NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Marsh & McLennan Companies, Inc. (“the Company”), a global professional services firm, is organized based on the different services that it offers. Under this organizational structure, the Company’s
two
business segments are Risk and Insurance Services 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. The Company conducts business in this segment through Marsh and Guy Carpenter.
In January 2012, Marsh acquired Alexander Forbes' South African brokerage operations, including Alexander Forbes Risk Services and related ancillary operations and insurance broking operations in Botswana and Namibia. In March 2012, Marsh acquired KSPH, LLC, a middle-market employee benefits agency based in Virginia, and Cosmos Services (America) Inc., the U.S. insurance brokerage subsidiary of ITOCHU Corp., which specializes in commercial property/casualty, personal lines, and employee benefits brokerage services to U.S. subsidiaries of Japanese companies. In June 2012, Marsh acquired Progressive Benefits Solutions, an employee benefits agency based in North Carolina, and Security Insurance Services, Inc., a Wisconsin-based insurance agency which offers property/casualty and employee benefits products and services to individuals and businesses. In August 2012, Marsh acquired Rosenfeld-Einstein, a South Carolina-based employee benefits service provider, and Eidson Insurance, a property/casualty and employee benefits services firm located in Florida.
The Consulting segment provides advice and services to the managements of organizations in the area of human resource consulting, comprising retirement and investments, health and benefits, outsourcing and talent; and strategy and risk management consulting, comprising management, economic and brand consulting. The Company conducts business in this segment through Mercer and Oliver Wyman Group.
In February 2012, Mercer acquired the remaining
49%
of Yokogawa-ORC, a global mobility firm based in Japan, and Pensjon & Finans, a leading Norway-based financial investment and pension consulting firm. In March 2012, Mercer acquired REPCA, a France-based broking and advising firm for employer health and benefits plans.
On August 3, 2010, the Company completed the sale of Kroll, the Company's former Risk Consulting & Technology segment. With the sale of Kroll, along with previous divestiture transactions between 2008 and 2010, the Company has divested its entire Risk Consulting & Technology segment. The run-off of the Company’s involvement in the Corporate Advisory and Restructuring business (“CARG”), previously part of Risk Consulting & Technology, in which the Company has “continuing involvement” as defined in SEC Staff Accounting Bulletin Topic 5e, is now managed by the Company’s corporate departments. Consequently, the financial results of the CARG businesses are included in “Corporate” for segment reporting purposes.
2. Principles of Consolidation and Other Matters
The consolidated financial statements included herein have been prepared by the Company 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 for interim filings, although the Company believes that the information and disclosures presented are adequate to make such information and disclosure not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2011
(the “
2011
10-K”).
The financial information contained herein reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s results of operations for the three- and nine-month periods ended
September 30, 2012
and
2011
.
Investment (Loss) Income
The caption “Investment (loss) income” in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in current earnings. It includes, when applicable, other than
temporary declines in the value of debt and available for sale securities and the change in value of the Company’s holdings in certain private equity funds, including equity method gains (losses) on its investment in Trident II, a limited partnership. The Company’s investments may include direct investments in insurance or consulting companies and investments in private equity funds. The company recorded equity method gains/(losses) on its investment in Trident II, of
$(1) million
and
$0 million
for the
three
months ended
September 30, 2012
and
2011
, respectively, and
$23 million
and
$14 million
for the
nine
months ended
September 30, 2012
and
2011
, respectively.
At
September 30, 2012
, the Company’s investment in Trident II was approximately
$66 million
, reflected in other assets in the consolidated balance sheet. The Company’s maximum exposure to loss is equal to its investment plus any calls on its remaining capital commitment of
$67 million
. Since this fund is closed to new investments, none of the remaining capital commitment is expected to be called.
Income Taxes
The Company's effective tax rate in the third quarter of 2012 was
26.8%
compared with
32.8%
in the third quarter of 2011. These rates reflect non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation. In addition, the lower rate in the current period reflects several tax benefits, including the benefit from recording previously unrecognized tax benefits as a result of expiring statutes of limitations for U.S. federal tax years 2006 and 2008, and a favorable permanent difference related to a tax-free adjustment to the estimated liability for contingent consideration. These benefits were partially offset by charges to increase unrecognized tax benefits for certain operations in Asia and U.S. tax costs related to actions taken during the quarter to reduce positions in the Euro currency held by certain of the Company's non-U.S. operations. The effective tax rate for the first nine months of 2012 and 2011 was
29.2%
and
30.4%
, respectively. The decline primarily reflects the effects of the aforementioned items as well as a lower estimated annual effective tax rate in the current year. The statute of limitations for the 2007 federal tax return remains open in connection with the IRS review of the Company's carryback of Foreign Tax Credits from 2009 to 2007.
The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When evaluating the potential imposition of penalties, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company's position, and the advice of professional tax advisors.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in the tax return. The Company's gross unrecognized tax benefits were approximately $
143 million
at both September 30, 2012 and December 31, 2011. Of the total unrecognized tax benefits at September 30, 2012 and December 31, 2011, $
94 million
and $
102 million
, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in a future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between
zero
and approximately $
20 million
within the next twelve months due to settlement of audits and expiration of statutes of limitation.
3. Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. The Company also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims proceeds are held by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds of
$31 million
and $
36 million
for the
nine
-month periods ended
September 30, 2012
and
2011
, respectively. The Consulting segment recorded fiduciary interest income of
$2 million
for the the
nine
-month period ended
September 30, 2012
and $
3 million
for the same period in
2011
. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Fiduciary assets include approximately
$5 million
and
$62 million
of fixed income securities classified as available for sale at
September 30, 2012
and
December 31, 2011
, respectively. Unrealized gains or losses from available for sale securities are recorded in other comprehensive income until the securities are disposed of, mature or a loss is recognized as an other than temporary impairment. Unrealized gains, net of tax, were
$0 million
and
$2 million
at
September 30, 2012
and
December 31, 2011
, respectively.
Net uncollected premiums and claims and the related payables amounted to
$10 billion
at
September 30, 2012
and
$9 billion
at
December 31, 2011
. The Company 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 the Company and are not included in the accompanying consolidated balance sheets.
In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. These advances are made from corporate funds and are reflected in the accompanying consolidated balance sheets as receivables.
Mercer manages approximately
$16 billion
of assets in trusts or funds for which Mercer’s management or trustee fee is considered a variable interest. Mercer is not the primary beneficiary of these trusts or funds. Mercer’s only variable interest in any of these trusts or funds is its unpaid fees, if any. Mercer’s maximum exposure to loss of its interests is, therefore, limited to collection of its fees.
4. Per Share Data
Under the accounting guidance which applies to the calculation of earnings per share ("EPS") for share-based payment awards with rights to dividends or dividend equivalents, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation.
Basic net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares (excluding those that are considered participating securities). The diluted EPS calculation reflects the more dilutive effect of either (a) the two-class method that assumes that the participating securities have not been exercised or (b) the treasury stock method. Reconciliation of the applicable income components used for diluted EPS and basic weighted average common shares outstanding to diluted weighted average common shares outstanding is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS Calculation -
Continuing Operations
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions, except per share figures)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income from continuing operations
|
$
|
246
|
|
|
$
|
133
|
|
|
$
|
939
|
|
|
$
|
738
|
|
Less: Net income attributable to non-controlling interests
|
6
|
|
|
5
|
|
|
21
|
|
|
18
|
|
Net income from continuing operations attributable to the Company
|
240
|
|
|
128
|
|
|
918
|
|
|
720
|
|
Less: Portion attributable to participating securities
|
—
|
|
|
1
|
|
|
2
|
|
|
5
|
|
Net income attributable to common shares for basic earnings per share
|
$
|
240
|
|
|
$
|
127
|
|
|
$
|
916
|
|
|
$
|
715
|
|
Basic weighted average common shares outstanding
|
544
|
|
|
540
|
|
|
544
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS Calculation -
Net Income
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions, except per share figures)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income attributable to the Company
|
$
|
241
|
|
|
$
|
130
|
|
|
$
|
917
|
|
|
$
|
737
|
|
Less: Portion attributable to participating securities
|
—
|
|
|
1
|
|
|
2
|
|
|
5
|
|
Net income attributable to common shares for basic earnings per share
|
$
|
241
|
|
|
$
|
129
|
|
|
$
|
915
|
|
|
$
|
732
|
|
Basic weighted average common shares outstanding
|
544
|
|
|
540
|
|
|
544
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation -
Continuing Operations
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions, except per share figures)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income from continuing operations
|
$
|
246
|
|
|
$
|
133
|
|
|
$
|
939
|
|
|
$
|
738
|
|
Less: Net income attributable to non-controlling interests
|
6
|
|
|
5
|
|
|
21
|
|
|
18
|
|
Net income from continuing operations attributable to the Company
|
240
|
|
|
128
|
|
|
918
|
|
|
720
|
|
Less: Portion attributable to participating securities
|
—
|
|
|
1
|
|
|
2
|
|
|
5
|
|
Net income attributable to common shares for diluted earnings per share
|
$
|
240
|
|
|
$
|
127
|
|
|
$
|
916
|
|
|
$
|
715
|
|
Basic weighted average common shares outstanding
|
544
|
|
|
540
|
|
|
544
|
|
|
543
|
|
Dilutive effect of potentially issuable common shares
|
8
|
|
|
9
|
|
|
8
|
|
|
9
|
|
Diluted weighted average common shares outstanding
|
552
|
|
|
549
|
|
|
552
|
|
|
552
|
|
Average stock price used to calculate common stock equivalents
|
$
|
33.53
|
|
|
$
|
28.87
|
|
|
$
|
32.60
|
|
|
$
|
29.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation -
Net Income
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions, except per share figures)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income attributable to the Company
|
$
|
241
|
|
|
$
|
130
|
|
|
$
|
917
|
|
|
$
|
737
|
|
Less: Portion attributable to participating securities
|
—
|
|
|
1
|
|
|
2
|
|
|
5
|
|
Net income attributable to common shares for diluted earnings per share
|
$
|
241
|
|
|
$
|
129
|
|
|
$
|
915
|
|
|
$
|
732
|
|
Basic weighted average common shares outstanding
|
544
|
|
|
540
|
|
|
544
|
|
|
543
|
|
Dilutive effect of potentially issuable common shares
|
8
|
|
|
9
|
|
|
8
|
|
|
9
|
|
Diluted weighted average common shares outstanding
|
552
|
|
|
549
|
|
|
552
|
|
|
552
|
|
Average stock price used to calculate common stock equivalents
|
$
|
33.53
|
|
|
$
|
28.87
|
|
|
$
|
32.60
|
|
|
$
|
29.27
|
|
There were
35.1 million
and
40.5 million
stock options outstanding as of
September 30, 2012
and
2011
, respectively.
5. Supplemental Disclosures to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions, interest and income taxes paid for the
nine
-month periods ended
September 30, 2012
and
2011
.
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
Assets acquired, excluding cash
|
$
|
160
|
|
|
$
|
148
|
|
Liabilities assumed
|
(39
|
)
|
|
(19
|
)
|
Contingent/deferred purchase consideration
|
(19
|
)
|
|
(16
|
)
|
Net cash outflow for current year acquisitions
|
102
|
|
|
113
|
|
Purchase of other intangibles
|
—
|
|
|
2
|
|
Contingent payments from prior years' acquisitions
|
—
|
|
|
3
|
|
Deferred purchase consideration from prior years' acquisitions
|
51
|
|
|
16
|
|
Net cash outflow for acquisitions
|
$
|
153
|
|
|
$
|
134
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
Interest paid
|
$
|
150
|
|
|
$
|
163
|
|
Income taxes paid/(refunded)
|
$
|
237
|
|
|
$
|
(37
|
)
|
The Company had non-cash issuances of common stock under its share-based payment plan of
$187 million
and
$191 million
for the
nine
months ended
September 30, 2012
and
2011
. The Company recorded stock-based compensation expense related to equity awards of
$117 million
and
$124 million
for the
nine
-month periods ended
September 30, 2012
and
2011
, respectively.
6. Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) for the three- and nine-month periods ended
September 30, 2012
and
2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
2012
|
|
2011
|
(In millions of dollars)
|
Pre-Tax
|
|
Tax
|
Net of Tax
|
|
Pre-Tax
|
|
Tax
|
Net of Tax
|
Foreign currency translation adjustments
|
$
|
171
|
|
$
|
4
|
|
$
|
167
|
|
|
$
|
(349
|
)
|
$
|
(1
|
)
|
$
|
(348
|
)
|
Unrealized investment gains (losses)
|
—
|
|
(1
|
)
|
1
|
|
|
(1
|
)
|
—
|
|
(1
|
)
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
Amortization of losses (gains) included in net periodic pension cost:
|
|
|
|
|
|
|
|
Prior service gains
|
(8
|
)
|
(6
|
)
|
(2
|
)
|
|
(8
|
)
|
(3
|
)
|
(5
|
)
|
Net actuarial losses
|
68
|
|
52
|
|
16
|
|
|
51
|
|
18
|
|
33
|
|
Subtotal
|
60
|
|
46
|
|
14
|
|
|
43
|
|
15
|
|
28
|
|
Foreign currency translation adjustments
|
(132
|
)
|
(60
|
)
|
(72
|
)
|
|
87
|
|
21
|
|
66
|
|
Pension/post-retirement plans (gains) losses
|
(72
|
)
|
(14
|
)
|
(58
|
)
|
|
130
|
|
36
|
|
94
|
|
Other comprehensive income (loss)
|
$
|
99
|
|
$
|
(11
|
)
|
$
|
110
|
|
|
$
|
(220
|
)
|
$
|
35
|
|
$
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
2012
|
|
2011
|
(In millions of dollars)
|
Pre-Tax
|
Tax
|
Net of Tax
|
|
Pre-Tax
|
Tax
|
Net of Tax
|
Foreign currency translation adjustments
|
$
|
142
|
|
$
|
(10
|
)
|
$
|
152
|
|
|
$
|
(112
|
)
|
$
|
1
|
|
$
|
(113
|
)
|
Unrealized investment gains (losses)
|
(1
|
)
|
1
|
|
(2
|
)
|
|
(6
|
)
|
(1
|
)
|
(5
|
)
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
|
|
Amortization of losses (gains) included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
Prior service gains
|
(24
|
)
|
(11
|
)
|
(13
|
)
|
|
(24
|
)
|
(8
|
)
|
(16
|
)
|
Net actuarial losses
|
202
|
|
95
|
|
107
|
|
|
160
|
|
52
|
|
108
|
|
Subtotal
|
178
|
|
84
|
|
94
|
|
|
136
|
|
44
|
|
92
|
|
Foreign currency translation adjustments
|
(116
|
)
|
(55
|
)
|
(61
|
)
|
|
(12
|
)
|
(5
|
)
|
(7
|
)
|
Pension/post-retirement plans (gains) losses
|
62
|
|
29
|
|
33
|
|
|
124
|
|
39
|
|
85
|
|
Other comprehensive income (loss)
|
$
|
203
|
|
$
|
20
|
|
$
|
183
|
|
|
$
|
6
|
|
$
|
39
|
|
$
|
(33
|
)
|
7. Acquisitions
During the first
nine
months of
2012
, the Company made
seven
acquisitions in its Risk and Insurance Services segment and
three
in its Consulting segment. In January 2012, Marsh acquired Alexander Forbes' South African brokerage operations, including Alexander Forbes Risk Services and related ancillary operations and insurance broking operations in Botswana and Namibia. In March 2012, Marsh acquired KSPH, LLC, a middle-market employee benefits agency based in Virginia, and Cosmos Services (America) Inc., the U.S. insurance brokerage subsidiary of ITOCHU Corp., which specializes in commercial property/casualty, personal lines, and employee benefits brokerage services to U.S. subsidiaries of Japanese companies. In February 2012, Mercer acquired the remaining
49%
of Yokogawa-ORC, a global mobility firm based in Japan, which was previously accounted for under
the equity method, and Pensjon & Finans, a leading Norway-based financial investment and pension consulting firm. In March 2012, Mercer acquired REPCA, a France-based broking and advisory firm for employer health and benefits plans. In June 2012, Marsh acquired Progressive Benefits Solutions, an employee benefits agency based in North Carolina, and Security Insurance Services, Inc., a Wisconsin-based insurance agency which offers property/casualty and employee benefits products and services to individuals and businesses. In August 2012 Marsh acquired Rosenfeld-Einstein, a South Carolina-based employee benefits service provider, and Eidson Insurance, a property/casualty and employee benefits services firm located in Florida.
Total purchase consideration for acquisitions made during the nine months of
2012
was
$205 million
, which consisted of cash paid of $
124 million
, deferred purchase and estimated contingent consideration of
$19 million
, and cash held in escrow of
$62 million
at December 31, 2011 that was released in the first quarter of 2012. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over
two to four years
. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During the nine-months ended September 30, 2012, the Company also paid $
51 million
of deferred purchase consideration and
$20 million
of contingent consideration related to acquisitions made in prior years.
The following table presents the preliminary allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their fair values:
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
(Amounts in millions)
|
2012
|
|
Cash (includes $62 million held in escrow at 12/31/11)
|
$
|
186
|
|
Estimated fair value of deferred/contingent consideration
|
19
|
|
Total Consideration
|
$
|
205
|
|
Allocation of purchase price:
|
|
Cash and cash equivalents
|
$
|
22
|
|
Accounts receivable, net
|
5
|
|
Property, plant, and equipment
|
3
|
|
Intangible assets
|
96
|
|
Goodwill
|
126
|
|
Other assets
|
3
|
|
Total assets acquired
|
255
|
|
Current liabilities
|
11
|
|
Other liabilities
|
39
|
|
Total liabilities assumed
|
50
|
|
Net assets acquired
|
$
|
205
|
|
Prior Year Acquisitions
During 2011, the Company made
seven
acquisitions in its Risk and Insurance Services segment and
five
in its Consulting segment. In January 2011, Marsh acquired RJF Agencies, Inc., an independent insurance broking firm in the Midwest. In February 2011, Marsh acquired Hampton Roads Bonding, a surety bonding agency for commercial, road, utility, maritime and government contractors in the state of Virginia, and the Boston office of Kinloch Consulting Group, Inc. In July 2011, Marsh acquired Prescott Pailet Benefits, an employee benefits broker in the state of Texas. In October 2011, Marsh acquired the employee benefits division of Kaeding, Ernst & Co, a Massachusetts-based employee benefits, life insurance and financial planning consulting firm. In November 2011, Marsh acquired Gallagher & Associates, Inc., a property and casualty insurance agency based in Minnesota. In November 2011, Marsh acquired Seitlin Insurance, an insurance firm based in South Florida. These acquisitions were made to expand Marsh
'
s share in the middle-market through Marsh
& McLennan Agency.
In January 2011, Mercer acquired Hammond Associates, an investment consulting company for endowments and foundations in the U.S. In June 2011, Mercer acquired Evaluation Associates LLC, an investment consulting firm. In July 2011, Mercer acquired Mahoney Associates, a health and benefits advisory firm based in South Florida. In
August 2011, Mercer acquired Censeo Corporation, a human resource consulting firm based in Florida. In December 2011, Mercer acquired Alicia Smith & Associates, a Medicaid policy consulting firm based in Washington, D.C.
Total purchase consideration for acquisitions made during the first nine months of 2011 was
$132 million
which consisted of cash paid of
$116 million
and estimated contingent consideration of
$16 million
. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over two to four years. The fair value of the contingent consideration was based on earnings projections of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During the first nine-months of 2011, the Company also paid
$19 million
of deferred purchase consideration related to acquisitions made in prior years. In addition, the Company paid
$2 million
to purchase other intangible assets during the first nine months of 2011.
In the second quarter of 2011, Marsh purchased the remaining minority interest of a previously majority owned entity for total purchase consideration of $
8 million
and accounted for this acquisition under the guidance for consolidations and non-controlling interests. This guidance requires that changes in a parent's ownership interest while retaining financial controlling interest in a subsidiary be accounted for as an equity transaction. Stepping up the acquired assets to fair value or the recording of goodwill is not permitted. Therefore, the Company recorded a decrease to additional paid in capital in 2011 of $
2 million
related to this transaction.
In the first quarter of
2011
, the Company also paid deferred purchase consideration of $
13 million
related to the purchase in 2009 of the minority interest of a previously controlled entity.
Pending Acquisitions
Subsequent to September 30, 2012, Marsh made two additional acquisitions for an aggregate purchase price of approximately $
60 million
and given the timing of these transactions, the initial accounting for the business combinations is not yet complete.
Pro-Forma Information
While the Company does not believe its acquisitions are material in the aggregate, the following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during
2012
and
2011
. In accordance with accounting guidance related to pro-forma disclosures, the information presented for current year acquisitions is as if they occurred on January 1, 2011. The pro-forma information adjusts for the effects of amortization of acquired intangibles. The unaudited pro-forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisitions had occurred on the dates indicated, nor is it necessarily indicative of future consolidated results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions, except per share data)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Revenue
|
$
|
2,848
|
|
|
$
|
2,850
|
|
|
$
|
8,946
|
|
|
$
|
8,762
|
|
Income from continuing operations
|
$
|
247
|
|
|
$
|
133
|
|
|
$
|
943
|
|
|
$
|
738
|
|
Net income attributable to the Company
|
$
|
242
|
|
|
$
|
130
|
|
|
$
|
921
|
|
|
$
|
737
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
– Continuing operations
|
$
|
0.44
|
|
|
$
|
0.24
|
|
|
$
|
1.69
|
|
|
$
|
1.32
|
|
– Net income attributable to the Company
|
$
|
0.44
|
|
|
$
|
0.24
|
|
|
$
|
1.69
|
|
|
$
|
1.35
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
– Continuing operations
|
$
|
0.44
|
|
|
$
|
0.23
|
|
|
$
|
1.67
|
|
|
$
|
1.30
|
|
– Net income attributable to the Company
|
$
|
0.44
|
|
|
$
|
0.24
|
|
|
$
|
1.66
|
|
|
$
|
1.33
|
|
The Consolidated Statements of Income for the
three and nine
months ended
September 30, 2012
include approximately
$31 million
of revenue and
$6 million
of net operating income and approximately
$76 million
of revenue and
$15 million
of net operating income, respectively, related to acquisitions made during
2012
8. Dispositions
Summarized Statements of Income data for discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions of dollars, except per share figures)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Other discontinued operations, net of tax
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Income (loss) from discontinued operations, net of tax
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Disposals of discontinued operations
|
—
|
|
|
3
|
|
|
—
|
|
|
11
|
|
Income tax (credit) expense
|
—
|
|
|
1
|
|
|
—
|
|
|
(6
|
)
|
Disposals of discontinued operations, net of tax
|
—
|
|
|
2
|
|
|
—
|
|
|
17
|
|
Discontinued operations, net of tax
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
17
|
|
Discontinued operations, net of tax per share
|
|
|
|
|
|
|
|
– Basic
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.03
|
|
– Diluted
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
$
|
0.03
|
|
Discontinued operations for the
nine
months ended September 30, 2011 primarily relates to an insurance recovery for legal fees incurred at Putnam prior to its sale and a tax recovery under the indemnity related to the Putnam sale.
9. Goodwill and Other Intangibles
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment test for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, the Company assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The Company considered the totality of numerous factors, which included that the fair value of each reporting unit exceeded its carrying value by a substantial margin in its most recent estimate of reporting unit fair values, whether significant acquisitions or dispositions occurred which might alter the fair values of its reporting units, macroeconomic conditions and their potential impact on reporting unit fair values, actual performance compared with budget and prior projections used in its estimation of reporting unit fair values, industry and market conditions, and the year over year change in the Company's share price. The Company completed its evaluation in the third quarter of 2012 and concluded that a two-step goodwill impairment test was not required in 2012 and that goodwill was not impaired.
Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated lives and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature.
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
Balance as of January 1, as reported
|
$
|
6,562
|
|
|
$
|
6,420
|
|
Goodwill acquired
|
126
|
|
|
88
|
|
Other adjustments
(a)
|
(9
|
)
|
|
31
|
|
Balance at September 30,
|
$
|
6,679
|
|
|
$
|
6,539
|
|
|
|
(a)
|
Reflects increases due to the impact of foreign exchange in both years. 2012 also reflects a reduction due to purchase accounting adjustments.
|
Goodwill allocable to the Company’s reportable segments is as follows: Risk & Insurance Services,
$4.6 billion
and Consulting,
$2.1 billion
.
Amortized intangible assets consist of the cost of client lists, client relationships and trade names acquired. The gross cost and accumulated amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
(In millions of dollars)
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortized intangibles
|
$
|
762
|
|
|
$
|
328
|
|
|
$
|
434
|
|
|
$
|
666
|
|
|
$
|
265
|
|
|
$
|
401
|
|
The Company recorded an intangible asset impairment charge of $8 million in the third quarter of 2012 in the Risk & Insurance Services segment.
Aggregate amortization expense for the
nine
months ended
September 30, 2012
and
2011
was
$53 million
and
$50 million
, respectively, and the estimated future aggregate amortization expense is as follows:
|
|
|
|
|
For the Years Ending December 31,
|
|
(In millions of dollars)
|
Estimated Expense
|
|
2012 (excludes amortization through September 30, 2012)
|
$
|
17
|
|
2013
|
65
|
|
2014
|
61
|
|
2015
|
58
|
|
2016
|
47
|
|
Subsequent years
|
186
|
|
|
$
|
434
|
|
10. Fair Value Measurements
Fair Value Hierarchy
The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy as defined by the FASB. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, for disclosure purposes, is determined based on the lowest level input that is significant to the fair value measurement.
Assets and liabilities recorded in the consolidated balance sheets at fair value are categorized based on the inputs in the valuation techniques as follows:
|
|
Level 1.
|
Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, most U.S. Government and agency securities, money market mutual funds and certain other sovereign government obligations).
|
|
|
Level 2.
|
Assets and liabilities whose values are based on the following:
|
|
|
a)
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
|
|
|
c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
|
|
|
d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).
|
|
|
Level 3.
|
Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs
|
reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long-dated options on gas and power).
Valuation Techniques
Equity Securities & Mutual Funds - Level 1
Investments for which market quotations are readily available are valued at the sale price on their principal exchange, or official closing bid price for certain markets. If no sales are reported, the security is valued at its last reported bid price.
Other Sovereign Government Obligations, Municipal Bonds and Corporate Bonds - Level 2
The investments in this caption, primarily investments in Germany and France, are valued on the basis of valuations furnished by an independent pricing service. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities.
Interest Rate Swap Derivative - Level 2
The fair value of interest rate swap derivatives is based on the present value of future cash flows at each valuation date resulting from utilization of the swaps, using a constant discount rate of
1.6%
compared to discount rates based on projected future yield curves (See Note 12).
Senior Notes due 2014 - Level 2
The fair value of the first
$250 million
of Senior Notes maturing in 2014 is estimated to be the amortized cost of those notes adjusted by the fair value of the interest rate swap derivative, discussed above. In the first quarter of
2011
, the Company entered into
two
interest rate swaps to convert interest on a portion of its Senior Notes from a fixed rate to a floating rate. The swaps are designated as fair value hedging instruments. The change in the fair value of the swaps will be recorded on the balance sheet. The carrying value of the debt related to these swaps will be adjusted by an equal amount (See Note 12).
Contingent Consideration Liability - Level 3
Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. Contingent consideration arrangements are primarily based on achieving EBITDA and revenue targets over two to four years. The fair value of contingent consideration is estimated as the present value of future cash flows that would result from the projected revenue and earnings of the acquired entities.
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of
September 30, 2012
and
December 31, 2011
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets
(Level 1)
|
|
Observable Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
(In millions of dollars)
|
09/30/12
|
|
|
12/31/11
|
|
|
09/30/12
|
|
|
12/31/11
|
|
|
09/30/12
|
|
|
12/31/11
|
|
|
09/30/12
|
|
|
12/31/11
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
(a)
|
$
|
137
|
|
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137
|
|
|
$
|
134
|
|
Money market funds
(b)
|
284
|
|
|
226
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
284
|
|
|
226
|
|
Interest rate swap derivatives
(c)
|
—
|
|
|
—
|
|
|
6
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
7
|
|
Total assets measured at fair value
|
$
|
421
|
|
|
$
|
360
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
427
|
|
|
$
|
367
|
|
Fiduciary Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local obligations (including non-U.S. locales)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
13
|
|
Other sovereign government obligations and supranational agencies
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
Corporate and other debt
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Money market funds
|
179
|
|
|
186
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
179
|
|
|
186
|
|
Total fiduciary assets measured at fair value
|
$
|
179
|
|
|
$
|
186
|
|
|
$
|
5
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
184
|
|
|
$
|
248
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability
(d)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77
|
|
|
$
|
110
|
|
|
$
|
77
|
|
|
$
|
110
|
|
Senior Notes due 2014
(e)
|
—
|
|
|
—
|
|
|
256
|
|
|
257
|
|
|
—
|
|
|
—
|
|
|
256
|
|
|
257
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
256
|
|
|
$
|
257
|
|
|
$
|
77
|
|
|
$
|
110
|
|
|
$
|
333
|
|
|
$
|
367
|
|
|
|
(a)
|
Included in other assets in the consolidated balance sheets.
|
|
|
(b)
|
Included in cash and cash equivalents in the consolidated balance sheets.
|
|
|
(c)
|
Included in other receivables in the consolidated balance sheets.
|
|
|
(d)
|
Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
|
|
|
(e)
|
Included in long term debt in the consolidated balance sheets.
|
During the
nine
-month period ended
September 30, 2012
, there were
no
assets or liabilities that transferred between Level 1 and Level 2 or between Level 2 and Level 3.
The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities for the nine month period ended
September 30, 2012
that represent contingent consideration related to acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
Fair Value,
December 31, 2011
|
|
Additions
|
|
Payments
|
|
Revaluation
Impact
|
|
Fair Value,
September 30, 2012
|
Contingent consideration
|
$
|
110
|
|
|
$
|
19
|
|
|
$
|
(20
|
)
|
|
$
|
(32
|
)
|
|
$
|
77
|
|
The fair value of the contingent liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net reduction in the estimated fair value of such liabilities for prior period acquisitions of $32 million in the nine-month period ended September 30, 2012. A
5%
increase in the above mentioned projections would increase the liability by approximately
$25 million
. A
5%
decrease in the above mentioned projections would decrease the liability by approximately
$25 million
.
11. Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension plans for its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth by U.S. law and the laws of the non-U.S. jurisdictions in which the Company offers defined benefit plans.
The target asset allocation for the U.S. Plan is
58%
equities and equity alternatives and
42%
fixed income. At the end of the second quarter of
2012
, the actual allocation for the U.S. Plan was
57%
equities and equity alternatives and
43%
fixed income. The target asset allocation for the U.K. Plans, which comprises approximately
80%
of non-U.S. Plan assets, is
53%
equities and equity alternatives and
47%
fixed income. At the end of the second quarter of
2012
, the actual allocation for the U.K. Plan was
52%
equities and equity alternatives and
48%
fixed income. The assets of the Company's defined benefit plans are diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.
The components of the net periodic benefit cost for defined benefit and other post-retirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
|
|
Postretirement
|
For the Three Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
$
|
59
|
|
|
$
|
55
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
148
|
|
|
153
|
|
|
3
|
|
|
2
|
|
Expected return on plan assets
|
(225
|
)
|
|
(223
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(4
|
)
|
|
(5
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Recognized actuarial loss
|
67
|
|
|
54
|
|
|
—
|
|
|
(3
|
)
|
Net periodic benefit cost
|
$
|
45
|
|
|
$
|
34
|
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
|
|
Postretirement
|
For the Nine Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
$
|
180
|
|
|
$
|
169
|
|
|
$
|
3
|
|
|
$
|
4
|
|
Interest cost
|
445
|
|
|
458
|
|
|
9
|
|
|
9
|
|
Expected return on plan assets
|
(676
|
)
|
|
(668
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(14
|
)
|
|
(14
|
)
|
|
(9
|
)
|
|
(10
|
)
|
Recognized actuarial loss
|
201
|
|
|
162
|
|
|
—
|
|
|
(3
|
)
|
Net periodic benefit cost
|
$
|
136
|
|
|
$
|
107
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Three Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
$
|
23
|
|
|
$
|
20
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Interest cost
|
57
|
|
|
58
|
|
|
2
|
|
|
1
|
|
Expected return on plan assets
|
(80
|
)
|
|
(79
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(4
|
)
|
|
(4
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Recognized actuarial loss (credit)
|
38
|
|
|
25
|
|
|
—
|
|
|
(3
|
)
|
Net periodic benefit cost (credit)
|
$
|
34
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Nine Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
$
|
70
|
|
|
$
|
62
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
172
|
|
|
173
|
|
|
6
|
|
|
6
|
|
Expected return on plan assets
|
(241
|
)
|
|
(236
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(12
|
)
|
|
(12
|
)
|
|
(9
|
)
|
|
(10
|
)
|
Recognized actuarial loss (credit)
|
114
|
|
|
75
|
|
|
(1
|
)
|
|
(3
|
)
|
Net periodic benefit cost (credit)
|
$
|
103
|
|
|
$
|
62
|
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Three Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
$
|
36
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Interest cost
|
91
|
|
|
95
|
|
|
1
|
|
|
1
|
|
Expected return on plan assets
|
(145
|
)
|
|
(144
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
29
|
|
|
29
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
11
|
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Nine Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
$
|
110
|
|
|
$
|
107
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
273
|
|
|
285
|
|
|
3
|
|
|
3
|
|
Expected return on plan assets
|
(435
|
)
|
|
(432
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
87
|
|
|
87
|
|
|
1
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
33
|
|
|
$
|
45
|
|
|
$
|
5
|
|
|
$
|
5
|
|
The weighted average actuarial assumptions utilized to calculate the net periodic benefit costs for the U.S. and significant non-U.S. defined benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
Postretirement
Benefits
|
September 30
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
Expected return on plan assets
|
8.04
|
%
|
|
8.18
|
%
|
|
—
|
%
|
|
—
|
%
|
Discount rate
|
4.91
|
%
|
|
5.59
|
%
|
|
5.05
|
%
|
|
5.84
|
%
|
Rate of compensation increase
|
3.09
|
%
|
|
4.09
|
%
|
|
—
|
%
|
|
—
|
%
|
The Company made approximately
$420 million
of contributions to its U.S. and non-U.S. defined benefit plans in the first
nine
months of
2012
, including discretionary contributions of $
100 million
to its U.S. qualified defined benefit plan and
$100 million
to its U.K. plans, and expects to contribute a total of approximately
$100 million
to its non-qualified U.S. and non-U.S. defined benefit plans during the remainder of
2012
.
12. Debt
The Company’s outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Short-term:
|
|
|
|
Current portion of long-term debt
|
$
|
259
|
|
|
$
|
260
|
|
Long-term:
|
|
|
|
Senior notes – 6.25% due 2012 (5.1% effective interest rate)
|
$
|
—
|
|
|
$
|
250
|
|
Senior notes – 4.850% due 2013
|
250
|
|
|
251
|
|
Senior notes – 5.875% due 2033
|
296
|
|
|
296
|
|
Senior notes – 5.375% due 2014
|
326
|
|
|
326
|
|
Senior notes – 5.75% due 2015
|
479
|
|
|
479
|
|
Senior notes – 2.30% due 2017
|
249
|
|
|
—
|
|
Senior notes – 9.25% due 2019
|
398
|
|
|
398
|
|
Senior notes – 4.80% due 2021
|
496
|
|
|
496
|
|
Mortgage – 5.70% due 2035
|
424
|
|
|
431
|
|
Other
|
1
|
|
|
1
|
|
|
2,919
|
|
|
2,928
|
|
Less current portion
|
259
|
|
|
260
|
|
|
$
|
2,660
|
|
|
$
|
2,668
|
|
The senior notes in the table above are publically registered by the Company with no guarantees attached.
During the first quarter of 2012 the Company repaid its
6.25%
fixed rate
$250 million
senior notes that matured. The Company used proceeds from the issuance of
2.3%
five-year
$250 million
senior notes in the first quarter of 2012 to fund the maturing notes.
On June 27, 2011, the Company commenced tender offers (the “tender offers”) to purchase for cash up to a total of $
500 million
aggregate principal amount of its outstanding
5.375%
notes due 2014 (the “2014 Notes”) and
5.750%
notes due 2015 (the “2015 Notes” and together with the 2014 Notes, the “Outstanding Notes”), of which
$650 million
and
$750 million
, respectively, were then outstanding.
On July 15, 2011, the Company purchased a total of
$600 million
of the Outstanding Notes comprised of
$330 million
of its 2014 Notes and
$270 million
of its 2015 Notes. The Company acquired the notes at market value plus a tender premium, which exceeded the notes' carrying value.
The Company used proceeds from the issuance of
4.80%
ten-year
$500 million
senior notes in the third quarter of
2011
and cash on hand to fund the amounts associated with the tendered bonds.
The Company and certain of its foreign subsidiaries maintain a $
1.0 billion
multi-currency
five
-year unsecured revolving credit facility. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were
no
borrowings outstanding under this facility at
September 30, 2012
.
Derivative Financial Instruments
In February 2011, the Company entered into
two
$125 million
3.5
-year interest rate swaps to hedge changes in the fair value of the first
$250 million
of the outstanding
5.375%
senior notes due in 2014.
Under the terms of the swaps, the counter-parties will pay the Company a fixed rate of
5.375%
and the Company will pay interest at a floating rate of three-month LIBOR plus a fixed spread of
3.726%
. The maturity date of the senior notes and the swaps match exactly. The floating rate resets quarterly, with every second reset occurring on the interest payment date of the senior notes. The swaps net settle every
six
months on the senior note coupon payment dates. The swaps are designated as fair value hedging instruments, and in accordance with applicable accounting guidance, are deemed to be perfectly effective . The fair value of the swaps at inception was
zero
and subsequent changes in the fair value of the interest rate swaps are reflected in the carrying value of the interest rate swaps and in the consolidated balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal amount. The gain or (loss) on the hedged item (fixed rate debt) and the offsetting gain or (loss) on the interest rate swaps for the year-to-date periods ending
September 30, 2012
and
September 30, 2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Income statement classification
(In millions of dollars)
|
Loss on Swaps
|
|
Gain on Notes
|
|
Net Income Effect
|
|
Gain on Swaps
|
|
Loss on Notes
|
|
Net Income Effect
|
Other Operating Expenses
|
$
|
(1.0
|
)
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
7.0
|
|
|
$
|
(7.0
|
)
|
|
$
|
—
|
|
The amounts earned and owed under the swap agreements are accrued each period and are reported in interest expense. There was
no
ineffectiveness recognized in the periods presented.
13. Restructuring Costs
The Company recorded total restructuring costs of
$21 million
in the first
nine
months of
2012
, the majority of which related to severance.
Details of the activity from January 1, 2011 through
September 30, 2012
regarding restructuring activities, which includes liabilities from actions prior to
2012
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
Liability at 1/1/11
|
|
Amounts
Accrued
|
|
|
Cash
Paid
|
|
|
Other
|
|
|
Liability at 12/31/11
|
|
Amounts
Accrued
|
|
|
Cash
Paid
|
|
|
Other
|
|
|
Liability at 9/30/12
|
Severance
|
$
|
40
|
|
|
$
|
29
|
|
|
$
|
(40
|
)
|
|
$
|
(2
|
)
|
|
$
|
27
|
|
|
$
|
12
|
|
|
$
|
(35
|
)
|
|
$
|
6
|
|
|
$
|
10
|
|
Future rent under non-cancelable leases and other costs
|
171
|
|
|
22
|
|
|
(42
|
)
|
|
3
|
|
|
154
|
|
|
9
|
|
|
(31
|
)
|
|
1
|
|
|
133
|
|
Total
|
$
|
211
|
|
|
$
|
51
|
|
|
$
|
(82
|
)
|
|
$
|
1
|
|
|
$
|
181
|
|
|
$
|
21
|
|
|
$
|
(66
|
)
|
|
$
|
7
|
|
|
$
|
143
|
|
The expenses associated with the above initiatives are included in compensation and benefits and other operating expenses in the consolidated statements of income. The liabilities associated with these initiatives are classified on the consolidated balance sheets as Accounts payable, Other liabilities, or Accrued compensation, depending on the nature of the items.
14. Financial Instruments
The estimated fair value of the Company’s significant financial instruments is provided below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or need to dispose of the financial instrument.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
(In millions of dollars)
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Cash and cash equivalents
|
$
|
2,044
|
|
|
$
|
2,044
|
|
|
$
|
2,113
|
|
|
$
|
2,113
|
|
Long-term investments
|
$
|
48
|
|
|
$
|
48
|
|
|
$
|
58
|
|
|
$
|
58
|
|
Short-term debt
|
$
|
259
|
|
|
$
|
263
|
|
|
$
|
260
|
|
|
$
|
261
|
|
Long-term debt
|
$
|
2,660
|
|
|
$
|
2,984
|
|
|
$
|
2,668
|
|
|
$
|
2,958
|
|
Cash and Cash Equivalents
: The estimated fair value of the Company’s cash and cash equivalents approximates their carrying value.
Long-term Investments
: Long-term investments include certain investments carried at cost and unrealized gains related to available-for-sale investments held in a fiduciary capacity as discussed below.
The Company has long-term investments of
$29 million
and
$37 million
at
September 30, 2012
and
December 31, 2011
, carried on the cost basis for which there are no readily available market prices. The remaining long-term investments are publicly traded mutual funds related to voluntary deferred compensation plans. The fair value of the mutual funds is based on quoted market prices. Management's estimate of the fair value of non-publicly traded investments is based on valuation methodologies including discounted cash flows, estimates of sale price based on multiples of revenue, earnings or EBITDA or estimates from private equity managers of the fair value of underlying investments in private equity funds. The ability to accurately predict future cash flows, revenue or earnings may impact the determination of fair value. These investments are included in Other assets in the consolidated balance sheets. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. These investments would be classified as Level 3 in the fair value hierarchy.
A portion of the Company’s fiduciary funds described in Note 3 are invested in high quality debt securities and are classified as available for sale. There were
no
gross unrealized gains or losses (pre-tax) on these securities at
September 30, 2012
.
Short-term and Long-term Debt
: The fair value of the Company’s short-term debt, which consists primarily of term debt maturing within the next year, approximates its carrying value. The estimated fair value of a primary portion of the Company’s long-term debt is based on discounted future cash flows using current interest rates available for debt with similar terms and remaining maturities. Short and long-term debt would be classified as Level 2 in the fair value hierarchy.
15. Common Stock
During the nine months of 2012, the Company repurchased
5.4 million
shares of its common stock for consideration of $
180 million
. The Company remains authorized to purchase additional shares of its common stock up to a value of $
373 million
. During the first nine months of 2011, the Company purchased
12.2 million
shares of its common stock for total consideration of
$361 million
.
16. Claims, Lawsuits and Other Contingencies
Errors and Omissions Claims
The Company and its subsidiaries, particularly Marsh and Mercer, are subject to a significant number of claims, lawsuits and proceedings in the ordinary course of business. Such claims and lawsuits consist principally of alleged errors and omissions in connection with the performance of professional services, including the placement of insurance, the provision of actuarial services for corporate and public sector clients, and the provision of consulting services relating to the drafting and interpretation of trust deeds and other documentation governing pension plans. Certain of these claims, particularly in the U.S. and the U.K., seek damages, including punitive and treble damages, in amounts that could, if awarded, be significant. In establishing liabilities for errors and omissions claims in accordance with FASB ASC Subtopic No. 450-20 (Contingencies—Loss Contingencies), the Company utilizes case
level reviews by inside and outside counsel and an internal actuarial analysis to estimate potential losses. A liability is established when a loss is both probable and reasonably estimable. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable.
To the extent that expected losses exceed our deductible in any policy year, the Company also records an asset for the amount that we expect to recover under any available third-party insurance programs. The Company has varying levels of third-party insurance coverage, with policy limits and coverage terms varying significantly by policy year.
Governmental Inquiries and Related Claims
In January 2005, the Company and its subsidiary Marsh Inc. entered into a settlement agreement with the New York State Attorney General (“NYAG”) and the New York State Insurance Department to settle a civil complaint and related citation regarding Marsh’s use of market service agreements with various insurance companies. The parties subsequently entered into an amended and restated settlement agreement in February 2010 that helps restore a level playing field for Marsh.
Numerous private party lawsuits based on similar allegations to those made in the NYAG complaint were commenced against the Company, one or more of its subsidiaries, and their current and former directors and officers. Most of these matters have been resolved.
Five
actions instituted by policyholders against the Company, Marsh and certain Marsh subsidiaries remain pending in federal court.
Our activities are regulated under the laws of the United States and its various states, the European Union and its member states, and the other jurisdictions in which we operate. In the ordinary course of business we are also subject to investigations, lawsuits and/or other regulatory actions undertaken by governmental authorities.
Other Contingencies—Guarantees
In connection with its acquisition of U.K.-based Sedgwick Group in 1998, the Company acquired several insurance underwriting businesses that were already in run-off, including River Thames Insurance Company Limited (“River Thames”), which we sold in 2001. Sedgwick guaranteed payment of claims on certain policies underwritten through the Institute of London Underwriters (the “ILU”) by River Thames. The policies covered by this guarantee are reinsured up to
£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
September 30, 2012
, the reinsurance coverage exceeded the best estimate of the projected liability of the policies covered by the guarantee. To the extent River Thames or the reinsurer is unable to meet its obligations under those policies, a claimant may seek to recover from us under the guarantee.
From 1980 to 1983, the Company owned indirectly the English & American Insurance Company (“E&A”), which was a member of the ILU. The ILU required the Company to guarantee a portion of E&A’s obligations. After E&A became insolvent in 1993, the ILU agreed to discharge the guarantee in exchange for the Company’s agreement to post an evergreen letter of credit that is available to pay claims by policyholders on certain E&A policies issued through the ILU and incepting between July 3, 1980 and October 6, 1983. Certain claims have been paid under the letter of credit and we anticipate that additional claimants may seek to recover against the letter of credit.
Putnam-related Matters
Under the terms of a stock purchase agreement with Great-West Lifeco Inc. (“GWL”) related to GWL’s purchase of Putnam Investments Trust from the Company in August 2007, a copy of which was included as an exhibit to the Company’s Form 8-K filed on February 1, 2007, we agreed to indemnify GWL with respect to certain Putnam-related litigation and regulatory matters. Most of these matters have been resolved.
Kroll-related Matters
Under the terms of a stock purchase agreement with Altegrity, Inc. (“Altegrity”) related to Altegrity’s purchase of Kroll from the Company in August 2010, a copy of which is attached as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2010, we agreed to provide a limited indemnity to Altegrity with respect to certain Kroll-related litigation and regulatory matters.
The pending proceedings and other matters described in this Note 16 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages and other forms of relief. Where a loss is both probable and reasonably estimable, we establish liabilities in accordance with FASB ASC Subtopic No. 450-20 (Contingencies—Loss Contingencies). Except as described above, we are not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company’s consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company’s consolidated results of operations, financial condition or cash flows in a future period.
17. Segment Information
The Company is organized based on the types of services provided. Under this organizational structure, the Company’s business segments are:
|
|
▪
|
Risk and Insurance Services
, comprising insurance services (Marsh) and reinsurance services (Guy Carpenter); and
|
|
|
▪
|
Consulting
, comprising Mercer and Oliver Wyman Group
|
The accounting policies of the segments are the same as those used for the consolidated financial statements described in Note 1 to the Company’s 2011 10-K. Segment performance is evaluated based on segment operating income, which includes directly related expenses, and charges or credits related to integration and restructuring but not the Company’s corporate-level expenses. Revenues are attributed to geographic areas on the basis of where the services are performed.
Selected information about the Company’s operating segments for the three- and nine-month periods ended
September 30, 2012
and
2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions of dollars)
|
Revenue
|
|
|
Operating
Income
(Loss)
|
|
|
Revenue
|
|
|
Operating
Income
(Loss)
|
|
2012 –
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
1,510
|
|
(a)
|
$
|
234
|
|
|
$
|
4,955
|
|
(c)
|
$
|
1,052
|
|
Consulting
|
1,346
|
|
(b)
|
193
|
|
|
4,000
|
|
(d)
|
524
|
|
Total Operating Segments
|
2,856
|
|
|
427
|
|
|
8,955
|
|
|
1,576
|
|
Corporate / Eliminations
|
(11
|
)
|
|
(49
|
)
|
|
(33
|
)
|
|
(153
|
)
|
Total Consolidated
|
$
|
2,845
|
|
|
$
|
378
|
|
|
$
|
8,922
|
|
|
$
|
1,423
|
|
2011–
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
1,475
|
|
(a)
|
$
|
186
|
|
|
$
|
4,729
|
|
(c)
|
$
|
925
|
|
Consulting
|
1,339
|
|
(b)
|
161
|
|
|
3,919
|
|
(d)
|
441
|
|
Total Operating Segments
|
2,814
|
|
|
347
|
|
|
8,648
|
|
|
1,366
|
|
Corporate / Eliminations
|
(8
|
)
|
|
(37
|
)
|
|
(30
|
)
|
|
(119
|
)
|
Total Consolidated
|
$
|
2,806
|
|
|
$
|
310
|
|
|
$
|
8,618
|
|
|
$
|
1,247
|
|
|
|
(a)
|
Includes inter-segment revenue of
$1 million
and
$2 million
in
2012
and
2011
, respectively, interest income on fiduciary funds of
$10 million
and
$14 million
in
2012
and
2011
, respectively, and equity method income of
$1 million
in
2011
.
|
|
|
(b)
|
Includes inter-segment revenue of
$10 million
and
$6 million
in
2012
and
2011
, respectively, and interest income on fiduciary funds of
$1 million
in both
2012
and
2011
.
|
|
|
(c)
|
Includes inter-segment revenue of
$4 million
in both
2012
and
2011
, interest income on fiduciary funds of
$31 million
and
$36 million
in
2012
and
2011
, respectively, and equity method income of
$10 million
in both
2012
and
2011
.
|
|
|
(d)
|
Includes inter-segment revenue of
$29 million
and
$26 million
in
2012
and
2011
, respectively, and interest income on fiduciary funds of
$2 million
and
$3 million
in
2012
and
2011
, respectively.
|
Details of operating segment revenue for the three- and nine-month periods ended
September 30, 2012
and
2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions of dollars)
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Risk and Insurance Services
|
|
|
|
|
|
|
|
Marsh
|
$
|
1,260
|
|
|
$
|
1,221
|
|
|
$
|
4,069
|
|
|
$
|
3,875
|
|
Guy Carpenter
|
250
|
|
|
254
|
|
|
886
|
|
|
854
|
|
Total Risk and Insurance Services
|
1,510
|
|
|
1,475
|
|
|
4,955
|
|
|
4,729
|
|
Consulting
|
|
|
|
|
|
|
|
Mercer
|
995
|
|
|
975
|
|
|
2,912
|
|
|
2,842
|
|
Oliver Wyman Group
|
351
|
|
|
364
|
|
|
1,088
|
|
|
1,077
|
|
Total Consulting
|
1,346
|
|
|
1,339
|
|
|
4,000
|
|
|
3,919
|
|
Total Operating Segments
|
2,856
|
|
|
2,814
|
|
|
8,955
|
|
|
8,648
|
|
Corporate
/
Eliminations
|
(11
|
)
|
|
(8
|
)
|
|
(33
|
)
|
|
(30
|
)
|
Total
|
$
|
2,845
|
|
|
$
|
2,806
|
|
|
$
|
8,922
|
|
|
$
|
8,618
|
|
18. New Accounting Pronouncements
In the first quarter of 2012, the Company adopted new accounting guidance related to the presentation of Comprehensive Income. The new guidance gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. On December 23, 2011, the FASB issued an update that indefinitely defers the provisions in this guidance related to the presentation of reclassification adjustments. Other than enhanced disclosure, adoption of this new guidance will not have a material effect on the Company's financial statements.
In January 2012, the Company adopted guidance issued by the FASB on accounting and disclosure requirements related to fair value measurements. The guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes, the sensitivity of the fair value to changes in unobservable inputs and the hierarchy classification, valuation techniques, and inputs for assets and liabilities whose fair value is only disclosed in the footnotes.
In January 2011, the Company adopted guidance issued by the FASB on revenue recognition regarding multiple-deliverable revenue arrangements. The adoption of this new guidance did not have a material impact on the Company’s financial statements.
In January 2011, the Company adopted guidance issued by the FASB which establishes a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of this guidance is limited to research or development arrangements and requires an entity to record the milestone payment in its entirety in the period received if the milestone meets all the necessary criteria to be considered substantive. However, entities would not be precluded from making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. The adoption of this new guidance did not have a material impact on the Company’s financial statements.