What drove the 1998 revenue and earnings growth?

Growth came mainly from the full-year inclusion of Johnson & Higgins, which was combined in late March 1997, and from the Sedgwick acquisition completed in November 1998. Excluding acquisitions and dispositions, revenue grew about 11%, led by a 22% increase in investment management revenue as average assets under management rose substantially.

How significant is the Sedgwick acquisition and what are the integration plans?

MMC paid about $2.2 billion in cash for Sedgwick, which had about $1.2 billion of annual risk and insurance revenue. Its risk and insurance business will be combined with J&H Marsh & McLennan during 1999, and its employee benefits consulting business with William M. Mercer. Management expects about $200 million of gross synergy savings and a special charge in 1999, though the charge is not yet quantified. The company expects Sedgwick to be accretive to earnings beginning in 2000.

What are the main risks to MMC's earnings?

Key risks include continued declines in property and casualty premium rates, which reduce brokerage commissions; a sustained equity market downturn, which would reduce Putnam's assets and fees (73% of assets are in equities); the integration of Sedgwick and J&H; and contingent liabilities. The largest contingent liability is the UK personal pension redress review, with an estimated exposure of about $355 million, of which $170 million is expected to be recovered from insurers. Management believes the pending litigation will not have a material adverse effect.

How is the company financing the Sedgwick acquisition and how leveraged is the balance sheet?

Sedgwick was initially financed with commercial paper backed by a $2.25 billion committed bank facility led by J.P. Morgan, which expires in August 1999. Short-term debt rose to $2.23 billion and long-term debt to $1.59 billion. Management intends to finalize a permanent financing of long-term debt and equity during 1999. Stockholders' equity was $3.66 billion at year-end 1998.

Which business segment is most profitable, and how is each segment performing?

Investment management (Putnam) is the most profitable, with a 29.5% operating margin and 1998 operating income of $677 million, up 46% from 1997. Risk and insurance services had a 18.3% margin and $613 million of operating income. Consulting (Mercer) had a 13.1% margin and $202 million of operating income, up 36%. Putnam's results are the most sensitive to market levels, while risk and insurance services depends on premium rates and new business.

MRSH/MMC 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.

Marsh & McLennan Companies (MMC) closed 1998 with revenue of $7.19 billion^a, up 20% from $6.01 billion in 1997, and net income of $796 million, up 34% (or roughly 26% in diluted EPS to $2.98 when excluding 1997 special charges, per management).

Growth was driven by the full-year effect of the Johnson & Higgins combination, the late-1998 acquisition of Sedgwick Group plc for about $2.2 billion^b, and strong asset growth at Putnam. Excluding acquisitions and dispositions, revenue grew about 11%, with investment management up 22%, risk and insurance services up about 5%, and consulting up about 12%. The three segments show clearly different economics.

Investment management (Putnam) delivered the highest operating margin at 29.5%, with year-end assets under management of $294 billion^c. Risk and insurance services (Marsh Inc.) generated $613 million of operating income at an 18.3% margin, and consulting (Mercer) earned $202 million at a 13.1% margin. Operating cash flow rose to $1.13 billion, and the balance sheet expanded substantially, with total assets reaching $11.9 billion and goodwill-driven intangibles of $4.8 billion.

Short-term debt jumped to $2.2 billion^d, largely commercial paper used to fund Sedgwick, and management planned to refinance this with long-term debt and equity during 1999. Investors should weigh several risks. Management expects premium rate declines to continue to pressure brokerage revenue, and Putnam's fees are tied to equity market levels, with 73% of assets in equities.

The company also disclosed a UK personal pension redress exposure estimated at about $355 million, of which $170 million is expected to be recovered from insurers, plus an ongoing J&H litigation (Aiena) and an EEOC age discrimination case. Management stated these matters are not expected to have a material adverse effect, and it guided to about $200 million of gross synergy savings from the Sedgwick integration, with a further special charge to be recorded in 1999.

02—Key points

Key Highlights

Revenue rose 20% to $7.19 billion in 1998, and net income rose 34% to $796 million; diluted EPS was $2.98, up from $1.73 reported in 1997 (about $2.36 excluding 1997 special charges).
Sedgwick Group plc was acquired for approximately $2.2 billion in cash, adding about $2.0 billion of goodwill; the risk and insurance business is to be combined with J&H Marsh & McLennan in 1999 to form Marsh Inc.
Putnam Investments was the standout segment, with 1998 operating income of $677 million (29.5% margin) and assets under management of $294 billion, up 25%.
Risk and insurance services generated $3.35 billion of revenue and $613 million of operating income, but growth excluding acquisitions was only about 5% amid ongoing premium rate declines.
Total assets increased to $11.9 billion from $7.9 billion, and short-term debt rose to $2.2 billion, mostly commercial paper used to finance Sedgwick; management plans permanent financing in 1999.
Operating cash flow was $1.13 billion, compared with $415 million in 1997, and dividends paid per share rose to $1.46 from $1.26 after a three-for-two stock split in 1998.

03—Questions

Frequently Asked Questions

What drove the 1998 revenue and earnings growth?
Growth came mainly from the full-year inclusion of Johnson & Higgins, which was combined in late March 1997, and from the Sedgwick acquisition completed in November 1998. Excluding acquisitions and dispositions, revenue grew about 11%, led by a 22% increase in investment management revenue as average assets under management rose substantially.
How significant is the Sedgwick acquisition and what are the integration plans?
MMC paid about $2.2 billion in cash for Sedgwick, which had about $1.2 billion of annual risk and insurance revenue. Its risk and insurance business will be combined with J&H Marsh & McLennan during 1999, and its employee benefits consulting business with William M. Mercer. Management expects about $200 million of gross synergy savings and a special charge in 1999, though the charge is not yet quantified. The company expects Sedgwick to be accretive to earnings beginning in 2000.
What are the main risks to MMC's earnings?
Key risks include continued declines in property and casualty premium rates, which reduce brokerage commissions; a sustained equity market downturn, which would reduce Putnam's assets and fees (73% of assets are in equities); the integration of Sedgwick and J&H; and contingent liabilities. The largest contingent liability is the UK personal pension redress review, with an estimated exposure of about $355 million, of which $170 million is expected to be recovered from insurers. Management believes the pending litigation will not have a material adverse effect.
How is the company financing the Sedgwick acquisition and how leveraged is the balance sheet?
Sedgwick was initially financed with commercial paper backed by a $2.25 billion committed bank facility led by J.P. Morgan, which expires in August 1999. Short-term debt rose to $2.23 billion and long-term debt to $1.59 billion. Management intends to finalize a permanent financing of long-term debt and equity during 1999. Stockholders' equity was $3.66 billion at year-end 1998.
Which business segment is most profitable, and how is each segment performing?
Investment management (Putnam) is the most profitable, with a 29.5% operating margin and 1998 operating income of $677 million, up 46% from 1997. Risk and insurance services had a 18.3% margin and $613 million of operating income. Consulting (Mercer) had a 13.1% margin and $202 million of operating income, up 36%. Putnam's results are the most sensitive to market levels, while risk and insurance services depends on premium rates and new business.

04—Continue

← View all 10-K filings