance Services $ 5,910 (a) $1,490 $ 8,571 $183 $257
Investment Management 2,166 560 2,144 108 82
Consulting 2,364 326 2,080 58 53
------- ------ ------- ---- ----
Total Operating Segments $10,440 $2,376 $12,795 $349 $392
------- ------ ------- ---- ----
Corporate/Eliminations (52)(b) (102)(c) 1,060(d) 10 31
------- ------ ------- ---- ----
Total Consolidated $10,388 $2,274 $13,855 $359 $423
======= ====== ======= ==== ====
(a) Includes interest income on fiduciary funds ($130 million in 2004, $114
million in 2003 and $118 million in 2002).
(b) Represents elimination of intercompany revenue among segments.
(c) Details provided in the chart below.
(d) Corporate assets primarily include unallocated goodwill, insurance
recoverables, prepaid pension and a portion of MMC's headquarters building.
A reconciliation of segment operating income to operating income in the
Consolidated Statements of Income is as follows:
(In millions of dollars) 2004 2003 2002
- ------------------------ ---- ------ ------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST:
Total segment operating income $672 $2,611 $2,376
Corporate expense (39) (140) (123)
Reclassification of minority interest 15 25 21
---- ------ ------
Operating income $648 $2,496 $2,274
==== ====== ======
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Operating Segment Revenue by Product is as follows:
(In millions of dollars) 2004 2003 2002
- ------------------------ ------- ------- -------
RISK & INSURANCE SERVICES
Risk Management and Insurance Broking $ 4,805 $ 4,881 $ 4,287
Reinsurance Broking and Services 842 797 652
Risk Consulting & Technology 716 300 124
Related Insurance Services 1,028 890 847
------- ------- -------
Total Risk & Insurance Services 7,391 6,868 5,910
------- ------- -------
INVESTMENT MANAGEMENT 1,757 2,001 2,166
------- ------- -------
CONSULTING
Retirement Services 1,356 1,203 1,115
Management and Organizational Change 585 449 280
Health Care & Group Benefits 397 388 358
Human Capital 407 384 340
Economic 166 150 130
------- ------- -------
2,911 2,574 2,223
Reimbursed Expenses 159 145 141
------- ------- -------
Total Consulting 3,070 2,719 2,364
------- ------- -------
TOTAL OPERATING SEGMENTS $12,218 $11,588 $10,440
------- ------- -------
Corporate/Eliminations (59) (44) (52)
------- ------- -------
Total $12,159 $11,544 $10,388
======= ======= =======
Information by geographic area is as follows:
(In millions of dollars) 2004 2003 2002
- ------------------------ ------- ------- -------
GEOGRAPHIC AREA:
EXTERNAL REVENUE -
United States $ 7,294 $ 7,371 $ 7,005
United Kingdom 2,083 1,760 1,499
Continental Europe 1,456 1,241 950
Other 1,385 1,216 986
------- ------- -------
$12,218 $11,588 $10,440
------- ------- -------
Corporate/Eliminations (59) (44) (52)
------- ------- -------
$12,159 $11,544 $10,388
======= ======= =======
FIXED ASSETS -
United States $ 906 $ 921 $ 914
United Kingdom 308 308 261
Continental Europe 85 78 64
Other 88 82 69
------- ------- -------
$ 1,387 $ 1,389 $ 1,308
======= ======= =======
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To 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 (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 7, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
(DELOITTE & TOUCHE LLP)
New York, New York
March 7, 2005
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MARSH & MCLENNAN COMPANIES, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA AND
SUPPLEMENTAL INFORMATION (UNAUDITED)
Net Income
Per Share (a) Dividends
(In millions of dollars, Operating Net ---------------- Paid Per
except per share figures) Revenue Income Income Basic Diluted Share
- ------------------------- ------- --------- ------ ------ ------- ---------
2004:
First quarter $ 3,196 $ 773 $ 446 $ .85 $ .83 $ .31
Second quarter 3,028 632 389 .75 .73 .31
Third quarter 2,950 128 21 .04 .04 .34
Fourth quarter 2,985 (885) (680) (1.29) (1.29) .34
------- ------ ------ ------ ------ -----
$12,159 $ 648 $ 176 $ .33 $ .33 $1.30
======= ====== ====== ====== ====== =====
2003:
First quarter $ 2,844 $ 717 $ 443 $ .83 $ .81 $ .28
Second quarter 2,854 599 365 .68 .66 .28
Third quarter 2,823 593 357 .67 .65 .31
Fourth quarter 3,023 587 375 .71 .69 .31
------- ------ ------ ------ ------ -----
$11,544 $2,496 $1,540 $ 2.89 $ 2.81 $1.18
======= ====== ====== ====== ====== =====
2002:
First quarter $ 2,619 $ 687 $ 418 $ .76 $ .73 $.265
Second quarter 2,601 565 336 .62 .60 .265
Third quarter 2,540 512 299 .56 .55 .28
Fourth quarter 2,628 510 312 .58 .57 .28
------- ------ ------ ------ ------ -----
$10,388 $2,274 $1,365 $ 2.52 $ 2.45 $1.09
======= ====== ====== ====== ====== =====
(a) Net income per share is computed independently for each of the periods
presented. Accordingly, the sum of the quarterly net income per share
amounts does not equal the total for the year in 2004.
All per share amounts have been restated for a two-for-one stock distribution of
MMC common stock, which was issued as a stock dividend on June 28, 2002.
As of February 25, 2005, there were 11,067 stockholders of record.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure. None.
- --------------------
Item 9A. Controls and Procedures.
- ------- -----------------------
Disclosure Controls and Procedures.
----------------------------------
Based on their evaluation, as of the end of the period for the filing of this
Form 10-K, the Company's chief executive officer and chief financial officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) are
effective in timely alerting them to material information relating to the
Company required to be included in our reports filed under the Exchange Act.
Internal Control over Financial Reporting.
------------------------------------------
(a) Management's Annual Report on Internal Control Over Financial Reporting
The management of Marsh & McLennan Companies, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting.
MMC's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
MMC's internal control over financial reporting included those policies and
procedures relating to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
MMC; the recording of all necessary transactions to permit the preparation of
MMC's consolidated financial statements in accordance with generally accepted
accounting principles; the proper authorization of receipts and expenditures in
accordance with authorizations of MMC's management and directors; and the
prevention or timely detection of the unauthorized acquisition, use or
disposition of assets that could have a material effect on MMC's consolidated
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management evaluated the effectiveness of MMC's internal control over financial
reporting as of December 31, 2004. In making this evaluation, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on
its evaluation, management determined that MMC maintained effective internal
control over financial reporting as of December 31, 2004.
-100-
Deloitte & Touche LLP, the Independent Registered Public Accounting Firm that
audited and reported on MMC's consolidated financial statements included in this
annual report, also issued an attestation report on management's evaluation of
the effectiveness of MMC's internal control over financial reporting as of
December 31, 2004.
Michael G. Cherkasky Sandra S. Wijnberg
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
March 7, 2005 March 7, 2005
(b) Attestation of the Registered Public Accounting Firm.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Marsh & McLennan Companies, Inc.:
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Marsh & McLennan Companies, Inc. and subsidiaries, (the "Company") maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in
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accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of the Company and our
report dated March 7, 2005 expressed an unqualified opinion on those financial
statements.
(DELOITTE & TOUCHE LLP)
New York, New York
March 7, 2005
(c) Changes in Internal Control Over Financial Reporting.
There have been no changes in the Company's internal controls over
financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information.
- ------- -----------------
On February 26, 2005, the MMC Board of Directors approved, subject to
stockholder approval, an option exchange program whereby non-executive officer
option holders would be able to elect to exchange eligible MMC stock options for
a lesser number of new stock options that will have an exercise price equal to
the fair market value of MMC common stock at the time of the exchange. Only
options with exercise prices that are significantly above the fair market value
of MMC common stock will be eligible. Exchange ratios will be set with the
intention that eligible option holders receive options that have a fair market
value that is equal to 90% of the value of the exchanged options. A detailed
description of the proposal will be included in the Notice and Proxy Statement
for the 2005 Annual Meeting of Stockholders to be filed within 120
-102-
days after December 31, 2004 (the "2005 Proxy Statement"). The proposal will be
voted upon by MMC stockholders at the 2005 Annual Meeting of Stockholders to be
held on May 19, 2005.
On November 9, 2004, MMC entered into a letter of understanding with its former
chairman and chief executive officer, Jeffrey W. Greenberg, confirming certain
arrangements regarding his termination of employment. A copy of the letter is
attached to this report as an exhibit.
PART III
Item 10. Directors and Executive Officers of MMC.
- ------- ---------------------------------------
Information as to the directors and nominees for the board of directors
of MMC is incorporated herein by reference to the material set forth under the
heading "Election of Directors" in the 2005 Proxy Statement.
The executive officers of MMC are Messrs. Beber, Beshar, Bonsignore,
Cabiallavetta, Cherkasky, Davis, Freakley, Gilbert, Haldeman, Morrison,
Petrullo, Storms, Zaffino and Ms. Wijnberg, with respect to whom information is
provided in Part I above under the heading "Executive Officers of MMC".
The information set forth in the 2005 Proxy Statement in the section
"Information Regarding the Board of Directors" under "--Committees--The Audit
Committee" and "--Codes of Business Conduct and Ethics" is incorporated herein
by reference.
The information set forth in the 2005 Proxy Statement in the section
"Transactions with Management and Others; Other Information" under "Section
16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by
reference.
Item 11. Executive Compensation.
- ------- ----------------------
The information under the headings "Information Regarding the Board of
Directors--Directors' Compensation", "Compensation of Executive Officers",
"Compensation Committee Report" and "Stock Performance Graph" in the 2005 Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ------- ------------------------------------------------------------------
Related Stockholder Matters.
- ---------------------------
The information under the heading "Stock Ownership of Management and
Certain Beneficial Owners" in the 2005 Proxy Statement is incorporated herein by
reference.
Information on MMC common stock authorized for issuance under equity
compensation plans is contained above in the "Equity Compensation Plan
Information Table" under Item 5 of this report on pages 23 to 25 of this report.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
Information under the headings " Information Regarding the Board of
Directors--Directors' Compensation" and "Transactions with Management and
Others; Other Information" in the 2005 Proxy Statement is incorporated herein by
reference.
-103-
Item 14. Principal Accountant Fees and Services.
- -------- --------------------------------------
The information under the heading "Ratification of Selection of
Auditors--Fees of Independent Auditors" in the 2005 Proxy Statement is
incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
- ------- ------------------------------------------
The following documents are filed as a part of this report:
1. Consolidated Financial Statements:
Consolidated Statements of Income for each of the three
years in the period ended December 31, 2004
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2004
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for each of the three years in the
period ended December 31, 2004
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Other:
Selected Quarterly Financial Data and Supplemental
Information (Unaudited) for the three years ended December
31, 2004
Five-Year Statistical Summary of Operations
2. All required Financial Statement Schedules are included in the
Consolidated Financial Statements or the Notes to Consolidated
Financial Statements.
3. The following exhibits are filed as a part of this report:
(3.1) MMC's restated certificate of incorporation
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2003)
(3.2) MMC's by-laws (incorporated by reference to MMC's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)
(4.1) Indenture dated as of June 14, 1999 between MMC and
State Street Bank and Trust Company, as trustee
(incorporated by reference to
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MMC's Registration Statement on Form S-3, Registration
No. 333-108566)
(4.2) First Supplemental Indenture dated as of June 14, 1999
between MMC and State Street Bank and Trust Company, as
trustee (incorporated by reference to MMC's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999)
(4.3) Second Supplemental Indenture dated as of February 19,
2003 between MMC and U.S. Bank National Association (as
successor to State Street Bank and Trust Company), as
trustee (incorporated by reference to MMC's Quarterly
Report on Form 10-Q for the quarter ended March 31,
2003)
(4.4) Third Supplemental Indenture dated as of July 30, 2003
between MMC and U.S. National Bank Association (as
successor to State Street Bank and Trust Company), as
trustee (incorporated by reference to MMC's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2003)
(4.5) Indenture dated as of March 19, 2002 between MMC and
State Street Bank and Trust Company, as trustee
(incorporated by reference to MMC's Registration
Statement on Form S-4, Registration No. 333-87510)
(4.6) Indenture, dated as of July 14, 2004, between MMC and
The Bank of New York, as trustee (incorporated by
reference to MMC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004)
(4.7) First Supplemental Indenture, dated as of July 14,
2004, between MMC and The Bank of New York, as trustee
(incorporated by reference to MMC's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004)
(4.8) Amended and Restated Rights Agreement dated as of
January 20, 2000 between MMC and Harris Trust Company
of New York (incorporated by reference to MMC's
Registration Statement on Form 8-A/A filed on January
27, 2000)
(4.9) Amendment No. 1 to Amended & Restated Rights Agreement
dated as of June 7, 2002, by and between MMC and Harris
Trust Company of New York (incorporated by reference to
MMC's Registration Statement on Form 8-A12B/A filed on
June 20, 2002)
(10.1) Agreement between the Attorney General of the State
of New York and the Superintendent of Insurance of the
State of New York, and Marsh & McLennan Companies,
Inc., Marsh Inc. and their subsidiaries and affiliates
dated January 30, 2005 (incorporated by reference to
MMC's Current Report on Form 8-K dated January 31,
2005)
-105-
(10.2) *Marsh & McLennan Companies, Inc. 2000 Senior
Executive Incentive and Stock Award Plan (incorporated
by reference to MMC's Annual Report on Form 10-K for
the year ended December 31, 1999)
(10.3) *Form of Awards under the 2000 Senior Executive
Incentive and Stock Award Plan (incorporated by
reference to MMC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
(10.4) *Marsh & McLennan Companies Stock Investment
Supplemental Plan (incorporated by reference to MMC's
Annual Report on Form 10-K for the year ended December
31, 1994)
(10.5) *Amendment to Marsh & McLennan Companies Stock
Investment Supplemental Plan dated June 16, 1997
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 1997)
(10.6) *Amendment to Marsh & McLennan Companies Stock
Investment Supplemental Plan dated November 20, 1997
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2000)
(10.7) *Amendment to Marsh & McLennan Companies Stock
Investment Supplemental Plan dated January 1, 2000
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2000)
(10.8) *Marsh & McLennan Companies Special Severance Pay
Plan (incorporated by reference to MMC's Annual Report
on Form 10-K for the year ended December 31, 1996)
(10.9) *Putnam Investments, Inc. Executive Deferred
Compensation Plan (incorporated by reference to MMC's
Annual Report on Form 10-K for the year ended December
31, 1994)
(10.10) *Putnam Investments, LLC Executive Deferred Bonus
Plan (incorporated by reference to MMC's Annual Report
on Form 10-K for the year ended December 31, 2000)
(10.11) *Putnam Investments Trust Equity Partnership Plan
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2003)
(10.12) *Marsh & McLennan Companies Supplemental Retirement
Plan (incorporated by reference to MMC's Annual Report
on Form 10-K for the year ended December 31, 1992)
______________________________
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
-106-
(10.13) *Amendment to Marsh & McLennan Companies
Supplemental Retirement Plan (incorporated by reference
to MMC's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003)
(10.14) *Marsh & McLennan Companies Senior Management
Incentive Compensation Plan (incorporated by reference
to MMC's Annual Report on Form 10-K for the year ended
December 31, 1994)
(10.15) *Marsh & McLennan Companies, Inc. Directors Stock
Compensation Plan (incorporated by reference to MMC's
Annual Report on Form 10-K for the year ended December
31, 1997)
(10.16) *MMC Capital, Inc. Amended and Restated Long Term
Incentive Plan dated as of March 19, 2001 (incorporated
by reference to MMC's Annual Report on Form 10-K for
the year ended December 31, 2000)
(10.17) *Employment Agreement, dated as of July 7, 2004,
among Marsh USA Inc., Kroll Inc. and Michael G.
Cherkasky (incorporated by reference to MMC's Current
Report on Form 8-K dated October 28, 2004)
(10.18) *MMC Capital, Inc. Amended and Restated Deferred
Compensation and Profits Limited Partnership Plan
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2001) (10.19)
*Marsh & McLennan Companies, Inc. 2000 Employee
Incentive and Stock Award Plan (incorporated by
reference to MMC's Annual Report on Form 10-K for the
year ended December 31, 2001)
(10.20) *Form of Awards under the 2000 Employee Incentive
and Stock Award Plan (incorporated by reference to
MMC's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004)
(10.21) Credit Agreement [2 Year Term Loan], dated as of
December 15, 2004 among MMC, Citibank, N.A., as
Administrative Agent and the banks listed therein
(10.22) Amendment No. 1 dated as of December 15, 2004, to
Credit Agreement [5-year], dated as of June 13, 2002,
among MMC, JPMorgan Chase Bank, as Administrative Agent
and the banks listed therein
(10.23) Amendment No. 1, dated as of December 15, 2004, to
Credit Agreement [5-year], dated as of June 9, 2004,
among MMC, JPMorgan Chase Bank, as Administrative Agent
and the Banks listed therein
(10.24) *Amended and Restated Limited Partnership Agreement
of Marsh & McLennan Affiliated Fund, L.P. dated October
12, 1999 (incorporated by reference to MMC's Annual
Report on Form 10-K for the year ended
December 31, 2001)
______________________________
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
-107-
(10.25) *Second Amended and Restated Limited Partnership
Agreement of Marsh & McLennan Capital Professionals
Fund, L.P. dated December 2, 1999 (incorporated by
reference to MMC's Annual Report on Form 10-K for the
year ended December 31, 2001)
(10.26) *Amended and Restated Limited Partnership Agreement
of Marsh & McLennan Capital Technology Professionals
Venture Fund, L.P. dated as of December 2, 1999
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2001)
(10.27) *First Amended and Restated Limited Partnership
Agreement of MMC Capital Tech Professionals Fund II,
L.P. dated as of October 31, 2000 (incorporated by
reference to MMC's Annual Report on Form 10-K for the
year ended December 31, 2001)
(10.28) *First Amended and Restated Limited Partnership
Agreement of MMC Capital C&I Professionals Fund, L.P.
dated as of July 21, 2000 (incorporated by reference to
MMC's Annual Report on Form 10-K for the year ended
December 31, 2001)
(10.29) *Amended and Restated Limited Partnership Agreement
of Trident Capital II, L.P. dated December 2, 1999
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2001)
(10.30) *Amended and Restated Limited Partnership Agreement
of Marsh & McLennan Capital Technology Venture GP, L.P.
dated December 2, 1999 (incorporated by reference to
MMC's Annual Report on Form 10-K for the year ended
December 31, 2001)
(10.31) *Amended and Restated Limited Partnership Agreement
of MMC Capital Tech GP II, L.P. dated as of August 22,
2000 (incorporated by reference to MMC's Annual Report
on Form 10-K for the year ended December 31, 2001)
(10.32) *Limited Partnership Agreement of Marsh & McLennan
Capital C&I GP, L.P. dated as of April 7, 2000
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2001)
(10.33) *Limited Partnership Agreement of Marsh & McLennan
C&I Employees' Securities Company, L.P. dated as of
July 21, 2000 (incorporated by reference to MMC's
Annual Report on Form 10-K for the year ended December
31, 2001)
(10.34) *Amended and Restated Limited Partnership Agreement
of Trident III Professional Fund, L.P. dated December
18, 2003 (incorporated by reference to MMC's Annual
Report on Form 10-K for the year ended December 31,
2003)
______________________________
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
-108-
(10.35) *Amended and Restated Limited Partnership Agreement
of Trident III ESC, L.P. dated December 12, 2003
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2003)
(10.36) Amended and Restated Limited Partnership Agreement
of Trident Capital III, L.P. dated December 4, 2003
(incorporated by reference to MMC's Annual Report on
Form 10-K for the year ended December 31, 2003)
(10.37) *Limited Liability Company Agreement of Putnam
Investments Employees' Securities Company I LLC dated
as of October 3, 2000 (incorporated by reference to
MMC's Annual Report on Form 10-K for the year ended
December 31, 2001)
(10.38) *Limited Liability Company Agreement of Putnam
Investments Employees' Securities Company II LLC dated
as of June 15, 2002 (incorporated by reference to MMC's
Annual Report on Form 10-K for the year ended December
31, 2001)
(10.39) Form of Waiver dated June 24, 2002 of certain
provisions of the MMC Capital Long-Term Incentive Plan
executive by Messrs. Greenberg and Davis (incorporated
by reference to MMC's Quarterly Report on Form 10-Q for
the quarter ending June 30, 2002)
(10.40) Representative Fund Advisory Contract with each of
the Putnam Funds (incorporated by reference to MMC's
Quarterly Report on Form 10-Q for the quarter ending
June 30, 2002)
(10.41) *Letter of Understanding with Jeffrey W. Greenberg
(12) Statement Re: Computation of Ratio of Earnings to Fixed
Charges
(14) Code of Ethics for Chief Executive and Senior Financial
Officers (incorporated by reference to MMC's Annual
Report on Form 10-K for the year ended December 31,
2002)
(21) List of Subsidiaries of MMC (as of 2/18/2005)
(23) Consent of Independent Registered Public Accounting
Firm
(24) Powers of Attorney
(31) Rule 13a-14(a)/15d-14(a) Certifications
(32) Section 1350 Certifications
______________________________
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
-109-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
this 8th day of March, 2005 on its behalf by the undersigned, thereunto duly
authorized.
MARSH & McLENNAN COMPANIES, INC.
By /s/ Michael G. Cherkasky
-----------------------------------------
Michael G. Cherkasky
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated this 8th day of March, 2005.
/s/ Michael G. Cherkasky /s/ Stephen R. Hardis
- -------------------------------------- -----------------------------------------
Michael G. Cherkasky Stephen R. Hardis
Director, Chief Executive Officer Director
& President
/s/ Sandra S. Wijnberg /s/ Gwendolyn S. King
- -------------------------------------- -----------------------------------------
Sandra S. Wijnberg Gwendolyn S. King
Senior Vice President and Director
Chief Financial Officer
/s/ Robert J. Rapport /s/ The Rt. Hon. Lord Lang of Monkton, DL
- -------------------------------------- -----------------------------------------
Robert J. Rapport The Rt. Hon. Lord Lang of Monkton, DL
Vice President and Controller Director
(Chief Accounting Officer)
/s/ Lewis W. Bernard /s/ David A. Olsen
- -------------------------------------- -----------------------------------------
Lewis W. Bernard David A. Olsen
Director Director
/s/ Zachary W. Carter /s/ Morton O. Schapiro
- -------------------------------------- -----------------------------------------
Zachary W. Carter Morton O. Schapiro
Director Director
/s/ Robert F. Erburu /s/ Adele Simmons
- -------------------------------------- -----------------------------------------
Robert F. Erburu Adele Simmons
Director Director
/s/ Oscar Fanjul
- --------------------------------------
Oscar Fanjul
Director