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.
The Company conducts business in its Consulting segment through
two
main business groups. Mercer provides consulting expertise, advice, services and solutions in the areas of talent, health, retirement and investments. Oliver Wyman Group provides specialized management, economic and brand consulting services.
Acquisitions impacting the Risk and Insurance Services and Consulting segments are discussed in Note 7 to the consolidated financial statements.
The Company has "continuing involvement" in certain Corporate Advisory and Restructuring businesses (“CARG”), that were disposed of in 2008. The run-off of the CARG business is being managed by the Company’s corporate departments and financial results of these entities 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 disclosures 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, 2012
(the “
2012
10-K”) and the amended Items 7 and 8 of the Annual Report filed May 10, 2013.
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, 2013
and
2012
.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of certificates of deposit and time deposits, with original maturities of three months or less, and money market funds. The estimated fair value of the Company's cash and cash equivalents approximates their carrying value. The Company is required to maintain operating funds of approximately
$250 million
related to regulatory requirements outside the U.S. or as collateral under captive insurance arrangements.
Investment Income
The caption “Investment 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 the Trident funds. The Company’s investments may include direct investments in insurance or consulting companies and investments in private equity funds. The Company recorded
(losses)
gains on its investment in Trident II of
$0 million
and
$(1) million
for the
three months ended
September 30, 2013
and
2012
, respectively, and
$20 million
and
$23 million
for the
nine months ended
September 30, 2013
and
2012
, respectively, including
$15 million
of deferred performance fees recognized in the first quarter of
2013
. Trident II has now harvested substantially all its portfolio investments and there are no remaining capital commitments for this fund. The Company has recognized substantially all of the
performance fees related to its general partnership interest in Trident II. Investment income for the
three- and nine-
months ended
September 30, 2013
includes performance fees of
$13 million
and
$34 million
, respectively, which had been deferred, that are no longer subject to claw-back from Trident III. At
September 30, 2013
, the Company has deferred performance fees of approximately
$43 million
related to Trident III. Recognition of these deferred performance fees will only occur as investments are harvested and the performance fees are no longer subject to claw-back. Timing of this is unknown and is not controlled by the Company.
Income Taxes
The Company's effective tax rate in the
third
quarter of
2013
was
32.1%
. This rate reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation and the impact of tax rate changes on the Company's deferred tax assets and liabilities.
The Company's effective tax rate in the
third
quarter of
2012
was
26.8%
. As discussed above, this rate reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation. In addition, it reflects several discrete 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. Partially offsetting these benefits in the quarter were 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
2013
was
30.1%
compared with
29.2%
for the first
nine
months of
2012
. The rate in both periods reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation, and the impact of discrete tax matters such as the resolution of tax examinations.
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 reliance on the opinion 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 tax returns. The Company's gross unrecognized tax benefits increased from
$
117 million
at
December 31, 2012
to
$133 million
at
September 30, 2013
. 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
$21 million
and $
31 million
for the
nine
-month periods ended
September 30, 2013
and
2012
, respectively. The Consulting segment recorded fiduciary interest income of
$3 million
and
$2 million
in the
nine
-month periods ended
September 30, 2013
and
2012
, respectively. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to
$9 billion
at
September 30, 2013
and
$9.1 billion
at
December 31, 2012
. 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
$17 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
From 2009 through 2012, the Company used the two-class method to compute basic and diluted earnings per share ("EPS"). Under the accounting guidance which applies to the calculation of 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 of basic and dilutive EPS using the two-class method.
In the first quarter of 2013, the share-based payment awards with non-forfeitable rights to dividends became fully vested. As a result, the Company is no longer required to use the two-class method and in the first quarter of 2013 used the treasury stock method to calculate EPS. There was no difference in the earnings per share calculations when comparing the two-class method to the treasury stock method in any quarter of 2012. Therefore, the prior period information in the chart below shows the earnings per share calculation using the treasury stock method, consistent with current year presentation.
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 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 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. Reconciliations of the applicable income components used for diluted EPS - Continuing operations and basic weighted average common shares outstanding to diluted weighted average common shares outstanding are presented below. The reconciling items related to the calculation of diluted weighted average common shares outstanding are the same for net income attributable to the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS Calculation -
Continuing Operations
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions, except per share figures)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net income from continuing operations
|
$
|
260
|
|
|
$
|
246
|
|
|
$
|
1,072
|
|
|
$
|
939
|
|
Less: Net income attributable to non-controlling interests
|
6
|
|
|
6
|
|
|
24
|
|
|
21
|
|
|
$
|
254
|
|
|
$
|
240
|
|
|
$
|
1,048
|
|
|
$
|
918
|
|
Basic weighted average common shares outstanding
|
549
|
|
|
544
|
|
|
549
|
|
|
544
|
|
Dilutive effect of potentially issuable common shares
|
9
|
|
|
8
|
|
|
9
|
|
|
8
|
|
Diluted weighted average common shares outstanding
|
558
|
|
|
552
|
|
|
558
|
|
|
552
|
|
Average stock price used to calculate common stock equivalents
|
$
|
42.08
|
|
|
$
|
33.53
|
|
|
$
|
39.15
|
|
|
$
|
32.60
|
|
There were
24.9 million
and
35.1 million
stock options outstanding as of
September 30, 2013
and
2012
, 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, 2013
and
2012
.
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
Assets acquired, excluding cash
|
$
|
199
|
|
|
$
|
160
|
|
Liabilities assumed
|
(59
|
)
|
|
(39
|
)
|
Contingent/deferred purchase consideration
|
(37
|
)
|
|
(19
|
)
|
Net cash outflow for current year acquisitions
|
103
|
|
|
102
|
|
Purchase of other intangibles
|
1
|
|
|
—
|
|
Deferred purchase consideration from prior years' acquisitions
|
4
|
|
|
51
|
|
Net cash outflow for acquisitions
|
$
|
108
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
Interest paid
|
$
|
140
|
|
|
$
|
150
|
|
Income taxes paid
|
$
|
258
|
|
|
$
|
237
|
|
The Company had non-cash issuances of common stock of
$148 million
and
$187 million
, respectively, for the
nine
months ended
September 30, 2013
and
2012
, primarily related to its share-based payment plans. The Company recorded stock-based compensation expense related to equity awards of
$84 million
and
$117 million
for the
nine
-month periods ended
September 30, 2013
and
2012
, respectively.
6. Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the nine-month period ended
September 30, 2013
, including amounts reclassified out of AOCI, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
Unrealized Investment Gains
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Balance as of January 1, 2013
|
$
|
4
|
|
|
$
|
(3,451
|
)
|
|
$
|
140
|
|
|
$
|
(3,307
|
)
|
Other comprehensive income (loss) before reclassifications
|
(1
|
)
|
|
36
|
|
|
(84
|
)
|
|
(49
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
143
|
|
|
—
|
|
|
143
|
|
Net current period other comprehensive income (loss)
|
(1
|
)
|
|
179
|
|
|
(84
|
)
|
|
94
|
|
Balance as of September 30, 2013
|
$
|
3
|
|
|
$
|
(3,272
|
)
|
|
$
|
56
|
|
|
$
|
(3,213
|
)
|
The components of other comprehensive income (loss) for the three and nine-month periods ended
September 30, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
2013
|
|
2012
|
(In millions of dollars)
|
Pre-Tax
|
|
Tax
|
|
Net of Tax
|
|
|
Pre-Tax
|
|
Tax
|
|
Net of Tax
|
|
Foreign currency translation adjustments
|
$
|
254
|
|
$
|
(2
|
)
|
$
|
256
|
|
|
$
|
171
|
|
$
|
4
|
|
$
|
167
|
|
Unrealized investment gains (losses)
|
—
|
|
—
|
|
—
|
|
|
—
|
|
(1
|
)
|
1
|
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
Amortization of losses (gains) included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
Prior service gains (a)
|
(6
|
)
|
(2
|
)
|
(4
|
)
|
|
(8
|
)
|
(6
|
)
|
(2
|
)
|
Net actuarial losses (a)
|
81
|
|
26
|
|
55
|
|
|
68
|
|
52
|
|
16
|
|
Subtotal
|
75
|
|
24
|
|
51
|
|
|
60
|
|
46
|
|
14
|
|
Foreign currency translation adjustments
|
(106
|
)
|
(25
|
)
|
(81
|
)
|
|
(132
|
)
|
(60
|
)
|
(72
|
)
|
Other
|
(6
|
)
|
(2
|
)
|
(4
|
)
|
|
—
|
|
—
|
|
—
|
|
Pension/post-retirement plans losses
|
(37
|
)
|
(3
|
)
|
(34
|
)
|
|
(72
|
)
|
(14
|
)
|
(58
|
)
|
Other comprehensive income (loss)
|
$
|
217
|
|
$
|
(5
|
)
|
$
|
222
|
|
|
$
|
99
|
|
$
|
(11
|
)
|
$
|
110
|
|
(a) Components of net periodic pension cost are included in compensation and benefits in the Consolidated Statements of Income. Tax on prior service gains and net actuarial losses is included in income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
2013
|
|
2012
|
(In millions of dollars)
|
Pre-Tax
|
|
Tax
|
|
Net of Tax
|
|
|
Pre-Tax
|
|
Tax
|
|
Net of Tax
|
|
Foreign currency translation adjustments
|
$
|
(91
|
)
|
$
|
(7
|
)
|
$
|
(84
|
)
|
|
$
|
142
|
|
$
|
(10
|
)
|
$
|
152
|
|
Unrealized investment gains (losses)
|
(1
|
)
|
—
|
|
(1
|
)
|
|
(1
|
)
|
1
|
|
(2
|
)
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
Amortization of losses (gains) included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
Prior service gains (a)
|
(17
|
)
|
(6
|
)
|
(11
|
)
|
|
(24
|
)
|
(11
|
)
|
(13
|
)
|
Net actuarial losses (a)
|
237
|
|
83
|
|
154
|
|
|
202
|
|
95
|
|
107
|
|
Subtotal
|
220
|
|
77
|
|
143
|
|
|
178
|
|
84
|
|
94
|
|
Foreign currency translation adjustments
|
51
|
|
11
|
|
40
|
|
|
(116
|
)
|
(55
|
)
|
(61
|
)
|
Other
|
(6
|
)
|
(2
|
)
|
(4
|
)
|
|
—
|
|
—
|
|
—
|
|
Pension/post-retirement plans losses
|
265
|
|
86
|
|
179
|
|
|
62
|
|
29
|
|
33
|
|
Other comprehensive income
|
$
|
173
|
|
$
|
79
|
|
$
|
94
|
|
|
$
|
203
|
|
$
|
20
|
|
$
|
183
|
|
(a) Components of net periodic pension cost are included in compensation and benefits in the Consolidated Statements of Income. Tax on prior service gains and net actuarial losses is included in income tax expense.
7. Acquisitions
The Company completed
six
acquisitions during the first nine months of
2013
.
In September 2013, Marsh purchased an additional stake in Insia a.s., an insurance broker operating in the Czech Republic and Slovakia which, when combined with its prior holdings, gave MMC a controlling interest. Insia a.s. was previously accounted for under the equity method. In August 2013, Mercer acquired Global Remuneration Solutions, a market leading compensation consulting firm based in South Africa. In July 2013, Oliver Wyman acquired Corven, a U.K.-based management consultancy firm and Guy Carpenter acquired Smith Group, a specialist disability reinsurance risk manager and consultant based in Maine. In June
2013
, Marsh acquired Rehder y Asociados Group, an insurance adviser in Peru. The business includes the insurance broker Rehder y Asociados and employee health and benefits specialist, Humanasalud. Marsh also completed the acquisition of Franco & Acra Tecniseguros, an insurance advisor in the Dominican Republic in
June 2013
.
Total purchase consideration for acquisitions made during the
nine
months of
2013
was
$156 million
, which consisted of cash paid of
$119 million
and deferred purchase and estimated contingent consideration of
$37 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 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. The Company also paid
$4 million
of deferred purchase consideration and
$8 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 during
2013
based on their fair values:
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
(Amounts in millions)
|
|
Cash
|
$
|
119
|
|
Estimated fair value of deferred/contingent consideration
|
37
|
|
Total Consideration
|
$
|
156
|
|
Allocation of purchase price:
|
|
Cash and cash equivalents
|
$
|
16
|
|
Accounts receivable, net
|
11
|
|
Property, plant, and equipment
|
4
|
|
Intangible assets
|
74
|
|
Goodwill
|
93
|
|
Other current assets
|
17
|
|
Total assets acquired
|
215
|
|
Current liabilities
|
26
|
|
Other liabilities
|
33
|
|
Total liabilities assumed
|
59
|
|
Net assets acquired
|
$
|
156
|
|
Prior Year Acquisitions
During
2012
, Marsh completed the following
twelve
acquisitions:
|
|
•
|
January - Marsh acquired Alexander Forbes' South African brokerage operations, including Alexander Forbes Risk Services and insurance broking operations in Botswana and Namibia to expand Marsh's presence in Africa. Marsh subsequently completed the acquisitions of the Alexander Forbes operations in Uganda, Malawi and Zambia.
|
|
|
•
|
March - Marsh & McLennan Agency business ("MMA") acquired KSPH, LLC, a middle-market employee benefits agency based in Virginia, and Marsh acquired 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.
|
|
|
•
|
June - MMA 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.
|
|
|
•
|
August - MMA 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.
|
|
|
•
|
October - MMA acquired Howalt+McDowell, a South Dakota-based agency which offers property casualty, surety, personal protection and employee benefits insurance to individuals and businesses, and The Protector Group Insurance Agency, a Massachusetts-based agency which provides property/casualty, employee benefits services, personal insurance and individual financial services.
|
|
|
•
|
November - MMA acquired Brower Insurance, an Ohio-based company providing employee benefits, property/casualty and consulting services.
|
|
|
•
|
December - MMA acquired McGraw Wentworth, a Michigan-based company providing consulting services to mid-sized organizations, and Liscomb Hood Mason, a Minnesota-based company providing property/casualty and employee benefits products and services.
|
The MMA acquisitions were made to expand Marsh's presence in the U.S. middle-market business.
During
2012
, Mercer completed the following
three
acquisitions:
|
|
•
|
February - 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 Norwegian financial investment and pension consulting firm.
|
|
|
•
|
March - Mercer acquired REPCA, a France-based broking and advisory firm for employer health and benefits plans.
|
Total purchase consideration for acquisitions made during the first
nine
months of
2012
was
$205 million
which consisted of cash paid of
$124 million
and estimated contingent consideration of
$19 million
, and cash held in escrow of
$62 million
that was released in the first quarter of
2013
. The Company also paid
$51 million
of deferred purchase and contingent consideration related to acquisitions made in prior years.
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 the first nine months of
2013
and
2012
. In accordance with accounting guidance related to pro-forma disclosure, the information presented for
2013
acquisitions is as if they occurred on
January 1, 2012
and reflects acquisitions made in
2012
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 figures)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenue
|
$
|
2,935
|
|
|
$
|
2,883
|
|
|
$
|
9,192
|
|
|
$
|
9,057
|
|
Income from continuing operations
|
$
|
260
|
|
|
$
|
247
|
|
|
$
|
1,076
|
|
|
$
|
947
|
|
Net income attributable to the Company
|
$
|
253
|
|
|
$
|
242
|
|
|
$
|
1,058
|
|
|
$
|
926
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
– Continuing operations
|
$
|
0.46
|
|
|
$
|
0.44
|
|
|
$
|
1.92
|
|
|
$
|
1.70
|
|
– Net income attributable to the Company
|
$
|
0.46
|
|
|
$
|
0.44
|
|
|
$
|
1.93
|
|
|
$
|
1.70
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
– Continuing operations
|
$
|
0.46
|
|
|
$
|
0.44
|
|
|
$
|
1.89
|
|
|
$
|
1.68
|
|
– Net income attributable to the Company
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
1.90
|
|
|
$
|
1.67
|
|
The consolidated statements of income includes the results of operations of acquired companies as of their respective acquisition dates. The consolidated statements of income for both the three-month and nine-month periods ending September 30, 2013 include approximately $
13 million
of revenue and
$0 million
of net operating income related to acquisitions made in 2013.
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)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Disposals of discontinued operations
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
Income tax expense (credit)
|
1
|
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
Disposals of discontinued operations, net of tax
|
(1
|
)
|
|
—
|
|
|
6
|
|
|
—
|
|
Discontinued operations, net of tax
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
Discontinued operations, net of tax per share
|
|
|
|
|
|
|
|
– Basic
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.01
|
|
|
$
|
—
|
|
– Diluted
|
$
|
—
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
—
|
|
The
nine
months ended
September 30, 2013
includes estimated costs covered under the indemnity related to the Kroll sale and tax indemnities 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 2013, the Company elected to not use the option to perform a qualitative assessment to determine if a step 1 impairment test was necessary and instead elected to perform a step 1 impairment test. Fair values of the reporting units are estimated using either a market approach or a discounted cash flow model. This fair value determination was categorized as Level 3 in the fair value hierarchy. Carrying values for the reporting units are based on balances at the prior quarter end and include directly identified assets and liabilities as well as an allocation of those assets and liabilities not recorded at the reporting unit level. The Company completed its 2013 annual review in the third quarter and concluded goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value by a substantial margin.
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)
|
2013
|
|
|
2012
|
|
Balance as of January 1, as reported
|
$
|
6,792
|
|
|
$
|
6,562
|
|
Goodwill acquired
|
93
|
|
|
126
|
|
Other adjustments
(a)
|
(20
|
)
|
|
(9
|
)
|
Balance at September 30,
|
$
|
6,865
|
|
|
$
|
6,679
|
|
|
|
(a)
|
Primarily reflects the impact of foreign exchange in each period.
|
Goodwill allocable to the Company’s reportable segments is as follows: Risk & Insurance Services,
$4.7 billion
and Consulting,
$2.2 billion
.
Amortized intangible assets consist of the cost of client lists, client relationships and trade names acquired. The gross cost and accumulated amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
(In millions of dollars)
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortized intangibles
|
$
|
887
|
|
|
$
|
399
|
|
|
$
|
488
|
|
|
$
|
814
|
|
|
$
|
345
|
|
|
$
|
469
|
|
The Company recorded an intangible asset impairment charge of
$5 million
and
$8 million
in the third quarter of 2013 and
2012
, respectively, in the Risk & Insurance Services segment.
Aggregate amortization expense for both
nine
months ended
September 30, 2013
and
2012
was
$53 million
and the estimated future aggregate amortization expense is as follows:
|
|
|
|
|
For the Years Ending December 31,
|
|
(In millions of dollars)
|
Estimated Expense
|
|
2013 (excludes amortization through September 30, 2013)
|
$
|
18
|
|
2014
|
71
|
|
2015
|
69
|
|
2016
|
61
|
|
2017
|
51
|
|
Subsequent years
|
218
|
|
|
$
|
488
|
|
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
Mutual Funds and Money Market 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.
U.S. Municipal Bonds - Level 2
These investments 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 that effectively 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 is recorded on the balance sheet. The carrying value of the debt related to these swaps is 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, 2013
and
December 31, 2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets
(Level 1)
|
|
Observable Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
(In millions of dollars)
|
09/30/13
|
|
|
12/31/12
|
|
|
09/30/13
|
|
|
12/31/12
|
|
|
09/30/13
|
|
|
12/31/12
|
|
|
09/30/13
|
|
|
12/31/12
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
(a)
|
$
|
146
|
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
146
|
|
|
$
|
139
|
|
Money market funds
(b)
|
23
|
|
|
483
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
483
|
|
Interest rate swap derivatives
(c)
|
—
|
|
|
—
|
|
|
3
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
6
|
|
Total assets measured at fair value
|
$
|
169
|
|
|
$
|
622
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
172
|
|
|
$
|
628
|
|
Fiduciary Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Municipal Bonds
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Money market funds
|
4
|
|
|
149
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
149
|
|
Total fiduciary assets measured at fair value
|
$
|
4
|
|
|
$
|
149
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
152
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability
(d)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
$
|
63
|
|
|
$
|
92
|
|
|
$
|
63
|
|
Senior Notes due 2014
(e)
|
—
|
|
|
—
|
|
|
253
|
|
|
256
|
|
|
—
|
|
|
—
|
|
|
253
|
|
|
256
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
253
|
|
|
$
|
256
|
|
|
$
|
92
|
|
|
$
|
63
|
|
|
$
|
345
|
|
|
$
|
319
|
|
|
|
(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, 2013
, 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 as of
September 30, 2013
and 2012 that represent contingent consideration related to acquisitions:
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
|
Balance at January 1,
|
$
|
63
|
|
|
$
|
110
|
|
|
Additions
|
21
|
|
|
19
|
|
|
Payments
|
(8
|
)
|
|
(20
|
)
|
|
Revaluation Impact
|
16
|
|
|
(32
|
)
|
|
Balance at September 30,
|
$
|
92
|
|
|
$
|
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 increase in the estimated fair value of such liabilities for prior period acquisitions of
$16 million
in the
nine
-month period ended
September 30, 2013
. A
5%
increase in the above mentioned projections would increase the liability by approximately
$15 million
. A
5%
decrease in the above mentioned projections would decrease the liability by approximately
$13 million
.
Fair Value of Long-term Investments
The Company has certain long-term investments, primarily related to investments in non-publicly traded private equity funds of
$12 million
and
$16 million
at
September 30, 2013
and
December 31, 2012
carried on the cost basis for which there are no readily available market prices. The carrying values of these investments approximates their fair value. Management's estimate of the fair value of these non-publicly traded investments is based on valuation methodologies including 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. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. If carried at fair value, these investments would be classified as Level 3 in the fair value hierarchy and are included in Other assets in the consolidated balance sheets.
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. As of
September 30, 2013
, the actual allocation for the U.S. Plan was
62%
equities and equity alternatives and
38%
fixed income. The target asset allocation for the U.K. Plans, which comprises approximately
83%
of non-U.S. Plan assets, is
53%
equities and equity alternatives and
47%
fixed income. As of
September 30, 2013
, the actual allocation for the U.K. Plan was
50%
equities and equity alternatives and
50%
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)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
$
|
63
|
|
|
$
|
59
|
|
|
$
|
2
|
|
|
$
|
1
|
|
Interest cost
|
144
|
|
|
148
|
|
|
2
|
|
|
3
|
|
Expected return on plan assets
|
(227
|
)
|
|
(225
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(5
|
)
|
|
(4
|
)
|
|
—
|
|
|
(3
|
)
|
Recognized actuarial loss
|
79
|
|
|
67
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
54
|
|
|
$
|
45
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
|
|
Postretirement
|
For the Nine Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
$
|
188
|
|
|
$
|
180
|
|
|
$
|
4
|
|
|
$
|
3
|
|
Interest cost
|
433
|
|
|
445
|
|
|
8
|
|
|
9
|
|
Expected return on plan assets
|
(680
|
)
|
|
(676
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(16
|
)
|
|
(14
|
)
|
|
—
|
|
|
(9
|
)
|
Recognized actuarial loss
|
237
|
|
|
201
|
|
|
1
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
162
|
|
|
$
|
136
|
|
|
$
|
13
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Three Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
$
|
26
|
|
|
$
|
23
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
57
|
|
|
57
|
|
|
1
|
|
|
2
|
|
Expected return on plan assets
|
(81
|
)
|
|
(80
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(4
|
)
|
|
(4
|
)
|
|
—
|
|
|
(3
|
)
|
Recognized actuarial loss
|
52
|
|
|
38
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
50
|
|
|
$
|
34
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Nine Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
$
|
78
|
|
|
$
|
70
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
171
|
|
|
172
|
|
|
5
|
|
|
6
|
|
Expected return on plan assets
|
(243
|
)
|
|
(241
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(12
|
)
|
|
(12
|
)
|
|
—
|
|
|
(9
|
)
|
Recognized actuarial loss (gain)
|
156
|
|
|
114
|
|
|
—
|
|
|
(1
|
)
|
Net periodic benefit cost (credit)
|
$
|
150
|
|
|
$
|
103
|
|
|
$
|
7
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Three Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
$
|
37
|
|
|
$
|
36
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Interest cost
|
87
|
|
|
91
|
|
|
1
|
|
|
1
|
|
Expected return on plan assets
|
(146
|
)
|
|
(145
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
27
|
|
|
29
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
4
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
|
|
Postretirement
|
For the Nine Months Ended September 30,
|
Benefits
|
|
Benefits
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
$
|
110
|
|
|
$
|
110
|
|
|
$
|
2
|
|
|
$
|
1
|
|
Interest cost
|
262
|
|
|
273
|
|
|
3
|
|
|
3
|
|
Expected return on plan assets
|
(437
|
)
|
|
(435
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
(4
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
81
|
|
|
87
|
|
|
1
|
|
|
1
|
|
Net periodic benefit cost
|
$
|
12
|
|
|
$
|
33
|
|
|
$
|
6
|
|
|
$
|
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,
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
Expected return on plan assets
|
7.66
|
%
|
|
8.04
|
%
|
|
—
|
%
|
|
—
|
%
|
Discount rate
|
4.38
|
%
|
|
4.91
|
%
|
|
4.32
|
%
|
|
5.05
|
%
|
Rate of compensation increase
|
2.43
|
%
|
|
3.09
|
%
|
|
—
|
%
|
|
—
|
%
|
The Company made approximately
$552 million
of contributions to its U.S. and non-U.S. defined benefit plans in the first
nine
months of
2013
, including
$250 million
to its U.K. pension plans to pre-fund all or a substantial portion of any deficit funding contributions that may be required from 2014 through 2016 as a result of negotiations with the Trustee of its U.K. pension plans. The Company also made discretionary contributions of
$70 million
to its Canadian pension plans. The Company expects to contribute approximately
$102 million
to its non-qualified U.S. pension and non-U.S. pension plans during the remainder of
2013
.
12. Debt
The Company’s outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Short-term:
|
|
|
|
Current portion of long-term debt
|
$
|
583
|
|
|
$
|
260
|
|
Long-term:
|
|
|
|
Senior notes – 4.850% due 2013
|
—
|
|
|
250
|
|
Senior notes – 5.875% due 2033
|
297
|
|
|
296
|
|
Senior notes – 5.375% due 2014
|
323
|
|
|
326
|
|
Senior notes – 5.75% due 2015
|
479
|
|
|
479
|
|
Senior notes – 2.30% due 2017
|
249
|
|
|
249
|
|
Senior notes – 9.25% due 2019
|
399
|
|
|
398
|
|
Senior notes – 4.80% due 2021
|
497
|
|
|
497
|
|
Senior notes – 2.55% due 2018
|
248
|
|
|
—
|
|
Senior notes – 4.05% due 2023
|
247
|
|
|
—
|
|
Mortgage – 5.70% due 2035
|
415
|
|
|
422
|
|
Term Loan Facility - due 2016
|
50
|
|
|
—
|
|
Other
|
2
|
|
|
1
|
|
|
3,206
|
|
|
2,918
|
|
Less current portion
|
583
|
|
|
260
|
|
|
$
|
2,623
|
|
|
$
|
2,658
|
|
The senior notes in the table above are publicly registered by the Company with no guarantees attached.
In September 2013, the Company issued $
250 million
of
2.55%
five
-year senior notes and $
250 million
of
4.05%
ten
-year senior notes. The net proceeds of this offering will be used for general corporate purposes, which includes a partial redemption of $
250 million
of the outstanding principal amount of the existing
5.75%
senior notes due 2015. The redemption settled in October 2013 with a total cash outflow of approximately $
275 million
including a
$24 million
charge for early redemption.
In February 2013, the Company repaid its
4.850%
fixed rate
$250 million
senior notes that matured using cash.
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.
The Company and certain of its foreign subsidiaries maintain a $
1.0 billion
multi-currency unsecured revolving credit facility which expires in October 2016. 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, 2013
.
In December 2012, the Company closed on a $
50 million
,
three
-year term loan facility. The interest rate on this facility at September 30, 2013 was
1.43%
, which is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facility requires the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed above. The Company had
$50 million
of borrowings under this facility at
September 30, 2013
.
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 pay the Company a fixed rate of
5.375%
and the Company pays 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 ended
September 30, 2013
and 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Income statement classification
(In millions of dollars)
|
Loss on Swaps
|
|
Gain on Notes
|
|
Net Income Effect
|
|
Loss on Swaps
|
|
Gain on Notes
|
|
Net Income Effect
|
Other Operating Expenses
|
$
|
(3
|
)
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
—
|
|
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.
Fair Value of Short-term and Long-term Debt
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, 2013
|
|
December 31, 2012
|
(In millions of dollars)
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Short-term debt
|
$
|
583
|
|
|
$
|
614
|
|
|
$
|
260
|
|
|
$
|
261
|
|
Long-term debt
|
$
|
2,623
|
|
|
$
|
2,828
|
|
|
$
|
2,658
|
|
|
$
|
2,986
|
|
The estimated fair value of the Company’s short and long-term debt is primarily 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.
13. Restructuring Costs
The Company recorded total restructuring costs of
$17 million
in the first
nine
months of
2013
, related to severance and future rent under non-cancelable leases. These costs were incurred as follows: Risk and Insurance Services -
$5 million
, Consulting -
$1 million
and Corporate -
$11 million
.
Details of the activity from January 1, 2012 through
September 30, 2013
regarding restructuring activities, which includes liabilities from actions prior to
2013
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
Liability at 1/1/12
|
|
Amounts
Accrued
|
|
|
Cash
Paid
|
|
|
Other
|
|
|
Liability at 12/31/12
|
|
Amounts
Accrued
|
|
|
Cash
Paid
|
|
|
Other
|
|
|
Liability at 9/30/13
|
Severance
|
$
|
27
|
|
|
$
|
46
|
|
|
$
|
(38
|
)
|
|
$
|
1
|
|
|
$
|
36
|
|
|
$
|
8
|
|
|
$
|
(30
|
)
|
|
$
|
(2
|
)
|
|
$
|
12
|
|
Future rent under non-cancelable leases and other costs
|
154
|
|
|
32
|
|
|
(50
|
)
|
|
(2
|
)
|
|
134
|
|
|
9
|
|
|
(28
|
)
|
|
3
|
|
|
118
|
|
Total
|
$
|
181
|
|
|
$
|
78
|
|
|
$
|
(88
|
)
|
|
$
|
(1
|
)
|
|
$
|
170
|
|
|
$
|
17
|
|
|
$
|
(58
|
)
|
|
$
|
1
|
|
|
$
|
130
|
|
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. Common Stock
During the first
nine
months of
2013
, the Company repurchased
10 million
shares of its common stock for consideration of $
400 million
. In May 2013, the Board of Directors of the Company authorized share repurchases of up to
$1 billion
of the Company's common stock. The Company remains authorized to purchase additional shares of its common stock up to a value of $
712 million
. There is no time limit on the authorization. During the first
nine
months of 2012, the Company repurchased
5.4 million
shares of its common stock for consideration of
$180 million
.
15. 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 restored 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. The vast majority of these matters have been resolved.
Two
actions instituted by policyholders against the Company, Marsh and certain Marsh subsidiaries remain pending.
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 the Company operates. In the ordinary course of business the Company is also subject to subpoenas, investigations, lawsuits and/or other regulatory actions undertaken by governmental authorities.
In this regard, Mercer recently received a subpoena from the New York Department of Financial Services in connection with a review of New York
’
s public pension funds
.
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 the Company 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, 2013, 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.
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, the Company 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 15 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, the Company establishes liabilities in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies). Except as described above, the Company is 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.
16. 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 2012 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.
Effective January 1, 2013, the Corporate Benefits and Association businesses, previously part of Marsh's U.S. Consumer operations, were transferred to Mercer. The segment data presented below reflects the reclassification of prior year segment data to conform with the current year presentations.
Selected information about the Company’s operating segments for the three-and nine-month periods ended
September 30, 2013
and
2012
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)
|
2013 –
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
1,504
|
|
(a)
|
$
|
222
|
|
|
$
|
4,963
|
|
(c)
|
$
|
1,111
|
|
Consulting
|
1,437
|
|
(b)
|
232
|
|
|
4,209
|
|
(d)
|
624
|
|
Total Operating Segments
|
2,941
|
|
|
454
|
|
|
9,172
|
|
|
1,735
|
|
Corporate / Eliminations
|
(9
|
)
|
|
(50
|
)
|
|
(26
|
)
|
|
(147
|
)
|
Total Consolidated
|
$
|
2,932
|
|
|
$
|
404
|
|
|
$
|
9,146
|
|
|
$
|
1,588
|
|
2012–
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
1,451
|
|
(a)
|
$
|
222
|
|
|
$
|
4,781
|
|
(c)
|
$
|
1,024
|
|
Consulting
|
1,405
|
|
(b)
|
205
|
|
|
4,174
|
|
(d)
|
552
|
|
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
|
|
|
|
(a)
|
Includes inter-segment revenue of $
1 million
in both
2013
and
2012
, interest income on fiduciary funds of
$7 million
and
$10 million
in
2013
and
2012
, respectively, and equity method income of $
2 million
in
2013
.
|
|
|
(b)
|
Includes inter-segment revenue of
$8 million
and $
10 million
in
2013
and
2012
, respectively, and interest income on fiduciary funds of $
1 million
in both
2013
and
2012
.
|
|
|
(c)
|
Includes inter-segment revenue of $
4 million
in both
2013
and
2012
, interest income on fiduciary funds of $
21 million
and
$31 million
in
2013
and
2012
, respectively, and equity method income of $
10 million
in both
2013
and
2012
.
|
|
|
(d)
|
Includes inter-segment revenue of
$22 million
and $
29 million
in
2013
and
2012
, respectively, and interest income on fiduciary funds of
$3 million
and $
2 million
in
2013
and
2012
, respectively.
|
Details of operating segment revenue for the three and nine-month periods ended
September 30, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In millions of dollars)
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Risk and Insurance Services
|
|
|
|
|
|
|
|
Marsh
|
$
|
1,241
|
|
|
$
|
1,201
|
|
|
$
|
4,038
|
|
|
$
|
3,895
|
|
Guy Carpenter
|
263
|
|
|
250
|
|
|
925
|
|
|
886
|
|
Total Risk and Insurance Services
|
1,504
|
|
|
1,451
|
|
|
4,963
|
|
|
4,781
|
|
Consulting
|
|
|
|
|
|
|
|
Mercer
|
1,072
|
|
|
1,054
|
|
|
3,157
|
|
|
3,086
|
|
Oliver Wyman Group
|
365
|
|
|
351
|
|
|
1,052
|
|
|
1,088
|
|
Total Consulting
|
1,437
|
|
|
1,405
|
|
|
4,209
|
|
|
4,174
|
|
Total Operating Segments
|
2,941
|
|
|
2,856
|
|
|
9,172
|
|
|
8,955
|
|
Corporate
/
Eliminations
|
(9
|
)
|
|
(11
|
)
|
|
(26
|
)
|
|
(33
|
)
|
Total
|
$
|
2,932
|
|
|
$
|
2,845
|
|
|
$
|
9,146
|
|
|
$
|
8,922
|
|
The following reflects the impact of the transfer discussed above on prior year's segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
Nine Months Ended September 30, 2012
|
(In millions of dollars)
|
As Reported
|
|
Reclassification
|
|
Current Presentation
|
|
As Reported
|
|
Reclassification
|
|
Current Presentation
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Marsh
|
$
|
1,260
|
|
|
$
|
(59
|
)
|
|
$
|
1,201
|
|
|
$
|
4,069
|
|
|
$
|
(174
|
)
|
|
$
|
3,895
|
|
Guy Carpenter
|
250
|
|
|
—
|
|
|
250
|
|
|
886
|
|
|
—
|
|
|
886
|
|
Total Risk and Insurance Services
|
1,510
|
|
|
(59
|
)
|
|
1,451
|
|
|
4,955
|
|
|
(174
|
)
|
|
4,781
|
|
Consulting
|
|
|
|
|
|
|
|
|
|
|
|
Mercer
|
995
|
|
|
59
|
|
|
1,054
|
|
|
2,912
|
|
|
174
|
|
|
3,086
|
|
Oliver Wyman Group
|
351
|
|
|
—
|
|
|
351
|
|
|
1,088
|
|
|
—
|
|
|
1,088
|
|
Total Consulting
|
1,346
|
|
|
59
|
|
|
1,405
|
|
|
4,000
|
|
|
174
|
|
|
4,174
|
|
Total Operating Segments
|
2,856
|
|
|
—
|
|
|
2,856
|
|
|
8,955
|
|
|
—
|
|
|
8,955
|
|
Corporate Eliminations
|
(11
|
)
|
|
—
|
|
|
(11
|
)
|
|
(33
|
)
|
|
—
|
|
|
(33
|
)
|
Total Revenue
|
$
|
2,845
|
|
|
$
|
—
|
|
|
$
|
2,845
|
|
|
$
|
8,922
|
|
|
$
|
—
|
|
|
$
|
8,922
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
234
|
|
|
$
|
(12
|
)
|
|
$
|
222
|
|
|
$
|
1,052
|
|
|
$
|
(28
|
)
|
|
$
|
1,024
|
|
Consulting
|
193
|
|
|
12
|
|
|
205
|
|
|
524
|
|
|
28
|
|
|
552
|
|
Total Operating Segments
|
427
|
|
|
—
|
|
|
427
|
|
|
1,576
|
|
|
—
|
|
|
1,576
|
|
Corporate Eliminations
|
(49
|
)
|
|
—
|
|
|
(49
|
)
|
|
(153
|
)
|
|
—
|
|
|
(153
|
)
|
Total Consolidated
|
$
|
378
|
|
|
$
|
—
|
|
|
$
|
378
|
|
|
$
|
1,423
|
|
|
$
|
—
|
|
|
$
|
1,423
|
|
17. New Accounting Guidance
In July 2013 the FASB issued new accounting guidance related to the presentation of unrecognized tax benefits as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward. However, to the extent a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction, the unrecognized tax benefit shall be presented in the financial statement as a liability and shall not be combined with deferred tax assets. The guidance is effective for fiscal years beginning after December 15, 2013. The adoption of this new guidance will affect balance sheet classification and footnote disclosure only and is not expected to have a material impact on the Company's financial statements.
In February 2013 the FASB issued new accounting guidance that adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The Company implemented this new guidance for the reporting period ended March 31, 2013. Other than enhanced disclosure, the adoption of this new guidance did not have a material effect on the Company's financial statements.
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. Other than enhanced disclosure, adoption of this new guidance did 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.