01—Abstract
Summary
Summary of the 10-K filed March 29, 2002. Cited figures are marked; the original filing is the authoritative source.
Marsh & McLennan Companies (MMC) closed 2001 with revenue of $9.94 billiona, down 2% from $10.16 billion in 2000, and reported net income of $974 million, or $3.39 per diluted share, down from $1.18 billion and $4.10 in 2000.
Excluding one-time items totaling $396 millionb (a $222 million write-down of its Bipop investment at Putnam, plus September 11 and special charges), MMC reported adjusted diluted EPS of $4.24, up 3% from $4.10. The results were pressured by a 19% revenue decline at Putnam as equity markets fell, offset by strong growth at the risk and insurance services unit, Marsh, where revenue rose 8% to $5.2 billion and operating income rose 21% to $1.14 billion. The September 11, 2001 attacks had a direct human and operational impact: 295 MMC colleagues were lost, and the company recorded $187 million in pretax charges net of expected insurance recoveries.
Management said the event's uninsured cash impact has not been significant, though insurance recoveries on certain property items remain contingent. The attacks also accelerated a hardening commercial insurance market, with rising premium rates and reduced capacity, which management cited as a driver of Marsh's growth. MMC Capital helped form AXIS Specialty Limited, a Bermuda reinsurer capitalized at $1.6 billionc, to add capacity.
Balance sheet and capital allocation remain solid: cash rose to $537 milliond, long-term debt was $2.3 billion, stockholders' equity was $5.2 billion, and operating cash flow was $1.4 billion. MMC repurchased 7.8 million shares for $763 million and paid $567 million in dividends. Management expects the adoption of SFAS 142 to add at least $0.40 to diluted EPS in 2002 by ending goodwill amortization, and expects the effective tax rate to fall to about 36%.
Key risks include the UK Personal Investment Authority pension review (estimated remaining exposure of $160 million, mostly insurer-recoverable), the Nelson v. AIM mutual fund fee class action against Putnam, and the sensitivity of Putnam's fee revenue to equity market levels.
02—Key points
Key Highlights
- Revenue fell 2% to $9.94 billion, with Putnam's revenue down 19% to $2.63 billion as average assets under management dropped to $328 billion from $397 billion.
- Reported diluted EPS was $3.39, down from $4.10; excluding $396 million in one-time items, adjusted diluted EPS rose 3% to $4.24.
- Risk and Insurance Services (Marsh) grew revenue 8% to $5.2 billion and operating income 21% to $1.14 billion, with a 22.1% operating margin, the segment's largest growth in operating earnings since 1986.
- September 11 cost MMC 295 colleagues and produced $187 million in pretax charges net of expected insurance recoveries; it also contributed to a $61 million restructuring charge tied to staff cuts and office consolidations.
- A $222 million other-than-temporary impairment on the Gruppo Bipop-Carire investment at Putnam was the largest single one-time item in 2001.
- MMC repurchased 7.8 million shares for $763 million and paid $567 million in dividends ($2.06 per share), while maintaining $537 million in cash and $2.3 billion in long-term debt.
- Adoption of SFAS 142 is expected to add at least $0.40 to 2002 diluted EPS by eliminating goodwill amortization; the tax rate is expected to fall to about 36%.
03—Questions
Frequently Asked Questions
Why did MMC's reported earnings fall in 2001 even though the underlying business grew?
Reported diluted EPS fell to $3.39 from $4.10 mainly because of $396 million in one-time items: a $222 million write-down of Putnam's Bipop investment, $187 million in September 11 charges net of expected insurance recoveries, and a $13 million special credit. Excluding these, diluted EPS rose 3% to $4.24. Marsh's operating income grew 21%, but Putnam's revenue fell 19% as equity market declines reduced assets under management.
How did the September 11 attacks affect MMC's operations and financial position?
The attacks destroyed the World Trade Center space where MMC had about 1,900 employees and killed 295 colleagues, most of them at Marsh. MMC recorded $187 million in pretax charges, including $69 million for victim and employee support, $32 million in asset write-offs, and $25 million for business disruption, all net of expected insurance recoveries. Management said the cash impact after insurance and tax benefits has not been significant, and it expects no material uninsured cash outflow beyond amounts already recognized.
Is Putnam's business at risk, and what legal exposures does it face?
Putnam's revenue depends on assets under management, which fell to $315 billion at year-end 2001 from $370 billion, so continued equity market declines would reduce future revenue. Putnam also faces the Nelson v. AIM class action, which alleges that mutual fund distribution and advisory fees since 1991 were unlawful and excessive. MMC and Putnam believe the suit is without merit and plan to defend it vigorously. Management does not expect the litigation to have a material adverse effect on consolidated results or financial position.
What is the outlook for the insurance brokerage business given the market changes after September 11?
Marsh reported that premium rates and reinsurance pricing rose sharply after September 11, and coverage terms tightened, which supported its revenue growth. Management noted that the transfer of commercial risk had already become more difficult and costly starting in 2000, and that the attacks accelerated those trends. Marsh also formed a risk retention group with the Air Transport Association and helped create AXIS Specialty Limited to add reinsurance capacity. Because rising premium rates tend to lift broker compensation, the segment's near-term results may benefit, though the filing gives no formal forecast.
04—Continue