Marsh & Mclennan Companies, Inc.

views updated

Marsh & Mclennan Companies, Inc.

1166 Avenue of the Americas
New York, New York 10036
U.S.A.
(212) 345-6000
Fax: (212) 345-4810

Public Company
Incorporated: 1923 as Marsh & McLennan, Incorporated
Employees: 24,000
Assets: $2.04 billion
Stock Exchanges: New York Midwest Pacific London

Marsh & McLennan Companies is a leading worldwide provider of services on insurance brokerage, reinsurance brokerage, consulting, and investment management.

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 “accidently” 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 president: “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 its 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 6 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, in 1958 Smith began 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 consolidated in 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% interest in the French insurance brokerage Faugere et Jutheau. In 1975 the company acquired a 15% interest in the German firm Gradmann & Holler, and a 29.5% interest in Henijean & Cie in Belgium. That year its name changed again, to Marsh & McLennan Companies.

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 M&M 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 M&M 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 M&M’s transformation into a global company. Six months after the takeover, M&M revenues had jumped 28%, while net income increased 22%, to more than $100 million.

M&M’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. M&M’s consulting capabilities expanded in the 1980s to include National Economic Research Associates; Temple, Barker & Sloan/Strategic Planning Associates; and Lippincott & Margulies.

In 1990 Marsh & McLennan again refocused on globalization. In January 1990 Marsh & McLennan completed its purchase of a majority stake in Gradmann & Holler, Germany’s largest insurance broker. Frank J. Tasco, who took over as chairman in 1986, upheld the policy of innovation that characterized M&M management since the days of Henry Marsh and Donald McLennan.

Principal Subsidiaries

Marsh & McLennan Incorporated; William M. Mercer Companies, Inc.; Temple, Barker & Sloan/Strategic Planning Associates, Inc.; The Putnam Companies, Inc.; Seabury & Smith Planning Associates, Inc.; Guy Carpenter & Company, Inc.; C.T. Bowring Reinsurance Ltd. (U.K.); Clayton Environmental Consultants, Inc.; National Economic Research Associates, Inc.; Lippincott & Margulies, Inc.