10-Q 1 f10q_2qtr2003.txt JUNE 30, 2003 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 2003 Marsh & McLennan Companies, Inc. 1166 Avenue of the Americas New York, New York 10036 (212) 345-5000 Commission file number 1-5998 State of Incorporation: Delaware I.R.S. Employer Identification No. 36-2668272 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . NO ___. As of July 31, 2003 there were outstanding 532,637,345 shares of common stock, par value $1.00 per share, of the registrant. 1 INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their representatives may from time to time make verbal 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 revenues, expenses, earnings, cash flow, capital structure, pension funding, financial losses and expected insurance recoveries resulting from the September 11, 2001 attack on the World Trade Center in New York City, as well as market and industry conditions, premium rates, financial markets, interest rates, foreign exchange rates, 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 future events impacting MMC. Forward-looking statements by their very nature involve risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by any forward-looking statements contained or incorporated or referred to herein include, in the case of MMC's risk and insurance services and consulting businesses, the amount of actual insurance recoveries and financial losses from the September 11 attack on the World Trade Center, or other adverse consequences from that incident. Other factors that should be considered in the case of MMC's risk and insurance services business are changes in competitive conditions, movements in premium rate levels, the continuation of difficult conditions for the transfer of commercial risk and other changes in the global property and casualty insurance markets, the impact of terrorist attacks, natural catastrophes, and mergers between client organizations, including insurance and reinsurance companies insolvencies. Factors to be considered in the case of MMC's investment management business include changes in worldwide and national equity and fixed income markets, actual and relative investment performance, the level of sales and redemptions, and the ability to maintain investment management and administrative fees at appropriate levels; and with respect to all of MMC's activities, changes in general worldwide and national economic conditions, changes in the value of investments made in individual companies and investment funds, fluctuations in foreign currencies, actions of competitors or regulators, changes in interest rates or in the ability to access financial markets, developments relating to claims, lawsuits and contingencies, prospective and retrospective changes in the tax or accounting treatment of MMC's operations and the impact of tax and other legislation and regulation in the jurisdictions in which MMC operates. 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. 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 on the first business day following the end of each month, except at the end of March, June, September and December, when such information will be released with MMC's quarterly earnings announcement. 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. 2 PART I, FINANCIAL INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) -------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, -------------------------------------------------------------------------------- (In millions, except per share figures) 2003 2002 2003 2002 -------------------------------------------------------------------------------- Revenue: Service revenue $2,840 $2,607 $5,681 $5,210 Investment income (loss) 25 5 36 37 -------------------------------------------------------------------------------- Operating revenue 2,865 2,612 5,717 5,247 -------------------------------------------------------------------------------- Expense: Compensation and benefits 1,475 1,281 2,853 2,530 Other operating expenses 791 766 1,548 1,465 -------------------------------------------------------------------------------- Operating expenses 2,266 2,047 4,401 3,995 -------------------------------------------------------------------------------- Operating income 599 565 1,316 1,252 Interest income 7 4 13 9 Interest expense (46) (38) (89) (75) -------------------------------------------------------------------------------- Income before income taxes and minority interest 560 531 1,240 1,186 Income taxes 189 189 421 421 Minority interest, net of tax 6 6 11 11 -------------------------------------------------------------------------------- Net income $ 365 $ 336 $ 808 $ 754 -------------------------------------------------------------------------------- Basic net income per share $ .68 $ .62 $ 1.51 $ 1.38 -------------------------------------------------------------------------------- Diluted net income per share $ .66 $ .60 $ 1.47 $ 1.33 -------------------------------------------------------------------------------- Average number of shares outstanding-Basic 534 545 535 546 -------------------------------------------------------------------------------- Average number of shares outstanding-Diluted 552 562 550 565 -------------------------------------------------------------------------------- Dividends Declared $ 0.31 $ 0.28 $ 0.59 0.55 -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated statements. 3 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- (Unaudited) June 30, December 31, (In millions of dollars) 2003 2002 -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 618 $ 546 -------------------------------------------------------------------------------- Receivables Commissions and fees 2,403 2,178 Advanced premiums and claims 115 119 Other 308 305 -------------------------------------------------------------------------------- 2,826 2,602 Less-allowance for doubtful accounts and cancellations (132) (124) -------------------------------------------------------------------------------- Net receivables 2,694 2,478 -------------------------------------------------------------------------------- Prepaid dealer commissions - current portion 181 226 Other current assets 270 414 -------------------------------------------------------------------------------- Total current assets 3,763 3,664 Goodwill and intangible assets 5,741 5,404 Fixed assets, net 1,386 1,308 (net of accumulated depreciation and amortization of $1,354 at June 30, 2003 and $1,275 at December 31, 2002) Long-term investments 567 578 Prepaid dealer commissions 210 292 Prepaid pension 1,135 1,071 Other assets 1,655 1,538 -------------------------------------------------------------------------------- $14,457 $13,855 -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated statements. 4 MARSH & MCLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- (Unaudited) June 30, December 31, (In millions of dollars) 2003 2002 -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 369 $ 543 Accounts payable and accrued liabilities 1,561 1,406 Accrued compensation and employee benefits 1,271 1,568 Accrued income taxes 491 194 Dividends payable 167 152 -------------------------------------------------------------------------------- Total current liabilities 3,859 3,863 -------------------------------------------------------------------------------- Fiduciary liabilities 4,554 4,010 Less - cash and investments held in a fiduciary capacity (4,554) (4,010) -------------------------------------------------------------------------------- - - Long-term debt 2,877 2,891 -------------------------------------------------------------------------------- Other liabilities 2,274 2,083 -------------------------------------------------------------------------------- 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 at June 30, 2003 and December 31, 2002 561 561 Additional paid-in capital 1,321 1,426 Retained earnings 4,982 4,490 Accumulated other comprehensive loss (264) (452) -------------------------------------------------------------------------------- 6,600 6,025 Less - treasury shares, at cost, 26,464,681 shares at June 30, 2003 and 22,441,817 shares at December 31, 2002 (1,153) (1,007) -------------------------------------------------------------------------------- Total stockholders' equity 5,447 5,018 -------------------------------------------------------------------------------- $14,457 $13,855 -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated statements. 5 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -------------------------------------------------------------------------------- For Six Months Ended June 30, 2003 2002 (In millions of dollars) -------------------------------------------------------------------------------- Operating cash flows: Net income $ 808 $ 754 Adjustments to reconcile net income to cash generated from (used for) operations: Depreciation of fixed assets and amortization, capitalized software and other intangible assets 194 175 Provision for deferred income taxes 73 14 (Gains) losses on investments (36) (37) Changes in assets and liabilities: Net receivables (189) (25) Prepaid dealer commissions 127 159 Other current assets 36 (24) Other assets (105) (111) Accounts payable and accrued liabilities 80 54 Accrued compensation and employee benefits (297) (296) Accrued income taxes 298 (151) Other liabilities 17 (17) Effect of exchange rate changes 50 24 -------------------------------------------------------------------------------- Net cash generated from operations 1,056 519 -------------------------------------------------------------------------------- Financing cash flows: Net decrease in commercial paper (640) (357) Proceeds from issuance of debt 502 748 Other repayments of debt (44) (6) Purchase of treasury shares (492) (802) Issuance of common stock 253 235 Dividends paid (301) (291) -------------------------------------------------------------------------------- Net cash used for financing activities (722) (473) -------------------------------------------------------------------------------- Investing cash flows: Capital expenditures (240) (187) Proceeds from sales related to fixed assets and capitalized software 9 12 Acquisitions (101) (21) Other, net 42 79 -------------------------------------------------------------------------------- Net cash used for investing activities (290) (117) -------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 28 5 -------------------------------------------------------------------------------- Increase/(Decrease) in cash & cash equivalents 72 (66) Cash & cash equivalents at beginning of period 546 537 -------------------------------------------------------------------------------- Cash & cash equivalents at end of period $ 618 $ 471 -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated statements. 6 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Operations -------------------- MMC, a professional services firm, is organized based on the different services that it offers. Under this organization structure, MMC operates 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 services principally in connection with originating, structuring and managing insurance, financial services and other industry-focused investments. 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. 2. Principles of Consolidation --------------------------- The consolidated financial statements included herein have been prepared by MMC pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such rules and regulations, although MMC believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in MMC's latest Annual Report on Form 10-K. The financial information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the six-month periods ended June 30, 2003 and 2002. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The caption "Investment income (loss)" in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in income. It includes other than temporary declines in the value of available for sale securities, the change in value of trading securities and the change in value of MMC's holdings in certain private equity funds. MMC's investments may include seed shares for mutual funds, direct investments in insurance, consulting or investment management companies and investments in private equity funds. 3. 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 7 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 $61 million and $56 million for the six-month periods ended June 30, 2003 and 2002, respectively. 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 amounted to $12.0 billion at June 30, 2003 and $11.7 billion at December 31, 2002, 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. 4. 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 associated with unvested shares granted under the Putnam Equity Partnership Plan and adding back dividend equivalent expense related to common stock equivalents. This result is then 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 three- and six-month periods ended June 30, 2003 and 2002. -------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, (In millions of dollars) 2003 2002 2003 2002 -------------------------------------------------------------------------------- Net income $365 $336 $808 $754 Less: Potential minority interest associated with the Putnam Class B Common Shares net of dividend equivalent expense related to common stock equivalents - - - (1) -------------------------------------------------------------------------------- Net income for diluted earnings per share $365 $336 $808 $753 -------------------------------------------------------------------------------- Basic weighted average common shares outstanding 534 545 535 546 Dilutive effect of potentially issuable common shares 18 17 15 19 -------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 552 562 550 565 -------------------------------------------------------------------------------- 8 5 Supplemental Disclosures to the Consolidated Statements of Cash Flow -------------------------------------------------------------------- The following schedule provides additional information concerning interest and income taxes paid for the six-month periods ended June 30, 2003 and 2002. --------------------------------------------------------------------------- (In millions of dollars) 2003 2002 --------------------------------------------------------------------------- Interest paid $ 81 $ 62 Income taxes paid $ 41 $ 468 6. Comprehensive Income The components of comprehensive income for the six-month periods ended June 30, 2003 and 2002 are as follows: --------------------------------------------------------------------------- (In millions of dollars) 2003 2002 --------------------------------------------------------------------------- Foreign currency translation adjustments $ 172 $ 60 Unrealized investment holding gains (losses), net of income taxes 26 (33) Less: Reclassification adjustment for realized gains included in net income, net of income taxes (7) (18) Deferred (loss) gain on cash flow hedges, net of income taxes (3) 4 --------------------------------------------------------------------------- Other comprehensive income 188 13 Net income 808 754 --------------------------------------------------------------------------- Comprehensive income $996 $767 --------------------------------------------------------------------------- 7. Acquisitions ------------ In April 2003, MMC acquired Oliver, Wyman & Company ("OWC") for $265 million, $159 million in cash, which will be paid over 4 years, and $106 million in MMC stock. Substantially all former employees of OWC are now employees of MMC. Approximately $35 million of the purchase consideration is subject to continued employment of the selling shareholders and is being recorded as compensation expense over four years. 9 8. Goodwill and Other Intangibles ------------------------------ Changes in the carrying amount of goodwill for the six-month period ended June 30, 2003, are as follows: -------------------------------------------------------------------------- (In millions of dollars) 2003 --------------------------------------------------------------------------- Balance as of January 1, $5,151 Goodwill acquired 221 Other adjustments (primarily foreign exchange) 61 --------------------------------------------------------------------------- Balance as of June 30, $5,433 --------------------------------------------------------------------------- The goodwill balance at June 30, 2003 and December 31, 2002 includes approximately $121 million of equity method goodwill. Amortized intangible assets consist primarily of the cost of client lists and client relationships acquired and the rights to future revenue streams from certain existing private equity funds. MMC has no intangible assets with indefinite lives. The gross carrying amount and accumulated amortization by major intangible asset class is as follows:
------------------------------------------------------------------------------------------------------------------------ June 30, 2003 December 31, 2002 ------------------------------------------------------------------------------ Net Net Gross Accumulated Carrying Gross Accumulated Carrying (In millions of dollars) Cost Amortization Amount Cost Amortization Amount ------------------------------------------------------------------------------------------------------------------------ Client lists and client relationships $226 $ 59 $167 $148 $ 50 $ 98 acquired Future revenue streams related to 216 83 133 216 70 146 existing private equity funds ------------------------------------------------------------------------------------------------------------------------ Total amortized intangibles $442 $142 $300 $364 $120 $244 ------------------------------------------------------------------------------------------------------------------------
Aggregate amortization expense for the six-month periods ended June 30, 2003 and 2002 was $20 million and $16 million, respectively and the estimated aggregate amortization expense is as follows: --------------------------------------------------------------------------- For the Years Ending December 31, Estimated (In millions of dollars) Expense --------------------------------------------------------------------------- 2003 $42 2004 $44 2005 $40 2006 $33 2007 $31 --------------------------------------------------------------------------- 9. Stock Benefit Plans ------------------- MMC has stock-based benefit plans under which employees are awarded grants of restricted stock, stock options and other forms of awards. As provided under SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") 10 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. 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. If compensation cost for MMC's stock-based compensation plans had been determined consistent with the fair value method prescribed by SFAS No. 123, MMC's net income and net income per share for the three- and six-month periods ended June 30, 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) Three Months Ended June 30, Six Months Ended June 30, 2003 2002 2003 2002 ---------------------------------------------------------------------------------------------------------------------- Net Income: As reported $365 $336 $808 $754 Adjustment for fair value method, net of tax (41) (39) (88) (74) ---------------------------------------------------------------------------------------------------------------------- Pro forma net income $324 $297 $720 $680 ---------------------------------------------------------------------------------------------------------------------- Net Income Per Share: Basic: As reported $0.68 $0.62 $1.51 $1.38 Pro forma $0.61 $0.55 $1.35 $1.24 Diluted: As reported $0.66 $0.60 $1.47 $1.33 Pro forma $0.59 $0.53 $1.32 $1.21 ----------------------------------------------------------------------------------------------------------------------
The pro forma information above includes the cost of 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. MMC stock purchase plans allow eligible employees to purchase MMC shares at prices not less than 85% of the less of the fair market value of the stock at the beginning or end of the offering period. The stock purchase plans represent approximately 20% of the increment from applying the fair value method in 2003 and 2002. 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 evaluated and revised, as necessary, to reflect market conditions and experience. 10. Long-term Debt -------------- 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 net proceeds from the 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 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 in accordance 11 with SFAS No. 133. 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). Commercial paper borrowings of $250 million and $750 million respectively, at June 30, 2003 and December 31, 2002, have been classified as long-term debt based on MMC's intent and ability to maintain or refinance these obligations on a long-term basis. In July 2003, MMC issued $300 million of 5.875% Senior Notes due 2033. 11. Integration and Restructuring Costs ----------------------------------- In 1999, as part of the 1998 combination with Sedgwick Group, plc ("Sedgwick") and the integration of Sedgwick, MMC adopted a plan to reduce staff and consolidate duplicative offices. The estimated cost of this plan relating to employees and offices of Sedgwick ("1999 Sedgwick Plan") amounted to $285 million and was included in the cost of the acquisition. Merger-related costs for employees and offices of MMC ("1999 MMC Plan") amounted to $266 million and were recorded as part of a 1999 special charge. In the third quarter of 2001, as a result of weakening business conditions, which were exacerbated by the events of September 11, MMC adopted a plan to provide for staff reductions and office consolidations, primarily in the consulting segment ("2001 Plan"). The charge of $61 million related to this Plan is comprised of $44 million for severance and related benefits affecting 750 people and $17 million for future rent under non-cancelable leases. The utilization of these charges is summarized as follows:
------------------------------------------------------------------------------------------------------------ Utilized and 1999 Sedgwick Plan: changes in (In millions of dollars) Initial estimates Utilized in Balance Balance through 2002 Six Months 2003 June30, 2003 ------------------------------------------------------------------------------------------------------------ Termination payments to employees $ 183 $ (181) $ - $ 2 Other employee-related costs 5 (5) - - Future rent under noncancelable leases 48 (33) (2) 13 Leasehold termination and related costs 49 (32) - 17 ------------------------------------------------------------------------------------------------------------ $ 285 $ (251) $(2) $ 32 ------------------------------------------------------------------------------------------------------------ Number of employee terminations 2,400 (2,400) - - Number of office consolidations 125 (125) - - ------------------------------------------------------------------------- ----------------------------------
12
------------------------------------------------------------------------------------------------------------ Utilized and 1999 MMC Plan: changes in (In millions of dollars) Initial estimates Utilized in Balance Balance through 2002 Six Months 2003 June 30, 2003 ------------------------------------------------------------------------------------------------------------ Termination payments to employees $ 194 $ (190) $ - $ 4 Future rent under noncancelable leases 31 (21) (1) 9 Leasehold termination and related costs 16 (13) - 3 Other integration related costs 25 (25) - - ------------------------------------------------------------------------------------------------------------ $ 266 $ (249) $ (1) $ 16 ------------------------------------------------------------------------------------------------------------ Number of employee terminations 2,100 (2,100) - - Number of office consolidations 50 (50) - - ------------------------------------------------------------------------------------------------------------
The actions contemplated by the 1999 Sedgwick Plan and the 1999 MMC Plan were substantially complete by year-end 2000. Some accruals, primarily for future rent under noncancelable leases, costs to restore leased properties to contractually agreed upon condition and salary continuance arrangements, are expected to be paid over several years.
------------------------------------------------------------------------------------------------------------ Utilized 2001 Plan Initial through Utilized in Balance (In millions of dollars) Balance 2002 Six Months 2003 June 30, 2003 ------------------------------------------------------------------------------------------------------------ Termination payments to employees $ 44 $ (39) $ (1) $ 4 Future rent under noncancelable leases 17 (4) (1) 12 ------------------------------------------------------------------------------------------------------------ $ 61 $ (43) $ (2) $ 16 ------------------------------------------------------------------------------------------------------------ Number of employee terminations 750 (750) - - Number of office consolidations 9 (9) - - ------------------------------------------------------------------------------------------------------------
Actions under the 2001 Plan were completed by September 30, 2002. Some accruals, primarily for future rent under noncancelable leases and salary continuance arrangements, are expected to be paid over several years. 12. Common Stock ------------ In 2003, 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 the six-month period ended June 30, 2003, MMC repurchased 11.5 million shares for total consideration of $503 million. 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 1.8 million shares of the repurchases discussed above were made under the 10b5-1 plan. 13. Claims, Lawsuits and Other Contingencies ---------------------------------------- MMC and its subsidiaries are subject to various claims, lawsuits and proceedings consisting principally of alleged errors and omissions in connection with the placement of insurance or reinsurance and in rendering 13 investment and consulting services. Some of these matters seek damages, including punitive damages, in amounts that could, if assessed, be significant. Insurance coverage applicable to such matters includes elements of both risk retention and risk transfer. As part of the combination with Sedgwick, MMC acquired River Thames Insurance Company Limited ("River Thames"), an insurance underwriting business that was already in run-off, which was sold in 2001. Sedgwick guaranteed payment of claims on certain policies underwritten through the Institute of London Underwriters by River Thames ("ILU Guarantee"). The policies covered by the ILU Guarantee are reinsured up to (pound)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 June 30, 2003, 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 are unable to meet their obligations under those policies, a claimant may seek to recover from MMC under the guarantee. MMC does not expect any material net impact on its consolidated financial position or results of operations related to this guarantee. Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on MMC and its subsidiaries, on the basis of present information, it is the opinion of MMC's management that the disposition or ultimate determination of these claims, lawsuits, proceedings or guarantees will not have a material adverse effect on MMC's consolidated results of operations or its consolidated financial position. 14. Segment Information ------------------- MMC operates in three principal business segments based on the services provided. Segment performance is evaluated based on operating income, which is after deductions for directly related expenses and minority interest but before special charges. The accounting policies of the segments are the same as those used for the consolidated financial statements. Selected information about MMC's operating segments for the six-month periods ended June 30, 2003 and 2002 follows: -------------------------------------------------------------------------------- Segment Operating (In millions of dollars) Revenue Income -------------------------------------------------------------------------------- 2003 Risk and Insurance Services $ 3,453 (a) $ 963 Investment Management 940 228 Consulting 1,324 182 -------------------------------------------------------------------------------- $5,717 $1,373 -------------------------------------------------------------------------------- 2002 Risk and Insurance Services $ 2,912 (a) $ 791 Investment Management 1,175 344 Consulting 1,160 164 -------------------------------------------------------------------------------- $5,247 $1,299 -------------------------------------------------------------------------------- (a)Includes interest income on fiduciary funds ($61 million in 2003 and $56 million in 2002). 14 A reconciliation of the total segment operating income to income before income taxes and minority interest in the consolidated financial statements is as follows: --------------------------------------------------------------------------- (In millions of dollars) 2003 2002 --------------------------------------------------------------------------- Total segment operating income $ 1,373 $1,299 Corporate expense (68) (58) Reclassification of minority interest 11 11 --------------------------------------------------------------------------- Operating income 1,316 1,252 Interest income 13 9 Interest expense (89) (75) --------------------------------------------------------------------------- Total income before income taxes and minority interest $ 1,240 $1,186 --------------------------------------------------------------------------- Operating segment revenue by product for the six-month periods ended June 30, 2003 and 2002 is as follows: --------------------------------------------------------------------------- (In millions of dollars) 2003 2002 --------------------------------------------------------------------------- Risk and Insurance Services Risk Management and Insurance Broking $2,593 $2,158 Reinsurance Broking and Services 423 334 Related Insurance Services 437 420 --------------------------------------------------------------------------- Total Risk and Insurance Services 3,453 2,912 --------------------------------------------------------------------------- Investment Management 940 1,175 --------------------------------------------------------------------------- Consulting Retirement Services 612 549 Health Care & Group Benefits 201 176 Human Capital 175 163 Management and Organizational Change 198 139 Economic 71 65 --------------------------------------------------------------------------- 1,257 1,092 Reimbursed Expenses 67 68 --------------------------------------------------------------------------- Total Consulting 1,324 1,160 --------------------------------------------------------------------------- Total $5,717 $5,247 --------------------------------------------------------------------------- 15. New Accounting Pronouncements ----------------------------- In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 interprets Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and addresses consolidation by business enterprises qualifying as variable interest entities ("VIE"). FIN 46 defines a VIE as a corporation, partnership, trust or other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 applies immediately to VIEs created after January 31, 2003 in which the company obtains an interest after that date. FIN 46 applies to the first fiscal year or interim period beginning after June 15, 2003 for VIEs in which MMC holds a variable interest that it acquired before February 1, 2003. 15 MMC through Putnam, manages $3.3 billion in the form of Collateralized Debt Obligations ("CDO") and Collateralized Bond Obligations ("CBO"). The CDOs and CBOs were created prior to January 31, 2003. 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 $4.0 million, reflected in Long-term investments in the Consolidated Balance Sheets at June 30, 2003. The implementation of FIN 46 will not have a significant impact on MMC's consolidated results of operations, financial position or cash flows. The FASB may issue future interpretive guidance to FIN 46. 16 Marsh & McLennan Companies, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Second Quarter and Six Months Ended June 30, 2003 General Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional services firm. MMC subsidiaries include Marsh, the world's largest risk and insurance services firm; Putnam Investments, one of the largest investment management companies in the United States; and Mercer, a major global provider of consulting services. Approximately 60,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries. MMC operates in three principal business segments based on the services provided. Segment performance is evaluated based on operating income, which is after deductions for directly related expenses and minority interest. For a description of critical accounting policies, including those which involve significant management judgment, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the consolidated financial statements in MMC's Annual Report on Form 10-K for the year ended December 31, 2002. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" on page one of this filing. This Form 10-Q should be read in conjunction with MMC's latest Annual Report on Form 10-K. The consolidated results of operations follow: -------------------------------------------------------------------------------- Second Quarter Six Months (In millions of dollars) 2003 2002 2003 2002 -------------------------------------------------------------------------------- Revenue: Service Revenue $2,840 $2,607 $5,681 $5,210 Investment Income (Loss) 25 5 36 37 -------------------------------------------------------------------------------- Operating Revenue 2,865 2,612 5,717 5,247 -------------------------------------------------------------------------------- Expense: Compensation and Benefits 1,475 1,281 2,853 2,530 Other Operating Expenses 791 766 1,548 1,465 -------------------------------------------------------------------------------- Operating Expenses 2,266 2,047 4,401 3,995 -------------------------------------------------------------------------------- Operating Income $ 599 $ 565 $1,316 $1,252 -------------------------------------------------------------------------------- Operating Income Margin 20.9% 21.6% 23.0% 23.9% -------------------------------------------------------------------------------- Revenue, derived mainly from commissions and fees, increased 10% from the second quarter of 2002. Revenue increased 5% on a constant currency basis which measures the change in revenue using consistent current exchange rates, before the impact of acquisitions and dispositions. Revenue increases in the risk and insurance services and consulting segments were partially offset by a revenue decline in the investment management segment. 17 The impact of foreign currency translation and acquisitions on MMC's reported revenue is as follows:
---------------------------------------------------------------------------------------------------------------------------- Three Months Ended % Change Currency/ June 30, GAAP Constant Acquisitions 2003 2002 Revenue Currency (b) Impact --------------------------------------------------------------------------------------------------------------------------- Risk and Insurance Services Risk Management and Insurance Broking $1,270 $1,082 17% 13% 4% Reinsurance Broking and Services 189 149 27% 24% 3% Related Insurance Services (a) 221 205 8% 7% 1 --------------------------------------------------------------------------------------------------------------------------- Total Risk and Insurance Services 1,680 1,436 17% 14% 3% --------------------------------------------------------------------------------------------------------------------------- Investment Management 495 581 (15)% (15)% - --------------------------------------------------------------------------------------------------------------------------- Consulting Retirement Services 312 279 12% 3% 9% Health Care & Group Benefits 103 92 12% 6% 6% Human Capital 89 85 5% 2% 3% Management and Organizational Change 117 71 65% (1)% 66% Economic 34 32 6% (1)% 7% ---------------------------------------------------------------------------------------------------------------------------- 655 559 17% 2% 15% Reimbursed Expenses 35 36 (3)% (3)% - ---------------------------------------------------------------------------------------------------------------------------- Total Consulting 690 595 16% 2% 14% ---------------------------------------------------------------------------------------------------------------------------- Total $2,865 $2,612 10% 5% 5% ---------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- Six Months Ended % Change Currency/ June 30, GAAP Constant Acquisitions 2003 2002 Revenue Currency (b) Impact ---------------------------------------------------------------------------------------------------------------------------- Risk and Insurance Services Risk Management and Insurance Broking $2,593 $2,158 20% 15% 5% Reinsurance Broking and Services 423 334 27% 23% 4% Related Insurance Services (a) 437 420 4% 4% - ---------------------------------------------------------------------------------------------------------------------------- Total Risk and Insurance Services 3,453 2,912 19% 15% 4% ---------------------------------------------------------------------------------------------------------------------------- Investment Management 940 1,175 (20)% (20)% - ---------------------------------------------------------------------------------------------------------------------------- Consulting Retirement Services 612 549 11% 3% 8% Health Care & Group Benefits 201 176 14% 9% 5% Human Capital 175 163 7% 3% 4% Management and Organizational Change 198 139 42% (3)% 45% Economic 71 65 9% 5% 4% ---------------------------------------------------------------------------------------------------------------------------- 1,257 1,092 15% 3% 12% Reimbursed Expenses 67 68 (1)% (1)% - ---------------------------------------------------------------------------------------------------------------------------- Total Consulting 1,324 1,160 14% 3% 11% ---------------------------------------------------------------------------------------------------------------------------- Total $5,717 $5,247 9% 4% 5% ---------------------------------------------------------------------------------------------------------------------------- (a) Includes U.S. affinity, claims management, underwriting management and MMC Capital businesses. (b) Constant currency measures the change in revenue using consistent currency exchange rates, before the impact of acquisitions and dispositions.
Revenue growth on a constant currency basis in the risk and insurance services segment was 14% in the second quarter of 2003, reflecting strong growth across all geographies in both insurance and reinsurance broking. Consulting revenue on a constant currency basis grew 2% primarily resulting from a higher volume of business in retirement services and health care & group benefits. Revenue 18 decreased 15% in the investment management segment as average assets under management declined 14% from the second quarter of 2002. For the six months, revenue growth was 9%, 4% on a constant currency basis. Operating expenses increased 11% in the second quarter of 2003 (5% on a constant currency basis) primarily due to increased compensation and benefit costs in the risk and insurance services segment partially offset by lower expenses in the investment management segment. Operating expenses also reflect an increase in costs for office space and insurance. For the six months, operating expenses increased 10%, 5% on a constant currency basis. Risk and Insurance Services -------------------------------------------------------------------------------- Second Quarter Six Months -------------------------------------------------------------------------------- (In millions of dollars) 2003 2002 2003 2002 -------------------------------------------------------------------------------- Revenue $1,680 $1,436 $3,453 $2,912 Expense 1,277 1,107 2,490 2,121 -------------------------------------------------------------------------------- Operating Income $ 403 $ 329 $ 963 $ 791 ------------------------------------------------------------------------------- Operating Income Margin 24.0% 22.9% 27.9% 27.2% ------------------------------------------------------------------------------- Revenue Revenue for the risk and insurance services segment grew 17% over the second quarter of 2002 and on a constant currency basis grew 14%. The revenue growth reflects continued strong demand for Marsh's services as clients face new, expanding and more complex risks. The effect of higher premium rates and an increase in placement service activities also contributed to the increase in revenue. In the second quarter, constant currency revenues in risk management and insurance broking, which accounts for approximately three quarters of the risk and insurance services segment grew 13% with strong growth across all geographies. Constant currency revenue in reinsurance broking and services grew 24%. Related insurance services revenues increased 7% on a constant currency basis, with revenue increases in claims management and underwriting management partially offset by declines in the U.S. affinity business and MMC Capital. For the six months, revenue grew 19% over 2002 and 15% on a constant currency basis. Pricing for commercial property risks has stabilized, however clients continue to face rate increases in most casualty lines, and restricted terms and conditions and coverage exclusions in all lines. Expense Risk and insurance services expenses increased 15% over the second quarter of 2002, 11% on a constant currency basis. Expense growth primarily reflects increased headcount due to higher volumes of business along with increased incentive compensation commensurate with the current operating environment. Operating expenses also reflect an increase in costs for office space and insurance. For the six months, operating expenses increased 17% over 2002, 13% on a constant currency basis. 19 Investment Management -------------------------------------------------------------------------------- Second Quarter Six Months -------------------------------------------------------------------------------- (In millions of dollars) 2003 2002 2003 2002 -------------------------------------------------------------------------------- Revenue $ 495 $ 581 $ 940 $1,175 Expense 370 412 712 831 -------------------------------------------------------------------------------- Operating Income $ 125 $ 169 $ 228 $ 344 ------------------------------------------------------------------------------- Operating Income Margin 25.3% 29.1% 24.3% 29.3% ------------------------------------------------------------------------------- Revenue Putnam's revenue decreased 15% compared with the second quarter of 2002 reflecting a decline in the level of average assets under management on which fees are earned. Assets under management averaged $260 billion in the second quarter of 2003, a 14% decline from the $301 billion managed in the second quarter of 2002. Assets under management aggregated $267 billion at June 30, 2003 compared with $284 billion at June 30, 2002 and $251 billion at December 31, 2002. The change from December 31, 2002 results primarily from an increase in equity market levels partially offset by net redemptions of $4.3 billion, including reinvested dividends. Positive flows from institutional business were more than offset by net outflows in retail mutual funds. Assets under management at July 31, 2003 aggregated $267 billion. Expense Putnam's expenses decreased 10% in the second quarter of 2003 from the same period of 2002 primarily due to reductions in volume related expenses, including amortization of prepaid dealer commissions and incentive compensation. Quarter-end and average assets under management are presented below: -------------------------------------------------------------------------------- (In billions of dollars) 2003 2002 -------------------------------------------------------------------------------- Mutual Funds: Growth Equity $48 $58 Value Equity 42 49 Blend Equity 35 40 Fixed Income 46 44 -------------------------------------------------------------------------------- 171 191 -------------------------------------------------------------------------------- Institutional: Equity 72 74 Fixed Income 24 19 -------------------------------------------------------------------------------- 96 93 -------------------------------------------------------------------------------- Quarter-end Assets $267 $284 -------------------------------------------------------------------------------- Assets from Non-US Investors $ 37 $30 -------------------------------------------------------------------------------- Average Assets $260 $301 -------------------------------------------------------------------------------- The categories of mutual fund assets reflect style designations aligned with each fund's prospectus. All prior year amounts have been reclassified to conform with the current investment mandate for each product. 20 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, which declined in 2002 for the third consecutive year after several years of substantial growth prior to 2000, increased in the second quarter of 2003. 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 appropriate levels. Revenue levels are sensitive to all of the factors above, but in particular, to significant changes in stock and bond market valuations. Putnam provides individual and institutional investors with a broad range of both equity and fixed income investment products and services, invested domestically and globally, designed to meet varying investment objectives and which afford its clients the opportunity to allocate their investment resources among various investment products as changing worldwide economic and market conditions warrant. At the end of the second quarter, assets held in equity securities represented 74% of assets under management, compared with 78% at June 30, 2002, while investments in fixed income products represented 26%, compared with 22% at June 30, 2002. Consulting -------------------------------------------------------------------------------- Second Quarter Six Months ------------------------------------------------------------------------------- (In millions of dollars) 2003 2002 2003 2002 -----------------------------------------------------------------------=------- Revenue $ 690 $ 595 $1,324 $1,160 Expense 591 505 1,142 996 ------------------------------------------------------------------------------- Operating Income $ 99 $ 90 $ 182 $ 164 ------------------------------------------------------------------------------- Operating Income Margin 14.3% 15.1% 13.7% 14.1% -------------------------------------------------------------------------------- Revenue Consulting revenue increased 16% over 2002 primarily due to the effect of foreign currency exchange rates, as well as acquisitions including Oliver, Wyman & Company ("OWC"), which is included in the management consulting practice. On a constant currency basis revenue increased 2%. Retirement services revenue, which represented approximately 50% of the consulting segment revenue, increased 3% on a constant currency basis and health care & group benefits consulting grew 6%. For the six months, revenue grew 14% over 2002, 3% on a constant currency basis. Expense Consulting expenses increased 17% over 2002 reflecting the impact of foreign exchange as well as the acquisition of OWC. As described in Note 7 to the financial statements, a portion of the OWC purchase consideration is contingent upon future employment. This amount has been accounted for as deferred compensation and is being recognized as compensation expense over four years. Expenses increased 2% on a constant currency basis over 2002. For the six months, expenses increased 15% over 2002, 3% on a constant currency basis. Interest Interest income earned on corporate funds amounted to $7 million in the second quarter of 2003, an increase of $3 million from the second quarter of 2002. 21 Interest expense of $46 million in 2003 increased from $38 million in the second quarter of 2002 primarily due to an increase in the average interest rates on outstanding debt in the second quarter of 2003. Since March 2002, MMC has improved liquidity and extended the average maturity of its debt through the issuance of $1.3 billion of long-term senior notes through June 30, 2003. The net proceeds from the notes were used to pay down outstanding commercial paper balances. The increase in the average interest rate results 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 34% of income before income taxes and minority interest in the second quarter of 2003 compared with 35.5% in the second quarter of 2002. As a result of the geographic mix of MMC's businesses, the effective tax rate for 2003 should remain at 34%. Liquidity and Capital Resources Operating Cash Flows MMC anticipates that funds generated from operations will be sufficient to meet its foreseeable recurring operating cash requirements as well as to fund dividends, capital expenditures and scheduled repayments of long-term debt. MMC's ability to generate cash flow from operations is subject to the business risks inherent in each operating segment. MMC generated $1.1 billion of cash from operations for the six-month period ended June 30, 2003 compared with $519 million for the same period in 2002. These amounts reflect the net income earned by MMC during those periods adjusted for non-cash charges and working capital changes. In 2003, MMC's tax payments decreased as compared to 2002. MMC's estimated tax payments related to the third quarter of 2001 were paid in the first quarter of 2002 due to the events of September 11, 2001 and the government's subsequent directives. In addition, current year tax payments reflect a refund of overpayment of prior year taxes. Other current assets at June 30, 2003 declined from the prior year end balance primarily due to lower deferred tax assets in the current period as well as a decrease in insurance recoveries receivable related to personal pension plan settlements in the United Kingdom. MMC's cash and cash equivalents aggregated $618 million on June 30, 2003, an increase of $72 million from the end of 2002. MMC increased its quarterly dividend by 11% to $.31 per share effective with the dividend to be paid on August 15, 2003. Financing Cash Flows 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. Commercial paper outstanding decreased $640 million during the first six months of 2003 as a result of these repayments. 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 in accordance with SFAS No. 133. 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). 22 In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033. During the first six months of 2003, MMC repurchased 11.5 million shares of its common stock at a cost of $503 million. 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. Investing Cash Flows MMC's additions to fixed assets and capitalized software, which amounted to $240 million in the first six months of 2003 and $187 million in the first six months last year, primarily relate to computer equipment purchases and the refurbishing and modernizing of office facilities and software development costs. MMC has committed to potential future investments of approximately $440 million in connection with various MMC Capital funds and other MMC investments. Approximately $35 million is expected to be invested during the remainder of 2003. MMC expects to fund future commitments, in part, with sales proceeds from existing investments. 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. 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. Publicly traded investments of $346 million are classified as available for sale under SFAS No. 115. Non-publicly traded investments of $155 million and $311 million are accounted for under APB Opinion No. 18 using the cost method and the equity method, respectively. The investments 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. 23 MMC Capital helped develop an additional source of insurance and reinsurance capacity after September 11 through the formation of AXIS Specialty Holdings ("AXIS"), a Bermuda domiciled insurance company. AXIS had an initial capitalization of $1.6 billion, which included a $250 million investment by Trident II and a $100 million direct investment by MMC. AXIS completed an initial public offering on July 1, 2003. MMC's direct investment is currently carried at cost and will be classified as an available for sale security, as restrictions on the sale of AXIS shares expire, with changes in fair value recorded in other comprehensive income until realized. Trident II's investments are carried at fair value, in accordance with investment company accounting. MMC's proportionate share of the change in value of its investment in Trident II is recorded as part of investment income (loss) in the Consolidated Income Statement. MMC utilizes option contracts to hedge the variability of cash flows from forecasted sales of certain available for sale investments. The hedge is achieved through the use of European style put and call options, which mature on the dates of the forecasted sales. The hedges are only executed with counterparties of high creditworthiness. Other The insurance coverage for potential liability resulting from alleged errors and omissions in the professional services provided by MMC includes elements of both risk retention and risk transfer. MMC believes it has adequately reserved for the self-insurance portion of the contingencies. Payments related to the respective self-insured layers are made as legal fees are incurred and claims are resolved and generally extend over a considerable number of years. The amounts paid in that regard vary in relation to the severity of the claims and the number of claims active in any particular year. The long-term portion of this liability is included in Other liabilities in the Consolidated Balance Sheets. New Accounting Pronouncements New accounting pronouncements are discussed in Note 15 to the Consolidated Financial Statements. 24 Part I - Item 4. Controls & Procedures --------------------------------------- Controls and Procedures Based on their evaluation, as of the end of the period for the filing of this Form 10-Q, 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. Changes in Internal Controls 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. 25 PART II. OTHER INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT June 30, 2003 Item 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Stockholders of MMC was held on May 15, 2003. Represented at the meeting, at which stockholders took the following actions, were 460,647,321 shares, or 87 percent, of MMC's 528,696,095 shares of common stock outstanding and entitled to vote: 1. MMC's stockholders elected the five director nominees named below with each receiving the following votes: Number of Number of Shares Shares Voted Voted to be For Withheld Peter Coster 443,927,171 16,720,150 ----------- ---------- Charles A. Davis 444,000,428 16,646,893 ----------- ---------- Gwendolyn S. King 446,564,657 14,082,664 ----------- ---------- Lawrence J. Lasser 435,329,928 25,317,393 ----------- ---------- David A. Olsen 345,367,039 115,280,282 ----------- ----------- 2. MMC's stockholders adopted an amendment to MMC's Restated Certificate of Incorporation increasing the number of authorized shares of common stock from 800,000,000 to 1,600,000,000, with a favorable vote of 426,263,910 of the shares represented (30,764,982 against and 3,618,228 abstaining). 3. Deloitte & Touche LLP was ratified as MMC's independent auditors for the year ending December 31, 2003, with a favorable vote of 430,132,915 of the shares represented (27,212,518 against and 3,300,488 abstaining). Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.1 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 (includes the form of senior note due 2033). 10.1 Renewal of Consulting Agreement between A.J.C. Smith and MMC dated as of May 16, 2003. 26 12. Statement Re: Computation of Ratio of Earnings to Fixed Charges. 31. Rule 13a-14(a)/15d-14(a) Certifications. 32. Section 1350 Certifications. (b) Reports on Form 8-K A Current Report on Form 8-K dated April 23, 2003 was filed by the registrant to report its issuance of a press release announcing its unaudited first quarter financial results for the quarter ended March 31, 2003. 27 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, MMC has duly caused this report to be signed this 14th of August, 2003 on its behalf by the undersigned, thereunto duly authorized and in the capacity indicated. MARSH & McLENNAN COMPANIES, INC. /s/ Sandra S. Wijnberg -------------------------------- Senior Vice President and Chief Financial Officer 28