10-QPeriod: Q1 FY2002

MARSH & MCLENNAN COMPANIES, INC. Quarterly Report for Q1 Ended Mar 31, 2002

Filed May 14, 2002For Securities:MRSHMMC

Summary

Marsh & McLennan Companies, Inc. (MMC) reported steady overall revenue for the first quarter of 2002, with total revenue largely flat compared to the prior year at $2,635 million. While the Risk and Insurance Services segment showed robust underlying revenue growth of approximately 12%, driven by higher commercial insurance rates and new business, this was partially offset by declines in the Investment Management and Consulting segments. Specifically, Investment Management revenue fell 14% due to a 12% decrease in average assets under management, reflecting market downturns. Consulting revenue also saw a slight decrease of 3% despite growth in specific areas like retirement and economic consulting, as other segments experienced reduced demand. The company's financial performance demonstrated improved profitability, with operating income increasing to $687 million from $645 million in the prior year, leading to a higher operating income margin. Net income rose to $418 million, or $1.53 per basic share, from $369 million, or $1.33 per basic share. This improvement was aided by a lower effective tax rate and the discontinuation of goodwill amortization following the adoption of SFAS No. 142, which positively impacted reported earnings. Cash flow from operations was a use of cash of $163 million, primarily due to seasonal compensation payments, though the company maintains a strong cash position.

Key Highlights

  • 1Total revenue remained stable at $2,635 million, largely unchanged from the prior year, indicating resilience across the business.
  • 2Operating income increased by 6.5% to $687 million, with operating margins improving across all segments, particularly in Risk and Insurance Services.
  • 3Net income grew by 13.3% to $418 million, with basic earnings per share increasing to $1.53 from $1.33 in the prior year.
  • 4Risk and Insurance Services segment demonstrated strong underlying revenue growth of approximately 12%, driven by higher premium rates and new business wins.
  • 5Investment Management segment experienced a 14% revenue decline due to a 12% decrease in average assets under management, reflecting broader market conditions.
  • 6The company adopted SFAS No. 142, discontinuing goodwill amortization, which positively impacted reported net income and EPS.
  • 7MMC issued $750 million in new senior notes to repay commercial paper borrowings, strengthening its long-term debt structure and managing interest rate risk through swaps.

Frequently Asked Questions

Overall revenue was largely flat. The Risk and Insurance Services segment saw robust underlying revenue growth of about 12%, driven by higher commercial insurance premium rates and new business. However, the Investment Management segment's revenue declined by 14% due to lower assets under management, and the Consulting segment's revenue decreased by 3% reflecting softer demand in certain areas.

Effective January 1, 2002, MMC adopted SFAS No. 142, which requires that goodwill no longer be amortized but tested for impairment. This change led to the discontinuation of goodwill amortization, resulting in an increase in reported net income and earnings per share for the period compared to prior periods where amortization was expensed. This adjustment notably improved the 'Adjusted Net Income' and 'Adjusted EPS' figures, although reported figures also saw an increase.

In March 2002, MMC issued $750 million in senior notes and used the proceeds to pay down commercial paper borrowings, extending its debt maturity profile. The company also entered into interest rate swap transactions to hedge its exposure to interest rate fluctuations on these new notes. MMC anticipates that funds generated from operations will be sufficient to meet its foreseeable cash requirements, including dividends and debt repayments.

While MMC is subject to various claims and lawsuits, including those related to alleged errors in insurance placement and investment services, management believes the ultimate disposition of these matters will not have a material adverse effect on the company's consolidated financial position or results of operations. Specifically, a class-action lawsuit against Putnam was dismissed, and while there's a contingent exposure for pension redress in the UK, a significant portion is expected to be recovered from insurers.