NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Marsh & McLennan Companies, Inc. (the "Company" or "Marsh McLennan"), 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 ("RIS") provides risk management solutions, services, advice and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations, and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter. Marsh advises individual and commercial clients of all sizes on insurance broking and innovative risk management solutions. Guy Carpenter develops advanced risk, reinsurance and capital strategies that help clients grow profitably and pursue emerging opportunities.
The Company conducts business in its Consulting segment through Mercer and Oliver Wyman Group. Mercer provides consulting expertise, advice, services and solutions in the areas of health, wealth and career consulting services and products. Oliver Wyman Group provides specialized management and economic and brand consulting services.
Business Update Related To COVID-19
The World Health Organization declared COVID-19 a pandemic in March 2020. The pandemic has impacted businesses globally including virtually every geography in which the Company operates. Governments continue to ease restrictions or fully reopen their economies, as the various vaccines are effective in mitigating the effects of the virus. Our businesses have been resilient throughout the pandemic and demand for our advice and services remains strong as the global economic conditions improve.
Although the vast majority of colleagues continue to work in a remote environment, the Company has provided guidelines on a gradual and phased return to the office depending on the level of virus containment and local health and safety regulations in each geography. The safety and well-being of our colleagues is paramount and the Company expects to continue to service clients effectively in the current remote environment and as colleagues gradually return to the office.
The Company had strong revenue growth through the first nine months of 2021 and benefited from the continued recovery of the global economy. However, uncertainty remains in the economic outlook and the ultimate extent of COVID-19 impact to the Company will depend on future developments that it is unable to predict, including new "waves" of infection from emerging variants of the virus, potential renewed restrictions and mandates by various governments or agencies, and the distribution and uptake of vaccines.
2. Principles of Consolidation and Other Matters
The Company prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. For interim filings, certain information and 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. 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, 2020 (the "2020 Form 10-K").
The financial information contained herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial statements as of and for the nine months ended September 30, 2021 and 2020.
Estimates: The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Company evaluates its estimates, judgments and methodologies. The estimates are based on historical experience and on various other assumptions that the Company believes are reasonable. Such matters include:
•the allowance for current expected credit losses on receivables
•estimates of revenue
•impairment assessments and charges
•recoverability of long-lived assets
•liabilities for errors and omissions
•deferred tax assets, uncertain tax positions and income tax expense
•share-based and incentive compensation expense
•useful lives assigned to long-lived assets, and depreciation and amortization
•fair value estimates of contingent consideration receivable or payable related to acquisitions or dispositions
The Company believes these estimates are reasonable based on information currently available at the time they are made. The Company also considered any COVID-19 potential impacts to its customer base in various industries and geographies. Insurance exposures subject to variable factors are subject to mid-term and end of term adjustments, as well as policy audits, which may reduce premiums and corresponding commissions. Estimates were updated based on internal and industry specific economic data. The ultimate extent to which COVID-19 will directly or indirectly impact the Company’s businesses, results of operations and financial condition will depend on numerous evolving factors and future developments that it is not able to predict. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of certificates of deposit and time deposits, with original maturities of three months or less, and money market funds. The estimated fair value of the Company's cash and cash equivalents approximates their carrying value. The Company is required to maintain operating funds primarily related to regulatory requirements outside of the United States or as collateral under captive insurance arrangements. At September 30, 2021, the Company maintained $306 million compared to $270 million at December 31, 2020 related to these regulatory requirements.
Allowance for Credit Losses on Accounts Receivable
The Company’s policy for providing an allowance for credit losses on its accounts receivable is based on a combination of factors, including historical write-offs, aging of balances, and other qualitative and quantitative analyses. The charge related to expected credit losses was immaterial to the consolidated statement of income for the three and nine months ended September 30, 2021 and 2020.
Investments
The caption "Investment income (loss)" in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in earnings. It includes, when applicable, other than temporary declines in the value of securities, mark-to-market increases or decreases in equity investments with readily determinable fair values and equity method gains or losses on the Company's investments in private equity funds.
The Company holds investments in certain private equity funds that are accounted for in accordance with the equity method of accounting using a consistently applied three-month lag period adjusted for any known significant changes from the lag period to the reporting date of the Company. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. Investment gains or losses for the Company's proportionate share of the change in fair value of the funds are recorded in earnings. Investments accounted for using the equity method of accounting are included in "other assets" in the consolidated balance sheets.
The Company recorded net investment income of $13 million and $43 million for the three and nine months ended September 30, 2021 compared to net investment losses of $14 million and $47 million for the same periods last
year. The income in 2021 is primarily driven by gains in the Company's private equity investments compared to losses for the same periods in prior year. The net investment loss reported in the third quarter of 2020 is primarily
due to the mark-to-market change related to the Company's investment in Alexander Forbes ("AF"). The net
investment loss for the nine months ended September 30, 2020 also includes a loss of $23 million from the sale of
shares of AF during the second quarter of 2020, as well as losses related to its private equity fund investments.
Income Taxes
The Company's effective tax rate in the third quarter of 2021 was 24.2% compared with 30.3% in the third quarter of 2020. The effective tax rates for the nine months ended September 30, 2021 and 2020 were 27.1% and 26.0%, respectively.
The rate in the third quarter of 2021 reflects tax benefits from planning implemented in the period that postponed the utilization of current-year losses in the U.K. to a future year when the tax rate will be 25%, additional tax benefits related to share-based compensation offset by changes to uncertain tax positions, deferred tax and other tax adjustments. The rate in the nine months ended September 30, 2021 reflects the charge recorded in the second quarter of approximately $100 million to re-measure the Company’s U.K. deferred tax assets and liabilities upon the enactment of legislation on June 10, 2021, commonly referred to as the "Finance Act 2021". The legislation increased the U.K. corporate income tax rate from 19% to 25% effective April 1, 2023. This is the most significant discrete item in the year-to-date period, increasing the Company’s effective tax rate by 3.1% for the nine months ended September 30, 2021.
The rate in the third quarter and nine months ended September 30, 2020 reflects costs of re-measuring the Company’s U.K. deferred tax assets and liabilities upon the enactment of legislation that cancelled a scheduled 2% reduction in the U.K. corporate income tax rate, partially offset by tax benefits for the implementation of a new international funding structure to facilitate global staffing and contracting.
The tax rates in both periods reflect the impact of discrete tax items such as excess tax benefits related to share-based compensation, enacted tax legislation, changes in uncertain tax positions, deferred tax adjustments and nontaxable adjustments to contingent acquisition consideration.
The Company's 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 effective tax rate and in evaluating uncertain tax positions.
Losses in one jurisdiction, generally, cannot offset earnings in another, and within certain jurisdictions profits and losses may not offset between entities. Consequently, losses in certain jurisdictions may require valuation allowances affecting the effective tax rate, depending on estimates of the realizability of associated deferred tax assets. The tax rate is also sensitive to changes in unrecognized tax benefits, including the impact of settled tax audits and expired statutes of limitation.
Changes in tax laws or tax rulings may have a significant impact on our effective tax rate. 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 was $101 million at September 30, 2021 and $98 million at December 31, 2020. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $33 million within the next twelve months due to settlements of audits and expirations of statutes of limitation.
Integration and Restructuring Charges
Severance and related costs are recognized based on amounts due under established severance plans or estimates of one-time benefits that will be provided. Typically, severance benefits are recognized when the impacted colleagues are notified of their expected termination and such termination is expected to occur within the legally required notification period. These costs are included in compensation and benefits in the consolidated statements of income.
Costs for real estate consolidation are recognized based on the type of cost, and the expected future use of the facility. For locations where the Company does not expect to sub-lease the property, the amortization of any right-of-use asset is accelerated from the decision date to the cease use date. For locations where the Company expects to sub-lease the properties subsequent to its vacating the property, the right-of-use asset is reviewed for potential impairment at the earlier of the cease use date or the date a sub-lease is signed. To determine the amount of impairment, the fair value of the right-of-use asset is determined based on the present value of the estimated net cash flows related to the property. Contractual costs outside of the right-of-use asset are recognized based on the net present value of expected future cash outflows for which the Company will not receive any benefit. Such
amounts are based on estimates of future sub-lease income to be received and future contractual costs to be incurred. These costs are included in other operating expenses in the consolidated statements of income.
Other costs related to integration and restructuring, such as moving, legal or consulting costs are recognized as incurred. These costs are included in other operating expenses in the consolidated statements of income.
3. Revenue
The core principle of the revenue recognition guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The entity applies the following steps to achieve that principle: 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. A performance obligation is satisfied either at a “point in time” or “over time” depending on the nature of the product or service provided, and the specific terms of the contract with customers.
The Company's revenue recognition guidance is provided in more detail in Note 2 of the consolidated financial statements and the notes included in Form 10-K for the year ended December 31, 2020.
The following schedule disaggregates components of the Company's revenue:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In millions)
|
|
2021
|
2020
|
|
2021
|
2020
|
|
Marsh:
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
600
|
|
$
|
536
|
|
|
$
|
2,233
|
|
$
|
1,887
|
|
|
Asia Pacific
|
|
281
|
|
254
|
|
|
902
|
|
790
|
|
|
Latin America
|
|
105
|
|
93
|
|
|
298
|
|
283
|
|
|
Total International
|
|
986
|
|
883
|
|
|
3,433
|
|
2,960
|
|
|
U.S./Canada
|
|
1,366
|
|
1,126
|
|
|
3,894
|
|
3,271
|
|
|
Total Marsh
|
|
2,352
|
|
2,009
|
|
|
7,327
|
|
6,231
|
|
|
Guy Carpenter
|
|
314
|
|
274
|
|
|
1,697
|
|
1,534
|
|
|
Subtotal
|
|
2,666
|
|
2,283
|
|
|
9,024
|
|
7,765
|
|
|
Fiduciary interest income
|
|
4
|
|
8
|
|
|
12
|
|
40
|
|
|
Total Risk and Insurance Services
|
|
$
|
2,670
|
|
$
|
2,291
|
|
|
$
|
9,036
|
|
$
|
7,805
|
|
|
Mercer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth
|
|
$
|
613
|
|
$
|
566
|
|
|
$
|
1,861
|
|
$
|
1,719
|
|
|
Health
|
|
449
|
|
430
|
|
|
1,398
|
|
1,348
|
|
|
Career
|
|
253
|
|
220
|
|
|
618
|
|
549
|
|
|
Total Mercer
|
|
1,315
|
|
1,216
|
|
|
3,877
|
|
3,616
|
|
|
Oliver Wyman Group
|
|
610
|
|
480
|
|
|
1,813
|
|
1,458
|
|
|
Total Consulting
|
|
$
|
1,925
|
|
$
|
1,696
|
|
|
$
|
5,690
|
|
$
|
5,074
|
|
The Company recognizes commission revenue from arrangements for a significant portion of its brokerage arrangements at a point in time on the effective date of the underlying policy. Commission revenue is estimated using historical information about the risks to be covered over the policy period, some of which are dependent on variable factors such as number of employees covered, covered payroll, airline passenger miles flown, shipped tonnage of marine cargo and others.
The following schedule provides contract assets and contract liabilities information from contracts with customers:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Contract assets
|
|
$
|
307
|
|
|
$
|
236
|
|
|
Contract liabilities
|
|
$
|
738
|
|
|
$
|
676
|
|
The Company records accounts receivable when the right to consideration is unconditional, subject only to the passage of time. Contract assets primarily relate to quota share reinsurance brokerage and contingent insurer
revenue. The Company does not have the right to bill and collect revenue for quota share brokerage until the underlying policies written by the ceding insurer attach to the treaty. Contract assets are included in other current assets in the Company's consolidated balance sheets. Contract liabilities primarily relate to the advance consideration received from customers. Contract liabilities are included in current liabilities in the Company's consolidated balance sheets. Revenue recognized in the first nine months of 2021 and 2020 that was included in the contract liability balance at the beginning of each of those years was $511 million and $420 million, respectively.
The amount of revenue recognized in the first nine months of 2021 and 2020 from performance obligations satisfied in previous periods, mainly due to variable consideration from contracts with insurers, quota share business and consulting contracts previously considered constrained was $68 million and $84 million, respectively.
The Company applies the practical expedient and does not disclose the value of unsatisfied performance obligations for (1) contracts with original contract terms of one year or less and (2) contracts where the Company has the right to invoice for services performed. The revenue expected to be recognized in future periods during the non-cancellable term of existing contracts greater than one year that is related to performance obligations that are unsatisfied or partially satisfied at the end of the reporting period is approximately $54 million for Marsh, $204 million for Mercer and $4 million for Oliver Wyman Group. The Company expects revenue in 2022, 2023, 2024, 2025 and 2026 and beyond of $143 million, $66 million, $31 million, $14 million and $8 million, respectively, related to these performance obligations.
4. Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. The Company also collects claims or refunds from underwriters on behalf of insureds. Un-remitted insurance premiums and claims proceeds are held by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds ("fiduciary interest income") of $4 million and $12 million for the three and nine month periods ended September 30, 2021, respectively, and $8 million and $40 million for the three and nine month periods ended September 30, 2020, respectively. The decrease in 2021 compared to 2020 reflects the impact of lower interest rates partially offset by a higher level of average invested funds. 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 $12.7 billion at September 30, 2021 and $11.2 billion at December 31, 2020. The Company is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Accordingly, net uncollected premiums and claims and the related payables are not assets and liabilities of the Company and are not included in the accompanying consolidated balance sheets.
In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. These advances are made from corporate funds and are reflected in the accompanying consolidated balance sheets as receivables.
5. Per Share Data
Basic net income per share attributable to the Company is calculated by dividing the after-tax income attributable to the Company by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company is calculated by dividing the after-tax income attributable to the Company by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS Calculation
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In millions, except per share data)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net income before non-controlling interests
|
$
|
542
|
|
|
$
|
320
|
|
|
$
|
2,367
|
|
|
$
|
1,667
|
|
|
Less: Net income attributable to non-controlling interests
|
5
|
|
|
4
|
|
|
27
|
|
|
25
|
|
|
Net income attributable to the Company
|
$
|
537
|
|
|
$
|
316
|
|
|
$
|
2,340
|
|
|
$
|
1,642
|
|
|
Basic weighted average common shares outstanding
|
506
|
|
|
507
|
|
|
508
|
|
|
506
|
|
|
Dilutive effect of potentially issuable common shares
|
7
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
Diluted weighted average common shares outstanding
|
513
|
|
|
512
|
|
|
513
|
|
|
511
|
|
|
Average stock price used to calculate common stock equivalents
|
$
|
151.22
|
|
|
$
|
114.64
|
|
|
$
|
133.41
|
|
|
$
|
107.64
|
|
6. Supplemental Disclosures to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions, interest and income taxes paid for the nine month periods ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2021
|
|
2020
|
|
Assets acquired, excluding cash
|
$
|
601
|
|
|
$
|
795
|
|
|
Liabilities assumed
|
(59)
|
|
|
(73)
|
|
|
|
|
|
|
|
Contingent/deferred purchase consideration
|
(141)
|
|
|
(163)
|
|
|
Net cash outflow for current year acquisitions
|
$
|
401
|
|
|
$
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2021
|
|
2020
|
|
Interest paid
|
$
|
407
|
|
|
$
|
437
|
|
|
Income taxes paid, net of refunds
|
$
|
686
|
|
|
$
|
414
|
|
The classification of 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 $110 million for the nine months ended September 30, 2021. This consisted of deferred purchase consideration related to prior years' acquisitions of $84 million and contingent purchase consideration of $26 million. Cash flows from financing activities also reflect the receipt of contingent consideration of $71 million related to prior year dispositions. For the nine months ended September 30, 2020, the Company paid deferred and contingent consideration of $125 million, consisting of deferred purchase consideration related to prior years' acquisitions of $60 million and contingent consideration of $65 million.
The following amounts are included in the operating section of the consolidated statements of cash flows. For the nine months ended September 30, 2021, the Company recorded an expense for adjustments to contingent consideration liabilities of $35 million and made contingent consideration payments of $46 million. In addition, the Company recorded income of $24 million, primarily related to the settlement of contingent consideration receivables and received cash of $19 million related to prior year dispositions. For the nine months ended September 30, 2020, the Company recorded an expense for adjustments to contingent consideration liabilities of $22 million and made contingent consideration payments of $36 million.
The Company had non-cash issuances of common stock under its share-based payment plan of $225 million and $217 million for the nine months ended September 30, 2021 and 2020, respectively. The Company recorded stock-based compensation expense for equity awards related to restricted stock units, performance stock units and stock options of $263 million and $219 million for the nine months ended September 30, 2021 and 2020, respectively.
7. Other Comprehensive Income (Loss)
The changes, net of tax, in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the three and nine months ended September 30, 2021 and 2020, including amounts reclassified out of AOCI, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
|
Balance as of July 1, 2021
|
|
|
$
|
(4,102)
|
|
|
$
|
(1,051)
|
|
|
$
|
(5,153)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
115
|
|
|
(346)
|
|
|
(231)
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
39
|
|
|
—
|
|
|
39
|
|
|
Net current period other comprehensive income (loss)
|
|
|
154
|
|
|
(346)
|
|
|
(192)
|
|
|
Balance as of September 30, 2021
|
|
|
$
|
(3,948)
|
|
|
$
|
(1,397)
|
|
|
$
|
(5,345)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
|
Balance as of July 1, 2020
|
|
|
$
|
(3,346)
|
|
|
$
|
(2,236)
|
|
|
$
|
(5,582)
|
|
|
Other comprehensive (loss) income before reclassifications
|
|
|
(94)
|
|
|
497
|
|
|
403
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
31
|
|
|
—
|
|
|
31
|
|
|
Net current period other comprehensive (loss) income
|
|
|
(63)
|
|
|
497
|
|
|
434
|
|
|
Balance as of September 30, 2020
|
|
|
$
|
(3,409)
|
|
|
$
|
(1,739)
|
|
|
$
|
(5,148)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
|
Balance as of December 31, 2020
|
|
|
$
|
(4,126)
|
|
|
$
|
(984)
|
|
|
$
|
(5,110)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
63
|
|
|
(413)
|
|
|
(350)
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
115
|
|
|
—
|
|
|
115
|
|
|
Net current period other comprehensive income (loss)
|
|
|
178
|
|
|
(413)
|
|
|
(235)
|
|
|
Balance as of September 30, 2021
|
|
|
$
|
(3,948)
|
|
|
$
|
(1,397)
|
|
|
$
|
(5,345)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Pension/Post-Retirement Plans Gains (Losses)
|
|
Foreign Currency Translation Gains (Losses)
|
|
Total Gains (Losses)
|
|
Balance as of December 31, 2019
|
|
|
$
|
(3,512)
|
|
|
$
|
(1,543)
|
|
|
$
|
(5,055)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
12
|
|
|
(196)
|
|
|
(184)
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
91
|
|
|
—
|
|
|
91
|
|
|
Net current period other comprehensive income (loss)
|
|
|
103
|
|
|
(196)
|
|
|
(93)
|
|
|
Balance as of September 30, 2020
|
|
|
$
|
(3,409)
|
|
|
$
|
(1,739)
|
|
|
$
|
(5,148)
|
|
The components of other comprehensive income (loss) for the three and nine month periods ended September 30, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2021
|
|
2020
|
|
(In millions)
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Foreign currency translation adjustments
|
|
$
|
(346)
|
|
$
|
—
|
|
$
|
(346)
|
|
|
$
|
500
|
|
$
|
3
|
|
$
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
|
|
Amortization of gains included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses (a)
|
|
52
|
|
13
|
|
39
|
|
|
40
|
|
9
|
|
31
|
|
|
Subtotal
|
|
52
|
|
13
|
|
39
|
|
|
40
|
|
9
|
|
31
|
|
|
Foreign currency translation adjustments
|
|
88
|
|
21
|
|
67
|
|
|
(113)
|
|
(19)
|
|
(94)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of remeasurement
|
|
64
|
|
16
|
|
48
|
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension/post-retirement plans gains (losses)
|
|
204
|
|
50
|
|
154
|
|
|
(73)
|
|
(10)
|
|
(63)
|
|
|
Other comprehensive (loss) income
|
|
$
|
(142)
|
|
$
|
50
|
|
$
|
(192)
|
|
|
$
|
427
|
|
$
|
(7)
|
|
$
|
434
|
|
|
(a) Components of net periodic pension cost are included in other net benefit credits in the consolidated statements of income. Income tax expense on net actuarial losses are included in income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
2021
|
|
2020
|
|
(In millions)
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Pre-Tax
|
Tax (Credit)
|
Net of Tax
|
|
Foreign currency translation adjustments
|
$
|
(413)
|
|
$
|
—
|
|
$
|
(413)
|
|
|
$
|
(200)
|
|
$
|
(4)
|
|
$
|
(196)
|
|
|
|
|
|
|
|
|
|
|
|
Pension/post-retirement plans:
|
|
|
|
|
|
|
|
|
Amortization of (gains) losses included in net periodic pension cost:
|
|
|
|
|
|
|
|
|
Prior service credits (a)
|
(1)
|
|
—
|
|
(1)
|
|
|
(1)
|
|
—
|
|
(1)
|
|
|
Net actuarial losses (a)
|
156
|
|
40
|
|
116
|
|
|
120
|
|
28
|
|
92
|
|
|
Subtotal
|
155
|
|
40
|
|
115
|
|
|
119
|
|
28
|
|
91
|
|
|
Foreign currency translation adjustments
|
7
|
|
1
|
|
6
|
|
|
17
|
|
5
|
|
12
|
|
|
Other adjustments
|
(7)
|
|
(2)
|
|
(5)
|
|
|
—
|
|
—
|
|
—
|
|
|
Effect of remeasurement
|
77
|
|
17
|
|
60
|
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Effect of settlement
|
2
|
|
—
|
|
2
|
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Pension/post-retirement plans gains
|
234
|
|
56
|
|
178
|
|
|
136
|
|
33
|
|
103
|
|
|
Other comprehensive (loss) income
|
$
|
(179)
|
|
$
|
56
|
|
$
|
(235)
|
|
|
$
|
(64)
|
|
$
|
29
|
|
$
|
(93)
|
|
|
(a) Components of net periodic pension cost are included in other net benefit credits in the consolidated statements of income. Income tax expense on net actuarial losses are included in income tax expense.
|
8. Acquisitions and Dispositions
The Company’s acquisitions have been accounted for as business combinations. Net assets and results of operations are included in the Company’s consolidated financial statements commencing at the respective purchase closing dates. In connection with acquisitions, the Company records the estimated values of the net tangible assets and the identifiable intangible assets purchased, which typically consist of customer relationships, developed technology, trademarks and non-compete agreements. The valuation of purchased intangible assets involves significant estimates and assumptions. The Company estimates the fair value of purchased intangible assets, primarily using the income approach, by determining the present value of future cash flows over the remaining economic life of the respective assets. The significant estimates and assumptions used in this approach include the determination of the discount rate, economic life, future revenue growth rates, expected account attrition rates and earnings margins. Refinement and completion of final valuation of net assets acquired could affect the carrying value of tangible assets, goodwill and identifiable intangible assets.
The Risk and Insurance Services segment completed three acquisitions during the first nine months ended September 30, 2021:
•April – Marsh McLennan Agency ("MMA") acquired PayneWest Insurance, Inc., a Montana-based full-service broker providing business insurance, surety, employee benefits and personal insurance services to companies and individuals, and The Pryor Group, LLC, a Texas-based full-service broker providing business insurance with a specialty in quick service restaurants and the personal lines of franchise owners.
•September – MMA acquired Vaaler Insurance, Inc., a North Dakota-based insurance broker providing business insurance, employee health and benefits, and personal lines solutions, with specialized expertise in the construction, education, and healthcare industries.
Total purchase consideration for acquisitions made during the nine months ended September 30, 2021 was $546 million, which consisted of cash paid of $405 million and deferred purchase consideration and estimated contingent consideration of $141 million. Contingent consideration arrangements are based primarily on earnings before interest, tax, depreciation and amortization ("EBITDA") or revenue targets over a period of two to four years. The Company also paid $84 million of deferred purchase consideration and $72 million of contingent consideration related to acquisitions made in prior years. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment until purchase accounting is finalized.
The following table presents the preliminary allocation of purchase consideration to the assets acquired and liabilities assumed during 2021 based on the estimated fair values for the acquisitions as of their respective acquisition dates:
|
|
|
|
|
|
|
|
|
|
Acquisitions through September 30, 2021
|
|
|
|
|
(In millions)
|
|
|
|
|
Cash
|
$
|
405
|
|
|
|
|
Estimated fair value of deferred/contingent consideration
|
141
|
|
|
|
|
Total consideration
|
$
|
546
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
Cash and cash equivalents
|
$
|
4
|
|
|
|
|
Accounts receivable, net
|
32
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
5
|
|
|
|
|
Other intangible assets
|
190
|
|
|
|
|
Goodwill
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
605
|
|
|
|
|
Current liabilities
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
32
|
|
|
|
|
Total liabilities assumed
|
59
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
$
|
546
|
|
|
|
The purchase price allocation for assets acquired and liabilities assumed is based on estimates that are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments must be finalized during the measurement period, which for a particular asset, liability, or non-controlling interest ends once the acquirer determines that either (1) the necessary information has been obtained or (2) the information is not available. However, the measurement period for all items is limited to one year from the acquisition date.
The estimation of fair value requires numerous judgments, assumptions and estimates about future events and uncertainties, which could materially impact these values, and the related amortization, where applicable, in the Company’s results of operations.
The following chart provides information about intangible assets acquired during 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets through September 30, 2021
(In millions)
|
|
Amount
|
|
Weighted Average Amortization Period
|
|
Client relationships
|
|
$
|
176
|
|
|
13.7 years
|
|
Other
|
|
14
|
|
|
3.8 years
|
|
|
|
$
|
190
|
|
|
|
The consolidated statements of income include the results of operations of acquired companies since their respective acquisition dates. The consolidated statements of income for the three and nine month periods ended September 30, 2021 include revenue of approximately $38 million and $73 million and operating income of $3 million and $4 million for acquisitions made in 2021. The consolidated statements of income for the three and nine month periods ended September 30, 2020 included approximately $52 million and $115 million of revenue, respectively, and operating loss of $8 million and operating income of $3 million, respectively, related to acquisitions made in 2020.
Dispositions
During the first nine months of 2021, the Company sold certain businesses, primarily in the U.S. and the U.K., for cash proceeds of approximately $84 million and recognized a net gain of approximately $50 million, primarily related to the commercial networks business in the U.K. that provided broking and back-office solutions for small independent brokers.
Prior-Year Acquisitions
The Risk and Insurance Services segment completed seven acquisitions during 2020:
•January – MMA acquired Momentous Insurance Brokerage Inc., a California-based full-service risk management and employee benefits firm specializing in high net worth private client services and insurance solutions for the entertainment industry, and Ironwood Insurance Services, LLC, an Atlanta-based broker that provides commercial property/casualty insurance, employee benefits, and private client solutions to mid-size businesses and individuals across the U.S.
•April – MMA acquired Assurance Holdings, Inc., an Illinois-based full service brokerage providing business insurance, employee benefits, private client insurance, and retirement services to businesses and individuals across the U.S.
•June – MMA acquired Nico Insurance Services, Inc., a California-based agency providing employee benefits solutions to groups and individuals.
•December – MMA acquired Heritage Insurance Services, Inc., a Kentucky-based full service broker that provides commercial property and casualty and personal lines primarily in the trucking and transportation industry, Inspro Insurance, Inc., a Nebraska-based full service broker that provides commercial property and casualty insurance, personal lines and employee benefits services, and Compass Financial Partners, LLC, a North Carolina-based retirement consulting and investment advisory firm.
Total purchase consideration for acquisitions made during the nine months ended September 30, 2020 was approximately $742 million, which consisted of cash paid of $579 million and deferred purchase and estimated contingent consideration of $163 million. Contingent consideration arrangements are based primarily on earnings before interest, tax, depreciation and amortization ("EBITDA") or revenue targets over a period of two to four years. For the first nine months of 2020, the Company also paid $60 million of deferred purchase consideration and $101 million of contingent consideration related to acquisitions made in prior years. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized.
Prior year dispositions
In the first nine months of 2020, the Company sold certain businesses primarily in the U.S., U.K. and Canada for cash proceeds of approximately $93 million.
Pro-Forma Information
The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during 2021 and 2020. In accordance with accounting guidance related to pro-forma disclosures, the information presented for acquisitions made in 2021 is as if they occurred on January 1, 2020 and reflects acquisitions made in 2020 as if they occurred on January 1, 2019. 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In millions, except per share data)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Revenue
|
$
|
4,587
|
|
|
$
|
4,019
|
|
|
$
|
14,730
|
|
|
$
|
12,955
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
$
|
538
|
|
|
$
|
322
|
|
|
$
|
2,345
|
|
|
$
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share attributable to the Company
|
$
|
1.06
|
|
|
$
|
0.63
|
|
|
$
|
4.62
|
|
|
$
|
3.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share attributable to the Company
|
$
|
1.05
|
|
|
$
|
0.63
|
|
|
$
|
4.57
|
|
|
$
|
3.24
|
|
|
|
|
|
|
|
|
|
|
9. Goodwill and Other Intangibles
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, a company can assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, the Company may elect to proceed directly to the quantitative goodwill impairment test. In 2021, the Company elected to perform a qualitative impairment assessment. As part of its assessment, the Company considered numerous factors, including:
•that the fair value of each reporting unit exceeds its carrying value by a substantial margin based on its most recent quantitative assessment in 2019;
•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 2021 and concluded that goodwill was not impaired.
Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated lives and assessed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature. Based on its assessment, the Company concluded that other intangible assets were not impaired. The Company does not have any indefinite lived intangible assets.
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
(In millions)
|
2021
|
|
2020
|
|
Balance as of January 1,
|
$
|
15,517
|
|
|
$
|
14,671
|
|
|
Goodwill acquired
|
374
|
|
|
462
|
|
|
Other adjustments(a)
|
(243)
|
|
|
(99)
|
|
|
Balance at September 30,
|
$
|
15,648
|
|
|
$
|
15,034
|
|
(a) Primarily reflects the impact of foreign exchange.
The goodwill arising from the acquisitions in 2021 and 2020 consist largely of the synergies and economies of scale
expected from combining the operations of the Company and the acquired entities and the trained and assembled
workforce acquired.
The goodwill acquired in 2021 and 2020 included approximately $374 million and $462 million, respectively, of which approximately $25 million and $140 million is deductible for tax purposes, and is primarily related to the Risk and Insurance Services segment.
Goodwill allocable to the Company’s reportable segments at September 30, 2021 is as follows: Risk and Insurance Services, $11.8 billion and Consulting, $3.8 billion.
The gross cost and accumulated amortization of identified intangible assets at September 30, 2021 and December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
(In millions)
|
Gross
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Cost
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Client relationships
|
$
|
3,827
|
|
|
$
|
1,331
|
|
|
$
|
2,496
|
|
|
$
|
3,713
|
|
|
$
|
1,170
|
|
|
$
|
2,543
|
|
|
Other (a)
|
367
|
|
|
276
|
|
|
91
|
|
|
386
|
|
|
230
|
|
|
156
|
|
|
Amortized intangibles
|
$
|
4,194
|
|
|
$
|
1,607
|
|
|
$
|
2,587
|
|
|
$
|
4,099
|
|
|
$
|
1,400
|
|
|
$
|
2,699
|
|
(a) Primarily non-compete agreements, trade names and developed technology.
Aggregate amortization expense for the nine months ended September 30, 2021 and 2020 was $278 million and $265 million, respectively. The estimated future aggregate amortization expense is as follows:
|
|
|
|
|
|
|
|
For the Years Ending December 31,
|
|
|
(In millions)
|
Estimated Expense
|
|
2021 (excludes amortization through September 30, 2021)
|
$
|
88
|
|
|
2022
|
329
|
|
|
2023
|
302
|
|
|
2024
|
281
|
|
|
2025
|
241
|
|
|
Subsequent years
|
1,346
|
|
|
Total future amortization
|
$
|
2,587
|
|
10. Fair Value Measurements
Fair Value Hierarchy
The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy as defined by the FASB. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, for disclosure purposes, is determined based on the lowest level input that is significant to the fair value measurement. Assets and liabilities recorded in the consolidated balance sheets at fair value are categorized based on the inputs in the valuation techniques as follows:
Level 1.Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities and exchange-traded money market mutual funds).
Assets and liabilities measured using Level 1 inputs include exchange-traded equity securities, exchange-traded mutual funds and money market funds.
Level 2.Assets and liabilities whose values are based on the following:
a)Quoted prices for similar assets or liabilities in active markets;
b)Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
c)Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
d)Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).
Assets and liabilities using Level 2 inputs are related to an equity security.
Level 3.Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
Assets and liabilities measured using Level 3 inputs relate to assets and liabilities for contingent purchase consideration.
Valuation Techniques
Equity Securities, Money Market Mutual 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 mutual funds are valued using a valuation technique that results in price per share at $1.00.
Contingent Purchase Consideration Assets and Liabilities – Level 3
Purchase consideration for some acquisitions and dispositions made by the Company include contingent consideration arrangements. Contingent consideration arrangements are based primarily on EBITDA or revenue targets over a period of two to four years. The fair value of the contingent purchase consideration asset and liability is estimated as the present value of future cash flows to be paid, based on projections of revenue and earnings and related targets of the acquired and disposed entities.
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets
(Level 1)
|
|
Observable Inputs
(Level 2)
|
|
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
(In millions)
|
09/30/21
|
|
12/31/20
|
|
09/30/21
|
|
12/31/20
|
|
09/30/21
|
|
12/31/20
|
|
09/30/21
|
|
12/31/20
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange traded equity securities(a)
|
$
|
60
|
|
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60
|
|
|
$
|
59
|
|
|
Mutual funds(a)
|
193
|
|
|
186
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
193
|
|
|
186
|
|
|
Money market funds(b)
|
106
|
|
|
587
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
106
|
|
|
587
|
|
|
Other equity investment(a)
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
Contingent purchase consideration assets(c)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
68
|
|
|
5
|
|
|
68
|
|
|
Total assets measured at fair value
|
$
|
359
|
|
|
$
|
832
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
5
|
|
|
$
|
68
|
|
|
$
|
372
|
|
|
$
|
908
|
|
|
Fiduciary Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury bills
|
$
|
75
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75
|
|
|
$
|
150
|
|
|
Money market funds
|
244
|
|
|
173
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
244
|
|
|
173
|
|
Total fiduciary assets measured
at fair value
|
$
|
319
|
|
|
$
|
323
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
319
|
|
|
$
|
323
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase
consideration liability(d)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
303
|
|
|
$
|
243
|
|
|
$
|
303
|
|
|
$
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
303
|
|
|
$
|
243
|
|
|
$
|
303
|
|
|
$
|
243
|
|
(a) Included in other assets in the consolidated balance sheets.
(b) Included in cash and cash equivalents in the consolidated balance sheets.
(c) Included in other receivables in the consolidated balance sheets.
(d) Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
The Level 3 assets in the chart reflect contingent purchase consideration from the sale of businesses. The change in the contingent purchase consideration assets from December 31, 2020 is driven primarily by cash receipts of approximately $90 million. This decrease was partially offset by the impact of accretion and adjustments to the fair value of the contingent purchase consideration assets.
During the nine months ended September 30, 2021, there were no assets or liabilities that were transferred between levels.
The following table sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities for the three and nine month periods ended September 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In millions)
|
2021
|
|
2020
|
|
2021
|
2020
|
|
Balance at beginning of period
|
$
|
340
|
|
|
$
|
233
|
|
|
$
|
243
|
|
$
|
225
|
|
|
Net additions
|
1
|
|
|
—
|
|
|
99
|
|
96
|
|
|
Payments
|
(54)
|
|
|
(23)
|
|
|
(72)
|
|
(101)
|
|
|
Revaluation impact
|
18
|
|
|
18
|
|
|
35
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Other (a)
|
(2)
|
|
|
2
|
|
|
(2)
|
|
2
|
|
|
Balance at September 30,
|
$
|
303
|
|
|
$
|
230
|
|
|
$
|
303
|
|
$
|
230
|
|
(a) Primarily reflects the impact of foreign exchange.
Long-Term Investments
The Company holds investments in public and private companies as well as certain private equity investments that are accounted for using the equity method of accounting. The carrying value of these investments was $328 million and $280 million at September 30, 2021 and December 31, 2020, respectively.
Investments in Public and Private Companies
The Company has investments in private insurance and consulting companies with a carrying value of $178 million and $169 million at September 30, 2021 and December 31, 2020, respectively. These investments are accounted for using the equity method of accounting, the results of which are included in revenue in the consolidated statements of income and the carrying value of which is included in other assets in the consolidated balance sheets. The Company records its share of income or loss on its equity method investments, some of which are on a one quarter lag basis.
Private Equity Investments
The Company's investments in private equity funds were $150 million and $111 million at September 30, 2021 and December 31, 2020, respectively. The carrying values of these private equity investments approximate fair value. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. The Company records in earnings its proportionate share of the change in fair value of the funds on the investment income (loss) line in the consolidated statements of income. These investments are included in other assets in the consolidated balance sheets. The Company recorded net investment gains of $13 million and $40 million for the three and nine month periods ended September 30, 2021, respectively, and gain of $2 million and loss of $6 million from these investments for the same periods in 2020.
Other Investments
At September 30, 2021 and December 31, 2020, the Company held certain equity investments with readily determinable market values of $74 million and $72 million, respectively, including an investment in the common stock of Alexander Forbes ("AF") of $55 million at September 30, 2021 and $54 million at December 31, 2020. The Company also held investments without readily determinable market values of $33 million at both September 30, 2021 and December 31, 2020.
The Company sold 242 million shares of the common stock of AF during 2020. The investment in AF, which was accounted for using the equity method of accounting prior to the sale of these shares, is accounted for at fair value, with investment gains and losses recorded as investment income (loss) in the consolidated statement of income.
11. Derivatives
Net Investment Hedge
The Company has investments in various subsidiaries with Euro functional currencies. As a result, the Company is exposed to the risk of fluctuations between the Euro and U.S. dollar exchange rates. The Company designated its €1.1 billion senior note debt instruments ("euro notes") as a net investment hedge (the "hedge") of its Euro denominated subsidiaries. The hedge effectiveness is re-assessed each quarter to confirm that the designated equity balance at the beginning of each period continues to equal or exceed 80% of the outstanding balance of the Euro debt instrument and that all the critical terms of the hedging instrument and the hedged net investment continue to match. The Company concluded that the hedge continues to be highly effective as of September 30,
2021, and the change in the debt balance related to foreign exchange fluctuations was recorded in foreign currency translation gains (losses) in the consolidated balance sheet. The U.S. dollar value of the euro notes decreased $63 million through September 30, 2021 due to the impact of foreign exchange rates, with a corresponding decrease to accumulated other comprehensive loss.
12. Leases
A lease is defined as a party obtaining the right to use an asset legally owned by another party. The Company determines if an arrangement is a lease at inception. Operating leases are recognized on the balance sheet as Right-of-Use ("ROU") assets and operating lease liabilities based on the present value of the remaining future minimum payments over the lease term at commencement date of the lease.
The Company uses discount rates to determine the present value of future lease payments. The Company primarily uses its incremental borrowing rate adjusted to reflect a secured rate, based on the information available for leases, including the lease term and interest rate environment in the country in which the lease exists. The lease terms used to calculate the ROU asset and lease liability may include options to extend or terminate when it is reasonably certain that the Company will exercise that option.
The Company leases office facilities under non-cancelable operating leases with terms generally ranging between 10 and 25 years. The Company utilizes these leased office facilities for use by its employees in countries in which the Company conducts its business. Leases are negotiated with third-parties and, in some instances contain renewal, expansion and termination options. The Company also subleases certain office facilities to third-parties when the Company no longer utilizes the space. None of the Company’s leases restrict the payment of dividends or the incurrence of debt or additional lease obligations, or contain significant purchase options. In addition to the base rental costs, our lease agreements generally provide for rent escalations resulting from increased assessments for real estate taxes and other charges. A portion of our real estate lease portfolio contains base rents subject to annual changes in the Consumer Price Index ("CPI") as well as charges for operating expenses which are reimbursable to the landlord based on actual usage. Changes to the CPI and payments for such reimbursable operating expenses are considered variable and are recognized as variable lease costs in the period in which the obligation for those payments is incurred. Approximately 99% of the Company’s lease obligations are for the use of office space. All of the Company’s material leases are operating leases.
As a practical expedient, the Company elected an accounting policy not to separate non-lease components from lease components and instead account as a single lease component. The Company also elected not to recognize ROU assets and lease liabilities for leases that, at the commencement date, are for 12 months or less.
The following chart provides additional information about the Company’s property leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In millions)
|
2021
|
2020
|
|
2021
|
2020
|
|
Lease Cost:
|
|
|
|
|
|
|
Operating lease cost
|
$
|
93
|
|
$
|
99
|
|
|
$
|
282
|
$
|
288
|
|
|
Short-term lease cost
|
1
|
|
1
|
|
|
4
|
3
|
|
|
Variable lease cost
|
38
|
|
28
|
|
|
101
|
92
|
|
|
Sublease income
|
(3)
|
|
(5)
|
|
|
(16)
|
(15)
|
|
|
Net lease cost
|
$
|
129
|
|
$
|
123
|
|
|
$
|
371
|
$
|
368
|
|
|
Other information:
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
|
|
$
|
310
|
$
|
306
|
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
|
|
|
$
|
282
|
$
|
162
|
|
|
Weighted-average remaining lease term – real estate
|
|
|
|
9.0 years
|
8.4 years
|
|
|
|
|
|
|
|
|
Weighted-average discount rate – real estate leases
|
|
|
|
2.75%
|
3.02%
|
|
|
|
|
|
|
|
Future minimum lease payments for the Company’s operating leases as of September 30, 2021 are as follows:
|
|
|
|
|
|
|
|
Payment Dates (In millions)
|
Real Estate Leases
|
|
Remainder of 2021
|
$
|
102
|
|
|
2022
|
387
|
|
|
2023
|
340
|
|
|
2024
|
298
|
|
|
2025
|
266
|
|
|
2026
|
243
|
|
|
Subsequent years
|
897
|
|
|
Total future lease payments
|
2,533
|
|
|
Less: Imputed interest
|
(294)
|
|
|
Total
|
$
|
2,239
|
|
|
Current lease liabilities
|
$
|
339
|
|
|
Long-term lease liabilities
|
1,900
|
|
|
Total lease liabilities
|
$
|
2,239
|
|
Note: Table excludes obligations for leases with original terms of 12 months or less which have not been recognized as a right of use asset or liability in the consolidated balance sheets.
As of September 30, 2021, the Company had additional operating real estate leases that had not yet commenced of $13 million. These operating leases will commence over the next 12 months.
13. Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension plans for some of its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax-qualified defined benefit pension plans is to contribute amounts at least sufficient to meet the funding requirements set forth in accordance with applicable law.
The target asset allocation for the Company's U.S. plans is 64% equities and equity alternatives and 36% fixed income. At September 30, 2021 the actual allocation for the Company's U.S. Plan was 65% equities and equity alternatives and 35% fixed income. The target allocation for the U.K. Plans at September 30, 2021 is 27% equities and equity alternatives and 73% fixed income. At September 30, 2021, the actual allocation for the U.K. Plans was 28% equities and equity alternatives and 72% fixed income. The Company's U.K. Plans comprised approximately 81% of non-U.S. plan assets at December 31, 2020. 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 plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
|
|
For the Three Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
Service cost
|
$
|
9
|
|
|
$
|
10
|
|
|
|
|
|
|
Interest cost
|
87
|
|
|
112
|
|
|
|
|
|
|
Expected return on plan assets
|
(208)
|
|
|
(212)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
52
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit
|
$
|
(60)
|
|
|
$
|
(50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
Service cost
|
$
|
29
|
|
|
$
|
27
|
|
|
|
|
|
|
Interest cost
|
258
|
|
|
322
|
|
|
|
|
|
|
Expected return on plan assets
|
(627)
|
|
|
(629)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
155
|
|
|
120
|
|
|
|
|
|
|
Net periodic benefit credit
|
$
|
(185)
|
|
|
$
|
(160)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement loss
|
2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit
|
$
|
(183)
|
|
|
$
|
(160)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recorded in the Consolidated Statement of Income
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
|
|
For the Three Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
Compensation and benefits expense
|
$
|
9
|
|
|
$
|
10
|
|
|
|
|
|
|
Other net benefit credit
|
(69)
|
|
|
(60)
|
|
|
|
|
|
|
Total credit
|
$
|
(60)
|
|
|
$
|
(50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recorded in the Consolidated Statement of Income
|
|
|
|
|
|
|
|
Combined U.S. and significant non-U.S. Plans
|
Pension
Benefits
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
Compensation and benefits expense
|
$
|
29
|
|
|
$
|
27
|
|
|
|
|
|
|
Other net benefit credit
|
(212)
|
|
|
(187)
|
|
|
|
|
|
|
Total credit
|
$
|
(183)
|
|
|
$
|
(160)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
Benefits
|
|
|
|
For the Three Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
47
|
|
|
$
|
53
|
|
|
|
|
|
|
Expected return on plan assets
|
(82)
|
|
|
(86)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
22
|
|
|
18
|
|
|
|
|
|
|
Net periodic benefit credit
|
$
|
(13)
|
|
|
$
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans only
|
Pension
Benefits
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
$
|
139
|
|
|
$
|
160
|
|
|
|
|
|
|
Expected return on plan assets
|
(245)
|
|
|
(259)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
67
|
|
|
54
|
|
|
|
|
|
|
Net periodic benefit credit
|
$
|
(39)
|
|
|
$
|
(45)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
Benefits
|
|
|
|
For the Three Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
Service cost
|
$
|
9
|
|
|
$
|
10
|
|
|
|
|
|
|
Interest cost
|
40
|
|
|
59
|
|
|
|
|
|
|
Expected return on plan assets
|
(126)
|
|
|
(126)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
30
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit
|
$
|
(47)
|
|
|
$
|
(35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-U.S. Plans only
|
Pension
Benefits
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
(In millions)
|
2021
|
|
2020
|
|
|
|
|
|
Service cost
|
$
|
29
|
|
|
$
|
27
|
|
|
|
|
|
|
Interest cost
|
119
|
|
|
162
|
|
|
|
|
|
|
Expected return on plan assets
|
(382)
|
|
|
(370)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
88
|
|
|
66
|
|
|
|
|
|
|
Net periodic benefit credit
|
$
|
(146)
|
|
|
$
|
(115)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement loss
|
2
|
|
|
—
|
|
|
|
|
|
|
Total credit
|
$
|
(144)
|
|
|
$
|
(115)
|
|
|
|
|
|
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
|
|
|
|
|
|
September 30,
|
2021
|
|
2020
|
|
|
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
4.72
|
%
|
|
5.31
|
%
|
|
|
|
|
|
Discount rate
|
1.92
|
%
|
|
2.57
|
%
|
|
|
|
|
|
Rate of compensation increase
|
1.85
|
%
|
|
1.76
|
%
|
|
|
|
|
The Company made approximately $90 million of contributions to its U.S. and non-U.S. defined benefit pension plans for the nine months ended September 30, 2021. The Company expects to contribute approximately $39 million to its U.S. and non-U.S. defined benefit pension plans during the remainder of 2021.
Defined Contribution Plans
The Company maintains certain defined contribution plans ("DC Plans") for its employees, the most significant being in the U.S. and the U.K. The cost of the U.S. DC Plans was $115 million and $110 million for the nine months ended September 30, 2021 and 2020, respectively. The cost of the U.K. DC Plans was $106 million and $94 million for the nine months ended September 30, 2021 and 2020, respectively.
14. Debt
The Company’s outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30,
2021
|
|
December 31,
2020
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
516
|
|
|
$
|
517
|
|
|
|
516
|
|
|
517
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes – 4.80% due 2021
|
—
|
|
|
500
|
|
|
|
|
|
|
|
Senior notes – 2.75% due 2022
|
500
|
|
|
499
|
|
|
Senior notes – 3.30% due 2023
|
349
|
|
|
349
|
|
|
Senior notes – 4.05% due 2023
|
249
|
|
|
249
|
|
|
Senior notes – 3.50% due 2024
|
598
|
|
|
598
|
|
|
Senior notes – 3.875% due 2024
|
996
|
|
|
995
|
|
|
Senior notes – 3.50% due 2025
|
498
|
|
|
498
|
|
|
Senior notes – 1.349% due 2026
|
647
|
|
|
677
|
|
|
Senior notes – 3.75% due 2026
|
598
|
|
|
597
|
|
|
Senior notes – 4.375% due 2029
|
1,499
|
|
|
1,499
|
|
|
Senior notes – 1.979% due 2030
|
632
|
|
|
664
|
|
|
Senior notes – 2.250% due 2030
|
738
|
|
|
737
|
|
|
Senior notes – 5.875% due 2033
|
298
|
|
|
298
|
|
|
Senior notes – 4.75% due 2039
|
495
|
|
|
495
|
|
|
Senior notes – 4.35% due 2047
|
493
|
|
|
493
|
|
|
Senior notes – 4.20% due 2048
|
592
|
|
|
592
|
|
|
Senior notes – 4.90% due 2049
|
1,238
|
|
|
1,237
|
|
|
Mortgage – 5.70% due 2035
|
320
|
|
|
331
|
|
|
|
|
|
|
|
Other
|
4
|
|
|
5
|
|
|
|
10,744
|
|
|
11,313
|
|
|
Less current portion
|
516
|
|
|
517
|
|
|
|
$
|
10,228
|
|
|
$
|
10,796
|
|
The senior notes in the table are registered by the Company with the Securities and Exchange Commission and are not guaranteed.
On April 9, 2021, the Company increased its short-term commercial paper financing program to $2.0 billion from $1.5 billion. The Company had no commercial paper outstanding at September 30, 2021.
Credit Facilities
On April 2, 2021, the Company entered into an amended and restated multi-currency unsecured $2.8 billion five-year revolving credit facility ("New Facility"). The interest rate on the New Facility is based on LIBOR plus a fixed margin which varies with the Company’s credit ratings. The New Facility expires in April 2026 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. The New Facility includes provisions for determining a LIBOR successor rate in the event LIBOR reference rates are no longer available or in certain other circumstances which are determined to make using an alternative rate desirable. As of September 30, 2021, the Company had no borrowings under this facility.
In connection with the New Facility, the Company terminated its previous multi-currency unsecured $1.8 billion five-year revolving credit facility and its unsecured $1 billion 364-day unsecured revolving credit facility ("364-day Facility").
In January 2020, the Company closed on a $500 million one-year and $500 million two-year term loan facilities. In the first quarter of 2020 the Company borrowed $1 billion against these facilities, which were subsequently repaid during the third and fourth quarters of 2020. These two facilities were terminated as of December 31, 2020 after repayment of the initial draw down.
Additional credit facilities, guarantees and letters of credit are maintained with various banks, primarily related to operations located outside the United States, aggregating $512 million at September 30, 2021 and $573 million at December 31, 2020. There were no outstanding borrowings under these facilities at September 30, 2021 and December 31, 2020.
Senior Notes
On April 15, 2021, the Company repaid $500 million of senior notes maturing in July 2021.
In May 2020, the Company issued $750 million of senior notes due 2030.
In March 2020, the Company repaid $500 million of maturing senior notes.
Fair Value of Short-term and Long-term Debt
The following table reflects the carrying values and estimated fair value of the Company’s short-term and long-term debt. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or need to dispose of the financial instrument.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
(In millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
$
|
516
|
|
|
$
|
519
|
|
|
$
|
517
|
|
|
$
|
523
|
|
|
Long-term debt
|
$
|
10,228
|
|
|
$
|
11,878
|
|
|
$
|
10,796
|
|
|
$
|
12,858
|
|
The fair value of the Company's short-term debt consists primarily of term debt maturing within the next year and its fair value approximates its carrying value. The estimated fair value 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-term and long-term debt would be classified as Level 2 in the fair value hierarchy.
15. Restructuring Costs
Jardine Lloyd Thompson Group plc ("JLT") Related Integration and Restructuring
The Company is in the final stages of its integration of JLT, which the Company acquired in April 2019. The costs incurred in connection with the integration and restructuring of the combined businesses, primarily related to severance, real estate rationalization and technology, consulting fees related to the management of the integration processes and legal fees related to the rationalization of legal entity structures.
Since the acquisition of JLT, the Company has incurred JLT integration and restructuring costs of $647 million through September 30, 2021. This reflects $19 million and $61 million of costs incurred for the three and nine months ended September 30, 2021, respectively, compared to $44 million and $181 million, respectively, for the same periods in the prior year.
Costs recognized are based on applicable accounting guidance which includes accounting for disposal or exit activities, guidance related to impairment of long lived assets (for right of use assets related to real estate leases), as well as other costs resulting from accelerated depreciation or amortization of leasehold improvements and other property and equipment.
In connection with the JLT integration and restructuring, the Company incurred costs of $19 million and $61 million: $11 million and $38 million in RIS and $9 million and $21 million in Consulting for the three and nine months ended September 30, 2021, respectively. The severance and related costs were included in compensation and benefits and the other costs were included in other operating expenses in the consolidated statements of income.
Details of the JLT integration and restructuring activity from January 1, 2020 through September 30, 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Severance
|
|
Real Estate Related Costs (a)
|
|
Information Technology (a)
|
|
Consulting and Other Outside Services (b)
|
|
Total
|
|
Liability at 1/1/20
|
$
|
42
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
2020 charges
|
43
|
|
|
69
|
|
|
62
|
|
|
77
|
|
|
251
|
|
|
Cash payments
|
(69)
|
|
|
(25)
|
|
|
(55)
|
|
|
(77)
|
|
|
(226)
|
|
|
Non-cash charges
|
—
|
|
|
(42)
|
|
|
(5)
|
|
|
—
|
|
|
(47)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at 12/31/20
|
$
|
16
|
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
2021 charges
|
9
|
|
|
19
|
|
|
15
|
|
|
18
|
|
|
61
|
|
|
Cash payments
|
(15)
|
|
|
(9)
|
|
|
(16)
|
|
|
(18)
|
|
|
(58)
|
|
|
Non-cash charges
|
—
|
|
|
(13)
|
|
|
—
|
|
|
—
|
|
|
(13)
|
|
|
Liability at 9/30/21
|
$
|
10
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
15
|
|
(a) Includes ROU asset impairments, data center contract termination costs and temporary infrastructure leasing costs.
(b) Includes consulting fees related to the management of the integration processes and legal fees related to the rationalization of legal entity structures.
Other Restructuring
The Company incurred costs of $12 million and $35 million for the three and nine months ended September 30, 2021 which reflect costs associated with the Company's global information technology and HR functions, and adjustments to restructuring liabilities for future rent under non-cancellable leases.
The following details other restructuring liabilities for actions initiated prior to 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Liability at
1/1/20
|
|
Amounts
Accrued
|
|
Cash
Paid
|
|
Non-Cash/Other
|
|
Liability at 12/31/20
|
|
Amounts
Accrued
|
|
Cash
Paid
|
|
Non-Cash/Other
|
|
Liability at 9/30/21
|
|
Severance
|
$
|
51
|
|
|
$
|
39
|
|
|
$
|
(54)
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
13
|
|
|
$
|
(35)
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
Future rent under non-cancelable leases and other costs
|
51
|
|
|
50
|
|
|
(46)
|
|
|
(10)
|
|
|
45
|
|
|
22
|
|
|
(31)
|
|
|
(4)
|
|
|
32
|
|
|
Total
|
$
|
102
|
|
|
$
|
89
|
|
|
$
|
(100)
|
|
|
$
|
(10)
|
|
|
$
|
81
|
|
|
$
|
35
|
|
|
$
|
(66)
|
|
|
$
|
(4)
|
|
|
$
|
46
|
|
The expenses associated with these 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.
16. Common Stock
In November 2019, the Board of Directors of the Company authorized the Company to repurchase up to $2.5 billion in shares of the Company's common stock, which superseded any prior authorizations. During the first nine months of 2021, the Company repurchased 5.3 million shares of its common stock for $734 million. As of September 30, 2021, the Company remained authorized to repurchase up to approximately $1.7 billion in shares of its common stock. There is no time limit on the authorization. During the first nine months of 2020, there were no repurchases of the Company's common stock.
The Company issued approximately 3.1 million and 3.4 million shares related to stock compensation and employee stock purchase plans during the first nine months of 2021 and 2020, respectively.
17. Claims, Lawsuits and Other Contingencies
Nature of Contingencies
The Company and its subsidiaries are subject to a significant number of claims, lawsuits and proceedings in the course of our 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 often seek damages, including punitive and treble damages, in amounts that could be significant. In establishing liabilities for errors and omissions claims in accordance with FASB guidance on Contingencies - Loss Contingencies, the Company uses case level reviews by inside and outside counsel, and internal actuarial analysis by Oliver Wyman, 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.
Our activities are regulated under the laws of the United States and its various states, the United Kingdom, the European Union and its member states, and the many other jurisdictions in which the Company operates. The Company also receives subpoenas in the ordinary course of business and, from time to time, receives requests for information in connection with governmental investigations.
Current Matters
Risk and Insurance Services Segment
•In January 2019, the Company received a notice that the Administrative Council for Economic Defense anti-trust agency in Brazil had commenced an administrative proceeding against a number of insurance brokers, including both Marsh and JLT, and insurers “to investigate an alleged sharing of sensitive commercial and competitive confidential information" in the aviation insurance and reinsurance sector.
•In 2017, JLT identified payments to a third-party introducer that had been directed to unapproved bank accounts. These payments related to reinsurance placements made on behalf of an Ecuadorian state-owned insurer between 2014 and 2017. In early 2018, JLT voluntarily reported this matter to law enforcement authorities. In February and March 2020, money laundering charges were filed in the United States against a former employee of JLT, the principals of the third-party introducer and a former official of the state-owned insurer. These individuals, including the former JLT employee, have since pleaded guilty to criminal charges. We are cooperating with all ongoing investigations related to this matter.
•From 2014, Marsh Ltd. was engaged by Greensill Capital (UK) Limited as its insurance broker. Marsh Ltd. placed a number of trade credit insurance policies for Greensill. On March 1, 2021, Greensill filed an action against certain of its trade credit insurers in Australia seeking a mandatory injunction compelling these insurers to renew coverage under expiring policies. Later that day, the Australian court denied Greensill’s application. Since then, a number of Greensill entities have filed for, or been subject to, insolvency proceedings, and several litigations and investigations have been commenced in the U.K., Australia, Germany, Switzerland and the U.S.
Consulting Segment
•In 2014, the FCA conducted an industry-wide review of the suitability of financial advice provided to individuals by a number of companies, including JLT, relating to enhanced transfer value ("ETV") defined benefit pension transfers. In January 2015, the FCA notified JLT that it was commissioning a Skilled Person review of ETV pension transfer advice given by JLT and a business acquired by JLT in 2012. Following the Skilled Person review which took place between 2015 and 2018, JLT engaged a compliance consulting firm to conduct an analysis of approximately 14,000 individual files to assess the suitability of the advice provided and, where appropriate, the amount of redress to be paid. In February 2019, prior to the completion of its acquisition by the Company, JLT recorded a gross liability of £59 million (or $77 million). This preliminary estimate by JLT, which reflected the projected redress amounts contained in the Skilled Person report, was based on a review of a limited number of files. Thereafter, the FCA expanded the scope
of the review. As of December 31, 2020, the updated redress liability, including the projected costs of completing the review, increased to £155 million (or $210 million) resulting from the expansion in the scope of the review, and the significant progress made in completing the individual suitability reviews. Payments of redress and expenses during the first three quarters of 2021, together with a reduction of the actuarial estimates of future redress payments, reduced the recorded liability to £25 million (or $34 million) as of September 30, 2021. We expect to finalize the suitability review and redress calculations and to make substantially all redress payments by the end of the fourth quarter of 2021. This gross liability has been, and we anticipate will continue to be, partially offset by a contractual indemnity obligation and insurance recoveries from third-party E&O insurers.
At this time, we are unable to predict the likely timing, outcome or ultimate impact of the foregoing matters. 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.
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 partly reinsured by a related party of River Thames. Payment of claims under the reinsurance agreement is collateralized by funds withheld by River Thames from the reinsurer. To the extent River Thames or the reinsurer is unable to meet its obligations under those policies, a claimant may seek to recover from the Company under the guarantee.
From 1980 to 1983, the Company owned indirectly the English & American Insurance Company ("E&A"), which was a member of the ILU. The ILU required the Company to guarantee a portion of E&A's obligations. After E&A became insolvent in 1993, the ILU agreed to discharge the guarantee in exchange for the Company's agreement to post an evergreen letter of credit that is available to pay claims by policyholders on certain E&A policies issued through the ILU and incepting between July 3, 1980 and October 6, 1983. Certain claims have been paid under the letter of credit and the Company anticipates that additional claimants may seek to recover against the letter of credit.
* * * *
The pending proceedings described above and other matters not explicitly described in this Note 17 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages, fines, penalties or other forms of relief. Where a loss is both probable and reasonably estimable, the Company establishes liabilities in accordance with FASB guidance on Contingencies - Loss Contingencies. Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.
18. Segment Information
The Company is organized based on the types of services provided. Under this structure, the Company’s segments are:
•Risk and Insurance Services, comprising insurance services (Marsh) and reinsurance services (Guy Carpenter); and
•Consulting, comprising Mercer and Oliver Wyman Group.
The accounting policies of the segments are the same as those used for the consolidated financial statements described in Note 1 to the Company’s 2020 Form 10-K. Segment performance is evaluated based on segment operating income, which includes directly related expenses, and charges or credits related to integration and restructuring but not the Company’s corporate-level expenses. Revenues are attributed to geographic areas on the basis of where the services are performed.
Selected information about the Company’s operating segments for the three and nine month periods ended September 30, 2021 and 2020 are as follows:
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|
|
Three Months Ended
September 30,
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Nine Months Ended
September 30,
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(In millions)
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Revenue
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|
Operating Income
(Loss)
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|
Revenue
|
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Operating Income
(Loss)
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|
2021–
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|
|
|
|
|
|
|
|
Risk and Insurance Services
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$
|
2,670
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|
(a)
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$
|
403
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|
|
$
|
9,036
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(c)
|
$
|
2,413
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Consulting
|
1,925
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(b)
|
404
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|
|
5,690
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(d)
|
1,109
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|
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Total Operating Segments
|
4,595
|
|
|
807
|
|
|
14,726
|
|
|
3,522
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|
|
Corporate/Eliminations
|
(12)
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|
|
(67)
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|
|
(43)
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|
|
(196)
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Total Consolidated
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$
|
4,583
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|
$
|
740
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|
|
$
|
14,683
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|
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$
|
3,326
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2020–
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|
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|
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Risk and Insurance Services
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$
|
2,291
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(a)
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$
|
333
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|
|
$
|
7,805
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(c)
|
$
|
1,883
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|
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Consulting
|
1,696
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|
(b)
|
278
|
|
|
5,074
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(d)
|
815
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Total Operating Segments
|
3,987
|
|
|
611
|
|
|
12,879
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|
|
2,698
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|
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Corporate/Eliminations
|
(19)
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|
(71)
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|
(71)
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|
(203)
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Total Consolidated
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$
|
3,968
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|
|
$
|
540
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|
|
$
|
12,808
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|
|
$
|
2,495
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|
|
|
|
|
(a) Includes interest income on fiduciary funds of $4 million and $8 million in 2021 and 2020, respectively, and equity method income of $8 million in 2021 and equity method loss of $6 million in 2020.
(b) Includes inter-segment revenue of $11 million and $19 million in 2021 and 2020, respectively.
(c) Includes inter-segment revenue of $5 million for both 2021 and 2020, interest income on fiduciary funds of $12 million and $40 million in 2021 and 2020, respectively, and equity method income of $25 million and $7 million in 2021 and 2020, respectively.
(d) Includes inter-segment revenue of $38 million and $66 million in 2021 and 2020, respectively, and equity method income of $4 million in 2020 and none in 2021.
Details of operating segment revenue for the three and nine month periods ended September 30, 2021 and 2020 are as follows:
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|
|
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|
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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(In millions)
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2021
|
|
2020
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|
2021
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|
2020
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|
Risk and Insurance Services
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|
|
|
|
|
|
|
|
Marsh
|
$
|
2,355
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|
|
$
|
2,015
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|
|
$
|
7,336
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|
|
$
|
6,259
|
|
|
Guy Carpenter
|
315
|
|
|
276
|
|
|
1,700
|
|
|
1,546
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|
|
Total Risk and Insurance Services
|
2,670
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|
|
2,291
|
|
|
9,036
|
|
|
7,805
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|
|
Consulting
|
|
|
|
|
|
|
|
|
Mercer
|
1,315
|
|
|
1,216
|
|
|
3,877
|
|
|
3,616
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|
|
Oliver Wyman Group
|
610
|
|
|
480
|
|
|
1,813
|
|
|
1,458
|
|
|
Total Consulting
|
1,925
|
|
|
1,696
|
|
|
5,690
|
|
|
5,074
|
|
|
Total Operating Segments
|
4,595
|
|
|
3,987
|
|
|
14,726
|
|
|
12,879
|
|
|
Corporate/Eliminations
|
(12)
|
|
|
(19)
|
|
|
(43)
|
|
|
(71)
|
|
|
Total
|
$
|
4,583
|
|
|
$
|
3,968
|
|
|
$
|
14,683
|
|
|
$
|
12,808
|
|
19. New Accounting Guidance
New Accounting Pronouncements Adopted Effective January 1, 2021:
In January 2020, the FASB issued guidance that addresses accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The standard takes effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this standard did not have a material impact on the Company’s financial position or its results of operations.
In December 2019, the FASB issued guidance related to the accounting for income taxes. The standard removes specific exceptions in the current rules and eliminates the need for an organization to analyze whether the following apply in a given period: (a) exception to the incremental approach for intraperiod tax allocation; (b) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (c) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The standard also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (a) franchise taxes that are partially based on income; (b) transactions with a government that result in a step-up in the tax basis of goodwill; (c) separate financial statements of legal entities that are not subject to tax and (d) enacted changes in tax laws in interim periods. The standard takes effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this standard did not have a material impact on the Company’s financial position or its results of operations.
New Accounting Pronouncements Adopted Effective January 1, 2020:
In August 2018, the FASB issued new guidance that amends required fair value measurement disclosures. The guidance adds new requirements, eliminates some current disclosures and modifies other required disclosures. The new disclosure requirements, along with modifications made to disclosures as a result of the change in requirements for narrative descriptions of measurement uncertainty, must be applied on a prospective basis. The effects of all other amendments included in the guidance must be applied retrospectively for all periods presented. The adoption of this guidance impacted disclosures only and did not have an impact on the Company's financial position or results of operations.
In January 2017, the FASB issued new guidance to simplify the test for goodwill impairment. The new guidance eliminates the second step in the current two-step goodwill impairment process, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill for that reporting unit. The new guidance requires a one-step impairment test, in which the goodwill impairment charge is based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance should be applied on a prospective basis with the nature of and reason
for the change in accounting principle disclosed upon transition. The adoption of this standard did not have an impact on the Company's financial position or results of operations.
In June 2016, the FASB issued new guidance on the impairment of financial instruments. The new guidance adds an allowance for credit losses ("CECL") impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses, which the FASB believes will result in more timely recognition of such losses. The new standard is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the new standard makes targeted changes to the impairment model for available-for-sale debt securities. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.