Company History:
Marsh & McLennan Companies, Inc.
Incorporated: 1923 as Marsh & McLennan, Incorporated
NAIC: 52421 Insurance Agencies & Brokerages
SIC: 6411 Insurance Agents, Brokers & Service
Marsh & McLennan Companies, Inc. (MMC) is a global professional services operation. Yet for all its years in business, sustained growth, and shear size, MMC is relatively obscure: hardly a household name. MMC is the parent company of Marsh Inc., the world's leading risk and insurance firm, which operates in more than 100 countries; Putnam Investments, Inc., one of the largest U.S. money management firms; and Mercer Consulting Group, serving the areas of strategic and operational human resource consulting and implementation and ranking among the largest firms of its kind in the world.
In 1885 an ambitious young Henry Marsh left Harvard College without graduating and joined R.A. Waller & Company, a Chicago-based insurance agency founded in 1871, the year of the Great Chicago Fire. Marsh's lack of a degree proved no disadvantage in this period of U.S. history. The 1880s and 1890s were a period of political corruption and gross materialism in the United States, yet the age was also one of tremendous industrial expansion and urban growth. In 1889, following the death of Robert A. Waller, Henry Marsh and another employee, Herbert J. Ulmann, bought a controlling interest in the firm, which they renamed Marsh, Ulmann and Company.
In this age of big business, Marsh was convinced that huge profits could be made by managing the insurance affairs of large corporations in return for appropriate commissions. As Marsh himself declared, "What's the use of shooting hummingbirds when elephants are so much easier to hit." Marsh realized that very large companies could set aside sufficient funds to cover themselves against potential losses without placing the risk with insurance companies. In 1901 Henry Marsh talked Charles Schwab, president of the United States Steel Corporation, into adopting such a scheme, with Marsh's company managing an appropriate fund to estimate potential risks to U.S. Steel. In this way Henry Marsh pioneered the modern-day concepts of self-insurance and risk management.
Henry Marsh met his future partner and associate, Donald McLennan, in the course of his attempts to secure railroad contracts for his growing insurance agency. McLennan had begun an insurance agency in partnership with L.B. Manley in Duluth, Minnesota, in 1900. Duluth's position on the Great Lakes had made it a major transfer point for the products--mostly agricultural--of the Great Plains. Goods arrived by rail and were loaded onto steamers to be shipped east. When the lakes froze during winter, such products were stored in warehouses owned by the railroads.
McLennan had recognized the enormous insurance potential in these activities. He quickly became an expert on railroad insurance, constantly traveling the Midwest and meeting with company executives. During one round of sales negotiations, McLennan was reported to have spent 30 consecutive nights in a railroad car.
As it transpired, Henry Marsh, Daniel Burrows, and Donald McLennan all had been promised the insurance account of the Chicago Burlington and Quincy Railroad by different directors. Rather than argue over the account, the three men joined forces. All realized the advantages of combining their skills and resources into one company with a view to securing still more insurance contracts.
On December 22, 1904, the Chicago Record-Herald reported the launching of the "New agency of Burrows, Marsh & McLennan" with annual premiums of $3 million. Soon other railroad contracts were secured, including The Great Northern and Northern Pacific. In 1906, following the retirement of Daniel Burrows, the new firm became known as Marsh & McLennan (M&M).
In the newly reorganized firm, Marsh concentrated on securing more contracts, while McLennan supervised the railroad account. Marsh's sales tactics sometimes surprised the more staid McLennan--Marsh would stop at nothing to obtain new contracts. He often sailed to England, and even went so far as to rearrange the deck chairs in order to "accidentally" meet potential new clients. On one such trip in 1910, Marsh met Theodore Vail, the president of the American Telephone and Telegraph Company (AT&T), and secured that company's business.
By 1917, the year the United States entered World War I, M&M had established offices throughout the country. During the war, McLennan became responsible for the allocation and regulation of building materials for purposes other than those directly related to the war effort. For the duration of the war, no U.S. company could build an industrial plant without McLennan's approval. In this way McLennan acquired many business contacts throughout the United States, enhancing M&M's reputation in the postwar period.
During the economic boom of the 1920s, M&M continued to prosper. In 1923 the legal structure of the company was changed from a partnership to a corporation, Marsh & McLennan, Incorporated. The stock was now held under a voting trust agreement by Marsh, McLennan, and four other people. Marsh became chairman, while McLennan increasingly assumed responsibility for the firm's management. The same year, the reinsurance brokerage firm, Guy Carpenter & Company, became a separately managed business of Marsh & McLennan.
The Great Depression of the 1930s had an adverse effect on the insurance industry. Many institutions and individuals simply could not afford to pay insurance premiums. Although premiums from most types of insurance declined, the life insurance business actually increased, as people craved financial security. The passage of the Social Security Act of 1937 further sparked interest in life and accident insurance as people became more concerned with financial security. Many firms adopted retirement programs to supplement Social Security benefits, and employed M&M to operate such funds. The American Can Company employed M&M to devise a pension plan for its employees, and also asked it to organize the fee-billing service.
After the entry of the United States into World War II, the conservative McLennan was invited to meet with New Deal President Franklin Roosevelt, who asked his advice on the management of the U.S. war industry. McLennan later spoke of his meeting with the famous leader: "When I left the White House, I went to my room at the hotel, took a cold shower and then walked around the block several times. It took me at least 48 hours to rekindle my dislike of the President. Never in my life have I met a more charming individual."
Neither Marsh nor McLennan lived to see the end of World War II, however. Henry Marsh died on April 13, 1943, and McLennan on October 9, 1944. Charles Ward Seabury became chairman of the board and Laurence S. Kennedy, the new president. The company survived the loss of its two founders and continued to prosper. In 1947 Ford Motor Company selected M&M to handle all its insurance. The postwar boom in consumer spending, much of it on credit, also provided an opportunity for innovation: M&M developed consumer credit insurance which it sold to eight of the nine major New York banks.
Following Seabury's retirement and Kennedy's death in 1955, Hermon Smith became the CEO and chairman. In 1957 Cosgrove & Company, the West Coast's largest regional broker, was merged into Marsh & McLennan. Between 1958 and 1962, 14 other agents and brokers were acquired. By 1962 M&M had become an international company with offices in the world's major financial centers, yet the structure of the company had not changed since 1923. In 1955 shareholders had numbered only 21, up from the original six shareholders in 1923. While technically a corporation, it nevertheless operated as a partnership. There were no stockholder meetings and stockholders' identities and the number of shares they held were kept secret. Beginning in 1957, when a stockholder died, retired, or turned 70 years old, his stock had to be sold back to the company.
Given the growing complexity of the insurance business and his desire for company growth, Smith began in 1958 to explore the idea of going public. In March 1962, 673,215 shares of M&M stock were offered to the public. This decision marked a transition in the company's ability to grow.
The 1960s signaled the beginning of a period of unparalleled expansion as M&M embarked on a series of acquisitions of smaller insurance agencies. In 1968, M&M acquired Edwards George and Company of Pittsburgh, Pennsylvania, and R.H. Squire of New York City. Revenues also increased dramatically throughout the 1960s. The company's first annual report, in 1962, recorded revenues of $52 million; by 1968 revenues had jumped to $106 million. In 1969, to administer its services more efficiently, Marsh & McLennan reorganized, and became known as MarLennan Corporation. Henceforth the company would provide a variety of its professional and financial services under the banners of separately managed companies. The first of these, the Putnam Management Company, became part of M&M in 1970. In 1975, M&M's employee-benefit-consulting business was folded into William M. Mercer Inc.
The 1970s marked a new phase in international development. John Regan, who became chief executive in 1973, was determined to transform the company into a global insurance force, and embarked on a policy of buying foreign brokerage firms in the world's major financial cities. In 1973 MarLennan acquired a 33.3 percent interest in the French insurance brokerage Faugere et Jutheau. In 1975 the company acquired a 15 percent interest in the German firm Gradmann & Holler, and a 29.5 percent interest in Henijean & Cie in Belgium. That year its name changed again, to Marsh & McLennan Companies (MMC).
Not all acquisitions proceeded smoothly, however. In 1980 Regan set his sights on C.T. Bowring, a large London brokerage firm. The acquisition of such a firm would allow MMC direct access to the profitable Lloyd's of London insurance market, open only to British firms. Many executives of Bowring, an old, traditional English firm, resented the takeover by the U.S. brokerage. In long, and often acrimonious, discussions, Bowring executives--despite their dependence on MMC business--continued to reject Regan's terms. Undaunted, Regan went directly to the shareholders, a tactic that outraged Bowring's management. Bowring Chairman Peter Bowring appealed to the British Insurance Brokers Association and the British government for help in preventing the incursion. Questions were raised in the House of Commons about the need to protect the British insurance industry. The French, it was reported, would never have allowed this to happen. Despite much rhetoric, little was done to help Bowring. With shares priced far above their market value, British shareholders could not resist the temptation to sell. In the end, Regan paid $580 million for Bowring, more than twice its book value.
Many executives resigned from the British firm. This development stunned Regan, who worried that such a loss of talent would severely hamper the effectiveness of his new acquisition. Regan claimed that he would have abandoned the takeover if he had known it would cause such a personnel exodus. Nevertheless, C.T. Bowring continued to function.
The Bowring purchase was a crucial move in MMC's transformation into a global company. Six months after the takeover, MMC revenues had jumped 28 percent, while net income increased 22 percent, to more than $100 million.
MMC's strategy in the 1980s was to diversify beyond insurance into consulting and money management. In 1982 insurance-program management separated from the consulting activities of Mercer to become a separate company, later called Seabury & Smith. MMC consulting capabilities expanded in the 1980s to include National Economic Research Associates; Temple, Barker & Sloan/Strategic Planning Associates; and Lippincott & Margulies.
Meanwhile the financial management side of the business was undergoing an overhaul. During its first decade under MMC ownership, Putnam Investments primarily managed assets for institutional clients. But in the early 1980s those sales slipped. Lawrence J. Lasser took charge of the operation in 1985, reorganized, expanded its offerings, and subsequently produced stellar growth.
"Putnam's performance couldn't come at a better time," Ronald Fink wrote in a 1993 Financial World article. "Marsh's core business--property and casualty insurance brokerage--has been in a slump for over six years. In fact, Putnam's profitability went a long way toward keeping Marsh's net income from falling last year." Putnam produced 14 percent of total company revenues in 1992 but contributed 23 percent of operating income.
On the insurance end, MMC turned its sights to globalization. In January 1990 the company completed its purchase of a majority stake in Gradmann & Holler, Germany's largest insurance broker. Additional affiliated companies were acquired and branch offices established--primarily in Europe--during the next two years. By 1993, MMC held wholly owned offices in the 12 European Community nations and in six non-member nations. Purchases in Latin and South America, the Far East, and Hong Kong were also in the works.
The acquisition push was followed by a streamlining of operations. A Global Broking Centre, based in London, was to link insurance wholesale offices and insurance underwriters around the world, facilitating the sharing of information by all the pertinent players, and easing large capacity property/casualty transactions for both U.S. and foreign clients. In a related move, MMC separated its large U.S. risk management accounts from its middle-market insurance brokerage clients--those without full-time risk managers. The move marked the beginning of a concerted push to gain more business in this mid-range area.
The consulting division, now called Mercer Consulting Group Inc., also made some changes in the early 1990s, selling off an environmental consulting operation. Remaining in the division in 1994 were: William M. Mercer, the world's largest actuarial and employee benefits consulting and human resource management firm; Mercer Management Consulting Inc., a corporate strategy and management consulting company; and the economics consulting firm, National Economic Research Associates Inc. About 65 percent of the consulting division's revenue, which remained flat during the period, came from U.S. accounts.
The company's U.S. insurance operation stagnated along with the rest of the industry during the mid-1990s, though there were some bright spots. In 1995, MMC's domestic middle-market segment, responding to aggressive marketing, showed strong growth. Overseas operations also showed strong growth, especially in the Pacific Rim. But overall, insurance revenue rose just 4 percent on the year.
In addition to flat or falling markets, insurers had to contend with other changes taking place within the industry, such as product line integration and insurance firm consolidation. MMC looked internally for answers. To counteract a blurring of lines between who sold what types of insurance, MMC restructured operations in an effort to better define its products for customers. In order to boost the reinsurance business, hurt by a drop in the number of insurance companies to which to sell its products, MMC created Risk Capital Insurance Company. The new unit differentiated itself by investing much of its resources in the stock of companies it served.
In 1996, after more than 20 years at the top of the worldwide insurance brokerage business, MMC was surpassed by Aon Corporation when the Chicago based competitor purchased Alexander & Alexander.
"Its army of brokers and consultants has been regarded as the best in the business. And the company has consistently recorded double-digit earnings growth," wrote Judy Temes for Crain's New York Business in 1997. "But suddenly, being good isn't good enough. The $4 billion giant--spread across the insurance, management consulting and mutual funds businesses--is finding itself on the defensive."
MMC's focus on internal growth, cost cutting measures, and technological improvements could not outstrip a decade of troubles in the insurance industry. Additionally, the company's six-year attempt to gain more of the higher-margin strategic consulting business had floundered, leaving Putnam to drive earnings growth. Consequently, MMC found its stock undervalued on the market and heard calls for a spinoff of the highly profitable financial management segment, a move which would benefit stockholders.
Marsh responded by purchasing some top notch businesses, first paying $200 million for the leading French insurance brokerage. The company followed up with the buyout of Johnson & Higgins in 1997 and Sedgwick Group PLC in 1998, a boon to middle-market business. MMC trimmed back its insurance-related purchases in 1999 but planned for more acquisitions in the consulting area.
Leadership changed hands in 1999. Jeffrey W. Greenberg was named CEO in November and then chairman of the board in May 2000; he succeeded A.J.C. Smith. Greenberg had a heady first 16 months at the helm, with the stock price rising 60 percent and high profile managers joining the ranks. Also, MMC Enterprise Risk, a cutting edge operation drawing on expertise throughout MMC, was launched and poised to offer integrated risk management services.
In terms of numbers, revenue topped the $10 billion mark in 2000, and net income rose by 23 percent to $1.2 billion. Marsh produced about half the total revenues, followed by Putnam with one-third, and the rest from Mercer. Greenberg would have to stay on his toes though, with the economy slowing and the stock market fluctuating.
Thus, MMC embarked on the new century back on the top of its core business sector, and importantly, insurance prices had headed upward: a trend which boded well for Marsh since its revenue came from rate sensitive commissions and negotiated fees. Moreover, the consolidation binge of the 1990s had produced two mega-insurance brokerages. Between them, Marsh and Aon generated 73 percent of all the revenue produced by the top ten companies in the industry. Conflicting views circulated as to whether or not this was a good thing.
The unimaginable happened on September 11, 2001. More than 300 MMC employees--primarily people working in accounting and information technology--were among those killed when New York's twin World Trade Center towers were destroyed. MMC, like the many other businesses directly affected, had to go on despite the horror.
In late September, MMC Capital Inc. announced the formation of Axis Specialty Ltd., a new insurer to be based in Bermuda. The unit would write insurance and reinsurance coverage in such areas as "all-peril property, aviation, war, political risk," which were deemed underserved, according to a report by David Pilla for A.M Best Newswire.
Meanwhile, commercial insurance rates, particularly in the hard-hit airline industry, skyrocketed. Property-insurance rates, already on the rise, also climbed, but less steeply. Workers' compensation increases were expected as well.
One month after the disaster, MMC announced the formation of a crisis-consulting practice. L. Paul Bremer, former ambassador-at-large for counterterrorism during President Reagan's administration, would head the operation.
Principal Subsidiaries
Marsh Inc.; Mercer Consulting Group Inc.; Putnam Investments, Inc.; MMC Capital Inc.; and MMC Enterprise Risk Inc.
Principal Competitors
Aon Corporation; Arthur J. Gallagher & Co.; Willis Group Holdings Limited.
Further Reading
Brent, Andrew, "... But Big Firms Can Afford to Be Aggressive," Mutual Fund Market News, October 8, 2001.
Fink, Ronald, "Cash Cow," Financial World, July 6, 1993, pp. 64-65.
Gjertsen, Lee Ann, "Marsh, Aon Regroup After Losses," American Banker, September 25, 2001, p. 7.
McLeod, Douglas, "Marsh & McLennan Cos. Inc.," Business Insurance, July 5, 1993, pp. 18, 20-21.
------, "Marsh & McLennan Cos. Inc.," Business Insurance, July 18, 1994, pp. 16-18.
Osborn, Neil, "The American Invasion of Lloyd's," Institutional Investor, October 1979.
------, "The Bloody Battle for Bowring," Insurance, August 1980.
Oster, Christopher, "Business Impact: Insurance Rates Rocket Across Industries, But Unlike Airlines, Help May Not Come," Wall Street Journal, October 8, 2001, p. A11.
------, "Marsh & McLennan Unit to Unveil Plan to Launch a Crisis-Consulting Practice," Wall Street Journal, October 11, 2001, p. C17.
Pilla David, "Marsh Unit Forms New Insurer in Response to Capacity Shortage," A.M. Best Newswire, September 28, 2001.
Requet, Mark E., "Marsh Ends Year on Strong, Positive Note," National Underwriter Property & Casualty-Risk & Benefits Management, February 12, 2001, p. 21.
Roberts, Sally, "Pros and Cons of Consolidation Debated," Business Insurance, July 16, 2001, p. 12.
Souter, Gavin, "Marsh & McLennan Cos. Inc.," Business Insurance, July 22, 1996, pp. 14+.
------, "Marsh & McLennan Cos. Inc." Business Insurance, July 17, 2000, pp. 20-22.
Temes, Judy, "Marsh's Growing Quagmire: Mergers Prod Inert Insurance Broker to Act," Crain's New York Business, February 17, 1997, pp. 1+.
Wipperfurth, Heike, "Quietly Making a Big Noise; Marsh & McLennan Loads Up on Talent; Racing to Stay Even," Crain's New York Business, March 12, 2001, p. 3.
— Michael Doorley; Updated by Kathleen Peippo
