MMC 03.31.2015 10Q


 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
_____________________________________________ 
FORM 10-Q
_____________________________________________ 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015
_____________________________________________ 
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
_____________________________________________ 
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
_____________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting Company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting Company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer  x
  
Accelerated Filer  ¨
 
 
Non-Accelerated Filer  ¨(Do not check if a smaller reporting company)
  
Smaller Reporting Company  ¨
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of April 24, 2015, there were outstanding 536,881,743 shares of common stock, par value $1.00 per share, of the registrant.
 




INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements," as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management's current views concerning future events or results, use words like "anticipate," "assume," "believe," "continue," "estimate," "expect," "future," "intend," "plan," "project" and similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will" and "would." For example, we may use forward-looking statements when addressing topics such as: the outcome of contingencies; the expected impact of acquisitions and dispositions; the impact of competition; pension obligations; the impact of foreign currency exchange rates; our effective tax rates; changes in our business strategies and methods of generating revenue; the development and performance of our services and products; changes in the composition or level of our revenues; our cost structure, dividend policy, cash flow and liquidity; future actions by regulators; and the impact of changes in accounting rules.
Forward-looking statements are subject to inherent risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements include, among other things:
•
our ability to maintain adequate safeguards to protect the security of confidential, personal or proprietary information, and the potential for the improper disclosure or use of such information, whether due to human error, improper action by employees, vendors or third parties, or as a result of a cyberattack;
•
the impact of fluctuations in foreign currency exchange rates, particularly in light of the recent strengthening of the U.S. dollar against most other currencies worldwide;
•
the impact of competition on our business, including the impact of our corporate tax rate, which is higher than the tax rate of some of our competitors;
•
the impact on our global pension obligations of changes in discount rates and asset returns, as well as projected salary increases, mortality rates, demographics, and inflation, and the impact of cash contributions required to be made to our global defined benefit pension plans due to changes in the funded status of those plans;
•
our exposure to potential liabilities arising from errors and omissions claims against us;
•
our exposure to potential civil remedies or criminal penalties if we fail to comply with foreign and U.S. laws that are applicable in the domestic and international jurisdictions in which we operate, including trade sanctions laws relating to countries such as Cuba, Iran, Russia, Sudan and Syria, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010 and local laws prohibiting corrupt payments to government officials;
•
the extent to which we are able to retain existing clients and attract new business, and our ability to effectively incentivize and retain key employees;
•
our ability to make acquisitions and dispositions and to integrate, and realize expected synergies, savings or benefits from, the businesses we acquire;
•
our ability to successfully recover should we experience a disaster or other business continuity problem;
•
the impact of changes in interest rates and deterioration of counterparty credit quality on our cash balances and the performance of our investment portfolios;
•
the impact of potential rating agency actions on our cost of financing and ability to borrow, as well as on our operating costs and competitive position;
•
changes in applicable tax or accounting requirements; and
•
potential income statement effects from the application of FASB's ASC Topic No. 740 (“Income Taxes”) regarding accounting treatment of uncertain tax benefits and valuation allowances, including the effect of any subsequent adjustments to the estimates we use in applying this accounting standard.
The factors identified above are not exhaustive. Marsh & McLennan Companies and its subsidiaries operate in a dynamic business environment in which new risks may emerge frequently. Accordingly, we caution readers not to place undue reliance on any forward-looking statements, which are based only on information currently available to us and speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made. Further information concerning Marsh & McLennan Companies and its businesses, including information about factors that could materially affect our results of operations and financial condition, is contained in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section and the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of our most recently filed Annual Report on Form 10-K.

2


TABLE OF CONTENTS
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
OF OPERATIONS
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.


3


PART I.    FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
March 31,
(In millions, except per share figures)
2015

 
2014

Revenue
$
3,215

 
$
3,264

Expense:
 
 
 
Compensation and benefits
1,730

 
1,839

Other operating expenses
750

 
752

Operating expenses
2,480

 
2,591

Operating income
735

 
673

Interest income
3

 
5

Interest expense
(36
)
 
(42
)
Investment income
2

 
13

Income before income taxes
704

 
649

Income tax expense
206

 
192

Income from continuing operations
498

 
457

Discontinued operations, net of tax
(3
)
 
(1
)
Net income before non-controlling interests
495

 
456

Less: Net income attributable to non-controlling interests
13

 
13

Net income attributable to the Company
$
482

 
$
443

Basic net income per share – Continuing operations
$
0.90

 
$
0.81

 – Net income attributable to
    the Company
$
0.89

 
$
0.81

Diluted net income per share – Continuing operations
$
0.89

 
$
0.80

 – Net income attributable to
    the Company
$
0.88

 
$
0.80

Average number of shares outstanding – Basic
539

 
548

– Diluted
545

 
556

Shares outstanding at March 31
538

 
549

The accompanying notes are an integral part of these consolidated statements.


4


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
March 31,
(In millions)
2015

 
2014

Net income before non-controlling interests
$
495

 
$
456

Other comprehensive income (loss), before tax:
 
 
 
    Foreign currency translation adjustments
(426
)
 
71

    Gain (loss) related to pension/post-retirement plans
236

 
(199
)
Other comprehensive (loss) income, before tax
(190
)
 
(128
)
Income tax expense (credit) on other comprehensive income
53

 
(41
)
Other comprehensive (loss) income, net of tax
(243
)
 
(87
)
Comprehensive income
252

 
369

Less: comprehensive income attributable to non-controlling interest
13

 
13

Comprehensive income attributable to the Company
$
239

 
$
356

The accompanying notes are an integral part of these consolidated statements.

5


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share and per share figures)
March 31,
2015

 
December 31,
2014

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,104

 
$
1,958

Receivables
 
 
 
Commissions and fees
3,135

 
3,142

Advanced premiums and claims
56

 
50

Other
285

 
280

 
3,476

 
3,472

Less-allowance for doubtful accounts and cancellations
(96
)
 
(95
)
Net receivables
3,380

 
3,377

Current deferred tax assets
466

 
521

Other current assets
227

 
199

Total current assets
5,177

 
6,055

Goodwill and intangible assets
7,832

 
7,933

Fixed assets
(net of accumulated depreciation and amortization of $1,635 at March 31, 2015 and $1,639 at December 31, 2014)
794

 
809

Pension related assets
1,010

 
967

Deferred tax assets
812

 
876

Other assets
1,209

 
1,200

 
$
16,834

 
$
17,840

 The accompanying notes are an integral part of these consolidated statements.


6


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In millions, except share and per share figures)
March 31,
2015

 
December 31,
2014

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
61

 
$
11

Accounts payable and accrued liabilities
1,699

 
1,883

Accrued compensation and employee benefits
706

 
1,633

Accrued income taxes
136

 
178

Dividends payable
151

 
—

Total current liabilities
2,753

 
3,705

Fiduciary liabilities
4,585

 
4,552

Less – cash and investments held in a fiduciary capacity
(4,585
)
 
(4,552
)
 
—

 
—

Long-term debt
3,828

 
3,376

Pension, post-retirement and post-employment benefits
2,070

 
2,244

Liabilities for errors and omissions
334

 
341

Other liabilities
986

 
1,041

Commitments and contingencies

 

Equity:
 
 
 
Preferred stock, $1 par value, authorized 6,000,000 shares, none issued
—

 
—

Common stock, $1 par value, authorized
 
 
 
1,600,000,000 shares, issued 560,641,640 shares at March 31, 2015
 
 
 
   and December 31, 2014
561

 
561

Additional paid-in capital
837

 
930

Retained earnings
10,515

 
10,335

Accumulated other comprehensive loss
(4,090
)
 
(3,847
)
Non-controlling interests
91

 
79

 
7,914

 
8,058

Less – treasury shares, at cost, 22,229,254 shares at March 31, 2015
 
 
 
   and 20,499,596 shares at December 31, 2014
(1,051
)
 
(925
)
Total equity
6,863

 
7,133

 
$
16,834

 
$
17,840

The accompanying notes are an integral part of these consolidated statements.


7


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31,
 
 
 
(In millions)
2015

 
2014

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
495

 
$
456

Adjustments to reconcile net income to cash used for operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
77

 
75

Amortization of intangible assets
24

 
22

Adjustments to acquisition related contingent consideration liability
(2
)
 
(6
)
Provision for deferred income taxes
87

 
59

Gain on investments
(2
)
 
(13
)
Loss on disposition of assets
1

 
1

Share-based compensation expense
24

 
33

Changes in assets and liabilities:
 
 
 
Net receivables
(1
)
 
(150
)
Other current assets
28

 
(35
)
Other assets
(43
)
 
33

Accounts payable and accrued liabilities
(128
)
 
47

Accrued compensation and employee benefits
(927
)
 
(764
)
Accrued income taxes
(37
)
 
28

      Contributions to pension and other benefit plans in excess of current year expense/credit
(134
)
 
(93
)
Other liabilities
(82
)
 
(85
)
Effect of exchange rate changes
90

 
12

Net cash used for operations
(530
)
 
(380
)
Financing cash flows:
 
 
 
Purchase of treasury shares
(300
)
 
(100
)
Net increase in commercial paper
—

 
100

Proceeds from debt
500

 
—

Repayments of debt
(2
)
 
(3
)
Shares withheld for taxes on vested units – treasury shares
(47
)
 
(49
)
Issuance of common stock from treasury shares
104

 
92

Payments of deferred and contingent consideration for acquisitions
(32
)
 
(20
)
Distributions of non-controlling interests
(1
)
 
(1
)
Dividends paid
(151
)
 
(137
)
Net cash provided by (used for) financing activities
71

 
(118
)
Investing cash flows:
 
 
 
Capital expenditures
(91
)
 
(99
)
Net (purchases) sales of long-term investments
(87
)
 
—

Proceeds from sales of fixed assets
1

 
1

Acquisitions
(16
)
 
(319
)
Other, net
(1
)
 
1

Net cash used for investing activities
(194
)
 
(416
)
Effect of exchange rate changes on cash and cash equivalents
(201
)
 
(9
)
Decrease in cash and cash equivalents
(854
)
 
(923
)
Cash and cash equivalents at beginning of period
1,958

 
2,303

Cash and cash equivalents at end of period
$
1,104

 
$
1,380

The accompanying notes are an integral part of these consolidated statements.

8


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
For the Three Months Ended March 31,
 
 
 
(In millions, except per share figures)
2015

 
2014

COMMON STOCK
 
 
 
Balance, beginning and end of period
$
561

 
$
561

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance, beginning of year
$
930

 
$
1,028

Change in accrued stock compensation costs
(40
)
 
(59
)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact
(53
)
 
(60
)
Balance, end of period
$
837

 
$
909

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
10,335

 
$
9,452

Net income attributable to the Company
482

 
443

Dividend equivalents declared – (per share amounts: $0.56 in 2015 and $0.50 in 2014)
(1
)
 
(1
)
Dividends declared – (per share amounts: $0.56 in 2015 and $0.50 in 2014)
(301
)
 
(274
)
Balance, end of period
$
10,515

 
$
9,620

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
Balance, beginning of year
$
(3,847
)
 
$
(2,621
)
Other comprehensive income (loss), net of tax
(243
)
 
(87
)
Balance, end of period
$
(4,090
)
 
$
(2,708
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(925
)
 
$
(515
)
Issuance of shares under stock compensation plans and employee stock purchase plans
174

 
194

Purchase of treasury shares
(300
)
 
(100
)
Balance, end of period
$
(1,051
)
 
$
(421
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
79

 
$
70

Net income attributable to non-controlling interests
13

 
13

Distributions
(1
)
 
—

Other changes
—

 
(1
)
Balance, end of period
$
91

 
$
82

TOTAL EQUITY
$
6,863

 
$
8,043

The accompanying notes are an integral part of these consolidated statements.

9


MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.     Nature of Operations
Marsh & McLennan Companies, Inc. (the "Company"), a global professional services firm, is organized based on the different services that it offers. Under this organizational structure, the Company’s two business segments are Risk and Insurance Services and Consulting.
The Risk and Insurance Services segment provides risk management 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 two main business groups. Mercer provides consulting expertise, advice, services and solutions in the areas of health, retirement, talent and investments. Within the investments business, Mercer provides delegated investment (fiduciary management) solutions to institutional investors (such as retirement plan sponsors and trustees) and to individual investors (primarily through the inclusion of funds managed by Mercer on defined contribution and wealth management platforms). As of March 31, 2015, Mercer had assets under management of $125 billion worldwide. Oliver Wyman Group provides specialized management and economic and brand consulting services.
Acquisitions impacting the Risk and Insurance Services and Consulting segments are discussed in Note 7 to the consolidated financial statements.
2.     Principles of Consolidation and Other Matters
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations for interim filings, the Company believes that the information and disclosures presented are adequate to make such information and disclosures not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 10-K").
The financial information contained herein reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial statements as of and for the three-month periods ended March 31, 2015 and 2014.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of certificates of deposit and time deposits, with original maturities of three months or less, and money market funds. The estimated fair value of the Company's cash and cash equivalents approximates their carrying value. The Company is required to maintain operating funds of approximately $171 million related to regulatory requirements outside the U.S. or as collateral under captive insurance arrangements.
Investments  
The Company holds investments in private companies and 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. The Company records in earnings, investment gains/losses for its proportionate share of the change in fair value of the funds. Investments using the equity method of accounting are included in other assets in the consolidated balance sheets.
The caption “Investment income” in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in current earnings. It includes, when applicable, other than temporary declines in the value of debt and available for sale securities and the change in value of the Company’s holdings in certain private equity funds, including equity method gains (losses) on its investment in the Trident funds. The Company’s investments may include direct investments in insurance or consulting companies and investments in

10


private equity funds. The Company recorded investment income of $2 million in the first quarter of 2015 compared to $13 million for the same period in 2014.
Income Taxes
The Company's effective tax rate in the first quarter of 2015 was 29.2% compared with 29.5% in the first quarter of 2014. These rates reflect non-U.S. income taxed at rates below the U.S. statutory rate, including the effect of repatriation, as well as the impact of discrete tax matters such as changes in circumstances that result in a change in judgment about the beginning balance in valuation allowances, the resolution of tax examinations and expirations of statutes of limitations.
The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When evaluating the potential imposition of penalties, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company's position, and reliance on the opinion of professional tax advisors.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in tax returns. The Company's gross unrecognized tax benefits increased from
$97 million at December 31, 2014 to $100 million at March 31, 2015. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $22 million within the next twelve months due to settlements of audits and expirations of statutes of limitation.
3.     Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. The Company also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims proceeds are held by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds of $5 million and $6 million for the three-month periods ended March 31, 2015 and 2014, respectively. The Consulting segment recorded fiduciary interest income of $1 million for each of the three-month periods ended March 31, 2015 and 2014. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to $8.1 billion at March 31, 2015 and $7.3 billion at December 31, 2014. The Company is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Net uncollected premiums and claims and the related payables are, therefore, not assets and liabilities of the Company and are not included in the accompanying consolidated balance sheets.
In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. These advances are made from corporate funds and are reflected in the accompanying consolidated balance sheets as receivables.
Mercer manages approximately $26 billion of assets in trusts or funds for which Mercer’s management or trustee fee is considered a variable interest. Mercer is not the primary beneficiary of these trusts or funds. Mercer’s only variable interest in any of these trusts or funds is its unpaid fees, if any. Mercer’s maximum exposure to loss of its interests is, therefore, limited to collection of its fees.
4.    Per Share Data
Basic net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares. Reconciliations of the applicable income components used for diluted EPS - Continuing operations and basic weighted average common shares outstanding to diluted weighted average common shares outstanding are presented below. The reconciling items related to the calculation of diluted weighted average common shares outstanding are the same for net income attributable to the Company.

11


Basic and Diluted EPS Calculation - Continuing Operations
 
Three Months Ended
March 31,
(In millions, except per share figures)
 
2015

 
2014

Net income from continuing operations
 
$
498

 
$
457

Less: Net income attributable to non-controlling interests
 
13

 
13

 
 
$
485

 
$
444

Basic weighted average common shares outstanding
 
539

 
548

Dilutive effect of potentially issuable common shares
 
6

 
8

Diluted weighted average common shares outstanding
 
545

 
556

Average stock price used to calculate common stock equivalents
 
$
56.37

 
$
47.84

There were 17.2 million and 21.6 million stock options outstanding as of March 31, 2015 and 2014, respectively.
5.    Supplemental Disclosures to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions, interest and income taxes paid for the three-month periods ended March 31, 2015 and 2014.
(In millions of dollars)
 
2015

 
2014

Assets acquired, excluding cash
 
$
30

 
$
464

Liabilities assumed
 
(2
)
 
(38
)
Contingent/deferred purchase consideration
 
(12
)
 
(113
)
Net cash outflow for current year acquisitions
 
$
16

 
$
313

(In millions of dollars)
2015

 
2014

Interest paid
$
40

 
$
44

Income taxes paid
$
118

 
$
120

The Company paid deferred purchase consideration related to prior years' acquisitions of $26 million and $6 million for the three months ended March 31, 2015 and 2014, respectively.
The Company had non-cash issuances of common stock of $64 million and $92 million for the three months ended March 31, 2015 and 2014, respectively, primarily related to its share-based payment plans. The Company recorded share-based compensation expense related to equity awards (excluding stock options) of $16 million and $26 million for the three-month periods ended March 31, 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 used for operations by $82 million for the quarter ended March 31, 2015.

12


6.    Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the three-month periods ended March 31, 2015 and 2014, 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, 2015
$
5

 
$
(3,393
)
 
$
(459
)
 
$
(3,847
)
Other comprehensive income (loss) before reclassifications
—

 
128

 
(423
)
 
(295
)
Amounts reclassified from accumulated other comprehensive income
—

 
52

 
—

 
52

Net current period other comprehensive income (loss)
—

 
180

 
(423
)
 
(243
)
Balance as of March 31, 2015
$
5

 
$
(3,213
)
 
$
(882
)
 
$
(4,090
)
(In millions of dollars)
Unrealized Investment Gains
 
Pension/Post-Retirement Plans Gains (Losses)
 
Foreign Currency Translation Adjustments
 
Total
Balance as of January 1, 2014
$
5

 
$
(2,682
)
 
$
56

 
$
(2,621
)
Other comprehensive income (loss) before reclassifications
—

 
(199
)
 
78

 
(121
)
Amounts reclassified from accumulated other comprehensive income
—

 
34

 
—

 
34

Net current period other comprehensive income (loss)
—

 
(165
)
 
78

 
(87
)
Balance as of March 31, 2014
$
5

 
$
(2,847
)
 
$
134

 
$
(2,708
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The components of other comprehensive income (loss) for the three-month periods ended March 31, 2015 and 2014 are as follows:
Three Months Ended March 31,
2015
 
2014
(In millions of dollars)
Pre-Tax

Tax

Net of Tax

 
Pre-Tax

Tax

Net of Tax

Foreign currency translation adjustments
$
(426
)
$
(3
)
$
(423
)
 
$
71

$
(7
)
$
78

Unrealized investment gains (losses)
—

—

—

 
—

—

—

Pension/post-retirement plans:
 
 
 
 
 
 
 
Amortization of losses (gains) included in net periodic pension cost:
 
 
 
 
 


 
Prior service gains (a)
—

—

—

 
(3
)
(1
)
(2
)
Net actuarial losses (a)
77

25

52

 
51

15

36

Subtotal
77

25

52

 
48

14

34

Effect of remeasurement
(4
)
(1
)
(3
)
 
(166
)
(33
)
(133
)
Effect of curtailment
—

—

—

 
(65
)
(13
)
(52
)
Plan Termination
(6
)
(2
)
(4
)
 
—

—

—

Foreign currency translation adjustments
169

34

135

 
(17
)
(2
)
(15
)
Other
—

—

—

 
1

—

1

Pension/post-retirement plans (losses) gains
236

56

180

 
(199
)
(34
)
(165
)
Other comprehensive income (loss)
$
(190
)
$
53

$
(243
)
 
$
(128
)
$
(41
)
$
(87
)
(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.

13


 
 
 
 
 
 
 
 
7.     Acquisitions
The Company completed 3 acquisitions during the first three months of 2015.
•
January – Marsh acquired INGESEG S.A., an insurance brokerage located in Argentina.
•
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.
Total purchase consideration for acquisitions made during the first three months of 2015 was $32 million, which consisted of cash paid of $20 million and deferred purchase and estimated contingent consideration of $12 million. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over periods ranging from two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. The estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. The Company also paid $26 million of deferred purchase consideration and $19 million of contingent consideration related to acquisitions made in prior years. In addition, the Company purchased other intangible assets in the amount of $3 million.
The following table presents the preliminary allocation of the acquisition cost to the assets acquired and liabilities assumed during 2015 based on their fair values:
 For the Three Months Ended March 31, 2015
 
(In millions of dollars)
 
Cash
$
20

Estimated fair value of deferred/contingent consideration
12

Total Consideration
$
32

Allocation of purchase price:
 
Cash and cash equivalents
$
4

Accounts receivable, net
3

Intangible assets
10

Goodwill
12

Other assets
5

Total assets acquired
34

Current liabilities
—

Other liabilities
2

Total liabilities assumed
2

Net assets acquired
$
32

Prior Year Acquisitions
The Risk and Insurance Services segment completed fifteen acquisitions during 2014.
•
January – Marsh & McLennan Agency ("MMA") acquired Barney & Barney, LLC, a San Diego-based insurance broking firm that provides insurance, risk management and employee benefits solutions to businesses and individuals throughout the U.S. and abroad, Great Lakes Employee Benefits Services, Inc., an employee group benefits consulting and brokerage firm based in Michigan, and Bond Network, Inc., a surety bonding agency based in North Carolina.
•
February – Marsh acquired Central Insurance Services, an independent insurance broker in Scotland that provides insurance broking and risk advisory services to companies of all sizes across industry sectors.
•
March – MMA acquired Capstone Insurance Services, LLC, an agency that provides property-casualty insurance and risk management solutions to businesses and individuals throughout South Carolina.
•
May – MMA acquired Kinker-Eveleigh Insurance Agency, an Ohio-based agency specializing in property-casualty and employee benefits solutions, VISICOR, a full-service employee benefits brokerage and consulting firm based in Texas, and Senn Dunn Insurance, a full-service insurance brokerage located in North Carolina.

14


•
August – Marsh acquired Seguros Morrice y Urrutia S.A., an insurance broker based in Panama City, Panama.
•
September – Marsh acquired Kocisko Insurance Brokers, Inc., a full-service commercial insurance brokerage located in Montreal, Quebec.
•
October – MMA acquired NuWest Insurance Services, Inc., a California-based property-casualty agency.
•
November – Marsh acquired Torrent Technologies, Inc., a Montana-based flood insurance specialist.
•
December – Marsh acquired Seafire Insurance Services, LLC, a Kansas-based managing general underwriter, and Trade Insure NV, a leading distributor of credit insurance policies in Belgium, and MMA acquired The Benefit Planning Group, Inc., a North Carolina-based employee benefit consulting firm.
The Consulting segment completed six acquisitions during 2014.
•
February – Mercer acquired Transition Assist, a retiree exchange specializing in helping retirees in employer-sponsored plans select Medicare supplemental health care insurance.
•
September – Oliver Wyman acquired Bonfire Communications, an agency specializing in employee engagement and internal communications based in San Francisco, California.
•
November – Mercer acquired AUSREM, a remuneration research and workforce consulting specialist based in Australia, and Jeitosa Group International, a global HR business consultancy and IT systems integration firm.
•
December – Mercer acquired Denarius, a compensation and benefits survey and information products consulting firm based in Chile, and Oliver Wyman acquired OC&C Strategy Consultants (Boston) LLC (part of the OC&C network), a Boston-based consulting firm specializing in the business media, information services and education sectors.
Total purchase consideration for acquisitions made during the first three months of 2014 was $444 million, which consisted of cash paid of $331 million and deferred purchase and estimated contingent consideration of $113 million. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over periods ranging from two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. The estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. The Company also paid $6 million of deferred purchase consideration and $30 million of contingent consideration related to acquisitions made in prior years.
Pro-Forma Information
The Company believes its acquisitions made during the first three months of 2015 are immaterial and no pro-forma adjustments to information presented for 2015 or 2014 has been made for those acquisitions. The information presented for the 2014 acquisitions is as if they occurred on January 1, 2013. The unaudited pro-forma information adjusts for the effects of amortization of acquired intangibles. The unaudited pro-forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisitions had occurred on the dates indicated, nor is it necessarily indicative of future consolidated results.
 
Three Months Ended
March 31,
(In millions, except per share figures)
2015

 
2014

Revenue
$
3,215

 
$
3,302

Income from continuing operations
$
498

 
$
460

Net income attributable to the Company
$
482

 
$
445

Basic net income per share:
 
 
 
– Continuing operations
$
0.90

 
$
0.81

– Net income attributable to the Company
$
0.89

 
$
0.81

Diluted net income per share:
 
 
 
– Continuing operations
$
0.89

 
$
0.80

– Net income attributable to the Company
$
0.88

 
$
0.80


15


The consolidated statements of income include the results of operations of acquired companies since their respective acquisition dates. The consolidated statement of income for the three-months ended March 31, 2015 includes approximately $3 million of revenue and $0 million of operating income related to acquisitions made in 2015.
8.     Dispositions
Summarized Statements of Income data for discontinued operations is as follows:
 
 
Three Months Ended
March 31,
(In millions of dollars, except per share figures)
2015

 
2014

Disposals of discontinued operations
$
(5
)
 
$
—

Income tax (credit) expense
(2
)
 
1

Disposals of discontinued operations, net of tax
(3
)
 
(1
)
Discontinued operations, net of tax
$
(3
)
 
$
(1
)
Discontinued operations, net of tax per share
 
 
 
– Basic
$
(0.01
)
 
$
—

– Diluted
$
(0.01
)
 
$
—

9.    Goodwill and Other Intangibles
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment test for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, the Company assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The Company considers numerous factors, which include that the fair value of each reporting unit exceeds its fair 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 2014 and concluded that a two-step goodwill impairment test was not required in 2014, 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:
March 31,
 
 
 
(In millions of dollars)
2015

 
2014

Balance as of January 1, as reported
$
7,241

 
$
6,893

Goodwill acquired
12

 
267

Other adjustments(a)
(93
)
 
(1
)
Balance at March 31,
$
7,160

 
$
7,159

(a) 
Primarily reflects the impact of foreign exchange in each period.
Goodwill allocable to the Company’s reportable segments at March 31, 2015 is as follows: Risk & Insurance Services, $5 billion and Consulting, $2.2 billion.

16


Amortized intangible assets consist of the cost of client lists, client relationships and trade names acquired. The gross cost and accumulated amortization are as follows:
  
March 31, 2015
 
December 31, 2014
(In millions of dollars)
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

 
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

Amortized intangibles
$
1,163

 
$
491

 
$
672

 
$
1,177

 
$
485

 
$
692

Aggregate amortization expense for the three months ended March 31, 2015 and 2014 was $24 million and $22 million, respectively. The estimated future aggregate amortization expense is as follows:
For the Years Ending December 31,
 
(In millions of dollars)
Estimated Expense

2015 (excludes amortization through March 31, 2015)
$
66

2016
77

2017
74

2018
72

2019
73

Subsequent years
310

 
$
672

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 Financial Accounting Standards Board ("FASB"). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, for disclosure purposes, is determined based on the lowest level input that is significant to the fair value measurement. Assets and liabilities recorded in the consolidated balance sheets at fair value are categorized based on the inputs in the valuation techniques as follows:
Level 1.
Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities and money market mutual funds).
Assets and liabilities utilizing Level 1 inputs include exchange-traded equity securities and mutual funds.
Level 2.
Assets and liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).
Assets and liabilities utilizing Level 2 inputs include corporate and municipal bonds, senior notes and interest rate swaps.

17


Level 3.
Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long-dated options on gas and power).
Liabilities utilizing Level 3 inputs include liabilities for contingent purchase consideration.
Valuation Techniques
Equity Securities and Mutual Funds – Level 1
Investments for which market quotations are readily available are valued at the sale price on their principal exchange, or official closing bid price for certain markets.
Contingent Consideration Liability – Level 3
Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. Contingent consideration arrangements are primarily based on meeting EBITDA and revenue targets 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 March 31, 2015 and December 31, 2014.
 
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
(In millions of dollars)
03/31/15

 
12/31/14

 
03/31/15

 
12/31/14

 
03/31/15

 
12/31/14

 
03/31/15

 
12/31/14

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds(a)
$
140

 
$
150

 
$
—

 
$
—

 
$
—

 
$
—

 
$
140

 
$
150

Money market funds(b)
36

 
107

 
—

 
—

 
—

 
—

 
36

 
107

Total assets measured at fair value
$
176

 
$
257

 
$
—

 
$
—

 
$
—

 
$
—

 
$
176

 
$
257

Fiduciary Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
95

 
$
57

 
$
—

 
$
—

 
$
—

 
$
—

 
$
95

 
$
57

Total fiduciary assets measured
at fair value
$
95

 
$
57

 
$
—

 
$
—

 
$
—

 
$
—

 
$
95

 
$
57

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent purchase
consideration liability(c)
$
—

 
$
—

 
$
—

 
$
—

 
$
206

 
$
207

 
$
206

 
$
207

Total liabilities measured at fair value
$
—

 
$
—

 
$
—

 
$
—

 
$
206

 
$
207

 
$
206

 
$
207

(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 three-month period ended March 31, 2015, there were no assets or liabilities that were transferred between any of the levels.
The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities as of March 31, 2015 and 2014 that represent contingent consideration related to acquisitions: 
(In millions of dollars)
2015

 
2014

 
Balance at January 1,
$
207

 
$
104

 
Additions
8

 
55

 
Payments
(19
)
 
(30
)
 
Revaluation Impact
10

 
4

 
Balance at March 31,
$
206

 
$
133

 

18


The fair value of the contingent liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net increase in the estimated fair value of such liabilities for prior-period acquisitions of $10 million in the three-month period ended March 31, 2015. 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 $24 million.
Fair Value of Long-Term Investments
The Company holds investments in certain private companies, public companies and certain private equity investments that are accounted for using the equity method of accounting. The carrying value of these investments amounted to $399 million at March 31, 2015 and $388 million at December 31, 2014. The Company's investments in private equity funds were $74 million and $61 million at March 31, 2015 and December 31, 2014, 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 would be classified as Level 3 in the fair value hierarchy and are included in other assets in the consolidated balance sheets.
During 2014, the Company purchased 34% of the common stock of Alexander Forbes. As of March 31, 2015, the carrying value of the Company’s investment in Alexander Forbes was approximately $278 million. As of March 31, 2015, the market value of the approximately 443 million shares of Alexander Forbes owned by the Company, based on the March 31, 2015 closing share price of 10.54 South African Rand per share, was approximately $386 million. The Company’s investment in Alexander Forbes and its other equity investments in private companies are accounted for using the equity method of accounting and included in revenue in the consolidated income statements and 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.
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. The Company has elected to account for this investment under the cost method of accounting as the shares purchased are categorized as restricted and cannot be sold for more than one year. When the restrictions on sale are less than one year in duration (January 1, 2017), the shares are expected to be classified as available for sale. This investment would then be classified as Level 2 in the fair value hierarchy 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 March 31, 2015 and without regard to the restrictions on sale was approximately $104 million.

19


11.    Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension plans for its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax-qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth by U.S. law and the laws of the non-U.S. jurisdictions in which the Company offers defined benefit plans.
The target asset allocation for the Company's U.S. Plan was 62% equities and equity alternatives and 38% fixed income and at March 31, 2015, the actual allocation for the Company's U.S. Plan was 61% equities and equity alternatives and 39% fixed income. The target asset allocation for the Company's U.K. Plans, which comprises approximately 83% of non-U.S. Plan assets, is 48% equities and equity alternatives and 52% fixed income. At March 31, 2015, the actual allocation for the U.K. Plans was 47% equities and equity alternatives and 53% fixed income. The assets of the Company's defined benefit plans are diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company generally uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.
The components of the net periodic benefit cost for defined benefit and other post-retirement plans are as follows:
Combined U.S. and significant non-U.S. Plans
Pension
 
Post-retirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions of dollars)
2015

 
2014

 
2015

 
2014

Service cost
$
52

 
$
61

 
$
1

 
$
1

Interest cost
146

 
161

 
2

 
3

Expected return on plan assets
(243
)
 
(248
)
 
—

 
—

Amortization of prior service credit
—

 
(3
)
 
—

 
—

Recognized actuarial loss
76

 
51

 
—

 
—

Net periodic benefit cost
$
31

 
$
22

 
$
3

 
$
4

Curtailment (credit)
—

 
(65
)
 
—

 
—

Plan termination
—

 
—

 
(128
)
 
—

Total cost (credit)
$
31

 
$
(43
)
 
$
(125
)
 
$
4

 
 
 
 
 
 
 
 
U.S. Plans only
Pension
 
Post-retirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions of dollars)
2015

 
2014

 
2015

 
2014

Service cost
$
30

 
$
22

 
$
1

 
$
—

Interest cost
62

 
63

 
1

 
2

Expected return on plan assets
(92
)
 
(86
)
 
—

 
—

Amortization of prior service credit
—

 
(2
)
 
—

 
—

Recognized actuarial loss
45

 
26

 
—

 
—

Net periodic benefit cost
$
45

 
$
23

 
$
2

 
$
2

Plan termination
—

 
—

 
(128
)
 
—

Total cost (credit)
$
45

 
$
23

 
$
(126
)
 
$
2

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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

20


Significant non-U.S. Plans only
Pension
 
Post-retirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions of dollars)
2015

 
2014

 
2015

 
2014

Service cost
$
22

 
$
39

 
$
—

 
$
1

Interest cost
84

 
98

 
1

 
1

Expected return on plan assets
(151
)
 
(162
)
 
—

 
—

Amortization of prior service cost
—

 
(1
)
 
—

 
—

Recognized actuarial loss
31

 
25

 
—

 
—

Net periodic benefit cost
$
(14
)
 
$
(1
)
 
$
1

 
$
2

Curtailment (credit)
—

 
(65
)
 
—

 
—

Total (credit) cost
$
(14
)
 
$
(66
)
 
$
1

 
$
2

 
 
 
 
 
 
 
 
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 U.K. 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. As a result of the re-measurement, the projected benefit obligation ("PBO") increased by approximately $147 million and the funded status decreased by approximately $137 million. The change in the PBO and in the funded status relates primarily to a decrease in the discount rate at the re-measurement date. The net periodic benefit costs recognized in 2014 were 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.
The weighted average actuarial assumptions utilized to calculate the net periodic benefit costs for the U.S. and significant non-U.S. defined benefit plans are as follows:
Combined U.S. and significant non-U.S. Plans
Pension
Benefits
 
Post-retirement
Benefits
March 31,
2015

 
2014

 
2015

 
2014

Weighted average assumptions:
 
 
 
 
 
 
 
Expected return on plan assets
7.25
%
 
7.53
%
 
—
%
 
—
%
Discount rate
3.79
%
 
4.74
%
 
4.08
%
 
5.03
%
Rate of compensation increase
2.42
%
 
2.64
%
 
—
%
 
—
%
The Company made approximately $42 million of contributions to its U.S. and non-U.S. defined benefit plans in the first three months of 2015. The Company expects to contribute approximately $152 million to its non-qualified U.S. pension and non-U.S. pension plans during the remainder of 2015.

21


12.    Debt
The Company’s outstanding debt is as follows:
 
(In millions of dollars)
March 31,
2015

 
December 31,
2014

Short-term:
 
 
 
Current portion of long-term debt
$
61

 
$
11

 


 


Long-term:
 
 
 
Senior notes – 2.30% due 2017
249

 
249

Senior notes – 2.55% due 2018
249

 
249

Senior notes – 2.35% due 2019
300

 
300

Senior notes – 2.35% due 2020
500

 
—

Senior notes – 4.80% due 2021
497

 
497

Senior notes – 4.05% due 2023
248

 
248

Senior notes – 3.50% due 2024
599

 
595

Senior notes – 3.50% due 2025
498

 
498

Senior notes – 5.875% due 2033
297

 
297

Mortgage – 5.70% due 2035
400

 
403

Term Loan Facility – due 2016
50

 
50

Other
2

 
1

 
3,889

 
3,387

Less current portion
61

 
11

 
$
3,828

 
$
3,376

The senior notes in the table above are publicly registered by the Company with no guarantees attached.
In March 2015, the Company issued $500 million of 2.35% five-year senior notes. The Company intends to use the net proceeds for general corporate purposes.
In September 2014, the Company issued $300 million of 2.35% five-year senior notes and $500 million of 3.50% 10.5 year senior notes. In October 2014, a significant portion of the net proceeds of this offering were used to redeem $630 million of debt, including $230 million of 5.75% senior notes due in September 2015 and $400 million of 9.25% senior notes due in 2019. Total cash outflow related to this transaction was approximately $765 million, including a $137 million cost for early redemption, which was reflected as a charge in the consolidated statements of income in the fourth quarter of 2014.
In May 2014, the Company issued $600 million of 3.50% ten-year senior notes. The net proceeds of this offering were used for general corporate purposes, which included the repayment of $320 million of the existing 5.375% senior notes, which matured on July 15, 2014.
On March 27, 2014, the Company and certain of its foreign subsidiaries amended and restated its $1.0 billion facility into a $1.2 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 March 2019 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility at March 31, 2015.
In December 2012, the Company closed on a $50 million, three-year term loan facility. The interest rate on this facility at March 31, 2015 was 1.17%, which is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facility requires the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed above. The Company had $50 million of borrowings outstanding under this facility at March 31, 2015.

22


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.
  
March 31, 2015
 
December 31, 2014
(In millions of dollars)
Carrying
Amount

 
Fair
Value

 
Carrying
Amount

 
Fair
Value

Short-term debt
$
61

 
$
61

 
$
11

 
$
11

Long-term debt
$
3,828

 
$
4,009

 
$
3,376

 
$
3,493

The fair value of the Company’s short-term debt, which consists primarily of term debt maturing in the next year, approximates its carrying value. The estimated fair value of a primary portion of the Company's long-term debt is based on discounted future cash flows using current interest rates available for debt with similar terms and remaining maturities. Short- and long-term debt would be classified as Level 2 in the fair value hierarchy.
13.    Restructuring Costs
The Company recorded total restructuring costs of $2 million in the first three months of 2015 primarily for future rent under non-cancelable leases. These costs were incurred in Corporate.
Details of the restructuring activity from January 1, 2014 through March 31, 2015, which includes liabilities from actions prior to 2015, are as follows:
 
(In millions of dollars)
Liability at 1/1/14
 
Amounts
Accrued

 
Cash
Paid

 
Other 

 
Liability at 12/31/14
 
Amounts
Accrued

 
Cash
Paid

 
Other 

 
Liability at 3/31/15
Severance
$
11

 
$
4

 
$
(8
)
 
$
—

 
$
7

 
$
—

 
$
(2
)
 
$
—

 
$
5

Future rent under non-cancelable leases and other costs
113

 
8

 
(35
)
 
(1
)
 
85

 
2

 
(5
)
 
(1
)
 
81

Total
$
124

 
$
12

 
$
(43
)
 
$
(1
)
 
$
92

 
$
2

 
$
(7
)
 
$
(1
)
 
$
86

The expenses associated with the above initiatives are included in compensation and benefits and other operating expenses in the consolidated statements of income. The liabilities associated with these initiatives are classified on the consolidated balance sheets as accounts payable, other liabilities, or accrued compensation, depending on the nature of the items.
14.    Common Stock
During the first three months of 2015, the Company repurchased approximately 5.3 million shares of its common stock for consideration of $300 million. In May 2014, the Board of Directors of the Company authorized share repurchases of up to $2 billion of the Company's common stock. At March 31, 2015, the Company remains authorized to purchase additional shares of its common stock up to a value of approximately $1 billion. There is no time limit on the authorization. During the first three months of 2014, the Company repurchased 2 million shares of its common stock for consideration of $100 million.
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

23


provision of consulting services relating to the drafting and interpretation of trust deeds and other documentation governing pension plans. These claims may seek damages, including punitive and treble damages, in amounts that could, if awarded, be significant. In establishing liabilities for errors and omissions claims in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies), the Company uses case level reviews by inside and outside counsel, an internal actuarial analysis and other analysis to estimate potential losses. A liability is established when a loss is both probable and reasonably estimable. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable.
To the extent that expected losses exceed our deductible in any policy year, the Company also records an asset for the amount that we expect to recover under any available third-party insurance programs. The Company has varying levels of third-party insurance coverage, with policy limits and coverage terms varying significantly by policy year.
Governmental Inquiries and 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.
Other Contingencies-Guarantees
In connection with its acquisition of U.K.-based Sedgwick Group in 1998, the Company acquired several insurance underwriting businesses that were already in run-off, including River Thames Insurance Company Limited (“River Thames”), which the Company sold in 2001. Sedgwick guaranteed payment of claims on certain policies underwritten through the Institute of London Underwriters (the “ILU”) by River Thames. The policies covered by this guarantee are reinsured up to £40 million by a related party of River Thames. Payment of claims under the reinsurance agreement is collateralized by segregated assets held in a trust. As of March 31, 2015, the reinsurance coverage exceeded the best estimate of the projected liability of the policies covered by the guarantee. To the extent River Thames or the reinsurer is unable to meet its obligations under those policies, a claimant may seek to recover from us under the guarantee.
From 1980 to 1983, the Company owned indirectly the English & American Insurance Company (“E&A”), which was a member of the ILU. The ILU required the Company to guarantee a portion of E&A's obligations. After E&A became insolvent in 1993, the ILU agreed to discharge the guarantee in exchange for the Company's agreement to post an evergreen letter of credit that is available to pay claims by policyholders on certain E&A policies issued through the ILU and incepting between July 3, 1980 and October 6, 1983. Certain claims have been paid under the letter of credit and we anticipate that additional claimants may seek to recover against the letter of credit.
Kroll-related Matters
Under the terms of a stock purchase agreement with Altegrity, Inc. (“Altegrity”) related to Altegrity's purchase of Kroll from the Company in August 2010, a copy of which is attached as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2010, the Company agreed to provide a limited indemnity to Altegrity with respect to certain Kroll-related litigation and regulatory matters.
* * * *
The pending proceedings and other matters described in this Note 15 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages and other forms of relief. Where a loss is both probable and reasonably estimable, the Company establishes liabilities in accordance with FASB ASC Subtopic No. 450-20 (Contingencies - Loss Contingencies). Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.
 

24


16.    Segment Information
The Company is organized based on the types of services provided. Under this organizational structure, the Company’s business segments are:
▪
Risk and Insurance Services, comprising insurance services (Marsh) and reinsurance services (Guy Carpenter); and
▪
Consulting, comprising Mercer and Oliver Wyman Group
The accounting policies of the segments are the same as those used for the consolidated financial statements described in Note 1 to the Company’s 2014 Form 10-K. Segment performance is evaluated based on segment operating income, which includes directly related expenses, and charges or credits related to integration and restructuring but not the Company’s corporate-level expenses. Revenues are attributed to geographic areas on the basis of where the services are performed.
Selected information about the Company’s operating segments for the three-month periods ended March 31, 2015 and 2014 are as follows:
 
 
Three Months Ended
March 31,
 
(In millions of dollars)
Revenue
 
Operating
Income
(Loss)
 
2015–
 
 
 
 
Risk and Insurance Services
$
1,803

(a) 
$
533

 
Consulting
1,421

(b) 
248

 
Total Operating Segments
3,224

  
781

 
Corporate / Eliminations
(9
)
 
(46
)
 
Total Consolidated
$
3,215

  
$
735

 
2014–
 
 
 
 
Risk and Insurance Services
$
1,839

(a) 
$
493

 
Consulting
1,432

(b) 
225

 
Total Operating Segments
3,271

  
718

 
Corporate / Eliminations
(7
)
 
(45
)
 
Total Consolidated
$
3,264

  
$
673

 
(a) 
Includes inter-segment revenue of $1 million and $0 million in 2015 and 2014, respectively, interest income on fiduciary funds of $5 million and $6 million in 2015 and 2014, respectively, and equity method income of $2 million and $0 million in 2015 and 2014, respectively.
(b) 
Includes inter-segment revenue of $8 million and $7 million in 2015 and 2014, respectively, interest income on fiduciary funds of $1 million in both 2015 and 2014, and equity method income of $3 million in 2015 and $0 million in 2014.
Details of operating segment revenue for the three-month periods ended March 31, 2015 and 2014 are as follows:
 
Three Months Ended
March 31,
 
(In millions of dollars)
2015

 
2014

 
Risk and Insurance Services
 
 
 
 
Marsh
$
1,434

 
$
1,457

 
Guy Carpenter
369

 
382

 
Total Risk and Insurance Services
1,803

 
1,839

 
Consulting
 
 
 
 
Mercer
1,037

 
1,061

 
Oliver Wyman Group
384

 
371

 
Total Consulting
1,421

 
1,432

 
Total Operating Segments
3,224

 
3,271

 
Corporate / Eliminations
(9
)
 
(7
)
 
Total
$
3,215

 
$
3,264

 

25


17.    New Accounting Guidance
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. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of the guidance on its financial condition and results of operations.
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. The guidance may be adopted prospectively, or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided the guidance is applied from the beginning of the fiscal year of adoption. Adoption of the guidance is not expected to 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. Early adoption is permitted. Adoption of the guidance is not expected to materially affect the Company's financial condition, results of operations or cash flows.
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. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Entities are permitted to adopt the guidance under one of the following methods: retrospectively to each prior reporting period presented (with certain practical expedients allowed) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. If an entity elects this transition method, it must provide disclosures in reporting periods that include the date of initial application of the amount by which each financial statement line item is affected in the current reporting period by application of the guidance as compared to guidance that was in effect before the change, and an explanation for the reasons for significant changes. The Company is currently evaluating the impact of the adoption of the guidance on its financial condition and results of operations.
In April 2014, the FASB issued new accounting guidance which changes 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 affect the Company's financial condition, results of operations or cash flows.






26


Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Marsh & McLennan Companies, Inc. (the "Company") is a global professional services firm offering clients advice and solutions in risk, strategy, and people. It is the parent company of a number of leading risk experts and specialty consultants, including: Marsh, the insurance broker, intermediary and risk advisor; Guy Carpenter, the risk and reinsurance specialist; Mercer, the provider of HR and related financial advice and services; and Oliver Wyman Group, the management, economic and brand consultancy. With approximately 57,000 employees worldwide and annual revenue of more than $13 billion, the Company provides analysis, advice and transactional capabilities to clients in more than 130 countries.
The Company conducts business through two segments:
•
Risk and Insurance Services includes risk management activities (risk advice, risk transfer and risk control and mitigation solutions) as well as insurance and reinsurance broking and services. We conduct business in this segment through Marsh and Guy Carpenter.
•
Consulting includes Health, Retirement, Talent and Investments consulting services and products, and specialized management, economic and brand consulting services. We conduct business in this segment through Mercer and Oliver Wyman Group.
A reconciliation of segment operating income to total operating income is included in Note 16 to the consolidated financial statements included in Part I Item 1 in this report. The accounting policies used for each segment are the same as those used for the consolidated financial statements.
This Management's Discussion & Analysis ("MD&A") contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” at the outset of this report.


27


Consolidated Results of Operations
 
 
Three Months Ended
March 31,
(In millions, except per share figures)
2015

 
2014

Revenue
$
3,215

 
$
3,264

Expense:
 
 
 
Compensation and Benefits
1,730

 
1,839

Other Operating Expenses
750

 
752

Operating Expenses
2,480

 
2,591

Operating Income
735

 
673

Income from Continuing Operations
498

 
457

Discontinued Operations, net of tax
(3
)
 
(1
)
Net Income Before Non-Controlling Interests
495

 
456

Net Income Attributable to the Company
$
482

 
$
443

Income From Continuing Operations Per Share:
 
 
 
Basic
$
0.90

 
$
0.81

Diluted
$
0.89

 
$
0.80

Net Income Per Share Attributable to the Company:
 
 
 
Basic
$
0.89

 
$
0.81

Diluted
$
0.88

 
$
0.80

Average Number of Shares Outstanding:
 
 
 
Basic
539

 
548

Diluted
545

 
556

Shares Outstanding at March 31
538

 
549

The Company's consolidated operating income increased 9% to $735 million in the first quarter of 2015 compared with $673 million in the prior year. This reflects the combined impact of a 1% decrease in revenue and a 4% decrease in expense. In the first quarter of 2015, the Company was adversely impacted by the strengthening of the U.S. dollar, which had the effect of reducing the translated value of the Company’s foreign earnings while pension expense worldwide increased due to lower interest rates. The impact of these headwinds was more than offset in the quarter by the impact of a net credit from the termination of the Company's post-65 retiree medical reimbursement plan in the U.S. (the "RRA plan") of approximately $125 million. Risk and Insurance Services operating income increased $40 million or 8% while Consulting operating income increased $23 million or 10% compared with the same period last year.
Income from continuing operations increased $41 million, or 9%, primarily reflecting the increase in operating income discussed above and a decrease in interest expense, partly offset by a decrease in investment income. Diluted net income per share from continuing operations increased 11% to $0.89, reflecting the increase in income from continuing operations and a 2% decrease in the average number of diluted shares outstanding as compared to the same period last year. Shares issued related to the vesting of share awards and exercise of employee stock options were more than offset by share repurchases over the past four quarters.


28


Consolidated Revenue and Expense
The Company conducts business in many countries, as a result of which the impact of foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, certain items that affect comparability, such as the revenue impact of acquisitions and dispositions, including transfers among businesses, may impact period-to-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by isolating these impacts. The impact of foreign currency exchange fluctuations, acquisitions and dispositions, including transfers among businesses, on the Company’s operating revenues by segment was as follows:
 
Three Months Ended
March 31,
 
%
Change
GAAP
Revenue
 
Components of Revenue Change*
Currency
Impact
 
Acquisitions/
Dispositions
Impact
 
Underlying
Revenue
(In millions of dollars)
2015

 
2014

 
Risk and Insurance Services
 
 
 
 
 
 
 
 
 
 
 
Marsh
$
1,430

 
$
1,452

 
(2
)%
 
(7
)%
 
3
 %
 
3
%
Guy Carpenter
368

 
381

 
(4
)%
 
(4
)%
 
(2
)%
 
2
%
Subtotal
1,798

 
1,833

 
(2
)%
 
(6
)%
 
2
 %
 
3
%
Fiduciary Interest Income
5

 
6

 
 
 
 
 
 
 
 
Total Risk and Insurance Services
1,803

 
1,839

 
(2
)%
 
(6
)%
 
2
 %
 
3
%
Consulting
 
 
 
 
 
 
 
 
 
 
 
Mercer
1,037

 
1,061

 
(2
)%
 
(6
)%
 
—

 
4
%
Oliver Wyman Group
384

 
371

 
4
 %
 
(6
)%
 
2
 %
 
8
%
Total Consulting
1,421