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Marsh & McLennan Cos. Inc.
1166 Ave. of the Americas, New York, N.Y. 10036; 212-345-5000;
fax: 212-345-4808;
1996 1995
Gross revenues $5.46 billion $3.79 billion
Brokerage: Retail 49% 40%
Wholesale 0% 1%
Reinsurance 6% 8%
Services 23% 28%
Investment income 2% 3%
Other 20% 20%
Employees 36,900 27,200
Rev./Employee $147,846 $139,265
Offices 320 178
1996 figures reflect combined Marsh & McLennan Cos. Inc., Johnson & Higgins and CECAR; 1995 figures are Marsh & McLennan only.
The world's largest broker in 1997 actually is three of last year's top 20 rolled into one.
The mergers were driven by a need to grow in an increasingly demanding business environment, Marsh & McLennan Cos. Inc. senior executives say.
And M&M indeed has grown. Accounting for the mergers earlier this year, M&M's 1996 revenues vaulted 44% to $5.46 billion, compared with 1995 revenues of $3.79 billion for M&M alone.
On a pro forma basis, 1996 revenues are up 8.9% over the combined $5.01 billion the three brokerages posted in 1995.
The company's new insurance services arm, J&H Marsh & McLennan Inc., will be more able to meet the increasing international and global service requirements of commercial policyholders, executives say.
The insurance services unit comprises: M&M, the long-standing largest insurance broker in the world; Johnson & Higgins, formerly the world's largest privately held insurance brokerage and largest member of the UNISON brokerage network; and Cie. Europeene de Courtage d'Assurances et de Reassurances, or CECAR, formerly the 20th-largest brokerage in the world and the second-largest brokerage in France.
If the asking price for Minet Group, which was put into play last year, had been lower, M&M may have been made up of four of last year's top 20. While M&M had been looking at Minet, Aon Group Inc. acquired it.
For now, the drive for size has likely ended at M&M, said Chairman A.J.C. Smith, who is also chairman of J&H Marsh & McLennan.
While the group may look to purchase another investment management company to fit with Putnam Investments Inc. or a management consulting company to add to William M. Mercer Cos. Inc., any future purchases of insurance brokerages will likely be limited in size, Mr. Smith said.
"We are now at the size where we really don't need to make any strategic acquisitions," he said.
The combination of the three brokerages gives J&H Marsh & McLennan an office system that stretches through most developed and developing insurance markets, he said.
Some exceptions include countries where M&M had a minor presence and where Johnson & Higgins operated through a correspondent in the UNISON network. For example, J&H Marsh & McLennan might seek to increase its presence in Mexico, where J&H had only had a minority holding in Brockman y Schuh.
While executives emphasize the similarities between the two companies' business philosophies and their emphasis on quality service, the international networks and holdings of the two illustrate a difference between them.
They had long taken opposite positions on the need to own overseas offices. While M&M had advocated ownership and control of foreign offices, J&H held that a system of correspondent networks ensured that policyholders would be serviced by well-established local brokerages.
In the new company, the M&M philosophy prevails, and the UNISON network has lost its senior member.
J&H brokers are currently being trained in a new international program. The Global Broking Centre started deployment in the first quarter in the New York operations. The Centre is designed so account managers would deal directly with insurers and local J&H Marsh & McLennan offices rather than deal separately with different offices to place different coverages on a large account.
So far, about a dozen insurers are participating in the Centre.
Only a year ago, then-J&H chairman and chief executive officer David A. Olsen said the brokerage was "not for sale."
Since he made that assertion, the Aon-led merger-mania that gripped the insurance brokerage industry put J&H in the position of either raising money on the stock market by going public and making acquisitions of its own, or seeking an acquirer to compete in size with its rivals.
"When we looked to the future, we recognized that it was inevitable that we had to grow," said Norman Barham, the former J&H president and now one of four vice-chairmen of J&H Marsh & McLennan.
The chance to create J&H Marsh & McLennan provided the two firms with "the opportunity of a lifetime," he said.
"When the opportunity arose, it just made so much sense," Mr. Barham said.
M&M also was looking to increase in size, said John T. Sinnott, a vice chairman of J&H Marsh & McLennan and the former president and chief executive officer of retail brokerage unit Marsh & McLennan Inc.
"If you look into the future, you can't stand still," he said.
M&M decided about two years ago that if the opportunity to purchase another global insurance broker arose, it should be seriously considered, Mr. Sinnott said.
The purchase of J&H, however, was not made in reaction to Aon's purchase of Alexander & Alexander Services Inc. in December 1996, which at the time catapulted Aon past M&M and made Aon the largest commercial insurance broker, Mr. Sinnott said.
"We were already meeting a month before the Aon/A&A deal. From our standpoint, it was irrelevant," Mr. Sinnott said.
Combined, the three companies have 328 offices, which will be reduced to fewer than 300. Where the brokers had offices in the same cities, the two offices usually will be combined.
The staff of 36,900 also is likely to drop by up to 1,000 people, said Mr. Smith. About one-third of those people will retire, another third will leave through natural attrition, and another third will be laid off, he said.
Some former J&H employees will be significantly richer as a result of the purchase. According to Securities and Exchange Commission filings, the $1.8 billion paid for J&H will be shared among the brokerage's directors, retired directors or their estates, managing principals, principals and 600 key employees.
However, the influx of millionaires into the new company will not create tensions with M&M employees or former J&H staff who did not share in the bonanza, according to Mr. Smith. When M&M has purchased private companies in the past, those owners have become wealthy and remained with M&M. "We've never asked people their net worth before we hire them," Mr. Smith said.
Also, senior employees at M&M have been rewarded with stock options as well as their salaries, noted Mr. Sinnott. "There are forms of financial reward that a public company can offer which a private company cannot," he said.
Robert J. Newhouse III, formerly chairman of M&M's U.S. operations, will fill the same role for the merged companies, overseeing all seven U.S. regions.
Top managers for the seven regions of the merged U.S. operations include four former J&H executives and three from M&M.
William C. Bauman, a former J&H director, now heads the Mid-Atlantic region, based in Washington. Richard E. Valliere, head of the Detroit-based Midwest region, held a similar position with J&H. James W. McElvany, former chairman of J&H California and head of the broker's Los Angeles office, now heads the merged companies' Los Angeles-based Pacific South region. Gerald R. Swanson, former chairman of J&H Washington and Western regional director, oversees the Seattle-based Pacific North unit of the merged companies.
Roger E. Egan, head of the New York-based Northeast region, held a similar role at M&M. Donald E. Williams, head of the merged Southeast regional operation based in Nashville, Tenn., held a similar position at M&M. Lloyd C. Reid, who oversees the new Southwest regional unit based in Houston, held a similar position with M&M.
In Bermuda, M&M senior staff are taking the top positions in both the captive management and brokering sides of the operation.
Andrew D. Carr, will head the worldwide captive management operations for J&H Marsh & McLennan as president and CEO of Global Captive Management. Previously, Mr. Carr was president of M&M's captive operations. Brian R. Hall, who previously was chairman of J&H's captive operation, is retiring from the company.
J&H had been a strong advocate and manager of captives. The combined company claims to manage more than 750 captives worldwide.
Margaret J. Liptay is president and head of the office for J&H Marsh & McLennan's global brokering operations in Bermuda. Previously, she was head of U.S. National Client Development.
Other J&H senior managers, including Roger C. Gillett, a senior vp on the captive management side, and Sheila Nicholl, vp on the brokering side, are staying on with the new company.
In France, CECAR, which was purchased in January, is being merged into J&H Marsh & McLennan's existing French operation, Faugere & Jutheau.
"We now have a significant critical mass in France," Mr. Sinnott said.
CECAR, which had an estimated $144.5 million in 1996 revenues, also had offices in Brazil, Spain, Italy and Portugal, which have been integrated.
The integration of all three companies is accelerating the planned integration of M&M's insurance services units, Mr. Sinnott said.
The holding company has three units:
J&H Marsh & McLennan, which contains all the insurance services units, including reinsurance broker Guy Carpenter & Co., the M&M unit that absorbed J&H's Willcox Inc., and Seabury & Smith, the program business unit.
It also includes Normandy Reinsurance Co. Ltd., which was established in 1994 as a unit of Guy Carpenter to design and market derivative contracts and other financial products that could be used to cover catastrophe risks.
Another Guy Carpenter subsidiary is IndexCo., which later this month will launch an index of homeowners' catastrophe losses, which can be used as a basis for insurance and reinsurance derivatives contracts.
William M. Mercer Cos. Inc., which absorbed J&H's A. Foster Higgins & Co. Inc. benefit consulting subsidiary.
Putnam Investments Inc.
Although Seabury & Smith and Guy Carpenter operate under their own names, the management structure of J&H Marsh & McLennan will bring all the insurance services under one umbrella, Mr. Sinnott said.
Another 1996 acquisition, Park Ridge, Ill.-based Albert H. Wohlers & Co., will become part of Seabury & Smith.
The integration of the units will benefit clients because they will be able to deal with one organization for all their insurance needs, said Mr. Barham.
"The lines between insurance, reinsurance and wholesale are now very blurred," so there is less need to have distinct organizations and managements governing each area, he said.
The merger has gone over well with clients, despite the reduction in choice that policyholders now have when they look for a large brokerage, Mr. Barham said.
"We have met with most of our major clients, and they say that as long as we don't change the teams and that we keep the same high level of service, they will be happy," he said.
So far, only one client has moved part of its account to another brokerage in order to retain a selection of brokerages, Mr. Barham said.
In terms of U.S. clients, the two brokerages generally complement each other, said Mr. Sinnott and Mr. Barham.
Both companies serviced large and middle-market accounts, but M&M was particularly strong in large accounts, while J&H had a significant amount of middle-market business.
While M&M acquired $1.3 billion in revenues with its purchases of CECAR, J&H and Wohlers, M&M's insurance services revenues before the acquisitions this year actually fell 2.9% to $1.91 billion in 1996 from $1.96 billion in 1995.
Of that, reinsurance brokering revenues fell 12.4% to $258.5 million in 1996. But insurance brokering revenues increased 4.8% to $1.32 billion in 1996.
The fall in insurance services revenues was due to the sale of The Frizzell Group Ltd. in the United Kingdom last June. Excluding the sale of Frizzell, insurance services revenues increased 1%.
The paltry growth is due to the soft insurance market and, in particular, falling reinsurance revenues, Mr. Sinnott said.
"The consolidation in the insurance market has reduced the number of clients, and the clients that have consolidated have increased their retentions," Mr. Sinnott said.
J&H on its own had revenues of $1.15 billion, up slightly from $1.08 in 1995.
J&H's reinsurance business suffered less from the consolidations as it concentrated more on middle-market insurers that are more reliant on reinsurance than many of the larger insurers, Mr. Barham said.
Geographically, M&M's insurance services business had mixed results.
Revenues in the United States increased 1.8% to $1.025 billion; in Europe, revenues fell 11.2% to $696.1 million; in Canada, revenues increased 2.7% to $96.4 million; and in the Pacific Rim and other areas, revenues increased 13.1% to $89.5 million.
The fall in revenues in Europe was largely attributable to drop in insurance rates in Germany, where the property insurance cartel ended, and the soft reinsurance market in London, Mr. Sinnott said.
Putnam turned in another stellar year, increasing revenues 44.3% to $1.08 billion in 1996 from $750 million in 1995.
Net income at M&M increased 14% to $459.3 million in 1996 from $402.9 million in 1995. J&H's operating income before taxes was $120.9 million, according to an M&M prospectus. Never before has J&H's operating income been publicly available.
And M&M's stock soared over the past year, to $104 per share at year-end 1996 from $88.75 in 1995. And after a two-for-one stock split at the end of June, the stock closed July 11 at $72.50.
The stock price went up partly due the acquisition of J&H but it also reflects the general strength of the stock market and the excellent performance of Putnam, said James English, an insurance analyst at J.P. Morgan Securities Inc. in New York.
The combination of the brokerages should help make M&M a stronger company, he said. In particular, the global reach of the company is significantly enhanced, Mr. English said.
Over the past year, some stock analysts have questioned whether M&M should spin off Putnam, suggesting that M&M's stock price is being held back by the poorer performing insurance business. Mr. English, however, disagrees with that analysis.
"I think the current price of the overall stock pretty well reflects the underlying values," he said.
The stock price correlates with the overall performance of the business, agreed Mr. Smith, who said M&M is not planning to spin off Putnam. "I've never understood the case for spinning it off. I don't think the argument stands up to analysis," he said.
Other senior personnel remaining with the combined brokerage include: Mr. Olsen, vice chairman of M&M; Richard H. Blum, the former chairman and CEO of Guy Carpenter, who is a vice chairman of J&H Marsh; and Richard A. Nielsen, the former chief operating officer and a vice chairman of J&H, who also is a vice chairman of J&H Marsh.
Joseph P. Platt and John W. Gussenhoven, two former J&H executive vps, do not have formal positions with J&H Marsh & McLennan. Their status still is "under review," Mr. Barham said.
Prior to the merger, Messrs. Barham, Gussenhoven and Platt were widely regarded as the leading candidates for the top positions at J&H on the retirement of Messrs. Olsen and Nielsen.
Other senior managers in J&H M&M include Dan Jones, the former head of Johnson & Higgins European operations, who will be chairman of the U.K. company.
Another senior executive of M&M, David D. Holbrook, will retire next summer. Mr. Holbrook was the chairman of M&M Inc., the former retail broking arm of Marsh & McLennan Cos. Inc.
Total cash compensation, including salaries and bonuses, paid to M&M's top five corporate officers in 1996 as reported to the SEC, follows:
Lawrence J. Lasser $10,370,000.
A.J.C. Smith $2,425,420.
Jeffrey W. Greenberg $1,462,500.
Peter Coster $1,289,598.
John T. Sinnott $1,153,983.