NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations:
Marsh & McLennan Companies, Inc. (the "Company"), a global professional services firm, is organized based on the different services that it offers. Under this structure, the Company’s
two
business segments are Risk and Insurance Services and Consulting.
The Risk and Insurance Services segment provides risk management activities and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations, and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter.
The Company conducts business in its Consulting segment through Mercer and Oliver Wyman Group. Mercer provides consulting expertise, advice, services and solutions in the areas of health, retirement, talent and investments. Oliver Wyman Group provides specialized management and economic and brand consulting services.
Acquisitions impacting the Risk and Insurance Services and Consulting segments are discussed in Note 4 below.
Principles of Consolidation:
The accompanying consolidated financial statements include all wholly-owned and majority-owned subsidiaries. All significant inter-company transactions and balances have been eliminated.
Fiduciary Assets and Liabilities:
In its capacity as an insurance broker or agent, the Company generally 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
,
$21 million
and
$24 million
in
2016
,
2015
and
2014
, respectively. The Consulting segment recorded fiduciary interest income of
$3 million
,
$4 million
and
$6 million
in
2016
,
2015
and
2014
, 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 were
$7 billion
and
$6.9 billion
at
December 31, 2016
and
2015
, respectively. 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.
Mercer manages approximately
$158 billion
of assets in trusts or funds for which Mercer’s management or trustee fee is not considered a variable interest, since the fees are commensurate with the level of effort required to provide those services. Mercer is not the primary beneficiary of these trusts or funds. Mercer’s maximum exposure to loss of its interests is, therefore, limited to collection of its fees.
Revenue:
Risk and Insurance Services revenue includes insurance commissions, fees for services rendered and interest income on certain fiduciary funds. Insurance commissions and fees for risk transfer services generally are recorded as of the effective date of the applicable policies or, in certain cases (primarily in the Company's reinsurance broking operations), as of the effective date or billing date, whichever is later. A reserve for policy cancellation is provided based on historic and current data on cancellations. Consideration for fee arrangements covering multiple insurance placements, the provision of risk management and/or other services is allocated to all deliverables on the basis of the relative selling prices. Fees for non-risk transfer services provided to clients are recognized over the period in which the services are provided, using a proportional performance model. Fees resulting from achievement of
certain performance thresholds are recorded when such levels are attained and such fees are not subject to forfeiture.
Consulting revenue includes fees paid by clients for advice and services and commissions from insurance companies for the placement of individual and group contracts. Fee revenue for engagements where remuneration is based on time plus out-of-pocket expenses is recognized based on the amount of time consulting professionals expend on the engagement. For fixed fee engagements, revenue is recognized using a proportional performance model. Revenue from insurance commissions not subject to a fee arrangement is recorded over the effective period of the applicable policies. Revenue for asset based fees is recognized on an accrual basis by applying the daily/monthly rate as contractually agreed with the client to the applicable net asset value. On a limited number of engagements, performance fees may also be earned for achieving certain prescribed performance criteria. Such fees are recognized when the performance criteria have been achieved and, when required, agreed to by the client. Reimbursable expenses incurred by professional staff in the generation of revenue and sub-advisory fees related to the majority of funds in the investment management business are included in revenue and the related expenses are included in other operating expenses.
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 the United States or as collateral under captive insurance arrangements. At December 31,
2016
, the Company maintained
$159 million
related to these regulatory requirements.
Fixed Assets:
Fixed assets are stated at cost less accumulated depreciation and amortization. Expenditures for improvements are capitalized. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and any gain or loss is reflected in income. Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation of buildings, building improvements, furniture, and equipment is provided on a straight-line basis over the estimated useful lives of these assets. Furniture and equipment is depreciated over periods ranging from
three
to
ten
years. Leasehold improvements are amortized on a straight-line basis over the periods covered by the applicable leases or the estimated useful life of the improvement, whichever is less. Buildings are depreciated over periods ranging from
thirty
to
forty
years. The Company periodically reviews long-lived assets for impairment whenever events or changes indicate that the carrying value of assets may not be recoverable.
The components of fixed assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
(In millions of dollars)
|
|
2016
|
|
|
2015
|
|
|
Furniture and equipment
|
|
$
|
1,113
|
|
|
$
|
1,133
|
|
|
Land and buildings
|
|
389
|
|
|
396
|
|
|
Leasehold and building improvements
|
|
906
|
|
|
865
|
|
|
|
|
2,408
|
|
|
2,394
|
|
|
Less-accumulated depreciation and amortization
|
|
(1,683
|
)
|
|
(1,621
|
)
|
|
|
|
$
|
725
|
|
|
$
|
773
|
|
Investments:
The Company holds investments in certain private equity funds. Investments in private equity funds are accounted for under the equity method of accounting using a consistently applied three-month lag period adjusted for any known significant changes from the lag period to the reporting date of the Company. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. Investment gains or losses for its proportionate share of the change in fair value of the funds are recorded in earnings. Investments using the equity method of accounting are included in other assets in the consolidated balance sheets.
In
2016
, the Company recorded investment income of less than
$1 million
compared to
$38 million
in
2015
and
$37 million
in
2014
. The investment income in 2015 and 2014 is primarily due to general partner carried interest from the Company's investment in Trident III, which was substantially liquidated in 2015.
Goodwill and Other Intangible Assets:
Goodwill represents acquisition costs in excess of the fair value of net assets acquired. Goodwill is reviewed at least annually for impairment. The Company performs an annual impairment test for each of its reporting units during the third quarter of each year. When a step 1 test is performed, fair values of the reporting units are estimated using either a market approach or a discounted cash flow model. Carrying values for the reporting units are based on balances at the prior quarter end and include directly identified assets and liabilities as well as an allocation of those assets and liabilities not recorded at the reporting unit level. As discussed in Note 6, the Company may elect to assess qualitative factors to determine if a step 1 test is necessary. Other intangible assets, which primarily consist of acquired customer lists, that are not deemed to have an indefinite life, are amortized over their estimated lives, typically ranging from
10
to
15
years, and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature. The Company had
no
indefinite lived identified intangible assets at
December 31, 2016
and
2015
.
Capitalized Software Costs:
The Company capitalizes certain costs to develop, purchase or modify software for the internal use of the Company. These costs are amortized on a straight-line basis over periods ranging from
3
to
10
years. Costs incurred during the preliminary project stage and post implementation stage, are expensed as incurred. Costs incurred during the application development stage are capitalized. Costs related to updates and enhancements are only capitalized if they will result in additional functionality. Capitalized computer software costs of
$482 million
and
$498 million
, net of accumulated amortization of
$1.1 billion
and
$958 million
at
December 31, 2016
and
2015
, respectively, are included in other assets in the consolidated balance sheets.
Legal and Other Loss Contingencies:
The Company and its subsidiaries are subject to a significant number of claims, lawsuits and proceedings including claims for errors and omissions ("E&O"). The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires that a liability be recorded when a loss is both probable and reasonably estimable. Significant management judgment is required to apply this guidance. The Company utilizes case level reviews by inside and outside counsel, an internal actuarial analysis by Oliver Wyman Group, a subsidiary of the Company, and other analysis to estimate potential losses. 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. Given the unpredictability of E&O claims and of litigation that could flow from them, it is possible that an adverse outcome in a particular matter could have a material adverse effect on the Company’s businesses, results of operations, financial condition or cash flow in a given quarterly or annual period.
In addition, to the extent that insurance coverage is available, significant management judgment is required to determine the amount of recoveries that are probable of collection under the Company’s various insurance programs.
The legal and other contingent liabilities described above are not discounted.
Income Taxes:
The Company's effective tax rate reflects its income, statutory tax rates and tax planning in the various jurisdictions in which it operates. Significant judgment is required in determining the annual tax provision and in evaluating uncertain tax positions and the ability to realize deferred tax assets.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step involves recognition. The Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial
statements. The second step is measurement. A tax position that meets the more-likely-than-not-recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate resolution with a taxing authority. Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, de-recognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Tax law may require items be included in the Company's tax returns at different times than the items are reflected in the financial statements. As a result, the annual tax expense reflected in the consolidated statements of income is different than that reported in the income tax returns. Some of these differences are permanent, such as expenses that are not deductible in the returns, and some differences are temporary and reverse over time, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which benefit has already been recorded in the financial statements. Valuation allowances are established for deferred tax assets when it is estimated that future taxable income will be insufficient to use a deduction or credit in that jurisdiction. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements.
Derivative Instruments:
All derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. The fair value of the derivative is recorded in the consolidated balance sheet in other receivables or accounts payable and accrued liabilities. The change in the fair value of a derivative is recorded in the consolidated statement of income in other operating expenses. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Changes in the fair value attributable to the ineffective portion of cash flow hedges are recognized in earnings.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, commissions and fees receivable and insurance recoverable. The Company maintains a policy providing for the diversification of cash and cash equivalent investments and places its investments in a large number of high quality financial institutions to limit the amount of credit risk exposure. Concentrations of credit risk with respect to receivables are generally limited due to the large number of clients and markets in which the Company does business, as well as the dispersion across many geographic areas.
Per Share Data:
Basic net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares. Reconciliations of the applicable components used to calculate basic and diluted EPS - Continuing Operations are presented below. The reconciling items related to the EPS calculation are the same for both basic and diluted EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS Calculation -
Continuing Operations
|
|
(In millions, except per share figures)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Net income from continuing operations
|
$
|
1,795
|
|
|
$
|
1,636
|
|
|
$
|
1,471
|
|
|
Less: Net income attributable to non-controlling interests
|
27
|
|
|
37
|
|
|
32
|
|
|
|
$
|
1,768
|
|
|
$
|
1,599
|
|
|
$
|
1,439
|
|
|
Basic weighted average common shares outstanding
|
519
|
|
|
531
|
|
|
545
|
|
|
Dilutive effect of potentially issuable common shares
|
5
|
|
|
5
|
|
|
8
|
|
|
Diluted weighted average common shares outstanding
|
524
|
|
|
536
|
|
|
553
|
|
|
Average stock price used to calculate common stock equivalents
|
$
|
63.51
|
|
|
$
|
56.27
|
|
|
$
|
51.15
|
|
There were
13.2 million
,
14.8 million
and
18.0 million
stock options outstanding as of
December 31, 2016
,
2015
and
2014
, respectively.
Estimates:
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may vary from those estimates.
New Accounting Pronouncements:
In November 2016, the Financial Accounting Standards Board ("FASB") issued new guidance which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance must be applied retrospectively to all periods presented. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company's consolidated balance sheets or consolidated statement of cash flows.
In October 2016, the FASB issued new guidance which changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the new guidance requires that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interest in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that are under common control with the reporting entity. The new guidance is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a significant impact on its financial position, results of operations and statement of cash flows.
In October 2016, the FASB also issued new guidance which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance eliminates the exception for an intra-entity transfer of an asset other than inventory. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The new guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of this standard will have on its financial position or results of operations.
In August 2016, the FASB issued new guidance which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including cash payments for debt prepayments or debt extinguishment costs, contingent consideration payments made after a business
combination and distributions received from equity method investees. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance must be applied retrospectively to all periods presented unless retrospective application is impracticable. Early adoption is permitted. The Company is currently evaluating the impact the adoption the guidance will have on its statement of cash flows.
In April 2016, the FASB issued new guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. Based on the Company’s stock price during January and through February 21, 2017, the Company expects the adoption of this standard to reduce the Company’s reported income tax expense and increase its net income and earnings per share in the first quarter of 2017. However, the specific impact will depend on the number of outstanding options exercised (which the Company does not control) and the Company’s stock price on the dates shares vest and options are exercised.
In March 2016, the FASB issued new guidance which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The new guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early application will be permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial position or results of operations.
In February 2016, the FASB issued new guidance intended to improve financial reporting about leasing transactions. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles ("GAAP"), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the new guidance requires that both types of leases be recognized on the balance sheet. The new guidance will require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, and additional information about the amounts recorded in the financial statements. The accounting by organizations that own the assets ("lessor") leased by the lessee will remain largely unchanged from current GAAP. However, the guidance contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The new guidance on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application will be permitted. The Company is currently evaluating the impact the adoption of the guidance will have on its financial position and results of operations, but expects material "right to use" assets and lease liabilities to be recorded on its consolidated balance sheets.
In January 2016, the FASB issued new guidance intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business
entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of the guidance on its financial position and results of operations.
New Revenue Recognition Pronouncement
In May 2014, the FASB issued new accounting guidance to clarify the principles for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that principle, the entity should apply the following steps: identify the contract(s) with the customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. Entities are permitted to adopt the guidance under one of the following methods: the "full retrospective" method, which applies the guidance to each period presented (prior years restated) or the "modified retrospective" method in which the guidance is only applied to the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings. The Company will adopt the new guidance effective January 1, 2018. The Company is evaluating the transition method it will use, but currently expects to use the modified retrospective method.
The Company continues to evaluate the impact of the standard on our Risk and Insurance Services ("RIS") segment. Based on the results of our review to date, the Company expects there will be some movement in the timing of revenue recognition between quarterly and annual periods. However, since the vast majority of our brokerage arrangements involve contracts that cover a single year of placements, on a year over year basis, the Company does not believe there will be a significant change to the amount of revenue recognized in an annual period.
The Company's initial review and preliminary conclusions for the Consulting segment indicate the impact on the existing pattern of revenue recognition in quarterly or annual periods will be less significant than for RIS. The conclusions will be completed following a final review of customer arrangement legal terms and conditions in certain of our non-U.S. locations.
The Company continues to evaluate the extent to which certain costs it incurs that are currently expensed under GAAP must be capitalized as costs to obtain or costs to fulfill customer contracts under guidance issued as part of the revenue recognition update. Any capitalized costs would be amortized on a basis consistent with the transfer of services to which they relate. Such expenses related to Risk and Insurance Services would generally be "amortized" over a period of one year or less. In the Consulting segment, certain expenses that are currently deferred may be amortized over a longer period than our current amortization policy, to reflect the amortization over the expected life of the contract including anticipated renewal periods.
The Company has not yet quantified the impact of the changes discussed above.
New Accounting Pronouncements Recently Adopted
In September 2015, the FASB issued new guidance intended to simplify the accounting for adjustments made to provisional amounts recognized in business combinations. The guidance requires the acquirer to recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustments are determined, and to record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if
any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed as of the acquisition date. The guidance also includes additional disclosures required for the amounts recorded in current period earnings arising from such adjustments. The guidance was adopted on January 1, 2016 and did not have a material impact on the Company's financial position or results of operations.
In May 2015, the FASB issued new guidance which removes the requirement to present certain investments for which the practical expedient is used to measure fair value at net asset value within the fair value hierarchy table. Instead, an entity is required to include those investments as a reconciling item so that the total fair value amount of investments in the disclosure is consistent with the fair value investment balance on the statement of net assets. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The adoption of this new guidance affects footnote disclosure only, and therefore did not have a material impact on the Company's financial position or results of operations.
In February 2015, the FASB issued new accounting guidance intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations and securitization structures. The guidance focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The guidance is effective for periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company's financial statements.
In January 2015, the FASB issued new accounting guidance that eliminated the concept of extraordinary items. The guidance is effective for annual periods beginning after December 15, 2015. Adoption of the guidance did not materially affect the Company's financial condition, results of operations or cash flows.
In June 2014, the FASB issued new accounting guidance to clarify the treatment of share-based payment awards that require a specific performance target to be achieved in order for employees to be eligible to vest in the awards which include terms that may provide that the performance conditions could be achieved after an employee completes the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, a reporting entity should apply the existing guidance as it relates to awards with performance conditions that affect vesting. The guidance is effective for annual periods beginning after December 15, 2015. Adoption of the guidance did not materially affect the Company's financial condition, results of operations or cash flows.
In April 2014, the FASB issued new accounting guidance which changed the criteria for reporting discontinued operations and enhances disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations, such as disposal of a major geographic area or a major line of business, should be presented as discontinued operations. Those strategic shifts should have a major impact on the organization's operations and financial results. In addition, the new guidance requires expanded disclosures about discontinued operations. The guidance is effective for fiscal years beginning on or after December 15, 2014. Adoption of the guidance did not have a material effect on the Company's financial condition, results of operations or cash flows.
2. Supplemental Disclosures
The following schedule provides additional information concerning acquisitions, interest and income taxes paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Assets acquired, excluding cash
|
$
|
960
|
|
|
$
|
1,327
|
|
|
$
|
815
|
|
|
Liabilities assumed
|
(111
|
)
|
|
(199
|
)
|
|
(64
|
)
|
|
Contingent/deferred purchase consideration
|
(36
|
)
|
|
(176
|
)
|
|
(197
|
)
|
|
Net cash outflow for acquisitions
|
$
|
813
|
|
|
$
|
952
|
|
|
$
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Interest paid
|
$
|
178
|
|
|
$
|
146
|
|
|
$
|
172
|
|
|
Income taxes paid, net of refunds
|
$
|
642
|
|
|
$
|
433
|
|
|
$
|
426
|
|
The classification of deferred or contingent consideration in the statement of cash flows is dependent upon 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
$98 million
in the year ended December 31, 2016, consisting of deferred purchase consideration of
$54 million
and contingent purchase consideration of
$44 million
. In the year ended December 31, 2015 the Company paid deferred and contingent consideration of
$49 million
, consisting of deferred purchase consideration of
$36 million
and contingent consideration of
$13 million
, and in the year ended December 31, 2014 the Company paid deferred and contingent consideration of
$55 million
, consisting of deferred purchase consideration of
$25 million
and contingent consideration of
$30 million
.
The following amounts are included in the operating section of the consolidated statements of cash flows. For the year ended December 31, 2016, the Company recorded a net charge for adjustments to acquisition related accounts of
$9 million
and contingent consideration payments of
$42 million
. For the year ended December 31, 2015, the Company recorded a net charge for adjustments to acquisition related accounts of
$45 million
and contingent consideration payments of
$34 million
, and for the year ended December 31, 2014 the Company recorded a net charge for adjustments to acquisition related accounts of
$31 million
and contingent consideration payments of
$12 million
.
The Company had non-cash issuances of common stock under its share-based payment plan of
$73 million
,
$72 million
and
$108 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The Company recorded stock-based compensation expense related to equity awards of
$87 million
,
$67 million
and
$75 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
The consolidated statement of cash flows includes the cash flow impact of discontinued operations related to indemnification payments from the Putnam disposition that reduced the net cash flow provided by operations by
$82 million
in 2015.
An analysis of the allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Balance at beginning of year
|
$
|
87
|
|
|
$
|
95
|
|
|
$
|
98
|
|
|
Provision charged to operations
|
31
|
|
|
14
|
|
|
20
|
|
|
Accounts written-off, net of recoveries
|
(20
|
)
|
|
(18
|
)
|
|
(17
|
)
|
|
Effect of exchange rate changes and other
|
(2
|
)
|
|
(4
|
)
|
|
(6
|
)
|
|
Balance at end of year
|
$
|
96
|
|
|
$
|
87
|
|
|
$
|
95
|
|
3. Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the years ended December 31,
2016
and
2015
, including amounts reclassified out of AOCI, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
Unrealized Investment Gains
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
|
Balance as of January 1, 2016
|
$
|
6
|
|
|
$
|
(3,124
|
)
|
|
$
|
(1,102
|
)
|
|
$
|
(4,220
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
13
|
|
|
(294
|
)
|
|
(778
|
)
|
|
(1,059
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
186
|
|
|
—
|
|
|
186
|
|
|
Net current period other comprehensive income (loss)
|
13
|
|
|
(108
|
)
|
|
(778
|
)
|
|
(873
|
)
|
|
Balance as of December 31, 2016
|
$
|
19
|
|
|
$
|
(3,232
|
)
|
|
$
|
(1,880
|
)
|
|
$
|
(5,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
Unrealized Investment Gains
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
|
Balance as of January 1, 2015
|
$
|
5
|
|
|
$
|
(3,393
|
)
|
|
$
|
(459
|
)
|
|
$
|
(3,847
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
1
|
|
|
101
|
|
|
(643
|
)
|
|
(541
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
168
|
|
|
—
|
|
|
168
|
|
|
Net current period other comprehensive income (loss)
|
1
|
|
|
269
|
|
|
(643
|
)
|
|
(373
|
)
|
|
Balance as of December 31, 2015
|
$
|
6
|
|
|
$
|
(3,124
|
)
|
|
$
|
(1,102
|
)
|
|
$
|
(4,220
|
)
|
The components of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
2016
|
|
(In millions of dollars)
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Foreign currency translation adjustments
|
$
|
(742
|
)
|
$
|
36
|
|
$
|
(778
|
)
|
|
Unrealized investment gains
|
21
|
|
8
|
|
13
|
|
|
Pension/post-retirement plans:
|
|
|
|
|
Amortization of losses included in net periodic pension cost:
|
|
|
|
|
Prior service losses (a)
|
3
|
|
1
|
|
2
|
|
|
Net actuarial losses (a)
|
166
|
|
46
|
|
120
|
|
|
Subtotal
|
169
|
|
47
|
|
122
|
|
|
Effect of curtailment
|
102
|
|
38
|
|
64
|
|
|
Net losses arising during period
|
(855
|
)
|
(175
|
)
|
(680
|
)
|
|
Foreign currency translation adjustments
|
416
|
|
70
|
|
346
|
|
|
Other adjustments
|
49
|
|
9
|
|
40
|
|
|
Pension/post-retirement plans losses
|
(119
|
)
|
(11
|
)
|
(108
|
)
|
|
Other comprehensive (loss) income
|
$
|
(840
|
)
|
$
|
33
|
|
$
|
(873
|
)
|
(a) Components of net periodic pension cost are included in compensation and benefits in the Consolidated Statements of Income. Tax on prior service gains and net actuarial losses is included in income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
2015
|
|
(In millions of dollars)
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Foreign currency translation adjustments
|
$
|
(639
|
)
|
$
|
4
|
|
$
|
(643
|
)
|
|
Unrealized investment gains
|
1
|
|
—
|
|
1
|
|
|
Pension/post-retirement plans:
|
|
|
|
|
Amortization of losses (gains) included in net periodic pension cost:
|
|
|
|
|
Prior service credits (a)
|
(1
|
)
|
—
|
|
(1
|
)
|
|
Net actuarial losses (a)
|
271
|
|
96
|
|
175
|
|
|
Subtotal
|
270
|
|
96
|
|
174
|
|
|
Effect of curtailment
|
(3
|
)
|
—
|
|
(3
|
)
|
|
Plan Termination
|
(6
|
)
|
(3
|
)
|
(3
|
)
|
|
Net losses arising during period
|
(125
|
)
|
(62
|
)
|
(63
|
)
|
|
Foreign currency translation adjustments
|
214
|
|
43
|
|
171
|
|
|
Other adjustments
|
(13
|
)
|
(6
|
)
|
(7
|
)
|
|
Pension/post-retirement plans gains
|
337
|
|
68
|
|
269
|
|
|
Other comprehensive (loss) income
|
$
|
(301
|
)
|
$
|
72
|
|
$
|
(373
|
)
|
(a) Components of net periodic pension cost are included in compensation and benefits in the Consolidated Statements of Income. Tax on prior service gains and net actuarial losses is included in income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
2014
|
|
(In millions of dollars)
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Foreign currency translation adjustments
|
$
|
(527
|
)
|
$
|
(12
|
)
|
$
|
(515
|
)
|
|
Pension/post-retirement plans:
|
|
|
|
|
Amortization of losses (gains) included in net periodic pension cost:
|
|
|
|
|
Prior service credits (a)
|
(16
|
)
|
(5
|
)
|
(11
|
)
|
|
Net actuarial losses (a)
|
242
|
|
74
|
|
168
|
|
|
Subtotal
|
226
|
|
69
|
|
157
|
|
|
Effect of curtailment
|
(65
|
)
|
(13
|
)
|
(52
|
)
|
|
Net losses arising during period
|
(1,418
|
)
|
(466
|
)
|
(952
|
)
|
|
Foreign currency translation adjustments
|
180
|
|
39
|
|
141
|
|
|
Other
|
(8
|
)
|
(3
|
)
|
(5
|
)
|
|
Pension/post-retirement plans losses
|
(1,085
|
)
|
(374
|
)
|
(711
|
)
|
|
Other comprehensive loss
|
$
|
(1,612
|
)
|
$
|
(386
|
)
|
$
|
(1,226
|
)
|
(a) Components of net periodic pension cost are included in compensation and benefits in the Consolidated Statements of Income. Tax on prior service gains and net actuarial losses is included in income tax expense.
The components of accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Foreign currency translation adjustments (net of deferred tax adjustments of $(9) in 2016 and deferred tax adjustments of $8 in 2015, respectively)
|
$
|
(1,880
|
)
|
|
$
|
(1,102
|
)
|
|
Net unrealized investment gains (net of deferred tax liability of $10 in 2016 and $2 in 2015)
|
19
|
|
|
6
|
|
|
Net charges related to pension / post-retirement plans (net of deferred tax asset of $1,530 and $1,519 in 2016 and 2015, respectively)
|
(3,232
|
)
|
|
(3,124
|
)
|
|
|
$
|
(5,093
|
)
|
|
$
|
(4,220
|
)
|
4. Acquisitions / 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 value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer lists, trademarks and non-compete agreements. The valuation of purchased intangible assets involves significant estimates and assumptions. Until final valuations are complete, any change in assumptions could affect the carrying value of tangible assets, goodwill and identifiable intangible assets.
The Risk and Insurance Services segment completed
nine
acquisitions during
2016
.
|
|
|
|
•
|
February – Marsh & McLennan Agency ("MMA") acquired The Celedinas Agency, Inc., a Florida-based brokerage firm providing property and casualty and marine insurance as well as employee benefits services, and Aviation Solutions, LLC, a Missouri-based aviation risk advisor and insurance broker.
|
|
|
|
|
•
|
March – MMA acquired Corporate Consulting Services, Ltd., a New York-based insurance brokerage and human resource consulting firm.
|
|
|
|
|
•
|
August – MMA acquired Benefits Advisory Group LLC, an Atlanta-based employee benefits consulting firm.
|
|
|
|
|
•
|
September – MMA acquired Vero Insurance, Inc., a Florida-based agency specializing in private client insurance services.
|
|
|
|
|
•
|
November – MMA acquired Benefits Resource Group Agency, LLC, an Ohio-based benefits consulting firm and Presidio Benefits Group, Inc., a California-based employee benefits consulting firm.
|
|
|
|
|
•
|
December – Marsh acquired AD Corretora, a multi-line broker located in Brazil, and Bluefin Insurance Group, Ltd, a U.K.-based insurance brokerage.
|
The Consulting segment completed
six
acquisitions during
2016
.
|
|
|
|
•
|
January – Mercer acquired The Positive Ageing Company Limited, a U.K.-based firm providing advice on issues surrounding the aging workforce.
|
|
|
|
|
•
|
April – Mercer acquired the Extratextual software system and related client contracts. Extratextual is a web based compliance system that helps clients manage and meet their compliance and risk management obligations.
|
|
|
|
|
•
|
December – Oliver Wyman acquired LShift Limited, a software development company, and Mercer acquired Sirota Consulting LLC, a global provider of employee benefit solutions; Pillar Administration, a superannuation provider located in Australia; and Thomsons Online Benefits, a U.K.-based global benefits software business.
|
Total purchase consideration for acquisitions made during
2016
was approximately
$901 million
, which consisted of cash paid of
$865 million
and deferred purchase and estimated contingent consideration of
$36 million
. Contingent consideration arrangements are based primarily on EBITDA and/or revenue targets over periods of
two
to
four
years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During
2016
, the Company also paid
$54 million
of deferred purchase consideration and
$86 million
of contingent consideration related to acquisitions made in prior years.
The following table presents the preliminary allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their fair values:
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
|
Cash
|
$
|
865
|
|
|
Estimated fair value of deferred/contingent consideration
|
36
|
|
|
Total consideration
|
$
|
901
|
|
|
Allocation of purchase price:
|
|
|
Cash and cash equivalents
|
$
|
52
|
|
|
Accounts receivable, net
|
49
|
|
|
Other current assets
|
8
|
|
|
Property, plant, and equipment
|
22
|
|
|
Other intangible assets
|
307
|
|
|
Goodwill
|
556
|
|
|
Other assets
|
18
|
|
|
Total assets acquired
|
1,012
|
|
|
Current liabilities
|
57
|
|
|
Other liabilities
|
54
|
|
|
Total liabilities assumed
|
111
|
|
|
Net assets acquired
|
$
|
901
|
|
Other intangible assets acquired are based on initial estimates and subject to change based on final valuations during the measurement period post acquisition date. The following chart provides information of other intangible assets acquired during 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted Average Amortization Period
|
|
Client relationships
|
|
$
|
241
|
|
|
13 years
|
|
Other (a)
|
|
66
|
|
|
7 years
|
|
|
|
$
|
307
|
|
|
|
(a) Primarily non-compete agreements, trade names and developed technology
Prior Year Acquisitions
During
2015
, the Risk and Insurance Services segment completed the following
thirteen
acquisitions:
|
|
|
|
•
|
January – Marsh acquired INGESEG S.A., an insurance brokerage located in Argentina.
|
|
|
|
|
•
|
May – Marsh acquired Sylvite Financial Services, Inc., a Canada-based insurance consulting firm and Sumitomo Life Insurance Agency America, Inc., an employee benefits brokerage and consulting firm providing employee benefit and other services to U.S.-based subsidiaries of Japanese companies.
|
|
|
|
|
•
|
June – MMA acquired MHBT, Inc., a Texas-based insurance broker and Marsh acquired SIS Co. Ltd., a Korea-based insurance broker and advisor.
|
|
|
|
|
•
|
July – MMA acquired Vezina, a Canada-based independent insurance brokerage firm, Tequesta Insurance Advisors, an employee benefits insurance provider based in Florida, Cline Wood Agency, a Kansas City-based independent specialty insurance agency and J.W. Terrill, a Missouri-based independent insurance agency. Marsh acquired SMEI Group Ltd., a U.K.-based insurance broker providing specialist commercial insurance to small and medium-sized firms.
|
|
|
|
|
•
|
August – Marsh acquired Dovetail Insurance, a leading provider of insurance technology services to the U.S. small commercial market.
|
|
|
|
|
•
|
October – MMA acquired Dawson Insurance Agency, a North Dakota-based agency providing commercial and personal insurance, surety bonds, safety and loss control programs, and employee benefits services.
|
|
|
|
|
•
|
December – Marsh acquired Jelf Group, PLC, a U.K.-based insurance broking and financial consulting firm.
|
During
2015
, the Consulting segment completed the following
eight
acquisitions:
|
|
|
|
•
|
February – Oliver Wyman acquired TeamSAI, a Georgia-based provider of consulting and technical services to the transportation industry, and Mercer acquired Strategic Capital Management AG, a Switzerland-based institutional investment advisor.
|
|
|
|
|
•
|
June – Mercer acquired Kepler Associates, a U.K.-based executive remuneration specialist.
|
|
|
|
|
•
|
August – Oliver Wyman acquired the Hong Kong and Shanghai franchises of OC&C Strategy Consultants.
|
|
|
|
|
•
|
September – Mercer acquired Comptryx, a global pay and workforce metrics business specializing in the technology sector.
|
|
|
|
|
•
|
November – Mercer acquired HR Business Solutions (Asia) Limited, a Hong Kong-based compensation and employee benefits consulting firm, and Gama Consultores Associados Ltda, a Brazil-based retirement consulting firm.
|
|
|
|
|
•
|
December – Mercer acquired CPSG Partners, a Workday Services partner assisting clients worldwide to maximize the value of Workday Financial Management and Human Capital Management.
|
Total purchase consideration for acquisitions made during
2015
was
$1.2 billion
, which consisted of cash paid of
$1.0 billion
and deferred purchase and estimated contingent consideration of
$176 million
. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over
two
to
four
years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. During
2015
, the Company also paid
$36 million
of deferred purchase consideration and
$47 million
of contingent consideration related to acquisitions made in prior years. In addition, the Company purchased other intangible assets in the amount of
$2 million
.
Subsequent Acquisition
On January 13, 2017, MMA entered into a definitive agreement to acquire J. Smith Lanier & Co. ("JSL"), one of the nation’s largest privately held insurance brokerage firms. The transaction is expected to close in the first quarter of 2017 pending customary approvals. JSL is a leading provider of insurance, risk management, and employee benefits solutions to businesses and individuals throughout the U.S. Upon completion of the transaction, JSL will operate as MMA’s Southeast regional hub.
Pro-Forma Information
The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during
2016
, 2015 and 2014. 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, 2015 and reflects acquisitions made in 2015 as if they occurred on January 1, 2014. The pro-forma information adjusts for the effects of amortization of acquired intangibles. The unaudited pro-forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisitions had occurred on the dates indicated, nor is it necessarily indicative of future consolidated results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(In millions, except per share data)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Revenue
|
$
|
13,503
|
|
|
$
|
13,528
|
|
|
$
|
13,395
|
|
|
Income from continuing operations
|
$
|
1,792
|
|
|
$
|
1,643
|
|
|
$
|
1,475
|
|
|
Net income attributable to the Company
|
$
|
1,765
|
|
|
$
|
1,606
|
|
|
$
|
1,469
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
– Continuing operations
|
$
|
3.40
|
|
|
$
|
3.02
|
|
|
$
|
2.65
|
|
|
– Net income attributable to the Company
|
$
|
3.40
|
|
|
$
|
3.02
|
|
|
$
|
2.69
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
– Continuing operations
|
$
|
3.37
|
|
|
$
|
2.99
|
|
|
$
|
2.61
|
|
|
– Net income attributable to the Company
|
$
|
3.37
|
|
|
$
|
2.99
|
|
|
$
|
2.66
|
|
The consolidated statement of income for
2016
includes approximately
$25 million
of revenue and
$4 million
of operating income related to acquisitions made during
2016
. The consolidated statement of income for 2015 includes approximately
$124 million
of revenue and
$7 million
of operating income related to acquisitions made during 2015.
Acquisition-related expenses incurred in 2016 were
$14 million
.
Dispositions
In December 2015, Mercer sold its U.S. defined contribution recordkeeping business. The Company recognized pre-tax gains of
$37 million
in 2015 and
$6 million
in 2016 from this transaction, which are included in revenue in the consolidated statements of income in those years.
5. Discontinued Operations
As part of the disposal transactions for Putnam and Kroll, the Company provided certain indemnities, primarily related to pre-transaction tax uncertainties and legal contingencies. In accordance with applicable accounting guidance, liabilities were established related to these indemnities at the time of the sales and reflected as a reduction of the gain on disposal. Discontinued operations includes charges or credits resulting from the settlement or resolution of the indemnified matters, as well as adjustments to the liabilities related to such matters.
On December 31, 2014, an agreement was reached between Putnam and the Massachusetts Department of Revenue ("DOR") regarding a tax dispute, which was covered under the indemnity agreement discussed above. The December 2014 agreement was subject to certain approvals, which included the State Attorney General and the Commissioner of the DOR. In January 2015, all necessary approvals were received, the agreement was executed and the tax was paid. Concurrently, Putnam and the Company executed a settlement agreement to resolve all remaining matters under the indemnity agreement. The Company recorded a gain, net of federal income taxes, of approximately
$28 million
in 2014 related to the settlement with Putnam.
Summarized Statements of Income data for discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Disposals of discontinued operations
|
—
|
|
|
(5
|
)
|
|
42
|
|
|
Income tax (credit) expense
|
—
|
|
|
(5
|
)
|
|
16
|
|
|
Disposals of discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
26
|
|
|
Discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
Discontinued operations, net of tax per share
|
|
|
|
|
|
|
– Basic
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
– Diluted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.04
|
|
6. Goodwill and Other Intangibles
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, the Company assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The Company considers numerous factors, which included that the fair value of each reporting unit exceeded its carrying value by a substantial margin in its most recent estimate of reporting unit fair values, whether significant acquisitions or dispositions occurred which might alter the fair value of its reporting units, macroeconomic conditions and their potential impact on reporting unit fair values, actual performance compared with budget and prior projections used in its estimation of reporting unit fair values, industry and market conditions, and the year-over-year change in the Company’s share price. The Company completed its qualitative assessment in the third quarter of
2016
and concluded that a two-step goodwill impairment test was not required in
2016
and that goodwill was not impaired.
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:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
Balance as of January 1, as reported
|
$
|
7,889
|
|
|
$
|
7,241
|
|
|
Goodwill acquired
|
556
|
|
|
783
|
|
|
Other adjustments
(a)
|
(76
|
)
|
|
(135
|
)
|
|
Balance at December 31,
|
$
|
8,369
|
|
|
$
|
7,889
|
|
|
|
|
|
(a)
|
Primarily due to the impact of foreign exchange in both years.
|
The goodwill acquired of
$556 million
in
2016
(approximately
$71 million
of which is deductible for tax purposes) is comprised of
$321 million
related to the Risk and Insurance Services segment and
$235 million
related to the Consulting segment.
Goodwill allocable to the Company’s reportable segments is as follows: Risk and Insurance Services,
$5.9 billion
and Consulting,
$2.5 billion
.
The gross cost and accumulated amortization at
December 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2016
|
|
2015
|
|
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Client relationships
|
$
|
1,390
|
|
|
$
|
392
|
|
|
$
|
998
|
|
|
$
|
1,281
|
|
|
$
|
347
|
|
|
$
|
934
|
|
|
Other (a)
|
204
|
|
|
76
|
|
|
128
|
|
|
176
|
|
|
74
|
|
|
102
|
|
|
Amortized intangibles
|
$
|
1,594
|
|
|
$
|
468
|
|
|
$
|
1,126
|
|
|
$
|
1,457
|
|
|
$
|
421
|
|
|
$
|
1,036
|
|
(a) Primarily non-compete agreements, trade names and developed technology
Aggregate amortization expense was
$130 million
for the year ended
December 31, 2016
,
$109 million
for the year ended December 31,
2015
and
$86 million
for the year ended December 31,
2014
. The estimated future aggregate amortization expense is as follows:
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
|
(In millions of dollars)
|
|
|
2017
|
$
|
148
|
|
|
2018
|
141
|
|
|
2019
|
134
|
|
|
2020
|
120
|
|
|
2021
|
107
|
|
|
Subsequent years
|
476
|
|
|
|
$
|
1,126
|
|
7. Income Taxes
For financial reporting purposes, income before income taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
U.S.
|
$
|
725
|
|
|
$
|
702
|
|
|
$
|
313
|
|
|
Other
|
1,755
|
|
|
1,605
|
|
|
1,744
|
|
|
|
$
|
2,480
|
|
|
$
|
2,307
|
|
|
$
|
2,057
|
|
|
|
|
|
|
|
|
|
The expense for income taxes is comprised of:
|
|
|
|
|
|
Income taxes:
|
|
|
|
|
|
|
Current–
|
|
|
|
|
|
|
U.S. Federal
|
$
|
208
|
|
|
$
|
90
|
|
|
$
|
80
|
|
|
Other national governments
|
366
|
|
|
385
|
|
|
369
|
|
|
U.S. state and local
|
43
|
|
|
52
|
|
|
26
|
|
|
|
617
|
|
|
527
|
|
|
475
|
|
|
Deferred–
|
|
|
|
|
|
|
U.S. Federal
|
26
|
|
|
125
|
|
|
27
|
|
|
Other national governments
|
32
|
|
|
15
|
|
|
62
|
|
|
U.S. state and local
|
10
|
|
|
4
|
|
|
22
|
|
|
|
68
|
|
|
144
|
|
|
111
|
|
|
Total income taxes
|
$
|
685
|
|
|
$
|
671
|
|
|
$
|
586
|
|
The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
Accrued expenses not currently deductible
|
$
|
582
|
|
|
$
|
586
|
|
|
Differences related to non-U.S. operations
(a)
|
127
|
|
|
120
|
|
|
Accrued U.S. retirement benefits
|
629
|
|
|
630
|
|
|
Net operating losses
(b)
|
56
|
|
|
70
|
|
|
Income currently recognized for tax
|
71
|
|
|
70
|
|
|
Foreign tax credit carryforwards
|
—
|
|
|
20
|
|
|
Other
|
50
|
|
|
49
|
|
|
|
$
|
1,515
|
|
|
$
|
1,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Differences related to non-U.S. operations
|
$
|
217
|
|
|
$
|
176
|
|
|
Depreciation and amortization
|
377
|
|
|
368
|
|
|
Accrued retirement & postretirement benefits - non-U.S. operations
|
10
|
|
|
94
|
|
|
Other
|
14
|
|
|
6
|
|
|
|
$
|
618
|
|
|
$
|
644
|
|
|
|
|
|
(a)
|
Net of valuation allowances of
$3 million
in
2016
and
$9 million
in
2015
.
|
|
|
|
|
(b)
|
Net of valuation allowances of
$17 million
in
2016
and
$19 million
in
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
Balance sheet classifications:
|
|
|
|
|
Deferred tax assets
|
$
|
1,097
|
|
|
$
|
1,138
|
|
|
Other liabilities
|
$
|
200
|
|
|
$
|
237
|
|
U.S. Federal income taxes are not provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration, which at
December 31, 2016
, the Company estimates, amounted to approximately
$4.4 billion
. The determination of the unrecognized deferred tax liability with respect to these investments is not practicable.
A reconciliation from the U.S. Federal statutory income tax rate to the Company’s effective income tax rate is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
U.S. Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
U.S. state and local income taxes—net of U.S. Federal income tax benefit
|
1.5
|
|
|
1.6
|
|
|
1.7
|
|
|
Differences related to non-U.S. operations
|
(9.2
|
)
|
|
(8.0
|
)
|
|
(7.5
|
)
|
|
Other
|
0.3
|
|
|
0.5
|
|
|
(0.7
|
)
|
|
Effective tax rate
|
27.6
|
%
|
|
29.1
|
%
|
|
28.5
|
%
|
The Company’s consolidated effective tax rate was
27.6%
,
29.1%
and
28.5%
in
2016
,
2015
and
2014
, respectively. The tax rate in each year reflects foreign operations, which are generally taxed at rates lower than the U.S. statutory tax rate.
Valuation allowances had net decreases of
$8 million
and
$69 million
in 2016 and 2015, respectively, and an increase of
$15 million
in
2014
. During the respective years, adjustments of the beginning of the year balances of valuation allowances decreased income tax expense by
$7 million
,
$14 million
and
$9 million
in 2016, 2015 and 2014, respectively. The decrease in the valuation allowance in 2015 also reflects the write down of a deferred tax asset along with its full valuation allowance because the Company cannot utilize a net operating loss. Approximately
77%
of the Company’s net operating loss carryforwards expire from
2017
through
2036
, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of
2016
comprised federal, state and local, and non-U.S. tax benefits of
$7 million
,
$48 million
and
$31 million
, respectively, before reduction for valuation allowances.
The realization of deferred tax assets depends on generating future taxable income during the periods in which the tax benefits are deductible or creditable. Tax liabilities are determined and assessed jurisdictionally by legal entity or filing group. Certain taxing jurisdictions allow or require combined or consolidated tax filings. The Company assessed the realizability of its deferred tax assets. The Company considered all available evidence, including the existence of a recent history of losses, placing particular weight on evidence that could be objectively verified. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized.
Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Balance at January 1,
|
$
|
74
|
|
|
$
|
97
|
|
|
$
|
128
|
|
|
Additions, based on tax positions related to current year
|
2
|
|
|
3
|
|
|
13
|
|
|
Additions for tax positions of prior years
|
6
|
|
|
22
|
|
|
3
|
|
|
Reductions for tax positions of prior years
|
(6
|
)
|
|
(10
|
)
|
|
(29
|
)
|
|
Settlements
|
(7
|
)
|
|
(20
|
)
|
|
(4
|
)
|
|
Lapses in statutes of limitation
|
(4
|
)
|
|
(18
|
)
|
|
(14
|
)
|
|
Balance at December 31,
|
$
|
65
|
|
|
$
|
74
|
|
|
$
|
97
|
|
Of the total unrecognized tax benefits at
December 31, 2016
,
2015
and
2014
,
$53 million
,
$53 million
and
$51 million
, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in any future periods. The total gross amount of accrued interest and penalties at
December 31, 2016
,
2015
and
2014
, before any applicable federal benefit, was
$11 million
,
$8 million
and
$7 million
, respectively.
As discussed in Note 5, the Company has provided certain indemnities related to contingent tax liabilities as part of the disposals of Putnam and Kroll. At
December 31, 2016
,
2015
and
2014
,
$0 million
,
$1 million
and
$2 million
, respectively, included in the table above, relates to Putnam and Kroll positions included in consolidated Company tax returns.
The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. In the US federal jurisdiction the Company participates in the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP), which is structured to conduct real-time compliance reviews. The IRS is currently examining the Company’s 2015 tax return and performing a pre-filing review of 2016. During 2016 the Company settled its federal tax audit with the IRS for the year 2014. In 2015, the Company settled its federal tax audit for the year 2013, and in 2014 settled the year 2012.
New York State and New York City have examinations underway for various entities covering the years 2007 through 2014. During 2016, California initiated and concluded an audit of years 2013 and 2014. Outside the United States, there are ongoing examinations in Germany for the years 2009 through 2012 and in France for the years 2013 and 2014. France closed examinations of years 2011 and 2012 in 2016. Canada closed its examination of year 2012 in 2016 and commenced examinations for years 2013 and 2014. The United Kingdom closed its 2011 and 2012 examination in 2016 and commenced an examination of year 2014. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. The Company has established liabilities for uncertain tax positions in relation to the potential assessments. The Company believes the resolution of tax matters will not have a material effect on the consolidated financial position of the Company, although a resolution of tax matters could have a material impact on the Company's net income or cash flows and on its effective tax rate in a particular future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between
zero
and approximately
$7 million
within the next twelve months due to the settlement of audits and the expiration of statutes of limitation.
8. Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension plans for its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth by U.S. law and the laws of the non-U.S. jurisdictions in which the Company offers defined benefit plans.
Combined U.S. and non-U.S. Plans
The weighted average actuarial assumptions utilized for the U.S. and significant non-U.S. defined benefit plans and postretirement benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
Discount rate (for expense)
|
4.10
|
%
|
|
3.83
|
%
|
|
4.12
|
%
|
|
3.87
|
%
|
|
Expected return on plan assets
|
7.06
|
%
|
|
7.23
|
%
|
|
—
|
|
|
—
|
|
|
Rate of compensation increase (for expense)
|
2.44
|
%
|
|
2.42
|
%
|
|
—
|
|
|
—
|
|
|
Discount rate (for benefit obligation)
|
3.40
|
%
|
|
4.11
|
%
|
|
3.64
|
%
|
|
4.12
|
%
|
|
Rate of compensation increase (for benefit obligation)*
|
1.77
|
%
|
|
2.44
|
%
|
|
—
|
|
|
—
|
|
*The 2016 assumption does not include a rate of compensation increase for the U.S. defined benefit plans since those plans were frozen to future benefits after December 31, 2016.
The Company uses actuaries from Mercer, a subsidiary of the Company, to perform valuations of its pension plans. The long-term rate of return on plan assets assumption is determined for each plan based on the facts and circumstances that exist as of the measurement date, and the specific portfolio mix of each plan’s assets. The Company utilizes a model developed by the Mercer actuaries to assist in the determination of this assumption. The model takes into account several factors, including: actual and target portfolio allocation; investment, administrative and trading expenses incurred directly by the plan trust; historical portfolio performance; relevant forward-looking economic analysis; and expected returns, variances and correlations for different asset classes. These measures are used to determine probabilities using standard statistical techniques to calculate a range of expected returns on the portfolio. The Company generally does not adjust the rate of return assumption from year to year if, at the measurement date, it is within the range between the 25
th
and 75
th
percentile of the expected long-term annual returns. Historical long-term average asset returns of each plan are also reviewed to determine whether they are consistent and reasonable compared with the rate selected. The expected return on plan assets is determined by applying the assumed long-term rate of return to the market-related value of plan assets. This market-related value recognizes investment gains or losses over a
five
-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market value of assets. Since the market-related value of assets recognizes gains or losses over a
five
-year period, the future market-related value of the assets will be impacted as previously deferred gains or losses are reflected.
The target asset allocation for the U.S. Plans is
64%
equities and equity alternatives and
36%
fixed income. At the end of
2016
, the actual allocation for the U.S. Plans was
65%
equities and equity alternatives and
35%
fixed income. The target asset allocation for the U.K. Plans, which comprise approximately
81%
of non-U.S. Plan assets, is
48%
equities and equity alternatives and
52%
fixed income. At the end of
2016
, the actual allocation for the U.K. Plans was
48%
equities and equity alternatives and
52%
fixed income. The assets of the Company's defined benefit plans are diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.
The discount rate selected for each U.S. plan is based on a model bond portfolio with coupons and redemptions that closely match the expected liability cash flows from the plan. Discount rates for non-U.S. plans are based on appropriate bond indices adjusted for duration; in the U.K., the plan duration is reflected using the Mercer yield curve.
The components of the net periodic benefit cost for defined benefit and other postretirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
|
|
Postretirement
|
|
For the Years Ended December 31,
|
Benefits
|
|
Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Service cost
|
$
|
178
|
|
|
$
|
196
|
|
|
$
|
213
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
Interest cost
|
537
|
|
|
587
|
|
|
641
|
|
|
5
|
|
|
5
|
|
|
11
|
|
|
Expected return on plan assets
|
(940
|
)
|
|
(977
|
)
|
|
(990
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service (credit) cost
|
(1
|
)
|
|
(1
|
)
|
|
(16
|
)
|
|
4
|
|
|
3
|
|
|
—
|
|
|
Recognized actuarial loss (gain)
|
168
|
|
|
271
|
|
|
243
|
|
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
Net periodic benefit (credit) cost
|
$
|
(58
|
)
|
|
$
|
76
|
|
|
$
|
91
|
|
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
14
|
|
|
Curtailment (loss) gain
|
(4
|
)
|
|
5
|
|
|
(65
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Plan termination
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(128
|
)
|
|
—
|
|
|
Settlement loss
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total (credit) cost
|
$
|
(62
|
)
|
|
$
|
82
|
|
|
$
|
26
|
|
|
$
|
9
|
|
|
$
|
(118
|
)
|
|
$
|
14
|
|
Plan Assets
For the U.S. Plans, investment allocation decisions are made by a fiduciary committee composed of senior executives appointed by the Company’s Chief Executive Officer. For the non-U.S. plans, investment allocation decisions are made by local fiduciaries, in consultation with the Company for the larger plans. Plan assets are invested in a manner consistent with the fiduciary standards set forth in all relevant laws relating to pensions and trusts in each country. Primary investment objectives are (1) to achieve an investment return that, in combination with current and future contributions, will provide sufficient funds to pay benefits as they become due, and (2) to minimize the risk of large losses. The investment allocations are designed to meet these objectives by broadly diversifying plan assets among numerous asset classes with differing expected returns, volatilities, and correlations.
The major categories of plan assets include equity securities, equity alternative investments, and fixed income securities. For the U.S. qualified plans, the category ranges are
59
-
69%
for equities and equity alternatives, and
31
-
41
% for fixed income. For the U.K. Plan, the category ranges are
45
-
51
% for equities and equity alternatives, and
49
-
55
% for fixed income. Asset allocation is monitored frequently and re-balancing actions are taken as appropriate.
Plan investments are exposed to stock market, interest rate, and credit risk. Concentrations of these risks are generally limited due to diversification by investment style within each asset class, diversification by investment manager, diversification by industry sectors and issuers, and the dispersion of investments across many geographic areas.
Unrecognized Actuarial Gains/Losses
In accordance with applicable accounting guidance, the funded status of the Company's pension plans is recorded in the consolidated balance sheets and provides for a delayed recognition of actuarial gains or losses arising from changes in the projected benefit obligation due to changes in the assumed discount rates, differences between the actual and expected value of plan assets and other assumption changes. The unrecognized pension plan actuarial gains or losses and prior service costs not yet recognized in net periodic pension cost are recognized in Accumulated Other Comprehensive Income ("AOCI"), net of tax. These gains and losses are amortized prospectively out of AOCI over a period that approximates the remaining life expectancy of participants in plans where substantially all participants are inactive, or the average remaining service period of active participants for plans with active participants.
Interest and Service Cost
In 2016, the Company modified the approach used to estimate the service and interest cost components of net periodic benefit cost for its significant non-U.S. plans. Historically, service and interest costs were estimated using a single weighted average discount rate derived from the yield curves used to measure the benefit obligations at the beginning of the period. This change in approach was made to improve the correlation between the projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The change does not impact the measurement of the plans’ total Projected Benefit Obligation. The Company has accounted for this change as a change in estimate, that was applied prospectively beginning in 2016.
U.S. Plans
The following schedules provide information concerning the Company’s U.S. defined benefit pension plans and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
Benefits
|
|
U.S. Postretirement
Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
5,685
|
|
|
$
|
5,924
|
|
|
$
|
40
|
|
|
$
|
177
|
|
|
Service cost
|
106
|
|
|
114
|
|
|
—
|
|
|
1
|
|
|
Interest cost
|
264
|
|
|
254
|
|
|
2
|
|
|
2
|
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
Effect of curtailment
|
(98
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Plan termination
|
—
|
|
|
—
|
|
|
—
|
|
|
(128
|
)
|
|
Actuarial loss (gain)
|
160
|
|
|
(392
|
)
|
|
—
|
|
|
(5
|
)
|
|
Benefits paid
|
(223
|
)
|
|
(215
|
)
|
|
(8
|
)
|
|
(10
|
)
|
|
Benefit obligation, December 31
|
$
|
5,894
|
|
|
$
|
5,685
|
|
|
$
|
37
|
|
|
$
|
40
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
4,160
|
|
|
$
|
4,516
|
|
|
$
|
3
|
|
|
$
|
18
|
|
|
Actual return on plan assets
|
401
|
|
|
(170
|
)
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
27
|
|
|
29
|
|
|
5
|
|
|
4
|
|
|
Employee contributions
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
Benefits paid
|
(223
|
)
|
|
(215
|
)
|
|
(8
|
)
|
|
(10
|
)
|
|
Other
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(12
|
)
|
|
Fair value of plan assets, December 31
|
$
|
4,365
|
|
|
$
|
4,160
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
Net funded status, December 31
|
$
|
(1,529
|
)
|
|
$
|
(1,525
|
)
|
|
$
|
(35
|
)
|
|
$
|
(37
|
)
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(27
|
)
|
|
$
|
(26
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
Non-current liabilities
|
(1,502
|
)
|
|
(1,499
|
)
|
|
(33
|
)
|
|
(35
|
)
|
|
Net liability recognized, December 31
|
$
|
(1,529
|
)
|
|
$
|
(1,525
|
)
|
|
$
|
(35
|
)
|
|
$
|
(37
|
)
|
|
Amounts recognized in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Prior service (cost) credit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
(7
|
)
|
|
Net actuarial (loss) gain
|
(1,720
|
)
|
|
(1,754
|
)
|
|
11
|
|
|
13
|
|
|
Total recognized accumulated other comprehensive (loss) income, December 31
|
$
|
(1,720
|
)
|
|
$
|
(1,754
|
)
|
|
$
|
8
|
|
|
$
|
6
|
|
|
Cumulative employer contributions in excess of (less than) net periodic cost
|
191
|
|
|
229
|
|
|
(43
|
)
|
|
(43
|
)
|
|
Net amount recognized in consolidated balance sheet
|
$
|
(1,529
|
)
|
|
$
|
(1,525
|
)
|
|
$
|
(35
|
)
|
|
$
|
(37
|
)
|
|
Accumulated benefit obligation at December 31
|
$
|
5,894
|
|
|
$
|
5,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
Benefits
|
|
U.S. Postretirement
Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Reconciliation of prior service credit (cost) recognized in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
4
|
|
|
Recognized as component of net periodic benefit cost
|
—
|
|
|
—
|
|
|
4
|
|
|
3
|
|
|
Plan termination
|
—
|
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
Prior service cost, December 31
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
Benefits
|
|
U.S. Postretirement
Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Reconciliation of net actuarial (loss) gain recognized in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(1,754
|
)
|
|
$
|
(1,749
|
)
|
|
$
|
13
|
|
|
$
|
2
|
|
|
Recognized as component of net periodic benefit cost (credit)
|
74
|
|
|
146
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Effect of curtailment
|
98
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Liability experience
|
(160
|
)
|
|
392
|
|
|
—
|
|
|
5
|
|
|
Asset experience
|
22
|
|
|
(543
|
)
|
|
—
|
|
|
—
|
|
|
Total (loss) gain recognized as change in plan assets and benefit obligations
|
(40
|
)
|
|
(151
|
)
|
|
—
|
|
|
5
|
|
|
Net actuarial (loss) gain, December 31
|
$
|
(1,720
|
)
|
|
$
|
(1,754
|
)
|
|
$
|
11
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
U.S. Pension
Benefits
|
|
U.S. Postretirement
Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Total recognized in net periodic benefit cost and other comprehensive loss (income)
|
$
|
31
|
|
|
$
|
146
|
|
|
$
|
885
|
|
|
$
|
2
|
|
|
$
|
(138
|
)
|
|
$
|
14
|
|
Estimated amounts that will be amortized from accumulated other comprehensive loss in the next fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
Benefits
|
|
U.S. Postretirement
Benefits
|
|
(In millions of dollars)
|
2017
|
|
|
2017
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
Net actuarial loss
|
37
|
|
|
1
|
|
|
Projected cost (credit)
|
$
|
37
|
|
|
$
|
(2
|
)
|
The weighted average actuarial assumptions utilized in determining the above amounts for the U.S. defined benefit and other U.S. postretirement plans as of the end of the year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
Benefits
|
|
U.S. Postretirement Benefits
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
Discount rate (for expense)
|
4.71
|
%
|
|
4.41
|
%
|
|
4.36
|
%
|
|
3.90
|
%
|
|
Expected return on plan assets
|
8.72
|
%
|
|
8.75
|
%
|
|
—
|
|
|
—
|
|
|
Rate of compensation increase (for expense)
|
2.00
|
%
|
|
2.00
|
%
|
|
—
|
|
|
—
|
|
|
Discount rate (for benefit obligation)
|
4.58
|
%
|
|
4.74
|
%
|
|
4.12
|
%
|
|
4.36
|
%
|
|
Rate of compensation increase (for benefit obligation) *
|
—
|
|
|
2.00
|
%
|
|
—
|
|
|
—
|
|
* No assumption is required since the U.S. plans were frozen to future benefits after December 31, 2016.
In 2014, the Society of Actuaries in the United States issued a new mortality table (RP-2014) and an updated improvement scale. The Company considered the effect of RP-2014, along with other available information on mortality improvement and industry specific mortality studies, to select its assumptions for measurement of the plans’ benefit obligations at December 31, 2016 and 2015.
The projected benefit obligation, accumulated benefit obligation and aggregate fair value of plan assets for U.S. pension plans with accumulated benefit obligations in excess of plan assets were
$5.9 billion
,
$5.9 billion
and
$4.4 billion
, respectively, as of
December 31, 2016
and
$5.7 billion
,
$5.6 billion
and
$4.2 billion
, respectively, as of
December 31, 2015
.
The projected benefit obligation and fair value of plan assets for U.S. pension plans with projected benefit obligations in excess of plan assets was
$5.9 billion
and
$4.4 billion
, respectively, as of
December 31, 2016
and
$5.7 billion
and
$4.2 billion
, respectively, as of
December 31, 2015
.
As of
December 31, 2016
, the U.S. qualified plans hold
4 million
shares of the Company’s common stock which were contributed to the Plan by the Company in 2005. This represented approximately
6.2%
of those plans' assets as of
December 31, 2016
. In addition, plan assets may be invested in funds managed by Mercer Investments, a subsidiary of the Company.
The components of the net periodic benefit cost for the U.S. defined benefit and other postretirement benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
For the Years Ended December 31,
|
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Service cost
|
$
|
106
|
|
|
$
|
114
|
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
Interest cost
|
264
|
|
|
254
|
|
|
253
|
|
|
2
|
|
|
2
|
|
|
7
|
|
|
Expected return on plan assets
|
(379
|
)
|
|
(373
|
)
|
|
(346
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service (credit) cost
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
4
|
|
|
3
|
|
|
—
|
|
|
Recognized actuarial loss (gain)
|
74
|
|
|
146
|
|
|
112
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
Net periodic benefit cost (credit)
|
$
|
65
|
|
|
$
|
141
|
|
|
$
|
103
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
Plan termination
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(128
|
)
|
|
—
|
|
|
Total cost (credit)
|
$
|
65
|
|
|
$
|
141
|
|
|
$
|
103
|
|
|
$
|
4
|
|
|
$
|
(124
|
)
|
|
$
|
7
|
|
Effective September 1, 2015, the Company divided its U.S. qualified defined benefit plan to provide enhanced flexibility to manage the risk associated with those participants not receiving benefit accruals. The existing plan was amended to cover only the retirees currently receiving benefits and terminated vested participants as of August 1, 2015. The Company's active participants as of that date were transferred into a newly established, legally separate qualified defined benefit plan. The benefits offered to the plans' participants were unchanged. As a result of the plan amendment and establishment of the new plan, the Company re-measured the assets and liabilities of the two plans as required under U.S. GAAP, based on assumptions and market conditions at the amendment date.
The net periodic pension
expense recognized in 2015 reflects the weighted average costs of the December 31, 2014 measurement and the September 1, 2015 re-measurement.
In October 2016, the Company modified its U.S. defined benefit pension plans to discontinue further benefit accruals for participants after December 31, 2016. At the same time, the Company amended its U.S. defined contribution retirement plans for most of its U.S. employees to add an automatic Company contribution equal to
4%
of eligible base pay beginning on January 1, 2017. This new Company contribution, together with the Company’s current matching contribution, provides eligible U.S. employees with the opportunity to receive a total contribution of up to
7%
of eligible base pay. As required under GAAP, the defined benefit plans that were significantly impacted by the modification were re-measured in October 2016 using market data and assumptions as of the modification date. The net periodic pension expense recognized in 2016 reflects the weighted average costs of the December 31, 2015 measurement and the October 2016 re-measurement. In addition, the U.S. qualified plans were merged effective December 30, 2016, since no participants would be receiving benefit accruals after December 31, 2016.
In March 2015, the Company amended its U.S. Post-65 retiree medical reimbursement plan (the "RRA plan"), resulting in its termination, with benefits to certain participants paid through
December 31, 2016
. As a result of the termination of the RRA plan, the Company recognized a net credit of approximately
$125 million
in the first quarter of 2015.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 became law. The net periodic benefit cost for all periods shown above includes the related subsidy.
The assumed health care cost trend rate for Medicare eligibles and non-Medicare eligibles is approximately
6.9%
in
2016
, gradually declining to
4.5%
in 2039. Assumed health care cost trend rates have a small effect on the amounts reported for the U.S. health care plans because the Company caps its share of health care trend at
5%
. A one percentage point change in assumed health care cost trend rates would have no effect on the total service and interest cost components or the postretirement benefit obligation.
Estimated Future Contributions
The Company expects to fund approximately
$32 million
for its U.S. plans in
2017
, including an ERISA funding requirement of
$6 million
to the U.S. qualified plan. The Company’s policy for funding its tax-qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth in the U.S. and applicable foreign law.
Non-U.S. Plans
The following schedules provide information concerning the Company’s non-U.S. defined benefit pension plans and non-U.S. postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
Benefits
|
|
Non-U.S.
Postretirement Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
9,076
|
|
|
$
|
10,018
|
|
|
$
|
79
|
|
|
$
|
93
|
|
|
Service cost
|
72
|
|
|
82
|
|
|
2
|
|
|
2
|
|
|
Interest cost
|
273
|
|
|
333
|
|
|
3
|
|
|
3
|
|
|
Employee contributions
|
7
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
Actuarial loss (gain)
|
1,966
|
|
|
(432
|
)
|
|
5
|
|
|
(6
|
)
|
|
Plan amendments
|
(49
|
)
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
Effect of settlement
|
(27
|
)
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
Effect of curtailment
|
(7
|
)
|
|
8
|
|
|
—
|
|
|
—
|
|
|
Benefits paid
|
(352
|
)
|
|
(337
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
Foreign currency changes
|
(1,290
|
)
|
|
(632
|
)
|
|
(5
|
)
|
|
(10
|
)
|
|
Other
|
1
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
Benefit obligation December 31
|
$
|
9,670
|
|
|
$
|
9,076
|
|
|
$
|
81
|
|
|
$
|
79
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
9,826
|
|
|
$
|
10,410
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
1,815
|
|
|
187
|
|
|
—
|
|
|
—
|
|
|
Effect of settlement
|
(27
|
)
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
Company contributions
|
187
|
|
|
166
|
|
|
3
|
|
|
3
|
|
|
Employee contributions
|
7
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
Benefits paid
|
(352
|
)
|
|
(337
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
Foreign currency changes
|
(1,439
|
)
|
|
(620
|
)
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
Fair value of plan assets, December 31
|
$
|
10,017
|
|
|
$
|
9,826
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Net funded status, December 31
|
$
|
347
|
|
|
$
|
750
|
|
|
$
|
(81
|
)
|
|
$
|
(79
|
)
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
766
|
|
|
$
|
1,144
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Current liabilities
|
(5
|
)
|
|
(5
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
Non-current liabilities
|
(414
|
)
|
|
(389
|
)
|
|
(78
|
)
|
|
(76
|
)
|
|
Net asset (liability) recognized, December 31
|
$
|
347
|
|
|
$
|
750
|
|
|
$
|
(81
|
)
|
|
$
|
(79
|
)
|
|
Amounts recognized in other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Prior service (cost) credit
|
$
|
43
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Net actuarial loss
|
(3,081
|
)
|
|
(2,887
|
)
|
|
(11
|
)
|
|
(6
|
)
|
|
Total recognized accumulated other comprehensive (loss) income, December 31
|
$
|
(3,038
|
)
|
|
$
|
(2,890
|
)
|
|
$
|
(11
|
)
|
|
$
|
(6
|
)
|
|
Cumulative employer contributions in excess of (less than) net periodic cost
|
3,385
|
|
|
3,640
|
|
|
(70
|
)
|
|
(73
|
)
|
|
Net asset (liability) recognized in consolidated balance sheet, December 31
|
$
|
347
|
|
|
$
|
750
|
|
|
$
|
(81
|
)
|
|
$
|
(79
|
)
|
|
Accumulated benefit obligation, December 31
|
$
|
9,397
|
|
|
$
|
8,830
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
Benefits
|
|
Non-U.S.
Postretirement Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Reconciliation of prior service credit (cost) recognized in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Recognized as component of net periodic benefit credit
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
Effect of curtailment
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
Plan amendments
|
49
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
Exchange rate adjustments
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Prior service (cost) credit, December 31
|
$
|
43
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
Benefits
|
|
Non-U.S.
Postretirement Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Reconciliation of net actuarial gain (loss) recognized in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(2,887
|
)
|
|
$
|
(3,215
|
)
|
|
$
|
(6
|
)
|
|
$
|
(14
|
)
|
|
Recognized as component of net periodic benefit cost
|
94
|
|
|
125
|
|
|
—
|
|
|
1
|
|
|
Effect of settlement
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Liability experience
|
(1,966
|
)
|
|
432
|
|
|
(5
|
)
|
|
6
|
|
|
Asset experience
|
1,254
|
|
|
(417
|
)
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
—
|
|
|
Effect of curtailment
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total amount recognized as change in plan assets and benefit obligations
|
(709
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
6
|
|
|
Exchange rate adjustments
|
421
|
|
|
206
|
|
|
—
|
|
|
1
|
|
|
Net actuarial loss, December 31
|
$
|
(3,081
|
)
|
|
$
|
(2,887
|
)
|
|
$
|
(11
|
)
|
|
$
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Non-U.S. Pension
Benefits
|
|
Non-U.S. Postretirement
Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Total recognized in net periodic benefit cost and other comprehensive loss (income)
|
$
|
21
|
|
|
$
|
(407
|
)
|
|
$
|
201
|
|
|
$
|
10
|
|
|
$
|
(2
|
)
|
|
$
|
5
|
|
Estimated amounts that will be amortized from accumulated other comprehensive income in the next fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
Benefits
|
|
Non-U.S.
Postretirement Benefits
|
|
(In millions of dollars)
|
2017
|
|
|
2017
|
|
|
Prior service credit
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
Net actuarial loss
|
126
|
|
|
1
|
|
|
Projected cost
|
$
|
124
|
|
|
$
|
1
|
|
The weighted average actuarial assumptions utilized for the non-U.S. defined and postretirement benefit plans as of the end of the year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension
Benefits
|
|
Non-U.S.
Postretirement Benefits
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
Discount rate (for expense)
|
3.71
|
%
|
|
3.49
|
%
|
|
4.00
|
%
|
|
3.85
|
%
|
|
Expected return on plan assets
|
6.36
|
%
|
|
6.57
|
%
|
|
—
|
|
|
—
|
|
|
Rate of compensation increase (for expense)
|
2.72
|
%
|
|
2.67
|
%
|
|
—
|
|
|
—
|
|
|
Discount rate (for benefit obligation)
|
2.69
|
%
|
|
3.71
|
%
|
|
3.42
|
%
|
|
4.00
|
%
|
|
Rate of compensation increase (for benefit obligation)
|
2.85
|
%
|
|
2.72
|
%
|
|
—
|
|
|
—
|
|
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the non-U.S. pension plans with accumulated benefit obligations in excess of plan assets were
$1.2 billion
,
$1.2 billion
and
$0.9 billion
, respectively, as of
December 31, 2016
and
$1.7 billion
,
$1.6 billion
and
$1.3 billion
, respectively, as of
December 31, 2015
.
The projected benefit obligation and fair value of plan assets for non-U.S. pension plans with projected benefit obligations in excess of plan assets was
$2.1 billion
and
$1.7 billion
, respectively, as of
December 31, 2016
and
$1.9 billion
and
$1.5 billion
, respectively, as of
December 31, 2015
.
Non-U.S. Plan Amendments
Effective August 1, 2015, the Company amended its Ireland defined benefit pension plans to close those plans to future benefit accruals and replaced those plans with a defined contribution arrangement. The Company re-measured the assets and liabilities of the plans, based on assumptions and market conditions on the amendment date. The net periodic pension costs recognized in 2015 reflect the weighted average costs of the December 31, 2014 measurement and the August 1, 2015 re-measurement.
After completion of a consultation period with affected colleagues, in January
2014
, the Company amended its U.K. defined benefit pension plans to close those plans to future benefit accruals effective August 1,
2014
and replaced those plans, along with its existing defined contribution plans, with a new, comprehensive defined contribution arrangement. This change resulted in a curtailment of the U.K. defined benefit plans and, as required under GAAP, the Company re-measured the defined benefit plans’ assets and liabilities at the amendment date, based on assumptions and market conditions at that date. The net periodic benefit costs recognized in
2014
are the weighted average resulting from the December 31,
2013
measurement and the January
2014
re-measurement. The Company recognized a curtailment gain of
$65 million
in the first quarter of 2014, primarily resulting from the recognition of the remaining unamortized prior service credit related to a plan amendment made in December 2012. This gain was mostly offset by the cost of a transition benefit for certain employees most impacted by the amendment, which is not part of net periodic pension cost.
Components of Net Periodic Benefits Costs
The components of the net periodic benefit cost for the non-U.S. defined benefit and other postretirement benefit plans and the curtailment, settlement and termination expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Non-U.S. Pension
Benefits
|
|
Non-U.S. Postretirement
Benefits
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Service cost
|
$
|
72
|
|
|
$
|
82
|
|
|
$
|
122
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Interest cost
|
273
|
|
|
333
|
|
|
388
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
Expected return on plan assets
|
(561
|
)
|
|
(604
|
)
|
|
(644
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service cost
|
(1
|
)
|
|
(1
|
)
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Recognized actuarial loss
|
94
|
|
|
125
|
|
|
131
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Net periodic benefit (credit) cost
|
(123
|
)
|
|
(65
|
)
|
|
(12
|
)
|
|
5
|
|
|
6
|
|
|
7
|
|
|
Settlement loss
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Curtailment (gain) loss
|
(4
|
)
|
|
5
|
|
|
(65
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total (credit) cost
|
$
|
(127
|
)
|
|
$
|
(59
|
)
|
|
$
|
(77
|
)
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
7
|
|
The assumed health care cost trend rate was approximately
5.20%
in
2016
, gradually declining to
4.48%
in 2026. Assumed health care cost trend rates can have a significant effect on the amounts reported for the non-U.S. health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
1 Percentage
Point Increase
|
|
1 Percentage
Point Decrease
|
|
Effect on total of service and interest cost components
|
$
|
1
|
|
|
$
|
—
|
|
|
Effect on postretirement benefit obligation
|
$
|
8
|
|
|
$
|
(7
|
)
|
Estimated Future Contributions
The Company expects to contribute approximately
$224 million
to its non-U.S. pension plans in
2017
. Funding requirements for non-U.S. plans vary by country. Contribution rates are generally based on local funding practices and requirements, which may differ significantly from measurements under U.S. GAAP. Funding amounts may be influenced by future asset performance, the level of discount rates and other variables impacting the assets and/or liabilities of the plan. Discretionary contributions may also be affected by alternative uses of the Company’s cash flows, including dividends, investments and share repurchases.
In the U.K., the assumptions used to determine pension contributions are the result of legally-prescribed negotiations between Company and the plans' trustee that typically occurs every three years in conjunction with the actuarial valuation of the plans. Currently, this results in a lower funded status than under U.S. GAAP and may result in contributions irrespective of the U.S. GAAP funded status. In November 2016, the Company and the Trustee of the U.K. Defined Benefits Plans agreed to a funding deficit recovery plan for the U.K. defined benefit pension plans. The current agreement with the Trustee sets out the annual deficit contributions which would be due based on the deficit at December 31, 2015. The funding level is subject to re-assessment, in most cases on November 1
st
of each year. If the funding level on November 1
st
is sufficient, no deficit funding contributions will be required in the following year, and the contribution amount will be deferred. As part of a long-term strategy, which depends on having greater influence over asset allocation and overall investment decisions, in November 2016, the Company renewed its agreement to support annual deficit contributions by the U.K. operating companies under certain circumstances, up to GBP
450 million
over a
seven
-year period.
Estimated Future Benefit Payments
The Plans' estimated future benefit payments for its pension and postretirement benefits (without reduction for Medicare subsidy receipts) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
(In millions of dollars)
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
|
2017
|
$
|
244
|
|
|
$
|
240
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
2018
|
$
|
259
|
|
|
$
|
272
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
2019
|
$
|
276
|
|
|
$
|
281
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
2020
|
$
|
287
|
|
|
$
|
293
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
2021
|
$
|
297
|
|
|
$
|
303
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
2022-2026
|
$
|
1,641
|
|
|
$
|
1,719
|
|
|
$
|
14
|
|
|
$
|
19
|
|
Defined Benefit Plans Fair Value Disclosures
The U.S. and non-U.S. plan investments are classified into Level 1, which refers to investments valued using quoted prices from active markets for identical assets; Level 2, which refers to investments not traded on an active market but for which observable market inputs are readily available; and Level 3, which refers to investments valued based on significant unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
In 2016, the Company adopted new guidance issued by the FASB, which removes the requirement to present certain investments for which the practical expedient is used to measure fair value at net asset value ("NAV") within the fair value hierarchy table. Instead, an entity is required to include those investments as a reconciling item so that the total fair value amount of investments in the disclosure is consistent with the fair value investment balance on the statement of net assets. The adoption of the new guidance, which requires retrospective application, resulted in the reclassifications of
$6.6 billion
and
$1.4 billion
from Level 2 and Level 3, respectively, to NAV categorization within the hierarchy table as of December 31, 2015.
The following table sets forth, by level within the fair value hierarchy, a summary of the U.S. and non-U.S. plans' investments measured at fair value on a recurring basis at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
Assets
(In millions of dollars)
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
NAV
|
|
Total
|
|
Common/collective trusts
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,805
|
|
|
$
|
6,821
|
|
|
Corporate obligations
|
—
|
|
|
3,024
|
|
|
9
|
|
|
—
|
|
|
3,033
|
|
|
Corporate stocks
|
2,009
|
|
|
3
|
|
|
2
|
|
|
—
|
|
|
2,014
|
|
|
Private equity/partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
722
|
|
|
722
|
|
|
Government securities
|
11
|
|
|
380
|
|
|
—
|
|
|
—
|
|
|
391
|
|
|
Real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
412
|
|
|
412
|
|
|
Short-term investment funds
|
297
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
319
|
|
|
Company common stock
|
270
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
270
|
|
|
Other investments
|
15
|
|
|
23
|
|
|
312
|
|
|
—
|
|
|
350
|
|
|
Total investments
|
$
|
2,618
|
|
|
$
|
3,452
|
|
|
$
|
323
|
|
|
$
|
7,939
|
|
|
$
|
14,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
Assets
(In millions of dollars)
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
NAV
|
|
Total
|
|
Common/collective trusts
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,861
|
|
|
$
|
7,036
|
|
|
Corporate obligations
|
—
|
|
|
2,651
|
|
|
1
|
|
|
—
|
|
|
2,652
|
|
|
Corporate stocks
|
1,844
|
|
|
6
|
|
|
2
|
|
|
—
|
|
|
1,852
|
|
|
Private equity/partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
710
|
|
|
710
|
|
|
Government securities
|
10
|
|
|
415
|
|
|
—
|
|
|
—
|
|
|
425
|
|
|
Real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
442
|
|
|
442
|
|
|
Short-term investment funds
|
312
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
316
|
|
|
Company common stock
|
222
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
222
|
|
|
Other investments
|
13
|
|
|
47
|
|
|
257
|
|
|
—
|
|
|
317
|
|
|
Total investments
|
$
|
2,576
|
|
|
$
|
3,123
|
|
|
$
|
260
|
|
|
$
|
8,013
|
|
|
$
|
13,972
|
|
The tables below set forth a summary of changes in the fair value of the plans’ Level 3 assets for the years ended
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (In millions)
|
Fair Value,
January 1, 2016
|
|
Purchases
|
|
Sales
|
|
Unrealized
Gain/
(Loss)
|
|
Realized
Gain/
(Loss)
|
|
Exchange
Rate
Impact
|
|
Transfers
in/(out)
and
Other
|
|
Fair
Value, December 31, 2016
|
|
Other investments
|
257
|
|
|
27
|
|
|
(28
|
)
|
|
67
|
|
|
1
|
|
|
(12
|
)
|
|
—
|
|
|
312
|
|
|
Corporate stocks
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Corporate obligations
|
1
|
|
|
8
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
9
|
|
|
Total assets
|
$
|
260
|
|
|
$
|
35
|
|
|
$
|
(28
|
)
|
|
$
|
68
|
|
|
$
|
1
|
|
|
$
|
(13
|
)
|
|
$
|
—
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(In millions)
|
Fair Value,
January 1, 2015
|
|
Purchases
|
|
Sales
|
|
Unrealized
Gain/
(Loss)
|
|
Realized
Gain/
(Loss)
|
|
Exchange
Rate
Impact
|
|
Transfers
in/(out)
and
Other
|
|
Fair
Value,
December 31, 2015
|
|
Other investments
|
239
|
|
|
47
|
|
|
(13
|
)
|
|
14
|
|
|
—
|
|
|
(30
|
)
|
|
—
|
|
|
257
|
|
|
Corporate stocks
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Corporate obligations
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
1
|
|
|
Total assets
|
$
|
243
|
|
|
$
|
47
|
|
|
$
|
(13
|
)
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
(2
|
)
|
|
$
|
260
|
|
The following is a description of the valuation methodologies used for assets measured at fair value:
Company common stock: Valued at the closing price reported on the New York Stock Exchange.
Common stocks, preferred stocks, convertible equity securities, rights/warrants and real estate investment trusts (included in Corporate stocks): Valued at the closing price reported on the primary exchange.
Corporate bonds (included in Corporate obligations): The fair value of corporate bonds is estimated using recently executed transactions, market price quotations (where observable) and bond spreads. The spread data used are for the same maturity as the bond. If the spread data does not reference the issuer, then data that references a comparable issuer are used. When observable price quotations are not available, fair value is determined based on cash flow models.
Commercial mortgage-backed and asset-backed securities (included in Corporate obligations): Fair value is determined using discounted cash flow models. Observable inputs are based on trade and quote activity of bonds with similar features including issuer vintage, purpose of underlying loan (first or second lien), prepayment speeds and credit ratings. The discount rate is the combination of the appropriate rate from the benchmark yield curve and the discount margin based on quoted prices.
Common/Collective trusts: Valued at the net asset value of units of a bank collective trust. The net asset value as provided by the trustee, is used as a practical expedient to estimate fair value. The net asset value is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported net asset value.
U.S. government bonds (included in Government securities): The fair value of U.S. government bonds is estimated by pricing models that utilize observable market data including quotes, spreads and data points for yield curves.
U.S. agency securities (included in Government securities): U.S. agency securities are comprised of two main categories consisting of agency issued debt and mortgage pass-throughs. Agency issued debt securities are valued by benchmarking market-derived prices to quoted market prices and trade data for identical or comparable securities. Mortgage pass-throughs include certain "To-be-announced" (TBA) securities and mortgage pass-through pools. TBA securities are generally valued using quoted market prices or are benchmarked thereto. Fair value of mortgage pass-through pools are model driven with respect to spreads of the comparable TBA security.
Private equity and real estate partnerships: Investments in private equity and real estate partnerships are valued based on the fair value reported by the manager of the corresponding partnership and reported on a one quarter lag. The managers provide unaudited quarterly financial statements and audited annual financial statements which set forth the value of the fund. The valuations obtained from the managers are based on various analyses on the underlying holdings in each partnership, including financial valuation models and projections, comparable valuations from the public markets, and precedent private market transactions. Investments are valued in the accompanying financial statements based on the Plan’s beneficial interest in the underlying net assets of the partnership as determined by the partnership agreement.
Insurance group annuity contracts: The fair values for these investments are based on the current market value of the aggregate accumulated contributions plus interest earned.
Swap assets (included in Other investments): Fair values for interest rate swaps, equity index swaps and inflation swaps are estimated using a discounted cash flow pricing model. These models use observable market data such as contractual fixed rate, spot equity price or index value and dividend data. The fair values of credit default swaps are estimated using an income approach model which determines expected cash flows based on default probabilities from the issuer-specific credit spread curve and credit loss recovery rates, both of which are dependent on market quotes.
Short-term investment funds: Primarily high-grade money market instruments valued at net asset value at year-end.
Registered investment companies: Valued at the closing price reported on the primary exchange.
Defined Contribution Plans
The Company maintains certain defined contribution plans for its employees, including the Marsh & McLennan Companies 401(k) Savings & Investment Plan ("401(k) Plan"), that are qualified under U.S. tax laws. Under these plans, eligible employees may contribute a percentage of their base salary, subject to certain limitations. For the 401(k) Plan, the Company matches a fixed portion of the employees’ contributions. The 401(k) Plan contains an Employee Stock Ownership Plan feature under U.S. tax law. Approximately
$436 million
of the 401(k) Plan’s assets at
December 31, 2016
and
$398 million
in
December 31, 2015
were invested in the Company’s common stock. If a participant does not choose an investment direction for his or her future contributions, they are automatically invested in a BlackRock LifePath Portfolio that most closely matches the participant’s expected retirement year. The cost of these defined contribution plans was
$53 million
in
2016
,
$51 million
in
2015
and
$49 million
in
2014
. In addition, the Company has a significant defined contribution plan in the U.K. As noted above, effective August 1, 2014, a newly formed defined contribution plan replaced the existing defined contribution and defined benefit plans with regard to future service. The cost of the U.K. defined contribution plan was
$81 million
,
$93 million
and
$65 million
in
2016
,
2015
and
2014
, respectively. The decrease in cost from 2016 as compared to 2015 is primarily due to the impact of foreign currency translation.
9. Stock Benefit Plans
The Company maintains multiple stock-based payment arrangements under which employees are awarded grants of restricted stock units, stock options and other forms of stock-based benefits.
Marsh & McLennan Companies, Inc. Incentive and Stock Award Plans
On May 19, 2011, the Marsh & McLennan Companies, Inc. 2011 Incentive and Stock Award Plan (the "2011 Plan") was approved by the Company's stockholders. The 2011 Plan replaced the Company's
two
previous equity incentive plans (the 2000 Senior Executive Incentive and Stock Award Plan and the 2000 Employee Incentive and Stock Award Plan).
The types of awards permitted under the 2011 Plan include stock options, restricted stock and restricted stock units payable in Company common stock or cash, and other stock-based and performance-based awards. The Compensation Committee of the Board of Directors (the "Compensation Committee") determines, at its discretion, which affiliates may participate in the 2011 Plan, which eligible employees will receive awards, the types of awards to be received, and the terms and conditions thereof. The right of an employee to receive an award may be subject to performance conditions as specified by the Compensation Committee. The 2011 Plan contains a provision which, in the event of a change in control of the Company, may accelerate the vesting of the awards. This provision requires both a change in control of the Company and a subsequent specified termination of employment for vesting to be accelerated.
The 2011 Plan retains the remaining share authority of the
two
previous plans as of the date the 2011 Plan was approved by stockholders. Thus, approximately
23.2 million
shares of common stock, plus shares remaining unused under the previous plans, are available for awards over the life of the 2011 Plan.
The current practice is to grant non-qualified stock options, restricted stock units and/or performance stock units ("PSUs") on an annual basis to senior executives and a limited number of other employees as part of their total compensation. Restricted stock units are also granted to new hires or as retention awards for certain employees. Restricted stock has not been granted since 2005.
Stock Options:
Options granted under the 2011 Plan may be designated as either incentive stock options or non-qualified stock options. The Compensation Committee determines the terms and conditions of the option, including the time or times at which an option may be exercised, the methods by which such exercise price may be paid, and the form of such payment. Options are generally granted with an exercise price equal to the market value of the Company's common stock on the date of grant. These option awards generally vest
25%
per annum and have a contractual term of
10 years
.
The estimated fair value of options granted is calculated using the Black-Scholes option pricing valuation model. This model takes into account several factors and assumptions. The risk-free interest rate is based on the yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumption at the time of grant. The expected life (estimated period of time outstanding) is estimated using the contractual term of the option and the effects of employees' expected exercise and post-vesting employment termination behavior. The Company uses a blended volatility rate based on the following: (i) volatility derived from daily closing price observations for the
10
-year period ended on the valuation date, (ii) implied volatility derived from traded options for the period one week before the valuation date and (iii) average volatility for the
10
-year periods ended on
15
anniversaries prior to the valuation date, using daily closing price observations. The expected dividend yield is based on expected dividends for the expected term of the stock options.
The assumptions used in the Black-Scholes option pricing valuation model for options granted by the Company in
2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Risk-free interest rate
|
1.39%
|
|
1.78%
|
|
1.88%
|
|
Expected life (in years)
|
6.0
|
|
6.0
|
|
6.0
|
|
Expected volatility
|
25.55%
|
|
23.75%
|
|
24.2%
|
|
Expected dividend yield
|
2.15%
|
|
1.97%
|
|
2.08%
|
A summary of the status of the Company’s stock option awards as of
December 31, 2016
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
($000)
|
|
Balance at January 1, 2016
|
14,776,804
|
|
|
$
|
34.14
|
|
|
|
|
|
|
Granted
|
2,167,645
|
|
|
$
|
57.55
|
|
|
|
|
|
|
Exercised
|
(3,593,033
|
)
|
|
$
|
29.32
|
|
|
|
|
|
|
Forfeited
|
(91,016
|
)
|
|
$
|
53.58
|
|
|
|
|
|
|
Expired
|
(17,871
|
)
|
|
$
|
30.13
|
|
|
|
|
|
|
Balance at December 31, 2016
|
13,242,529
|
|
|
$
|
39.15
|
|
|
5.7 years
|
|
$
|
377,580
|
|
|
Options vested or expected to vest at December 31, 2016
|
13,055,049
|
|
|
$
|
38.95
|
|
|
5.7 years
|
|
$
|
374,871
|
|
|
Options exercisable at December 31, 2016
|
8,598,826
|
|
|
$
|
31.63
|
|
|
4.4 years
|
|
$
|
309,778
|
|
In the above table, forfeited options are unvested options whose requisite service period has not been met. Expired options are vested options that were not exercised. The weighted-average grant-date fair value of the Company's option awards granted during the years ended December 31,
2016
,
2015
and
2014
was
$11.57
,
$11.34
and
$9.66
, respectively. The total intrinsic value of options exercised during the same periods was
$137.7 million
,
$124.6 million
and
$174.3 million
, respectively.
As of December 31,
2016
, there was
$14.4 million
of unrecognized compensation cost related to the Company's option awards. The weighted-average period over which that cost is expected to be recognized is approximately
1.42
years. Cash received from the exercise of stock options for the years ended December 31,
2016
,
2015
and
2014
was
$105.4 million
,
$134.7 million
and
$178.1 million
, respectively.
The Company's policy is to issue treasury shares upon option exercises or share unit conversion. The
Company intends to issue treasury shares as long as an adequate number of those shares is available.
Restricted Stock Units and Performance Stock Units:
Restricted stock units may be awarded under the Company's 2011 Incentive and Stock Award Plan. The Compensation Committee determines the restrictions on such units, when the restrictions lapse, when the units vest and are paid, and under what terms the units are forfeited. The cost of these awards is amortized over the vesting period, which is generally
three years
. Awards to senior executives and other employees may include three-year performance-based restricted stock units and three-year service-based restricted stock units. The payout of performance stock units (payable in shares of the Company's common stock) ranges, generally, from
0
-
200%
of the number of units granted, based on the achievement of objective, pre-determined Company performance measures, generally, over a
three
-year performance period. The Company accounts for these awards as performance condition restricted stock units. The performance condition is not considered in the determination of grant date fair value of such awards. Compensation cost is recognized over the performance period based on management's estimate of the number of units expected to vest and is adjusted to reflect the actual number of shares paid out at the end of the
three
-year performance period. Dividend equivalents are not paid out unless and until such time that the award vests.
A summary of the status of the Company's restricted stock units and performance stock units as of December 31,
2016
and changes during the period then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
|
Non-vested balance at January 1, 2016
|
2,459,293
|
|
$
|
52.51
|
|
|
678,165
|
|
$
|
46.25
|
|
|
Granted
|
1,844,661
|
|
$
|
57.54
|
|
|
323,990
|
|
$
|
57.47
|
|
|
Vested
|
(1,100,706
|
)
|
$
|
49.62
|
|
|
(260,089
|
)
|
$
|
36.56
|
|
|
Forfeited
|
(159,219
|
)
|
$
|
56.41
|
|
|
(20,049
|
)
|
$
|
54.49
|
|
|
Non-vested balance at December 31, 2016
|
3,044,029
|
|
$
|
56.40
|
|
|
722,017
|
|
$
|
54.68
|
|
The weighted-average grant-date fair value of the Company's restricted stock units granted during the years ended December 31,
2015
and
2014
was
$56.81
and
$48.16
, respectively. The weighted average grant date fair value of the Company's performance stock units granted during the years ended December 31,
2015
and
2014
was
$57.33
and
$48.00
, respectively. The total fair value of the shares distributed during the years ended December 31,
2016
,
2015
and
2014
in connection with the Company's non-option equity awards was
$91.4 million
,
$114.3 million
and
$165.3 million
, respectively.
The payout of shares in 2016 with respect to the PSUs awarded in 2013 was
180%
of target based on performance for the three-year performance period. The payout of shares with respect to the PSUs that vested in 2016 due to certain types of termination was based on performance for the abbreviated performance period. In aggregate,
468,858
shares became distributable in respect to PSUs vested in 2016.
As of December 31,
2016
, there was
$127.2 million
of unrecognized compensation cost related to the Company's restricted stock units and performance stock unit awards. The weighted-average period over which that cost is expected to be recognized is approximately
1.045
years.
Marsh & McLennan Companies Stock Purchase Plans
In May 1999, the Company's stockholders approved an employee stock purchase plan (the "1999 Plan") to replace the 1994 Employee Stock Purchase Plan (the "1994 Plan"), which terminated on September 30, 1999 following its fifth annual offering. Under the current terms of the Plan, shares are purchased
four
times during the plan year at a price that is
95%
of the average market price on each quarterly purchase date. Under the 1999 Plan, after including the available remaining unused shares in the 1994 Plan and reducing the shares available by
10,000,000
consistent with the Company's Board of Directors' action in March 2007, no more than
35,600,000
shares of the Company's common stock may be sold. Employees purchased
490,374
shares during the year ended December 31, 2016 and at December 31, 2016,
1,781,410
shares were available for issuance under the 1999 Plan. Under the 1995 Company Stock Purchase Plan for International Employees (the "International Plan"), after reflecting the additional
5,000,000
shares of common stock for issuance approved by the Company's Board of Directors in July 2002, and the addition of
4,000,000
shares due to a shareholder action in May 2007, no more than
12,000,000
shares of the Company's common stock may be sold. Employees purchased
135,362
shares during the year ended December 31, 2016 and there were
2,613,203
shares available for issuance at December 31, 2016 under the International Plan. The plans are considered non-compensatory.
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 using Level 1 inputs include exchange-traded equity securities, exchange-traded mutual funds and money market funds.
|
|
|
|
Level 2.
|
Assets and liabilities whose values are based on the following:
|
|
|
|
|
a)
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
|
|
|
|
|
c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
|
|
|
|
|
d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).
|
The Company does not have any assets or liabilities that use Level 2 inputs.
|
|
|
|
Level 3.
|
Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long-dated options on gas and power).
|
Liabilities using Level 3 inputs include liabilities for contingent purchase consideration.
Valuation Techniques
Equity Securities, Money Market Funds and Mutual Funds - Level 1
Investments for which market quotations are readily available are valued at the sale price on their principal exchange or, for certain markets, official closing bid price. Money market funds are valued using a valuation technique that results in price per share at
$1.00
.
Contingent Purchase Consideration Liability - Level 3
Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. These arrangements typically provide for the payment of additional consideration if earnings and revenue targets are met over periods from
two
to
four
years. The fair value of contingent consideration is estimated as the present value of future cash flows resulting from the projected revenue and earnings of the acquired entities.
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars)
|
Identical Assets
(Level 1)
|
|
Observable Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
12/31/16
|
|
|
12/31/15
|
|
|
12/31/16
|
|
|
12/31/15
|
|
|
12/31/16
|
|
|
12/31/15
|
|
|
12/31/16
|
|
|
12/31/15
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded equity securities
(a)
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
Mutual funds
(a)
|
141
|
|
|
142
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
141
|
|
|
142
|
|
|
Money market funds
(b)
|
22
|
|
|
140
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
140
|
|
|
Total assets measured at fair value
|
$
|
252
|
|
|
$
|
282
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
252
|
|
|
$
|
282
|
|
|
Fiduciary Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
90
|
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
48
|
|
|
Total fiduciary assets measured at fair value
|
$
|
90
|
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
48
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase consideration liability
(c)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
241
|
|
|
$
|
309
|
|
|
$
|
241
|
|
|
$
|
309
|
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
241
|
|
|
$
|
309
|
|
|
$
|
241
|
|
|
$
|
309
|
|
(a) Included in other assets in the consolidated balance sheets.
(b) Included in cash and cash equivalents in the consolidated balance sheets.
(c) Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
During the
year
ended
December 31, 2016
, 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 years ended
December 31, 2016
and
December 31, 2015
that represent contingent purchase consideration related to acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
|
2015
|
|
|
Balance at January 1,
|
$
|
309
|
|
|
$
|
207
|
|
|
Additions
|
17
|
|
|
104
|
|
|
Payments
|
(86
|
)
|
|
(47
|
)
|
|
Revaluation Impact
|
9
|
|
|
45
|
|
|
Other
(a)
|
(8
|
)
|
|
—
|
|
|
Balance at December 31,
|
$
|
241
|
|
|
$
|
309
|
|
(a)
Primarily reflects the impact of foreign exchange.
The fair value of the contingent purchase consideration liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net increase in the estimated fair value of such liabilities for prior period acquisitions of
$9 million
for the year ended
December 31, 2016
. A
5%
increase in the above mentioned projections would increase the liability by approximately
$21 million
. A
5%
decrease in the above mentioned projections would decrease the liability by approximately
$22 million
.
Long-Term Investments
The Company holds investments in certain private equity investments, public companies and private companies that are accounted for using the equity method of accounting. The carrying value of these investments was
$389 million
and
$347 million
at December 31,
2016
and
2015
, respectively.
Private Equity Investments
The Company's investments in private equity funds were
$79 million
and
$76 million
at December 31,
2016
and December 31,
2015
, respectively. The carrying values of these private equity investments approximates fair value. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. The Company records in earnings, investment gains/losses for its proportionate share of the change in fair value of the funds. These investments are included in other assets in the consolidated balance sheets.
Investments in Public and Private Companies
Alexander Forbes:
The Company owns approximately
33%
of the common stock of Alexander Forbes, a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for
7.50
South African Rand per share. As of
December 31, 2016
, the carrying value of the Company’s investment in Alexander Forbes was approximately
$247 million
. As of
December 31, 2016
, the market value of the approximately
443 million
shares owned by the Company, based on the
December 31, 2016
closing share price of
7.95
South African Rand per share, was approximately
$251 million
.
The Company’s investment in Alexander Forbes and its other equity investments in private insurance and consulting companies are accounted for using the equity method of accounting, the results of which are included in revenue in the consolidated income statements and the carrying value of which is included in other assets in the consolidated balance sheets. The Company records its share of income or loss on its equity method investments on a one quarter lag basis.
Benefitfocus: On February 24, 2015, Mercer purchased shares of common stock of Benefitfocus (NASDAQ:BNFT) constituting approximately
9.9%
of BNFT's outstanding capital stock as of the acquisition date. The purchase price for the BNFT shares and certain other rights and other consideration was approximately
$75 million
. In 2015, the Company elected to account for this investment under the cost method of accounting as the shares purchased were categorized as restricted. Effective December 31, 2016, these shares are no longer considered restricted for the purpose of determining if they are marketable securities under GAAP, and are accounted for as available for sale securities and included in other assets in the consolidated balance sheets. The value of the BNFT shares based on the closing price on the NASDAQ at December 31, 2016 was approximately
$84 million
. Related unrealized gains of approximately
$21 million
have been recorded in other comprehensive income.
Deconsolidation of a Subsidiary
Marsh operates in India through Marsh India Insurance Brokers Limited (Marsh India), which is owned
26%
by Marsh and
74%
by local shareholders. Prior to the second quarter of 2016, under the terms of its shareholders’ agreement with the local shareholders, Marsh had a controlling financial interest in Marsh India and its results were consolidated as required under U.S. GAAP. Under the recently adopted Insurance Laws (Amendment) Act 2015 of India and related regulations issued by the Indian Insurance Regulatory and Development Authority, Indian insurance companies (including insurance intermediaries and brokers like Marsh India) must now be controlled by Indian promoters or Indian investors.
In the second quarter of 2016, the shareholders’ agreement among the shareholders of Marsh India was amended to comply with these new regulations, which resulted in Marsh no longer having a controlling financial interest under U.S. GAAP. In accordance with U.S. GAAP, the Company was required to deconsolidate Marsh India and recognize its interest in Marsh India at fair value, with the difference between the carrying value and fair value recognized in earnings. The Company estimated the fair value of its interest in Marsh India, primarily using a discounted cash flow approach, which considered various cash flow scenarios and a discount rate appropriate for the investment. Certain provisions relating to restrictions on sales and repurchase of shares of Marsh India owned by its employees were also required to be removed by the new regulations. As a result, the deferred compensation expense related to those shares was accelerated in the second quarter of 2016. The net gain on the Company’s pre-tax income as a result of these changes was approximately
$11 million
, which is included in revenue for the year ended 2016. Beginning on May 1, 2016, the Company accounted for its investment in Marsh India using the equity method of accounting.
The summarized financial information presented below reflects the aggregated financial information of all significant equity method investees as of and for the twelve months ended September 30 of each year (or
portion of those twelve months the Company owned its investment), consistent with the Company’s recognition of the results of its equity method investments on a one quarter lag. The investment income information presented below reflects the net realized and unrealized gains/losses, net of expenses, related to the Company's investments in several private equity funds. Certain of the Company’s equity method investments, including Alexander Forbes, have unclassified balance sheets. Therefore, the asset and liability information presented below are not split between current and non-current.
Below is a summary of the financial information for the Company's significant equity method investees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended September 30,
|
|
|
|
|
|
|
|
(In millions of dollars)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Revenue
|
|
$
|
843
|
|
|
$
|
1,018
|
|
|
$
|
239
|
|
|
Net investment income (a)
|
|
$
|
1,824
|
|
|
$
|
1,620
|
|
|
$
|
161
|
|
|
Net income
|
|
$
|
91
|
|
|
$
|
196
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
|
|
(In millions of dollars)
|
|
2016
|
|
|
2015
|
|
|
Total assets
|
|
$
|
22,997
|
|
|
$
|
21,101
|
|
|
Total liabilities
|
|
$
|
21,087
|
|
|
$
|
19,348
|
|
|
Non-controlling interests
|
|
$
|
12
|
|
|
$
|
12
|
|
The information above includes twelve months of income statement activity for Alexander Forbes in
2016
,
2015
and two months of activity in 2014, reflecting the timing of the Company's investment.
(a) Net investment income in 2016 and 2015 includes approximately
$1.9 billion
and
$
1.5 billion
, respectively, related to Alexander Forbes, substantially all of which is credited to policy holders.
11. Long-term Commitments
The Company leases office facilities, equipment and automobiles under non-cancelable operating leases. These leases expire on varying dates, in some instances contain renewal and expansion options, do not restrict the payment of dividends or the incurrence of debt or additional lease obligations, and contain no significant purchase options. In addition to the base rental costs, occupancy lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. Approximately
98%
of the Company’s lease obligations are for the use of office space.
The consolidated statements of income include net rental costs of
$367 million
,
$381 million
and
$393 million
for
2016
,
2015
and
2014
, respectively, after deducting rentals from subleases (
$9 million
in
2016
,
$14 million
in
2015
and
$12 million
in
2014
). These net rental costs exclude rental costs and sublease income for previously accrued restructuring charges related to vacated space.
At
December 31, 2016
, the aggregate future minimum rental commitments under all non-cancelable operating lease agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Gross
Rental
Commitments
|
|
Rentals
from
Subleases
|
|
Net
Rental
Commitments
|
|
(In millions of dollars)
|
|
|
|
2017
|
$
|
372
|
|
|
$
|
46
|
|
|
$
|
326
|
|
|
2018
|
$
|
345
|
|
|
$
|
42
|
|
|
$
|
303
|
|
|
2019
|
$
|
297
|
|
|
$
|
36
|
|
|
$
|
261
|
|
|
2020
|
$
|
262
|
|
|
$
|
32
|
|
|
$
|
230
|
|
|
2021
|
$
|
198
|
|
|
$
|
4
|
|
|
$
|
194
|
|
|
Subsequent years
|
$
|
862
|
|
|
$
|
3
|
|
|
$
|
859
|
|
The Company has entered into agreements, primarily with various service companies, to outsource certain information systems activities and responsibilities and processing activities. Under these agreements, the Company is required to pay minimum annual service charges. Additional fees may be payable depending upon the volume of transactions processed, with all future payments subject to increases for inflation. At
December 31, 2016
, the aggregate fixed future minimum commitments under these agreements are as follows:
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
Future
Minimum
Commitments
|
|
(In millions of dollars)
|
|
2017
|
$
|
225
|
|
|
2018
|
79
|
|
|
2019
|
36
|
|
|
Subsequent years
|
11
|
|
|
|
$
|
351
|
|
12. Debt
The Company’s outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
(In millions)
|
2016
|
|
|
2015
|
|
|
Short-term:
|
|
|
|
|
Commercial paper
|
$
|
50
|
|
|
$
|
—
|
|
|
Current portion of long-term debt
|
262
|
|
|
12
|
|
|
|
312
|
|
|
12
|
|
|
Long-term:
|
|
|
|
|
Senior notes – 2.30% due 2017
|
250
|
|
|
249
|
|
|
Senior notes – 2.55% due 2018
|
249
|
|
|
249
|
|
|
Senior notes – 2.35% due 2019
|
299
|
|
|
298
|
|
|
Senior notes – 2.35% due 2020
|
497
|
|
|
496
|
|
|
Senior notes – 4.80% due 2021
|
498
|
|
|
497
|
|
|
Senior notes – 3.30% due 2023
|
347
|
|
|
—
|
|
|
Senior notes – 4.05% due 2023
|
248
|
|
|
248
|
|
|
Senior notes – 3.50% due 2024
|
596
|
|
|
595
|
|
|
Senior notes – 3.50% due 2025
|
495
|
|
|
495
|
|
|
Senior notes – 3.75% due 2026
|
596
|
|
|
595
|
|
|
Senior notes – 5.875% due 2033
|
297
|
|
|
297
|
|
|
Mortgage – 5.70% due 2035
|
382
|
|
|
393
|
|
|
Other
|
3
|
|
|
2
|
|
|
|
4,757
|
|
|
4,414
|
|
|
Less current portion
|
262
|
|
|
12
|
|
|
|
$
|
4,495
|
|
|
$
|
4,402
|
|
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 $
50 million
of commercial paper outstanding at December 31, 2016 at an effective interest rate of
1%
.
In March 2016, the Company issued
$350 million
of
3.30%
seven
-year senior notes. In September 2015, the Company issued
$600 million
of
3.75%
10.5
-year senior notes and in March 2015, the Company issued
$500 million
of
2.35%
five
-year senior notes. The Company used the net proceeds from these issuances for general corporate purposes.
The Company and certain of its foreign subsidiaries maintain a
$1.5 billion
multi-currency
five
-year unsecured revolving credit facility. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility expires in November 2020 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were
no
borrowings outstanding under this facility at
December 31, 2016
.
Additional credit facilities, guarantees and letters of credit are maintained with various banks, primarily related to operations located outside the United States, aggregating
$376
million at
December 31, 2016
and
$379
million at
December 31, 2015
. There was
$1.6 million
of outstanding borrowings under these facilities at
December 31, 2016
and
$0.4 million
of outstanding borrowings under these facilities at
December 31, 2015
.
In January 2017, the Company issued
$500 million
of
2.75%
senior notes due 2022 and $
500 million
of
4.35%
senior notes due 2047. The Company intends to use the net proceeds for general corporate purposes, including the repayment of a $
250 million
debt maturity in April 2017.
Scheduled repayments of long-term debt in
2017
and in the four succeeding years are
$262
million,
$262
million,
$313
million,
$514
million and
$515
million, respectively.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(In millions of dollars)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Short-term debt
|
$
|
312
|
|
|
$
|
313
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
Long-term debt
|
$
|
4,495
|
|
|
$
|
4,625
|
|
|
$
|
4,402
|
|
|
$
|
4,513
|
|
The fair value of the Company’s short-term debt consists primarily of commercial paper and term debt maturing within the next year and its fair value approximates its carrying value. The estimated fair value of a primary portion of the Company's long-term debt is based on discounted future cash flows using current interest rates available for debt with similar terms and remaining maturities. Short- and long-term debt would be classified as Level 2 in the fair value hierarchy.
13. Integration and Restructuring Costs
In
2016
, the Company implemented restructuring actions which resulted in costs totaling
$44 million
.
Restructuring costs consist primarily of severance and benefits, costs for future rent and other real estate costs. These costs were incurred as follows: Risk and Insurance Services—
$3 million
; Consulting—
$34 million
; and Corporate—
$7 million
.
Details of the restructuring liability activity from January 1,
2015
through
December 31, 2016
, including actions taken prior to
2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Balance at
1/1/15
|
|
|
Expense
Incurred
|
|
|
Cash
Paid
|
|
|
Other
|
|
Balance at
12/31/15
|
|
|
Expense
Incurred
|
|
|
Cash
Paid
|
|
|
Other
|
|
|
Balance at
12/31/16
|
|
|
Severance
|
$
|
7
|
|
|
$
|
17
|
|
|
$
|
(7
|
)
|
|
$
|
(2
|
)
|
|
$
|
15
|
|
|
$
|
40
|
|
|
$
|
(22
|
)
|
|
$
|
(1
|
)
|
|
$
|
32
|
|
|
Future rent under non-cancelable leases and other costs
|
85
|
|
|
11
|
|
|
(21
|
)
|
|
3
|
|
|
78
|
|
|
4
|
|
|
(17
|
)
|
|
(4
|
)
|
|
61
|
|
|
Total
|
$
|
92
|
|
|
$
|
28
|
|
|
$
|
(28
|
)
|
|
$
|
1
|
|
|
$
|
93
|
|
|
$
|
44
|
|
|
$
|
(39
|
)
|
|
$
|
(5
|
)
|
|
$
|
93
|
|
As of January 1, 2014, the liability balance related to restructuring activity was
$124 million
. In 2014, the Company accrued
$12 million
and had cash payments and other adjustments of
$44 million
related to restructuring activities that resulted in the liability balance at January 1,
2015
reported above.
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.
14. Common Stock
During
2016
, the Company repurchased
12.7 million
shares of its common stock for total consideration of
$800 million
. In November 2016, the Board of Directors renewed the Company's share repurchase program, allowing management to buy back up to
$2.5 billion
of the Company's common stock. The Company remains authorized to purchase additional shares of its common stock up to a value of approximately
$2.4 billion
. There is no time limit on the authorization. During
2015
, the Company purchased
24.8 million
shares of its common stock for total consideration of
$1.4 billion
.
15. Claims, Lawsuits and Other Contingencies
Litigation Matters
The Company and its subsidiaries are subject to a significant number of claims, lawsuits and proceedings in the ordinary course of business. Such claims and lawsuits consist principally of alleged errors and omissions in connection with the performance of professional services, including the placement of insurance, the provision of actuarial services for corporate and public sector clients, the provision of investment advice and investment management services to pension plans, the provision of advice relating to pension buy-out transactions and the provision of consulting services relating to the drafting and interpretation of trust deeds and other documentation governing pension plans. These claims typically seek damages, including punitive and treble damages, in amounts that could be significant. In establishing liabilities for errors and omissions claims in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies), the Company uses case level reviews by inside and outside counsel, and internal actuarial analysis by Oliver Wyman Group, a subsidiary of the Company, and other methods to estimate potential losses. A liability is established when a loss is both probable and reasonably estimable. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable.
To the extent that expected losses exceed our deductible in any policy year, the Company also records an asset for the amount that we expect to recover under any available third-party insurance programs. The Company has varying levels of third-party insurance coverage, with policy limits and coverage terms varying significantly by policy year.
Governmental Inquiries and Enforcement Matters
Our activities are regulated under the laws of the United States and its various states, the European Union and its member states, and the other jurisdictions in which the Company operates. In the ordinary course of business, the Company is also subject to subpoenas, investigations, lawsuits and other regulatory actions undertaken by governmental authorities. For example, the Financial Conduct Authority ("FCA") is conducting a market study of the U.K. asset management industry, which includes asset managers and investment consultants such as Mercer. In November 2016, the FCA published an interim report which contains preliminary findings relating to the investment consulting industry and a provisional reference to the U.K. Competition & Markets Authority for a market investigation.
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 December 31, 2016, 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 15 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages and other forms of relief. Where a loss is both probable and reasonably estimable, the Company establishes liabilities in accordance with FASB ASC Subtopic No. 450-20 (Contingencies - Loss Contingencies). Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.
16. Segment Information
The Company is organized based on the types of services provided. Under this 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. Segment performance is evaluated based on segment operating income, which includes directly related expenses, and charges or credits related to integration and restructuring but not the Company’s corporate-level expenses. Revenues are attributed to geographic areas on the basis of where the services are performed.
Selected information about the Company’s segments and geographic areas of operation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
(In millions of dollars)
|
Revenue
|
|
|
Operating
Income
(Loss)
|
|
Total
Assets
|
|
Depreciation
and
Amortization
|
|
Capital
Expenditures
|
|
2016 –
|
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
7,143
|
|
(a)
|
$
|
1,753
|
|
|
$
|
14,728
|
|
|
$
|
248
|
|
|
$
|
128
|
|
|
Consulting
|
6,112
|
|
(b)
|
1,103
|
|
|
6,770
|
|
|
121
|
|
|
68
|
|
|
Total Segments
|
13,255
|
|
|
2,856
|
|
|
21,498
|
|
|
369
|
|
|
196
|
|
|
Corporate/Eliminations
|
(44
|
)
|
|
(192
|
)
|
|
(3,308
|
)
|
(c)
|
69
|
|
|
57
|
|
|
Total Consolidated
|
$
|
13,211
|
|
|
$
|
2,664
|
|
|
$
|
18,190
|
|
|
$
|
438
|
|
|
$
|
253
|
|
|
2015 –
|
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
6,869
|
|
(a)
|
$
|
1,539
|
|
|
$
|
13,290
|
|
|
$
|
240
|
|
|
$
|
136
|
|
|
Consulting
|
6,064
|
|
(b)
|
1,075
|
|
|
6,485
|
|
|
120
|
|
|
108
|
|
|
Total Segments
|
12,933
|
|
|
2,614
|
|
|
19,775
|
|
|
360
|
|
|
244
|
|
|
Corporate/Eliminations
|
(40
|
)
|
|
(195
|
)
|
|
(1,559
|
)
|
(c)
|
63
|
|
|
81
|
|
|
Total Consolidated
|
$
|
12,893
|
|
|
$
|
2,419
|
|
|
$
|
18,216
|
|
|
$
|
423
|
|
|
$
|
325
|
|
|
2014 –
|
|
|
|
|
|
|
|
|
|
|
Risk and Insurance Services
|
$
|
6,931
|
|
(a)
|
$
|
1,509
|
|
|
$
|
12,211
|
|
|
$
|
213
|
|
|
$
|
173
|
|
|
Consulting
|
6,059
|
|
(b)
|
996
|
|
|
5,916
|
|
|
119
|
|
|
92
|
|
|
Total Segments
|
12,990
|
|
|
2,505
|
|
|
18,127
|
|
|
332
|
|
|
265
|
|
|
Corporate/Eliminations
|
(39
|
)
|
|
(204
|
)
|
|
(334
|
)
|
(c)
|
56
|
|
|
103
|
|
|
Total Consolidated
|
$
|
12,951
|
|
|
$
|
2,301
|
|
|
$
|
17,793
|
|
|
$
|
388
|
|
|
$
|
368
|
|
|
|
|
|
(a)
|
Includes inter-segment revenue of
$6 million
in both
2016
and
2015
and
$4 million
in
2014
, interest income on fiduciary funds of
$26 million
,
$21 million
and
$24 million
in
2016
,
2015
and
2014
, respectively, and equity method income of
$12 million
,
$6 million
and
$9 million
in
2016
,
2015
and
2014
, respectively.
|
|
|
|
|
(b)
|
Includes inter-segment revenue of
$38 million
,
$34 million
and
$35 million
in
2016
,
2015
and
2014
, respectively, interest income on fiduciary funds of
$3 million
in
2016
,
$4 million
in
2015
and
$6 million
in
2014
and equity method income of
$19 million
in
2016
,
$21 million
in
2015
and
$2 million
in
2014
.
|
|
|
|
|
(c)
|
Corporate assets primarily include insurance recoverables, pension related assets, the owned portion of the Company headquarters building and intercompany eliminations.
|
Details of operating segment revenue are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Risk and Insurance Services
|
|
|
|
|
|
|
Marsh
|
$
|
5,997
|
|
|
$
|
5,745
|
|
|
$
|
5,774
|
|
|
Guy Carpenter
|
1,146
|
|
|
1,124
|
|
|
1,157
|
|
|
Total Risk and Insurance Services
|
7,143
|
|
|
6,869
|
|
|
6,931
|
|
|
Consulting
|
|
|
|
|
|
|
Mercer
|
4,323
|
|
|
4,313
|
|
|
4,350
|
|
|
Oliver Wyman Group
|
1,789
|
|
|
1,751
|
|
|
1,709
|
|
|
Total Consulting
|
6,112
|
|
|
6,064
|
|
|
6,059
|
|
|
Total Segments
|
13,255
|
|
|
12,933
|
|
|
12,990
|
|
|
Corporate/Eliminations
|
(44
|
)
|
|
(40
|
)
|
|
(39
|
)
|
|
Total
|
$
|
13,211
|
|
|
$
|
12,893
|
|
|
$
|
12,951
|
|
Information by geographic area is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Revenue
|
|
|
|
|
|
|
United States
|
$
|
6,573
|
|
|
$
|
6,316
|
|
|
$
|
5,865
|
|
|
United Kingdom
|
2,019
|
|
|
2,036
|
|
|
2,111
|
|
|
Continental Europe
|
2,022
|
|
|
1,902
|
|
|
2,077
|
|
|
Asia Pacific
|
1,363
|
|
|
1,333
|
|
|
1,420
|
|
|
Other
|
1,278
|
|
|
1,346
|
|
|
1,517
|
|
|
|
13,255
|
|
|
12,933
|
|
|
12,990
|
|
|
Corporate/Eliminations
|
(44
|
)
|
|
(40
|
)
|
|
(39
|
)
|
|
Total
|
$
|
13,211
|
|
|
$
|
12,893
|
|
|
$
|
12,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(In millions of dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Fixed Assets, Net
|
|
|
|
|
|
|
United States
|
$
|
412
|
|
|
$
|
460
|
|
|
$
|
483
|
|
|
United Kingdom
|
94
|
|
|
115
|
|
|
120
|
|
|
Continental Europe
|
53
|
|
|
57
|
|
|
60
|
|
|
Asia Pacific
|
76
|
|
|
49
|
|
|
62
|
|
|
Other
|
90
|
|
|
92
|
|
|
84
|
|
|
Total
|
$
|
725
|
|
|
$
|
773
|
|
|
$
|
809
|
|