MARSH & MCLENNAN COMPANIES General
Marsh & McLennan Companies, Inc. and its consolidated subsidiaries (the "Company") is a global professional services firm offering clients advice and solutions in risk, strategy and people. Its businesses include: Marsh, the insurance broker, intermediary and risk advisor;Guy Carpenter , the risk and reinsurance specialist; Mercer, the provider of HR and Investment related financial advice and services; andOliver Wyman Group , the management, economic and brand consultancy. With 76,000 colleagues worldwide and annual revenue of$17 billion , the Company provides analysis, advice and transactional capabilities to clients in more than 130 countries. The Company conducts business through two segments: • Risk and Insurance Services includes risk management activities (risk advice, risk transfer and risk control and mitigation solutions) as well
as insurance and reinsurance broking and services. The Company conducts
business in this segment through Marsh and Guy Carpenter .
• Consulting includes health, wealth and career consulting services and
products, and specialized management, economic and brand consultingservices. The Company conducts business in this segment through Mercer and
We describe the primary sources of revenue and categories of expense for each segment below, in our discussion of segment financial results. A reconciliation of segment operating income to total operating income is included in Note 17 to the consolidated financial statements included in Part II, Item 8 in this report. The accounting policies used for each segment are the same as those used for the consolidated financial statements. Changes to Requirements for Prior Year Discussion of Results OnMarch 20, 2019 , theSecurities and Exchange Commission ("SEC") adopted changes to its rules and forms in an effort to modernize and simplify disclosure requirements for public companies. These rule changes include a registrant's option to omit the earliest year in its discussion in Management's Discussion and Analysis ("MD&A"). Under the previous rules, registrants generally provided a discussion covering the three-year period of the financial statements with year-to-year comparisons. The amendments allow registrants to eliminate the discussion of the earliest of the three years, if such a discussion was included in a prior 10-K filing and if there were no material changes to such older periods. The Company has elected to adopt this rule change and eliminate the prior year-to-year comparisons in this currentDecember 31, 2019 Annual Report on Form 10-K filing. For information on fiscal 2017 results and similar comparisons, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the fiscal year endedDecember 31, 2018 . Acquisition of JLT OnApril 1, 2019 , the Company completed the acquisition (the "Transaction") of all of the outstanding shares of Jardine Lloyd Thompson Group plc ("JLT"), a public company organized under the laws ofEngland andWales . Under the terms of the Transaction, JLT shareholders received £19.15 in cash for each JLT share, which valued JLT's existing share capital at approximately £4.3 billion (or approximately$5.6 billion based on the exchange rate ofU.S. $1 .31:£1) on the Transaction closing date. JLT's results of operations for the periodApril 1, 2019 throughDecember 31, 2019 are included in the Company's results of operations for 2019. Under applicable accounting guidance, JLT's results of operations for the periodJanuary 1 through March 31, 2019 and for the years ended 2018 and 2017 are not included in the Company's results of operations and therefore, affect comparability. Prior to being acquired by the Company, JLT operated in three segments: Specialty, Reinsurance and Employee Benefits. JLT operated in 41 countries, with significant revenue in theUnited Kingdom , Pacific,Asia andthe United States . As ofApril 1, 2019 , the historical JLT businesses were combined into MMC operations as follows:JLT Specialty is included by geography within Marsh, JLT Reinsurance is included inGuy Carpenter and the majority of JLT's Employee Benefits business was included inMercer Health and Wealth. 33 -------------------------------------------------------------------------------- Upon the consummation of the acquisition of JLT, the Company assumed the legal liabilities and became responsible for JLT's litigation and regulatory exposures as ofApril 1, 2019 . Please see the "Risk Factors" section of this Annual Report on Form 10-K for risks associated with the acquisition. The Company's results for the year endedDecember 31, 2019 were impacted by JLT related acquisition, restructuring and integration costs as well as legacy MMC restructuring programs as discussed in Note 14 to the consolidated financial statements. Acquisitions and dispositions impacting the Risk and Insurance Services and Consulting segments are discussed in Note 5 to the consolidated financial statements. This MD&A contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" at the outset of this report. Consolidated Results of Operations For the Years EndedDecember 31 , (In millions, except per share figures) 2019 2018 2017 Revenue$ 16,652 $ 14,950 $ 14,024 Expense Compensation and Benefits 9,734 8,605 8,085 Other Operating Expenses 4,241 3,584 3,284 Operating Expenses 13,975 12,189 11,369 Operating Income$ 2,677 $ 2,761 $ 2,655 Income Before Income Taxes$ 2,439 $ 2,244 $ 2,643 Income from Continuing Operations$ 1,773 $ 1,670 $
1,510
Discontinued Operations, Net of Tax - - 2 Net Income Before Non-Controlling Interests$ 1,773 $ 1,670 $ 1,512 Net Income Attributable to the Company$ 1,742 $ 1,650 $ 1,492 Basic net income per share - Continuing Operations$ 3.44 $ 3.26 $
2.91
- Net income attributable to the Company$ 3.44 $ 3.26 $ 2.91 Diluted net income per share - Continuing operations$ 3.41 $ 3.23 $
2.87
- Net income attributable to the Company$ 3.41 $ 3.23 $ 2.87 Average number of shares outstanding - Basic 506 506
513
- Diluted 511 511
519
Shares outstanding at December 31, 504 504
509
Consolidated operating income was$2.7 billion in 2019 compared with$2.8 billion in 2018. Improvements in the Company's ongoing operating results, both legacy and from the inclusion of JLT's results beginning onApril 1, 2019 was offset by the year-over-year increase in JLT integration, restructuring and acquisition related costs as per the chart below. Income before income taxes increased 9% to$2.4 billion as compared to$2.2 billion in 2018, reflecting the change in operating income discussed immediately above and the increase in year-over-year interest expense, primarily related to new debt issued to finance the JLT Transaction, partly offset by lower derivative related costs, pension settlement charges and the 2018 impairment charge related toAlexander Forbes . Diluted earnings per share increased 6% to$3.41 in 2019 compared with$3.23 in 2018. This increase is a result of the factors discussed above, and a lower effective tax rate in 2019. Average diluted shares 34 -------------------------------------------------------------------------------- outstanding for 2019 remained unchanged from 2018 at 511 million. Share repurchases during the year were offset by the shares issued related to vesting of share awards and the exercise of employee stock options. Risk and Insurance Services operating income decreased$31 million , or 2%, in 2019 compared with 2018. Revenue increased 17%, reflecting a 4% increase on an underlying basis partly offset by a 2% decrease from the impact of foreign currency translation. Expense increased 22% or 5% on an underlying basis in 2019 compared with 2018 primarily due to JLT related integration, restructuring and acquisition related costs. Consulting operating income increased$111 million , or 10%, to$1.2 billion in 2019 compared with 2018, reflecting the combined impact of increases in revenue of 5% and expense of 4%. The following chart summarizes the activity related to the restructuring and noteworthy items discussed in more detail below: Twelve Months Ended December 31, (In millions) 2019 2018 2017 Restructuring costs, excluding JLT $ 112 $ 161 $ 40 JLT integration and restructuring costs 335 - - JLT acquisition related costs 150 12 - Impact on operating income 597 173 40 Change in fair value of acquisition related derivative contracts 8 441 - Pension settlement charges 7 42 54 Early extinguishment of JLT debt 32 - - JLT related interest income - pre-acquisition (25 ) - - JLT related interest expense - pre-acquisition 53 30 - Investment loss (impairment loss) - 83 - Impact on income before taxes $ 672 $ 769 $ 94
In 2019 and 2018, the Company's results of operations and earnings per share were significantly impacted by the following items: • Restructuring costs, excluding JLT: Includes severance and related charges
from restructuring activities, adjustments to restructuring liabilities
for future rent under non-cancellable leases and other real estate costs,
and restructuring costs related to the integration of recent acquisitions.
These costs are discussed in more detail in Note 14 of the consolidated
financial statements.
• JLT integration and restructuring costs: Includes costs incurred for staff
reductions, lease related exit costs as well as consulting costs related
to the JLT Transaction. These costs are discussed in more detail in Note
14 of the consolidated financial statements.
• JLT acquisition related costs: Includes advisor fees and stamp duty taxes
related to the closing of the JLT Transaction and retention costs. These
costs are reflected as part of net operating income. Also includes the
loss on the sale of JLT's aerospace business, which is included in
revenue.
• Change in fair value of acquisition related derivatives: In connection
with the JLT Transaction, to hedge the risk of appreciation of the
GBP-denominated purchase price relative to the
2018, the Company entered into a deal contingent foreign exchange contract
(the "FX Contract") to, solely upon consummation of the JLT Transaction,
purchase £5.2 billion and sell a corresponding amount of
contracted exchange rate. The FX Contract is discussed in Note 11 to the
consolidated financial statements. An unrealized loss of
related to the fair value changes to this derivative was recognized in the
consolidated
35-------------------------------------------------------------------------------- statement of income for the year endedDecember 31, 2018 , largely due to the depreciation of the GBP fromSeptember 2018 . In 2019, the Company recorded a gain of$31 million upon final settlement of the FX Contract. In addition, to hedge the economic risk of increases in interest rates prior to its issuance of senior notes inJanuary 2019 , in the fourth quarter of 2018, the Company entered intoTreasury lock contracts related to$2 billion of the expected debt issuance. These economic hedges were not designated as accounting hedges. The Company recorded an unrealized loss of$116 million related to the changes in the fair value of these derivatives in the consolidated statement of income for the year endedDecember 31, 2018 . InJanuary 2019 , upon issuance of the$5 billion of senior notes, the Company settled theTreasury lock contracts and made a payment to its counter party for$122 million . In 2019, an additional charge of$6 million was recorded to the consolidated statement of income related to the settlement of theTreasury lock derivatives. • JLT related interest income and expense: To secure funding for the
Transaction, the Company entered into a bridge loan agreement with
aggregate commitments of £5.2 billion in
the customary upfront fees related to the bridge loan, which were
amortized as interest expense based on the period of time the facility was
expected to be in effect. The Company recorded interest expense of
approximately
the amortization of the bridge loan fees and an additional
2019 upon termination of the bridge loan agreement in connection with the
closing of the JLT Transaction. The Company recorded approximately $47
million of interest expense related to the senior notes issued in the
first quarter of 2019 and $25 million of interest income from theinvestment of the proceeds prior to the closing of the JLT Transaction
• Investment loss-impairment charge: The Company owns approximately 34% of
the common stock of
listed on the
extent to which the shares traded below their cost, the Company concluded
the decline in value of the investment was other than temporary and
recorded a charge of
income. See Note 5 to the consolidated financial statements for additional
information regarding the pending sale of the Company's remaining
investment in AF.
• Pension settlement charge: The Defined Benefit Pension Plans in the
and certain other countries allow participants an option for the payment
of a lump sum distribution from plan assets before retirement in full
satisfaction of the retirement benefits due to the participant as well as
any survivor's benefit. The Company's policy under applicable
to treat these lump sum payments as a partial settlement of the plan
liability if they exceed the sum of service cost plus interest cost
components of net period pension cost of a plan for the year ("settlement
thresholds"). The amount of lump sum payments through
exceeded the settlement thresholds in two of the
recorded non-cash settlement charges, primarily related to these plans of
2017, respectively, of which approximately 90% impacted
Services. In 2019, the Company recorded
settlement charges related to certain of its non
JLT Integration and Restructuring Costs The Company is currently integrating JLT, which is discussed in more detail in Note 14 to the consolidated financial statements, and will incur costs in connection with the integration and restructuring of the combined businesses, primarily related to severance, real estate rationalization, technology, consulting fees related to the management of the integration processes and legal fees related to the rationalization of legal entity structures. Based on current estimates, the Company expects to incur pre-tax charges of$700 million , of which approximately$625 million will be cash charges. These costs reflect$335 million incurred in 2019 and projected costs of approximately$365 million , most of which will be incurred in 2020 and the remainder in 2021. Based on further analysis and review during the second half of 2019, the Company identified additional opportunities for further efficiencies that will result in additional future cost savings and is currently tracking ahead of our prior guidance. The Company expects to achieve run rate savings of at least$350 million . The Company has realized cost savings in 2019 of approximately$125 36 -------------------------------------------------------------------------------- million and expects to achieve the remainder by the end of 2021. The Company incurred cash charges of approximately$265 million during 2019 and expects most of the remaining cash expenditures to occur in 2020, with a modest amount in 2021, related to this initiative. These integration and restructuring plans are still being finalized, which may change our current cost and related savings estimates, as the Company continues to refine its detailed plans for each business and location. JLT Acquisition Related Costs JLT acquisition related costs include costs directly related to completing the Transaction, such as retention costs, investment banking fees, legal fees and stamp duty tax. It also includes the loss on disposal of JLT's aerospace business. Consolidated Revenue and Expense Revenue - Components of Change The Company conducts business in many countries. As a result, foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, certain other items such as the revenue impact of acquisitions and dispositions, including transfers among businesses may impact period-to-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by isolating these impacts. The calculation of underlying revenue growth for the twelve-month period endedDecember 31, 2019 , is calculated as if MMC and JLT were a combined company a year ago, but excludes the impact of currency and other acquisitions, dispositions, and transfers among businesses. Combined prior year revenue information for MMC and JLT for the twelve-month periods endedDecember 31, 2018 are presented below. The unaudited 2018 JLT revenue amounts in the "2018 including JLT" column reflect historical JLT revenue information following IFRS, adjusted to conform withU.S. GAAP and the Company's specific accounting policies, primarily related to development of constraints and subsequent release of those constraints related to the reinsurance business. The decrease in revenue due to the disposal ofJLT's Aerospace business is reflected in the acquisitions/dispositions column beginning inJune 2019 , when the sale was completed. See the reconciliation of non-GAAP measures on page 55. All other acquisitions/dispositions activity is included in the acquisitions/dispositions column. Underlying expense growth is calculated in a similar manner. The impact of foreign currency exchange fluctuations, acquisitions and dispositions, including transfers among businesses, on the Company's operating revenues by segment are as follows: Year Ended December 31, Components of Revenue Change Including JLT* % Change % Change Acquisitions/ (In millions, except GAAP 2018 Including JLT Dispositions/ Other Underlying percentage figures) 2019 2018 Revenue Including JLT in 2018 Currency Impact Impact Revenue Risk and Insurance Services Marsh$ 8,014 $ 6,877 17 %$ 7,895 2 % (2 )% - 4 % Guy Carpenter 1,480 1,286 15 % 1,442 3 % (1 )% (1 )% 5 % Subtotal 9,494 8,163 16 % 9,337 2 % (2 )% - 4 % Fiduciary Interest Income 105 65 78 Total Risk and Insurance Services 9,599 8,228 17 % 9,415 2 % (2 )% - 4 % Consulting Mercer 5,021 4,732 6 % 5,001 - (2 )% - 2 % Oliver Wyman Group 2,122 2,047 4 % 2,047 4 % (2 )% - 6 %Total Consulting 7,143 6,779 5 % 7,048 1 % (2 )% - 3 % Corporate/Eliminations (90 ) (57 ) (57 ) Total Revenue$ 16,652 $ 14,950 11 %$ 16,406 2 % (2 )% - 4 % 37
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The following table provides more detailed revenue information for certain of the components presented above:
Year Ended
December 31, Components of Revenue Change Including JLT*
(In millions,
except % Change % Change Acquisitions/
percentage GAAP 2018 Including Including Dispositions/
figures) 2019 2018 Revenue JLT JLT in 2018 Currency Impact Other Underlying Revenue
Marsh:
EMEA $ 2,482 $ 2,132 16 % $ 2,607 (5 )% (3 )% (2 )% 1 %
Asia Pacific 953 683 39 % 948 1 % (3 )% (3 )% 7 %
Latin America 460 400 15 % 515 (11 )% (8 )% (6 )% 3 %
Total
International 3,895 3,215 21 % 4,070 (4 )% (4 )% (3 )% 3 %
U.S./Canada 4,119 3,662 12 % 3,825 8 % - 3 % 5 %
Total Marsh $ 8,014 $ 6,877 17 % $ 7,895 2 % (2 )% - 4 %
Mercer:
Wealth 2,369 2,185 8 % 2,394 (1 )% (3 )% 2 % -
Health 1,796 1,735 4 % 1,793 - (1 )% (3 )% 5 %
Career 856 812 5 % 814 5 % (2 )% 3 % 5 %
Total Mercer $ 5,021 $ 4,732 6 % $ 5,001 - (2 )% - 2 %* Components of revenue change may not add due to rounding.
Revenue
Consolidated revenue was$17 billion in 2019, an increase of 11%, or 4% on an underlying basis. Revenue in the Risk and Insurance Services segment increased 17% in 2019 compared with 2018, or 4% on an underlying basis. Revenue increased 4% and 5% on an underlying basis at Marsh andGuy Carpenter , respectively, as compared with 2018. The Consulting segment's revenue increased 5% compared with 2018, or 3% on an underlying basis. Revenue increased 2% and 6% on an underlying basis atMercer and Oliver Wyman Group , respectively, as compared with 2018. Operating Expense Consolidated operating expenses increased 15% in 2019 compared with 2018, or 4% on an underlying basis. The increase in underlying expenses is primarily due to the JLT acquisition, integration and restructuring as discussed in more detail in Notes 5 and 14 of the consolidated financial statements, as well as higher incentive compensation. Risk and Insurance Services In the Risk and Insurance Services segment, the Company's subsidiaries and other affiliated entities act as brokers, agents or consultants for insureds, insurance underwriters and other brokers in the areas of risk management, insurance broking and insurance program management services, primarily under the name of Marsh; and engage in reinsurance broking, catastrophe and financial modeling services and related advisory functions, primarily under the name ofGuy Carpenter . Marsh andGuy Carpenter are compensated for brokerage and consulting services primarily through fees paid by clients or commissions paid out of premiums charged by insurance and reinsurance companies. Commission rates vary in amount depending upon the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer, the capacity in which the broker acts and negotiates with clients. Revenues can be affected by premium rate levels in the insurance/reinsurance markets, the amount of risk retained by insurance and reinsurance clients themselves and by the value of the risks that have been insured since commission-based compensation is frequently related to the premiums paid by insureds/reinsureds. In many cases, fee compensation may be negotiated in advance, based on the type of risk, coverage required and service provided by the Company and ultimately, the extent of the risk placed into the insurance market or retained by the client. The trends and comparisons of revenue from one period to the next can be affected by changes in premium rate levels, fluctuations in client risk retention and increases or decreases in the value of risks that have been insured, as well as new and lost business, and the volume of business from new and existing clients. 38 -------------------------------------------------------------------------------- Marsh also receives other compensation from insurance companies, separate from retail fees and commissions. This compensation includes, among other things, payment for consulting and analytics services provided to insurers; administrative and other services provided to or on behalf of insurers (including services relating to the administration and management of quota share, panels and other facilities in which insurers participate); and contingent commissions. Marsh andGuy Carpenter also receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others. The investment of fiduciary funds is regulated by state and other insurance authorities. These regulations typically require segregation of fiduciary funds and limit the types of investments that may be made with them. Interest income from these investments varies depending on the amount of funds invested and applicable interest rates, both of which vary from time to time. For presentation purposes, fiduciary interest is segregated from the other revenues of Marsh andGuy Carpenter and separately presented within the segment, as shown in the revenue by segments charts presented earlier in this MD&A. The results of operations for the Risk and Insurance Services segment are presented below: (In millions of dollars, except percentages) 2019 2018 2017 Revenue$ 9,599 $ 8,228 $ 7,630 Compensation and Benefits 5,370 4,485 4,171 Other Operating Expenses 2,396 1,879 1,728 Operating Expenses 7,766 6,364 5,899 Operating Income$ 1,833 $ 1,864 $ 1,731 Operating Income Margin 19.1 % 22.7 % 22.7 % Revenue Revenue in the Risk and Insurance Services segment increased 17% in 2019 compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. Revenue grew 4% on an underlying basis partly offset by a 2% decrease related to the impact of foreign currency translation. In Marsh, revenue increased 4% on an underlying basis, partly offset by a 2% decrease from the impact of foreign currency translation.U.S. /Canada had underlying revenue growth of 5%. International operations increased 3% on an underlying basis, reflecting increases of 7% inAsia Pacific , 3% inLatin America and 1% in EMEA.Guy Carpenter's revenue increased 15% to$1.5 billion in 2019 compared with 2018, or 5% on an underlying basis. Fiduciary interest income was$105 million in 2019 compared with$65 million in 2018 primarily due to the inclusion of JLT's results fromApril 1 to December 31, 2019 . The Risk and Insurance Services segment completed five acquisitions during 2019, other than JLT. Information regarding those acquisitions is included in Note 5 to the consolidated financial statements. Expense Expense in the Risk and Insurance Services segment increased 22% in 2019 compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. The underlying expense increases of 5% and 3% from acquisitions, were partly offset by a 3% decrease from the impact of foreign currency. The increase in underlying expense reflects the impact of acquisition, restructuring and integration related costs of$326 million , primarily due to severance, lease related exit costs and consulting fees related to the JLT Transaction as well as higher incentive compensation. Consulting The Company conducts business in its Consulting segment through two main business groups,Mercer and Oliver Wyman Group . Mercer provides consulting expertise, advice, services and solutions in the areas of health, wealth and career.Oliver Wyman Group provides specialized management, economic and brand consulting services. The major component of revenue in the Consulting business is fees paid by clients for advice and services. Mercer, principally through its health line of business, also earns revenue in the form of 39 -------------------------------------------------------------------------------- commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily life, health and accident coverages. Revenue for Mercer's investment management business and certain of Mercer's defined contribution administration services consists principally of fees based on assets under management or administration. Revenue in the Consulting segment is affected by, among other things, global economic conditions, including changes in clients' particular industries and markets. Revenue is also affected by competition due to the introduction of new products and services, broad trends in employee demographics, including levels of employment, the effect of government policies and regulations, and fluctuations in interest and foreign exchange rates. Revenues from the provision of investment management services and retirement trust and administrative services are significantly affected by the level of assets under management or administration, which is impacted by securities market performance. For the investment management business, revenues from the majority of funds are included on a gross basis in accordance withU.S. GAAP and include reimbursable expenses incurred by professional staff and sub-advisory fees, and the related expenses are included in other operating expenses. The results of operations for the Consulting segment are presented below: (In millions of dollars, except percentages) 2019 2018 2017 Revenue$ 7,143 $ 6,779 $ 6,444 Compensation and Benefits 3,934 3,760 3,573 Other Operating Expenses 1,999 1,920 1,761 Operating Expenses 5,933 5,680 5,334 Operating Income$ 1,210 $ 1,099 $ 1,110 Operating Income Margin 16.9 % 16.2 % 17.2 % Revenue Consulting revenue in 2019 increased 5% compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. Revenue increased 3% on an underlying basis, partly offset by a 2% decrease from the impact of foreign currency translation. Mercer's revenue in 2019 increased 2% on an underlying basis. Mercer's year-over-year revenue comparison also reflects a 2% decrease from the impact of foreign currency translation. The underlying revenue growth reflects increases in both Career and Health of 5%, while Wealth remained flat.Oliver Wyman Group's revenue increased 4% in 2019 compared with 2018, or 6% on an underlying basis. Expense Consulting expense in 2019 increased 4% compared with 2018, reflecting the inclusion of JLT for the last three quarters of 2019. The underlying expense increases of 2% was offset by a 2% decrease from the impact of foreign currency translation. The increase in underlying expense reflects higher incentive compensation and restructuring-related costs. Consulting expense in 2019 included$56 million related to a business restructuring at Mercer. Corporate and Other Corporate expense in 2019 was$366 million compared with$202 million in 2018. Expenses increased 54% on an underlying basis, primarily due to acquisition, integration and restructuring costs related to the JLT Transaction of$139 million recorded in 2019 as well as higher incentive compensation. Other Corporate Items Interest Interest income earned on corporate funds amounted to$39 million in 2019 compared with$11 million in 2018. Interest expense in 2019 was$524 million compared with$290 million in 2018. During the first quarter of 2019, the Company issued approximately$6.5 billion of senior notes related to the JLT acquisition. The funds were held in escrow and released for payment inApril 2019 , when the acquisition was completed. The increase in interest income from the prior year is primarily due to interest earned on 40 -------------------------------------------------------------------------------- these funds. The increase in interest expense was primarily due to new debt issuances related to the JLT acquisition. Investment Income The caption "Investment income" in the consolidated statements of income comprises realized and unrealized gains and losses from investments. It includes, when applicable, other-than-temporary declines in the value of securities, mark-to-market increases/decreases in equity investments with readily determinable fair values and equity method gains or losses on its investments in private equity funds. The Company's investments may include direct investments in insurance, consulting or other strategically linked companies and investments in private equity funds. As discussed in Note 1 to the consolidated financial statements, effectiveJanuary 1, 2018 , the Company prospectively adopted a new accounting standard that requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company holds certain equity investments that under legacyU.S. GAAP were previously treated as available for sale securities, whereby the mark-to-market change was recorded to other comprehensive income in its consolidated balance sheet. The Company recorded a cumulative-effect adjustment increase to retained earnings as of the beginning of the period of adoption of$14 million , reflecting the reclassification of cumulative unrealized gains, net of tax, as ofDecember 31, 2017 from other comprehensive income to retained earnings. Prior periods have not been restated. The Company recorded net investment income of$22 million in 2019 which included$10 million related to mark-to-market changes to equity securities and$12 million of gains related to investments in private equity funds and other investments. The Company recorded a net investment loss of$12 million in 2018, that included an$83 million charge related to an other than temporary decline in the Company's equity method investment inAlexander Forbes (see Note 10 to the consolidated financial statements), partly offset by investment gains of$54 million related to mark-to-market changes in equity securities and$17 million related to investments in private equity funds and other investments. Income Taxes As noted above, onApril 1, 2019 , the Company completed the JLT Transaction. The integration of this global organization required intercompany transfers of acquired entities into the Company's country structures and combination of those entities within the equivalent Company businesses. The integration transactions were designed to be tax efficient. The Company's global effective tax rate on JLT's earnings was reduced compared to JLT's pre-acquisition tax rate by utilizing debt for the restructuring transactions to be capital efficient, and reducing the generation of post-acquisition tax losses by merging historically unprofitable JLT entities with profitable Company operations. The provisions for deferred taxes and uncertain tax positions have been established as part of the purchase price allocation as ofApril 1, 2019 . The broader JLT organization is now held under the Company, which makes it part of aU.S. -based multinational company and subjects it to fullU.S. taxation. In 2017, the tax reform legislation known as the "Tax Cuts and Jobs Act" (the "TCJA"), significantly changed theU.S. federal income tax regime. It provided for a reduction in theU.S. corporate tax rate to 21% and the creation of a quasi-territorial system to tax non-U.S. based operations, including adding a minimum tax on Global Intangible Low-Taxed Income ("GILTI"). The TCJA also changed the deductibility of certain expenses, primarily meals and entertainment, executive officers' compensation and interest. As further discussed in Note 7 to the consolidated financial statements, in the fourth quarter of 2017, the Company recorded a provisional charge of$460 million related to the enactment of the TCJA, and this provisional charge was finalized in 2018. State treatment of certain TCJA provisions is still evolving. The Company's consolidated effective tax rate was 27.3%, 25.6%, and 42.9% in 2019, 2018, and 2017, respectively. The rates in 2019 and 2018 reflect ongoing impacts of the TCJA, primarily the reduced 21%U.S. statutory tax rate, and certain tax planning benefits, largely offset by higherU.S. tax costs under the quasi-territorial system, greater disallowance of compensation and entertainment deductions, a decrease in excess tax benefits related to share compensation primarily due to the lowerU.S. tax rate, lower federal benefit for State taxes and treatment by States of certain TCJA provisions. The 2019 rate reflects items related to the JLT acquisition, including non-deductible goodwill allocated to the sale of Aerospace 41 -------------------------------------------------------------------------------- and non-deductible expenses incurred in relation to the JLT acquisition. The 2018 rate includes the effect of a charge related to the Company's investment inAlexander Forbes as discussed in Note 10. The tax rates in all periods reflect the impact of discrete tax matters, tax legislation, and nontaxable adjustments to contingent acquisition consideration. The effective tax rate may vary significantly from period to period for the foreseeable future. The effective tax rate is sensitive to the geographic mix and repatriation of the Company's earnings, which may result in higher or lower tax rates. Thus, a shift in the mix of profits among jurisdictions can affect the effective tax rate. In 2019, pre-tax income inBarbados ,Canada ,Australia ,Ireland ,Germany , theU.K. andBermuda accounted for approximately 60% of the Company's total non-U.S. pre-tax income, with effective rates in those countries of 1%, 28%, 32%, 14%, 29%, 105% and 1% respectively. In addition, losses in certain jurisdictions cannot be offset by earnings from other operations, and may require valuation allowances that affect the rate, depending on estimates of the value of associated deferred tax assets which can be realized. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized. The details are provided in Note 7 of the consolidated financial statements. The effective 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, rulings, policies or related legal and regulatory interpretations occur frequently and may also have significant favorable or adverse impacts on our effective tax rate. As aU.S. domiciled parent holding company, the Company is the issuer of essentially all of the Company's external indebtedness, and incurs the related interest expense in theU.S. The Company's interest expense deductions are not currently limited. Further, most senior executive and oversight functions are conducted in theU.S. and the associated costs are incurred primarily inthe United States . Some of these expenses may not be deductible in theU.S. , which may impact the effective tax rate. The quasi-territorial tax regime provides an opportunity for the Company to repatriate foreign earnings more tax efficiently and there is less incentive for permanent reinvestment of these earnings. However, permanent reinvestment continues to be a component of the Company's global capital strategy. The Company revised its permanent reinvestment assertion related to accumulated earnings that were subject to the 2017 transition tax of the TCJA, to facilitate repatriation of most of those accumulated earnings. For post-2017 years, including 2019, the Company continues to evaluate its global investment and repatriation strategy in light of our capital requirements, considering the TCJA and the quasi-territorial tax regime for future foreign earnings. Liquidity and Capital Resources The Company is organized as a legal entity separate and distinct from its operating subsidiaries. As the Company does not have significant operations of its own, the Company is dependent upon dividends and other payments from its operating subsidiaries to pay principal and interest on its outstanding debt obligations, pay dividends to stockholders, repurchase its shares and pay corporate expenses. The Company can also provide financial support to its operating subsidiaries for acquisitions, investments and certain parts of their business that require liquidity, such as the capital markets business ofGuy Carpenter . Other sources of liquidity include borrowing facilities discussed below in financing cash flows. The Company derives a significant portion of its revenue and operating profit from operating subsidiaries located outside ofthe United States . Funds from those operating subsidiaries are regularly repatriated tothe United States out of annual earnings. AtDecember 31, 2019 , the Company had approximately$1.0 billion of cash and cash equivalents in its foreign operations, which includes$178 million of operating funds required to be maintained for regulatory requirements or as collateral under certain captive insurance arrangements. The Company expects to continue its practice of repatriating available funds from its non-U.S. operating subsidiaries out of current annual earnings. Where appropriate, a portion of the current year earnings will continue to be permanently reinvested. With respect to repatriating 2018 and prior earnings, the Company has evaluated such factors as its short- and long-term capital needs, acquisition and borrowing strategies, and the availability of cash for repatriation for each of its subsidiaries. The Company has determined that, in general, its permanent reinvestment assertions, in light of the enactment of the Tax Cuts and Jobs Act, should allow the Company to repatriate previously taxed earnings from the deemed repatriations as cash becomes available. 42 -------------------------------------------------------------------------------- During 2019, the Company recorded foreign currency translation adjustments which increased net equity by$151 million . Continued weakening of theU.S. dollar against foreign currencies would further increase the translatedU.S. dollar value of the Company's net investments in its non-U.S. subsidiaries, as well as the translatedU.S. dollar value of cash repatriations from those subsidiaries. Cash on our consolidated balance sheets includes funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown separately in the consolidated balance sheets as an offset to fiduciary liabilities. Fiduciary funds cannot be used for general corporate purposes, and should not be considered as a source of liquidity for the Company. Operating Cash Flows The Company generated$2.4 billion of cash from operations in both 2019 and 2018. These amounts reflect the net income of the Company during those periods, excluding gains or losses from investments, adjusted for non-cash charges and changes in working capital which relate primarily to the timing of payments of accrued liabilities or receipts of assets and pension contributions. Pension-Related Items Contributions During 2019, the Company contributed$35 million to itsU.S. pension plans and$87 million to non-U.S. pension plans compared to contributions of$30 million toU.S. plans and$82 million to non-U.S. plans in 2018. Inthe United States , contributions to the tax-qualified defined benefit plans are based on ERISA guidelines and the Company generally expects to maintain a funded status of 80% or more of the liability determined under the ERISA guidelines. In 2019, the Company made$31 million of contributions to its non-qualified plans and$4 million to plans acquired in the JLT acquisition. The Company expects to contribute approximately$76 million to itsU.S. pension plans in 2020, including$47 million to the US qualified plans to meet ERISA funding requirements and$29 million for its non-qualified plans. The Company contributed$27 million to theU.K. plans in 2019, including an expense allowance of approximately$10 million . The Company's contributions to theU.K. plans in 2020 are expected to be approximately$39 million , including an expense allowance of$10 million . Outsidethe United States , the Company has a large number of non-U.S. defined benefit pension plans, the largest of which are in theU.K. , which comprise approximately 81% of non-U.S. plan assets atDecember 31, 2019 . Contribution rates for non-U.S. plans are generally based on local funding practices and statutory requirements, which may differ significantly from measurements underU.S. GAAP. In theU.K. , the assumptions used to determine pension contributions are the result of legally-prescribed negotiations between the Company and the plans' trustee that typically occur every three years in conjunction with the actuarial valuation of the plans. Currently, this results in a lower funded status than underU.S. GAAP and may result in contributions irrespective of theU.S. GAAP funded status. For theMMC U.K. Pension Fund , a new agreement was reached with the trustee in the fourth quarter of 2019 based on the surplus funding position atDecember 31, 2018 . Under the agreement no deficit funding is required until 2023. The funding level will be re-assessed during 2022 to determine if contributions are required in 2023. As part of a long-term strategy, which depends on having greater influence over asset allocation and overall investment decisions, inNovember 2019 the Company renewed its agreement to support annual deficit contributions by theU.K. operating companies under certain circumstances, up toGBP 450 million over a seven-year period. In addition, in theU.K. the Company assumed responsibility for JLT's Pension Scheme ("JLTU.K. plan"). Deficit funding of approximately$28 million is expected during 2020 with a new funding agreement expected to be reached with the Trustee during 2020. In the aggregate, the Company expects to contribute approximately$84 million to its non-U.S. defined benefit plans in 2020, comprising approximately$45 million to plans outside of theU.K. and$39 million to theU.K. plans. Changes to Pension Plans As part of the JLT Transaction, the Company assumed responsibility for a number of pension plans throughout the world, with$255 million of net pension liabilities as ofDecember 31, 2019 ($1,003 million in liabilities and$748 million of plan assets as ofDecember 31, 2019 ). The JLTU.K. plan has a defined 43 -------------------------------------------------------------------------------- benefit section which was frozen to future accruals in 2006 and a defined contribution section. The assets of the JLTU.K. plan are held in a trustee administered fund separate from the Company. Changes in Funded Status and Expense The year-over-year change in the funded status of the Company's pension plans is impacted by the difference between actual and assumed results, particularly with regard to return on assets, and changes in the discount rate, as well as the amount of Company contributions, if any. Unrecognized actuarial losses were approximately$2.1 billion and$3.1 billion atDecember 31, 2019 for theU.S. plans and non-U.S. plans, respectively, compared with losses of$1.9 billion and$2.6 billion atDecember 31, 2018 . The increases in both theU.S. and non-U.S. plans was primarily due to a decrease in the discount rate used to measure plan liabilities partly offset by an increase in asset values. In the past several years, the amount of unamortized losses has been significantly impacted, both positively and negatively, by actual asset performance and changes in discount rates. The discount rate used to measure plan liabilities in 2019 decreased in theU.S. andU.K. (the Company's largest plans) following increases in theU.S. and theU.K. in 2018. The discount rate used to measure plan liabilities decreased in 2017. An increase in the discount rate decreases the measured plan benefit obligation, resulting in actuarial gains, while a decrease in the discount rate increases the measured plan obligation, resulting in actuarial losses. During 2019, the Company's defined benefit pension plan assets had gains of 21.4% and 13.1% in theU.S. andU.K. , respectively as compared to losses of 7.4% and 1.0% in theU.S. andU.K. , respectively in 2018. During 2017, the Company's defined benefit pension plan assets had actual returns of 19.3% in theU.S. and 9.1% in the U.K. Overall , based on the measurement atDecember 31, 2019 , total benefit credits related to the Company's defined benefit plans are expected to decrease in 2020 by approximately$5 million compared to 2019, reflecting a decrease in non-U.S. plans of approximately$8 million , offset by an increase inU.S. plans of$3 million . The Company's accounting policies for its defined benefit pension plans, including the selection of and sensitivity to assumptions, are discussed below under Management's Discussion of Critical Accounting Policies. For additional information regarding the Company's retirement plans, see Note 8 to the consolidated financial statements. Financing Cash Flows Net cash provided by financing activities was$3.3 billion in 2019 compared with$1.3 billion used in 2018. Debt The Company increased outstanding debt by approximately$6.1 billion in 2019, discussed in more detail below. Outstanding debt increased$340 million in 2018. InJanuary 2019 , the Company issued$5 billion aggregate amount of Senior Notes consisting of$700 million of 3.50% Senior Notes due 2020,$1 billion of 3.875% Senior Notes due 2024,$1.25 billion of 4.375% Senior Notes due 2029,$500 million of 4.75% Senior Notes due 2039,$1.25 billion of 4.90% Senior Notes due 2049 and$300 million of Floating Rate Senior Notes due 2021. InMarch 2019 , the Company issued €550 million of 1.349% Senior Notes due 2026 and €550 million of 1.979% Senior Notes due 2030. In addition, the Company issued an additional$250 million of 4.375% Senior Notes due 2029, inMarch 2019 . These notes constitute a further issuance of the 4.375% Senior Notes due 2029, of which$1.25 billion aggregate principal amount was issued inJanuary 2019 (see above). After giving effect to the issuance of the notes, the Company has$1.5 billion aggregate principal amount of 4.375% Senior Notes due 2029. The Company used part of the net proceeds from these offerings, along with the$5 billion of Senior Notes issued inJanuary 2019 (discussed above) to primarily fund the acquisition of JLT, including the payment of related fees and expenses, and to repay certain JLT indebtedness, as well as for general corporate purposes. In connection with the closing of the JLT Transaction, the Company assumed approximately$1 billion of historical JLT indebtedness. In April and June of 2019, the Company repaid approximately$450 million and$553 million , respectively, which represented all of the JLT debt acquired upon the acquisition of JLT. The Company incurred debt extinguishment costs of$32 million in regard to the repayment of this debt. InSeptember 2019 , the Company repaid$300 million of maturing senior notes. 44 -------------------------------------------------------------------------------- The Company has established a short-term debt financing program of up to$1.5 billion through the issuance of commercial paper. The proceeds from the issuance of commercial paper are used for general corporate purposes. The Company had no commercial paper outstanding atDecember 31, 2019 . InOctober 2018 , the Company repaid$250 million of maturing senior notes. InMarch 2018 , the Company issued$600 million of 4.20% senior notes due 2048. The Company used the net proceeds for general corporate purposes. Credit Facilities InJanuary 2020 , the Company closed on$500 million one-year and$500 million two-year term loan facilities. The interest rate on these facilities is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facilities require the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed below. The Company has no current borrowings outstanding under these facilities. InMarch 2019 , the Company closed on$300 million one-year and$300 million three-year term loan facilities. The interest rate on these facilities was based on LIBOR plus a fixed margin which varies with the Company's credit ratings. InAugust 2019 , the Company terminated the$300 million three-year term loan facility. The Company had$300 million of borrowings outstanding under the one-year term facility atSeptember 30, 2019 which was terminated and repaid inDecember 2019 . InSeptember 2018 , the Company entered into a bridge loan agreement to finance the proposed JLT transaction. The Company paid approximately$35 million of customary upfront fees related to the bridge loan at the inception of the loan commitment. The bridge loan agreement was terminated onApril 1, 2019 . InOctober 2018 , the Company and certain of its foreign subsidiaries increased its multi-currency five-year unsecured revolving credit facility from$1.5 billion to$1.8 billion . The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility expires inOctober 2023 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility atDecember 31, 2019 . The Company also maintains other credit facilities, guarantees and letters of credit with various banks, aggregating$598 million atDecember 31, 2019 and$594 million atDecember 31, 2018 . There were no outstanding borrowings under these facilities atDecember 31, 2019 orDecember 31, 2018 . The Company's potential exposure to the discontinuance of LIBOR is discussed in Note 13 to the consolidated financial statements. The Company's senior debt is currently rated A- byStandard & Poor's and Baa1 by Moody's. The Company's short-term debt is currently rated A-2 byStandard & Poor's and P-2 by Moody's. The Company carries a Negative outlook from both firms. Share Repurchases During 2019, the Company repurchased 4.8 million shares of its common stock for total consideration of$485 million at an average price per share of$100.48 . InNovember 2019 , the Board of Directors authorized an increase in the Company's share repurchase program, which supersedes any prior authorization, allowing management to buy back up to$2.5 billion of the Company's common stock. As ofDecember 31, 2019 , the Company remained authorized to purchase additional shares of its common stock up to a value of approximately$2.4 billion . There is no time limit on this authorization. During 2018, the Company repurchased 8.2 million shares of its common stock for total consideration of$675 million at an average price per share of$82.61 . Dividends The Company paid total dividends of$890 million in 2019 ($1.74 per share),$807 million in 2018 ($1.58 per share) and$740 million in 2017 ($1.43 per share). Contingent Payments Related To Acquisitions During 2019, the Company paid$63 million of contingent payments related to acquisitions made in prior years. These payments are split between financing and operating cash flows in the consolidated statements of cash flows. Payments of$22 million related to the contingent consideration liability that was 45 -------------------------------------------------------------------------------- recorded on the date of acquisition are reflected as financing cash flows. Payments related to increases in the contingent consideration liability subsequent to the date of acquisition of$41 million are reflected as operating cash flows. Remaining estimated future contingent consideration payments of$223 million for acquisitions completed in 2019 and in prior years are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet atDecember 31, 2019 . The Company paid deferred purchase consideration related to prior years' acquisitions of$43 million and$62 million for the years endedDecember 31, 2019 and 2018, respectively. Remaining deferred cash payments of approximately$193 million are included in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheet atDecember 31, 2019 . In 2018, the Company paid$91 million of contingent payments related to acquisitions made in prior periods, of which$55 million was reported as financing cash flows and$36 million as operating cash flows. Derivatives JLT Fair Value Debt Derivative contracts Prior to the JLT Transaction closing, a significant portion of JLT's outstanding senior notes were denominated inU.S. dollars. In order to hedge its exposure against the risk of fluctuations between the GBP and theU.S. dollar, JLT entered into foreign exchange and interest rate swaps, which were designated as fair value hedges. InJune 2019 , the Company redeemed theseU.S. dollar denominated senior notes and settled the related derivative contracts. Both the change in fair value of the debt and the change in fair value of the derivative contracts were recorded in the consolidated statement of income in the second quarter of 2019. The Company received approximately$112 million upon settlement of these derivative contracts. JLT Cash Flow Hedges JLT also had a number of foreign exchange contracts to hedge the risk of foreign exchange movements between theU.S. dollar and GBP, related to JLT'sU.S. dollar denominated revenue in the U.K. Prior to the acquisition, these derivative contracts were designated as cash flow hedges. Upon acquisition, the derivative contracts were not re-designated as cash flow hedges by the Company. The contracts were settled inJune 2019 . The change in fair value between the acquisition date and the settlement date resulted in a charge of$26 million in the second quarter of 2019. The charge is recorded as a change in fair value of acquisition related derivative contracts in the consolidated statement of income. Foreign Exchange Forward Contract In connection with the JLT Transaction, to hedge the risk of appreciation of the GBP-denominated purchase price relative to theU.S. dollar, onSeptember 20, 2018 , the Company entered into the FX Contract to, solely upon consummation of the Transaction, purchase £5.2 billion and sell a corresponding amount ofU.S. dollars at a contracted exchange rate. The FX Contract, which did not qualify for hedge accounting treatment under applicable accounting guidance, is discussed in Note 11 to the consolidated financial statements. The Company settled the FX Contract onApril 1, 2019 , recording a realized gain to the consolidated statement of income of approximately$31 million in 2019. The cash outflow related to the settlement of the FX Contract was approximately$294 million in 2019. Foreign Exchange Contract on Euro Debt Issuance InMarch 2019 , the Company issued €1.1 billion of senior notes related to the JLT Transaction. See Note 14 for additional information related to the Euro senior note issuances. In connection with the senior note issuances of €1.1 billion, the Company entered into a forward exchange contract to hedge the economic risk of changes in foreign exchange rates from the issuance date to settlement date of the Euro senior notes. This forward exchange contract was settled inMarch 2019 and the Company recorded a charge of$7 million in the first quarter of 2019 related to the settlement of this contract. Treasury Locks on Senior Notes In connection with the JLT Transaction, to hedge the risk of increases in future interest rates prior to its issuance of senior notes, in the fourth quarter of 2018, the Company entered into treasury locks related to$2 billion of the expected debt. The fair value atDecember 31, 2018 was based on the published treasury rate plus forward premium as ofDecember 31, 2018 compared to the all in rate at the inception of the 46 -------------------------------------------------------------------------------- contract. The contracts were not designated as an accounting hedge. The Company recorded an unrealized loss of$116 million related to the change in the fair value of these derivatives in the consolidated statement of income for the twelve month period endedDecember 31, 2018 . InJanuary 2019 , upon issuance of the$5 billion of senior notes, the Company settled the treasury lock derivatives and made a payment to its counter party for$122 million . An additional charge of$6 million was recorded in the first quarter of 2019 related to the settlement of theTreasury lock 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 andU.S. dollar exchange rates. As part of its risk management program to fund the JLT acquisition, the Company issued €1.1 billion senior notes, as discussed above, and designated the debt instruments as a net investment hedge of its Euro denominated subsidiaries. The hedge 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. If the Company concludes that the hedge is highly effective, the change in the debt balance related to foreign exchange fluctuations will be recorded in foreign currency translation gains (losses) in the consolidated balance sheet. TheU.S. dollar value of the Euro notes decreased by$28 million during 2019 related to the change in foreign exchange rates. Since the Company concluded that the hedge was highly effective, it recorded an increase to foreign currency translation gains (losses) for the twelve months endedDecember 31, 2019 . Investing Cash Flows Net cash used for investing activities amounted to$5.7 billion in 2019 compared with$1.1 billion used for investing activities in 2018. The Company paid$5,505 million and$884 million , net of cash acquired, for acquisitions it made during 2019 and 2018, respectively. InJanuary 2019 , the Company increased its equity ownership inMarsh India from 26% to 49% for approximately$88 million .Marsh India is carried under the equity method. The Company's additions to fixed assets and capitalized software, which amounted to$421 million in 2019 and$314 million in 2018, primarily relate to computer equipment purchases, the refurbishing and modernizing of office facilities and software development costs. The Company has commitments for potential future investments of approximately$60 million in four private equity funds that invest primarily in financial services companies. Commitments and Obligations The following sets forth the Company's future contractual obligations by the types identified in the table below as ofDecember 31, 2019 : Payment due by Period Contractual Obligations Within 1-3 4-5 After 5 (In millions of dollars) Total 1 Year Years Years Years
Current portion of long-term debt
$ -
Long-term debt 10,808 - 1,334 2,234 7,240
Interest on long-term debt 5,556 456 807 689 3,604 Net operating leases 2,610 413 694 529 974 Service agreements 349 184 89 61 15 Other long-term obligations 448 195 243 5 5 Total$ 20,988 $ 2,465 $ 3,167 $ 3,518 $ 11,838 The above does not include the liability for unrecognized tax benefits of$86 million as the Company is unable to reasonably predict the timing of settlement of these liabilities, other than approximately$2 million that may become payable during 2020. The above does not include the remaining transitional tax payments related to the TCJA of$69 million . 47 -------------------------------------------------------------------------------- Management's Discussion of Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted inthe United States ("GAAP") requires management to make estimates and judgments that affect reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Management considers the policies discussed below to be critical to understanding the Company's financial statements because their application places the most significant demands on management's judgment, and requires management to make estimates about the effect of matters that are inherently uncertain. Actual results may differ from those estimates. Purchase Price Allocation Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. The JLT Transaction has increased the significance of judgments and estimates management must make to complete the purchase price allocation. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. These estimates directly impact the amount of identified intangible assets recognized and the related amortization expense in future periods. Revenue Recognition The adoption of the new revenue standard onJanuary 1, 2018 has increased the significance of judgments and estimates management must make to apply the guidance. In particular, in the Risk and Insurance Services segment, judgments related to the amount of variable revenue consideration to ultimately be received on placement of quota share reinsurance treaties and contingent commission from insurers, which was previously recognized when the contingency was resolved, now requires significant judgments and estimates. Under the new standard, certain costs to obtain or fulfill a contract that were previously expensed as incurred have been capitalized. The Company capitalizes the incremental costs to obtain contracts primarily related to commissions or sales bonus payments. These deferred costs are amortized over the expected life of the underlying customer relationships. The Company also capitalizes certain pre-placement costs that are considered fulfillment costs that are amortized at a point in time when the associated revenue is recognized. Management also makes significant judgments and estimates to measure the progress toward completing performance obligations and realization rates for consideration related to contracts as well as potential performance-based fees in the Consulting segment. See Note 2 to the consolidated financial statements for additional information. Legal and Other Loss Contingencies The Company and its subsidiaries are subject to numerous claims, lawsuits and proceedings including claims for errors and omissions ("E&O"). GAAP requires that a liability be recorded when a loss is both probable and reasonably estimable. Significant management judgment is required to apply this guidance. The Company utilizes case level reviews by inside and outside counsel, an internal actuarial analysis byOliver Wyman Group , a subsidiary of the Company, and other methods to estimate potential losses. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable. Given the unpredictability of E&O claims and of litigation that could flow from them, it is possible that an adverse outcome in a particular matter could have a material adverse effect on the Company's businesses, results of operations, financial condition or cash flow in a given quarterly or annual period. In addition, to the extent that insurance coverage is available, significant management judgment is required to determine the amount of recoveries that are probable of collection under the Company's various insurance programs. 48 -------------------------------------------------------------------------------- Retirement Benefits The Company maintains qualified and non-qualified defined benefit pension and defined contribution plans for its eligibleU.S. employees and a variety of defined benefit and defined contribution plans for its eligible non-U.S. employees. The Company's policy for funding its tax-qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth inU.S. and applicable foreign laws. The Company recognizes the funded status of its over-funded defined benefit pension and retiree medical plans as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The gains or losses and prior service costs or credits that have not been recognized as components of net periodic costs are recorded as a component of Accumulated Other Comprehensive Income ("AOCI"), net of tax, in the Company's consolidated balance sheets. The gains and losses that exceed specified corridors are amortized prospectively out of AOCI over a period that approximates the remaining life expectancy of participants in plans where substantially all participants are inactive or the average remaining service period of active participants for plans with active participants. The vast majority of unrecognized losses relate to inactive plans and are amortized over the remaining life expectancy of the participants. The determination of net periodic pension cost is based on a number of assumptions, including an expected long-term rate of return on plan assets, the discount rate, mortality and assumed rate of salary increase. The assumptions used in the calculation of net periodic pension costs and pension liabilities are disclosed in Note 8 to the consolidated financial statements. The assumptions for expected rate of return on plan assets and the discount rate are discussed in more detail below. The long-term rate of return on plan assets assumption is determined for each plan based on the facts and circumstances that exist as of the measurement date, and the specific portfolio mix of each plan's assets. The Company utilizes a model developed by Mercer, a subsidiary of the Company, to assist in the determination of this assumption. The model takes into account several factors, including: actual and target portfolio allocation; investment, administrative and trading expenses incurred directly by the plan trust; historical portfolio performance; relevant forward-looking economic analysis; and expected returns, variances and correlations for different asset classes. These measures are used to determine probabilities using standard statistical techniques to calculate a range of expected returns on the portfolio. The target asset allocation for theU.S. plans is 64% equities and equity alternatives and 36% fixed income. At the end of 2019, the actual allocation for theU.S. plans was 64% equities and equity alternatives and 36% fixed income. The target asset allocation for theU.K. plans, which comprise approximately 81% of non-U.S. plan assets, is 34% equities and equity alternatives and 66% fixed income. At the end of 2019, the actual allocation for theU.K. plans was 35% equities and equity alternatives and 65% fixed income. The discount rate selected for eachU.S. plan is based on a model bond portfolio with coupons and redemptions that closely match the expected liability cash flows from the plan. Discount rates for non-U.S. plans are based on appropriate bond indices adjusted for duration; in theU.K. , the plan duration is reflected using the Mercer yield curve. The table below shows the weighted average assumed rate of return and the discount rate at theDecember 31, 2019 measurement date (for measuring pension expense in 2020) for the total Company, theU.S. and the Rest of World ("ROW").Total Company U.S. ROW Assumed Rate of Return on Plan Assets 5.31 % 7.82 % 4.35 % Discount Rate 2.57 % 3.44 % 2.09 % 49
-------------------------------------------------------------------------------- Holding all other assumptions constant, a half-percentage point change in the rate of return on plan assets and discount rate assumptions would affect net periodic pension cost for theU.S. andU.K. plans, which together comprise approximately 85% of total pension plan liabilities, as follows: 0.5 Percentage 0.5 Percentage Point Increase Point Decrease (In millions of dollars) U.S. U.K. U.S. U.K.
Assumed Rate of Return on Plan Assets
$ 1 $ 2 $ (2 ) $ (3 ) The impact of discount rate changes shown above relates to the increase or decrease in actuarial gains or losses being amortized through net periodic pension cost, as well as the increase or decrease in interest expense, with all other facts and assumptions held constant. It does not contemplate nor include potential future impacts a change in the interest rate environment and discount rates might cause, such as the impact on the market value of the plans' assets. In addition, the assumed return on plan assets would likely be impacted by changes in the interest rate environment and other factors, including equity valuations, since these factors reflect the starting point used in the Company's projection models. For example, a reduction in interest rates may result in a reduction in the assumed return on plan assets. Changing the discount rate and leaving the other assumptions constant also may not be representative of the impact on expense, because the long-term rates of inflation and salary increases are often correlated with the discount rate. Changes in these assumptions will not necessarily have a linear impact on the net periodic pension cost. The Company contributes to certain health care and life insurance benefits provided to its retired employees. The cost of these post-retirement benefits for employees in theU.S. is accrued during the period up to the date employees are eligible to retire, but is funded by the Company as incurred. The key assumptions and sensitivity to changes in the assumed health care cost trend rate are discussed in Note 8 to the consolidated financial statements. Income Taxes Significant judgment is required in determining the annual effective tax rate and in evaluating uncertain tax positions. The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process: • First, the Company determines whether it is more likely than not that a tax
position will be sustained upon tax examination, including resolution of any
related appeals or litigation, based on only the technical merits of the
position. If a tax position does not meet the more-likely-than-not
recognition threshold, the benefit of that position is not recognized in the
financial statements.
• The second step is measurement. A tax position that meets the
more-likely-than-not recognition threshold is measured to determine the
amount of benefit to recognize in the financial statements. The tax position
is measured as the largest amount of benefit that is greater than 50-percent
likely of being realized upon ultimate resolution with a taxing authority.
Uncertain tax positions are evaluated based upon the facts and circumstances
that exist at each reporting period and involve significant management
judgment. Subsequent changes in judgment based upon new information may lead
to changes in recognition, de-recognition, and measurement. Adjustments may
result, for example, upon resolution of an issue with the taxing authorities,
or expiration of a statute of limitations barring an assessment for an issue.
The Company recognizes interest and penalties, if any, related to unrecognized
tax benefits in income tax expense.
Certain items are included in the Company's tax returns at different times than
the items are reflected in the financial statements. As a result, the annual tax
expense reflected in the consolidated statements of income is different than
that reported in the tax returns. Some of these differences are permanent, such
as non-deductible expenses, and some differences are temporary and reverse over
time, such as depreciation expense. Temporary differences create deferred tax
assets and liabilities, which are measured at existing tax rates. Deferred tax
liabilities generally represent tax expense recognized in the
50
--------------------------------------------------------------------------------
financial statements for which payment has been deferred, or expense for which a
deduction has been taken already in the tax return but the expense has not yet
been recognized in the financial statements. Deferred tax assets generally
represent items that can be used as a tax deduction or credit in tax returns in
future years for which a benefit has already been recorded in the financial
statements. The Company evaluates all significant available positive and
negative evidence, including the existence of losses in recent years and its
forecast of future taxable income by jurisdiction, in assessing the need for a
valuation allowance. The Company also considers tax planning strategies that
would result in realization of deferred tax assets, and the presence of taxable
income in prior period tax filings in jurisdictions that allow for the carryback
of tax attributes pursuant to the applicable tax law. The underlying assumptions
the Company uses in forecasting future taxable income require significant
judgment and take into account the Company's recent performance. The ultimate
realization of deferred tax assets is dependent on the generation of future
taxable income during the periods in which temporary differences or
carry-forwards are deductible or creditable. Valuation allowances are
established for deferred tax assets when it is estimated that it is more likely
than not that future taxable income will be insufficient to fully use a
deduction or credit in that jurisdiction.
Fair Value Determinations
Goodwill Impairment Testing - 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 goodwill impairment test. Alternatively, the company may elect to
proceed directly to the quantitative goodwill impairment test. In 2019, the
Company elected to perform a quantitative impairment assessment. Fair values of
the reporting units were estimated using a market approach. Carrying values for
the reporting units are based on balances at the prior quarter end and include
directly identified assets and liabilities as well as an allocation of those
assets and liabilities not recorded at the reporting unit level. The Company
completed its 2019 annual review in the third quarter and concluded goodwill was
not impaired, as the fair value of each reporting unit exceeded its carrying
value by a substantial margin.
Share-Based Payment
The guidance for accounting for share-based payments requires, among other
things, that the estimated grant date fair value of stock options be charged to
earnings. Significant management judgment is required to determine the
appropriate assumptions for inputs such as volatility and expected term
necessary to estimate option values. In addition, management judgment is
required to analyze the terms of the plans and awards granted thereunder to
determine if awards will be treated as equity awards or liability awards, as
defined by the accounting guidance.
As of December 31, 2019 , there was $19 million of unrecognized compensation cost
related to stock option awards. The weighted-average period over which the costs
are expected to be recognized is 1.25 years. Also as of December 31, 2019 , there
was $357 million of unrecognized compensation cost related to the Company's
restricted stock, restricted stock unit and performance stock unit awards. The
weighted-average period over which that cost is expected to be recognized is
approximately 1.11 years.
See Note 9 to the consolidated financial statements for additional information
regarding accounting for share-based payments.
Investments and Derivatives
Although not directly recorded in the Company's consolidated balance sheets, the
Company's defined benefit pension plans hold investments of approximately $17
billion , which include private equity and other non-liquid investments. The fair
value of the plan investments determines, in part, the over-or under-funded
status of those plans, which is included in the Company's consolidated balance
sheets. The Company also has minority positions in certain equity securities
(primarily Alexander Forbes ) as well as approximately $107 million of
investments in private equity funds accounted for using the equity method of
accounting.
The Company reviews the carrying value of its investments (both direct and held
through its pension plans) to determine if any valuation adjustments are
appropriate under the applicable accounting
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pronouncements. The Company bases its review on the facts and circumstances as
they relate to each investment. In those instances where quoted market prices
are not available, particularly for private equity funds, significant management
judgment is required to determine the appropriate value of the Company's
investments. Fair value of investments in private equity funds is determined by
the funds' investment managers. Factors considered in determining the fair value
of private equity investments include: implied valuation of recently completed
financing rounds that included sophisticated outside investors; performance
multiples of comparable public companies; restrictions on the sale or disposal
of the investments; trading characteristics of the securities; and the relative
size of the holdings in comparison to other private investors and the public
market float.
In connection with the JLT Transaction, the Company entered into several
derivative contracts, described in Note 11 to the consolidated financial
statements. These derivative contracts are recorded at fair value at the end of
each period, with the change in fair value recorded in the consolidated
statements of income. Prior to the settlement, determination of the fair value
of these contracts, in particular the deal contingent foreign exchange contract,
required significant management judgments or estimates about the potential
closing dates of the transaction and remaining value of the deal contingency
feature. All derivative contracts related to the JLT Transaction were settled
during 2019.
New Accounting Pronouncements
Note 1 to the consolidated financial statements contains a summary of the
Company's significant accounting policies, including a discussion of recently
issued accounting pronouncements and their impact or potential future impact on
the Company's financial results, if determinable, under the sub-heading "New
Accounting Pronouncements".
Reconciliation of Non-GAAP Measures
On April 1, 2019 , the Company completed its previously announced acquisition of
JLT. JLT's results of operations for the three months ended December 31, 2019
are included in the Company's results of operations for the fourth quarter of
2019. JLT's results of operations from April 1, 2019 are included in the
Company's results of operations for the twelve month-period ended December 31,
2019 . Prior periods in 2018 do not include JLT's results. Prior to being
acquired by the Company, JLT operated in three segments, Specialty, Reinsurance
and Employee Benefits. As of April 1, 2019 , the historical JLT businesses were
combined into MMC operations as follows: JLT Specialty is included by geography
within Marsh, JLT Reinsurance is included within Guy Carpenter and the majority
of the JLT Employee Benefits business is included in Mercer Health and Wealth.
The JLT Transaction had a significant impact on the Company's results of
operations in 2019. The Company believes that in addition to the change in
reported GAAP revenue, a comparison of 2019 GAAP reported revenue to the
combined 2018 revenue of MMC and JLT, as if the companies were combined on April
1, 2018 , provides investors with meaningful information as to the Company's
year-over-year underlying operating results. Investors should not consider the
comparison of these non-GAAP measures in isolation from, or as a substitute for,
the financial information that the Company reports in accordance with GAAP.
The 2018 Including JLT revenue information set forth in the table below presents
revenue information as if the companies were combined on April 1, 2018 and is
not necessarily indicative of what the results would have been had we operated
the business since April 1, 2018 .
The MMC revenue amounts are as previously reported by the Company in its
quarterly filings on Form 10-Q for the applicable periods. The unaudited 2018
JLT revenue amounts reflect historical JLT revenue information following IFRS,
adjusted to conform with U.S. GAAP and MMC's specific accounting policies,
primarily related to the development of constraints and subsequent release of
those constraints related to the reinsurance business. The revenue includes
JLT's aerospace business. Additional information can be found in the
supplemental information furnished to the SEC on June 6, 2019 on Form 8-K, which
is not incorporated by reference in this Form 10-K.
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Three Months Ended December 31, Twelve Months Ended December
(In millions) 2018 31, 2018
MMC As Previously Reported
Risk & Insurance Services
Marsh $ 1,804 $ 6,877
Guy Carpenter 102 1,286
Subtotal 1,906 8,163
Fiduciary Interest Income 19 65
Total Risk & Insurance Services 1,925 8,228
Consulting
Mercer 1,228 4,732
Oliver Wyman Group 577 2,047
Total Consulting 1,805 6,779
Corporate Eliminations (18 ) (57 )
Total Revenue $ 3,712 $ 14,950
JLT 2018
Specialty (Marsh) $ 407 $ 1,018
Reinsurance (Guy Carpenter) 48 156
Employee Benefits (Mercer) 96 269
Subtotal 551 1,443
Fiduciary Interest Income 5 13
Total Revenue $ 556 $ 1,456
2018 Including JLT
Marsh $ 2,211 $ 7,895
Guy Carpenter 150 1,442
Subtotal 2,361 9,337
Fiduciary Interest Income 24 78
Total Risk & Insurance Services 2,385 9,415
Consulting
Mercer 1,324 5,001
Oliver Wyman Group 577 2,047
Total Consulting 1,901 7,048
Corporate Eliminations (18 ) (57 )
Total Revenue Including JLT $ 4,268 $ 16,406
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