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 ("RIS") segment provides risk management solutions, services, advice 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. Mercer provides consulting expertise, advice, services and solutions in the areas of health, wealth and career consulting services and products. Oliver Wyman provides specialized management and economic and brand consulting services.
On April 1, 2019, the Company completed its previously announced acquisition (the "Transaction") of all of the outstanding shares of Jardine Lloyd Thompson Group plc ("JLT"), a public company organized under the laws of England and Wales. JLT results of operations for the three months ended June 30, 2019 are included in the Company’s results of operations for the second quarter of 2019. Prior periods in 2018 do not reflect JLT’s results of operations and therefore may affect comparability. Prior to being acquired by the Company, JLT operated in
three
segments: Specialty, Reinsurance and Employee Benefits. JLT operated in
41
countries, with significant revenue in the United Kingdom, Pacific, Asia and the United States. As of April 1, 2019, the historical JLT businesses were combined into MMC operations as follows: JLT Specialty was included by geography within Marsh, JLT Reinsurance was included in Guy Carpenter and the majority of JLT's Employee Benefits business was included in Mercer Health and Wealth.
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, 2018
(the "
2018
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, 2019
and
2018
.
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 primarily related to regulatory requirements outside of the United States or as collateral under captive insurance arrangements. At June 30, 2019, the Company maintained
$192 million
compared to
$186 million
at December 31, 2018 related to these regulatory requirements.
Investments
The caption "Investment income" 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 securities, mark-to-market increases or decreases in equity investments with readily determinable fair values and equity method gains or losses on the Company's investments in private equity funds.
The Company holds investments in certain private equity funds that 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 Company recorded net investment income of
$8 million
and
$13 million
for the three and six month periods ended June 30, 2019 compared to net investment income of
$28 million
for both the three and six month periods ended June 30, 2018. The three and six month periods ending June 30, 2019 includes gains of
$3 million
and
$6 million
related to mark-to-market changes in equity securities and gains of
$5 million
and
$7 million
related to investments in private equity funds and other investments. The three and six month periods ending June 30, 2018 include gains of
$26 million
and
$19 million
related to mark-to-market changes in equity securities and
$2 million
and
$9 million
related to investments in private equity funds and other investments.
Leases
Effective January 1, 2019, the Company adopted the new accounting standard related to leases. Under the new standard, a lessee is required to recognize assets and liabilities for its leases with lease terms of more than 12 months. The Company adopted this new standard using the modified retrospective method, which applies the new guidance beginning with the year of adoption, with the cumulative effect of initially applying the standard recognized as an adjustment to retained earnings at January 1, 2019. There was no cumulative-effect adjustment required to be recorded to retained earnings upon transition. Prior period results have not been restated to reflect the adoption of this new standard.
On January 1, 2019, the Company recognized a lease liability of
$1.9 billion
and a corresponding right-of-use asset ("ROU asset") of
$1.7 billion
, including the reclassification of approximately
$200 million
of unamortized lease incentives and restructuring liabilities, upon the adoption of this standard, with minimal impact on the consolidated statement of income.
See Note 12 for further information related to Leases.
Income Taxes
The Company's effective tax rate in the
second
quarter of
2019
was
37.4%
compared with
25.6%
in the
second
quarter of
2018
. The effective tax rates for the first six months of 2019 and 2018 were
28.2%
and
24.7%
, respectively. The rate in the second quarter of 2019 reflects discrete adjustments related to the JLT acquisition, including tax on the disposition of JLT’s aerospace business and nondeductible expenses incurred in connection with the Transaction. Both periods reflect the impact of other discrete tax matters such as excess tax benefits related to share-based compensation, tax legislation, changes in uncertain tax positions, deferred tax adjustments and nontaxable adjustments to contingent acquisition consideration.
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 decreased from
$78 million
at
December 31, 2018
to
$74 million
at
June 30, 2019
due to settlements of audits and expirations of statutes of limitation partially offset by current accruals. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between
zero
and approximately
$10 million
within the next twelve months due to settlements of audits and expirations of statutes of limitation.
Integration and Restructuring Charges
Severance and related costs are recognized based on amounts due under established severance plans or estimates of one-time benefits that will be provided. Typically, severance benefits are recognized when the impacted colleagues are notified of their expected termination and such termination is expected to occur within the legally required notification period. These costs are included in compensation and benefits in the consolidated statements of income.
Costs for real estate consolidation are recognized based on the type of cost, and the expected future use of the facility. For locations where the Company does not expect to sub-lease the property, the amortization of any right of use asset is accelerated from the decision date to the cease use date. For locations where the Company expects to sub-lease the properties subsequent to its vacating the property, the right-of-use asset is reviewed for potential impairment at the earlier of the cease use date or the date a sublease is signed. To determine the amount of impairment, the fair value of the right or use asset is determined based on the present value of the estimated net cash flows related to the property. Contractual costs outside of the right of use asset are recognized based on their
net present value of expected future cash outflows for which the Company will not receive any benefit. Such amounts are reliant on estimates of future sub-lease income to be received and future contractual costs to be incurred. These costs are included in other operating expenses in the consolidated statements of income.
Other costs related to integration and restructuring, such as moving, legal or consulting costs are recognized as incurred. These costs are included in other operating expenses in the consolidated statements of income.
3. Revenue
The core principle of the revenue recognition 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 applies 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.
Other revenue included in the consolidated statements of income that is not from contracts with customers is approximately
1%
of total revenue, and therefore is not presented as a separate line item.
Risk and Insurance Services
Risk and Insurance Services revenue reflects compensation for brokerage and consulting services through commissions and fees. Commission rates and fees vary in amount and can depend upon a number of factors, including the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer selected, and the capacity in which the broker acts and negotiates with clients. For the majority of the insurance and reinsurance brokerage arrangements, advice and services provided which culminate in the placement of an effective policy are considered a single performance obligation. Arrangements with clients may include the placement of a single policy, multiple policies or a combination of policy placements and other services. Consideration related to such "bundled arrangements" is allocated to the individual performance obligations based on their relative fair value. Revenue for policy placement is generally recognized on the policy effective date, at which point control over the services provided by the Company has transferred to the client and the client has accepted the services. The contractual terms for certain fee based brokerage arrangements meet the criteria for revenue recognition over time. For such arrangements, revenue is recognized using output measures, which correspond to the progress toward completing the performance obligation. Fees for non-risk transfer services provided to clients are recognized over time in the period the services are provided, using a proportional performance model, primarily based on input measures. These measures of progress provide a faithful depiction of the progress towards completion of the performance obligation.
Revenue related to reinsurance brokerage for excess of loss ("XOL") treaties is estimated based on contractually specified minimum or deposit premiums, and adjusted as additional evidence of the ultimate amount of brokerage is received. Revenue for quota share treaties is estimated based on indications of estimated premium income provided by the ceding insurer. The estimated brokerage revenue recognized for quota share treaties is constrained to an amount that is probable to not have a significant negative adjustment. The estimated revenue and the constraint are evaluated as additional evidence of the ultimate amount of underlying risks to be covered is received over the
12
to
18
months following the effective date of the placement.
In addition to commissions and fees from its clients, the Company also receives other compensation from insurance companies. This other insurer compensation includes, among other things, payments for consulting and analytics services provided to insurers, fees for administrative and other services provided to or on behalf of insurers (including services relating to the administration and management of quota shares, panels and other facilities in which insurers participate). The Company is also eligible for certain contingent commissions from insurers based on the attainment of specified metrics (i.e., volume and loss ratio measures) relating to Marsh's placements, particularly in Marsh & McLennan Agency ("MMA") and in parts of Marsh's international operations. Revenue for contingent commissions from insurers is estimated based on historical evidence of the achievement of the respective contingent metrics and recorded as the underlying policies that contribute to the achievement of the metric are placed. Due to the uncertainty of the amount of contingent consideration that will be received, the estimated revenue is constrained to an amount that is probable to not have a significant negative adjustment. Contingent consideration is generally received in the first quarter of the subsequent year.
A significant majority of the Company's Risk and Insurance Services revenue is for performance obligations recognized at a point in time. Marsh and Guy Carpenter also receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others.
Insurance brokerage commissions are generally invoiced on the policy effective date. Fee based arrangements generally include a percentage of the total fee due upon signing the arrangement, with additional fixed installments payable over the remainder of the year. Payment terms range from receipt of invoice up to
30
days from invoice date.
Reinsurance brokerage revenue is recognized on the effective date of the treaty. Payment terms depend on the type of reinsurance. For XOL treaties, brokerage revenue is typically collected in four installments during an annual treaty period based on a contractually specified minimum or deposit premium. For proportional or quota share treaties, brokerage is billed as underlying insured risks attach to the reinsurance treaty, generally over
12
to
18
months.
Consulting
The major component of revenue in the Consulting business is fees paid by clients for advice and services. Mercer, principally through its health line of business, also receives revenue in the form of commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily health, life and accident coverages. Revenue for Mercer’s investment management business and certain of Mercer’s defined benefit administration services consists principally of fees based on assets under delegated management or administration.
Consulting projects in Mercer’s wealth and career businesses, as well as consulting projects in Oliver Wyman typically consist of a single performance obligation, which is recognized over time as control is transferred continuously to customers. Typically, revenue is recognized over time using an input measure of time expended to date relative to total estimated time incurred at project completion. Incurred hours represent services rendered and thereby faithfully
depicts the transfer of control to the customer.
On a limited number of engagements, performance fees may also be earned for achieving certain prescribed performance criteria. Revenue for achievement is estimated and constrained to an amount that is probable to not have a significant negative adjustment.
A significant majority of fee revenues in the Consulting segment is recognized over time.
For consulting projects, Mercer generally invoices monthly in arrears with payment due within
30
days of the invoice date. Fees for delegated management services are either deducted from the net asset value of the fund or invoiced to the client on a monthly or quarterly basis in arrears. Oliver Wyman typically bills its clients
30
-
60
days in arrears with payment due upon receipt of the invoice.
Health brokerage and consulting services are components of both Marsh, which includes MMA, and Mercer, with approximately
62%
of such revenues reported in Mercer. Health contracts typically involve a series of distinct services that are treated as a single performance obligation. Revenue for these services is recognized over time based on the amount of remuneration the Company expects to be entitled in exchange for these services. Payments for health brokerage and consulting services are typically paid monthly in arrears from carriers based on insured lives under the contract.
The following schedule disaggregates components of the Company's revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In millions)
|
|
2019
|
|
2019
|
Marsh:
|
|
|
|
|
EMEA
|
|
$
|
652
|
|
|
$
|
1,285
|
|
Asia Pacific
|
|
291
|
|
|
456
|
|
Latin America
|
|
116
|
|
|
194
|
|
Total International
|
|
1,059
|
|
|
1,935
|
|
U.S./Canada
|
|
1,097
|
|
|
1,958
|
|
Total Marsh
|
|
2,156
|
|
|
3,893
|
|
Guy Carpenter
|
|
392
|
|
|
1,055
|
|
Subtotal
|
|
2,548
|
|
|
4,948
|
|
Fiduciary interest income
|
|
26
|
|
|
49
|
|
Total Risk and Insurance Services
|
|
$
|
2,574
|
|
|
$
|
4,997
|
|
Mercer:
|
|
|
|
|
Wealth
|
|
$
|
613
|
|
|
$
|
1,156
|
|
Health
|
|
458
|
|
|
900
|
|
Career
|
|
189
|
|
|
359
|
|
Total Mercer
|
|
1,260
|
|
|
2,415
|
|
Oliver Wyman
|
|
540
|
|
|
1,058
|
|
Total Consulting
|
|
$
|
1,800
|
|
|
$
|
3,473
|
|
The following schedule provides contract assets and contract liabilities information from contracts with customers.
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2019
|
|
January 1, 2019
|
Contract Assets
|
|
$
|
275
|
|
|
$
|
112
|
|
Contract Liabilities
|
|
$
|
641
|
|
|
$
|
545
|
|
The Company records accounts receivable when the right to consideration is unconditional, subject only to the passage of time. Contract assets primarily relate to quota share reinsurance brokerage and contingent insurer revenue. The Company does not have the right to bill and collect revenue for quota share brokerage until the underlying policies written by the ceding insurer attach to the treaty. Estimated revenue related to achievement of volume or loss ratio metrics cannot be billed or collected until all related policy placements are completed and the contingency is resolved. The change in contract assets from
January 1, 2019
to
June 30, 2019
is primarily due to the addition of
$62 million
from JLT,
$282 million
of additions during the period, partly offset by
$176 million
transferred to accounts receivables, as the rights to bill and collect became unconditional. Contract assets are included in other current assets in the Company's consolidated balance sheet. Contract liabilities primarily relate to the advance consideration received from customers. Contract liabilities are included in current liabilities in the Company's consolidated balance sheet. The change in contract liabilities includes cash received for performance obligations not yet fulfilled of
$362 million
,
$47 million
related to JLT's opening balance offset by revenue recognized in the first
six
months of
2019
that was included in the contract liability balance at the beginning of the year of
$307 million
. The amount of revenue recognized in the first
six
months of
2019
from performance obligations satisfied in previous periods, mainly due to variable consideration from contracts with insurers, quota share business and consulting contracts previously considered constrained was
$36 million
.
The Company applies the practical expedient and therefore does not disclose the value of unsatisfied performance obligations for (1) contracts with original contract terms of one year or less and (2) contracts where the Company has the right to invoice for services performed. The revenue expected to be recognized in future periods during the non-cancellable term of existing contracts greater than one year that is related to performance obligations that are unsatisfied or partially satisfied at the end of the reporting period is approximately
$22 million
for Marsh,
$323 million
for Mercer and
$3 million
for Oliver Wyman. The Company expects revenue in 2020, 2021, 2022, 2023 and 2024 and beyond of
$186 million
,
$100 million
,
$43 million
,
$14 million
and
$5 million
, respectively, related to these performance obligations.
4. 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
$26 million
and
$49 million
for the three and six month periods ended
June 30, 2019
, respectively, and
$15 million
and
$28 million
for the three and six month periods ending June 30, 2018, respectively. The Consulting segment recorded fiduciary interest income of
$1 million
and
$2 million
in the three and six month periods ended
June 30, 2019
, respectively, and
$1 million
and
$2 million
in the three and six month periods ending June 30, 2018, 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
$11.0 billion
at
June 30, 2019
and
$7.3 billion
at
December 31, 2018
. 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.
5. 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)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net income before non-controlling interests
|
$
|
344
|
|
|
$
|
536
|
|
|
$
|
1,071
|
|
|
$
|
1,232
|
|
Less: Net income attributable to non-controlling interests
|
12
|
|
|
5
|
|
|
23
|
|
|
11
|
|
Net income attributable to the Company
|
$
|
332
|
|
|
$
|
531
|
|
|
$
|
1,048
|
|
|
$
|
1,221
|
|
Basic weighted average common shares outstanding
|
507
|
|
|
507
|
|
|
506
|
|
|
507
|
|
Dilutive effect of potentially issuable common shares
|
5
|
|
|
5
|
|
|
5
|
|
|
6
|
|
Diluted weighted average common shares outstanding
|
512
|
|
|
512
|
|
|
511
|
|
|
513
|
|
Average stock price used to calculate common stock equivalents
|
$
|
95.74
|
|
|
$
|
81.64
|
|
|
$
|
92.14
|
|
|
$
|
82.24
|
|
6. 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, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
(In millions)
|
2019
|
|
|
2018
|
|
Assets acquired, excluding cash
|
$
|
8,593
|
|
|
$
|
204
|
|
Liabilities assumed
|
(2,718
|
)
|
|
(28
|
)
|
Non-controlling interests assumed
|
(309
|
)
|
|
—
|
|
Contingent/deferred purchase consideration
|
(66
|
)
|
|
(32
|
)
|
Net cash outflow for current year acquisitions
|
$
|
5,500
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2019
|
|
|
2018
|
|
Interest paid
|
$
|
141
|
|
|
$
|
107
|
|
Income taxes paid, net of refunds
|
$
|
327
|
|
|
$
|
349
|
|
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
$39 million
for the
six
months ended
June 30, 2019
. This consisted of deferred purchase consideration related to prior years' acquisitions of
$23 million
and contingent consideration of
$16 million
. For the six months ended
June 30, 2018
, the Company paid deferred and contingent consideration of
$85 million
, consisting of deferred purchase consideration related to prior years' acquisitions of
$53 million
and contingent consideration of
$32 million
.
The following amounts are included in the operating section of the consolidated statements of cash flows. For the
six
months ended
June 30, 2019
, the Company recorded an expense for adjustments to contingent consideration liabilities of
$20 million
and made contingent consideration payments of
$29 million
. For the
six
months ended
June 30, 2018
, the Company recorded an expense for adjustments to contingent consideration liabilities of
$11 million
and made contingent consideration payments of
$9 million
.
The Company had non-cash issuances of common stock under its share-based payment plan of
$162 million
and
$128 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. The Company recorded stock-based compensation expense for equity awards related to restricted stock units, performance stock units and stock options of
$117 million
and
$99 million
for the
six
-month periods ended
June 30, 2019
and
2018
, respectively.
Effective January 1, 2019, the Company adopted the new accounting guidance related to leases, which requires a lessee to recognize assets and liabilities for its leases. Upon adoption of this accounting standard, the Company recorded a non cash Right-of-Use Asset ("ROU asset") of
$1.7 billion
and lease liability of
$1.9 billion
during the first quarter of 2019.
7. 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, 2019
and
2018
, including amounts reclassified out of AOCI, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains (Losses)
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of April 1, 2019
|
$
|
—
|
|
|
$
|
(2,990
|
)
|
|
$
|
(1,600
|
)
|
|
$
|
(4,590
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
29
|
|
|
15
|
|
|
44
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
19
|
|
|
—
|
|
|
19
|
|
Net current period other comprehensive income
|
—
|
|
|
48
|
|
|
15
|
|
|
63
|
|
Balance as of June 30, 2019
|
$
|
—
|
|
|
$
|
(2,942
|
)
|
|
$
|
(1,585
|
)
|
|
$
|
(4,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains (Losses)
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of April 1, 2018
|
$
|
—
|
|
|
$
|
(2,963
|
)
|
|
$
|
(942
|
)
|
|
$
|
(3,905
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
129
|
|
|
(516
|
)
|
|
(387
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
27
|
|
|
—
|
|
|
27
|
|
Net current period other comprehensive income (loss)
|
—
|
|
|
156
|
|
|
(516
|
)
|
|
(360
|
)
|
Balance as of June 30, 2018
|
$
|
—
|
|
|
$
|
(2,807
|
)
|
|
$
|
(1,458
|
)
|
|
$
|
(4,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains (Losses)
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of December 31, 2018
|
$
|
—
|
|
|
$
|
(2,953
|
)
|
|
$
|
(1,694
|
)
|
|
$
|
(4,647
|
)
|
Other comprehensive (loss) income before reclassifications
|
—
|
|
|
(30
|
)
|
|
109
|
|
|
79
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
41
|
|
|
—
|
|
|
41
|
|
Net current period other comprehensive income
|
—
|
|
|
11
|
|
|
109
|
|
|
120
|
|
Balance as of June 30, 2019
|
$
|
—
|
|
|
$
|
(2,942
|
)
|
|
$
|
(1,585
|
)
|
|
$
|
(4,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unrealized Investment Gains (Losses)
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
Balance as of December 31, 2017
|
$
|
14
|
|
|
$
|
(2,892
|
)
|
|
$
|
(1,165
|
)
|
|
$
|
(4,043
|
)
|
Cumulative effect of amended accounting standard
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
29
|
|
|
(293
|
)
|
|
(264
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
56
|
|
|
—
|
|
|
56
|
|
Net current period other comprehensive income (loss)
|
—
|
|
|
85
|
|
|
(293
|
)
|
|
(208
|
)
|
Balance as of June 30, 2018
|
$
|
—
|
|
|
$
|
(2,807
|
)
|
|
$
|
(1,458
|
)
|
|
$
|
(4,265
|
)
|
The components of other comprehensive income (loss) for the
three
and
six
-month period ended
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
(In millions)
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
Foreign currency translation adjustments
|
|
$
|
13
|
|
$
|
(2
|
)
|
$
|
15
|
|
|
$
|
(529
|
)
|
$
|
(13
|
)
|
$
|
(516
|
)
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
|
Amortization of (gains) losses included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
Prior service credits (a)
|
|
—
|
|
—
|
|
—
|
|
|
(1
|
)
|
—
|
|
(1
|
)
|
Net actuarial losses (a)
|
|
26
|
|
6
|
|
20
|
|
|
37
|
|
9
|
|
28
|
|
Effect of remeasurement (a)
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|
—
|
|
—
|
|
—
|
|
Subtotal
|
|
25
|
|
6
|
|
19
|
|
|
36
|
|
9
|
|
27
|
|
Foreign currency translation adjustments
|
|
38
|
|
9
|
|
29
|
|
|
156
|
|
27
|
|
129
|
|
Pension/post-retirement plans gains
|
|
63
|
|
15
|
|
48
|
|
|
192
|
|
36
|
|
156
|
|
Other comprehensive income (loss)
|
|
$
|
76
|
|
$
|
13
|
|
$
|
63
|
|
|
$
|
(337
|
)
|
$
|
23
|
|
$
|
(360
|
)
|
(a) Components of net periodic pension cost are included in other net benefit credits in the consolidated statements of income. Income tax expense on net actuarial losses are included in income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
2019
|
|
2018
|
(In millions)
|
Pre-Tax
|
Tax
(Credit)
|
Net of Tax
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
Foreign currency translation adjustments
|
$
|
109
|
|
$
|
—
|
|
$
|
109
|
|
|
$
|
(301
|
)
|
$
|
(8
|
)
|
$
|
(293
|
)
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
Amortization of (gains) losses included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
Prior service credits (a)
|
(1
|
)
|
—
|
|
(1
|
)
|
|
(2
|
)
|
—
|
|
(2
|
)
|
Net actuarial losses (a)
|
52
|
|
12
|
|
40
|
|
|
74
|
|
16
|
|
58
|
|
Effect of remeasurement (a)
|
(1
|
)
|
—
|
|
(1
|
)
|
|
—
|
|
—
|
|
—
|
|
Effect of settlement (a)
|
4
|
|
1
|
|
3
|
|
|
—
|
|
—
|
|
—
|
|
Subtotal
|
54
|
|
13
|
|
41
|
|
|
72
|
|
16
|
|
56
|
|
Foreign currency translation adjustments
|
(34
|
)
|
(4
|
)
|
(30
|
)
|
|
36
|
|
7
|
|
29
|
|
Pension/post-retirement plans gains
|
20
|
|
9
|
|
11
|
|
|
108
|
|
23
|
|
85
|
|
Other comprehensive income (loss)
|
$
|
129
|
|
$
|
9
|
|
$
|
120
|
|
|
$
|
(193
|
)
|
$
|
15
|
|
$
|
(208
|
)
|
(a) Components of net periodic pension cost are included in other net benefit credits in the consolidated statements of income. Income tax expense on net actuarial losses are included in income tax expense.
|
8. Acquisitions and Dispositions
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 values of the net tangible assets and the identifiable intangible assets purchased, which typically consist of customer relationships, developed technology, trademarks and non-compete agreements. The valuation of purchased intangible assets involves significant estimates and assumptions. Refinement and completion of final valuation of net assets acquired could affect the carrying value of tangible assets, goodwill and identifiable intangible assets.
On April 1, 2019, the Company completed the JLT Transaction to purchase all of the outstanding shares of JLT. Under the terms of the Transaction, JLT shareholders received
£19.15
in cash for each JLT share, which valued JLT’s existing issued and to be issued share capital at approximately
£4.3 billion
(or approximately
$5.6 billion
based on an exchange rate of U.S.
$1.31
:
£1
), and the Company assumed existing JLT long-term indebtedness of approximately
$1 billion
. The Company implemented the Transaction by way of a scheme of arrangement under Part 26 of the United Kingdom Companies Act 2006, as amended.
The Company believes the Transaction strengthens MMC’s leadership position in insurance and reinsurance broking, health and retirement. The addition of over
10,000
colleagues provides deeper industry expertise in almost every part of the Company. The Transaction also builds on MMC’s efforts to expand in faster-growing geographies and market segments, and facilitates investment in data and analytics.
The Risk and Insurance Services segment completed
four
acquisitions during the first six months of 2019.
|
|
•
|
February – MMA acquired Bouchard Insurance, Inc., a Florida-based full service agency and Employee Benefits Group, Inc., a Maryland-based independent insurance agency.
|
|
|
•
|
April – MMA acquired Lovitt & Touche, Inc., an Arizona-based insurance agency and The Centurion Group, LLC, a Pennsylvania-based retirement consulting, asset management and benefit plan advisory firm.
|
Total purchase consideration for acquisitions made during the
six
months ended
June 30, 2019
was
$5,925 million
, which consisted of cash paid of
$5,859 million
and deferred purchase consideration and estimated contingent consideration of
$66 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
$23 million
of deferred purchase consideration and
$45 million
of contingent consideration related to acquisitions made in prior years.
The following table presents the preliminary allocation of purchase consideration to the assets acquired and liabilities assumed during
2019
based on the estimated fair values for JLT and other acquisitions as of their respective acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
Acquisitions through June 30, 2019
|
|
|
|
(In millions)
|
JLT
|
Other
|
Total Acquisitions
|
Cash
|
$
|
5,568
|
|
$
|
291
|
|
$
|
5,859
|
|
Estimated fair value of deferred/contingent consideration
|
—
|
|
66
|
|
66
|
|
Total consideration
|
$
|
5,568
|
|
$
|
357
|
|
$
|
5,925
|
|
Allocation of purchase price:
|
|
|
|
Cash and cash equivalents
|
$
|
353
|
|
$
|
6
|
|
$
|
359
|
|
Accounts receivable, net
|
714
|
|
6
|
|
720
|
|
Other current assets
|
143
|
|
—
|
|
143
|
|
Fixed assets, net
|
81
|
|
2
|
|
83
|
|
Other intangible assets
|
1,662
|
|
143
|
|
1,805
|
|
Goodwill
|
4,695
|
|
200
|
|
4,895
|
|
Right of use assets
|
379
|
|
—
|
|
379
|
|
Deferred tax assets
|
57
|
|
—
|
|
57
|
|
Other assets
|
503
|
|
8
|
|
511
|
|
Total assets acquired
|
8,587
|
|
365
|
|
8,952
|
|
Current liabilities
|
699
|
|
5
|
|
704
|
|
Fiduciary liabilities
|
1,275
|
|
—
|
|
1,275
|
|
Less- fiduciary assets
|
(1,275
|
)
|
—
|
|
(1,275
|
)
|
Long-term debt
|
1,044
|
|
—
|
|
1,044
|
|
Long-term lease liability
|
386
|
|
—
|
|
386
|
|
Pension, post-retirement and post-employment liabilities
|
234
|
|
—
|
|
234
|
|
Liabilities for errors and omissions
|
31
|
|
—
|
|
31
|
|
Other liabilities
|
316
|
|
3
|
|
319
|
|
Total liabilities assumed
|
2,710
|
|
8
|
|
2,718
|
|
Non controlling interests
|
309
|
|
—
|
|
309
|
|
Net assets acquired
|
$
|
5,568
|
|
$
|
357
|
|
$
|
5,925
|
|
The purchase price allocation above is based on estimates that are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments must be finalized within one year of the acquisition date. Items subject to change include the following:
|
|
•
|
Amounts of intangible assets, fixed assets, capitalized software assets and right-of use-assets, subject to finalization of valuation efforts;
|
|
|
•
|
Amounts for contingencies, pending the finalization of the Company’s assessment of the portfolio of contingencies;
|
|
|
•
|
Amounts for income tax assets, receivables and liabilities, pending the filing of the acquired companies' pre-acquisition income tax returns and receipt of information from taxing authorities which may change certain estimates and assumptions used; and
|
|
|
•
|
Amounts for deferred tax assets and liabilities pending the finalization of valuations of the assets acquired, liabilities assumed and associated goodwill.
|
The estimation of fair value requires numerous judgments, assumptions and estimates about future events and uncertainties, which could materially impact these values, and the related amortization, where applicable, in the Company’s results of operations.
The following chart provides information about intangible assets acquired during
2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets through June 30, 2019
(In millions)
|
|
JLT
|
|
Other
|
|
Total
|
|
JLT Weighted Average Amortization Period
|
|
Other Weighted Average Amortization Period
|
Client relationships
|
|
$
|
1,566
|
|
|
$
|
136
|
|
|
$
|
1,702
|
|
|
13 years
|
|
12 years
|
Other
|
|
96
|
|
|
7
|
|
|
103
|
|
|
5 years
|
|
3 years
|
|
|
$
|
1,662
|
|
|
$
|
143
|
|
|
$
|
1,805
|
|
|
|
|
|
During the second quarter of 2019, the Company purchased the outstanding minority interests of several former JLT subsidiaries.
In January 2019, Marsh increased its equity ownership in Marsh India from
26%
to
49%
. Marsh India is accounted for under the equity method.
Dispositions
On June 1, 2019, the Company completed the disposition of JLT’s global aerospace business for cash proceeds of
$165 million
and contingent consideration receivable of approximately
$65 million
, based on the aerospace business achieving certain revenue milestones in 2020. The aerospace business was divested as part of the European Commission's approval of the JLT Transaction.
Prior-Year Acquisitions
The Risk and Insurance Services segment completed
twelve
acquisitions during
2018
.
|
|
•
|
February – MMA acquired Highsmith Insurance Agency, a North Carolina-based independent insurance brokerage firm.
|
|
|
•
|
March – Marsh acquired Hoken Soken, Inc., a Japan-based insurance agency.
|
|
|
•
|
May – Marsh acquired Mountlodge Limited, a Scotland-based independent insurance broker and Lorant Martínez Salas y Compañía Agente de Seguros y de Fianzas, S.A. de C.V., a Mexico-based multi-line insurance broker.
|
|
|
•
|
June – MMA acquired Bleakley Insurance Services, a California-based provider of employee benefits solutions; Klein Agency, Inc., a Minnesota-based surety and property/casualty agency; and Insurance Associates, Inc., a Maryland-based independent insurance agency.
|
|
|
•
|
August – Marsh acquired John L. Wortham & Son, L.P., a Houston-based independent insurance broker.
|
|
|
•
|
October – MMA acquired Eustis Insurance, Inc., a Louisiana-based insurance agency.
|
|
|
•
|
November – MMA acquired James P. Murphy & Associates, Inc., a Connecticut-based insurance agency.
|
|
|
•
|
December – MMA acquired Otis-Magie Insurance Agency, Inc., a Minnesota-based insurance agency, and Marsh acquired Hector Insurance PCC Ltd, a U.K.-based captive management company.
|
The Consulting segment completed
eight
acquisitions during
2018
.
|
|
•
|
January – Oliver Wyman acquired Draw Ltd., a U.K.-based digital transformation agency.
|
|
|
•
|
March – Oliver Wyman acquired 8Works Limited, a U.K.-based design thinking consultancy.
|
|
|
•
|
May – Mercer acquired EverBe SAS, a France-based Workday implementer and advisory firm; and Evolve Intelligence Pty Ltd., an Australia-based talent strategy firm.
|
|
|
•
|
June – Mercer acquired India Life Capital Private Ltd., an India-based investment advisor.
|
|
|
•
|
November – Mercer acquired Induslynk Training Services Private Ltd., an India-based talent assessment company, Pavilion Financial Corp., a Canada-based investment services firm and Summit Strategies Inc., a Missouri-based investment consulting firm.
|
Total purchase consideration for acquisitions made during the first six months of
2018
was
$192 million
, which consisted of cash paid of
$160 million
and deferred purchase consideration and estimated contingent consideration of
$32 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 EBITDA of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. For the first six months of 2018, the Company also paid
$53 million
of deferred purchase consideration and
$41 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 2019 and 2018. 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, 2018 and reflects acquisitions made in 2018 as if they occurred on January 1, 2017. The unaudited pro-forma information adjusts for the effects of amortization of acquired intangibles and additional interest expense related to the issuance of debt related to the JLT Transaction. 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)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
$
|
4,346
|
|
|
$
|
4,339
|
|
|
$
|
8,863
|
|
|
$
|
8,902
|
|
Net income attributable to the Company
|
$
|
463
|
|
|
$
|
513
|
|
|
$
|
1,134
|
|
|
$
|
626
|
|
Basic net income per share attributable to the Company
|
$
|
0.91
|
|
|
$
|
1.01
|
|
|
$
|
2.24
|
|
|
$
|
1.23
|
|
Diluted net income per share attributable to the Company
|
$
|
0.90
|
|
|
$
|
1.00
|
|
|
$
|
2.22
|
|
|
$
|
1.22
|
|
The unaudited pro-forma information presented in the table above includes adjustments for acquisition related costs, the change in fair value of JLT acquisition related derivatives, bridge financing costs and the early extinguishment of debt:
|
|
•
|
A reduction of costs of
$151 million
for the three months ended June 30, 2019
|
|
|
•
|
An increase in costs of
$658 million
for the six month period ended June 30, 2018. Of this amount,
$169 million
represented a reduction of costs for the six months ended June 30, 2019, and the remainder was incurred in the third and fourth quarter of 2018.
|
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, 2019
include approximately
$486 million
and
$496 million
of revenue, respectively, and operating income of
$16 million
and
$18 million
, respectively, for acquisitions made in 2019. The consolidated statements of income for the three and six month periods ended June 30, 2018 included
$11 million
and
$14 million
, respectively, of revenue and operating losses of
$1 million
and
$2 million
, respectively, related to acquisitions made in 2018.
The Company incurred acquisition related costs, primarily related to legal, investment banking and U.K. stamp duty tax of
$84 million
and
$95 million
for the three and six month periods ended June 30, 2019, primarily related to the acquisition of JLT. These costs are included in other operating expenses in the Company's consolidated statement of income.
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 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. As part of its assessment, the Company considers numerous factors, including that the fair value of each reporting unit exceeds its carrying value by a substantial margin based on its most recent estimates, 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 2018 and concluded that a two-step goodwill impairment test was not required in 2018 and that goodwill was not impaired. There were no events or circumstances since our last qualitative assessment in the third quarter of 2018 that would indicate a goodwill impairment.
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:
|
|
|
|
|
|
|
|
|
June 30
,
|
|
|
|
(In millions)
|
2019
|
|
|
2018
|
|
Balance as of January 1,
|
$
|
9,599
|
|
|
$
|
9,089
|
|
Goodwill acquired
(a)
|
4,895
|
|
|
116
|
|
Other adjustments
(b)
|
(15
|
)
|
|
(28
|
)
|
Balance at June 30,
|
$
|
14,479
|
|
|
$
|
9,177
|
|
(a)
Primarily reflects the acquisition of JLT in 2019 of
$4.7 billion
.
(b)
Primarily reflects the impact of foreign exchange.
Of total goodwill acquired of
$4.9 billion
in
2019
,
$200 million
related to the Risk and Insurance Services segment is deductible for tax purposes. All of the goodwill arising from the acquisitions consist largely of the synergies and economies of scale expected from combining the operations of the Company and the acquired entities. The goodwill acquired was primarily assigned to the Risk and Insurance Services segment.
Goodwill allocable to the Company’s reportable segments at
June 30, 2019
is as follows: Risk and Insurance Services,
$11.6 billion
and Consulting,
$2.9 billion
.
The gross cost and accumulated amortization of identified intangible assets at
June 30, 2019
and
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
(In millions)
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Client Relationships
|
$
|
3,664
|
|
|
$
|
765
|
|
|
$
|
2,899
|
|
|
$
|
1,970
|
|
|
$
|
639
|
|
|
$
|
1,331
|
|
Other
(a)
|
365
|
|
|
181
|
|
|
184
|
|
|
259
|
|
|
153
|
|
|
106
|
|
Amortized intangibles
|
$
|
4,029
|
|
|
$
|
946
|
|
|
$
|
3,083
|
|
|
$
|
2,229
|
|
|
$
|
792
|
|
|
$
|
1,437
|
|
(a)
Primarily non-compete agreements, trade names and developed technology.
Aggregate amortization expense for the
six
months ended
June 30, 2019
and
2018
was
$151 million
and
$88 million
, respectively. The estimated future aggregate amortization expense is as follows:
|
|
|
|
|
For the Years Ending December 31,
|
|
(In millions)
|
Estimated Expense
|
|
2019 (excludes amortization through June 30, 2019)
|
$
|
194
|
|
2020
|
371
|
|
2021
|
359
|
|
2022
|
345
|
|
2023
|
336
|
|
Subsequent years
|
1,478
|
|
|
$
|
3,083
|
|
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 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).
|
Assets and liabilities using Level 2 inputs include treasury locks and an equity security.
|
|
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.
|
Assets and liabilities measured using Level 3 inputs include assets and liabilities for contingent purchase consideration and the deal contingent foreign exchange contract (the "FX Contract").
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
.
Treasury Locks - Level 2
In connection with the JLT Transaction, to hedge the risk of increases in future interest rates prior to its issuance of fixed rate debt, in the fourth quarter of 2018 the Company entered into treasury locks related to
$2 billion
of expected issuances of senior notes in January 2019. The fair value at December 31, 2018 was based on the published treasury rate plus forward premium as of December 31, 2018, compared to the all in rate at the inception of the contract. These treasury locks were settled during the first quarter of 2019.
Contingent Purchase Consideration Assets and Liability – Level 3
Purchase consideration for some acquisitions and dispositions made by the Company include 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 asset and 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 and disposed entities.
Foreign Exchange Forward Contract Liabilities - Level 3
In connection with the JLT Transaction, the Company entered into the FX Contract, to hedge the risk of appreciation of the GBP-denominated purchase price. The Company settled the FX Contract on April 1, 2019, upon completion of the JLT Transaction.
The fair value at December 31, 2018 was determined using the probability distribution approach, comparing the all in forward rate to the foreign exchange rate for possible dates the JLT Transaction could close, discounted to the valuation date and adjusted for the fair value of the deal contingency feature. Determining the fair value of the FX Contract required significant management judgments or estimates about the potential closing dates of the transaction and remaining value of the deal contingency feature.
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, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets
(Level 1)
|
|
Observable Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
(In millions)
|
06/30/19
|
|
|
12/31/18
|
|
|
06/30/19
|
|
|
12/31/18
|
|
|
06/30/19
|
|
|
12/31/18
|
|
|
06/30/19
|
|
|
12/31/18
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded equity securities
(a)
|
$
|
4
|
|
|
$
|
133
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
133
|
|
Mutual funds
(a)
|
153
|
|
|
151
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
153
|
|
|
151
|
|
Money market funds
(b)
|
71
|
|
|
118
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
118
|
|
Other equity investment
(a)
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
Contingent purchase consideration asset
(a)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65
|
|
|
—
|
|
|
65
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
228
|
|
|
$
|
402
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
301
|
|
|
$
|
410
|
|
Fiduciary Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20
|
|
Money market funds
|
347
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
347
|
|
|
80
|
|
Total fiduciary assets measured
at fair value
|
$
|
347
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
347
|
|
|
$
|
100
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase
consideration liability
(c)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196
|
|
|
$
|
183
|
|
|
$
|
196
|
|
|
$
|
183
|
|
Acquisition related derivative contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
116
|
|
|
—
|
|
|
325
|
|
|
—
|
|
|
441
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
116
|
|
|
$
|
196
|
|
|
$
|
508
|
|
|
$
|
196
|
|
|
$
|
624
|
|
(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.
The contingent purchase consideration of
$65 million
related to the JLT Transaction is classified as a Level 3 asset.
During the
six
-month period ended
June 30, 2019
, 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 for the three and six month periods ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
2018
|
|
Balance at beginning of period,
|
$
|
454
|
|
|
$
|
161
|
|
|
$
|
508
|
|
$
|
189
|
|
Additions
|
29
|
|
|
20
|
|
|
40
|
|
26
|
|
Payments
|
(10
|
)
|
|
(1
|
)
|
|
(45
|
)
|
(41
|
)
|
Revaluation Impact
|
9
|
|
|
6
|
|
|
20
|
|
11
|
|
Change in fair value of the FX contract
|
(283
|
)
|
|
—
|
|
|
(325
|
)
|
—
|
|
Other
(a)
|
(3
|
)
|
|
(1
|
)
|
|
(2
|
)
|
—
|
|
Balance at June 30,
|
$
|
196
|
|
|
$
|
185
|
|
|
$
|
196
|
|
$
|
185
|
|
(a)
Primarily reflects the impact of foreign exchange.
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
$20 million
in the
six
-month period ended
June 30, 2019
. A
5%
increase in the projections used to estimate the contingent consideration would increase the liability by approximately
$45 million
. A
5%
decrease would decrease the liability by approximately
$36 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
$439 million
and
$287 million
at
June 30, 2019
and December 31,
2018
, respectively.
Investments Accounted For Using the Equity Method of Accounting
Investments in Public and Private Companies
Alexander Forbes
:
The Company owns approximately
33%
of the common stock of Alexander Forbes ("AF"), a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for
7.50
South African Rand per share. In the third quarter of 2018, the Company concluded the decline in value of the investment was other than temporary and recorded an impairment charge of
$83 million
. As of June 30, 2019, the carrying value of the Company's investment in AF was approximately
$140 million
. As of June 30, 2019, the market value of the approximately
443 million
shares of AF owned by the Company, based on the June 30, 2019 closing share price of
5.79
South African Rand per share, was
$179 million
.
The Company has other investments in private insurance and consulting companies with a carrying value of
$219 million
and
$61 million
at June 30, 2019 and December 31, 2018, respectively.
The Company’s investment in Alexander Forbes and its other equity investments in 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, some of which on a one quarter lag basis.
Private Equity Investments
The Company's investments in private equity funds were
$79 million
and
$82 million
at
June 30, 2019
and December 31,
2018
, 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 its proportionate share of the change in fair value of the funds on the investment income line in the consolidated statements of income. These investments are included in other assets in the consolidated balance sheets. The Company recorded net investment income of
$5 million
and
$7 million
from these investments for the three and six month periods ended June 30, 2019, respectively, compared to net investment gains of
$2 million
and
$9 million
for the same periods in 2018.
Other Investments
At June 30, 2019 and December 31, 2018, the Company held certain equity investments with readily determinable market values of
$18 million
and
$146 million
, respectively. The Company recorded investment gains on these investments of
$3 million
and
$6 million
in the three and six month periods ended June 30, 2019, respectively, and investment gains of
$26 million
and
$19 million
for the same periods in 2018. The Company also held investments without readily determinable market values of
$43 million
and
$75 million
at June 30, 2019 and December 31, 2018, respectively. In March 2019, the Company disposed of its investment in BenefitFocus for total proceeds of approximately
$132 million
. The Company received
$115 million
in the first quarter of 2019 and
$17 million
in April 2019 as final settlement on the sale. During the second quarter of 2019, the Company disposed of its investment in Payscale and received proceeds of approximately
$47 million
.
11. Derivatives
On September 20, 2018, the Company entered into the FX Contract to purchase
£5.2 billion
at a contracted exchange rate, to hedge the risk of appreciation of the GBP-denominated purchase price of JLT, which was settled on April 1, 2019, upon the closing of the JLT Transaction. The FX Contract did not qualify for hedge accounting treatment under applicable accounting guidance, which required the Company to record the change in the fair value of the FX Contract on each reporting date to the statement of income. A loss of
$11 million
was recorded in the second quarter of 2019 related to the settlement of the FX contract. The Company recorded a gain of
$31 million
related to the FX Contract for the six month period ended June 30, 2019.
In connection with the JLT Transaction, to hedge the economic risk of changes in future interest rates prior to its issuance of fixed rate debt, in the fourth quarter of 2018 the Company entered into treasury lock contracts related to
$2 billion
of senior notes issued in January 2019. The fair value at December 31, 2018 was based on the published treasury rate plus forward premium as of December 31, 2018 compared to the all in rate at the inception of the contract. The contracts were not designated as an accounting hedge. The Company recorded an unrealized loss of
$116 million
related to the change in the fair value of this derivative in the consolidated statement of income for the full year ended December 31, 2018. In January 2019, upon issuance of the
$5 billion
of senior notes, the Company settled the treasury lock derivatives and made a payment to its counter party for
$122 million
. An additional charge of
$6 million
was recorded in the first quarter of 2019 related to the settlement of the Treasury lock contracts.
In March 2019, the Company issued
€1.1 billion
of senior notes related to the JLT Transaction. See Note 14 for additional information related to the Euro senior note issuances. In connection with the senior note issuances, the Company entered into a forward exchange contract to hedge the economic risk of changes in foreign exchange rates from the issuance date to settlement date of the Euro senior notes. The Company recorded a charge of
$7.3 million
in the first quarter of 2019, reflecting the settlement of this contract.
JLT Derivatives and Hedging Activity
A significant portion of JLT's outstanding senior notes at the time of completion of the Transaction were denominated in U.S. dollars. In order to hedge its exposure against the risk of fluctuations between the GBP and the U.S. dollar, JLT entered into foreign exchange contracts and interest rate swaps, which were designated as fair value hedges. In June, 2019, the Company redeemed these U.S. dollar denominated senior notes and settled the related derivative contracts. The offsetting changes in fair value of the debt and the change in fair value of the derivative contracts were recorded in the consolidated statement of income for the three months ended June 30, 2019.
JLT also had a number of foreign exchange contracts to hedge the risk of foreign exchange movements between the U.S. dollar and the British pound, related to JLT’s U.S. dollar denominated revenue in the U.K. Prior to the acquisition, these derivative contracts were designated as cash flow hedges. Upon completion of the JLT Transaction, these derivative contracts were not re-designated as cash flow hedges by the Company. The contracts were settled in June 2019. The change in fair value between the acquisition date and the settlement date resulted in a charge of
$26 million
in the second quarter of 2019. The charge is recorded as a change in fair value of acquisition related derivative contracts in the consolidated statement of income.
Net Investment Hedge
The Company has investments in various subsidiaries with Euro functional currencies. As a result, the Company is exposed to the risk of fluctuations between the Euro and U.S. dollar exchange rates. The Company designated its
€1.1 billion
senior note debt instruments ("euro notes") as a net investment hedge of its Euro denominated subsidiaries. The hedge will be re-assessed each quarter to confirm that the designated equity balance at the beginning of each period continues to equal or exceed
80%
of the outstanding balance of the Euro debt instrument and that all the critical terms of the hedging instrument and the hedged net investment continue to match. If the C
ompany concludes that the hedge is highly effective, the change in the debt balance related to foreign exchange fluctuations will be recorded in accumulated other comprehensive income (loss) in the consolidated balance sheet. The U.S. dollar value of the euro notes decreased
$9 million
at June 30, 2019 compared to March 31, 2019 due to the impact of foreign exchange rates. Since the Company concluded that the hedge was highly effective for the quarter ended June 30, 2019, the Company recorded an increase of
$9 million
to cumulative translation adjustments for the six months ended June 30, 2019.
12. Leases
A lease is defined as a party obtaining the right to use an asset legally owned by another party. The Company determines if an arrangement is a lease at inception. For operating leases entered into prior to January 1, 2019, the ROU assets and operating lease liabilities are recognized in the balance sheet based on the present value of the remaining future minimum payments over the lease term from the implementation date of the standard, January 1, 2019. The ROU asset was adjusted for unamortized lease incentives and restructuring liabilities that were reported, prior to January 1, 2019, as other liabilities in the consolidated balance sheet. For leases entered into subsequent to January 1, 2019, the operating lease ROU asset and operating lease liabilities are based on the present value of minimum payments over the lease term at commencement date of the lease.
The Company uses discount rates to determine the present value of future lease payments. The Company primarily uses its incremental borrowing rate adjusted to reflect a secured rate, based on the information available for leases, including the lease term and interest rate environment in the country in which the lease exists. The lease terms used to calculate the ROU asset and lease liability may include options to extend or terminate when it is reasonably certain that the Company will exercise that option.
The Company leases office facilities under non-cancelable operating leases with terms generally ranging between
10
and
25
years. The Company utilizes these leased office facilities for use by its employees in countries in which the Company conducts its business. Leases are negotiated with third-parties and, in some instances contain renewal, expansion and termination options. The Company also subleases certain office facilities to third-parties when the Company no longer intends to utilize the space. None of the Company’s leases restrict the payment of dividends or the incurrence of debt or additional lease obligations, or contain significant purchase options. In addition to the base rental costs, our lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. A portion of our real estate lease portfolio contains base rents subject to annual changes in the Consumer Price Index ("CPI") as well as charges for operating expenses which are reimbursable to the landlord based on actual usage. Changes to the CPI and payments for such reimbursable operating expenses are considered variable and are recognized as variable lease costs in the period in which the obligation for those payments was incurred.
As a practical expedient, the Company has elected an accounting policy not to separate non-lease components from lease components and instead, accounts for these components as a single lease component. The Company has made an accounting policy election not to recognize ROU assets and lease liabilities for leases that, at the commencement date, are for 12 months or less. Approximately
98%
of the Company’s lease obligations are for the use of office space. All of the Company’s material leases are operating leases.
The following chart provides additional information about the Company’s property leases:
|
|
|
|
|
|
|
|
For the Three and Six Months Ended June 30, 2019
(In millions)
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
Lease Cost:
|
|
|
Operating lease cost
|
$
|
100
|
|
$
|
182
|
|
Short-term lease cost
|
2
|
|
3
|
|
Variable lease cost
|
39
|
|
76
|
|
Sublease income
|
(4
|
)
|
(8
|
)
|
Net lease cost
|
$
|
137
|
|
$
|
253
|
|
Other information:
|
|
|
Operating cash outflows from operating leases
|
|
$
|
187
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
|
67
|
|
Weighted-average remaining lease term – real estate
|
|
8.99 years
|
|
Weighted-average discount rate – real estate leases
|
|
3.08
|
%
|
Future minimum lease payments for the Company’s operating leases as of
June 30, 2019
are as follows:
|
|
|
|
|
Payment Dates
(In millions)
|
Real Estate Leases
|
Remainder of 2019
|
$
|
203
|
|
2020
|
387
|
|
2021
|
330
|
|
2022
|
308
|
|
2023
|
267
|
|
2024
|
222
|
|
Subsequent years
|
974
|
|
Total future lease payments
|
2,691
|
|
Less: Imputed interest
|
(363
|
)
|
Total
|
$
|
2,328
|
|
Current lease liabilities
|
$
|
347
|
|
Long-term lease liabilities
|
1,981
|
|
Total lease liabilities
|
$
|
2,328
|
|
Note: Table excludes obligations for leases with original terms of 12 months or less which have not been recognized as a right to use asset or liability in the consolidated balance sheets.
As of
June 30, 2019
, the Company had additional operating real estate leases that had not yet commenced of
$38 million
. These operating leases will commence over the next
12
months.
At
December 31, 2018
, the aggregate future minimum rental commitments under all non-cancelable operating lease agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
Gross
Rental
Commitments
|
|
Rentals
from
Subleases
|
|
Net
Rental
Commitments
|
(In millions of dollars)
|
|
|
2019
|
$
|
361
|
|
|
$
|
32
|
|
|
$
|
329
|
|
2020
|
$
|
340
|
|
|
$
|
31
|
|
|
$
|
309
|
|
2021
|
$
|
277
|
|
|
$
|
12
|
|
|
$
|
265
|
|
2022
|
$
|
252
|
|
|
$
|
10
|
|
|
$
|
242
|
|
2023
|
$
|
214
|
|
|
$
|
9
|
|
|
$
|
205
|
|
Subsequent years
|
$
|
753
|
|
|
$
|
32
|
|
|
$
|
721
|
|
13. 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 in accordance with applicable law.
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, 2019
the actual allocation for the Company's U.S. Plan was
62%
equities and equity alternatives and
38%
fixed income. The target allocation for the U.K. Plans at
June 30, 2019
was
34%
equities and equity alternatives and
66%
fixed income. At
June 30, 2019
, the actual allocation for the U.K. Plans was
36%
equities and equity alternatives and
64%
fixed income. The Company's U.K. Plans comprised approximately
81%
of non-U.S. plan assets at
December 31, 2018
. 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.
JLT Defined Pension Plans
As part of the JLT Transaction, the Company has assumed responsibility for a number of pension plans throughout the world, with
$234 million
of net pension liabilities (approximately
$700 million
of plan assets), the most significant of which is the Jardine Lloyd Thompson U.K. Pension Scheme ("JLT U.K. plan"). The JLT U.K. plan has a defined benefit section which was frozen to future accrual in 2006 and a defined contribution section. The assets of the scheme are held in a trustee administered fund separate from the Company.
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)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
$
|
10
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
121
|
|
|
117
|
|
|
—
|
|
|
1
|
|
Expected return on plan assets
|
(217
|
)
|
|
(218
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service (credit) cost
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Recognized actuarial loss
|
26
|
|
|
37
|
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(60
|
)
|
|
$
|
(58
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Six Months Ended June 30,
|
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
$
|
18
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
240
|
|
|
235
|
|
|
1
|
|
|
2
|
|
Expected return on plan assets
|
(430
|
)
|
|
(439
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Recognized actuarial loss
|
52
|
|
|
74
|
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(120
|
)
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Settlement loss
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total credit
|
$
|
(116
|
)
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recorded in the Consolidated Statement of Income
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Three Months Ended June 30,
|
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Compensation and benefits expense (Operating income)
|
$
|
10
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other net benefit credits
|
(70
|
)
|
|
(65
|
)
|
|
—
|
|
|
—
|
|
Total credit
|
$
|
(60
|
)
|
|
$
|
(58
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recorded in the Consolidated Statement of Income
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Six Months Ended June 30,
|
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Compensation and benefits expense (Operating income)
|
$
|
18
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other net benefit credits
|
(134
|
)
|
|
(131
|
)
|
|
—
|
|
|
—
|
|
Total credit
|
$
|
(116
|
)
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Three Months Ended June 30,
|
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Interest cost
|
60
|
|
|
59
|
|
|
—
|
|
|
1
|
|
Expected return on plan assets
|
(85
|
)
|
|
(90
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Recognized actuarial loss
|
11
|
|
|
14
|
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(14
|
)
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Six Months Ended June 30,
|
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Interest cost
|
120
|
|
|
118
|
|
|
—
|
|
|
1
|
|
Expected return on plan assets
|
(171
|
)
|
|
(179
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Recognized actuarial loss
|
22
|
|
|
27
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(29
|
)
|
|
$
|
(34
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Three Months Ended June 30,
|
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
$
|
10
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
61
|
|
|
58
|
|
|
—
|
|
|
—
|
|
Expected return on plan assets
|
(132
|
)
|
|
(128
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
15
|
|
|
23
|
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(46
|
)
|
|
$
|
(41
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
For the Six Months Ended June 30,
|
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
$
|
18
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
120
|
|
|
117
|
|
|
1
|
|
|
1
|
|
Expected return on plan assets
|
(259
|
)
|
|
(260
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Recognized actuarial loss
|
30
|
|
|
47
|
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(91
|
)
|
|
$
|
(80
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Settlement loss
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total credit
|
$
|
(87
|
)
|
|
$
|
(80
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
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
,
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
Expected return on plan assets
|
5.74
|
%
|
|
5.83
|
%
|
|
—
|
|
|
—
|
|
Discount Rate
|
3.48
|
%
|
|
3.07
|
%
|
|
3.65
|
%
|
|
3.21
|
%
|
Rate of compensation increase
|
1.74
|
%
|
|
1.73
|
%
|
|
—
|
|
|
—
|
|
The Company made approximately
$49 million
of contributions to its U.S. and non-U.S. defined benefit pension plans for the
six
months ended
June 30, 2019
. The Company expects to contribute approximately
$62 million
to its U.S. and non-U.S. defined benefit pension plans during the remainder of
2019
.
Defined Contribution Plans
The Company maintains certain defined contribution plans ("DC Plans") for its employees, the most significant being in the U.S. and the U.K. The cost of the U.S. DC Plans was
$70 million
and
$67 million
for the
six
months ended
June 30
,
2019
and
2018
, respectively. The cost of the U.K. DC Plans was
$46 million
and
$42 million
for the
six
months ended
June 30
,
2019
and
2018
, respectively.
14. Debt
The Company’s outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Short-term:
|
|
|
|
Commercial paper
|
$
|
549
|
|
|
$
|
—
|
|
Term loan facility
|
300
|
|
|
—
|
|
Current portion of long-term debt
|
814
|
|
|
314
|
|
|
1,663
|
|
|
314
|
|
Long-term:
|
|
|
|
Senior notes – 2.35% due 2019
|
300
|
|
|
300
|
|
Senior notes – 2.35% due 2020
|
499
|
|
|
499
|
|
Senior notes – 3.50% due 2020
|
697
|
|
|
—
|
|
Senior notes – 4.80% due 2021
|
499
|
|
|
499
|
|
Senior notes - Floating rate due 2021
|
298
|
|
|
—
|
|
Senior notes – 2.75% due 2022
|
498
|
|
|
497
|
|
Senior notes – 3.30% due 2023
|
348
|
|
|
348
|
|
Senior notes – 4.05% due 2023
|
249
|
|
|
249
|
|
Senior notes – 3.50% due 2024
|
597
|
|
|
597
|
|
Senior notes – 3.875% due 2024
|
993
|
|
|
—
|
|
Senior notes – 3.50% due 2025
|
497
|
|
|
496
|
|
Senior notes – 1.349% due 2026
|
618
|
|
|
—
|
|
Senior notes – 3.75% due 2026
|
597
|
|
|
596
|
|
Senior notes – 4.375% due 2029
|
1,499
|
|
|
—
|
|
Senior notes – 1.979% due 2030
|
617
|
|
|
—
|
|
Senior notes – 5.875% due 2033
|
298
|
|
|
297
|
|
Senior notes – 4.75% due 2039
|
494
|
|
|
—
|
|
Senior notes – 4.35% due 2047
|
492
|
|
|
492
|
|
Senior notes – 4.20% due 2048
|
592
|
|
|
592
|
|
Senior notes – 4.90% due 2049
|
1,236
|
|
|
—
|
|
Mortgage – 5.70% due 2035
|
351
|
|
|
358
|
|
Other
|
4
|
|
|
4
|
|
|
12,273
|
|
|
5,824
|
|
Less current portion
|
814
|
|
|
314
|
|
|
$
|
11,459
|
|
|
$
|
5,510
|
|
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
$549 million
of commercial paper outstanding at
June 30, 2019
at an effective interest rate of
2.67%
.
On September 18, 2018, the Company entered into a bridge loan agreement to finance the JLT Transaction. The bridge loan agreement provided for commitments in the aggregate principal amount of
£5.2 billion
. In 2018, the Company paid approximately
$35 million
of customary upfront fees related to the bridge loan at the inception of the loan commitment, of which
$30 million
was amortized in 2018 and
$5 million
in the first quarter of 2019 as interest expense based on the period of time the facility was expected to be in effect (including any loans outstanding). The Company terminated its bridge loan agreement on April 1, 2019.
In January 2019, the Company issued
$700 million
of
3.50%
Senior Notes due 2020,
$1 billion
of
3.875%
Senior Notes due 2024,
$1.25 billion
of
4.375%
Senior Notes due 2029,
$500 million
of
4.75%
Senior Notes due 2039,
$1.25 billion
of
4.90%
Senior Notes due 2049 and
$300 million
of Floating Rate Senior Notes due 2021.
In March 2019, the Company issued
€550 million
of
1.349%
Senior Notes due 2026 and
€550 million
of
1.979%
Senior Notes due 2030. In addition, the Company issued an additional
$250 million
of
4.375%
Senior Notes due 2029, in March 2019. These notes constitute a further issuance of the
4.375%
Senior Notes due 2029, of which
$1.25 billion
aggregate principal amount was issued in January 2019 (see above). After giving effect to the issuance of the notes, the Company has
$1.5 billion
aggregate principal amount of
4.375%
Senior Notes due 2029. The Company used part of the net proceeds from these offerings, along with the
$5 billion
of Senior Notes issued in January 2019 (discussed above) primarily to fund the acquisition of JLT, including the payment of related fees and expenses, and to repay certain JLT indebtedness, as well as for general corporate purposes.
In March 2019, the Company closed on
$300 million
one
-year and
$300 million
three
-year term loan facilities. The interest rate on these facilities is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facilities require the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed below. The Company had
$300 million
of borrowings outstanding under the one -year term facility at June 30, 2019 at an average borrowing rate of
3.05%
.
In connection with the closing of the JLT Transaction, the Company assumed approximately
$1 billion
of historical JLT indebtedness. In April and June of 2019, the Company repaid approximately
$450 million
and
$553 million
, respectively, representing all of JLT's debt it acquired upon the closing of the Transaction. The Company incurred debt extinguishment costs of
$32 million
due to the debt repayments.
In March 2018, the Company issued
$600 million
of
4.20%
senior notes due 2048. The Company used the net proceeds for general corporate purposes.
In October 2018, the Company and certain of its foreign subsidiaries increased its multi-currency
five
-year unsecured revolving credit facility from
$1.5 billion
to
$1.8 billion
. 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 October 2023 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, 2019
.
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, 2019
|
|
December 31, 2018
|
(In millions)
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Short-term debt
|
$
|
1,633
|
|
|
$
|
1,665
|
|
|
$
|
314
|
|
|
$
|
313
|
|
Long-term debt
|
$
|
11,459
|
|
|
$
|
12,231
|
|
|
$
|
5,510
|
|
|
$
|
5,437
|
|
The fair value of the Company’s short-term debt consists primarily of commercial paper, borrowings from the term loan facility 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.
15. Restructuring Costs
During the second quarter of 2018, Marsh initiated a program to simplify the organization through reduced management layers and more common structures across regions and businesses to more closely align with its more formalized segmentation strategy across large risk management, middle market corporate, and small commercial & personal segments. These efforts are expected to create increased efficiencies and additional capacity for reinvestment in people and technology. The Company incurred severance and consulting costs of
$2 million
and
$7 million
for the three and six month periods ended June 30, 2019, respectively, related to this initiative.
During the fourth quarter of 2018, Mercer initiated a program to restructure its business to further optimize the way Mercer operates, setting up the Company for a more fluid and nimble structure and operating model for the future. The Company incurred restructuring severance and consulting costs of
$22 million
and
$32 million
for the three and six month periods, ended June 30, 2019, respectively, related to this initiative.
In addition to the changes discussed above, the Company incurred
$5 million
of restructuring costs related to severance and future rent under non-cancelable leases, primarily in Corporate.
Details of the restructuring activity from January 1, 2018 through
June 30, 2019
, which includes liabilities from actions prior to
2019
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Liability at
1/1/18
|
|
Amounts
Accrued
|
|
Cash
Paid
|
|
Other
|
|
Liability at 12/31/18
|
|
Amounts
Accrued
|
|
Cash
Paid
|
|
Other
|
|
Liability at 6/30/19
|
Severance
|
$
|
15
|
|
|
$
|
137
|
|
|
$
|
(77
|
)
|
|
$
|
(2
|
)
|
|
$
|
73
|
|
|
$
|
38
|
|
|
$
|
(73
|
)
|
|
$
|
(1
|
)
|
|
$
|
37
|
|
Future rent under non-cancelable leases and other costs
|
50
|
|
|
24
|
|
|
(37
|
)
|
|
2
|
|
|
39
|
|
|
6
|
|
|
(9
|
)
|
|
(1
|
)
|
|
35
|
|
Total
|
$
|
65
|
|
|
$
|
161
|
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
112
|
|
|
$
|
44
|
|
|
$
|
(82
|
)
|
|
$
|
(2
|
)
|
|
$
|
72
|
|
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. These programs are substantially completed as of June 30, 2019.
JLT Related Integration and Restructuring
The Company has begun its integration and restructuring activities related to JLT. The process will involve combining the business practices and colocating colleagues in most geographies, rationalization of real estate leases around the world, realization of synergies and migration of legacy JLT systems onto MMC’s information technology environment and security protocols. Costs will be recognized based on applicable accounting guidance which includes accounting for disposal or exit activities, guidance related to impairment of long lived assets (for right of use assets related to real estate leases), as well as other costs resulting from accelerated depreciation or amortization of leasehold improvements and other property and equipment. Based on its current estimates, the Company expects to incur costs of approximately
$375 million
in connection with the integration and restructuring of the combined businesses, primarily related to severance, real estate rationalization and technology. The Company expects to incur approximately half of these costs in 2019, with the remaining costs incurred evenly over the next two years. These integration and restructuring plans are still developing, and these estimates may change as the Company completes its detailed plans for each business and location.
In connection with the JLT integration and restructuring, the Company incurred costs of
$98 million
(RIS -
$75 million
, Consulting -
$5 million
, and Corporate -
$18 million
) in the second quarter of 2019 and
$134 million
(RIS -
$95 million
, Consulting -
$5 million
, and Corporate -
$34 million
) during the six months ended June 30, 2019. The severance and related costs were included in compensation and benefits and the other costs were included in other operating expenses in the consolidated statement of income.
Details of the JLT integration and restructuring activity from January 1, 2019 through
June 30, 2019
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Liability at
1/1/19
|
|
Amounts
Accrued
|
|
Cash
Paid
|
|
Other
|
|
Liability at 6/30/19
|
Severance
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
(27
|
)
|
|
$
|
—
|
|
|
$
|
46
|
|
Real estate related costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consulting and other outside services
|
—
|
|
|
61
|
|
|
(33
|
)
|
|
—
|
|
|
28
|
|
Total
|
$
|
—
|
|
|
$
|
134
|
|
|
$
|
(60
|
)
|
|
$
|
—
|
|
|
$
|
74
|
|
16. Common Stock
During the first six months of 2019, the Company repurchased approximately
1.0 million
shares of its common stock for consideration of
$100 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, 2019
, the Company remained authorized to repurchase up to approximately
$766 million
in shares of its common stock. There is no time limit on the authorization. During the first
six
months of
2018
, the Company repurchased approximately
6.1 million
shares of its common stock for consideration of
$500 million
.
The Company issued approximately
3.8 million
and
2.5 million
shares related to stock compensation and employee stock purchase plans during the first
six
months of
2019
and
2018
, respectively.
17. Claims, Lawsuits and Other Contingencies
Acquisition of Jardine Lloyd Thompson Group plc
On April 1, 2019, the Company completed its previously announced acquisition of all of the outstanding shares of JLT. See Note 8 to the consolidated financial statements for additional information. By virtue of the acquisition of JLT, the Company assumed the legal liabilities and became responsible for JLT’s litigation and regulatory exposures as of April 1, 2019.
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 may 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 guidance on 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.
Risk and Insurance Services Segment
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 offices of Marsh Limited, our Marsh and Guy Carpenter operating subsidiary in the United Kingdom, and JLT Specialty Ltd., JLT's U.K. operating subsidiary. The FCA indicated that it had reasonable grounds for suspecting that Marsh Limited, JLT Specialty Ltd. and other participants in the market have been sharing competitively sensitive information within the aviation insurance and reinsurance broking sector.
In October 2017, the Company received a notice that the Directorate-General for Competition of the European Commission had commenced a civil investigation of a number of insurance brokers, including both Marsh and JLT, regarding "the exchange of commercially sensitive information between competitors in relation to aviation and aerospace insurance and reinsurance broking products and services in the European Economic Area ("EEA"), as well as possible coordination between competitors." In light of the action taken by the European Commission, the FCA informed Marsh Limited and JLT Specialty Ltd. that it had discontinued its investigation under U.K. competition law. In May 2018, the FCA advised that it would not be taking any further action with Marsh Limited or JLT Specialty Ltd. in connection with this matter.
In January 2019, the Company received a notice that the Administrative Council for Economic Defense anti-trust agency in Brazil had commenced an administrative proceeding against a number of insurance brokers, including both Marsh and JLT, and insurers “to investigate an alleged sharing of sensitive commercial and competitive confidential information" in the aviation insurance and reinsurance sector.
We are cooperating with these investigations and are conducting our own reviews. At this time, 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 results of operations, financial condition or cash flows.
In July 2017, the Directorate-General for Competition of the European Commission together with the Irish Competition and Consumer Protection Commission conducted on-site inspections at the offices of Marsh and other industry participants in Dublin in connection with an investigation regarding the "possible participation in
anticompetitive agreements and/or concerted practices contrary to [E.U. competition law] in the market for commercial motor insurance in the Republic of Ireland." In May 2019, the European Commission advised that it would not be taking any further action with respect to Marsh in connection with this matter.
Consulting Segment
In 2014, the FCA conducted a thematic review of the suitability of financial advice provided to individuals by a number of firms, including JLT’s employee benefits business, relating to enhanced transfer value ("ETV") pension transfers. In January 2015, the FCA notified JLT it was commissioning a Skilled Person review of JLT’s ETV advice. In February 2019, prior to the completion of the acquisition, JLT disclosed that it had booked a net charge of
£38.4 million
(or approximately
$49.2 million
) arising from the Skilled Person report and ETV review, reflecting estimated net costs offset by potential insurance and indemnification recoveries. Pending the outcome of the FCA’s review, and based on our review as of June 30, 2019, the Company has a gross liability of
$82.7 million
recorded on its consolidated balance sheet for the estimated liabilities and costs arising from this matter. We expect this gross liability to be partially offset by insurance and indemnification claims under existing arrangements.
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, 2019
, 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 17 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 guidance on 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.
18. 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
2018
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.
Prior to being acquired by the Company, JLT operated in
three
segments: Specialty, Reinsurance and Employee Benefits. JLT operated in
41
countries, with significant revenue in the United Kingdom, Pacific, Asia and the United States. As of April 1, 2019, the historical JLT businesses were combined into MMC operations as follows: JLT Specialty was included by geography within Marsh, JLT Reinsurance was included in Guy Carpenter and the majority of JLT's Employee Benefits business was included in Mercer Health and Wealth.
Selected information about the Company’s operating segments for the
three
and
six
-month periods ended
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In millions)
|
Revenue
|
|
Operating Income
(Loss)
|
|
Revenue
|
|
Operating Income
(Loss)
|
2019–
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
2,574
|
|
(a)
|
$
|
517
|
|
|
$
|
4,997
|
|
(c)
|
$
|
1,250
|
|
Consulting
|
1,800
|
|
(b)
|
278
|
|
|
3,473
|
|
(d)
|
557
|
|
Total Operating Segments
|
4,374
|
|
|
795
|
|
|
8,470
|
|
|
1,807
|
|
Corporate/Eliminations
|
(25
|
)
|
|
(115
|
)
|
|
(50
|
)
|
|
(189
|
)
|
Total Consolidated
|
$
|
4,349
|
|
|
$
|
680
|
|
|
$
|
8,420
|
|
|
$
|
1,618
|
|
2018–
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
2,096
|
|
(a)
|
$
|
472
|
|
|
$
|
4,440
|
|
(c)
|
$
|
1,188
|
|
Consulting
|
1,650
|
|
(b)
|
267
|
|
|
3,318
|
|
(d)
|
514
|
|
Total Operating Segments
|
3,746
|
|
|
739
|
|
|
7,758
|
|
|
1,702
|
|
Corporate/Eliminations
|
(12
|
)
|
|
(48
|
)
|
|
(24
|
)
|
|
(103
|
)
|
Total Consolidated
|
$
|
3,734
|
|
|
$
|
691
|
|
|
$
|
7,734
|
|
|
$
|
1,599
|
|
(a)
Includes inter-segment revenue of
$3 million
in
2019
, respectively, interest income on fiduciary funds of
$26 million
and
$15 million
in
2019
and
2018
, respectively, and equity method income of
$4 million
and
$7 million
in
2019
and
2018
, respectively.
(b)
Includes inter-segment revenue of
$22 million
and
$12 million
in
2019
and
2018
, respectively, interest income on fiduciary funds of
$1 million
in
2019
and
2018
, respectively, and equity method income of
$5 million
in both
2019
and in
2018
.
(c)
Includes inter-segment revenue of
$4 million
and
$1 million
in
2019
and
2018
, respectively, interest income on fiduciary funds of
$49 million
and
$28 million
in
2019
and
2018
, respectively, and equity method income of
$6 million
in both
2019
and
2018
.
(d)
Includes inter-segment revenue of
$46 million
and
$23 million
in
2019
and
2018
, respectively, interest income on fiduciary funds of
$2 million
in both
2019
and
2018
, and equity method income of
$10 million
and
$8 million
in
2019
and in
2018
, respectively.
Details of operating segment revenue for the
three
and
six
-month periods ended
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In millions)
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Risk and Insurance Services
|
|
|
|
|
|
|
|
Marsh
|
$
|
2,174
|
|
|
$
|
1,760
|
|
|
$
|
3,927
|
|
|
$
|
3,463
|
|
Guy Carpenter
|
400
|
|
|
336
|
|
|
1,070
|
|
|
977
|
|
Total Risk and Insurance Services
|
2,574
|
|
|
2,096
|
|
|
4,997
|
|
|
4,440
|
|
Consulting
|
|
|
|
|
|
|
|
Mercer
|
1,260
|
|
|
1,158
|
|
|
2,415
|
|
|
2,329
|
|
Oliver Wyman Group
|
540
|
|
|
492
|
|
|
1,058
|
|
|
989
|
|
Total Consulting
|
1,800
|
|
|
1,650
|
|
|
3,473
|
|
|
3,318
|
|
Total Operating Segments
|
4,374
|
|
|
3,746
|
|
|
8,470
|
|
|
7,758
|
|
Corporate
/
Eliminations
|
(25
|
)
|
|
(12
|
)
|
|
(50
|
)
|
|
(24
|
)
|
Total
|
$
|
4,349
|
|
|
$
|
3,734
|
|
|
$
|
8,420
|
|
|
$
|
7,734
|
|
19. New Accounting Guidance
New Accounting Pronouncements Effective January 1, 2019:
The following new accounting standard was adopted using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of January 1, 2019:
Leases
In February 2016, the FASB issued new guidance intended to improve financial reporting for leases. Under the new guidance, a lessee is required to recognize assets and liabilities for leases. Consistent with legacy GAAP, the
recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on the classification of the lease as financing or operating. However, unlike legacy GAAP, which requires that only capital leases are recognized on the balance sheet, the new guidance requires that both operating and financing leases be recognized on the balance sheet. The Company adopted this new standard effective January 1, 2019, using a modified retrospective method, applying the new guidance as of the beginning of the year of adoption, with a cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings at January 1, 2019. Therefore, prior period information has not been restated. The Company has elected the package of practical expedients, which among other things, allows us to carry forward our historical lease classifications. The Company did not elect the hindsight practical expedient in determining lease term and impairment of an entity's ROU assets. On January 1, 2019, the Company recognized a lease liability of
$1.9 billion
and ROU asset of
$1.7 billion
,
related to real estate operating leases. The ROU asset also reflected reclassification adjustments primarily from other liabilities related to existing deferred rent, unamortized lease incentives and restructuring liabilities of
$0.2 billion
upon adoption. There was no cumulative-effect adjustment required to be booked to retained earnings upon transition. The adoption of this standard did not have a material impact on our income statement as compared to prior periods.
The following new accounting standards were adopted prospectively as of January 1, 2019:
Derivatives and Hedging
In August 2017, the FASB issued new guidance intended to refine and expand hedge accounting for both financial and commodity risks. The guidance creates more transparency around how economic results are presenting in both the financial statements and the footnotes, as well as making targeted improvements to simplify the application of hedge accounting guidance. The Company adopted this guidance effective January 1, 2019. The adoption of this standard did not have an impact on the Company's financial position or results of operations.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued new guidance that allowed an entity to reclassify the stranded tax effects resulting from TCJA from accumulated other comprehensive income ("AOCI") to retained earnings. The guidance is effective for the period beginning January 1, 2019. The Company elected not to reclassify the stranded income tax
effects of the TCJA from AOCI to retained earnings. The adoption of this standard had no impact on the Company's financial position or results of operations. The Company’s accounting policy related to releasing income tax effects from AOCI follows the portfolio approach.
New Accounting Pronouncements Effective January 1, 2018:
The following new accounting standards were adopted using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of January 1, 2018:
Revenue Recognition
In May 2014, the FASB issued new accounting guidance related to revenue from contracts with customers. 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. The Company adopted the new guidance effective January 1, 2018, using the modified retrospective method, which applies the new guidance beginning with the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings at January 1, 2018. The cumulative effect of adopting the standard, net of tax, on January 1, 2018 resulted in an increase to the opening balance of retained earnings of
$364 million
, with offsetting increases/decreases to other balance sheet accounts, e.g. accounts receivable, other assets and deferred income taxes.
Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued new guidance intended to improve the recognition and measurement of financial instruments. The new guidance requires investments in equity securities (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 Company adopted the new accounting guidance effective January 1, 2018, recording a cumulative-effect adjustment increase to retained earnings as of the beginning of the period of adoption of
$14 million
, reflecting the reclassification of cumulative unrealized gains, net of tax as of December 31, 2017 from accumulated other comprehensive income to retained earnings.
Income Tax Consequences of Intra-Entity Transfers
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. 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 adopted the new guidance effective January 1, 2018, recording a cumulative-effect adjustment decrease to retained earnings of approximately
$14 million
as of the beginning of the period of adoption.
New Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued new guidance that amends required fair value measurement disclosures. The guidance adds new requirements, eliminates some current disclosures and modifies other required disclosures. The new disclosure requirements, along with modifications made to disclosures as a result of the change in requirements for narrative descriptions of measurement uncertainty, must be applied on a prospective basis. The effects of all other amendments included in the guidance must be applied retrospectively for all periods presented. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted. Adoption of this guidance will impact disclosures only and will not have an impact on the Company's financial position or results of operations.
In August 2018, the FASB issued new guidance that amends disclosures related to Defined Benefit Plans. The guidance removes disclosures that no longer are considered cost-beneficial, clarifies the specific requirements of certain disclosures, and adds disclosure requirements identified as relevant. The guidance must be applied on a
retrospective basis. The guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. Adoption of this guidance will impact disclosures only and will not have an impact on the Company's financial position or results of operations.
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 its financial position or results of operations.
In June 2016, the FASB issued new guidance on the impairment of financial instruments. The new guidance adds an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses, which the FASB believes will result in more timely recognition of such losses. The new standard is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the new standard makes targeted changes to the impairment model for available-for-sale debt securities. The new standard is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods therein. The Company is currently evaluating the impact of this standard, but does not expect the adoption of this standard will have a material impact on its financial position or results of operations.