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EX-12.1 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - MARSH & MCLENNAN COMPANIES, INC.mmc0930201610qex_121.htm
EX-32.1 - SECTION 1350 CERTIFICATIONS - MARSH & MCLENNAN COMPANIES, INC.mmc0930201610qex_321.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - MARSH & MCLENNAN COMPANIES, INC.mmc0930201610qex_312.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MARSH & MCLENNAN COMPANIES, INC.mmc0930201610qex_311.htm

 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
_____________________________________________ 
FORM 10-Q
_____________________________________________ 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
_____________________________________________ 
Marsh & McLennan Companies, Inc.
logommc2015.jpg
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
_____________________________________________ 
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
_____________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer  x
  
Accelerated Filer  ¨
 
 
Non-Accelerated Filer  ¨(Do not check if a smaller reporting company)
  
Smaller Reporting Company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of October 21, 2016, there were outstanding 515,593,865 shares of common stock, par value $1.00 per share, of the registrant.
 





INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements," as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management's current views concerning future events or results, use words like "anticipate," "assume," "believe," "continue," "estimate," "expect," "intend," "plan," "project" and similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will" and "would." Forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed or implied in our forward-looking statements.
Factors that could materially affect our future results include, among other things:
our ability to maintain adequate safeguards to protect the security of our information systems and confidential, personal or proprietary information;
our ability to successfully recover if we experience a business continuity problem due to cyberattack, natural disaster or otherwise;
our exposure to potential losses and liabilities, including reputational impact, arising from errors and omissions, breach of fiduciary duty and similar claims against us;
our ability to compete effectively and adapt to changes in the competitive environment, including to pricing pressures and technological and other types of innovation;
the impact of macroeconomic conditions, political events and market conditions on us, our clients and the industries in which we operate, including the effects of the vote in the U.K. to exit the E.U. and rising protectionist laws and business practices;
the impact of changes in applicable tax laws and regulations, particularly in the United States and Europe;
the effect of our global pension obligations on our financial position, earnings and cash flows and the impact of low interest rates on those obligations;
the financial and operational impact of complying with laws and regulations where we operate;
our exposure to potential civil remedies or criminal penalties if we fail to comply with applicable U.S. and non-U.S. laws and regulations;
the impact of fluctuations in foreign exchange, interest rates and securities markets on our results;
the impact on our competitive position of our tax rate relative to our competitors;
our ability to incentivize and retain key employees; and
the impact of changes in accounting rules or in our accounting estimates or assumptions.
The factors identified above are not exhaustive. We caution readers not to place undue reliance on any forward-looking statements, which are based only on information currently available to us and speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made.
Further information concerning Marsh & McLennan Companies and its businesses, including information about factors that could materially affect our results of operations and financial condition, is contained in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section and the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of our most recently filed Annual Report on Form 10-K.

2



TABLE OF CONTENTS
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
OF OPERATIONS
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.


3



PART I.    FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share amounts)
2016

 
2015

 
2016

 
2015

Revenue
$
3,135

 
$
3,115

 
$
9,847

 
$
9,555

Expense:
 
 
 
 
 
 
 
Compensation and benefits
1,817

 
1,878

 
5,543

 
5,434

Other operating expenses
746

 
776

 
2,273

 
2,296

Operating expenses
2,563

 
2,654

 
7,816

 
7,730

Operating income
572

 
461

 
2,031

 
1,825

Interest income

 
3

 
4

 
9

Interest expense
(47
)
 
(41
)
 
(141
)
 
(117
)
Investment income (loss)

 
34

 
(2
)
 
39

Income before income taxes
525

 
457

 
1,892

 
1,756

Income tax expense
141

 
128

 
538

 
500

Income from continuing operations
384

 
329

 
1,354

 
1,256

Discontinued operations, net of tax

 
2

 

 
(1
)
Net income before non-controlling interests
384

 
331

 
1,354

 
1,255

Less: Net income attributable to non-controlling interests
5

 
8

 
22

 
31

Net income attributable to the Company
$
379

 
$
323

 
$
1,332

 
$
1,224

Basic net income per share – Continuing operations
$
0.73

 
$
0.61

 
$
2.56

 
$
2.29

 – Net income attributable to
    the Company
$
0.73

 
$
0.61

 
$
2.56

 
$
2.29

Diluted net income per share – Continuing operations
$
0.73

 
$
0.60

 
$
2.54

 
$
2.27

 – Net income attributable to
the Company
$
0.73

 
$
0.61

 
$
2.54

 
$
2.27

Average number of shares outstanding – Basic
518

 
528

 
520

 
534

– Diluted
523

 
533

 
525

 
540

Shares outstanding at September 30,
516

 
522

 
516

 
522

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


4



MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2016

 
2015

 
2016

 
2015

Net income before non-controlling interests
$
384

 
$
331

 
$
1,354

 
$
1,255

Other comprehensive (loss) income, before tax:
 
 
 
 
 
 
 
    Foreign currency translation adjustments
(52
)
 
(278
)
 
(373
)
 
(458
)
    Unrealized investment income
1

 
1

 
1

 
1

    Gain related to pension/post-retirement plans
82

 
94

 
383

 
247

Other comprehensive (loss) income, before tax
31

 
(183
)
 
11

 
(210
)
Income tax expense on other comprehensive income
19

 
16

 
80

 
65

Other comprehensive (loss) income, net of tax
12

 
(199
)
 
(69
)
 
(275
)
Comprehensive income
396

 
132

 
1,285

 
980

Less: comprehensive income attributable to non-controlling interest
5

 
8

 
22

 
31

Comprehensive income attributable to the Company
$
391

 
$
124

 
$
1,263

 
$
949

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

5



MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share amounts)
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,388

 
$
1,374

Receivables
 
 
 
Commissions and fees
3,316

 
3,198

Advanced premiums and claims
53

 
51

Other
318

 
309

 
3,687

 
3,558

Less-allowance for doubtful accounts and cancellations
(84
)
 
(87
)
Net receivables
3,603

 
3,471

Other current assets
218

 
199

Total current assets
5,209

 
5,044

Goodwill
7,975

 
7,889

Other intangible assets
907

 
1,036

Fixed assets
(net of accumulated depreciation and amortization of $1,694 at September 30, 2016 and $1,621 at December 31, 2015)
717

 
773

Pension related assets
1,253

 
1,159

Deferred tax assets
1,085

 
1,138

Other assets
1,212

 
1,177

 
$
18,358

 
$
18,216

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

6



MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In millions, except share amounts)
September 30,
2016
 
December 31,
2015
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
262

 
$
12

Accounts payable and accrued liabilities
1,862

 
1,886

Accrued compensation and employee benefits
1,310

 
1,656

Accrued income taxes
213

 
154

Dividends payable
178

 

Total current liabilities
3,825

 
3,708

Fiduciary liabilities
4,532

 
4,146

Less – cash and investments held in a fiduciary capacity
(4,532
)
 
(4,146
)
 

 

Long-term debt
4,494

 
4,402

Pension, post-retirement and post-employment benefits
1,969

 
2,058

Liabilities for errors and omissions
317

 
318

Other liabilities
999

 
1,128

Commitments and contingencies

 

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

 

Common stock, $1 par value, authorized
 
 
 
1,600,000,000 shares, issued 560,641,640 shares at September 30, 2016
 
 
 
   and December 31, 2015
561

 
561

Additional paid-in capital
812

 
861

Retained earnings
11,953

 
11,302

Accumulated other comprehensive loss
(4,289
)
 
(4,220
)
Non-controlling interests
83

 
89

 
9,120

 
8,593

Less – treasury shares, at cost, 44,118,274 shares at September 30, 2016
 
 
 
   and 38,743,686 shares at December 31, 2015
(2,366
)
 
(1,991
)
Total equity
6,754

 
6,602

 
$
18,358

 
$
18,216

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

7



MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30,
 
 
 
(In millions)
2016

 
2015

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
1,354

 
$
1,255

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
231

 
233

Amortization of intangible assets
99

 
79

Adjustments and payments related to contingent consideration liability
(37
)
 
15

Gain on deconsolidation of subsidiary
(12
)
 

Provision for deferred income taxes
43

 
214

Loss (gain) on investments
2

 
(39
)
Loss on disposition of assets
3

 
3

Share-based compensation expense
84

 
67

Changes in assets and liabilities:
 
 
 
Net receivables
(162
)
 
(118
)
Other current assets
(20
)
 
(10
)
Other assets
(2
)
 
(11
)
Accounts payable and accrued liabilities
(29
)
 
(96
)
Accrued compensation and employee benefits
(349
)
 
(319
)
Accrued income taxes
65

 
(61
)
      Contributions to pension and other benefit plans in excess of current year expense/credit
(214
)
 
(178
)
Other liabilities
(3
)
 
(98
)
Effect of exchange rate changes
59

 
53

Net cash provided by operations
1,112

 
989

Financing cash flows:
 
 
 
Purchase of treasury shares
(625
)
 
(1,325
)
Proceeds from debt
347

 
1,090

Repayments of debt
(9
)
 
(8
)
Shares withheld for taxes on vested units – treasury shares
(38
)
 
(48
)
Issuance of common stock from treasury shares
154

 
179

Payments of deferred and contingent consideration for acquisitions
(96
)
 
(42
)
Distributions of non-controlling interests
(12
)
 
(17
)
Dividends paid
(504
)
 
(468
)
Net cash used for financing activities
(783
)
 
(639
)
Investing cash flows:
 
 
 
Capital expenditures
(174
)
 
(249
)
Net purchases of long-term investments
(4
)
 
(63
)
Proceeds from sales of fixed assets
5

 
2

Acquisitions
(88
)
 
(431
)
Other, net
3

 
(2
)
Net cash used for investing activities
(258
)
 
(743
)
Effect of exchange rate changes on cash and cash equivalents
(57
)
 
(235
)
Increase (decrease) in cash and cash equivalents
14

 
(628
)
Cash and cash equivalents at beginning of period
1,374

 
1,958

Cash and cash equivalents at end of period
$
1,388

 
$
1,330

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

8



MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
For the Nine Months Ended September 30,
 
 
 
(In millions, except per share amounts)
2016

 
2015

COMMON STOCK
 
 
 
Balance, beginning and end of period
$
561

 
$
561

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance, beginning of year
$
861

 
$
930

Change in accrued stock compensation costs
14

 
1

Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact
(63
)
 
(80
)
Balance, end of period
$
812

 
$
851

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
11,302

 
$
10,335

Net income attributable to the Company
1,332

 
1,224

Dividend equivalents declared – (per share amounts: $1.30 in 2016 and $1.18 in 2015)
(5
)
 
(3
)
Dividends declared – (per share amounts: $1.30 in 2016 and $1.18 in 2015)
(676
)
 
(628
)
Balance, end of period
$
11,953

 
$
10,928

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
Balance, beginning of year
$
(4,220
)
 
$
(3,847
)
Other comprehensive loss, net of tax
(69
)
 
(275
)
Balance, end of period
$
(4,289
)
 
$
(4,122
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(1,991
)
 
$
(925
)
Issuance of shares under stock compensation plans and employee stock purchase plans
250

 
280

Purchase of treasury shares
(625
)
 
(1,325
)
Balance, end of period
$
(2,366
)
 
$
(1,970
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
89

 
$
79

Net income attributable to non-controlling interests
22

 
31

Deconsolidation of subsidiary
(14
)
 

Distributions and other changes
(14
)
 
(15
)
Balance, end of period
$
83

 
$
95

TOTAL EQUITY
$
6,754

 
$
6,343

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

9



MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.     Nature of Operations
Marsh & McLennan Companies, Inc. (the "Company"), a global professional services firm, is organized based on the different services that it offers. Under this organizational structure, the Company’s two business segments are Risk and Insurance Services and Consulting.
The Risk and Insurance Services segment provides risk management activities and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter.
The Company conducts business in its Consulting segment through Mercer and Oliver Wyman Group. Mercer provides consulting expertise, advice, services and solutions in the areas of health, retirement, talent and investments. Within the investments business, Mercer provides delegated investment (fiduciary management) solutions to institutional investors (such as retirement plan sponsors and trustees) and to individual investors (primarily through the inclusion of funds managed by Mercer on defined contribution and wealth management platforms). As of September 30, 2016, Mercer had assets under management of $156 billion worldwide. Oliver Wyman Group provides specialized management and economic and brand consulting services.
Acquisitions impacting the Risk and Insurance Services and Consulting segments are discussed in Note 7 to the consolidated financial statements.
2.     Principles of Consolidation and Other Matters
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations for interim filings, the Company believes that the information and disclosures presented are adequate to make such information and disclosures not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Form 10-K").
The financial information contained herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial statements as of and for the three- and nine-month periods ended September 30, 2016 and 2015.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of certificates of deposit and time deposits, with original maturities of three months or less, and money market funds. The estimated fair value of the Company's cash and cash equivalents approximates their carrying value. The Company is required to maintain operating funds of approximately $180 million, primarily related to regulatory requirements outside the United States or as collateral under captive insurance arrangements.
Investments  
The Company holds investments in certain private equity funds. Investments in private equity funds are accounted for under the equity method of accounting using a consistently applied three-month lag period adjusted for any known significant changes from the lag period to the reporting date of the Company. The underlying private equity funds follow investment company accounting, where investments within the fund are carried at fair value. Investment gains or losses for the Company's proportionate share of the change in fair value of the funds are recorded in earnings. Investments using the equity method of accounting are included in other assets in the consolidated balance sheets.
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 debt and available-for-sale securities and equity method gains or losses on its investment in private equity funds. The Company recorded net investment income of less than $1 million in the third quarter of 2016 compared to net investment income of $34 million for the same period in 2015, and recorded an investment

10



loss of $2 million compared to net investment income of $39 million for the nine months ended September 30, 2016 and 2015, respectively.
Income Taxes
The Company's effective tax rate in the third quarter of 2016 was 26.8% compared with 27.9% in the third quarter of 2015. The effective tax rate for the first nine months of 2016 and 2015 was 28.4%. These rates reflect non-U.S. income taxed at rates below the U.S. statutory rate, including the effect of repatriation, as well as the impact of discrete tax matters such as tax legislation, changes in valuation allowances, nontaxable adjustments to contingent acquisition consideration and the true-up of the tax provision to amounts filed in the Company's U.S. federal tax return.
The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When evaluating the potential imposition of penalties, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company's position, and reliance on the opinion of professional tax advisors.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in tax returns. The Company's gross unrecognized tax benefits decreased from
$74 million at December 31, 2015 to $67 million at September 30, 2016. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $6 million within the next twelve months due to settlements of audits and expirations of statutes of limitation.
3.     Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. The Company also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims proceeds are held by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds of $8 million and $6 million for the three months ended September 30, 2016 and 2015, respectively, and $20 million and $16 million for the nine months ended September 30, 2016 and 2015, respectively. The Consulting segment recorded fiduciary interest income of $1 million for each of the three months ended September 30, 2016 and 2015, respectively, and $2 million and $3 million for the nine months ended September 30, 2016 and 2015, respectively. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to $7.0 billion at September 30, 2016 and $6.9 billion at December 31, 2015. 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.
4.    Per Share Data
Basic net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income attributable to common shares by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares. Reconciliations of the applicable components used to calculate basic and diluted EPS - Continuing operations are presented below. The reconciling items related to the EPS calculation of net income attributable to the Company is the same for both basic and diluted EPS.

11



Basic and Diluted EPS Calculation - Continuing Operations
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share amounts)
2016

 
2015

 
2016

 
2015

Net income from continuing operations
$
384

 
$
329

 
$
1,354

 
$
1,256

Less: Net income attributable to non-controlling interests
5

 
8

 
22

 
31

 
$
379

 
$
321

 
$
1,332

 
$
1,225

Basic weighted average common shares outstanding
518

 
528

 
520

 
534

Dilutive effect of potentially issuable common shares
5

 
5

 
5

 
6

Diluted weighted average common shares outstanding
523

 
533

 
525

 
540

Average stock price used to calculate common stock equivalents
$
66.98

 
$
55.80

 
$
62.33

 
$
56.64

There were 13.6 million and 15.5 million stock options outstanding as of September 30, 2016 and 2015, respectively.
5.    Supplemental Disclosures to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions, interest and income taxes paid for the nine-month periods ended September 30, 2016 and 2015.
(In millions)
 
2016

 
2015

Assets acquired, excluding cash
 
$
121

 
$
636

Liabilities assumed
 
(4
)
 
(51
)
Contingent/deferred purchase consideration
 
(29
)
 
(154
)
Net cash outflow for acquisitions
 
$
88

 
$
431

(In millions)
2016

 
2015

Interest paid
$
148

 
$
126

Income taxes paid, net of refunds
$
417

 
$
335

The Company paid deferred and contingent consideration of $96 million for the nine months ended September 30, 2016. This consisted of deferred purchase consideration related to prior years' acquisitions of $53 million and contingent consideration of $43 million. For the nine months ended September 30, 2015, the Company paid deferred and contingent consideration of $42 million, consisting of deferred purchase consideration related to prior years' acquisitions of $30 million and contingent consideration of $12 million. These amounts are included in the consolidated statements of cash flows as a financing activity.
For the nine months ended September 30, 2016, the Company recorded a net charge for adjustments to acquisition related accounts of $5 million and contingent consideration payments of $42 million. For the nine months ended September 30, 2015, the Company recorded a net charge for adjustments related to acquisition related accounts of $42 million and contingent consideration payments of $27 million. These amounts are included in the operating section of the consolidated statements of cash flows.
The Company had non-cash issuances of common stock under its share-based payment plan of $71 million and $68 million for the nine months ended September 30, 2016 and 2015, respectively. The Company recorded stock-based compensation expense related to equity awards of $66 million and $49 million for the nine-month periods ended September 30, 2016 and 2015, respectively.
The consolidated statement of cash flows includes the cash flow impact of discontinued operations related to indemnification payments from the Putnam disposition that reduced the net cash flow provided by operations by $82 million for the nine months ended September 30, 2015.

12



6.    Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the three and nine-month periods ended September 30, 2016 and 2015, including amounts reclassified out of AOCI, are as follows:
(In millions)
Unrealized Investment Gains
 
Pension/Post-Retirement Plans Gains (Losses)
 
Foreign Currency Translation Gains (Losses)
 
Total Gains (Losses)
Balance as of July 1, 2016
$
6

 
$
(2,885
)
 
$
(1,422
)
 
$
(4,301
)
Other comprehensive income (loss) before reclassifications
1

 
36

 
(54
)
 
(17
)
Amounts reclassified from accumulated other comprehensive income

 
29

 

 
29

Net current period other comprehensive income (loss)
1

 
65

 
(54
)
 
12

Balance as of September 30, 2016
$
7

 
$
(2,820
)
 
$
(1,476
)
 
$
(4,289
)
(In millions)
Unrealized Investment Gains
 
Pension/Post-Retirement Plans Gains (Losses)
 
Foreign Currency Translation Gains (Losses)
 
Total Gains (Losses)
Balance as of July 1, 2015
$
5

 
$
(3,289
)
 
$
(639
)
 
$
(3,923
)
Other comprehensive income (loss) before reclassifications
1

 
31

 
(276
)
 
(244
)
Amounts reclassified from accumulated other comprehensive income

 
45

 

 
45

Net current period other comprehensive income (loss)
1

 
76

 
(276
)
 
(199
)
Balance as of September 30, 2015
$
6

 
$
(3,213
)
 
$
(915
)
 
$
(4,122
)
(In millions)
Unrealized Investment Gains
 
Pension/Post-Retirement Plans Gains (Losses)
 
Foreign Currency Translation Adjustments
 
Total Gains (Losses)
Balance as of January 1, 2016
$
6

 
$
(3,124
)
 
$
(1,102
)
 
$
(4,220
)
Other comprehensive income (loss) before reclassifications
1

 
214

 
(374
)
 
(159
)
Amounts reclassified from accumulated other comprehensive income

 
90

 

 
90

Net current period other comprehensive income (loss)
1

 
304

 
(374
)
 
(69
)
Balance as of September 30, 2016
$
7

 
$
(2,820
)
 
$
(1,476
)
 
$
(4,289
)
(In millions)
Unrealized Investment Gains
 
Pension/Post-Retirement Plans Gains (Losses)
 
Foreign Currency Translation Adjustments
 
Total Gains (Losses)
Balance as of January 1, 2015
$
5

 
$
(3,393
)
 
$
(459
)
 
$
(3,847
)
Other comprehensive income (loss) before reclassifications
1

 
33

 
(456
)
 
(422
)
Amounts reclassified from accumulated other comprehensive income

 
147

 

 
147

Net current period other comprehensive income (loss)
1

 
180

 
(456
)
 
(275
)
Balance as of September 30, 2015
$
6

 
$
(3,213
)
 
$
(915
)
 
$
(4,122
)



13



The components of other comprehensive income (loss) for the three- and nine-month periods ended September 30, 2016 and 2015 are as follows:
Three Months Ended September 30,
 
2016
 
2015
(In millions)
 
Pre-Tax

Tax

Net of Tax

 
Pre-Tax

Tax (Credit)

Net of Tax

Foreign currency translation adjustments
 
$
(52
)
$
2

$
(54
)
 
$
(278
)
$
(2
)
$
(276
)
Unrealized investment gains
 
1


1

 
1


1

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


 
Prior service cost (a)
 
1

1


 
1


1

Net actuarial losses (a)
 
41

12

29

 
67

23

44

Subtotal
 
42

13

29

 
68

23

45

 Effect of remeasurement
 



 
(89
)
(30
)
(59
)
 Effect of curtailment
 



 
4


4

 Effect of settlement
 



 
1


1

 Foreign currency translation gains
 
40

4

36

 
105

24

81

 Other
 



 
5

1

4

Pension/post-retirement plans gains
 
82

17

65

 
94

18

76

Other comprehensive income (loss)
 
$
31

$
19

$
12

 
$
(183
)
$
16

$
(199
)
(a) Components of net periodic pension cost are included in compensation and benefits in the consolidated statements of income. Income tax credits on prior service losses and net actuarial losses are included in income tax expense.
Nine Months Ended September 30,
2016
 
2015
(In millions)
Pre-Tax

Tax

Net of Tax

 
Pre-Tax

Tax (Credit)

Net of Tax

Foreign currency translation adjustments
$
(373
)
$
1

$
(374
)
 
$
(458
)
$
(2
)
$
(456
)
Unrealized investment gains
1


1

 
1


1

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


 
 
 
 
 
 
 Prior service cost (a)
2

1

1

 
1


1

 Net actuarial losses (a)
125

36

89

 
220

74

146

Subtotal
127

37

90

 
221

74

147

Effect of remeasurement
(1
)

(1
)
 
(92
)
(31
)
(61
)
Effect of curtailment
3

1

2

 
4


4

Effect of settlement
1


1

 
2


2

Plan Termination



 
(6
)
(2
)
(4
)
Foreign currency translation gains
253

41

212

 
113

25

88

Other



 
5

1

4

Pension/post-retirement plans gains
383

79

304

 
247

67

180

Other comprehensive income (loss)
$
11

$
80

$
(69
)
 
$
(210
)
$
65

$
(275
)
(a) Components of net periodic pension cost are included in compensation and benefits in the consolidated statements of income. Tax on prior service gains and net actuarial losses is included in income tax expense.

14



7.     Acquisitions
The Risk and Insurance Services segment completed five acquisitions during the first nine months of 2016.
February – Marsh & McLennan Agency ("MMA") acquired The Celedinas Agency, Inc., a Florida-based brokerage firm providing property and casualty and marine insurance as well as employee benefits services, and Aviation Solutions, LLC, a Missouri-based aviation risk advisor and insurance broker.
March – MMA acquired Corporate Consulting Services, Ltd., a New York-based insurance brokerage and human resource consulting firm.
August – MMA acquired Benefits Advisory Group LLC, an Atlanta-based employee benefits consulting firm.
September – MMA acquired Vero Insurance, Inc., a Florida-based agency specializing in private client insurance services.
The Consulting segment completed two acquisitions during the first nine months of 2016.
January – Mercer acquired The Positive Ageing Company Limited, a U.K.-based firm providing advice on issues surrounding the aging workforce.
April – Mercer acquired the Extratextual software system and related client contracts. Extratextual is a web based compliance system that helps clients manage and meet their compliance and risk management obligations.
Total purchase consideration for acquisitions made during the first nine months of 2016 was $119 million, which consisted of cash paid of $90 million and deferred purchase and estimated contingent consideration of $29 million. 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 consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. The Company also paid $53 million of deferred purchase consideration and $85 million of contingent consideration related to acquisitions made in prior years.
The following table presents the preliminary allocation of the acquisition cost to the assets acquired and liabilities assumed during 2016 based on their fair values:
For the Nine Months Ended September 30, 2016
 
(In millions)
 
Cash
$
90

Estimated fair value of deferred/contingent consideration
29

Total Consideration
$
119

Allocation of purchase price:
 
Cash and cash equivalents
$
2

Accounts receivable, net
1

Property, plant, and equipment
1

Other intangible assets
45

Goodwill
74

Total assets acquired
123

Current liabilities
2

Other liabilities
2

Total liabilities assumed
4

Net assets acquired
$
119


15



Other intangible assets acquired are based on initial estimates and subject to change based on final valuations during the measurement period after the acquisition date. The following chart provides information of other intangible assets acquired during 2016:
 
 
Amount
 
Weighted Average Amortization Period
Client relationships
 
$
41

 
13 years
Other (a)
 
4

 
4 years
 
 
$
45

 
 
(a) Primarily non-compete agreements, trade names and developed technology.
 
Prior-Year Acquisitions
The Risk and Insurance Services segment completed thirteen acquisitions during 2015.
January – Marsh acquired INGESEG S.A., an insurance brokerage located in Argentina.
May – Marsh acquired Sylvite Financial Services, Inc., a Canada-based insurance consulting firm and Sumitomo Life Insurance Agency America, Inc., an employee benefits brokerage and consulting firm providing employee benefit and other services to U.S.-based subsidiaries of Japanese companies.
June – MMA acquired MHBT, Inc., a Texas-based insurance broker and Marsh acquired SIS Co. Ltd, a Korea-based insurance broker and advisor.
July – MMA acquired Vezina, a Canada-based independent insurance brokerage firm, Tequesta Insurance Advisors, an employee benefits insurance provider based in Florida, Cline Wood Agency, a Kansas City-based independent specialty insurance agency and J.W. Terrill, a Missouri-based independent insurance agency. Marsh acquired SMEI Group Ltd., a U.K.-based insurance broker providing specialist commercial insurance to small and medium-sized firms.
August – Marsh acquired Dovetail Insurance, a leading provider of insurance technology services to the U.S. small commercial market.
October – MMA acquired Dawson Insurance Agency, a North Dakota-based agency providing commercial and personal insurance, surety bonds, safety and loss control programs, and employee benefits services.
December – Marsh acquired Jelf Group, PLC, a U.K.-based insurance broking and financial consulting firm.
The Consulting segment completed eight acquisitions during 2015.
February – Oliver Wyman acquired TeamSAI, a Georgia-based provider of consulting and technical services to the transportation industry, and Mercer acquired Strategic Capital Management AG, a Switzerland-based institutional investment advisor.
June – Mercer acquired Kepler Associates, a U.K.-based executive remuneration specialist.
August – Oliver Wyman acquired the Hong Kong and Shanghai franchises of OC&C Strategy Consultants.
September – Mercer acquired Comptryx, a global pay and workforce metrics business specializing in the technology sector.
November – Mercer acquired HR Business Solutions (Asia) Limited, a Hong Kong-based compensation and employee benefits consulting firm, and Gama Consultores Associados Ltda, a Brazil-based retirement consulting firm.
December – Mercer acquired CPSG Partners, a Workday Services partner assisting clients worldwide to maximize the value of Workday Financial Management and Human Capital Management.
Total purchase consideration for acquisitions made during the first nine months of 2015 was $602 million, which consisted of cash paid of $448 million and deferred purchase and estimated contingent consideration of $154 million. Contingent consideration arrangements are primarily based on EBITDA or revenue targets over two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. In the first nine months of 2015, the Company also paid $30 million of deferred purchase consideration and $39 million of contingent consideration related to acquisitions made in prior years. In addition, the Company purchased other intangible assets in the amount of $2 million.

16



Pro-Forma Information
The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during 2016 and 2015. In accordance with accounting guidance related to pro-forma disclosures, the information presented for current year acquisitions is as if they occurred on January 1, 2015 and reflects acquisitions made in 2015 as if they occurred on January 1, 2014. The 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 figures)
2016

 
2015

 
2016

 
2015

Revenue
$
3,137

 
$
3,177

 
$
9,860

 
$
9,838

Income from continuing operations
$
384

 
$
333

 
$
1,357

 
$
1,283

Net income attributable to the Company
$
379

 
$
328

 
$
1,335

 
$
1,251

Basic net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.73

 
$
0.62

 
$
2.57

 
$
2.35

– Net income attributable to the Company
$
0.73

 
$
0.62

 
$
2.57

 
$
2.34

Diluted net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.73

 
$
0.61

 
$
2.54

 
$
2.32

– Net income attributable to the Company
$
0.73

 
$
0.61

 
$
2.54

 
$
2.32

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, 2016 include approximately $7 million and $17 million of revenue, respectively, and $2 million and $3 million of operating income, respectively, related to acquisitions made in 2016.
8.    Goodwill and Other Intangibles
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, the Company assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. The Company considers numerous factors, which included that the fair value of each reporting unit exceeded its carrying value by a substantial margin in its most recent estimate of reporting unit fair values, whether significant acquisitions or dispositions occurred which might alter the fair value of its reporting units, macroeconomic conditions and their potential impact on reporting unit fair values, actual performance compared with budget and prior projections used in its estimation of reporting unit fair values, industry and market conditions, and the year-over-year change in the Company’s share price. The Company completed its qualitative assessment in the third quarter of 2016 and concluded that a two-step goodwill impairment test was not required in 2016 and that goodwill was not impaired.
Changes in the carrying amount of goodwill are as follows:
September 30,
 
 
 
(In millions)
2016

 
2015

Balance as of January 1, as reported
$
7,889

 
$
7,241

Goodwill acquired
74

 
356

Other adjustments(a)
12

 
(91
)
Balance at September 30,
$
7,975

 
$
7,506

(a) 
The increase in 2016 reflects purchase accounting adjustments, partly offset by the impact of foreign exchange. The decrease in 2015 is primarily due to the impact of foreign exchange.
Goodwill allocable to the Company’s reportable segments at September 30, 2016 is as follows: Risk & Insurance Services, $5.7 billion and Consulting, $2.3 billion.

17



Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated lives and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature.
The gross cost and accumulated amortization at September 30, 2016 and December 31, 2015 are as follows:
  
September 30, 2016
 
December 31, 2015
(In millions)
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

 
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

Client Relationships
$
1,202

 
$
371

 
$
831

 
$
1,281

 
$
347

 
$
934

Other (a)
148

 
72

 
76

 
176

 
74

 
102

 Amortized intangibles
$
1,350

 
$
443

 
$
907

 
$
1,457

 
$
421

 
$
1,036

(a) Primarily non-compete agreements, trade names and developed technology.
Aggregate amortization expense for the nine months ended September 30, 2016 and 2015 was $99 million and $79 million, respectively. The estimated future aggregate amortization expense is as follows:
For the Years Ending December 31,
 
(In millions)
Estimated Expense

2016 (excludes amortization through September 30, 2016)
$
34

2017
118

2018
115

2019
112

2020
92

Subsequent years
436

 
$
907

9.     Fair Value Measurements
Fair Value Hierarchy
The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy as defined by the Financial Accounting Standards Board ("FASB"). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, for disclosure purposes, is determined based on the lowest level input that is significant to the fair value measurement. Assets and liabilities recorded in the consolidated balance sheets at fair value are categorized based on the inputs in the valuation techniques as follows:
Level 1.
Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities and money market mutual funds).
Assets and liabilities using Level 1 inputs include 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

18



d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).
The Company does not have any assets or liabilities that use Level 2 inputs.
Level 3.
Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long-dated options on gas and power).
Liabilities using Level 3 inputs include liabilities for contingent purchase consideration.
Valuation Techniques
Equity Securities, Money Market Funds and Mutual Funds – Level 1
Investments for which market quotations are readily available are valued at the sale price on their principal exchange or, for certain markets, official closing bid price. Money market funds are valued using a valuation technique that results in price per share at $1.00.
Contingent Purchase Consideration Liability – Level 3
Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. These arrangements typically provide for the payment of additional consideration if earnings and revenue targets are met over periods from two to four years. The fair value of contingent consideration is estimated as the present value of future cash flows resulting from the projected revenue and earnings of the acquired entities.
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015.
 
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
(In millions)
09/30/16

 
12/31/15

 
09/30/16

 
12/31/15

 
09/30/16

 
12/31/15

 
09/30/16

 
12/31/15

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

 
$
142

 
$

 
$

 
$

 
$

 
$
140

 
$
142

Money market funds(b)
72

 
140

 

 

 

 

 
72

 
140

Total assets measured at fair value
$
212

 
$
282

 
$

 
$

 
$

 
$

 
$
212

 
$
282

Fiduciary Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
69

 
$
48

 
$

 
$

 
$

 
$

 
$
69

 
$
48

Total fiduciary assets measured
at fair value
$
69

 
$
48

 
$

 
$

 
$

 
$

 
$
69

 
$
48

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent purchase
consideration liability(c)
$

 
$

 
$

 
$

 
$
232

 
$
309

 
$
232

 
$
309

Total liabilities measured at fair value
$

 
$

 
$

 
$

 
$
232

 
$
309

 
$
232

 
$
309

(a) 
Included in other assets in the consolidated balance sheets.
(b) 
Included in cash and cash equivalents in the consolidated balance sheets.
(c) 
Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
During the nine-month period ended September 30, 2016, there were no assets or liabilities that were transferred between any of the levels.




19



The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities as of September 30, 2016 and 2015 that represent contingent consideration related to acquisitions: 
(In millions)
2016

 
2015

Balance at January 1,
$
309

 
$
207

Additions
9

 
73

Payments
(85
)
 
(39
)
Revaluation Impact
5

 
42

Other (a)
(6
)
 

Balance at September 30,
$
232

 
$
283

(a) Primarily reflects the impact of foreign exchange.
The fair value of the contingent purchase consideration liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net increase in the estimated fair value of such liabilities for prior-period acquisitions of $5 million in the nine-month period ended September 30, 2016. A 5% increase in the above mentioned projections would increase the liability by approximately $21 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $37 million.
Long-Term Investments
The Company holds investments in certain private equity investments, public companies and private companies that are accounted for using the equity method of accounting. The carrying value of these investments was $410 million and $347 million at September 30, 2016 and December 31, 2015, respectively.
Private Equity Investments
The Company's investments in private equity funds were $81 million and $76 million at September 30, 2016 and December 31, 2015, 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, investment gains/losses for its proportionate share of the change in fair value of the funds. These investments are included in other assets in the consolidated balance sheets.
Investments in Public and Private Companies
Alexander Forbes: The Company owns approximately 33% of the common stock of Alexander Forbes, a South African company listed on the Johannesburg Stock Exchange, which it purchased in 2014 for 7.50 South African Rand per share. As of September 30, 2016, the carrying value of the Company’s investment in Alexander Forbes was approximately $266 million. As of September 30, 2016, the market value of the approximately 443 million shares of Alexander Forbes owned by the Company, based on the September 30, 2016 closing share price of 6.45 South African Rand per share, was approximately $208 million. During the first nine months of 2016, the shares closed between 4.61 Rand (in late January) to 7.16 Rand (in early May), with trades as high as 7.63 Rand. The Company considered several factors related to its investment in Alexander Forbes, including its financial position, the near- and long-term prospects of Alexander Forbes and the broader South African economy and capital markets, the length of time and extent to which the market value was below cost and the Company’s intent and ability to retain the investment for a sufficient period of time to allow for anticipated recovery in market value. As a result, the Company has determined the investment is not impaired as of September 30, 2016.
The Company’s investment in Alexander Forbes and its other equity investments in private insurance and consulting companies are accounted for using the equity method of accounting, the results of which are included in revenue in the consolidated income statements and the carrying value of which is included in other assets in the consolidated balance sheets. The Company records its share of income or loss on its equity method investments on a one quarter lag basis.
Benefitfocus: On February 24, 2015, Mercer purchased shares of common stock of Benefitfocus (NASDAQ:BNFT) constituting approximately 9.9% of BNFT's outstanding capital stock as of the acquisition date. The purchase price for the BNFT shares and certain other rights and other consideration was approximately $75 million. The Company has elected to account for this investment under the cost method of accounting as the shares purchased are

20



categorized as restricted and cannot be sold for an extended period. Effective January 1, 2017, these shares will be accounted for as available for sale securities, classified as Level 2 in the fair value hierarchy and included in other assets in the consolidated balance sheets. The value of the BNFT shares based on the closing price on the NASDAQ as of September 30, 2016 and without regard to the restrictions on sale was approximately $112 million.
Deconsolidation of a Subsidiary
Marsh operates in India through Marsh India Insurance Brokers Limited (Marsh India), which is owned 26% by Marsh and 74% by local shareholders. Prior to the second quarter of 2016, under the terms of its shareholders’ agreement with the local shareholders, Marsh had a controlling financial interest in Marsh India and its results were consolidated as required under U.S. GAAP. Under the recently adopted Insurance Laws (Amendment) Act 2015 of India and related regulations issued by the Indian Insurance Regulatory and Development Authority, Indian insurance companies (including insurance intermediaries and brokers like Marsh India) must now be controlled by Indian promoters or Indian investors.
In the second quarter of 2016, the shareholders’ agreement among the shareholders of Marsh India was amended to comply with these new regulations, which resulted in Marsh no longer having a controlling financial interest under U.S. GAAP. In accordance with U.S. GAAP, the Company was required to deconsolidate Marsh India and recognize its interest in Marsh India at fair value, with the difference between the carrying value and fair value recognized in earnings. The Company estimated the fair value of its interest in Marsh India, primarily using a discounted cash flow approach, which considered various cash flow scenarios and a discount rate appropriate for the investment. Certain provisions relating to restrictions on sales and repurchase of shares of Marsh India owned by its employees were also required to be removed by the new regulations. As a result, the deferred compensation expense related to those shares was accelerated in the second quarter of 2016. The net gain on the Company’s pre-tax income as a result of these changes was approximately $12 million, which is included in revenue for the nine-months ended 2016. Beginning on May 1, 2016, the Company’s investment in Marsh India is accounted for using the equity method of accounting.
10.    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 retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth by U.S. law and the laws of the non-U.S. jurisdictions in which the Company offers defined benefit plans.
The target asset allocation for the Company's U.S. Plan was 64% equities and equity alternatives and 36% fixed income and at September 30, 2016, the actual allocation for the Company's U.S. Plan was 63% equities and equity alternatives and 37% fixed income. The target asset allocation for the Company's U.K. Plans, which comprise approximately 83% of non-U.S. Plan assets at December 31, 2015, was 48% equities and equity alternatives and 52% fixed income. At September 30, 2016, the actual allocation for the U.K. Plans was 46% equities and equity alternatives and 54% fixed income. The assets of the Company's defined benefit plans are diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company generally uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.

21



The components of the net periodic benefit cost for defined benefit and other post-retirement plans are as follows:
Combined U.S. and significant non-U.S. Plans
Pension
 
Post-retirement
For the Three Months Ended September 30,
Benefits
 
Benefits
(In millions)
2016

 
2015

 
2016

 
2015

Service cost
$
43

 
$
48

 
$
1

 
$

Interest cost
132

 
147

 

 
1

Expected return on plan assets
(232
)
 
(246
)
 

 

Amortization of prior service cost
1

 

 
1

 

Recognized actuarial loss
43

 
66

 

 

Net periodic benefit (credit) cost
$
(13
)
 
$
15

 
$
2

 
$
1

Curtailment loss

 
4

 

 

Settlement loss

 
2

 

 

Total (credit) cost
$
(13
)
 
$
21

 
$
2

 
$
1

 
 
 
 
 
 
 
 
Combined U.S. and significant non-U.S. Plans
Pension
 
Post-retirement
For the Nine Months Ended September 30,
Benefits
 
Benefits
(In millions)
2016

 
2015

 
2016

 
2015

Service cost
$
133

 
$
150

 
$
1

 
$
2

Interest cost
407

 
439

 
3

 
5

Expected return on plan assets
(715
)
 
(732
)
 

 

Amortization of prior service cost

 

 
3

 
1

Recognized actuarial loss (gain)
127

 
220

 
(1
)
 
(1
)
Net periodic benefit (credit) cost
$
(48
)
 
$
77

 
$
6

 
$
7

Curtailment (gain) loss
(5
)
 
4

 

 

Settlement loss
1

 
2

 

 

Plan termination

 

 

 
(128
)
Total (credit) cost
$
(52
)
 
$
83

 
$
6

 
$
(121
)
 
 
 
 
 
 
 
 
U.S. Plans only
Pension
 
Post-retirement
For the Three Months Ended September 30,
Benefits
 
Benefits
(In millions)
2016

 
2015

 
2016

 
2015

Service cost
$
26

 
$
29

 
$

 
$

Interest cost
66

 
63

 

 

Expected return on plan assets
(95
)
 
(93
)
 

 

Amortization of prior service cost

 

 
1

 

Recognized actuarial loss
19

 
35

 

 

Net periodic benefit cost
$
16

 
$
34

 
$
1

 
$


22



U.S. Plans only
Pension
 
Post-retirement
For the Nine Months Ended September 30,
Benefits
 
Benefits
(In millions)
2016

 
2015

 
2016

 
2015

Service cost
$
79

 
$
88

 
$

 
$
1

Interest cost
198

 
188

 
1

 
2

Expected return on plan assets
(285
)
 
(277
)
 

 

Amortization of prior service cost

 

 
3

 
1

Recognized actuarial loss (gain)
55

 
126

 
(1
)
 
(1
)
Net periodic benefit cost
$
47

 
$
125

 
$
3

 
$
3

Plan termination

 

 

 
(128
)
Total cost (credit)
$
47

 
$
125

 
$
3

 
$
(125
)
In October 2016, the Company modified its U.S. defined benefit pension plans to discontinue further benefit accruals for participants after December 31, 2016. At the same time, the Company amended its U.S. defined contribution retirement plans for most of its U.S. employees to add an automatic Company contribution equal to 4% of eligible base pay beginning on January 1, 2017. This new Company contribution, together with the Company’s current matching contribution, provides eligible U.S. employees with the opportunity to receive a total contribution of up to 7% of eligible base pay. As required under GAAP, the defined benefit plans that are significantly impacted by the modification will be re-measured using market data and assumptions as of the modification date. The impact of this remeasurement on the Company’s overall pension expense in the fourth quarter of 2016 is not expected to be significant.
Effective September 1, 2015, the Company divided its U.S. qualified defined benefit plan to provide enhanced flexibility and better manage the risks. The existing plan was amended to cover only the retirees currently receiving benefits and terminated vested participants as of August 1, 2015. The Company's active participants as of that date were transferred into a newly established, legally separate qualified defined benefit plan. The benefits offered to the plans’ participants were unchanged. As a result of the plan amendment and establishment of the new plan, the Company re-measured the assets and liabilities of the two plans as required under U.S. GAAP, based on assumptions and market conditions at the amendment date. The net periodic pension expense recognized in 2015 reflects the impact of the remeasurement discussed above.
In March 2015, the Company amended its U.S. Post-65 retiree medical reimbursement plan (the "RRA plan"), resulting in its termination, with benefits to certain participants to be paid through December 31, 2016. As a result of the termination of the RRA plan, the Company recognized a net credit of approximately $125 million in the first quarter of 2015.
Significant non-U.S. Plans only
Pension
 
Post-retirement
For the Three Months Ended September 30,
Benefits
 
Benefits
(In millions)
2016

 
2015

 
2016

 
2015

Service cost
$
17

 
$
19

 
$
1

 
$

Interest cost
66

 
84

 

 
1

Expected return on plan assets
(137
)