NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Marsh & McLennan Companies, Inc. and its consolidated subsidiaries (the "Company"), a global professional services firm, is organized based on the different services that it offers. Under this structure, the Company’s
two
segments are Risk and Insurance Services and Consulting.
The Risk and Insurance Services segment provides risk management services 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 Mercer and Oliver Wyman Group. Mercer provides consulting expertise, advice, services and solutions in the areas of health, wealth and career. As of
June 30, 2017
, Mercer had assets under delegated management of
$191 billion
worldwide. Oliver Wyman Group provides specialized management and 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.
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. While 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, 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, 2016
(the "
2016
Form 10-K").
The financial information contained herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial statements as of and for the three and six month periods ended
June 30, 2017
and
2016
.
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
$172 million
,
primarily related to regulatory requirements outside the United States or as collateral under captive insurance arrangements.
Investments
The Company holds investments in certain private equity funds. Investments in private equity funds are accounted for under the equity method of accounting using a consistently applied
three
-month lag period adjusted for any known significant changes from the lag period to the reporting date of the Company. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. Investment gains or losses for the Company's proportionate share of the change in fair value of the funds are recorded in earnings. Investments accounted for using the equity method of accounting are included in other assets in the consolidated balance sheets.
The caption "Investment income (loss)" in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in earnings. It includes, when applicable, other than temporary declines in the value of debt and available-for-sale securities and equity method gains or losses on the Company's investments in private equity funds. The Company recorded net investment income of
$5 million
in the second quarter of 2017 compared to
$1 million
for the same period in 2016, and net investment income of
$5 million
compared to a net investment loss of
$2 million
for the six months ended June 30, 2017 and 2016, respectively.
Income Taxes
The Company's effective tax rate in the
second
quarter of
2017
was
28.6%
compared with
29.5%
in the
second
quarter of
2016
. The effective tax rate for the first six months of 2017 and 2016 was
25.9%
and
29.0%
, respectively. The rates reflect foreign operations which are taxed at rates below the U.S. statutory tax rate, including the effect of repatriation, as well as the impact of discrete tax matters such as tax legislation, changes in valuation allowances, nontaxable adjustments to contingent acquisition consideration and, starting in 2017, excess tax benefits related to share-based compensation.
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
$65 million
at
December 31, 2016
to
$66 million
at
June 30, 2017
. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between
zero
and approximately
$9 million
within the next twelve months due to settlements of audits and expirations 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 $
9 million
and
$6 million
for the three months ended
June 30, 2017
and
2016
, respectively, and
$17 million
and
$12 million
for the six months ended June 30, 2017 and 2016, respectively. The Consulting segment recorded fiduciary interest income of less than
$1 million
for each of the three month periods ended
June 30, 2017
and
2016
, and
$1 million
for each of the six months ended June 30, 2017 and 2016. 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
$7.7 billion
at
June 30, 2017
and
$7.0 billion
at
December 31, 2016
. 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. Accordingly, net uncollected premiums and claims and the related payables are 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.
4. Per Share Data
Basic net income per share attributable to the Company is calculated by dividing the after-tax income attributable to the Company by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company is calculated by dividing the after-tax income attributable to the Company 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS Calculation
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In millions, except per share amounts)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic weighted average common shares outstanding
|
514
|
|
|
521
|
|
|
514
|
|
|
521
|
|
Dilutive effect of potentially issuable common shares
|
6
|
|
|
4
|
|
|
7
|
|
|
5
|
|
Diluted weighted average common shares outstanding
|
520
|
|
|
525
|
|
|
521
|
|
|
526
|
|
Average stock price used to calculate common stock equivalents
|
$
|
75.41
|
|
|
$
|
64.17
|
|
|
$
|
73.36
|
|
|
$
|
60.01
|
|
There were
12.4 million
and
13.9 million
stock options outstanding as of
June 30, 2017
and
2016
, 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
six
-month periods ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
Assets acquired, excluding cash
|
|
$
|
576
|
|
|
$
|
107
|
|
Liabilities assumed
|
|
(74
|
)
|
|
(4
|
)
|
Contingent/deferred purchase consideration
|
|
(90
|
)
|
|
(26
|
)
|
Net cash outflow for acquisitions
|
|
$
|
412
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
|
2016
|
|
Interest paid
|
$
|
92
|
|
|
$
|
86
|
|
Income taxes paid, net of refunds
|
$
|
297
|
|
|
$
|
303
|
|
The classification of contingent consideration in the statement of cash flows is determined by whether the payment was part of the initial liability established on the acquisition date (financing) or an adjustment to the acquisition date liability (operating).
The following amounts are included in the consolidated statements of cash flows as a financing activity. The Company paid deferred and contingent consideration of
$97 million
for the six months ended
June 30, 2017
. This consisted of deferred purchase consideration related to prior years' acquisitions of
$37 million
and contingent consideration of
$60 million
. For the six months ended June 30, 2016, the Company paid deferred and contingent consideration of
$63 million
, consisting of deferred purchase consideration related to prior years' acquisitions of
$39 million
and contingent consideration of
$24 million
.
The following amounts are included in the operating section of the consolidated statements of cash flows. For the six months ended
June 30, 2017
, the Company recorded a net credit for adjustments to acquisition related accounts of $
8 million
and contingent consideration payments of
$5 million
. For the six months ended June 30, 2016, the Company recorded a net charge for adjustments related to acquisition related accounts of
$18 million
and contingent consideration payments of
$26 million
.
The Company had non-cash issuances of common stock under its share-based payment plan of
$87 million
and
$70 million
for the six months ended
June 30, 2017
and
2016
, respectively. The Company recorded stock-based compensation expense for equity awards related to restricted stock units, performance stock units and stock options of
$75 million
and
$58 million
for the six-month periods ended
June 30, 2017
and
2016
, respectively.
Effective January 1, 2017, the Company adopted new accounting guidance related to share-based compensation, that requires companies to record excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement and classify excess tax benefits as an operating activity in the statement of cash flows. Prior to the adoption of this standard, the Company recorded excess tax benefits in equity in the consolidated balance sheet and as a financing activity in the consolidated statement of cash flows. For the six months ended June 30, 2017, the adoption of this new standard reduced income tax expense in the consolidated statement of income by approximately $
48 million
. For the six months ended June 30, 2016, the Company recorded an excess tax benefit of $
24 million
as an increase to equity in its consolidated balance sheet, which was reflected as cash provided by financing activities in the consolidated statement of cash flows.
6. Other Comprehensive Income (Loss)
The changes, net of tax, in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the
three
and
six
-month periods ended
June 30, 2017
and
2016
, including amounts reclassified out of AOCI, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of April 1, 2017
|
$
|
16
|
|
|
$
|
(3,208
|
)
|
|
$
|
(1,645
|
)
|
|
$
|
(4,837
|
)
|
Other comprehensive income (loss) before reclassifications
|
14
|
|
|
(40
|
)
|
|
289
|
|
|
263
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
Net current period other comprehensive income (loss)
|
14
|
|
|
(7
|
)
|
|
289
|
|
|
296
|
|
Balance as of June 30, 2017
|
$
|
30
|
|
|
$
|
(3,215
|
)
|
|
$
|
(1,356
|
)
|
|
$
|
(4,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of April 1, 2016
|
$
|
6
|
|
|
$
|
(3,014
|
)
|
|
$
|
(1,089
|
)
|
|
$
|
(4,097
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
98
|
|
|
(333
|
)
|
|
(235
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
31
|
|
|
—
|
|
|
31
|
|
Net current period other comprehensive income (loss)
|
—
|
|
|
129
|
|
|
(333
|
)
|
|
(204
|
)
|
Balance as of June 30, 2016
|
$
|
6
|
|
|
$
|
(2,885
|
)
|
|
$
|
(1,422
|
)
|
|
$
|
(4,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of January 1, 2017
|
$
|
19
|
|
|
$
|
(3,232
|
)
|
|
$
|
(1,880
|
)
|
|
$
|
(5,093
|
)
|
Other comprehensive income (loss) before reclassifications
|
11
|
|
|
(46
|
)
|
|
524
|
|
|
489
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
Net current period other comprehensive income (loss)
|
11
|
|
|
17
|
|
|
524
|
|
|
552
|
|
Balance as of June 30, 2017
|
$
|
30
|
|
|
$
|
(3,215
|
)
|
|
$
|
(1,356
|
)
|
|
$
|
(4,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of January 1, 2016
|
$
|
6
|
|
|
$
|
(3,124
|
)
|
|
$
|
(1,102
|
)
|
|
$
|
(4,220
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
178
|
|
|
(320
|
)
|
|
(142
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
61
|
|
|
—
|
|
|
61
|
|
Net current period other comprehensive income (loss)
|
—
|
|
|
239
|
|
|
(320
|
)
|
|
(81
|
)
|
Balance as of June 30, 2016
|
$
|
6
|
|
|
$
|
(2,885
|
)
|
|
$
|
(1,422
|
)
|
|
$
|
(4,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of other comprehensive income (loss) for the three and
six
-month periods ended
June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
(In millions)
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Pre-Tax
|
Tax
(Credit)
|
Net of Tax
|
Foreign currency translation adjustments
|
|
$
|
290
|
|
$
|
1
|
|
$
|
289
|
|
|
$
|
(334
|
)
|
$
|
(1
|
)
|
$
|
(333
|
)
|
Unrealized investment gains
|
|
24
|
|
10
|
|
14
|
|
|
—
|
|
—
|
|
—
|
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
|
Amortization of losses included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
Net actuarial losses (a)
|
|
42
|
|
9
|
|
33
|
|
|
43
|
|
12
|
|
31
|
|
Subtotal
|
|
42
|
|
9
|
|
33
|
|
|
43
|
|
12
|
|
31
|
|
Effect of remeasurement
|
|
—
|
|
1
|
|
(1
|
)
|
|
—
|
|
—
|
|
—
|
|
Effect of curtailment
|
|
—
|
|
—
|
|
—
|
|
|
3
|
|
1
|
|
2
|
|
Foreign currency translation (losses) gains
|
|
(47
|
)
|
(8
|
)
|
(39
|
)
|
|
116
|
|
21
|
|
95
|
|
Other
|
|
—
|
|
—
|
|
—
|
|
|
1
|
|
—
|
|
1
|
|
Pension/post-retirement plans gains (losses)
|
|
(5
|
)
|
2
|
|
(7
|
)
|
|
163
|
|
34
|
|
129
|
|
Other comprehensive income (loss)
|
|
$
|
309
|
|
$
|
13
|
|
$
|
296
|
|
|
$
|
(171
|
)
|
$
|
33
|
|
$
|
(204
|
)
|
(a) Components of net periodic pension cost are included in compensation and benefits in the consolidated statements of income. Income tax credits on prior service losses and net actuarial losses are included in income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
2017
|
|
2016
|
(In millions)
|
Pre-Tax
|
Tax
(Credit)
|
Net of Tax
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
Foreign currency translation adjustments
|
$
|
525
|
|
$
|
1
|
|
$
|
524
|
|
|
$
|
(321
|
)
|
$
|
(1
|
)
|
$
|
(320
|
)
|
Unrealized investment gains
|
19
|
|
8
|
|
11
|
|
|
—
|
|
—
|
|
—
|
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
Amortization of losses included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
Prior service cost (a)
|
—
|
|
—
|
|
—
|
|
|
1
|
|
—
|
|
1
|
|
Net actuarial losses (a)
|
82
|
|
19
|
|
63
|
|
|
84
|
|
24
|
|
60
|
|
Subtotal
|
82
|
|
19
|
|
63
|
|
|
85
|
|
24
|
|
61
|
|
Effect of remeasurement
|
9
|
|
3
|
|
6
|
|
|
(1
|
)
|
—
|
|
(1
|
)
|
Effect of curtailment
|
(1
|
)
|
—
|
|
(1
|
)
|
|
3
|
|
1
|
|
2
|
|
Effect of settlement
|
1
|
|
—
|
|
1
|
|
|
1
|
|
—
|
|
1
|
|
Foreign currency translation (losses) gains
|
(62
|
)
|
(11
|
)
|
(51
|
)
|
|
213
|
|
37
|
|
176
|
|
Other
|
(1
|
)
|
—
|
|
(1
|
)
|
|
—
|
|
—
|
|
—
|
|
Pension/post-retirement plans gains
|
28
|
|
11
|
|
17
|
|
|
301
|
|
62
|
|
239
|
|
Other comprehensive income (loss)
|
$
|
572
|
|
$
|
20
|
|
$
|
552
|
|
|
$
|
(20
|
)
|
$
|
61
|
|
$
|
(81
|
)
|
(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’s acquisitions have been accounted for as business combinations. Net assets and results of operations are included in the Company’s consolidated financial statements commencing at the respective purchase closing dates. In connection with acquisitions, the Company records the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer lists, developed technology, trademarks and non-compete agreements. The valuation of purchased intangible assets involves significant estimates and assumptions. Until final valuations are complete, any change in assumptions could affect the carrying value of tangible assets, goodwill and identifiable intangible assets.
The Risk and Insurance Services segment completed
five
acquisitions during the first
six
months of 2017.
|
|
•
|
January – Marsh & McLennan Agency ("MMA") acquired J. Smith Lanier & Co. ("JSL"), a privately held insurance brokerage firm providing insurance, risk management, and employee benefits solutions to businesses and individuals throughout the U.S.
|
|
|
•
|
February – MMA acquired iaConsulting Services, a Texas-based employee benefits consulting firm.
|
|
|
•
|
March – MMA acquired Blakestad, Inc., a Minnesota-based private client and commercial lines insurance agency, and RJF Financial Services, a Minnesota-based retirement advisory firm.
|
|
|
•
|
May – MMA acquired Insurance Partners of Texas, a Texas-based employee benefits consulting firm.
|
Total purchase consideration for acquisitions made during the
six
months ended June 30,
2017
was
$510 million
, which consisted of cash paid of
$420 million
and deferred purchase and estimated contingent consideration of $
90 million
. Contingent consideration arrangements are based primarily on earnings before interest, tax, depreciation and amortization ("EBITDA") or revenue targets over a period of
two
to
four
years. The fair value of the contingent consideration was based on projected revenue or EBITDA 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 $
37 million
of deferred purchase consideration and $
65 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
2017
based on their fair values:
|
|
|
|
|
For the Six Months Ended June 30
,
2017
|
|
(In millions)
|
|
Cash
|
$
|
420
|
|
Estimated fair value of deferred/contingent consideration
|
90
|
|
Total Consideration
|
$
|
510
|
|
Allocation of purchase price:
|
|
Cash and cash equivalents
|
$
|
8
|
|
Accounts receivable, net
|
7
|
|
Property, plant, and equipment
|
3
|
|
Other intangible assets
|
196
|
|
Goodwill
|
370
|
|
Total assets acquired
|
584
|
|
Current liabilities
|
4
|
|
Other liabilities
|
70
|
|
Total liabilities assumed
|
74
|
|
Net assets acquired
|
$
|
510
|
|
The following chart provides information about other intangible assets acquired during 2017:
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted Average Amortization Period
|
Client relationships
|
|
$
|
184
|
|
|
13 years
|
Other
|
|
12
|
|
|
4 years
|
|
|
$
|
196
|
|
|
|
Prior-Year Acquisitions
The Risk and Insurance Services segment completed
nine
acquisitions during
2016
.
|
|
•
|
February – MMA acquired The Celedinas Agency, Inc., a Florida-based brokerage firm, providing property, casualty and marine insurance, as well as employee benefits services, and Aviation Solutions, LLC, a Missouri-based aviation risk advisor and insurance broker.
|
|
|
•
|
March – MMA acquired Corporate Consulting Services, Ltd., a New York-based insurance brokerage and human resource consulting firm.
|
|
|
•
|
August – MMA acquired Benefits Advisory Group LLC, an Atlanta-based employee benefits consulting firm.
|
|
|
•
|
September – MMA acquired Vero Insurance, Inc., a Florida-based agency specializing in private client insurance services.
|
|
|
•
|
November – MMA acquired Benefits Resource Group Agency, LLC, an Ohio-based benefits consulting firm and Presidio Benefits Group, Inc., a California-based employee benefits consulting firm.
|
|
|
•
|
December – Marsh acquired AD Corretora, a multi-line broker located in Brazil, and Bluefin Insurance Group, Ltd, a U.K.-based insurance brokerage.
|
The Consulting segment completed
six
acquisitions during
2016
.
|
|
•
|
January – Mercer acquired The Positive Ageing Company Limited, a U.K.-based firm providing advice on issues surrounding the aging workforce.
|
|
|
•
|
April – Mercer acquired the Extratextual software system and related client contracts. Extratextual is a web based compliance system that assists clients to manage and meet their compliance and risk management obligations.
|
|
|
•
|
December – Oliver Wyman acquired LShift Limited, a software development company, and Mercer acquired Sirota Consulting LLC, a global provider of employee benefit solutions; Pillar Administration, a superannuation provider located in Australia; and Thomsons Online Benefits, a U.K.-based global benefits software business.
|
Total purchase consideration for acquisitions made during the first
six
months of
2016
was
$105 million
, which consisted of cash paid of
$79 million
and deferred purchase and estimated contingent consideration of
$26 million
. Contingent consideration arrangements are primarily based on EBITDA or revenue targets over a period of
two
to
four
years. The fair value of the contingent consideration was based on projected revenue or earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. In the first
six
months of 2016, the Company also paid
$39 million
of deferred purchase consideration and
$50 million
of contingent consideration related to acquisitions made in prior years.
Pro-Forma Information
The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during 2017 and 2016. 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, 2016 and reflects acquisitions made in 2016 as if they occurred on January 1, 2015. The unaudited 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
June 30,
|
|
Six Months Ended
June 30,
|
(In millions, except per share figures)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
$
|
3,496
|
|
|
$
|
3,493
|
|
|
$
|
7,011
|
|
|
$
|
6,951
|
|
Net income attributable to the Company
|
$
|
502
|
|
|
$
|
470
|
|
|
$
|
1,072
|
|
|
$
|
950
|
|
Basic net income per share attributable to the Company
|
$
|
0.98
|
|
|
$
|
0.90
|
|
|
$
|
2.08
|
|
|
$
|
1.82
|
|
Diluted net income per share attributable to the Company
|
$
|
0.96
|
|
|
$
|
0.89
|
|
|
$
|
2.06
|
|
|
$
|
1.81
|
|
The consolidated statements of income include the results of operations of acquired companies since their respective acquisition dates. The consolidated statements of income for the three and six-month periods ended
June 30, 2017
include approximately
$34 million
and
$63 million
of revenue, respectively, and
$5 million
and
$15 million
of operating income, respectively, related to acquisitions made in
2017
.
8. 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 assessment 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 considers numerous factors, which include whether 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 value 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 qualitative assessment in the third quarter of 2016 and concluded that a two-step goodwill impairment test was not required in 2016 and that goodwill was not impaired.
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
June 30
,
|
|
|
|
(In millions)
|
2017
|
|
|
2016
|
|
Balance as of January 1, as reported
|
$
|
8,369
|
|
|
$
|
7,889
|
|
Goodwill acquired
|
370
|
|
|
62
|
|
Other adjustments
(a)
|
82
|
|
|
(6
|
)
|
Balance at June 30,
|
$
|
8,821
|
|
|
$
|
7,945
|
|
|
|
(a)
|
The increase in 2017 primarily reflects the impact of foreign exchange.
|
Goodwill allocable to the Company’s reportable segments at
June 30, 2017
is as follows: Risk and Insurance Services,
$6.3 billion
and Consulting,
$2.5 billion
.
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.
The gross cost and accumulated amortization at
June 30, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In millions)
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Client Relationships
|
$
|
1,581
|
|
|
$
|
453
|
|
|
$
|
1,128
|
|
|
$
|
1,390
|
|
|
$
|
392
|
|
|
$
|
998
|
|
Other
(a)
|
198
|
|
|
93
|
|
|
105
|
|
|
204
|
|
|
76
|
|
|
128
|
|
Amortized intangibles
|
$
|
1,779
|
|
|
$
|
546
|
|
|
$
|
1,233
|
|
|
$
|
1,594
|
|
|
$
|
468
|
|
|
$
|
1,126
|
|
(a)
Primarily non-compete agreements, trade names and developed technology.
Aggregate amortization expense for the
six
months ended
June 30, 2017
and
2016
was
$80 million
and
$67 million
, respectively. The estimated future aggregate amortization expense is as follows:
|
|
|
|
|
For the Years Ending December 31,
|
|
(In millions)
|
Estimated Expense
|
|
2017 (excludes amortization through June 30, 2017)
|
$
|
85
|
|
2018
|
158
|
|
2019
|
149
|
|
2020
|
127
|
|
2021
|
118
|
|
Subsequent years
|
596
|
|
|
$
|
1,233
|
|
9. 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 Financial Accounting Standards Board ("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 and exchange-traded money market mutual funds).
|
Assets and liabilities measured using Level 1 inputs include exchange-traded equity securities, exchange-traded mutual funds and money market funds.
|
|
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).
|
The Company does not have any assets or liabilities that are measured using Level 2 inputs.
|
|
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.
|
Liabilities measured using Level 3 inputs include liabilities for contingent purchase consideration.
Valuation Techniques
Equity Securities, Money Market Funds and Mutual Funds – Level 1
Investments for which market quotations are readily available are valued at the sale price on their principal exchange or, for certain markets, official closing bid price. Money market funds are valued using a valuation technique that results in price per share at
$1.00
.
Contingent Purchase Consideration Liability – Level 3
Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. These arrangements typically provide for the payment of additional consideration if earnings or revenue targets are met over periods from
two
to
four
years. The fair value of the contingent purchase consideration liability is estimated as the present value of future cash flows to be paid, based on projections of revenue and earnings and related targets 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
June 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets
(Level 1)
|
|
Observable Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
(In millions)
|
06/30/17
|
|
|
12/31/16
|
|
|
06/30/17
|
|
|
12/31/16
|
|
|
06/30/17
|
|
|
12/31/16
|
|
|
06/30/17
|
|
|
12/31/16
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded equity securities
(a)
|
$
|
107
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
107
|
|
|
$
|
89
|
|
Mutual funds
(a)
|
140
|
|
|
141
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
140
|
|
|
141
|
|
Money market funds
(b)
|
36
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
22
|
|
Total assets measured at fair value
|
$
|
283
|
|
|
$
|
252
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
283
|
|
|
$
|
252
|
|
Fiduciary Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
82
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
$
|
90
|
|
Total fiduciary assets measured
at fair value
|
$
|
82
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
$
|
90
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase
consideration liability
(c)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
203
|
|
|
$
|
241
|
|
|
$
|
203
|
|
|
$
|
241
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
203
|
|
|
$
|
241
|
|
|
$
|
203
|
|
|
$
|
241
|
|
|
|
(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 accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
|
During the
six
-month period ended
June 30, 2017
, there were
no
assets or liabilities that were transferred between any of the levels.
The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities as of
June 30, 2017
and
2016
that represent contingent consideration related to acquisitions:
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
|
2016
|
|
Balance at January 1,
|
$
|
241
|
|
|
$
|
309
|
|
Additions
|
34
|
|
|
8
|
|
Payments
|
(65
|
)
|
|
(50
|
)
|
Revaluation Impact
|
(8
|
)
|
|
18
|
|
Other
(a)
|
1
|
|
|
(6
|
)
|
Balance at June 30,
|
$
|
203
|
|
|
$
|
279
|
|
(a)
Primarily reflects the impact of foreign exchange.
The fair value of the contingent purchase consideration liability is based on projections of revenue and EBITDA for the acquired entities in relation to the established targets and 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 decrease in the estimated fair value of such liabilities for prior-period acquisitions of
$8 million
in the
six
-month period ended
June 30, 2017
. A
5%
increase in the above mentioned projections would increase the liability by approximately
$19 million
. A
5%
decrease in the above mentioned projections would decrease the liability by approximately
$22 million
.
Long-Term Investments
The Company holds investments in certain private equity investments, public companies and private companies that are accounted for using the equity method of accounting. The carrying value of these investments was
$416 million
and
$389 million
at
June 30, 2017
and December 31,
2016
, respectively.
Private Equity Investments
The Company's investments in private equity investments were
$76 million
and
$79 million
at
June 30, 2017
and December 31,
2016
, respectively. The carrying values of these private equity investments approximate fair value. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. The Company records in earnings, investment gains/losses for its proportionate share of the change in fair value of the funds. These investments are included in other assets in the consolidated balance sheets.
Investments in Public and Private Companies
Alexander Forbes
:
The Company owns approximately
33%
of the common stock of Alexander Forbes, a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for
7.50
South African Rand per share. As of
June 30, 2017
, the carrying value of the Company’s investment in Alexander Forbes was approximately
$275 million
. As of
June 30, 2017
, the market value of the approximately
443 million
shares of Alexander Forbes owned by the Company, based on the
June 30, 2017
closing share price of
6.95
South African Rand per share, was approximately
$237 million
. During the first six months of 2017, the daily closing share price ranged between
5.99
Rand (in late April) and
7.95
Rand (in early January). During the month of June 2017, Alexander Forbes stock price ranged from
6.25
Rand on June 1 to a high of
7.31
Rand on June 23. The Company considered several factors related to its investment in Alexander Forbes, including its financial position, the near- and long-term prospects of Alexander Forbes and the broader South African economy and capital markets, the length of time and extent to which the market value was below cost and the Company’s intent and ability to retain the investment for a sufficient period of time to allow for anticipated recovery in market value. As a result, the Company determined the investment was not impaired.
The Company’s investment in Alexander Forbes and its other equity investments in private insurance and consulting companies are accounted for using the equity method of accounting, the results of which are included in revenue in the consolidated statements of income and the carrying value of which is included in other assets in the consolidated balance sheets. The Company records its share of income or loss on its equity method investments on a one quarter lag basis.
Benefitfocus
:
On February 24, 2015, the Company purchased shares of common stock of Benefitfocus (NASDAQ:BNFT) constituting
9.9%
of BNFT's outstanding capital stock as of the acquisition date. The purchase price for the BNFT shares and certain other rights and other consideration was approximately
$75 million
. Until December 31, 2016, the Company accounted for this investment under the cost method of accounting as the shares purchased were categorized as restricted. Effective December 31, 2016, these shares were no longer considered restricted for the purpose of determining if they are marketable securities under applicable accounting guidance, and are now accounted for as available for sale securities and included in other assets in the consolidated balance sheets. The value of the BNFT shares based on the closing price on the NASDAQ as of
June 30, 2017
was approximately
$102 million
. During the first six months of 2017 an unrealized gain related to these shares of approximately
$19 million
was recorded in other comprehensive income.
10. Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension plans for some of its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax-qualified defined benefit pension 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 such plans.
The target asset allocation for the Company's U.S. Plan was
64%
equities and equity alternatives and
36%
fixed income and at
June 30, 2017
, the actual allocation for the Company's U.S. Plan was
64%
equities and equity alternatives and
36%
fixed income. The target asset allocation for the Company's U.K. Plans, which comprise approximately
81%
of non-U.S. plan assets at
December 31, 2016
, was
46%
equities and equity alternatives and
54%
fixed income. At
June 30, 2017
, the actual allocation for the U.K. Plans was
46%
equities and equity alternatives and
54%
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 generally 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
Benefits
|
|
Post-retirement
Benefits
|
For the Three Months Ended June 30,
|
|
(In millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
$
|
19
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
124
|
|
|
138
|
|
|
1
|
|
|
1
|
|
Expected return on plan assets
|
(230
|
)
|
|
(242
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
Recognized actuarial loss
|
43
|
|
|
42
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(45
|
)
|
|
$
|
(17
|
)
|
|
$
|
1
|
|
|
$
|
2
|
|
Curtailment gain
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
Settlement loss
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Total (credit) cost
|
$
|
(45
|
)
|
|
$
|
(21
|
)
|
|
$
|
1
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. plans
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Six Months Ended June 30,
|
|
(In millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
$
|
37
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
246
|
|
|
275
|
|
|
2
|
|
|
3
|
|
Expected return on plan assets
|
(454
|
)
|
|
(483
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
(1
|
)
|
|
(1
|
)
|
|
1
|
|
|
2
|
|
Recognized actuarial loss (gain)
|
83
|
|
|
84
|
|
|
—
|
|
|
(1
|
)
|
Net periodic benefit (credit) cost
|
$
|
(89
|
)
|
|
$
|
(35
|
)
|
|
$
|
3
|
|
|
$
|
4
|
|
Curtailment gain
|
(1
|
)
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
Settlement loss
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Total (credit) cost
|
$
|
(89
|
)
|
|
$
|
(39
|
)
|
|
$
|
3
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Three Months Ended June 30,
|
|
(In millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
66
|
|
|
66
|
|
|
1
|
|
|
—
|
|
Expected return on plan assets
|
(90
|
)
|
|
(95
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Recognized actuarial loss (gain)
|
10
|
|
|
18
|
|
|
(1
|
)
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(14
|
)
|
|
$
|
16
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Six Months Ended June 30,
|
|
(In millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
132
|
|
|
132
|
|
|
1
|
|
|
1
|
|
Expected return on plan assets
|
(179
|
)
|
|
(190
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Recognized actuarial loss (gain)
|
19
|
|
|
36
|
|
|
(1
|
)
|
|
(1
|
)
|
Net periodic benefit (credit) cost
|
$
|
(28
|
)
|
|
$
|
31
|
|
|
$
|
2
|
|
|
$
|
2
|
|
In October 2016, the Company modified its U.S. defined benefit pension plans to discontinue further benefit accruals for participants after December 31, 2016. At the same time, the Company amended its U.S. defined contribution retirement plans for most of its U.S. employees to add an automatic Company contribution equal to
4%
of eligible base pay beginning on January 1, 2017. This new Company contribution, together with the Company’s current matching contribution, provides eligible U.S. employees with the opportunity to receive a total contribution of up to
7%
of eligible base pay. In addition, the U.S. qualified defined benefit plans were merged effective December 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Three Months Ended June 30,
|
|
(In millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
58
|
|
|
72
|
|
|
—
|
|
|
1
|
|
Expected return on plan assets
|
(140
|
)
|
|
(147
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
Recognized actuarial loss
|
33
|
|
|
24
|
|
|
1
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(31
|
)
|
|
$
|
(33
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
Curtailment gain
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
Settlement loss
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Total (credit) cost
|
$
|
(31
|
)
|
|
$
|
(37
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Six Months Ended June 30,
|
|
(In millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
$
|
37
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
114
|
|
|
143
|
|
|
1
|
|
|
2
|
|
Expected return on plan assets
|
(275
|
)
|
|
(293
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
Recognized actuarial loss
|
64
|
|
|
48
|
|
|
1
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(61
|
)
|
|
$
|
(66
|
)
|
|
$
|
1
|
|
|
$
|
2
|
|
Curtailment gain
|
(1
|
)
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
Settlement loss
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Total (credit) cost
|
$
|
(61
|
)
|
|
$
|
(70
|
)
|
|
$
|
1
|
|
|
$
|
2
|
|
In March 2017, the Company modified its defined benefit pension plans in Canada to discontinue further benefit accruals for participants after December 31, 2017 and replaced them with a defined contribution arrangement. The Company also amended its post-retirement benefits plan in Canada so that individuals who retire after April 1, 2019 will not be eligible to participate, except in certain situations. The Company re-measured the assets and liabilities of the plans, based on assumptions and market conditions on the amendment date.
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
|
|
Post-retirement
Benefits
|
June 30
,
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
Expected return on plan assets
|
6.64
|
%
|
|
7.07
|
%
|
|
—
|
|
|
—
|
|
Discount rate
|
3.40
|
%
|
|
4.11
|
%
|
|
3.64
|
%
|
|
4.12
|
%
|
Rate of compensation increase*
|
1.77
|
%
|
|
2.44
|
%
|
|
—
|
|
|
—
|
|
*The
2017
assumption does not include a rate of compensation increase for the U.S. defined benefit plans since future benefit accruals were discontinued for those plans after December 31, 2016.
The Company made approximately $
120 million
of contributions to its U.S. and non-U.S. defined benefit plans in the first
six
months of
2017
. The Company expects to contribute approximately $
136 million
to its U.S. pension and non-U.S. pension plans during the remainder of
2017
.
Defined Contribution Plans
The Company maintains certain defined contribution plans for its employees, the most significant being in the U.S. and the U.K. The cost of these U.S. and U.K. defined contribution plans was
$65 million
and
$38 million
for the
six
months ended
June 30
,
2017
and
2016
, respectively.
11. Debt
The Company’s outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Short-term:
|
|
|
|
Commercial paper
|
$
|
150
|
|
|
$
|
50
|
|
Current portion of long-term debt
|
12
|
|
|
262
|
|
|
162
|
|
|
312
|
|
Long-term:
|
|
|
|
Senior notes – 2.30% due 2017
|
—
|
|
|
250
|
|
Senior notes – 2.55% due 2018
|
249
|
|
|
249
|
|
Senior notes – 2.35% due 2019
|
299
|
|
|
299
|
|
Senior notes – 2.35% due 2020
|
498
|
|
|
497
|
|
Senior notes – 4.80% due 2021
|
498
|
|
|
498
|
|
Senior notes – 2.75% due 2022
|
496
|
|
|
—
|
|
Senior notes – 3.30% due 2023
|
347
|
|
|
347
|
|
Senior notes – 4.05% due 2023
|
248
|
|
|
248
|
|
Senior notes – 3.50% due 2024
|
596
|
|
|
596
|
|
Senior notes – 3.50% due 2025
|
496
|
|
|
495
|
|
Senior notes – 3.75% due 2026
|
596
|
|
|
596
|
|
Senior notes – 5.875% due 2033
|
297
|
|
|
297
|
|
Senior notes – 4.35% due 2047
|
492
|
|
|
—
|
|
Mortgage – 5.70% due 2035
|
376
|
|
|
382
|
|
Other
|
3
|
|
|
3
|
|
|
5,491
|
|
|
4,757
|
|
Less current portion
|
12
|
|
|
262
|
|
|
$
|
5,479
|
|
|
$
|
4,495
|
|
The senior notes in the table above are registered by the Company with the Securities and Exchange Commission and are not guaranteed.
The Company has established a short-term debt financing program of up to
$1.5 billion
through the issuance of commercial paper. The proceeds from the issuance of commercial paper are used for general corporate purposes. The Company had
$150 million
of commercial paper outstanding at June 30, 2017 at an effective interest rate of
1.45%
.
In January 2017, the Company issued
$500 million
of
2.75%
senior notes due 2022 and
$500 million
of
4.35%
senior notes due 2047. The Company used the net proceeds for general corporate purposes, including the repayment of a
$250 million
debt maturity in April 2017.
In March 2016, the Company issued
$350 million
of
3.30%
seven
-year senior notes. The Company used the net proceeds for general corporate purposes.
The Company and certain of its foreign subsidiaries maintain a
$1.5 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 expires in November 2020 and requires the Company to maintain certain
coverage and leverage ratios which are tested quarterly. There were
no
borrowings outstanding under this facility at
June 30, 2017
.
Fair Value of Short-term and Long-term Debt
The estimated fair value of the Company’s short-term and long-term debt 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In millions)
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Short-term debt
|
$
|
162
|
|
|
$
|
162
|
|
|
$
|
312
|
|
|
$
|
313
|
|
Long-term debt
|
$
|
5,479
|
|
|
$
|
5,714
|
|
|
$
|
4,495
|
|
|
$
|
4,625
|
|
The fair value of the Company’s short-term debt consists primarily of commercial paper and term debt maturing within the next year and its fair value 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.
12. Restructuring Costs
The Company recorded total restructuring costs of
$24 million
in the first
six
months of
2017
, primarily for severance at Mercer and future rent under non-cancelable leases. These costs were incurred in Risk and Insurance Services (
$4 million
), Consulting (
$16 million
) and Corporate (
$4 million
).
Details of the restructuring activity from January 1, 2016 through
June 30, 2017
, which includes liabilities from actions prior to
2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Liability at 1/1/16
|
|
Amounts
Accrued
|
|
Cash
Paid
|
|
Other
|
|
Liability at 12/31/16
|
|
Amounts
Accrued
|
|
Cash
Paid
|
|
Other
|
|
Liability at 6/30/17
|
Severance
|
$
|
15
|
|
|
$
|
40
|
|
|
$
|
(22
|
)
|
|
$
|
(1
|
)
|
|
$
|
32
|
|
|
$
|
19
|
|
|
$
|
(30
|
)
|
|
$
|
(2
|
)
|
|
$
|
19
|
|
Future rent under non-cancelable leases and other costs
|
78
|
|
|
4
|
|
|
(17
|
)
|
|
(4
|
)
|
|
61
|
|
|
5
|
|
|
(9
|
)
|
|
(2
|
)
|
|
55
|
|
Total
|
$
|
93
|
|
|
$
|
44
|
|
|
$
|
(39
|
)
|
|
$
|
(5
|
)
|
|
$
|
93
|
|
|
$
|
24
|
|
|
$
|
(39
|
)
|
|
$
|
(4
|
)
|
|
$
|
74
|
|
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 and accrued liabilities, other liabilities or accrued compensation and employee benefits, depending on the nature of the items.
13. Common Stock
During the first
six
months of
2017
, the Company repurchased approximately
5.4 million
shares of its common stock for consideration of
$400 million
. During the first six months of
2016
, the Company repurchased approximately
7.0 million
shares of its common stock for consideration of
$425 million
. In November 2016, the Board of Directors of the Company authorized the Company to repurchase up to
$2.5 billion
in shares of the Company's common stock, which superseded any prior authorizations. As of
June 30, 2017
, the Company remained authorized to repurchase up to approximately
$2 billion
in shares of its common stock. There is no time limit on the authorization.
The Company issued approximately
3.7 million
and
4.1 million
shares related to stock compensation and employee stock purchase plans during the first six months of 2017 and 2016, respectively.
14. Claims, Lawsuits and Other Contingencies
Litigation Matters
The Company and its subsidiaries 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, the provision of investment advice and investment management services to pension plans, the provision of advice relating to pension buy-out transactions and the provision of consulting services relating to the drafting and interpretation of trust deeds and other documentation governing pension plans. These claims typically seek damages, including punitive and treble damages, in amounts that could be significant. In establishing liabilities for errors and omissions claims in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies), the Company uses case level reviews by inside and outside counsel, and internal actuarial analysis by Oliver Wyman Group, a subsidiary of the Company, and other methods 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 Enforcement Matters
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 April 2017, the Financial Conduct Authority in the United Kingdom (the "FCA") commenced a civil competition investigation into the aviation insurance and reinsurance sector. In connection with that investigation, the FCA carried out an on-site inspection at the London office of Marsh Limited, our Marsh and Guy Carpenter operating subsidiary in the United Kingdom. The FCA indicated that it had reasonable grounds for suspecting that Marsh Limited and other participants in the market have been sharing competitively sensitive information within the aviation insurance and reinsurance broking sector.
In July 2017, the Directorate-General for Competition of the European Commission and the Irish Competition and Consumer Protection Commission conducted on-site inspections at the offices of Marsh and other brokers in Dublin in connection with an investigation into potential anti-competitive practices in the commercial motor insurance market in the Republic of Ireland.
We are cooperating fully with these investigations and are conducting our own reviews. As these investigations are at early stages, we are unable to predict their likely timing, outcome or ultimate impact. There can be no assurance that the ultimate resolution of these or any related matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
In June 2017, the FCA issued a final report in connection with a market study of the U.K. asset management industry, which includes asset managers and investment consultants, including Mercer. In its report, the FCA indicated it would likely make a market investigation referral with respect to the investment consulting industry to the U.K. Competition & Markets Authority (the "CMA"). The FCA expects to announce a final decision regarding its referral to the CMA in September 2017.
In the ordinary course of business, the Company is also subject to other investigations, subpoenas, lawsuits and 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 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 were 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
June 30, 2017
, 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 the Company 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 the Company anticipates that additional claimants may seek to recover against the letter of credit.
* * * *
The pending proceedings described above and other matters not explicitly described in this Note 14 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages, fines, penalties or 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.
15. Segment Information
The Company is organized based on the types of services provided. Under this structure, the Company’s 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
2016
Form 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
six
-month periods ended
June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In millions)
|
Revenue
|
|
Operating
Income
(Loss)
|
|
Revenue
|
|
Operating
Income
(Loss)
|
2017–
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
1,916
|
|
(a)
|
$
|
528
|
|
|
$
|
3,905
|
|
(c)
|
$
|
1,141
|
|
Consulting
|
1,592
|
|
(b)
|
283
|
|
|
3,118
|
|
(d)
|
524
|
|
Total Operating Segments
|
3,508
|
|
|
811
|
|
|
7,023
|
|
|
1,665
|
|
Corporate / Eliminations
|
(13
|
)
|
|
(47
|
)
|
|
(25
|
)
|
|
(92
|
)
|
Total Consolidated
|
$
|
3,495
|
|
|
$
|
764
|
|
|
$
|
6,998
|
|
|
$
|
1,573
|
|
2016–
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
1,850
|
|
(a)
|
$
|
490
|
|
|
$
|
3,718
|
|
(c)
|
$
|
1,025
|
|
Consulting
|
1,539
|
|
(b)
|
285
|
|
|
3,017
|
|
(d)
|
530
|
|
Total Operating Segments
|
3,389
|
|
|
775
|
|
|
6,735
|
|
|
1,555
|
|
Corporate / Eliminations
|
(13
|
)
|
|
(49
|
)
|
|
(23
|
)
|
|
(96
|
)
|
Total Consolidated
|
$
|
3,376
|
|
|
$
|
726
|
|
|
$
|
6,712
|
|
|
$
|
1,459
|
|
|
|
(a)
|
Includes inter-segment revenue of
$4 million
and
$3 million
in
2017
and
2016
, respectively, interest income on fiduciary funds of
$9 million
and
$6 million
in
2017
and
2016
, respectively, and equity method income of
$7 million
and
$6 million
in
2017
and
2016
, respectively.
|
|
|
(b)
|
Includes inter-segment revenue of
$9 million
and
$10 million
in
2017
and
2016
, respectively, interest income on fiduciary funds of less than
$1 million
in both
2017
and
2016
, and equity method income of
$5 million
in both
2017
and
2016
.
|
|
|
(c)
|
Includes inter-segment revenue of
$4 million
in both
2017
and
2016
, interest income on fiduciary funds of
$17 million
and
$12 million
in
2017
and
2016
, respectively, and equity method income of
$9 million
and
$7 million
in
2017
and
2016
, respectively.
|
|
|
(d)
|
Includes inter-segment revenue of
$21 million
and
$19 million
in
2017
and
2016
, respectively, interest income on fiduciary funds of
$1 million
in both
2017
and
2016
, and equity method income of
$9 million
in both
2017
and
2016
.
|
Details of operating segment revenue for the three and
six
month period ended
June 30, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Risk and Insurance Services
|
|
|
|
|
|
|
|
Marsh
|
$
|
1,621
|
|
|
$
|
1,564
|
|
|
$
|
3,223
|
|
|
$
|
3,057
|
|
Guy Carpenter
|
295
|
|
|
286
|
|
|
682
|
|
|
661
|
|
Total Risk and Insurance Services
|
1,916
|
|
|
1,850
|
|
|
3,905
|
|
|
3,718
|
|
Consulting
|
|
|
|
|
|
|
|
Mercer
|
1,109
|
|
|
1,079
|
|
|
2,186
|
|
|
2,118
|
|
Oliver Wyman Group
|
483
|
|
|
460
|
|
|
932
|
|
|
899
|
|
Total Consulting
|
1,592
|
|
|
1,539
|
|
|
3,118
|
|
|
3,017
|
|
Total Operating Segments
|
3,508
|
|
|
3,389
|
|
|
7,023
|
|
|
6,735
|
|
Corporate
/
Eliminations
|
(13
|
)
|
|
(13
|
)
|
|
(25
|
)
|
|
(23
|
)
|
Total
|
$
|
3,495
|
|
|
$
|
3,376
|
|
|
$
|
6,998
|
|
|
$
|
6,712
|
|
16. New Accounting Guidance
In March 2017, the FASB issued new guidance that changes the presentation of net periodic pension cost and net periodic postretirement cost (''net periodic benefit costs"). The new guidance requires employers to report the service cost component of net periodic benefit costs in the same line item as other compensation costs in the income statement. The other components of net periodic benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. In addition, only the service cost component is eligible for capitalization, when applicable. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The new guidance requires retrospective application for the presentation of the service cost component and the other components of net periodic benefit costs, and prospective application for the capitalization of the service cost component. The adoption of this guidance will impact the presentation of the Company's results of operations, in particular, reducing net operating income, but will have no impact on the Company's net income.
In January 2017, the FASB issued new guidance to simplify the test for goodwill impairment. The new guidance eliminates the second step in the current two-step goodwill impairment process, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill for that reporting unit. The new guidance requires a one-step impairment test, in which the goodwill impairment charge is based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance should be applied on a prospective basis with the nature of and reason for the change in accounting principle disclosed upon transition. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's financial position or results of operations.
In January 2017, the FASB issued guidance which clarifies the definition of a business in order to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted under certain circumstances and the guidance must be applied prospectively as of the beginning of the period of adoption. The Company is currently evaluating the impact, if any, the adoption of this standard will have on its financial position or results of operations.
In November 2016, the FASB issued new guidance which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-
of-period total amounts shown on the statement of cash flows. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance must be applied retrospectively to all periods presented. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company's consolidated balance sheets or consolidated statements of cash flows.
In October 2016, the FASB also issued new guidance which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance eliminates the exception for an intra-entity transfer of an asset other than inventory. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The new guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of this standard will have on its financial position and results of operations.
In August 2016, the FASB issued new guidance which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including cash payments for debt prepayments or debt extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance must be applied retrospectively to all periods presented unless retrospective application is impracticable. Early adoption is permitted. The Company is currently evaluating the impact the guidance will have on its statement of cash flows.
In February 2016, the FASB issued new guidance intended to improve financial reporting for leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease. However, unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the new guidance requires that both types of leases be recognized on the balance sheet. The new guidance will require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, and additional information about the amounts recorded in the financial statements. The accounting by organizations that own the assets ("lessor") leased by the lessee will remain largely unchanged from current GAAP. However, the guidance contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The new guidance on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application will be permitted. The Company is currently evaluating the impact the adoption of the guidance will have on its financial position and results of operations, but expects material "right to use" assets and lease liabilities to be recorded on its consolidated balance sheets.
In January 2016, the FASB issued new guidance intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the guidance on its financial position and results of operations.
New Revenue Recognition Pronouncement
In May 2014, the FASB issued new accounting guidance to clarify the principles for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. To achieve that principle, the entity should apply the following steps: identify the contract(s) with the customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. Entities are permitted to adopt the guidance under one of the following methods: the "full retrospective" method, which applies the guidance to each period presented (prior years restated) or the "modified retrospective" method in which the guidance is only applied to the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings. The Company will adopt the new guidance effective January 1, 2018. The Company is evaluating the transition method it will use, but currently expects to use the modified retrospective method.
The Company continues to evaluate the impact of the new standard. Based on the results of our reviews to date, the Company expects there will be significant movement in the quarterly timing of revenue recognition in the Risk and Insurance Services segment. In particular, in the Company’s reinsurance broking operations recognition of revenue will be accelerated under the new standard. Currently, revenue related to certain reinsurance placements is recognized on the later of billing or effective date as premiums are written and attached to the reinsurance treaties. This typically results in revenue being recognized over a 12 to 24 month period. Under the new guidance, revenue will be recognized largely at the policy effective date, subject to the constraint as defined in the guidance. In the insurance brokerage operations, revenue from commission based arrangements will continue to be recorded at the policy effective date, while the timing of revenue recognition for certain fee based arrangements will shift among quarters. Since the vast majority of our fee arrangements involve contracts that cover a single year of services, the Company does not believe there will be a significant change to the amount of revenue recognized in an annual period once the standard is adopted. The Company is currently evaluating, designing and implementing changes in processes, controls and systems necessary to support the new revenue recognition requirements.
The Company's initial review and preliminary conclusions for the Consulting segment indicate the application of the new standard will not materially change the existing timing of revenue recognition in quarterly or annual periods. The conclusions will be completed following a final review of customer arrangement legal terms and conditions in certain non-U.S. locations.
The Company expects that certain costs that are currently expensed will be capitalized as costs to obtain or costs to fulfill customer contracts under guidance issued as part of the revenue recognition standard. Costs to obtain a contract, generally, would be amortized over the expected life of the underlying customer relationship. However, in many cases, costs to obtain a contract renewal are commensurate with the costs to obtain the initial contract. Those costs would have an amortization period of less than one year, and the Company would expect to use the practical expedient available in the standard and expense such costs as incurred. Any capitalized costs to fulfill a contract would be amortized on a basis consistent with the transfer of services to which they relate. Such expenses related to Risk and Insurance Services would generally be "amortized" over a period of one year or less. The Company is continuing to quantify the amount of such costs that must be deferred. In the Consulting segment, certain implementation expenses that are currently deferred may have a longer amortization period to reflect the amortization over the expected life of the contract including anticipated renewal periods.
The Company has not yet fully quantified the impact of the changes discussed above. However, the Company expects that it will recognize a significant amount of contract assets and/or receivables upon implementation of the standard, related to both the contract assets for capitalized costs to obtain and fulfill contracts, as well as commissions receivable related to reinsurance brokerage activity.
New Accounting Pronouncements Recently Adopted
In October 2016, the FASB issued new guidance which changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the new guidance requires that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interest in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that are under common control with the reporting entity. The adoption of this guidance did not have a significant impact on its financial position, results of operations and statement of cash flows.
In April 2016, the FASB issued new guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance requires that companies record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement and classify excess tax benefits as an operating activity in the statement of cash flows. The Company adopted this new guidance prospectively, effective January 1, 2017 and prior periods have not been adjusted. For the six months ended June 30, 2017, the adoption of this new standard reduced income tax expense in the consolidated statement of income by approximately $
48 million
. For the six months ended June 30, 2016, the Company recorded an excess tax benefit of $
24 million
as an increase to equity in its consolidated balance sheet, which was reflected as cash provided by financing activities in the consolidated statement of cash flows.
In March 2016, the FASB issued new guidance which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The new guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The guidance was adopted on January 1, 2017 and did not have an impact on the Company's financial position or results of operations.