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1166 Avenue of the Americas, New York, N.Y. 10036;
212-345-5000 fax: 212-345-4802
Gross revenues $6.30 billion $4.42 billion
Brokerage revenues $4.40 billion $3.07 billion
Brokerage: Retail 43% 39%*
Reinsurance 5% 7%*
Services 22% 27%*
Investment Income 0% 2%*
Other 30% 25%*
Employees* 30,900 23,271*
Rev./Employee* $142,275 $131,773
Offices* 300 320
* BI estimates.
1997 revenues are pro forma; 1996 revenues are actual. The number of offices in 1996 is pro forma.
Marsh & McLennan Cos. Inc. seems to have largely satisfied its appetite for other insurance brokerages after spending much of 1997 digesting some of its rivals.
While the world's largest broker continues to swallow a few overseas members of the UNISON network, the company -- at least for now -- has pushed back from the major consolidation table.
Instead, the broker is enjoying the benefits of its previous acquisitions and is concentrating its efforts on supplying better service to its clients and on attracting new business, according to executives at J&H Marsh & McLennan Inc., M&M's insurance services arm. A centerpiece of those efforts is J&H Marsh & McLennan's Global Broking Centers, which the broker uses to integrate its regional placements. The centers allow J&H Marsh & McLennan to place business more efficiently and obtain better deals for policyholders, brokerage executives say.
However, the centers have been a source of controversy in the past year -- a year in which service from brokers and insurers and the commission system have been closely scrutinized -- as some risk managers question whether policyholders' best interests are being served.
Total corporate revenues for Marsh & McLennan increased 42.6% to $6.3 billion in 1997 on a pro forma basis. The increase is largely due to acquisitions in 1997 that totaled $1.3 billion in revenues, including Johnson & Higgins and Cie. Europeenne de Courtage d'Assurances et de Reassurances, or CECAR.
Brokerage revenues also increased significantly as a result of the acquisitions. In 1997, brokerage revenues increased 43.4% on a pro forma basis to $4.40 billion.
Putnam Investments Inc., M&M's investment management subsidiary, also had another stellar year.
Overall in the past year, J&H Marsh & McLennan has successfully integrated the former J&H and CECAR, which was France's second-largest broker, and is well-positioned to succeed in what still is a tough market, says John T. Sinnott, chief executive officer.
The combination with J&H resulted in costs savings in many areas last year, but the process of combining offices has not been completed, he said.
"The achievement of all the synergies will not be accomplished until 1998-1999," he said.
The reduction in the workforce of the combined brokerage has led to higher expense savings than were previously anticipated. Shortly after the merger J&H Marsh & McLennan expected to reduce its head count by about 1,000, but the workforce has dropped on a pro forma basis to 30,900 from 32,900 in 1996. BI esti-mates the actual 1996 workforce at 23,271.
The brokerage also has largely finished merging its offices in cities where J&H had offices, he said.
In addition to merging the offices, J&H Marsh & McLennan also has been on a mini buying spree of former members of the UNISON network. J&H had been the senior member of the network.
Over the past year, J&H Marsh & McLennan has completed the purchase of former UNISON partners Brockman y Schuh Group of Cos. in Mexico, Bonnor & Co. A/S in Denmark, Ab Max Matthiessen in Sweden and Hannan & Co. Pty. Ltd. in Australia. The acquisitions of former UNISON members Interbrokers Oy in Helsinki, Finland (BI , Feb. 23), and SAN Sigorta ve Reansurans Brokerligi A.S. in Istanbul, Turkey, are pending (BI, March 30).
Also, J&H Marsh & McLennan bought a minority stake in the former Swiss UNISON member Kessler & Co. (BI, March 23).
"They saw the writing on the wall. If you want to be an international player, you have to be part of a large organization," said Norman Barham, vice chairman of J&H Marsh & McLennan Inc.
Small brokers simply are not able to meet policyholders' growing need for international service as effectively as large brokers, he said.
"Many middle-market accounts now have overseas exposures," Mr. Barham said.
Large brokers also can place domestic business more efficiently for policyholders, said Robert J. Newhouse III, president of J&H Marsh & McLennan (Americas).
Cost savings and efficiencies aside, some risk managers have said J&H Marsh & McLennan has lost some of its client focus since the merger of the former J&H and M&M. The broker did not shine on a quality score card developed by the Risk & Insurance Management Society Inc. and the Quality Insurance Congress. The score card, released in May at the annual RIMS conference, was based on responses from risk managers. J&H Marsh & McLennan ranked below average for both overall satisfaction and performance (BI, May 4).
Mr. Sinnott says the brokerage still is assessing the results of the scorecard along with feedback from its clients.
He concedes that the process of putting the brokerages together was diverting.
"Clearly, during 1997 the integration process was going on and we were putting offices together, and that was a distraction. But I think those issues are basically behind us," he said.
"But every time you don't get 100% there's clearly work to be done," Mr. Sinnott added.
One service issue that J&H Marsh & McLennan had to address over the past year stems from the Global Broking Centers. Despite the broker's stated objectives for the centers, some risk managers have expressed concerns that the centers circumvent established local relationships and that the broker was using its clout to dictate how risks should be placed.
The six J&H Marsh & McLennan centers that began operating last year in the United States are in New York, Chicago, Los Angeles, San Francisco, Atlanta and Dallas. Outside the United States, centers are located in London; Zurich, Switzerland; and Ber-muda. Account managers throughout the brokerage deal with the Global Broking Center brokers, who place the risks with insurers' main offices rather than through the local offices of the insurers. Currently, the centers
place business with 43 insurers, of which 12 to date have linked their computer systems with the centers.
The centers provide superior risk transfer facilities for policyholders as they gain access to the specialized expertise of the brokers at the centers who are dealing with many similar accounts, said Mr. Newhouse.
"It's producing results that the clients want. They get the optimal match-up, program design and implementation," Mr. Newhouse said.
However, risk managers voiced some concern last year after an internal J&H Marsh & McLennan memo revealed that the brokerage was instructing regional managers to channel all property/casualty business placed with Chubb Corp. through the Global Broking Centers (BI, Oct. 13, 1997).
The memo only referred to middle-market business, and large policyholders will not be forced to use the centers, Mr. Newhouse said last fall when the memo became public.
As a side issue, the contingent commissions that are a feature of the Global Broking Centers and other placements by other brokerages have prompted heated discussion this year and were debated at the RIMS conference. Contingent commissions based on volume are paid by insurers to many brokers. Some risk managers who took part in the RIMS debate clearly were concerned that contingent commissions could compromise a broker who should be searching for the best deal for policyholders (BI, May 11).
"We've had a few clients that have raised questions and wanted to pursue particular issues, but by and large, clients are comfortable with it," Mr. Sinnott said.
On top of the events surrounding integration of acquisitions, J&H Marsh & McLennan battled the continued soft market and the general consolidation trend spanning all businesses, which Mr. Sinnott said are the main reasons behind the slow revenue growth.
Non-U.S. operations saw stronger revenue growth than the domestic operations, Mr. Barham pointed out. In Latin America, in particular, J&H Marsh & McLennan saw double-digit growth.
Insurance services revenues in general have been helped by the continuing shift toward compensation by fees and negotiated commissions rather than the traditional commissions, said Mr. Newhouse. Because the levels of fees are less affected by the price of insurance than a percentage commission, brokerage revenues are hurt less by the soft market, he said.
Guy Carpenter & Co. Inc., the reinsurance arm of J&H Marsh & McLennan, has struggled against the soft market and mergers among insurers.
Reinsurance revenues increased 13% to $293.1 million in 1997, but the increase was mainly due to the incorporation of Willcox Inc., the reinsurance arm of J&H. Excluding acquisitions, reinsurance revenues fell 2%.
But things are looking up in 1998, said Brandon Sweitzer, CEO of Guy Carpenter. Although the reinsurance market is getting softer in 1998, the brokerage has managed to attract new clients, Mr. Sweitzer said.
"We've had, and expect to see, strong single-digit client revenue growth" this year, he said.
J&H Marsh & McLennan's program management business unit, Seabury & Smith, saw revenue growth despite a difficult market, said Claude Mercier, president and chief executive officer. Much of Seabury & Smith's business is professional liability risks, and rates in that sector have fallen by 10% to 20% over the past year, he said.
Still, program revenues grew 11% in 1997 to $259.5 million. Excluding acquisitions and dispositions, the revenues grew 6%.
Seabury & Smith also bought Kirke-Van Orsdel Inc., a Des Moines, Iowa-based program administration company that was partly owned by J&H.
Revenues generated by consulting services provided through Mercer Consulting Group and investment management provided through Putnam Investments Inc. increased substantially in 1997.
Consulting services revenues increased 15.4% to $1.34 billion in 1997. After allowing for acquisitions and dispositions, revenues still grew 10%.
Putnam revenues grew 41% to $1.88 billion.
Profits for the whole of Marsh & McLennan in 1997 fell 13% to $399.4 million. However, that drop reflects a special charge of $296.8 million primarily related to J&H acquisition expenses.
M&M's share price also performed well in 1997. Excluding a recent stock split but allowing for a two-for-one split last year, the 1997 year-end share price was $74.60, compared with $52 at year-end 1996. Allowing for the three-for-two stock split last month, the year-end 1997 price was $49.70 and the 1996 price was $34.70. The stock closed at $62.06 on July 10.
Another issue confronting J&H Marsh & McLennan is a legal fight between many former directors of the former J&H over how the $1.8 billion paid for the brokerage should be divided.
Last November, a group of the retired directors filed a lawsuit alleging that they were defrauded in the $1.8 billion sale. The complaint accused the active directors of manipulating the privately held broker's corporate structure to secure the lion's share of the proceeds for themselves and to block the retirees from having any say in the transaction (BI, Dec. 8, 1997).
The 10 retirees that filed the original suit were joined by nine other retired directors in an amended suit in March (BI, March 16, 1998).
Mr. Sinnott said he could not comment on pending litigation but said the suit has not affected morale at the brokerage.
There have been several senior management changes at J&H Marsh & McLennan over the past year.
In January 1998, Mr. Sinnott was named CEO. He had held the title at Marsh & McLennan Inc. prior to the purchase of J&H. After the merger, he had been named a vice chairman of the combined company.
The other two remaining vice chairmen also took on additional responsibilities. Richard H. Blum now is responsible for the brokerage's overall relationship with insurers and the development of its capital markets-based insurance products. Mr. Blum is a former chairman and CEO of Guy Carpenter.
Mr. Barham, the other vice chairman, also was named president of J&H Marsh & McLennan (Global), one of three divisions that form the operating units of the combined brokerage.
Mr. Newhouse became president of J&H Marsh & McLennan (Americas) and Mr. Sweitzer heads Guy Carpenter, the reinsurance division.
At the end of 1997, David A. Olsen retired as vice chairman of Marsh & McLennan. Mr. Olsen was previously chairman and CEO of Johnson & Higgins. He remains a director of M&M.
In October 1997, Richard A. Nielsen retired as a vice chairman of J&H Marsh & McLennan. Mr. Nielsen had been J&H vice chairman and chief operating officer.
Joseph P. Platt and John W. Gussenhoven, who were former executive vps of J&H, left the brokerage at year end. Along with Mr. Barham, the two executive vps were the principal candidates to take the senior management positions at J&H had the broker remained independent. Neither Mr. Platt or Mr. Gussenhoven got senior executive positions in the combined company.
Total cash compensation, including salaries and bonuses, paid to M&M's top five corporate officers in 1997, as reported to the SEC, was:
Lawrence J. Lasser $12,870,000
A.J.C. Smith $2,333,519
Jeffrey W. Greenberg $1,562,500
Peter Coster $1,340,116
John T. Sinnott $1,168,273